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.