I have moved my blog.

Hi peeps,

I have moved to : Joecashflow.blogpost.com

Follow me there!

Thanks,

Joe.

Reproduced : Power of Compound Interest

This was my guest post on my buddy's blog -

http://straighteyeforthestraightguy.blogspot.com/ - A quintessential guide to ...as Russel Peters says : Be a Man! (do the right thing!)

I was guest posting trying to convince people that the time to start saving & investing is now... and why? The power of compound interest is why! This is the

1st Part of my 3 part series of guest posts on his blog. Read on!

The Power of Compound Returns

This is the First Part of a Three Part series on “Getting Started to Managing Your Finances” by Joe. Yes, he’s your average Joe and he’s probably in not much better shape financially that you are but hey, you can’t blame a man from trying, no?

First off, if you’re reading this you’re probably in your 20s maybe 30s and sharp, good looking and having not too bad of a time with the opposite sex, thanks to Straight Guy (and Gal now!).

But have you thought to yourself – I don’t have enough money! I wish I was earning more money!

Sure, you can get a new, better paying job - but I'm not here to interview you for a job opening - instead what I'm here for is to share some basic skills and knowledge that everybody, and I mean everybody, should have. Managing your finances, as they call it - to make more money with what you already have.

For my first part, I want to share a very simple concept before diving deeper into the art of managing your finances. It is not only an essential concept but indeed one that is very powerful and handy to know.

It was Albert Einstien who said : "Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it."

If the world’s smartest man to have ever lived said that, boy, don’t we all have to sit up and listen what he has to say! But wait - just what does this "compound interest" mambo jambo mean in real life?

It means two things.

First of all, it’s a powerful tool to make your money work harder for you. It’s funny how we all work so hard for our money, and yet never have given thought to how it can work harder for us.

Let me give you a quick and simple example.

I. Love. Coffee.

I love it so much that every single day in the year I spend RM9.50 on a grande Cappuccino at Starbucks. Doing the simple math of RM9.50 x 365 = RM 3467.5 (assuming it’s not a leap year).

Now, how much do you think I'd save annually if I had taken that money and put it into a fixed deposit account instead (with say 5% interest per year and the interest is left in the account to accumulate – ie: compound interest.)?

Doing the math, by the end of the 20th year, I would have RM 114,656!

Okay, but what if I'd just saved that money in a jar under my bed? (that would be alot of jars!)

RM 3467.5 x 20 = A mere RM 69, 350.

Thanks to compound interest, I'd have effortlessly made myself an additional, sweet RM 44k!

What compound interest can do to a man.

This in turn, leads me to introduce the Rule of 72.

If you had a fixed amount of money and you wanted to calculate how many years it would take to double it, just divide the rate of your returns against it.

For example, you have a fixed deposit which gives you a returns rate of 6% per annum. 72/6 = 12 years for your money to double.

This rule also works if you want to calculate the returns rate which you need to double your money in a certain number of years - e.g. say 6 years which is 12%. (72/12 = 6 years)

However, the only downside to the above is this rule is less useful if the number that divides it is 20 or above.

So, what now?

With that realization, I hope you've come to understand two things - It is worth saving and investing money here and now!

Start early.

Use the power of compound interest to make your money work harder for you. Each ringgit saved is akin to a "biblical mustard seed" if invested well.

Conversely so, you should avoid raking up excessive credit card/personal loan debt as this is the flip side of the compounding interest action, making you poorer and the banks all the much richer!

That is all for now. Look out for my 2nd part of my guest series on the HOW to manage, after we've dealt today with the WHY. Until next time!

Cheers,
Joe.

For the Income Investors out there - Digi and Maxis?

While doing some other research, I came across this report by Insider Asia on Maxis and Digi - http://www.theedgemalaysia.com/insider-asia/180047-maxis-and-digi-offer-yields-at-fairly-low-risks.html

Basically, Maxis and Digi have been paying about market dividends of over 6% in the past year and are steady picks to continue doing so!

If you're thinking of investing in an alternative in investing other than Fixed-Deposit... check these stocks out. Easy to understand businesses, Both pay out dividends quarterly and would make good income spinners for those looking for a steady cashflow yet not willing to risk too much. Don't expect too much capital gain though!

The only concern I can think off my head is their mobile internet market might shrink and also, you have to consider whether they can keep up their high dividends.

Generally, stocks that pay dividends outperform stocks that don't. Its a sign of confidence of their businesses that they can reward their shareholders. More on that... next time!

MEGB retracted - Greater Safety of Margin?

One stock in my portfolio is MEGB.

Today, after news on Monday (10/11) that Insider Asia's model portfolio I follow acquired shares at 20k shares at RM2.39 I felt more confident on my long-term pick. But then today, it dropped further to RM 2.34 with news that a foreign fund had sold 174million of its shares last week - http://www.theedgemalaysia.com/business/180065-fmr-llc-disposes-of-174m-masterskill-shares.html

That may have caused some panic understandably and some have sold off in a panic.

Here's where I quote Buffet on being a contrarion investor - Be fearful when others are greedy and greedy when others are fearful!

As such, this retraction gives a bigger margin of safety f0r retail investors (yes, you and me!) to jump in. Yes, there is a concern that FMR LLC may know something we know but that will be pure speculation. The IPO was priced at RM3.80 which was way too much to begin with! Let's examine why I like it and its downsides:

Why I like it?

I like it because it's my two favourite industries - Healthcare and Education. If you don't know already - Masterskill Education Group Berhad (MEGB) provides higher education and training in nursing and allied health sciences and you can see they are quite well advertised everywhere!

They are also undervalued in terms of PER compared to its other Malaysian Education stocks - Help and SEGI.

Being a top down investor, let me first explain what's so great about these two sectors and why I believe besides its defensive nature (low volatility), I believe there's growth:

Healthcare - With a growing, ageing population (living longer than ever to add!), there will be a need for better healthcare provision around the world. As such, there is a growing demand for healthcare professionals to cater to that need.

Education - Its an Asian thing to have a good education for our children so there will be demand to send children to higher education no matter the price! On top of that Masterskill's courses tend to have a higher margin than say HELP's or SEGI's because of the nature of their courses offered.

Potential Downside

PTPTN loans - There's a problem collecting these low (to no!) interest loans from graduates and these loans provide funding for most of MEGB's students. This was widely reported 4Q2010 resulting in the drop of its share most of that quarter.

But, no worries for help is on the way as the tax department, IRB announced this year that they will automatically be deducting the monies owed as soon as these graduated students start working with the help of legislative enactments/amendments.

The number of students currently affected - awaiting for their funding from the government are only 2% and are in Kuching. So it's overblown, some research houses have said.

Heavy Gearing? - A friend of mine mentioned they are heavily geared. I'll be honest. I took a glance here - http://www.masterskill.edu.my/MASTERSKILL%20WEBSITE/masterskill/investor/IR_financial.php

and first glance, it looks okay. But I will need to take a closer look.

Uncertainty for its intake of students - This is linked to the PTPTN loans but I remember a research house indicating that MEGB is a top ranked institution and it would be one of the last to get its funding cut/reduced. Also, I reiterate I am confident on these two sectors.

Fundamentals/Growth/Profits - The IPO was to generae funds to purchase and construct new buildings and expands it existing campus so the growth prospect is there.

In the last 3 financial years MEGB has a Pre-tax profits of - 56.485, 80.058, 112.289 for 2007-2009. So that's a good track record of profits! It's margin in % has steadily been around 40%!

That's quite a few thumbs up!

The only concern is the gearing which I will look our when the 2010 Financial Year Report is out. Might acquire more from my small position I have on it at the moment. I am holding this for the long term- Given my past mistakes, I need to discipline myself and learn to hold longer!

Well, that's all for me. Remember to do some of your own research before you take a plunge!

Are you a student with MEGB or investor who would like to add their 2 cents? Leave a comment below.

Disclosure: Yes, Joe does own shares in MEGB and shall not trade in it for the next 3 days.

Update 16/11- As for the end of the week - MEGB has dropped to RM2.20 - I say, still a good margin of safety to dip in.

Portfolio Review for 2H 2010 - Pt 1

My losses/gains in 2H 2010 and notes(Click on the pic to enlarge)

I lost money on MYEG, SEGI warrants, Notion Vtec and Rubicon Minerals (an American listed Gold mining company).

Over these few days I shall examine these losses. Two at a time.(if all at one time, too painful!)

MYEG - was one of the first purchases. I was convinced that this was a good buy at that time because I was thinking it was the only E-gov provider providing such services as renewal of road tax, maid licenses, etc.The next few weeks eyeing the stock, it jumped and I got excited and thought I had missed the boat. When it retracted, I jumped! It was RM0.80+ then and I had taken quite big position by my standards.

Next, I waited. A few months later, I was reading about other stocks and grew impatient and MYEG was barely budging and if fact, it was dropping. So, I decided to sell into other stocks at a loss of about a few cent per share. *sigh* I also realised I did not look at the companies fundamentals and fully understand the stock. This was my first loss.

MYEG going forward - But, I still believe MYEG at first glance looks like a good idea with its unique position (only e-gov provider of services) and it was listed in Jan's Personal Finance Money as a pick for 2011 for Kenanga Research.... ****

Notion Vtec -Besides Personal Money, I also read the monthly shares digest aptly called - Shares. One of its picks that month was Notion citing that all the chip producing companies had doubled and were looking strong. Based solely on that, I took a medium position in the stock. Next thing I knew, it dropped by 10% and mentally setting my losses to be capped at 10% I sold.

Why 10%? It was a sell rule I had picked up reading a book called "24 Essential Lessons for Investment Success" by William J. O'Neil and 10% was the biggest lost I was willing to take.

Wow, writing all that makes me feel really dumb right now.

But it would have been dumber if I had held Notion Vtec which now had dropped from the RM2.70 I sold to RM 1.50 or lower! This was down to some problems it had with it factory and the general slump chipmakers were going through in 2010. So, the positive was that the market turned the other way.

NOTION going forward - Last I read in the Edge was Notion was attempting to grow in the Camera Sector but I am generally sceptical as the slump in chipmakers is quite bad with the rise of smartphones and tablets affecting sales of netbooks.

Moving Forward now...

So, peeps, how can I improve? Next time...

1) If you read some stock tip/advise, research, research,research! Does the business outlook support your assumptions? Do the numbers add up? How do the ratios compare to other competitors in the market (locally and regionally)?

2) Sit out and think about it and think whether there are better opportunities out there. Let the 'hot tip' simmer in your head and talk it over. Do others share your enthusiasm? Or are you just wanting to hear what you want to hear?

3) Take a small/moderate position in the stock. Remember to diversify and not to pull all your eggs in one basket!

That's all for now, peeps.. Tomorrow I will talk about my two biggest losses - RBY and Segi Warrants.

Second Week of the Year - Trade War? Collapse of USD?

I was told pics of hot chicks would increase my blog's traffic...

It's just the second (working) week of the year! KLSE and markets around the world have pulled back a little - minor correction? or profit taking mostly?

Still a relatively New Year I say and I have been thinking about some stuff I have written and realised I did neglect to mention one concern which seems to be brewing these days - A currency/trade war and perhaps a word on the USD/US stock market.

Commentary: Currency/Trade War or Collapse of the USD?

http://www.ft.com/cms/s/0/89b2887e-1c19-11e0-9b56-00144feab49a,s01=1.html

Reading around this issue, I think I can best sum it up this way - Western developed nations like Japan, US, UK are net lenders of the world running humongous deficits but also in an attempt to spend their way out of the downturn, pumped even more money increasing the supply of their currencies. The effect of this is of course to devalue their debts as well.

So, some countries like Brazil are shouting: Hey, That's not fair! And we're suffering because the value of your currency is way too low and ours is way too high because we're not flooding the markets with printed money.

The result of that is their exports are more expensive and less desirable than their goods which are artificially cheaper because of a weak currency.

Bummer.

Another commenter is Stephanie Flanders who does point a finger at the US and with good reason perhaps- http://www.bbc.co.uk/blogs/thereporters/stephanieflanders/2011/01/the_us_as_deadbeat_discuss.html

How serious are these things? Well, currency/trade war - With US pumping more money in the middle of the year and stubbornly going ahead with it - this is one to watch. It may just be noise but the market is reacting to it. I think its more saber rattling than anything and more for the benefit of the voters at home.

As for the devaluation of the USD or worse, the collapse of it, I say it may happen but not so soon. The US is still the largest economy and the world can afford it to collapse and China is holding ka-zillions of US bonds and would sink along with the Titanic that is the US!

Yes, the US is still quite in a mess and they cannot seem to get their act together but I do invest in the US stock market because it is still the biggest of markets (spoilt for choice in terms of stocks!) and my current portfolio there has more international exposure than US exposure. I also think there's more fear than rationality there so there is value there and it's always good to diversify your holdings.

Then again, for the medium term with the rise of China and all - I should really start looking at the markets closer to home - ie: SGX and Hang Seng!

The Week Ahead

Also, for this week I have decided I shall analyse my gains/losses in the last year. Well, half of the year because I only started investing in stock the 2nd half of the year!

Perhaps, my dear readers, serve as a word of caution of what to do and what not to do!

I have made my fair share of mistakes and I hope there's something you can gain from my follies!

Till' next time.

Joe.

Image Credit : Melis82 (dreamstime)

Observation : Car Sales up - Green shoots of Spring or False Dawn?

Green shoot of Spring for the Global Economy?

I tend to watch the US market closely not only because I do invest in US stocks but well, it is the largest economy in the world. As the saying goes - When the US sneezes, the world catches the flu!

One piece of news which did not get much media in Malaysia was the rise of sale of motor vehicles in the US - http://www.bloomberg.com/news/2011-01-05/u-s-auto-recovery-may-continue-with-12-9-million-sales-in-2011.html

Why is this significant for some observers?

During downturns, consumers tend to delay their decision to pay for high expense items like cars until they feel the economy is doing better. Also, there was no government policy to encourage car sales (ie: tax wise or scrapping old cars) So, could this be an indication that consumers are feeling more confident of the economy?

Stocks markets around the world are also generally up but this may be down to the January Effect where generally most Januaries, the stock market goes up and this may be because investors in the US sell their shares before the year and repurchase them for tax purposes. On top of general optimism of course.

My take? Believing the worse is over and spending your way out of a recession is very important for the recovery. As such, I will be cautiously optimistic but look out for these things:

1) Inflation/Hyperinflation - With record low interest rates in developed nations (US, Japan) and loose monetary policy (ie: QE) everything is rising with the latest concern being food prices. This would put strains on the recovery as people's money is worth less so they buy less goods. So companies sell less and growth would be lessened or more layoffs may happen.

2) Rising Interest rates - Once central banks raise their interest rates, in theory, there is less money going around with more expensive debt and consequently, asset prices (ie: commodities, stocks, property) tend to fall.

Also, look out for these potential time bombs:

1) The EURO Debt crisis - The debt crisis in European nations known as the PIGS (Portugal, Ireland, Greece and Spain) has not fully played out?

2) The state Debt crisis in the US - States in US such as California and New York are in heavy debt and are cutting jobs/funds left,right and centre! See: http://www.time.com/time/business/article/0,8599,1991062,00.html

3) Credit card debt crisis - Alot of Americans who have lost their jobs are not only unable to pay off their mortgages which led to the 2008 subprime crisis but they have outstanding credit card debt. This may be the next bubble.

Summary

With all these concerns, I would be prepared for anything and be cautiously optimistic this 1st half of 2011. Observers have correctly pointed out that the fundamentals may not have been fully resolved so we can only cross and fingers and hope.

If the theory of cyclical downturns is to believe, we have had crises in 1986, 1997, 2008.. so the next one should be 2019 but hey, history doesn't always repeat itself, does it?