LP minibonds 20k

I was setting up the stage for LP mini bond for my parents' friend for 20k, so naturally I've to do some homework. I started by looking up the yields for the different bonds and preference shares listed at SGX.


Do take note that the yields I calculate is based on my own way stated here. It basically included all the coupon/dividends payment until the first date of maturity, subtracted from the guaranteed capital loss from buying the bonds/pref shares above par.


Retail bonds

1. Genting SP5.125% Perp - 7.8 yrs to maturity (YTM) - 4.47% pa
2. Olam6.75%b180129 US$ - 3.1 YTM - 5.70% pa (USD)
3. LTA n4.17%160510 10k - 1.4 YTM - 1.59% pa
4. CapmallA3.8%b220112 - 7.0 YTM - 3.09% pa
5. SIA 2.15%b150930 - 0.8 YTM - 2.19%pa

Pref shares

1. OCC5.1% NCPS 100 - 3.7 YTM - 3.76% pa
2, CityDev NCCPS - perp
3. DBS Bk 4.7% NCPS 100 - 5.9 YTM - 3.67% pa
4. Hyflux 6% CPS 10 - 3.3 YTM - 4.98% pa
5. OCBC Bk4.2% NCPS - perp
6. OCC 3.93% NCPS 10 - 0.2% YTM - 8.97% pa


I noticed a few things:

1. The price of most pref shares either dropped or stayed the same. The drop is understandable, because the numbers of payments before maturity decreases, hence the price will have to drop so that the yield remained good enough to entice people to buy. But I noticed that the price drops lesser decrease in future payments, meaning that the yield actually drops a little.

In other words, I'll have a better deal buying earlier than later, despite the drop in market price of these bonds/pref shares.


2. OCC 3.93% is selling at par value right now. It'll mature on 20th Mar 2015 (optional), so there's still one more payment left. They pay twice every year, on Mar and Sept so one more payment means 1.965% returns with zero capital loss (since you're buying on par). Only commissions. Since 20th Mar is an optional redemption date, they can choose not to redeem, and therefore pay a 1.85% + 3mSOR quarterly starting on 20th Mar, Jun, Sep and Dec. The 3m SOR is about 0.42% now, expected to rise further, so minimally after 20th Mar (if they choose not to redeem), you can expect to get at least 2.27% pa, split into 4 times a year.

To sum up, it's 1.965% this year. If they redeem, they redeem at par, so net net just lose commission for buying. If they didn't redeem back, at least 2.27% pa every quarter from 20th Mar. But it might be some time before they will redeem back, so the market price might keep dropping, which is still fine as long as you don't sell it. Your capital is just locked up.


Good deal? I leave it to you.


In the end, I decided on 2 holdings for the 20k portfolio. Too little to diversify.

1. Capmalla3.8% b220112 (47.0 % of portfolio)
2. DBS Bk 4.7% NCPS 100 (52.9 % of portfolio)

The earliest maturity date is 5.9 yrs, and the guaranteed capital loss because of buying above par will be $900. My plan for this minibond is as usual, pay 2% pa and build up the cash reserves for that guaranteed loss. Thereafter, pay a higher % pa but always reserve some cash in case the person wants to redeem back and the market price is lower than par. This is no longer a capital guaranteed bond, but I'll still treat it as such. The only difference is that now, I didn't say it's capital guaranteed, haha


A big difference it'll make ;)

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Reviewing my resolutions

It's interesting to see other bloggers starting to put out their battle plans for 2015 with their great goals and targets. It's just not me though, not because I don't believe in goals and planning but I think it shouldn't be dictated by the number of revolutions the earth rotates about its axis and around the sun. I think it should be set when one is motivated and the circumstances forces a change in plans :) For me, if you feel all motivated to begin the new year at the end of the current year, go ahead and plan it out. I just feel I'm still in a holiday mood now and I'm not so ready to begin my year, haha :)


I looked back at my past post to see if I did any resolutions (and more importantly, whether I kept to it or not). I realised that while I do set long term targets, I seldom have any new year resolutions. The resolutions, if they are present, is to give myself some leeway to break my long term targets. Blur? Let me explain.


I've some perennial goals and are always present. It's always in my mind. Here's a few:


1. Save 50k per year. While the figure might change pending on circumstances, the goal is still intact, plus minus a few k. For example, my savings target this year is just 30-40k, that's because my outlook for this year isn't that great. Fortunately, I was proved wrong, lol

2. Have a fitness program. This goes on and off, mostly depending on my schedule. At least I worked hard for about a quarter to half a year (before my peak season starts), thereafter my fitness schedule goes to the dumps as work picks up. But at least my diet is the thing that can stay constant. I'm eating better food and less economic rice. While economic rice saves me money, it is very oily, salty and the food is not always the freshest nor the best parts. Tze char seems to be the costlier choice, but better in quality and I can always ask them to use less oil and salt (which they do).

3. Read 52 books a year. Always. No excuses.


These are always going to be my resolutions, so much so that they are the default mode. There's no need to dedicate one day, every year, to write them out again unless one day they proved to be suitably non-challenging anymore. From what I can see, it's not going to be any easier but harder to achieve them. So as long as they challenge me, it'll be there. Here, take a look at some of my 'resolutions' that I've written in the past:


1. Repugnant resolution (2011)

2. Resolutions: To spend more money (2011)

2. New year resolutions redefined (2010)


Firstly, that's not a lot of resolutions written since I started the blog in 2006! Secondly, my resolutions, as mentioned earlier, is all about breaking my perennial goals. Spend more money, work less, enjoy life more, eat more nonsense foods, experience more life, all written in a wishy-washy, messy manner! That's in direct contrast to my clinical and surgical goals - a fixed number by a certain fixed date. Interesting isn't it? Maybe even a bit schizophrenic.

No, I'm not crazy! Okay, maybe just a little.

But that's okay. I'm a complex person and I reserve the rights to be both superbly rational in one minute and a crazily emotional beast the next minute. As long as I'm happy, that's the most important condition.


Wishing everyone a fulfilling, healthy and prosperous 2015 :)

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LP bonds 2014 part 2

Here's part 1. There's an important part that I need to remind myself. Most of the holdings are preference shares and bonds listed in SGX. Here are the holdings:

1. OCBC Bk 4.2% NCPS (perpetual, maybe be redeemed after Jul 2013)

2. OCC 5.1% NCPS 100 (maturity 3.7 yrs)

3. DBS Bk 4.7% NCPS 100 (maturity 5.9 yrs)

4. CapMallA3.8%b220112 (maturity 7.1 yrs)

5. CapMallTrb3.08%210220 (maturity 6 yrs)

Since I bought the bonds/pref shares above par value, there will be a guaranteed capital loss if the issuer wants to redeem back the bonds/shares. That's why I need to keep a part of the cash distributed aside for such an eventuality and not distribute it to my parents 100%. How much do I need to keep for LP bonds?

1. LP bond 50k

Guaranteed capital loss from buying above par: $2,588

Cash from holdings per year: $2,144

Cash distributed to parents per year : $1,000

Cash left: $1,144

Balance sheet wise, I will have enough to pay off the guaranteed capital loss from buying the holdings above par value. I just need about 2.5 yrs and I can accumulate enough to pay off this guarantee capital loss. The only problem here is that the issuer might take it back at different times, especially for the OCBC Bk 4.2% NCPS, which is perpetual and which means they can take back it anytime after Jul 2013. If that's the case, I will have to cough out money and also lose this stream of cash. Double whammy. 

In other words, in the next 2.5 yrs, I need to conserve and pay as minimally to my parents as possible. Once I accumulated enough to pay off that $2,588 from buying above par, I'll be safe. Then I can distribute more out to them. Without caring for the perpetual OCBC Bk 4.2%, the shortest time frame I need to accumulate is 3.7 yrs from now. Any other holdings will mature longer than 3.7 yrs (again, except for the ocbc perps). Furthermore, except the two capmall bonds, not all will mature at the time duration stated above. It's just the date at which the issuer can start redeeming back. 

For a good pref shares or bond, you wish they will keep delaying their redemption. The right time to hold such bonds/pref shares is forever.

2. LP bond 60k

Guaranteed capital loss from buying above par: $2,527

Cash from holdings per year: $2,462.40

Cash distributed to parents per year : $1,200
Cash left: $1,262.40

For this, I will need just 2 yrs to accumulate enough to pay off the capital loss from buying above par, should the issuer redeem back the holdings. The good thing is that once I stashed enough money to make sure I have enough to break even without losing any capital, I can distribute out more. How much more? Both LP bonds will be able to distribute 100% cash received from holdings without worrying about the rise or fall of the market price of the holdings, and by extension, the interest rate environment as long as I hold the bond till maturity. That is the single most important part of this strategy, something that bond fund cannot provide me. 

LP bond 50k will thus pay out 4.29% (2144/50000) and LP bond 60k will pay out 4.10% (2462.4/60000). The first bond pays out slightly more because it is started in Jan while the second one starts off in Feb. That one month means I missed out on one payment cycle for one of the bonds. And the mix of holdings are also a little different. Hey, it's still more than doubled of what is giving out now, at 2% pa. 4%+ per annum will be great.

Either that will happen, or the interest rates rise tremendously within 2 to 3 yrs time so much so that the fixed deposit rate will increase beyond 4+%. If that unlikely scenario takes place, then I will close off both funds, take the loss in capital, distribute back to my parents and ask them to invest in fixed deposit. Lagi better, no longer am I the guarantor! Let others take the hit haha :)

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LP bonds 2014 results

This is the time to distribute coupons for my LP bonds back to my parents. For those who are scratching their heads, here's the prequel for this post.


There are two tranches for the bond:

1. LP bond 50k

Starting capital: 50k
Invested capital (inclusive of comms): $49,773.02
Cash accumulated from payout of holdings: $2,144
Paper gain (loss) from drop in market price of holdings: ($748.02)
Total portfolio gain (loss): $1,395.98
Total portfolio % changes: 2.79%

Going forward, since it's a capital guaranteed bond (by me, of course), I need to retain a certain amount of cash in case my parents need to liquidate it. I'll pay 70% of the net portfolio gain or 2% of 50k (which is $1000), whichever is higher. That should be the policy going forward.

70% of $1,395.98 is $977.19, which is lower than $1000, so I'll just pay out $1k for this tranche.


2. LP bond 60k

Starting capital: 60k
Invested capital (inclusive of comms): $59,699.66
Cash accumulated from payout of holdings: $2184.94
Paper gain (loss) from drop in market price of holdings: ($498.66)
Total portfolio gain (loss) : $1,686.28
Total portfolio % change: 2.81%

Cash payout so far: $600

For this bond, it's a semi-annual payout. I've already distributed $600 in the middle of this year. Going by the same policy of 70% of net portfolio gain or 2% of 60k ($1.2k), whichever is higher,

70% of $1,686.28 = $1,180.40, which is lesser than $1200, so I'll just pay out $1.2k. However, I've already distributed $600 earlier, so this time, it's only another $600.

It's not easy to run a fund that promises a guaranteed payout of a fixed percentage and yet there's capital guaranteed. The returns are not fantastic, but I must remember what the risk profile of my parents are and what are their goals. They initially just wanted to get into a fixed deposit, which pays about 1.2% or 1.3% at that time but I thought they are not doing their money justice. Hence, I offered to do this for them. Hence my benchmark should be the long term fixed deposit rate. As long as I can do better than the fixed deposit rate, I should run it for them, if not, I might as well cash out, have less trouble and not bounded by my own guarantee!


They are still interested to invest with me (another 100k plus minus!), but too bad, closed shop liao. LP guaranteed bonds is officially over! If they want to invest with me, it'll be LP equity fund LOL! Equity funds means bo bao capital, and if the market tanks, they will bear the loss. I need to highlight that to them haha :) For LP bonds, it's low guaranteed returns and capital guaranteed, maybe for LP equity funds, it'll be medium guaranteed returns but no capital guaranteed...see how lah

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To see the world through the eyes of a newbie

The moment you don't need to excel is precisely the moment you start excelling.


I knew that from my past experience as a air rifle shooter. When you take part in competition, you should be in a meditative state of mind. You have to know that you're competing, yet you cannot think you're competing. If you cannot treat the competition like it's just normal, routine practice, you cannot perform well. It's just that when you treat the competition like it's oh-so-important, you start to act and react different. Your heart starts to race when you get a bulls-eye and sink when you miss your shots. These emotional roller coaster creates a cascading avalanche of emotions on subsequent shots, and before you know it, you're a totally different person. Very different when you're doing your usual practice. In usual practice, you're just mindlessly shooting pellets after pellets with no regards to the actual score. You might even be having fun.


I think this can apply to a lot of situation.


1. SMOL had a fantastic year 2014 in his trading performance, and some well-meaning readers suggested increasing his capital size so that the profits will multiply, I'm very glad that he chose not do it. When you're trading with $1000, it's going to be very different trading with $10,000. Until you know how to trade with $2000, then $3000 and progressively increase your trading capital, you're going to act differently and react differently. And that makes all the difference between a 6 bagger or a 6 begger trading performance. I think it's because he don't have to trade for a living, that's why he can trade for a living.


2. There's an examination in university days that I remembered clearly. It's a statistics paper. Not a big deal, it's just mathematics and in my engineering course, there's plenty of those that I have to take up. However, I wanted to do very well for that paper (I'm not sure why). Outside the examination hall, before we all went in to our respective seats, I did something that I never did during all my papers - I started revising. I don't know why I did that, maybe it's because everyone around me all studying (but that never bothered me in the past...) or maybe I really really wanted to do very well for that paper. When I went in and sat down in my seat, I suddenly had a panic attack. Seemingly simple things suddenly became complicated to me and I couldn't do them! I skipped to the next and the next and the next, scribbling out some semblance of an answer but I just couldn't do anything. At that point in time, my mind started painting scenario of me failing the statistics module, having to repeat it again and the next semester I'll have an even heavier workload and I'll fail them all. A small oh-shit moment creates the next bigger oh-shit moment.

That's when I realise I'm panicking. Damn.

They say recognizing we have a problem is the first step towards solving it. I closed the question booklet, and sit back on my chair, took out my water bottle and sipped a mouthful. I just chill-laxed for about half an hour doing nothing except seeing people around me scribbling like crazy. I started humming some music mentally. No point panicking, I thought. What's the big deal? At most just fail loh. When I felt relaxed enough, with a comfortable tune in my mind (it's Madonna's Rain, if you must know), I started attempting my paper. The first question that stumped me suddenly looks do-able. I gave it my best shot, thinking that there's no harm trying. I'm going to fail anyway, so I might as well try. As I did more and more questions, I realised that there's nothing complex about these questions at all! Every question that I did boosted my confidence and I remembered that I thought to myself, I might have a chance after all.

When the results are out, I didn't do that badly. I got an A in spite of my panic attack. But I gave myself an A+ distinction for the great recovery in the middle of the examinations. And I never read my notes ever again before I entered the examination hall. I pay more attention to my mental state from then on. When I don't mind failing, I don't need to fail anymore.


The point here isn't to encourage everyone to accept failure so that you won't fail. It's just that I know that I've performance anxiety. It's part and parcel of having experienced success for a big part of my life. The more you achieve success, the more you have to lose when you experience failure. You're afraid that your excellent track record is broken. You're afraid that others will brand you as a has-been from now on. It's not a particularly strong feeling in me, but I know it's there, hiding deep inside my psyche. It's just whether I'm honest enough to recognise that.


I need to overcome this irritating behaviour, where I stop trying things after I've accomplished what I perceived as my greatest work, my magnum opus. I give a few examples:


1. After doing some digital painting, I never did it again. Deep down, I'm really afraid I couldn't do another one like these again.

But when I started doing this, I've totally ZERO expectations. I didn't expect it to turn out great. And the irony is when it did turn out great, I stopped being great. I simply stopped trying because deep down, I'm afraid I won't be able to produce such great works again.


2. My poem/short stories. Again, I thought this is my magnum opus. I just couldn't bring myself to pen another one. Perhaps it's also the same reason...when I achieved some success, I suddenly become afraid to try like a newbie.


So, I really understand what the first sentence of this blog article means. The moment you don't need to excel is precisely the moment you start excelling. May I change certain words to crystallise the gist of the sentence? The moment you stop trying is precisely the moment you stop excelling.


So try, try and try. Never ever let success stop you from trying. This is a mental limitation that I need to overcome - how to see the world in the eyes of a newbie when you're no longer a newbie. As a full time tutor, this is perhaps one of the greatest ability I can ever master. If you've taught a subject for 10 yrs, you're not going to teach it the same way when you're in year 1. It's just different. You take little things for granted. You take student's confusion with great impatience. After you taught them once, you expect them to know it immediately. But that's not how people learned. You no longer teach as if you're a newbie tutor.


If I ever did that, that'll be the end of me. Stay humble, stay foolish and stay newbie...even when you're not.

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2014 in the eyes of the books I've read

I blogged about my book challenge here. Essentially, it's for me to read 1 book per week, for 52 weeks, summing up to a grand total of 52 books per year. The last time I succeeded in this challenge was way back in 2008 where I managed 55 books that year. Most of the time, it's just 30 odd books, which is about 1 book every 4 days.


I also shared that the main purpose of this challenge is not to squeeze as many books as possible. It's really to ensure that I've a commitment to make to myself to read widely and never give up on books that are unappetizing for the first few chapters. There are many gems that only reveal themselves perhaps half way through the book, so by throwing away books without completing them, it seems I'm not giving them a fair shot at impressing me.


Below are the list of books that I've read in 2014, arranged in chronological order (book 1 is the first book I've read, book 52 is the last) As usual, I'll highlight a few books that I think are really the power-reads for the year 2014.

1) The Alchemist - Paulo Coelho                              
2) How to fail at almost everything and still win big - Scott Adams                            
3) E-Squared: 9 DIY energy experiements that prove your thoughts create reality - Pam Grout
4) Quiet: The power of introverts - Susan Cain                  
5) Outliers - Malcom Gladwell                  
6) The Wolf of wall street - Jordan Belfort                          
7) How to read a book - Mortimer J. Adler, Charles Van Doren                  
8) The Android's Dream - John Scalzi                    
9) Predictably Irrational - Dan Ariely                      
10) Beyond Outrage - Robert B. Reich                  
11) Redshirts – John Scalzi                          
12) Superpowers - David J. Schwartz                    
13) Luka and the Fire of Life - Salman Rushdie                  
14) An unknown world - Jacob Needleman                        
15) Good Omens - Terry Pratchett & Neil Gailman                          
16) Reaper Man - Terry Pratchett                          
17) An illustrated book of bad arguments - Ali Almossawi                            
18) The world until yesterday - Jared Diamond                
19) The art of thinking clearly - Rolf Dobelli                        
20) The Forgotten Highlander - Alistair Urquhart                              
21) The Victorian Internet - Tom Standage                        
22) David and Goliath - Malcolm Gladwell                          
23) The book thief - Mark Zusak                              
24) The Companions - The Sundering, Book 1                    
25) The Godborn: The Sundering, Book 2                            
26) All Bad things - Stephen Blackmoore                              
27) The Earth Transformed - Mike Stackpole & Nathan Long                      
28) City of screams - James Rollins                          
29) The Blood Gospel - James Rollins & Rebecca Cantrell                              
30) I will teach you to be rich - Ramit Sethi                          
31) The science of getting rich - Wallace D. Wattles                        
32) The total money makeover - Dave Ramsey                
33) The Rosie Project - Graeme C. Simsion                        
34) Damned - Chuck Palaniuk                  
35) Man vs Markets - Paddy Hirsch                        
36) The Richest Woman in America - Janet Wallach                        
37) Gone fishing with Buffett - SeanSeah                            
38) The Big Short - Michael Lewis                            
39) 30 second economics - Donald Marron                        
40) Buddha - Deepak Chopra                    
41) Apocalypse - John Michael Greer                    
42) What your school never taught you about money - Dennis Ng                          
43) The romantic economist - William Nicolson                
44) The secret lives of litterbugs - M.A.C. Farrant                            
45) The Rules of Money - Richard Templar                          
46) Allison Hewitt is trapped - Madeleine Roux                
47) Flash Boys - Michael Lewis                  
48) Secrets of the millionaire investors - Adam Khoo/Conrad Alvin Lim                  
49) Belle - Paula Byrne                
50) Everything is bullshit: Priceonomics authors              
51) Millionaire teacher - Andrew Hallam                              
52) Boomerang - Michael Lewis   

This year I included a few fiction in the list as well. They are just too good to not recommend. Not in any order of importance,

1) How to fail at almost everything and still win big - Scott Adams

I'm sure everyone heard of Dilbert, but not everyone knows the story of Scott Adams, the creator of that comic strip. What I found good about this book is the idea of creating a system to ensure that you win rather than setting goals. Setting goals means that you're going to fail everyday until you hit the set target, but having a system means that you're always working towards an end game. That's the most important take away for me from this book. It's really an easy read because he's quite a good writer. Funny too :)

2) E-squared: Nine do it yourself energy experiments to prove your thoughts create reality - Pam Grout

I can safely say this book transformed my life! In books like "The secret" or even Antony Robbin's books, you can see them talking about how you can shape your reality by believing in something so much that it becomes reality. Well, this book shows you in 9 steps how to do so. I like it that they start off with small experiments (that you should do!) and gradually get bigger and grander. I was always very amazed when the thought that I wrote out, with all the dateline for it to appear, really does appear, but you have to train your mind to clarify your thoughts so that the right frequency gets sent out. For the first few experiments, I wrote down that I wanted to see a yellow bird, within 24 hours. I'm thinking of a particular yellow bird that flies around my HDB precinct and you can spot them occasionally. In the first 23 hours, there's nothing. But in the last hour, I really saw a yellow bird. Not the real bird, but Birdie from Macdonald's! They are promoting their last toy or something for their happy meal and I saw the yellow bird from the newspaper! I know, it's not the same as what I had in mind, but that hooked me. Progressively, I set higher and harder challenges for the universe to help me, like having xyz students, having xyz income, having xyz savings. All of them exceeded beyond my expectations so much that this year is the best year of my entire 10 yrs of working in my line. I came from a pretty bad position in 2013, so this seriously kickstarted my drive and reset my thinking. I couldn't recommend this book enough and I will read it every now and then to reinforce what I've learnt. If you want to read this, you must try out the activities!

3) Quiet - Susan Cain

I'm an introvert and will always be. From this book, I learnt a lot about people of my type. Introvert doesn't mean that we're not sociable or shy, it just means that we derive energy from introspection and reflection, unlike being an extrovert where they derive their energy from interacting and mingling with people. This book also highlight how an introvert can use his/her own personality to make a difference to the world where extroverts rule. For one thing, being an introvert makes me a better listener. Perhaps that's why I blog - it's to release my inner voice and have a space to air my thoughts in an otherwise crowded extrovert world.

4) Redshirts - John Scalzi

When I like an author, I'll try to read all his/her series. This will give me a broad range of his works and to better appreciate any relationship between the books. John Scalzi is one of these authors that I constantly go back to for sci-fi reads. I've read a lot of sci-fi books and I'm really really wow-ed by the plot. It's like those Ender's game moments where the world you no longer knew the world around you. It's that mind blowing. Not for everyone - only for sci-fi fans.

5) The world until yesterday - Jared Diamond

This is highly academic and not very readable, and it definitely benefited from my practice of not stopping until I finish a book from cover to cover. The book is actually very enlightening because it shows how traditional society differs from our modern society. Things that you took for granted considered weird just 20-30 yrs ago. For example, in certain parts of the world, kids from traditional society are treated exactly as adults, except they are discounted because of their smaller size. They are allowed to play with knives or practically wander around exposing themselves to all kinds of dangers. Why? They are treated as adults, so they are responsible for their own actions. It's not surprise for the authors to see young kids with burnt marks and scars from their mistakes. Another example is how traditional society handles conflict. If a person makes a mistake, his entire tribe and family and immediate friends are liable to pay for it. We're talking about 30-50 people and above here! They have different ways of resolving conflicts but the ultimate aim is to ensure that they can continue living in harmony. Now, that's something we can all learn from.


6) The Rosie Project - Graeme C. Simsion

I read this book because it's in a book list by Bill Gates. Actually, it's recommended to him by his wife. I really find this book humorous and engaging..it's literally a page turner for me. Good books have this ability to transcend your reality and make you see the world in a different person in a different role. Rosie project did exactly that and lets you see the world in the eyes of a person with Asperger syndrome. Just trust me. Read this book if you have to read one fiction this year, and you won't regret it.


7) The big shot, Flash boys, Boomerang - Michael Lewis

Michael Lewis. Ever since Liar's Poker, I was hooked by his style. He has this ability to explain seemingly complicated things into something easily accessible, and best of all, in a humorous way. The big shot is about the subprime and how it came about. It's a riveting read. I didn't know I can be excited about reading CDO, subprime, mortgage dicing and slicing, but I did. Flash boys is about HFT - or high frequency trading - on how a fraction of a second is so important that people are willing to pay tremendous amount of money to screw other people. Lastly, Boomerang is about the author going to different financial whacked country, like Iceland, Greece and Ireland, to find out about the 'national character' of their people, in order to understand why people do what they do when they have a godzillian amount of money flowing into their pockets. Same crisis, but each country reacted in different ways because of this difference in their national character. I realised I love reading history, specifically the history of financial disasters. If you love it too, you must read Michael Lewis's books. It's really very accessible.


There you go! This year, I've a hard time compiling the list of books that I want to recommend to readers. It's because almost all the books are so good. Special mentions goes to Malcom Gladwell's Outliers and David & Goliath. I also didn't include Janet Wallach's The richest woman in America, which is about Hetty Green, the witch of Wall street. I'm very fascinated with historical figures especially when they have something to do with finance. Sean Seah's Gone fishing with Buffett and Dennis Ng's What you school never taught you about Money are also good reads since it's one of those rare books that deals with local finance. 

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My offensive and defensive strategies

I wrote about my dilemma regarding whether to pay down my HDB loans or use the excess money for investment. That was back in Nov 2013 and more than a year had since passed. Back then, I really put in an extra 24k to do partial repayment for my HDB loans, and it shaved off 2.5 yrs off my 30 yrs loan.


One year later, I still don't know if I did the right decision. The dilemma is always the same: given a sum of money, is it better to use it pay down the 2.6% mortgage loan or invest in the market to get a yield of more than 2.6%? The decision is complicated by factors such as:

1. Certainty of interest payable on money borrowed vs uncertainty of returns in the market

2. Property insurance bought in the event that either owners hit death or TPD

3. The liquidity of the money invested in the market vs doing a partial capital repayment


In the end I opted for a balanced solution, meaning that I will save a portion for investment and save a portion to make partial capital repayment for my HDB loans. This will avoid the two extreme end game scenario of being asset rich but cash poor (if I use my savings to pay off HDB loans early) and paying excessive interest by dragging the loan period to the maximum (if I invest my savings totally). Both are not ideal outcomes for me, so I would avoid both.


This year, I'm more slanted towards investing my savings in the market. Value is emerging in the stock markets, and so I would keep a larger part of my savings liquid to take opportunities. I made a proposal to my wife to see if she can part with 6k (12k in total) to make partial capital repayments. If we can keep at this rate for every year, we'll be out of debt in 14.2 yrs. This is opposed to not doing any repayments, and letting the loan drag for 24.4 yrs. 6k per person per year seems like a reasonable amount to be able to continue for the long term (at least 10 over years!), and with that we can save about 70k off the total payment for our flat.


I did a comparison by doing several amount of repayment, ranging from 6k all the way to 24k annually. The table shows the results obtained. I tried putting in half yearly too, which means say instead of putting in 24k per year in one shot, I put in 2 injections every half a year of 12k each. Interestingly, not much difference, so I dropped that plan.

24k per year (12k per person per year) is too insane. I can do it for extended period but I'm quite sure my wife would be complaining. If I save 50k per year, 12k would be roughly 25%, so it might be a tad too much. The consensus so far is 12k or 6k per person per year, roughly 10% of my savings of 50k. Like the government, I'll have to adjust this percentage on a yearly basis, seek the shareholder's vote (aka wife's consent) and roll out the plan.


This year, I seem to have a lot of bright ideas to manage my personal finance, like setting up a emergency fund of funds in CPF by doing voluntary contribution and building a base of 240k so that I can generate enough yield to cover my mortgage loan of 1k, It seems like I'm a headless chicken running around in all different directions, don't you think?


But I have my financial freedom plan! On one hand, I'll build up a capital base of 240k. Grow big enough to make my problems smaller. At the same time, I'll reduce my debts by making capital repayments. That's my 'offensive' strategy. My 'defensive' strategy is to lock up enough funds in my CPF OA by doing voluntary contribution, so that I can depend on it in the event that I cannot work for prolonged period of time. A back of the envelope calculation means I've to put 6k per year to make partial repayments (I'll make an effort to do it annually), another 6 to 12k to put into CPF OA (entirely optional, depends on circumstances), so in total about 12k to 18k out of my savings will be channelled into my strategies. And the good thing is that I reserve the rights to change my opinion anytime haha! I'll tweak to my heart's delight every year based on the circumstances. That will give me the leeway to evolve my financial plans together with me.


Here's the summary of the 'budget' needed to run these 'programs':

1. HDB capital repayment plan (intermediate priority)

Short summary: Pay extra $ on top of mortgage payable to reduce interest paid for flat
End point: Be debt free in 14.2 yrs
Amt needed per year: 6k
Expected project duration: 14.2 yrs

2.  Build up of capital for 1k/mth dividend plan (highest priority)

Short summary: Build up a base of 240k (shortfall 100k), invest at >5%
End point: 1k per month dividends based on 5% returns
Amt needed per year to fund: 30k to 50k
Expected project duration: 2-3 yrs

3. Emergency fund of funds (lowest priority)

Short summary: Do voluntary contribution, build up OA acct to contain 1 yr of full monthly mortgage (2k)
End point: Have >24k in OA account
Amt needed per year: 6k to 12k (depending on earnings and tax reliefs obtained)
Expected project duration: 1 to 5 yrs


That's why I need to save money!! 3 programs and I need the budget to run them! Somewhere down the line, the 3 programs will overlap and I will (likely) change my plan again. Paying off my HDB loans will require me to have less money in my emergency fund of funds, then I can use the money to build up my capital of passive income, which will lead me to have more money to pay off my housing loans and have more emergency funds etc etc.


We'll see :) I think my plan for the next 3-5 yrs are crystallising nicely. I'll just need time and effort to carry it through then.








1) Updates of goals on 8th Nov 2016 here

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My offensive and defensive strategies

I wrote about my dilemma regarding whether to pay down my HDB loans or use the excess money for investment. That was back in Nov 2013 and more than a year had since passed. Back then, I really put in an extra 24k to do partial repayment for my HDB loans, and it shaved off 2.5 yrs off my 30 yrs loan.


One year later, I still don't know if I did the right decision. The dilemma is always the same: given a sum of money, is it better to use it pay down the 2.6% mortgage loan or invest in the market to get a yield of more than 2.6%? The decision is complicated by factors such as:

1. Certainty of interest payable on money borrowed vs uncertainty of returns in the market

2. Property insurance bought in the event that either owners hit death or TPD

3. The liquidity of the money invested in the market vs doing a partial capital repayment


In the end I opted for a balanced solution, meaning that I will save a portion for investment and save a portion to make partial capital repayment for my HDB loans. This will avoid the two extreme end game scenario of being asset rich but cash poor (if I use my savings to pay off HDB loans early) and paying excessive interest by dragging the loan period to the maximum (if I invest my savings totally). Both are not ideal outcomes for me, so I would avoid both.


This year, I'm more slanted towards investing my savings in the market. Value is emerging in the stock markets, and so I would keep a larger part of my savings liquid to take opportunities. I made a proposal to my wife to see if she can part with 6k (12k in total) to make partial capital repayments. If we can keep at this rate for every year, we'll be out of debt in 14.2 yrs. This is opposed to not doing any repayments, and letting the loan drag for 24.4 yrs. 6k per person per year seems like a reasonable amount to be able to continue for the long term (at least 10 over years!), and with that we can save about 70k off the total payment for our flat.


I did a comparison by doing several amount of repayment, ranging from 6k all the way to 24k annually. The table shows the results obtained. I tried putting in half yearly too, which means say instead of putting in 24k per year in one shot, I put in 2 injections every half a year of 12k each. Interestingly, not much difference, so I dropped that plan.

24k per year (12k per person per year) is too insane. I can do it for extended period but I'm quite sure my wife would be complaining. If I save 50k per year, 12k would be roughly 25%, so it might be a tad too much. The consensus so far is 12k or 6k per person per year, roughly 10% of my savings of 50k. Like the government, I'll have to adjust this percentage on a yearly basis, seek the shareholder's vote (aka wife's consent) and roll out the plan.


This year, I seem to have a lot of bright ideas to manage my personal finance, like setting up a emergency fund of funds in CPF by doing voluntary contribution and building a base of 240k so that I can generate enough yield to cover my mortgage loan of 1k, It seems like I'm a headless chicken running around in all different directions, don't you think?


But I have my financial freedom plan! On one hand, I'll build up a capital base of 240k. Grow big enough to make my problems smaller. At the same time, I'll reduce my debts by making capital repayments. That's my 'offensive' strategy. My 'defensive' strategy is to lock up enough funds in my CPF OA by doing voluntary contribution, so that I can depend on it in the event that I cannot work for prolonged period of time. A back of the envelope calculation means I've to put 6k per year to make partial repayments (I'll make an effort to do it annually), another 6 to 12k to put into CPF OA (entirely optional, depends on circumstances), so in total about 12k to 18k out of my savings will be channelled into my strategies. And the good thing is that I reserve the rights to change my opinion anytime haha! I'll tweak to my heart's delight every year based on the circumstances. That will give me the leeway to evolve my financial plans together with me.


Here's the summary of the 'budget' needed to run these 'programs':

1. HDB capital repayment plan (intermediate priority)

Short summary: Pay extra $ on top of mortgage payable to reduce interest paid for flat
End point: Be debt free in 14.2 yrs
Amt needed per year: 6k
Expected project duration: 14.2 yrs

2.  Build up of capital for 1k/mth dividend plan (highest priority)

Short summary: Build up a base of 240k (shortfall 100k), invest at >5%
End point: 1k per month dividends based on 5% returns
Amt needed per year to fund: 30k to 50k
Expected project duration: 2-3 yrs

3. Emergency fund of funds (lowest priority)

Short summary: Do voluntary contribution, build up OA acct to contain 1 yr of full monthly mortgage (2k)
End point: Have >24k in OA account
Amt needed per year: 6k to 12k (depending on earnings and tax reliefs obtained)
Expected project duration: 1 to 5 yrs


That's why I need to save money!! 3 programs and I need the budget to run them! Somewhere down the line, the 3 programs will overlap and I will (likely) change my plan again. Paying off my HDB loans will require me to have less money in my emergency fund of funds, then I can use the money to build up my capital of passive income, which will lead me to have more money to pay off my housing loans and have more emergency funds etc etc.


We'll see :) I think my plan for the next 3-5 yrs are crystallising nicely. I'll just need time and effort to carry it through then.








1) Updates of goals on 8th Nov 2017 here

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Ally, Beth and Charlene - my 3 chilli plants

I started planting chilli late last year. It's Dec 2014 now, so it's almost a year since I saw them grew from dormant dry seeds in a paper packet to the tall living fledgling plants bearing fruits now. I have three main chilli plants, let's call them Ally, Beth and Charlene, all of them in the same planter box. I wanted to give a "Best chilli plant 2014" award to one of them, so let's do a short review of their history.

Chilli flowers - 5 white petals and giving a very minty scent when it bloomed

When they are just dormant seeds, Ally, Beth and Charlene managed to shrug of their sleepiness when submerged in water, and wake up to become seedlings. That might be just normal routine stuff, but there's a small percentage of dormant seeds that do not actually 'revive' upon adding water. They are dead from the start. To be able to survive the transition from seeds to seedlings is a miracle by itself. I also tried growing tomatoes from dried seeds, but my entire batch of tomatoes didn't make it. A full pack of tomato seeds with 100% mortality rate - total wipe out!

When Ally, Beth and Charlene are young seedlings. Picture taken before the 'Massacre'.

Once the first leaves start growing, Charlene began this growth spurt. She's always taller than the rest. If you are to place a bet there and then on which plant is going to bear chilli fruits first, Charlene will be the horse to bet on. She has this potential in her to do so. On the other hand, Ally is the weaker one. Her roots didn't grow deeply, so a gust of wind will blow her off. There's this incident called the 'Massacre', where I have to (reluctantly) remove the 30+ seedlings, discard them and replant the stronger ones so that they can grow taller. Ally, Beth and Charlene are the survivors. The rest of the sisters are discarded. I don't know why I chose Ally actually. She's a black horse? Ally is so weak and fragile that I'll need special care. I thought she wouldn't be able to make it but she did eventually. Strong survivor, she is.

From left to right: Ally, Beth and Charlene. Notice Charlene is taller than the rest.

Not only did Ally survived, she thrived. In the months that followed, Ally overshot Charlene, who is so far the tallest of the group. In Ally's growth phase, she overtook Charlene's height and started flowering. Chilli's flowers are small and white, 5 petals in all, with a characteristic minty smell in the first few days of its bloom. The flowers don't last long. In about 3-4 days, it'll wither and drop off. For every 5 flowers, maybe 1 will have its stigma retained behind. That's a sign that I know a fruit is bearing from the flowers. Of the three, Ally is the one that bore the first baby chilli fruit. Tiny green little tooth that grows longer and longer, eventually turning red when ripe. If you did bet on Charlene to bear fruit first, you'll have lost! The weakest starter, Ally, became a strong finisher.

The 4 chilli fruits by Ally. One (the extreme left) had matured and turned red.

Charlene, ever the fastest grower, had another growth spurt somewhere around Aug/Sept. Now, she's almost as tall as me, with its leaves at my eye level. Charlene however, despite her tallness, is the last to flower. She didn't flower until the Ally had 4 chilli fruits, one of them actually matured and turned red. Charlene, till now, did not bear any chilli fruits.

From left to right: Ally, Beth, Charlene. I'm not joking when I said that Charlene is almost my height. Look at how tall she goes!

Did you notice I didn't talk much about Beth? She don't have this volatile growth stop-start phase. She's been growing steadily upwards all the way since she's just a seedling. She's the only one without the growth spurt and so she's also the shortest between the three of them. However, about a month or two ago, she started flowering and bearing 2 twin baby chilli fruits. Unlike Ally, who had about 4 chilli fruits now, Beth's transition from flowers to fruits is just slow and steady. Beth's a little slow in growing, but she'll be there surely. Not exactly spectacular, but someone you can depend on to show up and get things done every time.


But if you were to criticize that Beth is slow, perhaps you should look nearer to the root of the problem. I had grouped 2 other plants together with Beth, all within the same space. No wonder Beth didn't grow fast. Unlike Ally and Charlene, which are planted as a stand-alone, there's a lot of competition for resources for Beth. Now if you consider that new information, it's very decent that Beth can grow and produce 2 chilli fruits. Very very decent, given its circumstances. Without that competition, who knows if Beth can outgrow and out produce her two sisters, Ally and Charlene.

Beth's dependents. There's 2 other plants grouped together with Beth, competing for resources.

So back to the question: Who should I award the "Best chilli plant 2014" to?

Ally? Because she's a survivor, growing against the odds and eventually flowering and producing the greatest harvest of chilli fruits way before the rest?

Beth? Despite her circumstances, she plodded on steadily and surely, though growing shorter than the rest, started flowering after Ally and produced 2 twin baby chilli fruits before long?

Charlene? The fastest grower among the three (almost as tall as me now), for always pushing ahead and gaining the greatest height so as to get more sunlight? But she's the only one who have not produced any chilli fruits...


I couldn't decide. How could I? Everyone is unique to their own specific circumstances and each has their own way of handling the adversities of life. I scrapped off that idea and thought no more of awards. All of them are winners, in their own right and in spite of their own circumstances.


Did you also try to award the "Best chilli plant 2014" to somebody? It might not be the same award title, because there's various names to it, like "Most successful person 2014", or "Made the most money 2014" or "Most incredible networth grower 2014" etc etc. Perhaps you should consider scrapping it too. There'll always an Ally, a Beth and a Charlene among us.

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Short term goals for my long term plan

I was tallying up my numbers to plan for the short term goals in the next 2-4 yrs. I was 'suddenly' inspired to save up again. The last time I did that was because I wanted to save up for my downpayment and renovation for my flat without getting in debts. So there was this period that I was going 50k per year savings for 3 yrs. Looking back, it's a very sad 3 yrs where I worked like a crazy rabbit on steroids.


Here's goes the thesis. I want to earn enough passive income to hit my stage 1 of my financial freedom game. Stage 1 means that I will have enough dividends to pay off my part of the monthly mortgage loans of 1k (total 2k, but split between me and wife). So working backwards, I needed 240k on a basis of 5% returns to get 1k per month. I know I can achieve that because my current Singapore portfolio is getting that returns. My US is getting more than 5% and for my HK portfolio, I subscribed to dividends reinvestment program (gross dividends about 5% before cost), so the dividends are rolling and compounded. Anyway, yield is easy to get, you just need the base to be big enough, which is what I'm working on right now.


Here's the summary:

I need $1k per month
Yield: 5%
Capital required: $240,000

Invested in market: $75,000
Investible cash: $70,000
Total capital so far: $145,000

Capital shortfall: $240k - $145k = $95k or approximately $100k


Okay, so I needed another 100k more to fulfill stage 1. And with that, I would also need to set aside 10k of emergency cash (3 months), 2 yr worth of mortgage payment ($1k from my portion) in CPF OA account.


Probably can hit this in 2 yrs time, provided I'm lucky in my career. Once I hit that stage, I can finally think about going easy. Maybe I'll take 1 day off per week instead of working 7 days LOL! Till then, excuse me while I work on my 50-60k savings per yr. This time, it's going to be more fun than the last time. Somehow after my 1 yr hiatus, my drive and motivation is reset :)

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DDM valuation for Blue-black Blue chips

Let's do some low ball valuation for a few blue chips, most of them beaten until blue-black.

I'm using a dividend discounted (DDM) model, with the assumptions:

1. Zero growth rate for dividend
2. Rate of return required = 5% (twice as much as CPF's OA account)
3. Dividends given till perpetuity
4. No special dividends included, unless they occur every year. I'll guesstimate in that case.
5. I'm using a geometric progression, specifically the sum to infinity with first term as the dividend at year 0 and the geometric ratio as the ratio between the 1st yr and the 0th year. The formula is:

Sum to infinity = First term / (1 - geometric ratio)

Here's an example of a company, ACME, that pays 100 cts dividends every year.

The sum is 100/(1-(95.238/100)) = $21.


Alright? Let's go:


1. ST Engineering

Dividends per share: 14 cts
Sum = $2.94
Price now = $3.36

2. OCBC

Dividends per share: 34 cts
Sum = $7.14
Price now = $10.33

3. DBS

Dividends per share: 54 cts
Sum = $11.34
Price now = $19.73

4. Kepcorp

Dividends per share: 40 cts
Sum = $8.4
Price now = $8.21

5. Sembcorp Marine

Dividends per share: 12 cts
Sum = $2.52
Price now = $2.92

6. SIA Engineering

Dividends per share: 20 cts
Sum = $4.20
Price now = $3.95

7. Sembcorp Industries

Dividends per share: 15 cts
Sum = $3.15
Price now = $4.16

Take away:


I highlighted the 2 companies where the current price now is lower than this low ball method of calculating the intrinsic value of the company. If you look at Kepcorp, this method gives a value of $8.4. This means that if you take it that Kepcorp is going to give you dividends forever at 40 cts per year, not a cent more or less, AND if you want a return of 5%, you should get it at $8.21. Any dividends above 40 cts is a bonus (because it's not included in the calculations) for you, so is any special dividend declared if any. So how sure are you of getting the 40 cts dividends? That's the ultimate question.

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Be careful of domain specific expertise

We have very specific expertise in very specific domains. It'll be extremely unwise to think that being an expert in one domain can naturally lead to expertise in other domains. 

For example, you're an economic professor teaching in a local university. Due to the nature of your work, you have to be somewhat of an expert in economics. But to think that your expertise in economics extend to areas like financial investments is delusional. It's just not the same. I can even postulate that real life economics is also different from academic economics. Being an expert in academic economics also doesn't guarantee that you're an expert in real life economics. It's that specific.

Case in point: Me. I was studying civil engineering back in NUS and had to do reservist during the school holidays. I must say I'm quite an expert in soil mechanics. There are numerous modules in soil engineering, and I never fail to get anything less than an A- in them. But I failed miserably when I was asked to hammer in a long iron picket in a dry soil. The soil is just too hard to push it through and several attempts at hammering it didn't really help (I must confess we didn't even have a hammer...guess what we did to hammer it?). Even if it goes in, there's not a lot of friction in the dry soil (it's more like sand) to hold the picket upright. Fortunately, there came along a course mate who is also in my platoon. He suggested pouring some water on the soil to increase the shear strength and then he proceeded to pour his whole water bottle onto the patch of sandy soil. It works damn well! The soil becomes less sandy, with a marked increment in the angle of phi, so the shear strength of the soil also increases. This allows the picket to maintain its upright position.

This episode must obviously had a huge impact on me, knowing that I still remembered it after all these years. Being an expert in soil mechanics on paper doesn't guarantee that you're an expert in soil mechanics in practice. Domain specific expertise is that specific.

A person who is a successful businessman doesn't mean he's good at investing. A mathematician specializing in probability doesn't mean he's good at estimating real life odds. A economics teacher doesn't mean he's good at interpreting global trends. A tutor who had taught for 10 yrs in various fields like maths and science doesn't mean he's good at finance. LOL

So the next time you see anyone claiming to be an expert:

1. Ignore his title. What associate director, what CEO..forget it, it's not important

2. Ignore his qualifications. Paper qualifications, hence academic, does not guarantee real life qualifications. Being an expert in mathematics on paper, doesn't mean that you're an expert in real life mathematics, but at least there's a theoretical background to fall back on. Being an expert in mathematics and thinking that you're an expert in technical analysis (for example) is a big fallacy you must not fall into, or believe that others are capable of. Reminds me of Antony Robbins - the self motivation guru espousing wisdom on investments, lol

3. Ignore his years of experience. Unless you can show that the experience is close to the situation as possible. And you must be really really discerning. 

So in a world of smoke and mirrors, what gives? In my opinion, experience in the exact situation (or similar enough, but be discerning) is the best forecaster of expertise. If you've been hammering nails in metal sheets for 10 yrs, you're an expert at hammering nails in metals sheets. You might be some sort of expert in hammering nails in wooden planks, but it might be kind of far fetch to say you're an expert at working with metals. 

In my line, having 10 yrs of experience teaching good students is equivalent to less than 1 yr of experience teaching bad students. Yes, again, it's that specific LOL

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Views on CPF contribution by a Self-employed

This year, I made a bold move. I started to put my cash into CPF for voluntary contribution. It's a strange idea. When I was younger, I wanted to conserve my cash and invest in it myself. But as I get older, I started to think of things that can go wrong. I wanted some insurance against my own investment, in case things goes wrong.


Rationale for putting cash into CPF

There's not a lot of write up for self employed people out there regarding CPF, so I might as well shed some light based on the findings I've done. So this is really tailored for self employed people who are not employed by any companies. The reasons why I want to contribute are:

1. Tax planning - if you know you'll have good earnings for the year, you'll want to plan your taxes ahead so that you don't have to pay unnecessarily

2. Build up a super emergency cash in the form of CPF, especially in the Ordinary Account, for the sole purpose of paying the mortgage when shit hits the fan. This is so super emergency that I planned never to use it at all unless absolutely necessary. The built in trouble and impossibility of taking out that emergency funds only adds serves to highlight the strict conditions in utilizing this fund. If shit really hits the fan, I'll have to go the nearest CPF building to sign some forms so that I can pay my mortgage loans from the OA account of my CPF instead of the usual cash payment for me.


Take this as the emergency of my emergency cash. Ideally, this should be about 20 to 24 months worth of housing mortgage so that I can tank for up to 2 yrs living at bare minimum with a roof above my head.

Getting your hands dirty on the bloody abbreviations

With this in mind, I started reading up on 3 things:

A. Self-employed Mandatory Contribution and Voluntary contribution to medisave account (VC-MA)

B. CPF Minimum Sum (MS) topping-up scheme

C. Voluntary contribution to CPF


A. Self employed Mandatory Medisave contribution (Mandatory Contribution)

For the self employed, it's voluntary to contribute to CPF. However, the medisave account needs to be topped up, and that's the only thing that is compulsory. As long as you're self employed and is a Singapore citizen or PR making a yearly net trade income of more than $6000, you'll have to contribute to medisave account.

Table 1: Self employed compulsory medisave contribution rates in 2014

This contribution is subject to a cap based on different age groups. For example, if you're between 35 to 45 yrs old, you'll have to pay a max of $4800 that year, which corresponds to a monthly income of $5k. Even if your net trade income is more than $5k per month, $4.8k is the maximum amount that you have to contribute to your medisave account.


Okay lah, medisave is going to be useful in the future. Sooner or later, the amount will be used, so might as well put it in a good place earning high interest to pay for the future. Pay now and use later. For more information, you can read the link here.


Self employed Voluntary Medisave contribution (VC-MA)

This is different from the compulsory one, even though both are contributed to the medisave account. The difference lies in that there is no tax relief for the compulsory medisave contribution. It's by law that you have to contribute. If you have extra cash that you want to top up specifically to the Medisave account, you can do so and also earn tax relief if you hit the following conditions:

1. You are a Singapore citizen or PR, AND

2. You have made a voluntary contribution to your medisave account in the previous year


The key word here is 'AND', not 'or'. A little planning is important, especially if you know that in the next 1-2 yrs, you're going to earn more money and you need that extra tax relief by doing voluntary contribution.


The tax relief is limited to the lower of:

1. Voluntary cash contribution directed specifically to Medisave account (VC-MA)

2. Annual CPF contribution limit ($30,600 in 2014, $31,450 in 2015) less Mandatory Contribution amount

3. Prevailing Medisave contribution ceiling table (MCC). It's $48,500 for 2014.


It sounds really complicated, but I assure you it's not. IRAS website illustrates with very clear examples of what happens when a self employed earning this amount, putting that amount in CPF voluntarily over and above his compulsory medisave contribution can get how much relief. You can find the link here.


B. CPF Minimum Sum (MS) topping-up scheme

This minimum sum topping up scheme is for you to top up your own or your loved ones' Special Account (SA) or Retirement Account (RA). Whether it's funded to SA or RA depends on the recipient's age. If the recipient (can be yourself) is below age 55, it'll go into the SA. If the recipient's age is 55 or more, it'll go to the RA account. CPF has a strict definition of loved ones. To them, 'loved ones' include only your parents, parents-in-law, grandparents, grandparents-in-law, spouse and siblings. No mistress, no friends, no co-habitants and no dependents.


The amount of tax reliefs is equal to the amount that you topped up, subject to a cap, of course. The maximum tax relief for contributing towards your own SA or RA is $7k per year. The maximum tax relief for contributing towards your 'loved ones' SA or RA is $7k per year also. Remember to read the definition of 'loved ones' above. The tax relief cap of $7k is applied separately, so you can theoretically get a max of $14k tax relief per year if you top up BOTH your own SA/RA and your 'loved ones' SA/RA.


Oh, by the way, it's called CPF Cash Top-Up Relief for a reason. To qualify, you should use cash and you can't transfer your own CPF account to others. Also, for spouse and siblings, they must not have an annual income exceeding $4k in the year of top-up. Otherwise, you won't get the tax relief. You can read more about it in detail in the link here.


C. Voluntary Contribution to CPF

This is different from Voluntary contribution to medisave account (VC-MA). This is where you inject money into all 3 accounts (OA, SA and MA) in your CPF, in a ratio that is dependent on your age.

Table 2: CPF contribution / allocation rates for different age groups in
2014 for wages > $750. For wages <$750, click here to see the table.

It's not really good to see that table, isn't it? The reason is that the amount of money that you voluntarily contributed to all 3 accounts in your CPF does not have an employer's portion. Let's say you're between 35-45 yrs old, your contribution rate should be 20% and 16% from employers, forming a total of 36%. But since you're contributing voluntarily, your entire sum will form the 36% normally contributed by both employer and employee, Of the 36 parts, 21 parts, 7 parts and 8 parts will be contributed to the OA, SA and MA respectively.


It's really easier to see the contribution amount in the form of a ratio below.

Table 3: CPF allocation rates (ratio) in 2014 for different age groups

Okay, this makes it much clearer. If you contribute $10k voluntarily to 3 accounts, you'll end up contributing $5,834 (10k x 0.5834) to your OA, $1,944 (10k x 0.1944) to your SA and $2,222 (10k x 0.2222) to your MA. But you can only contribute up to a cap. That cap is the Annual CPF contribution limit ($30,600 in 2014, $31,450 in 2015) less Mandatory Contribution amount. The Mandatory Contribution amount for a purely self-employed person not being any employee of any company is also the money that you have to contribute to your medisave account by law every year.


What about tax relief?


First, you must hit the conditions:

1. You are a self employed person and you've a positive net trade income in the yr of assessment and

2. You've contributed to your mandatory medisave contribution in the preceeding year and/or

3. You've made voluntary contributions to your medisave account (VC-MA) in the preceeding year


Basically if you haven't contributed any amount to your medisave account that is mandatory or voluntarily, you won't be entitled to the Voluntary CPF contribution tax relief. If you hit the conditions above, then your tax relief will be the amount contributed subject to a cap, which is the lower of:

1. 36% of your net trade income for 2014 (37% of net trade income for 2015)

2. Annual CPF contribution limit ($30,600 for 2014, $31,450 for 2015)


You can see this link here to read up some illustrations.

Above all these, there's this site that clarified a lot of queries for me. I don't even know how to do a voluntary contribution for CPF until I read the FAQ here. It's a very useful read for all self employed people.


Take away:

So, what's the right course of action? Firstly, I have to pay the compulsory medisave account. You can (1) pay it directly to your MA account, or (2) you can do a voluntary contribution to 3 cpf accounts so that a certain % will flow to your MA, but make sure your contribution to MA is equal or higher than the amount of medisave you are legally required to contribute yearly. If not, you still have to top up your MA to hit the legal requirement. That's not a choice.

After that, I'll have to weigh these 3 factors:

1. How much cash do I want to keep for my personal investment as a warchest

2, How fast I want to fill my fund of the mother of all emergencies, in the form of OA in my CPF

3. How much tax reliefs I can knock off my income to bring my assessed income to a lower tax level.


Here's a brief summary of all the schemes. That hardest part of this research is making heads and tails of all the available top ups with their abbreviations and jargons.

Table 4: Summary of schemes available and tax reliefs

My answer to the above 3 factors will allow me to decide how much money I can contribute and also into which account. I will be contributing to all 3 accounts (doing a Voluntary contribution to all 3 accounts), and not just contribute to my SA account (through CPF Minimum sum top up scheme). The main reason is that the tax relief for Voluntary contribution to CPF is higher than the CPF minimum top up scheme. The other reason that I need to build up my OA to pay for my housing. I can't pay for my housing using SA, even though the interest rate is higher. It just doesn't serve my purpose and address my concerns.

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The relationship between ROE and ROA

Been reading a few books on finance recently to brush up some stuff. Things that you don't use it often, you'll forget. So I make it a point to re-read some of the books that I've read and also some books for newbies. It's important to learn as if you are a newbie even though you are not. You'll see things in different light.


Anyway, I was just musing over a key criteria in evaluating companies. Among other things, it must have:

1. High consistent ROE, > 15% over 10 yrs or more, or if 5 yrs, have a higher margin of safety

2. High consistent ROA, >7%, same time criteria as above


ROE is calculated by taking the net profits divided by the equities portion. You can find net profits in the income statement, usually right at the bottom of it (it's literally called the bottom line). Equities is found in the balance sheet. Equities is what you are left with after subtracting total liabilities from total assets. ROE itself changes depending on how much debt you use to leverage to increase your earnings, so it's very important to consider the debt profile of the company together with ROE and not just treat ROE as a stand alone matrix.


You can break up ROE into the following 3 components to better clarify what exactly drives the ROE.


ROE = Net profits/equities = Net profits/Revenue x Revenue/Assets x Assets/Equities


Net profits/Revenue is the net profit margin. It measures how many dollars you book as profits after subtracting all the costs of selling $1 worth of goods/services. It's important to realise firstly this might not necessarily translate into cash straight away because this is just an accounting profit. The actual cash might come in later (or not) and can be seen in the statement of cash flow. Obviously, the higher the net profit margin, the better it'll be.


Revenue/Assets is the component that measures how efficient your conversion of the assets to revenue. It varies widely from a company that sells goods to a company that sells services. Generally, a company that sells services are lighter on assets, so their revenue/assets ratio will also be higher than say, a company that sells shoes. Again, the higher the better.


Assets/Equities measures the gearing (some sort) of the company. Assets (A) = Equities (E) + Liabilities (L). If the company has a lot of debts, their liabilities portion will be substantial, thereby raising this ratio. Out of the 3 components, this is a ratio that might not be good if it's higher. Given the same ROE, a company with low Asset/equities ratio is generally in a better position than one with higher Asset/equities. With debts, you can leverage a higher profit, but it goes both ways too when the economic situation becomes dire. You can lose more than you owe. Short-term wise, with debts, generally ROE will be raised (but at what cost?) because it's just a product of the three components.


But I want to introduce ROA into the picture as well. ROA is defined as follows:

ROA = Net profits/Assets

It measures how efficient the company is at converting its assets into net profits. Generally, the higher the better. However, because the denominator is Assets, and Assets = Equities + Liabilities, essentially:

ROA = Net profits / (Equities + Liabilities)

Now compare this with ROE, which is:

ROE = Net profits / (Equities)

and you'll realise two things:


1. Mathematically, ROE is greater than or equal to ROA, because the denominator for ROA is larger or equal to that when calculating ROE

2. ROA approaches ROE when Liabilities approaches zero. For a company with zero debt, there should be no difference between the ROA and ROE


That was my hypothesis anyway. It formulated when I was at a coffeeshop waiting for my seafood hor fun and I got myself thinking after looking at the 2 criteria stated above (high ROE and high ROA) for good companies. I knew I got to test it out, so let's see it in real life cases.

It's instructive to compare 2 companies with similar ROE and then compare their ROA, after which we see their Debt/Equity ratio.


Observations:

1. The two green columns - ST Engineering and Sheng Siong - have very similar ROE at 26+%. That's very high. But notice also that while ST Engineering has a much lower ROA, Sheng Siong has a much higher ROA. If we look at the Debt/equity, we notice that ST Engineering has a lot more debts than Sheng Siong. This by itself isn't a red flag, but it's just something we have to take note of. Debt is only a problem if they have a problem paying it off. We can see that the high ROE of ST Engineering is partly fueled by its debts.


2. The two purple columns - GDS and Vicom - again have very similar ROE at around 22 to 25%, which is very admirable. This time, both have very low debt/equity ratio and thus their ROA matches very closely to their ROE. GDS especially, is a company that I didn't know existed until I tried finding a company listed in SGX with the lowest Debt/equity ratio. Having a high ROE (25%)  and a high ROA (19%) plus a good yield of about 3.8%, it's one of those small caps that might be worth while for investors to dig deeper.


3. The last 2 red columns - Sembcorp Ind and Hock Lian Seng - also have pretty good ROE of around 16.8%. But we can immediately see the difference in their ROA. Sembcorp Ind has still a decent 8% ROA but Hock Lian Seng's ROA failed the criteria of having ROA being 7% or more (it's 4.8% in 2013). And we can observe why - the debt/equity for Hock Lian Seng is much much higher than that of Sembcorp Ind.


Take away:

I think if we track the ROE and ROA trends of a company across years, we can uncover something interesting. ROE by itself is just a number; we have to check the quality of that number. If it's maintained by higher and higher debts, we can see it in their ROA trends too. Basically you don't want a situation where the ROE keeps increasing and the ROA keeps decreasing. A divergence of this two matrices means only one thing - the debt is piling up.


But of course, I still highly recommend the elegant Dupont's analysis of ROE that I've blogged about at length and summarised here. It clearly shows which of the 3 components are the ones that brings the bacon home and maintains the ROE.

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