Money and sense for Singaporean

JP Morgan Asia Confidence note

2008-07-07T15:05:00.002+08:00

I was reading the papers, and this advertisment caught my eyes. It is called "JP Morgan Asia Confidence note". So I called up to check it out.

This structure is as follow :

1)Tenure of 2.5years

2)7.5%p.a coupon fixed – payable quarterly.

3)Based on Singapore, Malaysia, Thailand and Taiwan Indices movement.
Buffer level for Principal to be affected @ 50% - i.e. index must fall by 50% for
Principal to be affected.

4)Early callable every quarter.

On the face of it, this structured notes looks good, so I asked more questions on the product. This is what I understand from the marketing officer :

The product pay 7.5% p.a. coupon fixed on a quaterly basis, but is callable every quarter. What does this mean? This mean that if at every quarter, if the 4 indices are above the initial price, the bank has the right to "call" the product, i.e., the product will no longer exist as the bank will pay you the principal to redeem the product.

If throughout the 2.5 years, any one of the indicies fell 50% from the initial price, the trigger comes in. You do not know your loss at this point in time, because you need to wait till the end of the 2.5 years to see where does the worst index ends. If the worst index ends above the initial price, than no loss is incured. If the worst index ends below the initial price, the loss will be the difference between the initial price and the price at the end of 2.5 years.

It sounds complicated in words, so a decision tree illustration may be helpful :

Assuming that the initial price for all 4 indicies are 100, and the initial investment is $100,000. Than

Step 1: Did an early redemption event occur? i.e. ALL indices close above Initial Price

*If YES, Note is early redeemed, Noteholder receives 100% principal

*If NO, proceed to next step

Step 2: Did a Trigger Event occur?i.e. Is conditional principal protection still valid? Did any Index close below 50% of their respective Initial Price?

*Note: There is NO need to proceed to step 3 if Step 2 does not occur.

Step 3: At maturity (Final Valuation Date), did Straggler (least performing index) close above its Initial Priceof 100?

*If YES, Noteholder receives 100% principal, i.e. $100,000.

*If NO, Noteholder receives (Straggler Final Price / Straggler Initial Price) x Principal.

Assuming that the final price of the worst index is say at price 60, than you receive $60,000 plus whatever coupon you received before the expiry date.

Is this a good product? Well, it really depends on your view of the market. Let me explain.

Because of the nature of this product is structured, the investor have limited upside but unlimited downside in theory. If the 4 market (Singapore, Malaysia, Thailand, Taiwan) close above the inital price of say 100 (this is just a price I use for illustration) immediately in the first quarter, investor only received the 7.5% p.a., i.e., $1,875 for 1 payment, and the bank than redeem the note.

Therefore, the only way for the investor to receive the full number of cipon payment if for the 4 market indices to trade below the initial price for the next 2.5 years. However, you do not want the market to trade too low to have the triggered event kicks in, if that is the case, you have a possibility of losing your capital. Remember that the triggered event is if any of the 4 indicies close below 50% of the initial price. If this is to happen, what is the chance of it rebound above the inital price before the 2.5 years is up? Say the Thailand market fell 50% after 1 year, thus the triggered event kicks in, and you must than hope that the Thailand market can rebound 100% in the next 1.5 years so that you will not loss money, quite an unlikely event.

Furthemore, the way it is structured, it is a "diversification in reverse". If you put money into the 4 market, you hope to diversify, in case any one market tank badly, you will not be affected that badly. However, in this structure, any one market tank will drag your whole porfolio down since it is basked on any one market that fell 50%. Therefore, if say Thailand market is affected by its political situation and tanked 50%, even if other market make 100%, 200% or 300%, it does not matter, you will not make a single dime because of the Thailand market.

In my view, this product is good if you think that the market will at least go lower and remain low for awhile, but not too low to let the triggered event kicks in. market may consolidate for a while, but it is unlikely that it will remain within a range for 2.5 years.

So do not expect to get 7.5% p.a. for the full 2.5 years, chances are that if market recovers, this structured notes will get redeemed sooner rather than later.

As an aside, this product looks like the investor is selling a call optionon the 4 market at the initial price of 100, and at the same time, also sell a put of the 4 market at the initial price of 100, but with a knock-in at 50% below the intial price, i.e., at 50.

The (Whole) Truth about Trading Performance

2008-05-26T14:13:00.004+08:00

I bump into my friend this morning while having breakfast. She is now working in a local bank as a private banker.

We had some small talk, and I mentioned to her that I am doing some trading on the side, and if things work out smoothly, than within the next 2-3 years, the income that I generate from my trading should be about the same or even exceed my pay. She is curious if I will just quit my job and do trading for full time.

I told her that it depends if I am happy at that time with my company and boss. If I am happy (or at least able to take the nonsense from my boss), than I just stay put. At the end of the day, I am like getting paid 2 salary (one from my normal job, and another from my trading). Moreover, I developed a trading methodoloy where by it does not depend on the direction of the market, which somebody call this market-neutral trading. The good thing is that it requires very little attention from my part, the bad thing is that I will not be able to generate super normal profit (hey, you need to give and take). But if I can make it, than at least I have a choice, and to me, such choice is very important in this day and age whereby you do not know when you will be axe...

From my friend's expression, she is as if asking me what sort of return I am making. I told her that I started trakking the performance from Jul 2007. I benchmark my performance against the exchange traded fund SPY (this is an exchange traded fun that track the performance of the S&P 500). Since Jul 2007, SPY return is -5.54%, while my trading performance is +11.67%, thereby outperforming the SPY by 17.21%.

My cumulative return on a month-to-month basis is as follow :

Date SPY S&P Return Fund Return
7/31/2007 145.72 (SPY) (in USD)
8/31/2007 147.19 1.01% -4.52%
9/30/2007 152.58 4.71% -3.04%
10/31/2007 154.65 6.13% -1.10%
11/30/2007 148.66 2.02% 0.64%
12/31/2007 147.10 0.95% 1.36%
1/31/2008 137.37 -5.73% 1.12%
2/29/2008 133.82 -8.17% 6.32%
3/31/2008 131.97 -9.44% 5.32%
4/30/2008 138.26 -5.12% 7.09%
5/23/2008 137.64 -5.54% 11.67%

My trading performance seems to be very good compared with a passive buy-and-hold strategy (compared with buying the index fund of SPY, whereby the return is -5.54%), however, I told my friend this is infact a little misleading. The reason is that before Jul 2007, I have been losing money. I gone through a period of trial and error, research etc. to find a trading method that is suitable for me, and only than I started to turn in some profit.

And this bring me to my topic today.

As one can see from above, my trading underperform from Aug to Nov, but outperform from Dec to May. If I want to mislead people, I will simply show people my trading performance from Dec onwards.

Many times, one read from the papers about courses that teach readers how to trade FX or options, and the advertisements are full of testimonials from students that make tons of money. Is that the truth? The Straits Times wrote an article 1-2 months back. One reader wrote in to the forum and said that his friends lost alot of money. So why the difference?

I think the answers are as follow :

1) the advertisement told the truth, but not the whole truth.

For example, in an advertisement of option trading, the student claim that he made 1000%. While I have no doubt that this is true, however, that trade may be the ONLY trade that he make money. That is to say, he can be making 20, 30, 50 trade, but only one trade happen to make 1000%, and overall he still lose money.

Another possibility is that the student just buy a very cheap option, like $0.10 per contract before the earnings result. It happen that on that particular quarter, the results beat expectation by a wide margin, and the stock price went up. The option than jumped from $0.10 to $1.00. The result is that the student make 1000%, but in absolute term, only make $0.90!

So what's the point, you may ask, for making 1000%, when in absolute term he only make $0.90 (or $90 per contract)?. This has to do with the "Option Competition" organised by the trainer. The trainer organised an option trading competition, and will give out awards to student that make the most in term of percentage gain. In order to "make it", students can make many small bets by buying very cheap option, like the $0.10 option. If the trade gone wrong, he loss $0.10 (or $10 per contract), but if things gone right, he can boast about the 1000% gain.

2) unrealistic expectation.

One must realised that trading is just like any other profession, to be good at it, you need constant learning and practise to improve your skill. A doctor taks 6 years of medical school to get to where he is, ditto for dentist, architect etc, so what makes one think that he can master trading just within a 3-4 day seminar?

3) the trainer himself is questionable.

Will you want to learn from Warren Buffett (the richest man who make his money fromm investing), or will you want to learn from a Mr. Tan Ai Kou who you have never heard before? The answer is obvious. However, there are many traders out there that can and had make their money, but is not as well known as Warren Buffett, so the only way to be sure is to ask them for their trading account. If he can produce his trading account and show that he can consistantly make money in the past, than you will be more comfortable learning from him. One should ask for the statement for at least 18 months to be certain, if not, the trainer can simply show you a very short period of time that he happen to make money (like if I only show others my "track record" from Dec to May).

4) Failed to understand own personality and style.

There are many trainers out there that are true trader that make their money. unfortunately, their methd f trading may not be suitable for you. Take an extreme example. Warren Buffet is well known for his buy and hold style. He identify solid companies and hold it for years and decade. Now, if one day, Warren Buffett knock on your door and offer to teach you everything he know, will you become Warren Buffett the second? if you are one of those that itch for action and are impatient, you cannot even hold the stock for 3 days, not to say 3 months or 3 years. Than you will end up making losses eveytime the market is against you and you just get out of your position. The stock may ultimately goes up, but you are not there to take advantage already. Warren Buffett's method work-- for him, but unfortuantely, it does not work for you.

Capital Protected Note in EUR

2008-02-26T17:54:00.003+08:00

Last month, my boss gave me a note. The note outlined a structured product call Capital Protected Note (CPN). My boss was very excited over the product and asked me what I think.

The CPN works like this :

"The CPN enables you to participate in the positive development of an equally weighted currency basket composed of a selection of 5 emerging currencies (BRL, RUB, IDR, INR, ARS) against USD while remaining invested in EUR."

If the basket of currency falls, you get 101.50% of your capital upon maturity. If it appreciates, you get 117%.

Once I saw such structure, I immediately know that the bank is trying to rip the customers off. The bank do it by several ways, but before I get to that, I need to break down the components of the structure.

1) The bank take your EUR which has a higher interest rates compared to the USD. They than hedge it buy doing a currency swap, whereby the interest rate differential is in their favor. In this way, no risk of the EUR/USD exchange rate is hedged and therefore there is no risk for the bank. They than tell the customer that the customer can invest in EUR without any EUR/USD risk, which in actual fact, the customer lost out!. The estimated lost to the customer is about 0.50% on this component.

2) The bank than go and buy what we call a "basket option" of the 5 currencies. Specifically, the bank buys a USD put against the 5 currencies. A basket option is cheaper than if the bank were to buy USD put against each individual currency because as a basket, there is diversification and offsetting of the volatility. The is the second component that the bank rip customer of without telling them.

3) Because the USD interest rate is very low and the basket currencies are of high interest rate currencies, the USD put is very cheap. So what the bank does is to take the customers' money, use a small portion to buy option, and than invest the balance into instrument like FD or T-Bills. The yield from FD and T-Bills will be more than enough to cover the cost of the option and thus making the structure "capital protected". The bank than charge a "management fee" of 1%.

The customer, like my boss, were trailed by such products because they do not understand how it was structures and how it can be done cheaply by themselves.

However, I feel very sad after I showed my boss how we can structured the same product at a lower cost and also avoiding paying the bank 1% management fee. My boss, who is initially very excited with the product, lost interest just because I show him I can structured it. He must be thinking if I can structured it, than the product must be not very complex and thus do not want to invest in such simple product.

1)

Dual Currency Deposit

2007-11-07T17:23:00.001+08:00

My ex-colleague told me the other time that she just placed a dual currency deposit whereby she get a higher interest rate compared with a normal SGD fixed deposit. She asked for my view on this instrument. She is a little concerned after her colleague, who is a treasury manager working with her, told her that it is a risky investment.

To understand if this is a risky instrument, I told her that she need to understand how does it work. In a dual currency deposit as for her case, she has SGD and thus SGD is her base currency, and AUD is her alternate currency. By placing her SGD into a dual currency deposit, effectively she is selling a “put” option – an AUD put, to be specific against SGD. In return for this option that she sold, the bank “compensate” her by giving her a higher interest rate for her SGD deposit. Therefore, if the strike is at say 1.2500, and upon expiry if the AUDSGD rate goes below 1.2500 to say 1.2000, she will take delivery of the AUD at the rate of 1.2500, instead of being able to buy AUD at 1.2000 (which is cheaper). The question is than whether she thinks that the AUDSGD rate will be above 1.2500 when the deposit mature.

From the looks of it, I told her that the AUD will likely to strengthening against the SGD and thus she need not be overly concerned.

So as far as investor is concern, such instrument can enhance the yield because investor is selling a naked put option to the bank. As long as the investor understands what the dual currency deposit comprise of and the directional view of the currency pair, it is not as risky an instrument.

For me, I am more particular about the pricing of the product. The bank always priced this type of product in order to rip of the customers. So I went to a bank to ask them for a quotation for a dual currency deposit on NZD against USD to see how much the bank rip the customers off, and this is what I found:

Current spot NZD/USD: 0.7835
USD interest rate for 1 month: 16.5%
Strike: 0.7785
So you receive USD14,208.33 if you deposit USD1 million in the structure.

I than check the inter-bank rate for the option pricing for NZDUSD, and it is as follow:

As you can see, the premium for the option is 1.5687%. That is to say, if you sell a NZD put against the USD for USD1 million for 1 month, you can receive USD15,686.99. On top of that, you still have your USD sitting in the bank, and assuming you set aside USD100,000 as margin, your balance of USD900,000 should earn you interest. At a rate of say 4.5% for 1 month, it can earn you USD3,487.50.

Therefore, all in all, if you sell naked put option on the NZD put on margin, you can achieved the same risk payoff at a cheaper price. How much cheaper? Well, through the selling of naked put option plus the deposit, you received a total of USD19,174.49. The bank pays you USD14,208.33, and the difference is USD4,966.16.
on top of that, because the bank quoted me a spot NZDUSD rate which is 20 pips away from the interbank spot rate, that will cost me another USD2,000. So all in all, it is about USD6,966.16.

Of course, I am basing on USD1 million. If you work out base on USD100,000 it will be about 10% of it.

STI update - Part 4

2007-09-17T10:49:00.000+08:00

The STI moved up nicely. On Friday, it traded higher but closed the day at the low, forming a "doji". This is bearish in nature. From the trend line, it traded above the up trend line. This is term a "throw over". The whole up move from August 2007 looks like a rising wedge to me and thus I view this as a correction.

I stick to myview that the up move in the STI is a correction within a correction, and thus I expect the STI to have another leg down towards the 2800-3000 level.

Why isn't the SGD as strong as what the media make out to be?

2007-09-07T15:27:00.000+08:00

I have this strange feeling, although this is at odds with what we are know.

We were being told by the media that how strong the Singapore economy were and how strong the Singapore currency (SGD) were, and how strong the stock market (STI) were. However, when I went back and check the SGD exchange rate with other currencies including EUR, GBP, CHF, THB, IDR, CAD, AUD, NZD, JPY and USD, the SGD in the past 10 years only strengthen against the USD, JPY and IDR. In fact, if we were to discard the period of weakness from 1997-1998 for the IDR, SGD has in fact gone nowhere against the IDR!

So if our economy is doing that well, why our currency is weakening against others? This is really at odds with my understanding. The reason is, therefore, our economy is not as good as it is. True that the STI is making new high. But that is so only because it measured in SGD term. If we measure it in term of say EUR, the gain is only just maybe 3%, and measured against gold, it in fact decreased! What happen? To put it simply, our purchasing power is eroded, and if you happen to be the less well off or less educated and did not put your money into equity or property market, you will loss out.

I ponder what is installed for us going forward. I looked at the CHF against SGD and to me, it is clearly bottoming out. It means that the SGD will weaken against the CHF going forward. In fact, I foresee SGD weakening going forward. And because of the weakening of the SGD, the STI may scale new high, but that is nothing to shout about because it merely reflects the weakness of the SGD. The central bank can simply print money to jack the stock market higher, but if you measured it against hard currencies like gold, you will find that the stock market measured in term of gold will fall dramatically.

What is the implication? This implies that the gap between the have and have not will widen.

I am not very optimistic about the future of Singapore. Despite what the government paint about a picture perfect scenario, I think their policies are just benefiting the rich.

With the Indonesia government reviving their plan to build a nuclear plant near a volcano, and natural disaster will have a huge impact. According to Australia National University (ANU), its study suggested that if there is a nuclear plant accident, the leak of the radiation can cover as wide as from Southern Thailand to Northern Australia, effectively wiping out whole of Singapore. So why isn’t our government doing anything about it? Or is it that they think that nothing can be done? If that is the case, I am not surprise that we will see our minister starts to migrate in the next decade (and maybe this explain why they wanted the pay hike).

Compulsory Annuity Scheme is a bad idea

2007-09-03T17:37:00.000+08:00

The compulsory annuity program that the government is thinking of is not a good idea in my opinion. This is simply because I believe by setting aside the money in a saving account for the members will be more feasible and better, as this will allow them to have their money return to them should they fail to live beyond age 85.

I did a quick calculation based on my understanding of the scheme:

1) Assuming that a sum is set aside at age 55, and can only start to withdraw at age 85.
2) Assuming that one live till 100 years old (which is highly unlikely, but for argument sake)
3) Assuming the scheme is to let one withdraw $300 per month.
4) Also assuming an interest rate of 4% (which is the current Special account interest rate)

With the above assumptions, we can calculate the Present value (PV) of the sum required to have for one in age 85. The PV is $40,558.

To achieve an amount of $40,558 from the time a member withdraw his money in age 55 to the age 85 is a thirty-year period. Therefore, by setting aside $12,505 at the age of 55 and compounded it at 4% over 30 years, one can easily meet the objective of having $300 per month.

The good thing about this saving scheme is that the member need not worry about whether he can live beyond 85 as it is just a saving scheme and upon his death, any outstanding sum can be returned to his family member.

I urge the government to consider this alternative instead.

STI update - Part III

2007-08-29T10:28:00.001+08:00

I written about a month or so ago that I expect STI, after breaking the uptrend line, to trade higher to "kiss" the trend line before it fall. The market play out exactly to my script. Than I mentioned in part II that I expect the STI to find support only around 3000-3200 level. The market hit around 2960 level and rebounded.

So the question is where it is heading to now. I expect STI to trade in a range first. It will eventualy trade lower to retest the low of around 2960 or exceed it by a little to around 2800. There is where I think STI will botom out. Of course, whether it will reach there or not is anyone guess, but if STI ever goes to around those level, I think it is a good time to enter the market.

Heading to Japan for holiday

2007-08-08T17:21:00.000+08:00

After about 1.5 years since my last holiday, I am taking my break. And this time round, will be going to Japan again (this will be my sixth time visiting Japan). Below is a video by Hiromi Iwasaki, one of the singers I like alot.

An update on the USD index

2007-08-07T16:55:00.000+08:00

A few weeks ago, I asked the question whether has the USD turned. The USD index broke up the downtrend resistance line, and now it falss back to retest that line.

It is quite common for any instrument to do the above. With the fear now in the market that the USD may collapse, this may be the real turning point for the USD.

Equity link Structured Deposit - Is it a worthwhile investment?

2007-08-02T20:04:00.000+08:00

I walked past a bank the other day and got a brochure of the above. Many of my friends actually asked me if it is worthwhile to invest in it. So I took a look at the brochure.

I do not know the exact situation but I can make a guess how the bank structured the product. This product :

1)gives customers 100% principal guaranteed if it was held to maturity or upon UOB early redemption;
2)pay interets of maximum 7% only if all shares is above the barrier level, which is 3% above initial price;
3)it is based on the performance of 5 stocks, and if any of the stock is below the barrier level, which is around 90-95% of the initial price, you get only 0.353%.

Now, you need to compare this with the situation if you buy the 5 stocks yourself. If this is the case, you will make or loss depending on the movement of the 5 stocks. However, since you are holding a portfolio of 5 stocks, you are diversified, and if any one stock tank, you can still come out a winner.However, in this product, the reverse is true. You just need any one stock to tank and you are out.

Than if all stocks are performing well, your maimum upside is 7%.

I reckon that the bank already have all these stocks in their book. So what they are doing is that they structured this product and sell to the customers. The customers put money into this product. What UOB is that they sell call options on the 5 stocks and pocket the premium. The deposit from the customer, they can placed it out as Fixed deposit and again pocket the interest. if the one of the stock fall and hit the barrier, at expiry, the customer will be strike out and received only minial interest while the bank pocket the premium and the fixed deposit interest.

If the 5 stock rally and all closed above teh barrier, the bank make money from the 5 stock they already hold. The bank still pocket the premium and the deposit interest, and at the same time, deliver the stock to the option buyer. The bank wins anyway.

So to me, it may not worth the while. Unfortunatley, retail customers cannot get access to option in Singapore stock and therefore is at teh mercy of the bank for such products.

STI Index - an Update on the technical outlook

2007-07-28T11:48:00.000+08:00

Last 2 weeks, I have been updating on the STI index chart and suggested that the index looks like it is turning. I said that the what is most likely for the index is that after breaking the uptrend support line, it will go up and "kiss" the uptrend line before making a plunge down.

The market seems to play my script out exactly.

Given the fall in the Dow Jones yesterday (27 Jul 2007), I believe that the STI has more room to go down. However, I also believe that the STI should find support at 3000-3300 level. This is only a preliminary assessment. Market is changing everyday, and when new information on the chart unfolds, than I can fine tune my assessment.

Is Japan really that expensive for visitors?

2007-07-24T17:13:00.000+08:00

I need a break.

After a long while from my previous holiday back in Feb 2006, I am now planing my next holiday in Japan, Hokkaido. "Japan again!" are my friends reaction when I told them that I am heading to Japan for holiday. Well, it is understandable that they have such reaction, because this will be my sixth time to Japan.

They (my friends) alway think that Japan is an expensive place to have holiday. They compare the prices in Japan and Singapore and just complain about the price they need to pay for every meal. Logging is expensive, they reasoned, and also not forgeting the train fare when compared to the MRT of Singapore.

Is Japan that expensive? I always tell them that while Japan is expensive on an absolute level, it is not expensive in a relative level. So what do I mean by that?

Take a meal in Japan for example. Unlike Singapore, Japan do not have hawker centre or coffeeshop. If you want to eat a meal, you go to a restaurant or an eating house. You probably get a meal for about 800 yen in an eating house, but say you eat in a causal dinning restaurant, and it is about 1,100 yen per meal. This is about SGD14.50. Now, if you were to go to a Japanese restaurant in Singapore and have the same meal, it will probably cost you at least SGD15, or about 17.50 including service charge and Sales Tax. And mind you that in Japan, the amount you pay is net of GST and service charge. Moreover, the service you get in Japan is second to none!

I one went into a conveyor belt sushi restautant in Kyoto, and they charge 120yen per plate for sushi. That is about SGD1.60....this cheaper than you can get in say Sushi Teh in Singapore. And I can tell you that the fish is about 5% larget and fresher than those you get in Singapore!

Transportation wise, the train fare in Tokyo is definately more expensive and more crowded. However, when you consider the inefficient network of the Singapore system, the difference in price probably make up for it. In Tokyo, the network of the subway is so extensive that you hardly need to change to a bus inorder to go to your destination. In Singapore, the system is designed such that you have to change to a bus. The transfer cost you money, the transfer cost you time.

So if one take these into consideration, Japan is not that an expensive place to visit... so why don't make Japan your next place for your holiday?

Why Selling Options is not as dangerous as it seems.

2007-07-16T16:03:00.000+08:00

I have been receiving questions on my trading of options. In particular, some of the people out there are wondering if it is too dangereous to sell nake puts or calls. After all, this is what they were told :

1) Theoraticaly, if you sell a call, your lost is unlimited as the stock price can go through the roof;
2) If you sell a put and the company goes bankrupt, you will lost alot of money.

My answer to them? This is not really true.

Selling naked option is not really dangerous. The academic and the broker like to tell you that. I believe you heard them said something like "oh, selling option have unlimited risk because in theory the price of the stock can go up and up, or it can go down to zero, so you will be caught...etc etc."

This will not happen for the following reasons :

1) you trade short options like you trade long options. You get out if you know you are wrong, or your stop loss is triggered;

2) your broker will not allowed that to happen because they monitor your margin like a hawk. Once your losses is greater than the margin, they will buy back your short option to ensure you have sufficient margin;

3) option has an expiry date, so do you think that within a 1 month period your stock will go through the roof or go down to zero?

Having said that, there is always the possibility of a stock like Enron that collapse overnight, and if you happen to short the put, than you are caught. However, your risk is really nothing more than if you own the share of Enron! For example, if you bought Enron share at say $100 for 100 shares, you pay $10,000. Now, if you sell a naked put on Enron share for strike at $100 for 1 option contract, you have an underlying exposure of $10,000.

If Enron goes under overnight, you lost $10,000 you bought the share. If you short the put, you lost $10,000 as well, but you still get to keep the option premium. You are no worst than those guys that bought the shares.

Moreover, I trade Exchange Traded Funds (ETFs), and because it's underlying shares are a basket of shares, ETF's will never goes to zero, unless each and every of the company in the ETF goes bankrupt, which is unlikely to be the case!

Why I never place Foreign Currency Fixed Deposit Part II

2007-07-12T15:26:00.000+08:00

In my previous posting, I shard with the reader the cost of placing foreign currency deposit (FCD) and how the banks rip the customers off by giving them a wide spread.
Many readers thus wonder how can they place a FCD in an efficient and cheap manner.

The way we professionals do it is by way of foreign exchange forwards, whereby we get the same risk and reward exposure but yet in a cheap and efficient manner.
In order to illustrate how the professionals do it, let us walk through an example of a customer who go by the conventional way of buying the foreign currency and placed it into the fixed deposit.

Let us assume that the customer walk into a bank and wanted to place a USD fixed deposit of USD100,000 for 6 months. The bank will sell the USD to this customer at a rate of 1.5235. So the customer needs to pay the bank :

USD100,000 x 1.5235 = SGD152,350

The customer placed the USD100,000 with the bank, whereby the bank will pay the customer an interest rate of 4.745% for 6 months. The interest the customer will received at the end of 6 mths is :

USD100,000 x 4.745% x 183 days/360 days = USD2,412.04

The principal plus interest the customer has at the end of the 6 months period is therefore :

USD100,000 (principal) + USD2,412.04 (interest) = USD102,412.04

Now, assuming that the USD/SGD exchange happens to remains the same as it is, and the customer decided to convert the USD back into SGD, he will then receive :

USD102,412.04 x 1.5105 = SGD154,693.39

The profit for the customer is thus SGD154,693.39 – SGD152,350 = SGD2,343.39

Now, a professional fx trader will go by the FX forward market by going to a futures trading house to do the transaction. This is how he does it.

He will buy a fx forward of USD100,000 at an all-in forward rate of 1.4963. This fx contract will mature only 6 mths later, which is essentially the same as the 6 mth deposit.

Now fast forward to six months later. Again, assuming the USD/SGD rate remains unchanged, the spot rate is 1.5155, and the professional trader than “square-off” his position by selling away the USD100,000.

The profit the fx trader so thus USD100,000 x (1.5155- 1.4963) = SGD1,920

Because the trader is only entering a FX contract, he still has the SGD152,350 with him, which he will than placed it in a SGD 6 mth fixed deposit with the bank. Please note that because the fx trader need to place a margin with the futures house, he will not have the full SGD152,350, but a reduced amount of SGD142,350 (the SGD10,000 is for the margin). He placed the SGD at 1.70% as follow :

SGD142,350 x 1.70% x 183 days / 365 = SGD1,213.29

The fx trader total profit is thus SGD1,920+SGD1,213.29= SGD3,133.29
Compared the customer’s profit of SGD2,343.39 with the fx trader’so profit of SGD3,133.29, the difference is a whopping SGD789.90, or 33% difference.

STI Index - An update

2007-07-10T10:20:00.000+08:00

A few days ago, I mentioned that I expect the STI index to trade higher and "kiss" the uptrend line before it turn lower.

The STI is now at such juncture. Will it play out exactly to my script? Let's wait and see. Nevertheless, investors should be caution at this stage of the rally.

Investment is a game of chance, and if the odds is against you or not in your favor, why take the risk?

Is the US Dollars turning?

2007-07-07T14:10:00.000+08:00

The U.S. dollar has been falling for the past few months and the dollar index (DXY)has declined over the past three weeks from a high above 83 to a recent print near 81.5. A move below the April low at 81.25 will take the index to a new two-year low.

Many traders have been watching the 80 level on this index. The dollar almost certainly will move lower in the long-term given its fundamental. However, in the short-term, they can generate short-term countertrend moves that go against a fundamentals- driven trend for longer than most expect.

The chart below shows the dollar index from April 2005. The index has declined over the past 18 months, but it has done so in a way that possibly sets up a more bullish outlook in the coming year. We can see that the index is trading in a falling wedge formation. This type of formation will ususally result in a breakout in the reverse direction. This suggests a bullish move in the dollar is possible with a break above the upper trend line.

U.S. Dollar Index 2005-2007

But I say “possibly” because sometimes these formations lead to a breakdown followed by a fast decline, and I have no way to know in advance which way it will go. However, if the US$ index does go the way I expected, i.e., higher, it should do so in an explosive manner. The support 80 level is very critical. The dollar has bounced off this level for almost 20 years, and a breakdown would send a clear signal that a whole new phase of the dollar’s decline has begun.

U.S. Dollar Index 1984-2007

With the dollar index currently trading near 81.5, it is halfway between two critical points. If the index does trade above 83, I forsee a sizable countertrend rally that ends in the 95-105 resistance area. If the index falls below 80, all bullish bets are off and we can expect more downside to take place.

I suggest readers take note of the news magazine cover story. If the news cover story of say The Economist is about a falling U.S. dollars, chances are that the turning of teh US dollars are just around the corner.

What to look out for in a housing loan?

2007-07-05T11:01:00.000+08:00

Every Singaporean is in debt. Yes, you see it right, housing loan, credit card debt, car loan, renovation loan, and many others on hire purchase. However, it is without doubt that housing loan will be the biggest debt one has to take on. Therefore it is important to choose the correct loan package.

A typical loan will last for about 2-30 years, and below, I listed some consideration :

Interest rates

This is the most important consideration. Most banks offer “promotional” rates, but the reality is that the borrower do not get to enjoy it very much. This is because by the time the borrower starts to draw down the loan, the promotional rate will almost be coming to an end.

Most banks peg the housing loan rates at a discount off their bank lending rate (BLR) and for different period for the promotional rates. Therefore one has to consider and compare between different banks the rates both within the promotional rates period and beyond.

“Promotional Rate” starting date
This is where the bank starts to ripe the customers off. While they may say that there is a promotional rate for say a period of 3 years, for example. However, the starting date for the “promotional rate” may be the day the bank approved the loan.

Therefore if a buyer is buying a property that is under construction and the payment is a progressive or deferred payment scheme, by the time the buyer draw down the loan, a substantial part of the promotional period would have lapsed.

Early redemption penalty

Will the bank charge you a penalty for early redemption? The bank incurred much time and money to process the housing loan for the buyer, and it is understandable that there will impose a penalty for early redemption. Check the fine print for the amount of the penalty.

Legal Fee

Does the bank pay for your legal fee? The amount can be substantial.

Refinancing

If you wanted to refinance your housing loan, what sort of penalty is there? Can you refinance it with another bank at a cheaper rate without much cost?

Loan period adjustment

Can you prepay the bank partially without additional cost? This will help in reducing your interest cost should you have spare cash.

How to invest in Chinese Currency RMB in Singapore?

2007-07-04T11:53:00.000+08:00

The rise of China has led to many people wanted to invest in the Chinese currency RMB as they think that with the economic growth of China, the RMB will continue to rise, especially RMB is currently undervalue against other currencies.

The problem with “investing” in the RMB is that there is no foreign currency deposit in RMB for investors to deposit in. So how does one play the RMB currency in Singapore? This question was posted to me a few times.

As the RMB is not a free currency that has offshore market, it is virtually not possible to buy RMB outside China.

One way to play it is to invest in the Chinese stock market. This is not a direct play, however, as the value of the Chinese stocks are influenced by other factors which may not be the same as those factors that affects the currency. Nevertheless, if the general growth for the country continues, the equity market should continue to perform well, so will the currency. A word of caution, as the Chinese equity market has run up much more than the currency, if there is a correction in the Chinese market, the lost on the equity investment may be more than the currency depreciation.

The other way is to open a RMB account with a bank in Hong Kong, as Hong Kong is allowed to take in RMB deposit. However, this route is impractical for many people. Furthermore, it is unclear if non Hong Kong resident can open a RMB deposit account.

The last method, which to me is the purest play on the RMB, is going through the futures market. The Chicago Mercantile Exchange (CME) has a USD/RMB futures contract. Therefore if one is bullish on the RMB, one should short the USD/RMB futures contract. This is not for the faint hearted. Furthermore, futures contract has expiry date whereby one needs to rollover the contract if he still wants to continue to have the exposure, unlike fixed deposit whereby the bank can rollover automatically for you. However, the futures contract does provide a cheap and efficient way of having an exposure in foreign currencies, much more efficient than the fixed deposit market.

Jim Rogers sold out emerging market

2007-07-03T11:54:00.000+08:00

Jim Rogers, who predicted the start of the global commodities rally in 1999, said he's sold out of all emerging markets with the exception of China because they're ``over-exploited.''. He hope that he can buy it back in the next big correction. Jim Rogers, chairman of New York-based Beeland Interests Inc., said in an interview in Singapore on 2 Jul 2007

The emerging markets index has jumped 17 percent in 2007, but MSCI World Index only gained 8.2 percent gain.

My view is that valuations are not super-attractive as these markets have run up quite a lot. Therefore, while it is not expensive in my view, it is not cheap either, and a correction in the market is possible in the near term.

If we take a look at the STI chart, the STI has broken the uptrend line, which means that chance for a correction is getting higher. A likely situation is that the STI will trade higher to “kiss” the uptrend line before making a bigger correction down.

How I trade options - A personal Journey

2007-07-01T14:38:00.000+08:00

The email below was an email I wrote to a forum whereby the participants are all students of a option trading course. I sort of summarised my personal journey in option trading so far. Hope it help others that are seeking some advise.

Hi Everybody,

After reading the article in "Today" and the responds I saw in the
group forum, I thought of just sharing my experience with all of you
concerning trading and the courses offered.

I used to be a FX trader with a foreign bank before I left to join
the corporate, but I still do trading for my company. Year in and
year out, I make money for the company. But when I trade on my own
account, I lost quite a lot of money. Apparently, something is
wrong, why should I be making money for my company but not making
money for myself? This is when I think my trading style is not
suitable for trading small account, and of course, the emotion
aspect comes into play when trading own money.

I attended a course (I shall not mentioned the name of the trainer). My personal experience was that his method try to make money by buying options before earnings
announcement. This is precisely why he can advertise by claiming his
students can make 1,000% or make a few thousand US$ per night. It is
true, no doubt about it, but the problem is that that may be the only
trade of that student making that time of return. Out of 10 trades,
maybe only one trade make that type of money, the rest of the 9
trades may be looser. Therefore, be careful of those claims in the
advertisements. It may be true, but may not be the whole truth.

An excellent example was that I went to one of the students house.
At that time, there was an ads claiming that he make something like
over $20k in one night. When I was there, I asked him about it, and
he confirmed it is true, but he also told me that his other trades
are losing big time, and overall, he is about break even. How do I
know what he said is true? He showed me his IB account. So to me,
this method looks abit like "ti kum ti kum".

Therefore, it seems to me that the trainer is more of a marketing guy
who really package his course. Also, he employed alot of
motivational techniques in his seminar to motivate the students into
believing in themselves and that it is possible to become millionair.
While this is important, but after striping out the motivational
speech and one thinks about it, the actual content in trading has
been watered down somewhat.

I attended another trainer's course later. This other trainer's method is a more technical approach, which suits me better. However, I still did not make
money. I stopped trading for a while to review where I went wrong.
Finally, I decided to modify the "TAB" method to accomodate my
situation and my personality. Well, it works so far and I am
consistantly making about 2-3% return per month (or 20-30% per
year). Now, I do not need to monitor the market every nite, I place
my order in the morning when I reach office and can forget it.
Sometimes, I still need to monitor the market in the evening if the
my position is not in good shape. But by and large, my current
method suits me fine.

Therefore, for those who thinking of attending other courses like
those by Clement or other trainers, you may want to consider if their method suits your own situation and personality. What works for them may not work
for you.

Cheers.

Options Trading - In Singapore?

2007-06-30T21:51:00.000+08:00

There are a few people actually asked me about trading options in Singapore.

I find it difficult to answer them because I am not sure what exactly they are asking as they just drop me an email or private message me in a forum. Do they mean that they want to trade options listed in Singapore? Or do they mean that they want to trade in Singapore those options listed overseas?

Therefore, I try to answer their questions by using a Q&A format, and hope that they can find my answers useful.

1) What are the Singapore listed options we can trade in Singapore?

Ans : While Singapore claim to be an international fiancial centre, I still find that its financial market lacks width and dept. In the Singapore Exchange, there isn't any listed options available for trading. The nearest is warrants issued by various banks on selected stocks and index. This is not as good as listed options because you can only buy the warrants but not short the warrant. The other alternative is to trade listed options on futures for Nikkei 225 futures, or the MSCI Taiwan index futures. The liquidity is not great and the margin requirement for Nikkei 225 is quite high as well. Therefore, to me, option listed in Singapore are not very tradable.

However, if you still would like to trade Singapore listed option, you may approach brokerage houses like Phillibs Futures, CIMB-GK Goh Futures or other brokerage houses to open a futures trading account. You are required to put a minimum sum as deposit (for margin purpose) before you can start trading.

2) How can one trade US options out of Singapore?

Ans : You can open a trading account with US brokers like interactive brokers or optionsxpress. These are internet brokers whereby you can trade through them as long as you have internet connection.

3) Is there any different between those option listed in Singapore and those listed in US?

Ans : Option is basically a derivative base on an underlying instrument. Therefore, there is no difference. However, the market in US is wider and deeper, and therefore there are alot of liquidity. Morever, listed options are available in US stocks, and therefore it means a wide selection of trading choices for the traders.

The basics of option is the same regardless where it is listed. An option is an option, period. A call option is a call option, whether you are talking about those listed in Singapore or US.

4) Are they any useful site I can go to if I want to learn more about option?

Ans : There are many options website available. One website that I think will be useful for new comers is www.schaeffersresearch.com. It gives out free education materials.

5) I saw many advertisments on Options trading courses, are they any good?

Ans : This is a difficult question to answer as it will depends on indiviuals. However, do be careful with some of the claims. They may advertise that their students make 100%, or even 1000% return trading options. While it may be true, but it may not be the whole truth. The students may make those return in one out of ten trades, with the other 9 trades being loser.

Honda Minako

2007-06-30T18:05:00.000+08:00

I did not know that Honda Minako passed away till I watched this video today.

It is a sad thing as I used to listen to her songs during my polytechic days....

How to Spot an Investment Bubble

2007-06-29T11:54:00.000+08:00

I came across this article and thought it is a good one.

There were three groups of investors in a room — company executives, graduate-level economists students and econ undergrads. This is an experiment carried out by Researchers Caginalp, Porter and Smith. They showed in a study back in 2000 that stock prices could differ from their fundamental values for long period of time. Much of their study was based on experimental markets — where just about every variable was under their full control. The conclusion was that investor ignorance and ineptitude gives the rest of us some great moneymaking opportunities…

The study, as described in James Montier’s Behavorial Finance, included two-hour “trading sessions” in which each participant was given play money to invest in fictitious stocks. The trading session was divided into 15 separate periods where simulated buying and selling could take place. The players were told that one of the stocks would pay a dividend. They were given a table of what it would likely payout, and they were told that the stock would be worthless at the end of the game:

25% chance of receiving 0 dividend
25% chance of receiving 0.08 dividend
25% chance of receiving 0.28 dividend
25% chance of receiving 0.60 dividend

Expected payout = (0.25x0.0)+(0.25x0.08)+(0.25x0.28)+(0.25x0.60)= $0.24

Given the data, one can determine that the stock would likely pay $0.24 per each share held for each of the 15 periods it was owned in the game. If you multiply them together and the stock is at worth about $3.60 per share, and would be worth $0.24 less as each of the 15 periods gone by. There is no need to concern with present values.

The post-grad economists were the most rational of the 3 group of investors. They got it right. They were willing to pay $3.60 a share and valued the stock $0.24 less each period. The other groups’ behavior, however, if not as ratinal.

The undergrads traded in such a way as to create a price bubble. They were not willing to pay full value for the shares — that is, $3.60 — in the beginning of the game. But then in the middle of the action they bid the stock up 270% more than its fundamental value.

The company execs reportedly were even less rational. They started their bids a little closer to the true fundamental value of $3.60, then bid shares up 530% past it!

We have to bare in mind these were experimental market conditions where you could buy and sell without real world concerns. There were no commissions, liquidity problems, or anything else to worry about. If you wanted to buy the shares, you can buy it at the price you want. There was no trickery here.

The experiment showed that stock market bubbles can occur when you have more neophyte investors involved than rational, educated participants.

Many sets of experiments conducted by Caginalp, Porter and Smith under a host of different conditions have shown that security prices typically start lower than the $3.60 fundamental value during the first period, then rise dramatically higher than the fundamental value during the middle to late periods. Sometime late in the game the asset prices begin to fall hard. They usually fall below their fundamental value.

Follow up studies have shown that market bubbles dissipate over time and the main reason is due to one thing: experience. The groups who ignorantly inflated the price they’d pay for shares learned quicly what not to do in their second and third go-rounds. In fact, in the third round each group played, the bubbles were gone completely.

Apply this to something like the U.S. real estate bubble of recent years. There were a lot of inexperienced people wielding a lot of cheap credit buying up real estate assets at sky-high prices. Many made outrageous claims like “prices would never come down again.”

Many of us knew then, as well as now, that such sentiment was illogical. So, where is the bubble today? Could it be China, whereby newbbies start to bid up the share price way, way above their fundamental value? Can it be Singapore whereby the property prices just shoot through the roof?

As Marc Faber puts it, nowadays, everybody is bullish about something, the equity trader is bullish about equity, the bond salesman is bullish about bonds, the art dealer is bullish about art piece, and the wine dealer is bullish about wine!

When the bubble burst, they will be many people that will get burned, but as for now, the party is still on....

Is the equity market over value now?

2007-06-28T17:34:00.000+08:00

DBS Vikers published a report yesterday, with a target for STI to be at 3750/4200 for 3 and 12 months respectively.

The question is whether is STI overvalue at this point in time.

If we look at the STI price/earnings ratio (P/E), it is currently at 14.61. If we were to take the reciprocal of this ratio, i.e., take 1 divide by 14.61, we get 6.84%. This is what we call the earning yield of the market. We subtract this from the 1 year S$ deposit rate of about 1.8%, we get 5.04%.

Historically, the spread of 5.04% is considerd to be cheap.

Based on this yardstick, I would say that the STI is not over strech. However, there can be correction along the way, and it also depends on the risk appetite of the investors and what happen to the US market.

Why I never place Foreign Currency Fixed Deposit.

2007-06-28T13:53:00.000+08:00

Being in the Foreign exchange business has its own hazard. One of those hazards is that I was often approached by friends who want to know if it is alright for them to buy USD, EUR, AUD or NZD. When they say “buy”, they usually mean through foreign currency deposit (FCD).

I am never a believer in FCD because I always feel that this is a ripped-off by the bank. When you are in the foreign exchange business, you see the absurd amount of money the bank ripped you off by pushing you these products. You can simply replicate the risk and payout by going through the FX market at a “cheaper cost”.

So how you do it? Before I dwell into this, you need to understand what you are “paying”.

When you place a deposit in say USD, you need to buy the USD against the SGD. So say you wanted to do a USD100,000 deposit, you need to buy the USD from the bank. From the screen-capture below, you can see that the bank is selling you the USD at a rate of 1.5445. However, the bank is only willing to buy the USD at 1.5315. The difference is what we call the bid-ask spread. The spread in this instant is 0.0130, or 130 pips as we call it in the FX market. This is very wide, consider the spread in the inter-bank market is only 3 pips, or 0.0003. It may look small, but for every USD100,000, you pay extra S$1,270 more!

In the deposit side, you get an interest rate of 4.745% from the bank, not bad you think, compared to a miserable 0.5% you got from your saving account for SGD.

However, in the interbank market, you should be getting 5.32% from the bank in a 6 month USD deposit (see below). You lost another US$292, or about S$450.

So all in all, you pay S$1,720 extra to the bank!

This is the reason why I never, never place foreign currency FD with the bank, the feeling of being ripped of is too great to be ignored!

CFA and its value - A personal view.

2007-06-27T13:40:00.000+08:00

Nowadays, being in the investment and finance profession seems to be the hottest property in town. This is because there is so much publicity on the profession and everybody thinks that we guys are making big bucks. There is nothing further from the truth.

Anyway, I do receive some questions on my job and how to get into the line, especially if you are not finance or accounting graduate, and whether does a Chartered Financial Analyst (CFA) qualification helps.

As an investment manager, I take care of the company foreign exchange (FX) and FX option portfolio. On a day-to-day basis, I monitor the FX market, read the news and analyze the economic data released from US, Europe, and Japan. Technical analysis is something I used a lot in deciding whether to do a trade or not. I will also be looking into derivative instruments like options and futures enhancing the yield and risk management purpose.

Screening for stock investment ideas is also something that is part of the daily routine. There are thousands of ways to screen for stock ideas, and there is no correct way because of he difference in strategies. After having some stocks idea list, doing industry research, company financial analysis, valuation, and monitoring the news of the company soon follow. Sometimes the stocks are not covered by any analyst at all, and that makes it more difficult for us to do secondary research. Bloomberg machine is our best friend, and for that matter, is probably any research analyst’s best friend.

On rare occasion we will have company visit and have opportunity to speak to the management, however, since we are not a fund or brokerage house, primary research is not what we will focus on.

Questions I received from others are that if they are currently an engineer or IT specialist, is it easy or possible to switch line and get a job in the investment industry? Does a CFA qualification help at all? Is the CFA examination difficult, and should they self-study or take lesson.

While I cannot speak for others, I can only speak from my own experience.

Many times, I find that people in the engineering or IT line can be better investment professionals than those from the finance sector. The reasons are (1) they are better train in mathematics and analytical skill, and (2) they have industry knowledge in their respective field, and that helps in understanding the companies that they analyze. My ex-colleague used to be an engineer before joining my firm as an investment analyst, and I think he is quite good and fast in picking up financial concepts.

Having a CFA qualification has increasingly become an entry qualification for the investment industry, and in my view, it does help in getting your foot into the door for the job. Furthermore, the knowledge one gain from the program is something that is valuable – it helps one to understand financial statements and various valuation methodologies.

If one is totally new to finance, it will be difficult to self-study, in my view. In fact, CFA institute recommends that candidates without accounting background should take a course in accounting on their own before embarking of the CFA examinations. I myself gone through the program through self-study. It took me 4 years to pass all the 3 level of examination (I retook the level 3 paper).

The passing rate for the exam is about 50%, 55% and 60% for level 1,2, and 3 respectively as I remembers it. Why such a high failure rate in level 1? I think this is because many candidates registered for the examination with a “tic-kam tic-kam” attitude. They reason that if they can pass level 1 exam with a little bit of luck, than they will go on to do level 2 and 3, if not, they will just drop out and forget it. After passing level 1, the remaining candidates are people that are more serious. And if one goes to level 3, he will be very serious about it. Surely, he will not want to drop out in the last level. This explains why the failure rate is lower in level 3 than level one.

At the end of the day, attitude holds the key. There are many investment managers out there without a CFA quailification, yet they are very successful.

Term or Whole Life Insurance?

2007-06-25T15:08:00.000+08:00

Recently I saw from a forum whereby a reader was asking whether if he should be buying a term insurance or a whole life insurance, and he also ask what is the difference between the two.

To answer his question, I think we should start off by seeing what the similarity is.

Both type of insurance give the insured a form of protection. Should the insured die, the insurance company will pay the beneficiary a sum of money, which is the insured amount. The differences between the two are as follow:

· There is a saving element in whole life policy, and this makes the premium for whole life insurance more expensive. In whole life insurance, part of the premium went to pay for the “insurance protection” element, and part of the premium went into savings. While in term insurance, none goes to saving.
· The term policy will lapse if you do not pay the premium. As for the whole life insurance, because of the saving element, it can be used to off-set the premium and therefore your insurance policy will not lapse immediately.
· Term insurance is valid for a certain term, ranging anyway from 1 to 30 years or more, depending on the insurance company. Whole life, as it name suggest, is valid for life.
· While the premium for whole life insurance tends to be the same as time passes, term insurance premium increases over time, though it normally remains the same for a five year term. This is because the premium for term insurance has to increase to compensate for the risk to the insurance company.

Should one buy term or life? Well, you may have heard of the saying, “buy term and invest the difference”. Before I give my own take on this, I would like to highlight some points concerning term insurance.

Firstly, for term insurance, there is a maximum time period, it can be a 2 year term, or it can be until certain age like 60 years old. Why is this point crucial? In my view, this is crucial because if the term happens to be shorter tan what you wanted and the policy do not allow you to extend it, you may find yourself unprotected just when you need it most! For example, assuming you buy a 20 year term policy when you are at the age of 25. Therefore when you reach 45 years old, your term policy expire and thus you have no more coverage. What if you die immediately after the expiration of the policy? At age 45, you are probably at a time whereby your financial commitment is at your highest.

Secondly, human being as we are, we may not have the discipline to really “invest the rest”. Say you compare a term policy and a whole life policy. The premium for term policy is $50, and the premium for whole life is $350. So you buy the term policy and pay $50 per month, and you invest the balance of the $300. Now, say after a few years, you saw a very beautiful car and you thought of buying it. You realized that you do not have enough to buy it, so you start to think of ways to get the money. And one of the way is to liquidate your investment and to buy the car! If you buy whole life, because of the penalty in surrendering your policy, you may give the idea of buying a miss.

Thirdly, a term is a form of "temporary" insurance whereby one can buy it to provide insurance coverage at a cheap premum. There are a few reasons for doing this, one main reason is that someone who just started ot in the workforce may not have much cash to spend, and therefore look to buy term insurance as a temporary cover. As time passes by, when the person's salary increases, he can than covert it into a whole life policy.

Therefore, my own opinion is that unless you can have the discipline to stay focus on your investment, it may be better to have a mix of both term and whole life policy.

Singpore’s growth may not be as good as it seems

2007-06-25T10:47:00.000+08:00

The Singapore economy seems to be doing well lately with the stock market roaring upwards everyday. The Singapore Strait Times Index (STI) has risen from 1976 points in October 2000 to about 3546 points as of 7th June 2007, an increase of 79% over slightly less than seven years.

A more detailed look at the data, however, reveals a different story. The Singapore dollar (SGD) had been weakening against hard currency (which in this case- gold) for the same period. The gold price measured in SGD was around 465.60 in Oct 2000, and had weakened to around 1028 recently, a drop of 220%. Meanwhile, the STI measured in gold term falls from 4.24 STI units per unit of SGD gold to 3.45 STI units for the same period. This represents a fall of about 19.7% for the STI measured in hard currency!

This implies that the purchasing power of SGD falls for the past seven years.

A falling purchasing power of the currency is bad for the ordinary citizens and the have not. This is because during such time, smart operators and large industrial groups accumulated large fortunes at the expense of small savers and the working class. The smart operators can hedge the falling currency through diversifying into asset class and hard currencies, but the ordinary working class either has no such knowledge, or has no such means.

To add to their misery, the Gini Coefficient (a measurement of of inequality of a distribution of income) widens from 0.425 in 1998 to 0.472 in 2006. An indication of the rich getting richer at the expense of the poor.

Furthermore, the Gross Domestic Product (GDP) forecast for Singapore by Monetary Authority of Singapore (MAS) this year is between 4.5 to 6.5%, below that of Hong Kong’s 6.8%. Hong Kong has a cheaper government and without Goods and Services Tax.

The hard question we need to ask ourselves is whether has the life of the ordinary working class improved for last seven years. From the above, I think the answer is a resounding “NO”.

Why I start this blog

2007-06-24T16:32:00.000+08:00

As an investment professional, I have been approached by many people to give them advise on investment - what to invest, how to invest, what are the hottest investment tips, and what is a good time to invest.

Quite often, I am very reluctant to give them investment tips. This is because the strategy I used will be different from theirs, and therefore what make sens to me does not necessary make sense to them. Furthermore, our risk tolerance are different and therefore it will not be in their interest to invest in the same stock that I invest in. Furthermore, when I invest for my company, I took a portfolio approach rather than a piecemail approach.

Nevertheless, some questions pertaining to financial products are very interesting, and I think I can help them to clarify their doubts and also help them to understand how certian products work.

Many time, the general public just buy the products recommended by their "friendly bankers" without understanding whether the products is suitable for them, and without knowing if they are being ripped off. Sometime, the "friendly banker" have no idea how does the products work.

A case in point was a few years back, my ex-colleague asked me how to investment her money. Her objective was to beat the fixed deposit (FD) rate, and her priority was to have her capital protected and any cost. I therefore suggested that she go and buy Singapore Government Bonds. Since she is not familiar with online financial portal, I suggested that she go to the invest shop of UOB and ask the "friendly financial advisor" to help her. You can imagine how surprise I am when she return and told me that the financial advisor of UOB she saw had no idea what Singapore Government Bond was, and therefore cannot help her.

This makes me realised that there are many people out there that wanted to know more about financial products, and wanted to learn more about investment, but are afraid to take the first step, or are too shy to ask others (maybe they do not want to appear stupid in front of others). I really think that there is no such thing as stupid questions when come to matters that concrn your money. I myself are still learning about investment and financial products, and I am sure that there are many people out there that have a better understanding than me on many things.

However, I start this blog with the intention of helping people so that hopefully, they can understand what financial products they are buying. if they have something that they wanted to ask, they can email me if they think that they do not want to trouble their own financial advisor, or are afraid that their own financial advisor may have conflict of interest. there is no guarantee that I can have answer to each and every questions, but I will try. I also have friends that are managers and district managers in the insurance industry whereby I can ask for their views.

In my subsequent posting, I will start to write about various topics that I think will be of interest to readers. I saw from forum many questions being asked. That will be a good start.