Books and Thoughts - Sowing the Seeds Of Prosperity

Previously I have shared about the books Growing Your Tree Of Prosperity and Harvesting The Fruits Of Prosperity by our local writer Mr Ng Wai Chung. Recently I have just completed his latest book Sowing the Seeds of Prosperity. Unlike the previous 2 books, which are more for advance investors, this latest book is more about the basics of financial planning. It covers a wide range of topics about financial planning, which includes:

• Earning Your Wealth - Your work and income
• Saving Your Income - Income minus expenses
• Investing Your Money - Where to park the money saved
• Protecting Yourself - Insurance
• Giving Your Wealth Away - Wills and legacy

Like the previous books, this book is also written in the Singapore context, so it is recommended for Singaporeans who want to have an overall idea about financial planning. This book will be a good starting point for those who wanted to try out doing financial planning DIY. Even if you are already engaging the services of a financial planner and you do not intend to DIY, it does no harm for you to know what financial planning is all about so that you can make better decisions about the recommendations from your financial planner.


One of the chapters I like in particular is the one that chartered a Singaporean's life into various stages and what to look out for in the different aspects of financial planning. These stages of life include being a student, being a single working adult, being a working adult with family and kids, and being someone who is about to retire. I would say this chapter is a very useful reference especially for students who are about to graduate and embark on a working life. A lot of people, myself included, did not really bother much about financial planning when we were still students. The most we would do was perhaps to purchase a whole life or endowment insurance policy, without really knowing what it is all about and whether we really need it at all. On top of that some may go one step further to invest in some unit trusts based on promised returns printed prominently in the beautiful brochures, without knowing much about the product. Of course I am not trying to say that it is wrong to invest in unit trusts or purchase insurance policies. What I am trying to say is that all these are financial commitment that may have an impact on you in subsequent stages of your life, and it is better to be prudent and understand more about the products first. Following are some real life examples of financial commitment without proper understanding or planning experienced by myself or someone I know:

The first example was what I have experienced myself. Around the time when I was graduating and starting my working life, I bought some unit trusts in the Technology sector just by looking at the historical data that showed unbelievably high returns. I did not follow any financial news then and neither did I bother to check what were the associated sector risks. Unfortunately I bought them when the sector was peaking, and the technology bubble was bursting. My technology funds never recovered from their losses since, and they were in the red even during the massive bull run in 2007.

Another example is that of a friend. During the early stage of working life, he began committing himself in quite a number of insurance polices. Some were investment linked policies which required quite a substantial premium. Gradually his monthly premium ballooned to over a thousand dollars. It was alright when he was still a single, but things were different when he started a family and have a kid. The rather affordable thousand dollars per month premium payment now becomes quite a burden on his cash flow. Of course some may argue that these policies are supposed to protect you and give you a decent return at your old age. I can't argue with that. But you must at least try to find out what are the exit rules if one day you realize you cannot commit further and needs to cancel the policy.


Talking about cancellation of insurance policy, it brings me to another personal experience. I committed to a whole life policy with some savings element when I was a student. Years later, I became more confident about investment matters, and felt that I should buy term insurance and invest the rest of the money myself. I spoke to my insurance agent, and realized that I will incur a loss if I cancel the policy at that point in time, and it would take another 10 years or more for me to break even. So every month I still have to commit a sum of money for the policy, when I know that I could get more coverage buying term insurance, and have more control of my money by investing on my own.

I have to emphasize again that the above examples are not meant to say that it is wrong to buy whole life, endowment or investment linked policies. It may in fact be suitable for someone who has absolutely no idea or no interest in investing on his or her own. Rather, the examples above are more to point out the need to understand whatever financial or insurance products you are committing yourself to. Books like Sowing the Seeds of Prosperity, which is in the local context and explains some concepts about insurance and financial products will be a good starting point. You can also try to ask your insurance agent or financial planner as many questions as possible until you are absolutely comfortable with the product. Most importantly you have to take note that if it is going to be a long term commitment, you should try to find out what happens if there are any changes to your cash flow in the future, like when you get married and have kids.

The book also comes with some practical guides for beginners in different aspects of financial matters. In one of the examples above, I have mentioned about buy term insurance and invest the rest of the money on your own. This is also one of the ideas advocated in the book. There is one section in the book that provides some guidance about how you can go about purchasing a term insurance from NTUC income. There is also a guide for absolute beginners who want to start investing in stocks in SGX. It includes basic matters like opening a CDP account and a trading account.


Although I am not exactly a beginner, overall I have enjoyed reading the book. There are interesting stories of typical Singaporeans and their outlook in financial matters, which I find very interesting especially when I find that it is similar to someone I know, including myself. In terms of subject matter I still prefer the previous 2 books which have more emphasis on generating passive income. Do hope to see the author come up with more books about practical application of Robert Kiyosaki's ideas like cash flow in the Singapore context, which I feel that the previous 2 books have quite successfully achieved.

Books and Thoughts - The Richest Man In Babylon

I was given the book, "The Richest Man In Babylon" by George S. Clason, at a money management workshop I have attended. I think bookshops and libraries will probably place this book in the investment or finance section. However, you will be in for a surprise if you are expecting to find things like investment tips and strategies or stock picking skills that you will usually find in a book about investment. In fact it is made up of several parable-like stories in the setting of ancient Babylon. While a parable is a short story that conveys a moral lession, the stories in this book are trying to convey some fundamental money management wisdom that are timeless. It is a very thin book and easy to read.  In fact I think even children can read it like reading a story book, and at the same time gain some ideas about money management at a young age.


There are 2 recurring concepts mentioned in the book that I find very useful:

1. Keep a part of all you earned for yourself
The guideline given in the book is one tenth of your earnings. The primary idea is to keep part of your earnings for investment, or as savings such that it can grow to become substantial enough for investment. I have come across similar ideas in Robert Kiyosaki's "Rich Dad Poor Dad", which mentions that you should pay yourself first before paying your bills.

2. Learn to make your treasure work for you, make it your slave. Make its children and its children's children work for you.
Here it is saying that you should let your money work for you through investment. The interests and dividends earned from the investment are the children of your money, and you should let them work further to produce more children. This concept ties in closely with the idea of compound interest. Slavery is of course a cruel thing, but i guess its use in the story for illustration purpose is in line with the setting in ancient babylon. In fact, it will form a more vivid picture of how your money is working for you than just mentioning the term compound interest.

Application - Keep a part of all you earned for yourself
To keep a part of all you earned for yourself, and to grow it for investment, it will very much depend on how you handle the income and expenses part of your cash flow equation. Increasing the income and reducing expenses will help you save more. If you can keep more than one tenth, you can of course grow your seed money for investment faster. You should also read up on books about personal financial management to understand how much money you should save aside for emergency purposes, and the amount of risk you should take. In the book, there is a character who saved one tenth of his earnings for a year, only to lose it all because he has asked a brick layer to help invest his money in jewels. Of couse the character learned from his mistakes in that he should ask the jewel merchants about jewels, not the brick-maker. So he saved for another year, invested wisely this time round, and managed to make a good return on his investment subsequently.

Application - Make your money work for you
As I read the book about making your money and its children work for you, dividend investing came to my mind as a good way to put this concept into practice. Dividends are the children of your investment, and you can use them for investment to grow more dividends. So invest in a good dividend-yielding stock and reinvest the dividend into the stock may be a good idea. Of course for most of the retail investors like us, the quarterly dividend may be too little to be practical for reinvestment into stocks as transactions incur commission cost. Following are some practical suggestions I can think of:

• Script Dividend: Some stocks such as OCBC offer the script dividend scheme. What it does is that instead of giving you the dividend, it will use the dividend to buy and issue you new shares, usually at a discounted price. The downside is that the scheme may be stopped anytime. For example, First Ship Lease Trust offered this scheme for only one quarterly distribution last year. Another downside is that the stock may grow to become too big a percentage of your investment portfolio.
• Unit Share Market: Phillips Securities offers the Unit Share Market, in which you can buy as little as 1 share of a stock. The commission is also lower. From my experience one transaction is around $10 compare to about $28 in the normal market. Downside is that the spread between buying and selling price tends to be very big.
• DBS STI ETF 100: This is an exchange traded fund (ETF) recently launched by DBS that tracks the Straits Times Index. Its board lot is 100, so at the current pricing you can get one lot at around $200 to $300. In the recent quarter it has announced a dividend of $0.03 per share. Downside is that since it is a fund of other stocks, the amount of dividend may not be as easy to gauge as a single stock.
  
• Stocks with smaller board lots: Some dividend yielding stocks offer smaller board lots, example Singtel 10, Singtel 100, SBS Transit 500. You can get one lot at around few hundred dollars. Downside is the commission charges may make up a relatively higher percentage of the transaction.
• Money Market Fund:The MMF is a unit trust that invests in high-quality short-term instruments and debt securities such as Fix Deposits. The Cash Fund of Fundsupermart, Phillips MMF, LionGlobal SGD MMF are some MMFs in the market. At the current low interest environment, these funds are yielding slightly more than 1%, which is rather low. So I will consider putting money in MMF as savings rather than investment. But it is a good place to park your money instead of in Fix Deposits for a potential better yield, if there are no good investment opportunities for the time being. The units can also be liquidated easily. For example you can sell your Fundsupermart Cash Fund units anytime and get the money on the next working day.

The above are just some suggestions, and of course you must research into them to be sure of what you are investing into, so that you do not end up like the character mentioned above who lost one whole year of savings.

    

Books and Thoughts - Growing Your Tree Of Prosperity

The "Me and My Money" article of the sunday times investment section this week features Mr Ng Wai Chung, the author of the books Growing Your Tree Of Prosperity (2005), Harvesting The Fruits Of Prosperity (2007), and the latest book Sowing The Seeds Of Prosperity. I have read the first 2 books, and actually my interest in REIT investment is partly inspired by his books. I believe he is in turn inspired by Robert Kiyosaki's idea of cash flow in Rich Dad Poor Dad. The main idea he is trying to put forward is that we should grow our passive income and reduce our expenses to a point that the passive income can more than cover the expenses. I like the books because they are written in the Singapore context, so while Rich Dad Poor Dad tells you the concept of cash flow, these books provide some useful guidance in how to put the cashflow concept into practice in Singapore.

REIT was introduced in the books as a viable investment vehicle to grow the passive income because it pays a dividend that is usually higher than normal companies, and it does so in a regularly and consistently, in terms of the distribution amount. The books also introduced some companies that pay relatively high dividend consistently, such as the telcos, Comfort Delgro, SPH, etc.

I remember reading about REITs in one of the chapters, probably in the 2005 book. I think at that time not many REITs have been listed yet, so it has only introduced Ascendas REIT (A-REIT) and CapitaMall Trust (CMT). The yield then, as mentioned in the book, was about 4%, and it was considered a relatively high yield at that time. As of this writing, CMT yield is about 5.4%, and A-REIT about 7%. Few months back in March, their stock prices were so depressed that they were yielding more than 10%. I think someone who has seen these REITs yielding at 4% in 2005, would never have believed the yield will go up to 10% one day. This just get to show how much things can change in the market.

In 2008, around the time after the collapse of Bear Stearns and before the collapse of Lehman Brothers, in order to grow my passive income, I was shopping around for high yield stocks. I thought it was a good time to go into the market as some time after the collapse of Bear Stearns, the market seems to have stabilized. So I bought high yield stocks like Cambridge Industrial Trust (CIT), a REIT, First Ship Lease Trust (FSLT), a Shipping Trust, and Macquarie International Infrastructure Fund (MIIF), a Business Trust. I bought CIT at around 0.680++, FSLT at around 1.100++, and MIIF at around 0.860++. At that time I thought it was too good an opportunity to miss, as they were trading at around 50-70% of their peak prices in 2007, at 50-70% of their NAV, and were all yielding more than 10%. I did check their historical cash flow to verify that they had been consistent in generating the cash flow to support the dividend distribution. The gearing was rather high for all the 3 trusts, but I did not think too much into it. My thinking then was even if the market goes down, I will still be able to get a regular distribution of cash to help ride through the rough times.

Well to this day I still believe my thinking was not entirely wrong then. Dividend yield stocks should indeed help you ride through rough times with the regular cash flow. However, I have underestimated the effect of the credit crunch on companies with high level of debts. During the good times where there was abundance of credit, these companies have borrowed heavily to acquire more assets to boost the yield.With the collapse of Lehman, financial institutions were unwilling to lend, and so the worry over the repayment or refinancing of debts became such a big issue that their stock prices were heavily punished by the market. Their prices went down to an all time low, dropping by a further 50-70% of my purchase prices. Dividends were also cut, some by as much as 50%. I sold them at a huge loss at the worst of the crisis to switch to blue chips. Prices of blue chips also went down a lot at that time, but I was more confident of the recovery of blue chips than the high yield and high gearing stocks. In hind side, I have done the right thing as with the recent bull run most of the blue chips have recovered to pre-Lehman levels, whereas CIT and MIIF are still trading around 0.4++ and FSLT around 0.6++, still way below their pre-Lehman levels.

So what have I learnt? Don't chase high yield stocks just for the sake of getting as much dividend as possible. Research into whether they can sustain the dividend payout. More importantly, check the kind of debts they are holding and the chances of repaying or refinancing. If you are not sure,
it may be wiser to go for something that may yield less but is able to give you a better peace of mind (like Singapore Post, Comfort Delgro, etc). If you are not careful, you may lose so much in the capital that will take years of dividends to cover back. The building up of passive income should be a long term affair, so sustainabilty of the payout is very important. You do not want to come to a point that suddenly the distribution is cut such that your passive income is no longer able to cover the expenses.