All the coming posts will be about China, investing and health. These are the topics I am interested in. Will try my best to write in proper English but can’t promise you anything!

My Initial “Biased” View About China

I always thought China is not-that-good. I believed in all the ‘bad’ things ‘newspaper’ says about China, you know the ‘immoral’ Chinese businessmen that make poisonous toys and foods, the environment ‘unfriendly’ Chinese that cause pollution and global warming, the ‘inhuman’ one-family-one-child policy, the ‘undemocratic’ communist government, the ‘evil’ Mao Zedong, etc.

And because some of my Malay readers can’t wait to kick me back to China because they don’t like my post on sohai and prostitute, I decided to study more about China and see if going back there is a good choice!

[Actually I am researching China for investing opportunities lar.]

The more I study, the more I find out that we have been brainwashed by the newspaper (especially the Western media) about China. What we read in the paper is not reflecting the real truth behind the scene. The price you need to pay, if you are now aware between the ‘truths’ and the ‘lies’ is like digging a hole in the sand and hiding your head in it while keeping your big fat ass outside. In the short terms, things can look cloudy, in the long term, everything will be clear and you will know who is the biggest liar.

What’s So Special About The 4 Developed Countries

After world war 2, economy in the whole world is booming and we have over 100 emerging economies. We call them the developing country. They are doing very well. These include Malaysia, Vietnam, Brazil, Mexico, Taiwan, Singapore, India and a lot more.

Out of these 100+ developing countries, only 4 rise to become developed countries. Which 4? Knowing which are these 4 countries will explain everything about today’s post and serve as a STRONG support and proof or what I am writing.

The 4 countries are:-

1. SINGAPORE
2. TAIWAN
3. HONG KONG
4. SOUTH KOREA.

Many countries didn’t make it. Some even create multiple financial crisis and disaster for themselves. So what makes the above 4 countries rise above the pack and become developed country?

Answer: They Are Mostly ‘Chinese’

“Fuck You, Koreans are not Chinese!” I heard you. But their people and country are very “Chinese”. Their tiny country is sticked to Mainland China like your balls are sticked to your body. Before they invented their own characters that look like “boxes”, they write in Chinese characters. Seoul is known as the “Han City” in Chinese before they change it to “Sou Er” 3 years ago. Chinese people are also known as Han people and 90% of the Chinese in China are from the Han ethic. When I went to Korea a few years ago and visit their ancient University, there is a statue of Confucius in the school! They study the teaching of Confucius. And the Koreans even claim that Confucius was a Korean instead a Chinese. At the end, they also like to eat gin seng like the Chinese.

So, Korean are heavily influence by Chinese culture and traditions. They are influenced by the teaching and virtue of the Chinese great old master like Confucius. So while they don’t speak Chinese, they are very similar to one. And I bet a Westerner can’t differentiate between a Chinese and a Korean.

So what’s so special about Chinese?

Chinese are simply the greatest capitalist in the world. In plain English, Chinese are the greatest businessmen in the world. It has been demonstrated again and again for the last 5,000 years. While China didn’t look good until recently, just look at how the overseas Chinese are doing, especially the 4 Asian tigers that I mentioned earlier.

China encountered a series of ‘unfortunate’ events before they have the chance to rise up again. They are fallen far behind because of the mismanagement under the late qing dynasty, the opium war by the westerners (and later by selling drugs to the Chinese), the invasion of Japan and later the Civil war between the Republic of China and the Communist Party. There were all sorts of mess in China. Everything is just ugly.

The people are poor. Living is difficult. So it make sense for many Chinese to try to make a living overseas! Exactly like a Bangla coming to Malaysia to work at Kopitiam and serve in Ipoh’s Dim Sum restaurant! Because of this, you can find Chinese in every corner of the world. My mum’s father is one of them. His mum sold the only pig at home, buy him a ship ticket and took 1 week to sail Malaysia through the South China Sea.

While mainland China was doing poorly at that time (now is different story), overseas Chinese are doing a better. Look at Taiwan, look at Singapore and look at Hong Kong. Singapore GDP per capita is 6 times bigger than Malaysia. Which means 1 Singaporean produce 6 times more than a Malaysian. Knock! Knock! The hypocrites 47 years ago (1963) voiced that Singapore would not survive for more than 3 years because it is a just a tiny dot. 47 years later, the hypocrites say that Singapore is “supposed” to be better off than Malaysia because it can be managed more easily because it is just a tiny dot. Fuck!

Dot or not a dot, it has something has to do with the people! In the last 50 years after world war II, we also place very high hopes on economies such as Mexico, Argentina, Vietnam , Thailand and Philippines. But then they are not able to make it! So what is differentiating them with Singapore? (and Hong Kong and Taiwan).

Again, it is about the PEOPLE. This is the key you need to remember, disregard to whether you are a Chinese or NOT a Chinese! Knowing this fact alone will allow you to make smart investment choices in the future!

If you are non Chinese, especially when you are Malay, you may not like what I just wrote. You may again want to kick me back to China. But if you are the new open minded Malay that is willing to learn, knowing Chinese are great capitalist and great businessmen allows you to know where to invest your money with! While feeling inferior to another race is not fun, making MORE MONEY for yourself because you know where to put your money with is VERY FUN! While face is important, think about your wallet and your bank account! You will always got your “Face” back when you have thick wallet! Pretending and ignorance will not.

Remember: Chinese Is Just Too Good About Money

I am not trying to glorify Chinese, I am trying to bring the truth to the table. Truth is something that doesn’t care whether you believe it or not. If gravity will pull us down, it will pull us down. Not believing on it won’t cause gravity to stop working. That’s call truth. Truth needs no defending! [For those who like to use war to defend their religion, please remember “Truth needs no defending”. Something that needs to be defend is not truth]

Chinese invented their own “calculator” known as abacus. Abacus is so powerful that by training yourself to imagine a virtual abacus in your brain, you can do powerful mathematics with your brain without any electronic devices! Not only you can do it without a device, you can do it FASTER than a device because you don’t need to press the number into your calculator or your computer. You just look or listen to the numbers and you can spit the answer out with your mouth! This is what all the super-genius-math class is about, a virtual abacus in your mind. Send your kid to learn!

While it look like I am saying it is the Chinese “genes” that do all the wonders, it is actually more to their virtues, culture and traditions pass down since 5,000 years ago.

Virtue #1 – Hardworking

The first virtue is Chinese are very very hardworking, i really mean “HARD” working. They are willing to work very hard, survive in very bad circumstances and still make money out of it!

Many Chinese in Malaysia have to work overseas too in places like Ireland and Japan. My aunt used to work in Japan for almost 10 years. She (and others) didn’t sleep on bed, they sleep in “cages!” A room will contain several “cages” with multiple few levels. While you might have a double deckers bed in your children room, they have 6 deckers or 7 deckers. When you go to work, you lock all your belongings in your cage. When you come home, you sleep in the cage.

So maybe your address will look something like “Cage Level 6B …”

My father’s mahjong mate used to work in a ‘black’ zone in US. It’s black because they are mostly black people that don’t follow law, they can come to you and take your money and stuff, or maybe even rape you (your ass) and beat you to death.

But Chinese can still make money in such a world! They adapt by opening stores with thick iron grills and bulletproof windows! They hire security guards armed with real guns! They only let 1 customer in at a time. And man! These are not banks and jewelries shop! They are only selling Shampoo and Maggi Mee!

Virtue #2 – Saving

The second virtue is that Chinese are very good at saving money. Unfotunately, the worst habit that Chinese have is exactly the opposite – Gambling! Don’t simple stick with Chinese friends! Stick with the savers and stay away from the gamblers!

The American (the biggest spender in the world) spends $70 for every $40 they made! I still don’t know how to do the math! Where will the $30 come from? They borrow from the future. If you are still young like me, you will have a chance to witness how US has to face this problem in the future, which will be very very ugly.

Chinese on the other hand save a large portion of their income. While the Americans buy house by borrowing from the banks, many Chinese don’t! Most Chinese (inland and overseas) prefer to use their own savings (and their parents savings) to buy house! Even when they borrow, it is their habit to put bigger down payment and pay off the loan earlier. Chinese don’t like to owe people money. (Disclaimer: Gamblers excluded).

When 1 + 1 is greater than 2

If you are hardworking and at the same time a great saver, imagine what is the outcome? These Chinese that can’t make a living in Malaysia and choose to work hard and save a lot in oversea as an illegal foreign worker that get little pay for lots of work can actually come home, buy house and car and live a lot better than their peers! Some are using their savings to start some small businesses and make a better living.

[They always come home. They come home to Malaysia, not China.]

Bringing these Virtues to Businesses

The MOST SHOCKING TRUTH that I ever got is after I reading several annual reports of the Chinese companies listed in the Hong Kong Stock Exchange. I find out that most of these Chinese companies DON’T BORROW to run their business! Not only that they are not borrowing, they are also keeping a lot of CASH in their bank accounts! American business don’t operate this way. Not only the American consumers like to borrow, the American businesses also like to borrow.

Chinese businessmen are more conservative and I prefer to invest my money with them. How about you?

How China Will Be Affected?

Now I want to ask you a question that is worth 1 million dollar, what country has the most Chinese?

This is the main difference that separates China with any other emerging countries, including India which most people like to compare China with. And you know it now, it is the people that makes the difference.

The China Miracle, the economy booming that we are witnessing right now, where the westerners like to call it “fake” and “make up” is something that you need to pay special attention to. Now I want to explain to you why China is so special to you and to the world.

As I’ve pointed out, the Chinese people is very good with money. You don’t need to teach them how to make money. You don’t need to send them to business school. It is already in their genes, in their traditions, in their virtues, in their brain or in whichever body parts you like to name.

The KEY so special to China compare to any other country is, once you are able to set the platform and the stage for these Chinese to perform, YOU DON’T NEED TO DO ANYTHING and they will perform themselves.

All that the Chinese government needs to do is to set the stage for their people to perform! There are just too many smart people out waiting to perform! Once you open up and let them do their work, they will perform and deliver, no spoon feeding and Harvard Business School require.

And it is not only the inland Chinese that is performing right now! The overseas Chinese play an even bigger role in the miracle! And it has to go back to Singapore, to Hong Kong, to Taiwan and even to Malaysia!!! (I think Korean will regret renaming “Han City” to “Sou er”)

When the Chinese government open up and says to the Chinese overseas, “We Need You And We Welcome You Back!” The BIG CHUCK of successful Chinese all over the world start to invest money back to their homeland. Because they are already very successful overseas, they have lots of MONEY and lots of EXPERIENCES. Imagine having all the greatest player in a football team! China is having all the greatest players in their “business” game.

Do you know the MOST SUCCESSFUL departmental store in China is known as PARKSON?!?!?!??!?!? And the founder and owner of Parkson is Tan Sri Cheng Heng Jem who is an experience businessmen in Malaysia? If there is a Malaysia brand that Malaysian can be proud of in China, that must be Parkson.

The largest electronics and computer components manufacturer in the world is known as Foxconn. They produce your iPod, iPhone, PS3 and many more on a contractual basis. They have 550,000 employees working in their “factory city” [Ipoh has 700,000 people, KL City 1,800,000 for comparison sake!]. Foxconn will provide food and accommodation to their factory workers and I bet they have the biggest hostel and canteen in the world! They also setup the most number of ATMs in their “city”.

Foxconn is founded by Terry Gou, an incredibly successful entrepeuner from Taiwan, who owns Hon Hai Precision Industry. Terry is already very successful in Taiwan, and see how his money and experience can do wonder in China, providing 500,000+ jobs and cheap iPod to you!

There are much much more people like Cheng Heng Jem and Terry Gou who are bringing their money and experience back to China. I am sure you will know who is Li Ka Sing! And even our local Genting’s Lim Kok Thay keep dumping money into Macau.

Many successful businesses in Hong Kong are expanding fast into China. Oversea Chinese investor will always have a head start compare to the westerners because they simply are closer to China in distance, cultures, language, name and skin colour!

Aiya….

Diu, I overwrite again! Isn’t that I am suppose to write short?! Let’s continue in Part 2 next time.

When the economy is not good, government use the magic pill called ‘interest rate’ to boost up the economy. By lowering interest rate, businesses can access to cheaper funds to expand their business and produce more goods/services. They will hire more people and thus create more jobs, expand production and thus increase purchases of raw materials, etc. Consumers are also tempted to borrow more money to spend, such as buying cars, house, Armani, etc. So the reason to reduce interest rate is to increase spending.

Government also setup emergency funds for SME to borrow and use. Reason? To increase spending.

EPF asks us to reduce contributions from 11% to 7% so we can have the extra money to spend and thus get the economy rolling.

I understand all these. But at the same time, government also ask us not to spend money. They say the economy is not good. They ask us not to go shopping, not to buy house, not to buy car. They ask us to keep all our money and spend nothing.

They even ask us not to buy vegetables but instead plant them ourselves. Ask us not to eat in mamak store but cook ourselves. They even suggest something call the ‘no spending day’ where we choose a day that whole Malaysian will not be spending.

Ahem…..

I am confused. Mr Government, what do you actually want me to do? To spend or not to spend?

When they ask us not to spend and give suggestions that we should plant vegetables ourselves and organize ‘no spending day’, you know that they come from politicians that can talk but don’t know what they are talking (ahem, they are leaders chosen by you).

Lets look at planting vegetables ourselves.

In KL, if you have land in your house to plant vegetables, I think you are the less affected by the economy downturn! Most people stay in condos, apartments and terrace house and where should they plant the vegetables? In the toilet bowl? Or on top of their proton saga?

Now look at the effect of ‘no spending’.

Everyone is not going to Mid Valley and mamak store and kopitiam. The management of Mid Valley and the CEO of the mamak store decided that since there will be no business, why do business? So they close shop. All staff no need to work and no salary is paid because their work is no longer required. Staff has no salary, business also not making money. Business don’t pay rent anymore. Premise owner also don’t have money to pay loan installment. The ex-staff also don’t have money to eat and feed their family! They spend their savings if they still have some. Factory also stop running because mid valley won’t buy their productions because no one is buying. Factory worker also lost their job. Factory are not buying new machine, machine seller also go out of business. Factory and Mid Valley are not using electricity, TNB also lose money. Everyone no money to eat, farmers also stop planting because their crops are left to rot because no one is buying. Borrowers don’t have money to pay housing loan and car loan. Loans start to default. Borrowers become bankrupt, bank loses money and don’t want to lend anymore… then parti keadilan blame BN for all these, Lim Kit Siang and Kapal Sigh blame Najib and Ong Kee Tiat for these, the Malay blame Chinese for all these, and the Chinese blame feng shui for all these…

Sorry to be too fat fetched. I just want you to know the chain reaction of not spending is very big. Even if the whole Malaysians stop spending for just 1 day, the effect can be very destructing.

—

Although most of us didn’t go to business school. The economy can be understood by this simple metaphor. The whole economy is like our body. The money flowing is like our blood. Our blood need to circulate to do all the works of transporting oxygen to the body and carbon dioxide out of our body. The blood also contains white blood cells that protect us from ‘alien’, platelets that stop us from bleeding to death, etc. The blood play an important role to sustain the health of the body. All it needs to do is just to flow and flow and continue to flow. What happened when the blood stop flowing? The body dies. The same applies to economy (the body), the money (blood) flow decides the health/state of the economy (body)

Blood stop flowing = die.
Blood flowing too slow? tired, boredom = economy downturn/recession.
Blood flowing too fast? stress, high blood pressure, heart attack! = inflation, “hard landing”, unsustainable growth and economy collapsed.

interest rate = one of the magic pill to control how fast the blood flow. Higher = make it slower. Lower = make it faster.

Japan interest rate is almost zero. The magic pill don’t work in Japan. The Japanese themselves don’t spend money. Everyday is ‘no spending day’. The Japanese can only sell to non-Japanese so actually the non-Japanese are doing blood infusion to the Japan economy to sustain their life. Now the whole world does’t have enough blood and no longer be able to do blood infusion to Japan. That’s why Japan is the first country in the world to get into recession in this ‘crisis’.

—

Leaders are meant to lead and teach people. Choose your leaders wisely.

Back to what I want to write today. What does the so-called ‘financial crisis’ means to you as an ordinary investor? What does the 50%+ fall of the whole world stock market (30% fall in October 2008 alone) means to you? Is my popular 20% compounded growth plan still relevant? Is my review on ICAP a rubbish? What about all the value investing posts that I have been writing?

Instead of answering them directly, let’s ponder some interesting facts that newspaper won’t be publishing and you won’t see them as headlines in NTV7 news.

What investing gurus are saying?

Gurus from all over the world are using almost the same word to describe the current crisis. It is not ’sad’, not ‘disappointing’, not ‘bad’, not ’scary’ but ‘exciting’! They are using the word exciting to describe the current stock market.

Ken Heebner a guru who compound more tan 20% per year for many years is actually buying bank stocks!

What did Seth Klarman, another great value investor said a few days ago (just before the market tank another 10% in a day)?

“Normally, as a buyer you have to compete with a lot of very, very smart competitors,” said Mr. Klarman. “But many of the smartest people are on the sidelines now because of redemptions, margin calls or panicked-out-of-their-mind selling. So you don’t have to be as smart as you did before. You just have to be in the game.” article link

What he said contains a lot of intelligence that you need to understand. Let me explain the whole concept in AhYap’s style.

Perspective #1 – What happened when you are forced to only sell and are not allowed to buy

I have condemned mutual funds many times but I have to do it again because now you will learn the most. Unlike ICAP, mutual fund is open ended. That means the fund size can increase and decrease depending on how many people willing to pour money into it or take money out of it. So a mutual fund as large as RM 100 million can shrink their size to RM10 million if the holder want to take the money out from it.

In normal days, mutual fund usually invest only 70-90% of their money and keep the remaining in cash. The prospectus will specify the percentage that need to be invested. Say a mutual fund that specify that they need 90% of money invested in the stock market all the time, they have to follow that and make sure 90% of money in the stock market, no matter if the stock market is overvalue or undervalue.

The problem is that when time of panic selling comes, 10% cash is not enough for redemption (the fund doesn’t have enough money to pay to his holders who sell the mutual fund). So where do they get the money to pay them? They have to sell stocks to get money in order to pay them. So when more and more and more people what to get out of mutual funds, the fund managers have no choice but to keep on selling their stocks no matter what is the price! The fund managers may think a stock is cheap at RM3 but are forced to sell it at RM1 because someone want to get out from the fund.

The ice ball roll bigger when more and more people want to get out of the mutual fund. The continue selling from the mutual fund creates a big SUPPLY but the DEMAND is very low. Everyone what to sell but no one what to buy! They ask for lower and lower price. Price tank. Market tank.

The fund manager might be very intelligent in investing. But he can’t do a shit even if he is as good as Warren Buffett. Because he has no choice! He can only be at the sideline watching. First he is forced to sell at cheaper price. Second he cannot buy anything that he think is cheap because he has no money to buy! Money flow out quickly from the fund and no new money flow into it.

When you are in mutual fund, you are partnering with many Ah Beng and Ahmad that you don’t know (maybe just live next door to you) and what they do affect your investment.

How have margin calls affected the stock market? Many people borrow money to buy stocks and use the stock they bought as collateral. Same thing as you borrow money to buy your house and use your house as collateral. Problem is when the value of the collateral drops to a certain value, they are required to either increase the collateral (pump in more money) or sell stocks to reduce the borrowings to the acceptable margin level, which is what we called ‘margin call’ [i.e. your broker call you and tell you that you don't have enough margin].

Unfortunately most people don’t have money to pump in! If they have the extra money, why would they need to borrow? So they have no choice but to sell no matter what is the price! The key phase that is same as the mutual funds, ’sell no matter what is the price!’.

This creates another surge is selling orders that crash the stock market. And mind you, it is not you and me the small little guy that have only RM23 in Maybank account that is margin called but the BIG guys that control billions of dollars! These guys run hedge fund (unregulated but leveraged mutual funds) that borrow a lot of money to invest! These guys are forced to sell because their collateral (stocks they bought) are no longer enough to cover their borrowings.

In short, the force selling of mutual funds and margin calls has create a big SUPPLY of stocks, contributing to a big fall to the stock market. Because they have to sell disregard of price, but the selling doesn’t have much relation with the underlying value of the stock.

Here comes the intelligent investor.

People who are not forced to sell or who have the courage to buy now has the advantage than those who choose to sell or stupid enough to buy mutual funds all the years. Unlike common mutual fund which is open-ended, ICAP is a closed-end fund. It doesn’t need to sell even a single stock even ICAP shareholders are dumping the share in the market. ICAP can keep anything that the fund manager thinks is cheap and at the same time can utilized the RM50 million cash it has to buy more shares that is selling at big discount. That means the next door Ah Beng who owns 1 million shares of ICAP and dump it crazily in the market yesterday until the market price drop to RM1.20 can’t do a shit to its real value (NAV – RM1.42).

For individual investor who has money right now, you also have the chance to grab stocks that are in big discount. Stock market are currently in 4-5 years low. That means in order to buy something at current price, the last chance is 4-5 years ago.

Perspective #2 – The Gap Between Price and Value

Price is what you pay and value is what you get. You can pay whatever price for anything but what you get is just the value. You can pay RM500 for a Mc Fillet O Fish but what you get is still a Mc Fillet O Fish (RM5.90).

“In the short run, the market is a voting machine, but in the long run it is a weighing machine.”
– Benjamin Graham, The Intelligent Investor

Warren Buffet explains what his teacher said a few weeks ago in CNBC.

“Well, the stock market in the short — my old boss Ben Graham said that in the short-run the stock market is a voting machine, in the long-run it’s a weighing machine. As a voting machine, it responds to people’s emotions. There’s no literacy test for voting. You vote according to how much money you have, not according to how smart you (are.) So the stock market does some very silly things in the short-run. Over the long-run, it behaves quite rationally. And, you know, five years from now, ten years from now, we’ll look back on this period and we’ll see that you could have made some extraordinary buys. That doesn’t mean it won’t get more extraordinary a week or a month from now. I have no idea what the stock market is going to do next month or six months from now. I do know that the American economy, over a period of time, will do very well, and people who own a piece of it will do well. But they shouldn’t own it on leverage. That’s what people have learned in this period, that you’ve got to be able to play out your hand and it’s a big mistake to let somebody else be in a position where they can sell you out.”

Why the gap between price and value will eventually closed? Why it is a “weighting machine” in the long run? Because the longer time goes by, the more OBVIOUS the fact that Mr. Market is mispricing a stock and eventually more and more people will noticed it, buy it and push up the price.

Mohnish Pabrai bought IPSCO for 3 times free cashflow (read my post on PE Ratio), a stock that Pabrai knows the market is mispricing. Since it is a voting machine in the short term, the price may remain low and even drop further for the short term. But what will happened after 3 years? The company would have generated cash that is more then it market capitalization! (market cap: the price the whole company is worth i.e no of shares x share price) That means you are exchanging RM1 for RM1 cash in that company PLUS the factories, inventories, future profits, management, employees, palm trees, Diamond water filter, toilet papers, CEO’s secretary, etc. ALL FOR FREE! At this time, even sohai can notice the value-price gap! It is so obvious.

Pabrai bought it at $45 and sold it for $155. And Pabrai said currently many of his stocks is trading at 1 times free cash flow. How long do you think he needs to wait before things get obvious for others?

Perspective #3 – How many McChicken will be sold in China and India?

Tan Teng Boo organized a seminar last year about his theory on ‘i Capital Long Boom’. After paying a few hundred bucks, you received a ’seminar’ book that look more like a nuclear bomb manual written in Russian. You listen to Uncle Tan speaks for numerous hours about facts and figures and looking at charts and data on the screen that you can never underestand. And yet, ironically, everyone get very excited!

Dump away all the statistics – the nickle comsumption per capita, the price of USD vs Nigeria Naira, the washing machine sold per household, stainless steel nuts and bolts consumption, etc etc etc … Why not just ask yourself a few questions.

How many Nike shoes do you think the China and India man will buy in the next 10, 15, 20 years?
(Hint: China has 1.3 billion people. India has 1.1 billion. India population will surpass China in 20+ years. US population is only 0.3 billion!)

How many chicken (real chicken ok) have to be fried by KFC in the next 10, 15, 20 years?

How many condoms are required by China and India man to make sure they don’t have too many ‘liabilities’?

How many toilet paper do they need? Toothpaste? Hand phones, computer chips, rubber bands, Diamond/Nesh water filter, Crocodile underwear, etc etc etc.

It is mind boggling. The China, India and all other Asian countries will play a big role in the world economies in the future. Tan Teng Boo describe it as something that happened once in a millennium.

Perspective #4 – When Price Drops, It Gets Less Risky, Not More Risky!

Given that you have done a thorough analysis on a stock and you bought it a discount, the stock will not get riskier when the price fall! For example, Mohnish did a research on IPSCO, a cyclical steel company. His analysis read like this -

(...)
Read the rest of The 6 Important Perspectives That You Need To Know To Make Big Money From The ‘Financial Crisis’ (1,918 words)

When I look at Tenaga Nasional Berhad (TNB) business model, I think it is a joke. However, many people including all those ‘experts’ in newspaper think that Tenaga Nasional is a very good stock because it has a monopoly on the electricity supply of Malaysia. All houses and businesses in Malaysia must pay TNB to get their electric, to watch Astro, refrigerate their watermelon and surf porn online. They also say it is a very good business because TNB income is very ’stable’ and so you can also expect to receive ’stable’ dividends.

But listen carefully, a monopoly business doesn’t mean it is a great business. And ’stable’ income doesn’t equal to ’stable’ dividends.

The biggest problem with TNB is that they simply control the price of their goods (electricity)! Even if their cost jump up a lot, they still can’t adjust their tariff (until yesterday). What is the meaning of monopoly when you can’t even control the price of your product! When you can’t control the selling price of your product but at the same time the cost of your product keep increasing, you will make less money or even lose money!

At this case, the monopoly end up hurting itself. What is benefit of your monopoly when you have to sell something fixed at RM100 while you produce it at RM150! And because you monopoly, you become compulsory to lose that RM50 no matter what. And the more customers you have, the more money you are compulsory to lose!

Do you think it is funny if your business look like that? Do you want to own such businesses? How do you expect to receive ’stable’ dividends when you have ’stable’ loses! Businesses can’t pay you good dividends when they are actually burning money, instead of generating money.

[The above examples are over-exaggerated by AhYap for Drama Effect, TNB is still able to cover their cost and make some money, but not a lot of money. They are also paying dividends, but not a lot of dividends. And with such business model, I don't think they can make good money and pay good dividends in the future even after the rate hike.]

It becomes more ridiculous when you realized that TNB runs on a business model that punish big customers! I don’t know what other businesses would do that and I really can’t accept that as an investor and a consumer. When you use less electricity, you pay lower tariff. The more you use, the higher the tariff would go! That would means if you buy 1 burger from McDonald, they charge you RM3, if you buy 2, they have to charge you RM10! WTF.

Businesses are meant to make money. Businesses like TNB is a ridiculous business because it didn’t reward their customers that use more! And end up investors don’t make much money from owning this stupid business.

It is almost guaranteed that if you spend more in a shop or buy more of a same products, the shop will happily give you discounts! That’s the correct way to do business, to motivate their customer to spend more so they can make more money. The customer is happy to get the discount and the business owner (and the investor) is happy to make more money. It is a win-win situation.

If you buy a box of Durex with 12 condoms in it, you expect each unit to cost less than the 3 condom pack! They motivate you to buy more (and fuck more), so you get more discount and enjoyment while they make more money. Same applies to Head and Shoulder shampoos, Whisper pads, Jack n Jill potato chips, Scottex toilet paper, Renoma underwear and almost everything else. The bigger pack you buy, the cheaper the averaged cost per unit.

If you go to popular restaurants like McDonald, KFC, PizzaHut, Starbucks, etc. All add ons are always cheaper than your initial purchase. McDonald sells 1 banana pie for RM2 and 2 pies for RM3! Starbucks large coffee is double the size of the small but cost only RM 2 extra! PizzaHut lets you add-on a salad bowl for only RM1 (normal price RM6) when you already order main course. [Damn it, suddenly I realized I eat a lot of junk food.]

Usually if you buy cloths over certain amount, say RM200, you will automatically get say 10% discounts. They are motivating you to spend more so they can make more money. Some shops will give you free gifts (actually sample/trial packs as bait to fish you for buying more in the future). Even if they don’t give you discount, they might give you a cool paper bag to wrap your goods instead of plastic bag so you look more cool when walking around the shopping complex.

Credit card companies motivate you to spend more by giving your bonus points to redeem for gifts! And they even motivate you to owe more money by offering you lower interest rate the more you owe them. So they can make more interest income from you. Even lousy companies like Malaysia Airlines (MAS) offer Enrich Miles to let their customers earn free flights. The more your fly, the more free flights you can redeem. And you got more Enrich Miles if you fly first class or business class (so they can charge you more on those seats). We also have Bonus Link card, Real Rewards card, Jusco Card and even Sen Heng card! The more you spend, the more gift/discounts you get.

Service industries motivate you to buy more by offering you bulk packages. Your averaged cost of signing up a 12 sessions slimming treatment at Terimee is cheaper than you sign up for 3. Your averaged cost of signing up a life time membership with California Fitness is cheaper than a 1 year membership. Even the QQ Express Cut at Mid Valley gives me a stamping cut that gives me 1 free cut for every 6 cut, so you earn an extra idiot look hair cut after they make you look like a sohai for 6 times! Many food restaurants like Coffee Bean are giving away loyalty cards that earn 1 stamp for each visit. And you can redeem free drinks/food after certain amount of visits.

It is very clear that businesses should always reward customers that spend more and customers that are loyal. But what does TNB do? They punish them! The more electric you use, the more expensive you need to pay. This is stupid.

I understand the reason behind this ‘ridiculous’ tariff structure is because the government wants us to spend less on electricity to save on energy. If that is the case, TNB can be considered as a good government entity or an environment friendly company BUT DEFINITELY not a good business/investment.

As a consumer, I want cheaper goods if I spend more. As an investor, I want a company that will motivate their customers to spend more so it can make more money for me. Thus, as a consumer and an investor, I think TNB-sucks-damn-a-lot.

There are many perspectives to look at businesses and this is one of the very rare one. I don’t expect you to read it in newspaper. I end my post with our new electricity tariff for you to enjoy.

Everything that I have learned can be summarized into 1 sentence, “Buy wonderful businesses at discounted price.” That’s the whole strategy of value investing. That’s what those books trying to tell me.

The biggest gain from reading those books is actually to realize that it is impossible to do it myself. It is impossible for me to read 10 years annual reports for just a single company to find out if it is a wonderful business. It is very boring for me to dig deep into the income statements and balance sheets to calculate the intrinsic value of the company so I can figure out if it is selling at a discount.

The problem is not that we don’t spend enough time and effort on it! The problem is that investing is an art and not an exact science. The sentence, “Buy wonderful businesses at discounted price” make a lot of sense, but implementing it is a very very tough job. It is like you also know your should not get angry easily but you rant all the time when are you inside your car and press your car horn just because the car in front didn’t move after 0.01 second after the light goes green. You know it, but it is hard to be done. You also know that you should exercise more to get healthy but when it is time to go exercise, you say “tomorrow lar, today very tired”. You know it, but it is hard to be done.

What are wonderful businesses? What price is undervalue and what price is overvalue?

I don’t mind spending time reading 10 annual reports for a company if after that I can figure out if it is a wonderful business. I also don’t mind spending 10 hours reading all income statements and balance sheet if I can figure out its intrinsic value.

But it didn’t work like that! After reading 10 annual reports doesn’t mean you will know if it is wonderful. Spending 10 hours to get an ‘intrinsic value’ doesn’t mean it is an accurate one and you can make money from it! There is no guarantee that the effort and time you put in will give you the results you want, because deciding whether a company is wonderful and finding its intrinsic value is an ART and not a SCIENCE!

10 different guys reading the same 10 annual reports can come out with 10 totally different conclusions on whether it is a good company or a bad company. 100 different guys trying to calculate its intrinsic value and they can get 100 different answers. There is no exact answer! You will only know who is right and wrong after years has passed and the future performance of the company and its stock price becomes history.

The best you can do about the future is to predict it. Prediction is an art!

I love money. But I am not really passionate about stocks. I just love its compounding power, but I feel boring reading annual reports and income statements. It is simply not my cup of tea! I have a lot of other interests, passions and hobbies. I am interested in learning and doing a lot of things but I really don’t want to be an investing guru (or a politician)! I am passionate about heath, I am passionate about my spiritual practice, I am passionate on talking cock, but I am not really passionate on picking stocks!

If you look at all investor gurus, there are very passionate in investing. They spend their entire life in investing, although they say they are long term investor and they can buy a stock and hold it for 10 years without looking at it, they NEVER DO THAT! They still look at the stock market everyday, they just don’t buy and sell everyday, but they still look and still do a lot buy and sell within a year! Because it is their passion, their life. They can’t live without looking at stocks. Also, it is their job and career because they make money by investing for others.

But it is definitely not my passion. It is also not my job and my career. I feel stressed with stock. The less I look at it, the more happy I am. So, why spend so much time on it? But I realized that the best way to compound my money is to use stocks! So what should I do?

“To be happy, you need to find someone who loves to do what you hate to do, and can do it a lot better than you.”

This is the key concept of this post, and the key strategy of how I compound my money, how I do my stock investing.

Instead of going to research and pick my own stocks, I actually went to research and pick my own fund managers! I want to find someone that is good at doing what I hate to do!

4 of my favorite investors are Warren Buffet, Mohnish Pabrai, Peter Lynch and Tan Teng Boo. Every value investor loves Warren Buffet. He is the richest man in the world now after compounding for 50 years!

I like Mohnish Pabrai because he has proved that low risk high return value investing works! He started his investing business in 1999 which is quickly followed by the dot com bubble. And yet, not only that he is not affected by the market downfall but he actually deliver an outstanding performance where he manage to obtain 28% compounded return until today! If you study him and look at his strategy, he is so conservative with his investment, making his invertors able to sleep soundly at night.

The chart below shows the severity of the dot com bubble where the NASDAQ Stock Market has plunged sharply from the peak of 5,000 points in the end of 1999 to only 1,100 points in the end of 2002! That means if you have $5,000 at the peak, you are left with $1,100 after ‘negative compounding’ for 3 years. And yet, Mohnish Pabrai, a strict value investor, made 28% compounded return from 1999 until today!

Peter Lynch is the best mutual fund manager in the world. Yep, I condemn mutual fund a lot but Peter Lynch is actually one of the very rare distinct fund manager out there. While owning lots of stocks in his mutual fund, he achieved an outstanding 29.2% compounded return for 13 years! What he did is simple, “Buying wonderful businesses at discounted price”. But different than other gurus, he made it by buying hundreds of wonderful businesses. For comparison, Warren Buffet, the richest investor and richest man in the world, only owns around 60 stocks.

You should have heard of Tan Teng Boo if you have read about my ICAP post. He is one of the best brains in Malaysia which luckily our lousy government haven’t exported to Singapore. I have seen him spoke a few times. The first time is already 4 years ago when I attended a seminar organized by him. When it comes to money, you won’t be confidence with a person by just someone ‘recommend’ him to you, like what I am doing right now. You must listen to him speak yourself. Listen to how he answers the questions throw to him. There are many videos of his interview in his website here. Watch yourself.

I decided not to invest with Warren Buffet’s Berkshire Harthaway because I know it is very hard to invest billions of cash and get spectacular returns. Warren Buffets has been compounding his money for 50 years until he becomes the richest man in the world, how big more can he be?

I like Mohnish Pabrai. But to invest with him you need $2 million USD. “*_* So you know why I didn’t invest with him.

I like Peter Lynch. But he is retired now.

There are just too many reasons why Tan Teng Boo is the best person for me to outsource my investing. The man that loves what I hate to do and can even do it better than me! I found my ’slave’! [I think investing is painful so doing investing job everyday look like a salve to me, but he enjoys it, so let him be. keke]

1. He is so near. A Malaysian who just live in KL. A real person that you can touch (hand & shoulder only, not butt). A real person that you can see with your own eyes (not TV or picture only). Someone who also know who is Adbullah Badawi and Hishammuddin.

2. He has a newsletter published weekly so you know what he thinks every week. And his newsletter has several paper portfolio where you can mimic his buy and sells!

3. He is the fund manager of the only closed-end fund listed in KLSE! You can let him invest for you as low as RM2.17 per share right now! [not USD 2 million]

So why do it yourself when someone can do it better for you?

I prefer to have more time myself doing things I like.

I buy my first batch of ICAP in February 2007 at RM1.54. At that time I have only read a few books on investing (not 20 yet), confidence on value investing is still very very weak. And I am also doubtful to Tan Teng Boo. Within 2 weeks, the whole market suddenly crashed when the Shanghai market fell 9% in 1 day. Being one of the panic chicken, I sold it for RM1.48 and lost money! I started scolding Tan Teng Boo as a cibai. Look at the ICAP chart below, you will see a sharp fall end of February 2007.

I can say all value investing books will have this quote by Warren Buffet.

“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

Somehow, I remembered that later. And I actually started to buy back ICAP after the crash. I buy gradually for the next few months. In June, I become very confident and sold all my mutual funds and convert all proceeds to ICAP. The highest price I ever pay for ICAP is RM1.70. My averaged purchase price is RM1.55. I hold just 1 single stock and nothing else for a long time. No mutual funds, no blue chips, no Amanah Saham Wawasan 2020.

Lets look at 2 of the mutual funds I sold in June (I also sold my ASW2020 to my father, haha).

ING Global Real Estate Fund – Bought this in September 2006 after I failed to buy any ASW2020 after queuing for 2 hours at Maybank. So I immediately walk to Hong Leong bank to buy this fund. Bought price is RM0.5103. Today’s price RM0.3999. Investment return based on NAV if I hold it until today is -22%! But because it does pay dividends all the time, the return will be slightly better but I take note that I need to pay around 5% commission when I buy. So does buy and hold really works? Do mutual funds work?

Public Global Select Fund – Bought this on its launching period in September 2006 too. Commission is 6% with 1% free units, so net commission is 5%. Look at the chart below, it is -8% since inception and if I am still holding it until today for 18 months, my return will be -13% (8% + 5% commission). They even perform poorer that the market (red line)! What is the need to pay 6% commission and 1.5% annual management fee to the fund companies when they can’t even do better than the overall market?

They even perform worse than Fixed Deposits and ASW2020!

Luckily I didn’t hold any mutual funds anymore. Because another important thing that I have learned from reading those investment books is -

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Read the rest of How To Make 20% Compounded Return By Yourself Without Being a Guru? Your Complete "Do It Yourself" Investment Game Plan. (2,309 words)

It used to have only 2 stocks listed under the closed-end fund section – ICAP and AMANMFB. But funny enough, AMANMFB has closed shop a few weeks ago. AMANMFB performance sucks from day 1 and they looked even uglier when ICAP is launched 2 years ago. So instead of keep hiding their head under the table, the fund manager decided to terminate the fund.

Most people are not familiar will a closed end fund because most funds that we buy are open-ended funds. Please read the article "Closed End Fund vs. Unit Trust Fund" to learn more about them in details.

To make a quick explanation, an open-ended fund doesn’t have a fixed amount of units. Today it can have 13 million units and tomorrow it can have 10 million units, depending on how many people have bought or sold the funds. The price that you buy or sell an open-ended fund is based on the NAV of the fund, which is calculated daily by the fund companies and is published daily on the newspaper. [NAV = Net Asset Value = how much the fund is worth = the exact price of the fund]

As opposed to an open-ended fund, a closed-end fund has a fixed amount of units. For example, ICAP has a fixed 140 million units available. Tomorrow, it will still be 140 million units no matter how many people sell or buy it. The bid and ask price do not depend on the NAV but actually depends on supply and demand.

When you buy a Public Mutual fund, you are buying from Public Mutual directly at the NAV + entry fee (6.5%). If you sell, you are selling to Public Mutual directly at the NAV. You don’t need to worry whether there are buyers or sellers available, Public Mutual will always buy or sell to you.

Since ICAP only has a fixed 140 million of units, you can only buy from an existing ICAP holders who wants to sell to you (sorry, AhYap is not selling his to you). And so the price is determined by supply and demand.

The above image shows that there are 152 lots available for sale at RM2.40. If you are already holding ICAP and want to sell them, you can sell 148 lots at RM2.39 right now. A lot means 100 units/shares.

Where do you buy and sell ICAP? You do that exactly the same way you buy or sell other stocks such as GENTING or DIGI. That’s either through a reminsier or do-it-yourself via a discount broker such as HLeBroking.com. You need to pay brokerage fee, stamp duty & clearing fees when you buy or sell ICAP just like your buy or sell other stocks in KLSE.

Since ICAP is also a fund, it also has its own NAV. But instead of being calculated and published daily like other mutual funds. ICAP NAV is calculated on every Wednesday and will be published end of Thursday on icapital.biz and klse.com.my (’Listed Companies’ Menu -> Company Announcement -> Announcements -> Current -> ‘By Company’ Tab -> ‘I’ Button -> ICAPITAL.BIZ BERHAD).

From website iCapital.biz, it will look like this

Latest NAV – RM2.10
(as at 14/11/2007)

From klse.com.my, the announcement will read like this

On behalf of the Board of icapital.biz, we wish to announce that the NAV per share of icapital.biz as at 14 November 2007 was RM2.10.

If you are smart enough, you will notice that ICAP is actually selling at RM2.40 right now while the NAV is only RM2.10! What does that means? Demand is so strong that there are actually idiots trying to buy it at RM2.40 (Yes, I mean Idiots).

Logically, ICAP should be bought or sold around the NAV. So if the NAV is RM2.10, buy and sell should be around that amount. As a buyer, you want to buy it as low as possible. If you are a seller, you want to sell it as high as possible. If the NAV is RM2.10 and you pay RM2.20 to buy it, you are actually paying a premium to buy it. It is OK to pay a premium to buy a good fund. When you buy a mutual fund, you need to pay 6% to 7% entry fee as well which is also a premium. However, paying 19% of premium to buy a fund is ridiculous to me.

The reason why idiots bid it so high right now is due to the lack of understanding to ICAP and the ignorance of a bunch of traders. A lot of trading software (including IntegraStocks promoted heavily by Bursa Pursuit) are giving buy signals to ICAP because it keep on breaking new high. So these traders, who know nothing about ICAP other than its s-p-e-l-l-i-n-g thought that this stock is the next stock that will go up 500% in the next few weeks. They will be proven wrong and burned hard.

ICAP is a registered company but it doesn’t has its own ‘business’. It’s ‘business’, is to own other businesses that is listed in the KLSE (they buy stocks!). ICAP is owning around 15 stocks right now, including PARKSON, PETDAG, UMW, PIE, BSTEAD, etc.

ICAP doesn’t has a single employee! Everything is outsourced. The decisions on what stocks to buy and sell are outsourced to Capital Dynamics Sdn Bhd, which is run and operated by Tan Teng Boo (the fund manager). The annual management fee paid to Capital Dynamics yearly is 1.5% of the NAV. Almost all mutual funds that you buy will will have such management fee paid to the fund manager ranging from 1% to 2%, 1.5% is most commonly used.

Tan Teng Boo publish an investment newletter weekly since 1988. And everyone can subscribe to this newsletter (of course you need to pay lah). The gem of this newsletter is that is contains a paper portfolio where he will tell you exactly what stock to buy and sell. He called this portfolio "Section C". The performance of this portfolio is amazing, it has averaged a 21.73% compounded return since it is started in 1991! Remember that a 20% compound rate will grow your money 6 times in 10 years. Click here for the complete track record details with yearly breakdown and chart. Since this portfolio is make public to all subscribers since 1991, everything can be traced back to 1991 and thus the track record cannot be faked.

What makes ICAP so interesting when compared to other mutual funds in Malaysia?

The core philosophy of typical mutual funds is diversification. A typical fund will own a lot of stocks, probably hundreds or even thousands of them! What they do is buy a little bit of this and a little bit of that. Their reasoning behind this is that the risk can be reduced by ’spreading’ it over a lot of counters. What they are thinking is, if the fund own 300 stocks and 1 of them go down 100% to 0, the fund overall net loss is only 0.33%. This is known as "Don’t put all your eggs in one basket".

Unfortunately, sword has a double edge. If your fund buy 300 stocks, 1 of them go up 100%, the effect of the superior performance of this stock only net to 0.33% to the overall fund performance! So there is nothing to be proud of when one of the stock go up 100%!

Warren Buffett, the world’s most successful investor (the #2 richest man in the world) who runs Berkhshire Harthaway that is worth over USD 200 billion ($200,000,000,000) owns only 39 stocks! So for a typical mutual fund that is worth RM100 million to diversify as much as 300 stocks is meaningless.

When mutual funds owns too many stocks, their performance will be much or less same as the overall market! So if you read the headline and the stock market tumbled 3%, most probably your fund will also tumbled 3%. This is because the fund owns so many stocks that it is actually the stock market itself! If KLSE has only 1,500 stocks and your fund owns 500 of them, it is very logical that your fund price will drop when the overall market drop.

Look at Public Growth Fund (red) vs the KLSE Composite Index (blue). Look how close they mimic each other. This is because they own too many stocks. So they will have a high correlation to each other.

As ICAP owns only 15 stocks, its performance will not rely too much on what the overall market is doing. So it has lower correlation when compared to typical mutual funds. This can be seen clearly on the ICAP performance beginning at April 2007. While the market is going flatline, ICAP is able to appreciate continuously.

Performance of a value investor doesn’t depends on the market but the earning performance of the underlying companies. The companies that ICAP owns keep making good earnings on that period and thus the price is reflecting that. Note that I am using the NAV of ICAP and not the stock price of ICAP because NAV is the real value of the fund and not the price (which is insane right now).

* A mutual fund that holds too many stocks will not be able to outperform the market in a large margin for the long run. But an intelligently value investing portfolio that focus only on a few well researched stocks can easily outperform the market by a large margin in the long run. *

Before I continue, I will now write my responds to Boyboycute’s comment. He takes a great effort on researching more about ICAP which I salute (a lot of people either listen and forget, or listen blindly).

Icaptal.biz was listed 2 years ago on 19 Oct 2005. Whatever ICAP is doing, it will be under scrutinized by Bursa starting from that date only. Before the listing, ICAP self-claimed in http://www.icapital.biz/english/trackrec_1.asp about the performance of Capital Dynamics without any supporting documents or evidence. No one can certify the performance of Capital Dynamics before the listing of ICAP. Since ICAP has two years of track record only, I cannot make any good judgement about the fund. By the way, did you read the disclaimer in the website? Past performance is not an indication for future performance. See it here: http://www.icapital.biz/english/disclaimer.asp

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Read the rest of What You Need To Know About ICAP (iCapital.biz Berhad) And Why It Can Make You A Lot Of Money (Only If You Know How)! (3,904 words)

scwong: The math that we studies before, 90% of it is not useful in everyday life. I speak for those who are not engineers or accountants or architects, etc.

True! We try to figure out things like Train A start from Ipoh at 8.00am at the speed of 80km/h and Train B start from Johor Bahru at 9.00a.m. at the speed of 100km/h, at what time and where will both the train meet each other? Zzzzzzzzzz.

ahbi: ah yap a….y no add me in msn le…i gave u my email last time mer

My ex-coursemate Donald (The #1 cibai according to Google) has answered it for me nicely. “You guys don’t need to check him on messenger coz i can’t even get him on email!” Yes, CibaiYap really don’t play messenger and reply to emails. He also off his handphone most of the time. Even when it is on, he can let the phone ring and ring and ring without picking it up, making the caller on the other side jump like a monkey. That’s AhYap, or better be called CibaiYap because of this.

taikor: I only knew how to save RM100k in 5 years even before I graduate. For those working in Singapore, that’s a lot easier. Just bring back around S$950 every month and you’ll be able to save Rm100k in 5 years.

Those making SGD should aim for SGD $100,000 to become a SGD millionaire! But if you are making Rupiah, don’t save only 100,000 Rupiah lar. 100,000 Rupiah is only RM39.10!!!

april: i also bought ICAP. but damn miserable .. bought at 1.74 and only 200 units coz super and extremely poor. :’( Plan to sell at 2.15 and wait for it to drop and the buy alot alot in the future. Currently bought under my auntie’s account so have to sell asap or else next year all the minimum rate will increase to RM40. But sibeh good ah the share!!!!

I am very happy, so you are now the #4 people who listen to me. Did you buy 200 or 2,000? If one buy 200 units of ICAP at 1.74, his total cost would be RM361.14 including commissions and fees, making the averaged bought price 1.8057. In order to just break even, one need to sell it at 1.88! It needs to increase at least 8% before you can make any money.

The amount of units you bought affect your break-even point (the price where you sell and you don’t make or lose any money). If you buy ICAP at RM1.74 here are the break even points for different amount of units you buy.

100 – RM2.01
200 – RM1.88
300 – RM1.83
400 – RM1.81
500 – RM1.80
600 – RM1.79
700 – RM1.79
800 – RM1.78
900 – RM1.79
1,000 and above – RM1.77 (total investment around RM1,800)

When we buy or sell a stock, we need to pay the brokerage fee, stamp duty & clearing Fee. It’s the stamp duty and clearing fee that affect our break-even point because when you buy too little, stamp duty and clearing fee will account for a large percentage of your total invested amount.

Lesson 1: Every time you buy or sell, make sure the transacted amount is at least RM1,800 to maximize your return.

Online brokerage like HLeBroking and Maybank2u charge only 0.42% brokerage fee. If you are buying through a reminsier, you will need to pay 0.7%! If you know you can negotiate (most people don’t know), they will give you 0.6%. But that’s still more expensive than the 0.42%.

Lesson 2: Use an online brokerage house to save on brokerage fee.

yangsquare: I’m very prospective about this- but how do you manage to get 20% compound interest?? even 12% would be difficult to find, wont it?

It is very easy, if you know how. It is very hard, if you don’t know how. If you know how to swim, swimming is very easy. If you don’t know how to swim, swimming is very hard (and you can even get drown!). So is swimming easy or hard? Of course, I will share more and blog more later about how to get the 20%. Akan Datang.

yangsquare: Also remember there is also a negative force behind all positive forces; that is what we call INFLATION. inflation rate is currently around 2% for the whole country and 6% in big cities like KL. That means your money will diminish if you keep it in time.. meaning your 20% compound would only be like 18% after subtracting the inflation rate.

Brilliant. The answer is in the statement itself. Because inflation is unavoidable, that’s exactly the reason why we need to aim for a higher compound interest rate (and not the Amanah Saham’s 8%!). If you have live long enough, you should have witnessed the destruction-power of inflation. How much does 2 pop-piah cost 20 years ago? 80 cents. How much today? 2 Ringgit and 80 cents.

yangsquare: btw, how do i start a trading account? any minimum age for that?

18 is the minimum age. Open it online at HLeBroking.com. But you still need to print out the final application form and go to any Hong Leong bank to have your signature witnessed and IC certified. Then you can ask them to mail it for you to Hong Leong securities. To trade, you can bank in money to your brokerage account via Maybank or Hong Leong bank.

Huiying: I agree with the compounding theory too.. it really requires a lot of discipline to reject all kinds of temptations to make that type of saving. Meaning, if you are earning around 3k, while you are still young, no outings, no trips and no fun. Really tough. And so, I think balance is really important. A balance of lifestyle and having saving at the same time.

This is a very open topic like politics and religion. Always can’t get a right or wrong from it. If you are honest with yourself and look at all the people around you, do you think there is more rich people or poor people? Is there more healthy people or unhealthy people? Is there more successful people or fucked-up people? If you do what most people do, you will get what most people get – poor, unhealthy and fucked-up. But this arrangement is good and nothing need to be changed. If not, who is going to sweep the street? Who is going to tar the road? Who is going to be police (haha)?

But what different now is that most people don’t know they have a choice. You know you have a choice now. So you want to be like most people or you want to join the less-people club? But as I said earlier, it is okay to be like most people. If everyone has money, who is going to work at the bank’s counter? Who is going to be our accountant? Who is going to be a brilliant engineer to design better stuffs for our livings? Who’s going to repair our car when it is broken?

Huiying: Just wondering, when you purchased ICAP, you are using the rule#1 method?

No, I don’t. You don’t evaluate ICAP using Rule #1 method because ICAP is a fund and not an ordinary business. ICAP is currently holding 15 stocks. You can happily evaluate it’s holdings using rule #1. ICAP strategy is value investing, and rule #1 is one kind of value investing which is more ‘aggressive’. There are many ways to implement value investing and ICAP is using a more conservative value investing approach than rule #1, making you sleep easier at night. I will discuss what I mean by aggressive and conservative in some other posts.

Most youngster think that MLM is the best opportunities to get rich. But when I look back at my friends who joined MLM for the pass few years, almost all of them quit and get back to their day job! When they try to recruit me in university time, they promised me a lot of get-rich-dreams and scold me stupid for not joining. Now they all quit. Imagine you have joined an MLM company because you believe in the sales pitch of your upline and later he quit! You are left alone! So think twice before you get into MLM.

I have 2 friends that are incredible Great Eastern insurance agent. One of them sold 97 covers last year. Another guy told me he can close 1 sale on every 5 meetings! Great! Unfortunately, I also have a lot of friends who can hardly sell 1 insurance policy in a month! Gave up, and got back to day job. Insurance is not for everyone.

How about trading? I have attended an Options Trading seminar 2 years ago. The speaker is the #1 options teacher in Asia based on the number of students he has. He is extremely high profile. I know he is very rich, but not all his students make it (including me).

You know what, when I talk to a few seminar participants in the graduates gathering few months later, most of them don’t even have a trading account yet! And the questions they ask me tell me that they simply learn nothing from the seminar. They are still not up to the kindergarden level!

Understanding the basic doesn’t guarantee you to make money, but NOT understanding the basic means you can’t even play the game! If I understand everything and actively trade for 2 years but still cannot make money, do you expect they can?

Again, it is not for everyone. You you haven’t heard me sing “My Money Live Over The Ocean“, you need to.

How about the current HOT make money online? Most people who teach you how to make money online make money by teaching you how to make money online. (sorry for this poor sentence structure.) They don’t know how to make money online. I have a long post on it.

How about starting your own business? Huh, if you can’t make money when somebody is helping you, i.e. MLM and Insurance, and you are having problem making money trading and internet marketing, then what is the success rate for you to start your very own business? Do you have the capital? Do you have the knowledge? Can you differentiate between a sole proprietorship and a Sdn Bhd?

MLM is out. Insurance is out. Trading is out. Internet marketing is out. Starting your own business is out. Then WHAT?

Just continue to work as an engineer! (or doctor or lawyer or anything that you study in University)

&@#^&$%^$#&%^&%^*$$%!

Ok ok, don’t get mad. Give me some time to explain. You just need to understand a simple concept. This concept is so SIMPLE that most engineers and university graduates CANNOT understand it because these professionals can only understand COMPLICATED things but not simple things. They know how to calculate e = mc² but tell you 1 + 1 = 3. They can measure the speed of light and the number of electrons in a piece of silicon plus the amount of laser required to cut your eye without blinding you but they cannot understand this simple concept-

The Power Of Compounding!

Albert Einstein has repeatedly telling people the power of compounding in a lot of occasions. And now AhYap is doing the same and this is not the first post I talk about it.

“Compounding,” Albert Einstein said, “is mankind’s greatest invention because it allows for the reliable, systematic accumulation of wealth.”

Einstein calls compounding the “8th wonder of the world.”

Einstein, “The most powerful force in the universe is compound interest.”

Here is how compounding works. If you have $100,000 today and if you can grow it by 20% each year, here is what it will become in the 30 years period.

Begin _ $---100,000
Year 5_ $ _-248,832
Year 10 $ _-619,173
Year 15 $ 1,540,702
Year 20 $ 3,833,760
Year 25 $ 9,539,622
Year 30 $23,737,631

Did you notice that you just need 15 years to become a millionaire if you have $100,000 right now and you are able to compound it 20% per year?

Let’s don’t argue in this post whether 20% is achievable or reasonable, I will explain it in another post. At this time, you just need to know that Warren Buffett, the 2nd richest man in the world compound his money at 21% for over 40 years! In his first 10 years from 1957 to 1967, he actually compounded at 29%. Peter Lynch, the best mutual fund manager in the world compounded his fund at 29% for 19 years. He is retired now. Tan Teng Boo, the Malaysia #1 fund manager compounded at 24% for 10 years! And he is STILL ALIVE and NOT RETIRED YET!

20% is definitely achievable if you know where to put your money.

There are 3 factors that is very important to compounding:-

1. The compound return rate (the interest rate)
2. The initial capital/money
3. The compounding period (how long you compound it)

We have talked about the compound return rate just now. From today onwards, I want you to remember the number 6!

AhYap, “If you can compound your money at 20% per year, your money will grow 6 times every 10 years.”

Remember it!

20% is what we are aiming for. If we failed, and say we only manage to compound at 15% (some Public Mutual Funds are able to compound at 15%), what will we get? For 15%, our money will grow 4 times every 10 years.

Notice the big differences? 20% = 6 times, 15% = 4 times. Don’t feel upset, even at 15% (4 times every 10 years), $100,000 will become $400,000 in 10 years and then $1.6 million in 20 years. Happy now?

What if you are good enough to get 25%? Your money will grow 9 times! Wow! 25% is still reasonable as Peter Lynch did 29% for 19 years. But don’t dream too big, everything beyond 30% for the long term is unreasonable and hard to achieve.

If you are ignorant and you put your money in Amanah Saham 2020 which gives you averaged 8% return, how much will it grow? Your money will only grow 2 times (double) in 10 years. Now you know why I sold all my Amanah Saham 2020 to my parents after holding it for 10 years since 1997!

Now here is the most interesting thing. At 20%, your money grow 6 times every 10 years. If you eat enough ginseng and bird’s nest, you will probably have a lot of 10 years in your life! If you are 25 and you live until 75, you have five 10 years. Eat more ginseng and maybe you have six, seven or eight 10 years more.

Every 10 years, your money grow 6 times more!

$100,000 … (10 years later) … $600,000 … (10 years later) … $3,600,000 … (10 years later) … $21,600,000 … (10 years later) … $129,600,000 … (10 years later) … $777,600,000

If you have RM777,600,000 today, you will be ranked around the 20th richest men in Malaysia. But that’s too far fetched. 50 years is too long to imagine. Malaysia just celebrate his 50 year old birthday. So, we just target 20 years enough.

RM100,000 + 20 years + 20% compound = RM3.6 Million

Key understanding here is that the rewards from compounding come late in time. Early in time, the reward is not enough to feed chicken. Let me explain.

At the beginning, you will laugh at the return. On the first year, your money only increase RM20,000 from your RM$100,000. Most people make more than RM20,000 per year. So compare to their income, they can say, “So what?” It is not tasty at the beginning.

Even in the 2nd year, you only get RM24,000 from your nest eggs of RM120,000. Again “So what?”. Not tasty.

But when the snow ball grow bigger and bigger, your money actually increase to RM600,000 in 10 years. Your money will grow $120,000 on the 11th year! Well, there are still people who can make $120,000 per year. So nevermind, wait another 10 years until your snow ball grow to RM3.6 million. At the 21st year, your money will grow by $720,000! Now, tell me how many jobs can give you $720,000 per year? Even Hishammuddin doesn’t make it!

The power of compounding come late in time. It is like a exactly like a snow ball that roll bigger and bigger.

– NOW, THE PLAN –

1. Save RM100,000 in 5 years. You need to start as early as possible. If you start immediately after graduation, you should be able to save RM100,000 before 30.

Remember that the more money you are able to pump in at the beginning, the bigger rewards you are going to reap at the end. RM100,000 is the bare minimum. If you can, get more! RM100,000 gives you RM3.6 million in 20 years, RM200,000 will gives you RM7.2 million!

2. Aim for 20% compounded return. But you will still do fine with 15%. With initial capital of RM100,000, 15% will give you RM1.6 million in 20 years. 20% will give you RM3.6 million in 20 years.

At that time, petrol and toll fee at KL is dirt cheap for you and you will not be angry with Sammy Vellu.

Why The Early Stage Is The Most Critical!

A RM1,000 saved at 25 year old is worth a lot more than a RM1,000 saved at 35 year old. Because if you saved RM1,000 at 25, it will become RM6,000 when you are 35! (remember the magic number 6)

So it is the same for RM100,000! A RM100,000 saved at 30 year old is worth a lot more than RM100,000 saved at 40! Because the RM100,000 saved at 30 will grow 6 times to RM600,000 at 40!

This is why it is very important to start as early as possible and squeeze as much money as possible from your salary.

Here are my suggestions… these are not jokes!!!

1. Don’t buy a Toyota Vios or a Honda City yet! These are fresh graduates favorite cars. Don’t even buy a Proton Savvy or Proton Wira! Just buy a damn Proton Iswara (or Honda 70)! If you buy a Honda City, you probably will drive the Honda City for your whole life. But if you buy an Iswara and save the remaing for compounding, you can drive an S Class or BMW 7 series or even a Porsche 20 years later (buy 2nd hand one lar, cheaper). If you really want to buy a better car, buy it only after you have saved RM100,000.

[AhYap is still driving his damn Iswara]

2. Don’t buy a house yet! Rent a small cheap room for the first 5 years or stay with your mum! Buy a house only after you have saved your RM100,000 capital. If you get a housing loan too early, it is VERY hard for you to save the RM100,000 because of the heavy installments. A house is NOT an asset -> Read the book ‘Rich Dad Poor Dad’. It will only make your poorer.

3. Don’t buy medical card and insurance yet! My insurance friends are going to kill me on this. But I still have to say it. Buy it only after you have saved your RM100,000! If you really want to buy, a better plan is to kill yourself after 2 years so your family will have the RM100,000 insurance claim to compound and let them get rich.

Why can’t you just take the risk of not having an insurance policy for another 5 years? Most probably you don’t have any insurance policy when you are studying in University and in secondary school. Most people spend 10 to 20% of their income in insurance. That’s a lot of money!

4. Don’t get married yet! Uhhhh. This is not an advice, this is just the truth. When you have a family (even just a girlfriend), you will tend to overspend. Luxurious dinners, gifts and entertainments…

Furthermore, females are weaker with money (a.k.a. NUMBERS). It is very hard for them to understand why you need to save so much and the concept of compounding. I am not discriminating female, I am just telling the truth. Female hates physics and maths in secondary school because their brains are not design to process numbers. For girls, it is always better to buy a new shoe and a new Sony Ericsson right now, than to see it grow 36 times in 20 years so she can buy many many LV bags and Coach bags.

Girls are also brain washed by their parents since they are kids. If you want to marry her, you need to buy her a house and put her name on it. No house, no wife. You will also need to buy her an EXPENSIVE wedding ring. Because she says the SIZE of the ring represent how much you love her! Wedding dresses, wedding dinner, wedding album…. you have got to show that you love her, with MONEY.

[Girls, if you have a RM5,000 budget to buy a diamond ring today and you spend all to buy it, your diamond ring will immediately worth 50% less because it is now 2nd hand. And you will never have the chance to sell it at RM5,000 again in your whole life. If you buy a RM1,000 ring and put the RM4,000 to compound, you can buy a RM96,000 diamond ring 20 years later]

Cibai… why my post is getting longer and longer…

There are thousands of ways to save more money from your salary. Don’t go to Mid Valley, One U and The Curve will guarantee to save you plenty of money. You all know Sunway Pyramid has just expanded with a new wing, but don’t go!

Can a University Graduate Really Save RM100,000 in 5 years?

University graduates usually will have an income from RM2,000 to RM5,000 in the first 5 years of their working horizon. It is even more if you are a Malaysian working overseas in places such as Hong Kong and Singapore. If you can stay alive with just a mere RM600 PTPTN in University, it is BULLSHIT that you can’t save RM100,000 in 5 years with such salary.

The point is whether you are willing to save those money by temporary lowering your standard of living so you can reap the BIG reward in the future. And on whether you understand how much your RM100,000 will be worth 20 years later.

Save the damn RM100,000 in the first 5 years. Live like you are depending on PTPTN for the first 5 years. Then you can do whatever you want to do with your salary after you got your initial capital (car, house, insurance, wife, Sky Bar, Lorenzo, prostitute …).

To make my earlier examples more easy to understand, I’ve asked you to compound only after you have RM100,000. But in real case scenario, you begin to compound the day you start putting money into your capital! If you save RM10,000 for the first year and compound it at 20% for 5 years, it will become RM25,000! So the money you save in early years will enjoy compound gain. So even if you save less at the beginning when your salary is low, the power of compounding is already working for you. And in the late years when your salary is higher, you can save a higher portion of your salary. So RM100,000 is really not that hard!

Savings Plan Example -

Year 1 – RM10,000
Year 2 – RM15,000
Year 3 – RM15,000
Year 4 – RM20,000
Year 5 – RM25,000
Total _- RM85,000

So you saved a total of RM85,000 from your salary in 5 years. But since you already have money saved in the first 2 years (RM25,000), you should be able to invest those money and earn your remaining RM15,000 easily on Year 5. So you will be able to get a minimum of RM100,000. Understand now why car, house, insurance and wife will slow you down?

Final Words

I have explained the power of compounding to a lot of people in the pass few months. And honestly, most of them listen with one ear in and one ear out. Some even feel so sleepy that they open their mouth as BIG as the mouth of hippopotamus. So I decided to blog everything out once and save my saliva next time.

I even told many of them to buy ICAP when it is traded in the range of RM1.60. Luckily my parents listened to me, and also 2 of my friends (one of them is soufulow. Yo! high five). But most of the others never listen. This is the market price of ICAP compare to KLSE Composite Index.

It is traded in the range of RM1.60 for several months, giving people a lot of time to buy. I bought from February to April at prices range from RM1.44 to RM1.66, with the final averaged bought price of RM1.55. Soufulow even bought at the peak at RM1.67 in May. I sold all my mutual funds, Amanah Saham 2020 and close all my FDs to invest almost ALL my money in this one single stock. It closed at RM2.04 on last Friday. A 31% growth for me.

This close end fund (listed as ICAP in KLSE), is managed by Tan Teng Boo, the guy who did 24% compound for the last 10 years. You can learn more about the fund here. I will definitely write more about ICAP in the future.

I’ve shared my knowledge here. It takes me more than 7 hours to write this post. I’ve done my part. I don’t have the responsibility to make you rich. I could have watch movies or sleep in the last 7 hours (it’s 6.18am now). I don’t make a single cent from blogging. I have read 20+ books on investing in the last 12 months and this is the essence I have for you. Plus a few more that I have written in Intelligent Investing. So whether you want to make use of these knowledge, is totally up to you.

Click here for Part 2

Most people don’t understand what is stock and what they are buying. All they know is that there is a counter NAME and then there is a PRICE. And what they need to do is to speculate the movement of price, hoping to buy low and sell high to make some money.

They can use numerous techniques and most of them rely on rumors and tips. Some that are more advanced might use charting techniques which is know as technical analysis. Tips or charts, they are the same gang. They try to speculate on the price movement to make money.

Let’s say you have RM100,000 to invest in KLSE.

You speculate all in 1 counter and your investment go up to RM110,000 in 1 month (you may have used tips or charts in making the buying decision). Speculators believe that stocks are only paper money and only cash is the real money. When they hold stock, they feel risky. They believe that their money is in ‘unsafe’ position. So in order to see the real money and to protect their profit, they need to sell the stock and get the cash. After selling, they think their profit is now ’safe’. This is called ‘profit taking’ or ‘taking profit’.

The problem IS -

What are you going to do with your RM110,000 ’safe’ cash now? It might be safe now, but what do you want to do with it now? You might spend a few hundred or a few thousand to celebrate, but most probably you will still end up having RM100,000+ in cash.

So probably you will have to buy another counter (using another tip or chart). And this is irony because at first, you sell a counter because you believe holding a stock is risky and you must take profit. Now after you sell one, you have to buy another one and put yourself back to the ‘risk’ of holding a stock!

Are you sure you can pick a new one that can make you money again? If you invest based on pure luck, you can still be lucky for a few times but not definitely not forever. If you have to switch from 1 counter to another every month, you have to switch 12 times a year and 120 times in 10 years! Can you have a lucky streak of 120 times based on tips and charts? And most of us have more than 10 years to live!

While you can make money in stock, you can also lose money! You can always lose $10,000 instead of making $10,000.

This is the problem with short term trading. You didn’t reduce your risk in anyway because after ‘taking profit’ you still need to buy another counter. By thinking that ‘taking profit’ make your money safe, you are just lying to yourself. Your money is never ’safe’. You are just transferring the risk to another counter.

What do you need to do with your money after you sell is the biggest problem for a short term trader.

You need to trouble yourself in making new decisions and selections every time after you sell. And you won’t be lucky every time with your new picks. When the market is hot, you might have more luck on picking the next right counter. But in a sideway (now) or bear market, I don’t think you will have much luck speculating.

—

A long term value investor, on the other hand doesn’t need to do much with his investment. The market is so red on the week I went to Sipadan, and yet I can dive happily without looking at the market.

Long term value investors are buying for the long term. They don’t need to adjust their portfolio daily, weekly or monthly. And because they only buy GOOD businesses at DISCOUNT price, their risk is minimized. They don’t chase price upwards and they will even refuse to buy GOOD businesses that is not selling at DISCOUNT. They will stay away from BAD businesses that don’t have a good future. They don’t speculate on the next BIG thing, e.g. the next Microsoft.

You might argue to me that it is very hard to know the value of a stock. I FULLY agree with you because after I read 20+ books on investing, I still don’t know exactly how to evaluate a business. It does require a lot of work just to understand a business before you can put a value on it.

After reading 20+ investing books doesn’t make me a super investor that can pick and evaluate stocks. But, it let me know exactly what is the RIGHT STRATEGY for investing. It is not tips, not charts, not short term, not speculating. You also don’t need to guess who is in the next Microsoft or Bill Gates. That strategy is called ‘Value Investing’. It can be explained in 1 short sentence -

“Buy wonderful businesses at discounted price.”

People like you and me don’t have much time in evaluating businesses and calculating their value. If we believe in Value Investing, then all we need to do is to find a fund manager who practice value investing, who has a good track record for the pass few years (the longer the better) and have him invest the money for us! They are professionals, they spend all their time on evaluating businesses. Let outsource the job to them and have them work for us!

That explain why most of my money is in ICAP and why I can still dive happily in Sipadan when the KLSE dive 100+ points to below 1,300 last week. It only screws short term traders and speculators, it doesn’t screw value investor. Irony, value investor are more happy when the stock market dive because that’s the time when lots of wonderful businesses are sold at discounted price!

It takes me 4 years to fully adapt to value investing. I have been a short term trader and speculator. I have used tips and charts. I have been an active options trader for 2 years (buy and sell for over 1,000 times). I have attended several seminars and read a few books on trading, options and technical analysis. I have gone thorough a lot before I come to this understanding. For most of you, I don’t think you can understand the power of value investing from this post alone. Most people have to go through things themselves before they can understand. And unfortunately, most will never understand.

Good luck with your money!

—

Related Post:
Value investing has a lot to do with Price and Earning. Earning let you know the value of a business while the price let you know if it is selling at a discount.

What they are thinking is, “Should I sell! Should I take the profit? Will it rise more? What if I sell and it rise more? What if I didn’t sell and it drop back to $1?! Or $0.50!!!”

They scare that their profit will be vanished if they don’t sell now. Or even worst, lost their initial capital. They believe that they still haven’t really make the $2 until the sell. They feel that the $2 is in a risky position that can be gone if the price go down.

People get an idea of something by comparing it to something else. (remember my post on politicians play the compare game?) It is something similar.

What does 100kg means? It means nothing unless you know what context to compare it. When we are talking about human weight, we will need to compare 100kg with other human weights. In this context 100kg is someone with a FAT ass. 100kg is very heavy. But if we are talking about dinosaur, 100kg might just be its fat-little-dick (Oh!). 100kg become very little.

Now, when somebody bought a stock at $1 and he knows nothing about the underlying business, the only thing he can compare with is his buying price! So if it goes up to $5, he compare it to his buying price of $1 and think that his stock is very expensive now and he should consider selling. If it goes down to $0.50, he also compares to the $1 and feel that his stock has gone to hell.

If you do that, you have compare the price with the wrong thing. The whole context and perspective are wrong. For the very same stock, it can be very expensive when it is $1 and it can be extremely cheap when it is $10.

The right thing to compare is not your buying price or historical price. The right thing to compare is the EARNING of the business! How much you are willing to pay for a business depends on how much money the business is making (and will be making)!

Let’s say you own a petrol station and you want to sell it. Your petrol station will make a steady earning of $200,000 per year. How much do you want to sell it?

Will you sell it for $200,000? If you will, you need to jump off from KLCC. Your petrol station can make $200,000 per year and 5 years it will make $1 million and the money you can make is basically infinite and forever (unless your petrol station is hit by a meteor and exploded). It is a money printing machine. Only idiots (sohai in our language) and gamblers who owe money to Lim Goh Thong (the Boss of Genting Casino) will sell it at $100,000.

So what is the right price to sell? You are selling something that is depositing a fix amount of money to your bank account every year. To make sense, you need to sell it for a few times that earning. That means instead of waiting ’slowly’ for $200,00 once a year, you are willing to sell it to somebody who will pay you in advance a few years of the future earnings. Say 5 years, it will be $1 million.

You receive $1 million in your bank account today, 5 years of your future earning. By taking that money in advance, you give away your rights to the petrol station. The business has nothing to do with you anymore no matter how much it make in the future. The buyer, on the other hand has taken the company from you. He will be able to collect back his initial investment capital of $1 million 5 years from today. After that, he will be making real money that is not his initial capital.

How many times the earning you are willing to pay create a ratio called the Price Per Earning Ratio. We called it the PE ratio. In the petrol station case, the earning is $200,000 and the price sold is $1 million. So the PE ratio is 5.

PE is very meaningful when we are referring to a healthy business that is consistently profitable, such as Public Bank, Digi, etc. They all have stable earnings (the E) and a quoted price everyday from the stock market (the P). With the E and the P, we can easily get the PE, that’s how many times people are currently willing to pay for the earning.

Today DIGI’s PE is 21 while PBBANK’s PE is 19. So if you buy DIGI today, you are willing to pay 21 times the current earning of DIGI.

Let’s go back to what I am talking at the beginning. Why people are comparing to the wrong thing and why $1 can be more expensive than $10.

From our very first example, you pay $1 for a stock and 3 years later it goes to $3. You become very nervous and keep asking yourself, “Should I sell? Should I sell?”.

Read This Carefully -> You don’t compare the current price with your buying price or historical price because the situation of the business today is very different than the situation 3 years ago!

When you bought at $1, the company might be making 10 cents per share (PE 10). 3 years later, the business grows and it might be making 30 cents now. The PE is still 10! So why do you need to be so worry about your $1 investment that now become $3? The value of the company has increase the same time when the price of your stock increase. Both has increased equally in this scenario.

REPEAT -> Compare the current price to the earning, not your buying price or historical price!

Let’s make it more interesting. Instead of making 30 cents per share, the company is now making 60 cents! The PE is now 5! It is actually cheaper at $3 now when it was $1! Why? Because when you bought it, you were paying $1 for $0.10 (PE 10). If you buy it now, you are paying $3 for $0.60 or $1 for $0.20 (PE 5)! You are getting a bargain here.

Why the heck do you need to sell it if you can see the correct picture here? If you have money, you should actually BUY MORE! If you are comparing to your $1 entry price, you will think that I am crazy if I ask you to buy more. But after you know you need to compare the price to earning (the right thing) instead of your buying price (the wrong thing), BUY MORE make a lot of sense now!

Let’s stuck more knowledge into your brain.

A stock that is selling at ALL TIME HIGH doesn’t mean it is expensive. A stock that is selling at ALL TIME LOW doesn’t mean it is cheap. When you are using the word ‘ALL TIME’ you are comparing it with the historical prices. Mistake. A company that is selling at ALL TIME HIGH might also have Earnings at RECORD HIGH so it justify the price. In our previous example when the stock is selling for all time high of $3 but is making a record earning of $0.60 per share, it has actually become cheaper (not more expensive!).

Understanding this let you know that buying at all time high is not stupid and is not risky (given that you have do your homework). It also prevents you from jumping into a sinking Titanic when it is all time low (MEGAN!). Remember, all time high doesn’t mean it is expensive. All time low doesn’t mean it is cheap. You need to compare it to the underlying value, not the historical price (also known as the chart!).

So the answer to the question. “If You Buy a Stock at $1 and It Rises To $3, What Do You Do? Sell? Hold? Buy More?!” should be very clear to you now. What price you buy, has nothing to do with your decision. It is the current earnings and future earnings that are the primary factor to consider.

I think this is a very important thing to know if you want to invest in the stock market. If you know this, I assured you that you are already better than 80% of other investors (They should be called speculators). Uncle aunties who didn’t know this is acceptable. But there are a lot of educated people who work as knowledge workers who didn’t know this at all! That is very disappointed.

Knowing the idea of PE is a good start to your investing journey. But don’t expect it is that simple. What I have explained here is an extremely simplified version. There are still a lot of things that you need to know. For example, if the E of the PE is fake, PE is meaningless. For example, Megan has a PE of 2 when it is selling at $0.60. But later they find out the E is fake. There is no E! It is negative! You can’t even get a PE from a negative E. The same goes to Tranmil that has a fake E. PE become meaningless.

(Megan was selling for only $0.60 for a long time, it is so cheap because PE is only 2! But it ends up that the E is actually fake! Hokkien will say, “Jia Lat Lor!”)

There are a lot more. For example, a construction company can make a lot of money when doing a big project such as building the KLIA. The company can make nothing after that. So the E can be very big when they are working on the project but 0 when the project is over. PE become unreliable if the future is unclear.

As a conclusion, comparing the current price with your buying price or historical price is wrong because businesses do change with time. Current earnings and the future earnings are what you need to compare it with.

This is oversimplified explanation but still serve as a good standing point. The current averaged PE for all the KLSE stocks is around 17.

Next post I will tell you why some company sell more than averaged PE and why some sell for less.