Thursday, August 23, 2007

A Simple Logic

by klse.8k
Translated by Felix Leong
[Link to original article (Simplified Chinese)]

A friend asked me would I be interested to buy a second-hand luxury car, saying that the car owner wants to sell it together with the license plate. It was a single digit license plate, which the owner had spent more than 30 thousand ringgit to win the bid for that particular number at that time.

Seeing that how much money was spent just to bid for that license plate, you can imagine what kind of person the owner was.

My friend told me that during those days the owner was a high income earner with monthly salaries that amounts to tens of thousands. So buying a 30-over thousand license plate wasn't a big deal back then. But now his income was far from what he earned in the past and he was forced to sell his car together with the license plate in order to relieve some financial burden.

This reminds me of what my friend, a high income earner, had said to me: Those in the high income group have a higher social standing, and therefore having their expenses being much higher compared to your average Joe.

In order to maintain a exclusive lifestyle, it would require a luxurious car and a classy house to match. These things were so expensive that even those who earned tens of thousands per month would have to take up a loan in order to purchase such luxuries. And the ability to repay the loan installments greatly depends on your future income! There's a potential to wreck financial disasters if you mistakenly overestimated your ability to earn money for years to come.

The taste of crashing down from the skies and having your face falling flat on earth is definitely not enjoyable at all.

And the sad thing is that those who are too full with themselves will never come to understand this.

Those who are successful in their careers will always think this way: My month income was more than ten thousand dollars, the load installments of my car is just a mere two thousand a month, wasn't that a "purchase with great discretion" already?

The real problem is on whether your income be able to outlast your installments.

The times when one is over confident is the time when he will overestimate his own abilities and only believes the the path ahead will only be smoother as he continues to walk ahead. He will never imagine or thought of the times of an unpredictable rainy day. And only when the storm comes that he will be shocked to realize that how inadequate he was in having himself prepared for such a situation.

Those who spends more than he earns will never be able to save at all! Savings can only happen when you tone down your lifestyle. Therefore, understanding how to trim the fat in your lifestyle is extremely important!

If a person earning ten thousand a month can maintain his lifestyle like those who earn eight thousand a month will be able to save at least two thousand a month. If a person earning five thousand a month can maintain his lifestyle like those who earn four thousand a month will be able to save at least a thousand a month.

Most importantly: Try not to upgrade your lifestyle/standards of living! Try not to attain physical luxuries beyond your means! Only that you'll be able to increase your savings.

So, will those who knows how to save will live happily ever after?

I had a friend who is working hard to save and works overtime almost everyday. His wife is also an office worker, so the total of their income is pretty significant. He told me that with their current income they can afford to let the family to live a comfortable life.

But calculating his children's education and considering that he had only about 10 years before he retires, he believes that he have to work even harder to save in order to achieve a golden future of their own.

The excessive amount of work has taken up all his time available, causing him to lose the opportunity to think on how to let the money to do the work of earning more money. Therefore, he only knows how to utilize the "him working for money" mindset to accumulate wealth, but never dared to think of how to "have money working for him".

"Working diligently before retirement is the only sure way to ensure the better days in his future", that's his belief.

Of course I believe that his "future" will be happy. But I also believe that his "present" is a bit arduous! Working diligently can only last for a short few years, but it is something that should never be done until retirement.

Does wealth accumulation really needs to be achieve through "us working for money"? Of course I don't believe that! I only believe that "having money to work for us" is the fastest way to amass riches. The starting years will be the time when money has to be earned through hard labour, but after that it depends on how you let your money to do that job for you!

Only through "having money working for you" will free yourself the time to enjoy life! Having less work, completely relaxed and being stress-free is the best life you can ever have! All of this can only happen if you learn how to let the "money working for you"!

Therefore I always advise my friends that so long that you don't rush yourself into improving your lifestyle, you'll be able to reduce your workload and spend the time to enjoy life and think on ways to let the "money working harder for you".

So long you understand how to let money working for you, our future will be full of bliss!

Too bad such a simple logic is rarely understood.

Friday, August 17, 2007

How Should a Fresh Graduate Start to Invest in Stock Markets

by klse.8k
Translated by Felix Leong
[Link to original article (Simplified Chinese)]

Students who had just graduated from university often lacked the capital and experience needed in investing, especially the case with experience which plays an important role in investing. Therefore, my advice to them are:

  1. Get a job first, earn your living and accumulate capital and experience at the same time
  2. Don't waste money unnecessarily, so that you can accumulate some money to be used for investments purposes as soon as possible
  3. Do not borrow to invest, you must use your own money to invest. And that the amount invested must be the amount that you are capable to bear in case you lose everything in your investments, this is the volume which you need to take control of.
  4. Find some books on finances, so that you'll be able to comprehend and analyze financial reports. Also, find a couple of books on the stock market, so that you'll be able to understand some financial jargons
  5. Practice value investing, never speculate, never think of it as a gamble, do not expect you'll become rich overnight. Investing is a marathon, not a sprint
  6. Before you start dipping yourself in the stock market you must do your homework, do not blindly enter the market: because every single cent does not come easy. A good mentality is important, never be rash or impatient.
  7. Scan through all stocks across the whole stock market, and from there search for candidates. Then lastly select the stocks that you wanted to invest from your list of candidates. Do not spread your money across too many stocks, three to five counters should be sufficient.
  8. Steps of selecting viable candidates are as follows (At every step, those that does not fulfill the requirement can be filtered out, so at each stage the number of possible candidates will decrease):
    1. The company must not bear a loss for the past five years (which therefore filter out all companies which has reported financial irregularities as well)
    2. The company must have reported increased profit every year (thus will disqualify even more candidates)
    3. Total liabilities must be less than half the holdings of share owners (i.e. debts must not be too much)
    4. Total liabilities must be less than one fifth of the year's total of net profits and reserves for deprecation (this is also to make sure that the company was not too deep in debt)
    5. Price-Earning (PE) ratio must not be larger than 25 (This recommendation is based on the situation in China, for foreign stocks I choose those not greater than 10), the lesser the better
    6. Calculate the estimated long term investment return rate, which is "Long term investment return rate = (1/PE ratio) + Average compounded earning growth rate for many years". The return rate must be greater than 25%, otherwise it must be disqualified
    7. The current stock price must not be greater than five times the net tangible asset (for foreign stocks, I chose those not greater than three times the value)
    8. The company must have a good management team with caliber (those companies that have a management personnel with bad track records must be disqualified)
    9. According to whatever the company is doing, you estimated that the profits are capable of growing for the coming years
  9. From your list of candidates only choose a few which you ranked amongst the best in your list, buy and then hold them until they no longer satisfy your fixed criteria (i.e. sell them when the time comes). Otherwise do not do anything.
The selection process above may cause you to miss a few fast growing opportunities, but it is also capable to prevent you from taking unnecessary risks. You can say that the stocks/companies which fits in the above criteria will only be a handful, but the fact that it had passed such a stringent selection makes it a good investment.

[*Translator note: It seemed that the author might not have completed the last lines of this article, since there's a dangling character "Long" in the original article. From my guess it should read among the lines of encouraging long term investment, which it is capable to generate greater returns in the long run. But of course, that's just my speculation]