As from April 2013 my Journey in Investing is to create Retirement Income for Life till 85 years old in 2041 for two persons over market cycles of Bull and Bear.

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This blog is authored by an old multi-bagger blue chips stock picker uncle from HDB heartland!

"The market is not your mother. It consists of tough men and women who look for ways to take money away from you instead of pouring milk into your mouth." - Dr. Alexander Elder

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Sunday, 16 August 2009

Financial literacy is one of the most important skills an adult should have


A FRIEND from my university days called to say that she and her husband had committed to buying a second property and are finding their finances a little tight despite having two incomes. Then she asked a question that I get rather often: 'Got any good stocks to buy or not? Any inside information?'

'No,' I said. 'I never get any inside information! You go do your own analysis!' She said: 'You mean you do your own analysis when you buy stocks? I buy on 'tips'. Anyway, I don't know how to analyse stocks. Where did you learn how to do that? In school ah?'

Yes, I did. My studies in Business Administration and Applied Finance and the CFA programme did equip me with some of the principles of investment analysis.

I told her that financial literacy is one of the most important skills an adult should have and that it should be taught in schools. Increasingly this is being recognised, and such courses are being offered as part of enrichment programmes.

But for those of us who didn't have that privilege, there is no lack of material available out there if one really takes an interest in the matter. I have friends from non-financial industries who through years of reading the 'how to' investment books, have become very savvy investors. A number of them came to know me through this column.

One of them is from Penang. He used to run his own construction business and is now retired. He said he was an ignorant young man in the 80s and had lost money investing in a fund. He then resolved to educate himself on investment. Like most value investors, he idolises Warren Buffett. He bought a few lots of Berkshire Hathaway shares some years back, with the intention of leaving one lot each to his grand kids as their education fund.

But he sold some near the peak in 2007, sensing the frothiness of the market. Earlier this year, he bought into Citigroup when it sank to around US$1. He has sold some to get back his capital. What's left in the stock now is all 'free money'.[Createwealth8888: Pillow stocks ah!]

Having experienced and seen the results of wise investments, this friend is very fervent about convincing others of the importance of learning that skill. [Createwealth8888: Me too, but how many people will believe me?] At 60-plus, he still buys and reads books like Trump Strategies for Real Estate: Billionaire Lessons for the Small Investor and Accounts Demystified by Anthony Rice.

Some months back, he asked me to help him edit a two-pager that he had penned on his investing experience. He wanted to share it with his friends, particularly the younger ones. I think many readers can benefit from his advice as well. Here's what he wrote:

'I have no money to invest in stocks! - This statement is wrong! Why? Because one can always start small. Below are two real life examples. Case 1: With her monthly salary of less than RM200 back in 1958, a 'poor' Chinese primary school teacher (my friend's cousin) managed to put some savings away every month. In the early 1960s, she started to buy stocks as investments.

She did the 'right' thing in investment. She chose the 'good' stocks - companies with good businesses. She held on to the stocks for the long term. Over the years, she bought more of the stocks with her additional savings as well as the dividends received. Her stockholding also grew as the companies distributed bonuses and issued rights.

Thirty years later, she had become a millionaire. She managed to send her kids to England to study. Despite her wealth, she is still very careful with her money. As a retired civil servant, she receives a pension of RM1,000 a month. But dividends from her stocks come to RM3,000 a month. Case 2: In 1985, a young 'ignorant' young man (my friend himself) invested $500,000 of his hard-earned income/savings in a fund managed by a bank. He didn't know much about stock investing. He thought the bank's fund managers would be in a better position to help him invest. But over the next one to two years, his invested fund decreased in value. He lost about $150,000! He lost confidence in the fund managers, and withdrew what was left of his money.

The lessons from the examples are: One, it's not true to say one has no money to invest. Two, even if you have money, without sound knowledge of investment, it is 'useless'. People will try to take away your money. Three, it is better to start learning how to invest when you are young so that your 'good' investment can enjoy the 'magic of compounding' over a longer time frame.

The compounding effect is such that the longer the time, the bigger the money will grow to! For example, a $100,000 invested with a compounded return of 8 per cent a year, will: in 10 years grow to $216,000; in 20 years grow to $466,000; and in 30 years grow to $1,006,000!

It's never too late to start. And from your own experience, you can pass on to your next generation the 'correct' way to invest their hard-earned money.

Also, it is not true that we have no time to manage our own investment. This is the misconception that so-called 'experts' perpetuate to mislead us, so that they can slowly take away our money through the 'clever' knowledge of investment! Remember Bernie Madoff? (How cleverly he cheated his clients!)

It is not a time factor, nor a cost matter. It is a matter of focus and priority. So equip yourself with good knowledge and attitude of investment. There are a few good books to teach/guide us.

The Richest man in Babylon;
Rich Dad and Poor Dad;
Who Moved My Cheese?
The Intelligent Investors;
Beating the Street;
Common Stocks and Uncommon Profits;
Books on Buffett's investment strategy, including The Warren Buffett Way; Buffettology; The New Buffettology.

You can finish reading these books within one year and they will cost you less than $2,000! This is another way to self-study an Investment MBA course.

Yes, it is simple but yet not so easy. It needs determination and belief that this is the right and only way. 'Yes, you can!' as Mr Obama would say.

Good luck and have a happy life. It's achievable if we choose the 'right' track. Laziness and greed are the biggest enemies! And no 'quick money' mentality, please!'

Well put indeed. To readers who have written in to ask which are the good investment books, perhaps the list above is a good place to start.

Along the vein of 'experts' trying to profit from the uninitiated, another friend pointed out to me what he deemed to be the latest instance of that - the just launched POSB's MyHome Fund.

Managed by DBS Asset Management (DBSAM), the fund will invest in two exchange traded funds (ETFs) - namely the DBS STI ETF and ABF Singapore Bond Index fund. Both ETFs are listed on the Singapore Exchange. Depending on risk appetite, investors can choose from two portfolios offered which differ in their allocation to the two ETFs.

Why pay DBSAM a fee of 0.5 per cent when investors can buy both the ETFs directly from the market, he asked. Some observers see the MyHome Fund as a ploy by POSB - a unit of the DBS Group - to raise funds for the DBS STI ETF which hasn't attracted that much monies since its launch earlier this year.

Another friend cheekily said they could launch their own 'Milk the People Fund'. 'That's why learning to invest or at least understanding the gist of it should be rated as an essential life skill in this world of sharks that we live in,' he said.

'Sadly, most laymen will not be able to pass it down to their kids. [Createwealth8888: The purpose of this blog is to record the truth and fact of investing down to our kids] And these kids will grow up wondering how to invest, read the ads in the papers and end up enriching those guys selling trading programmes or courses but still end up nowhere.'

Also commenting on the MyHome Fund, the website The Book of Wise Investors concluded: 'Finance companies, insurance companies and banks are not benevolent donors to your wealth. The most important fact in growing your hard- earned money is really more financial literacy and not paying unnecessary expenses for nothing.'

But to be fair, as pointed out by financial adviser Martin Lee of Den of Lion Investors, MyHome Fund investors don't have to incur costs rebalancing their portfolio. For investors who want to do regular investments of $100 to $1,000, the upfront costs will be lower via the fund.

Also, according to him, if MyHome Fund manages to attract a big pool of money, its manager - DBSAM - may be able to get the manager of the DBS STI ETF, also DBSAM, to create units at net asset value. Hence, investors would save on the bid-ask spread, a cost that someone who buys the ETFs directly from the market will have to pay.

My take on all these is: Do your own research, and weigh the costs and benefits of any investments you intend to make. Then decide for yourself whether they suit your needs. Nobody else but you should be the most diligent in safeguarding your hard-earned money.

The writer is a CFA charterholder
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