What is staggering is the amount; but underlying this story is what can potentially happen to any of us when we take a gambling approach towards financial freedom.

I have been to the Resorts World Casino in Sentosa. It was an educational and interesting experience to see groups of people who come together with a common purpose to gamble with their money on the various games provided by the casino. While individual motivations differ, the activity is the same. Taking a bet on a random outcome and potentially gaining or losing money in the toss of a dice or roll of the roulette wheel.

Some feel that gambling is a vice. Others feel that it can be a harmless hobby if one plays within one’s limits and sees it as a leisure activity and not a money making opportunity.

I too have gambled on SGX. Punting on short-term movements in share prices of companies which I had little interest to understand and research. How different is that from gambling in a casino? I am also wagering my capital on the outcome of share prices in the future. The time horizon may be longer than the time it takes for the roulette wheel to finish spinning but the concept is similar especially if my mindset is that I don’t really understand the company and business much and am just watching for the volatility in share prices to buy lower and sell higher.

Ultimately, if one doesn’t really understand what we are getting into in terms of investments, then we are moving closer to a gambling mentality to investing rather than true investing.

The lesson from the $26million loss by the businessman is clear. Play within your means be it investment or gambling. Do not invest (gamble) on credit. And most important of all, know your limits and when to cut loss and walk away without destroying yourself and your own life savings recklessly.

Be well and prosper.

"Black Swan" by Nita W

I am constantly reminded about the unpredictability of life. Yesterday one of my colleagues injured herself getting down from the bus and was on a week’s medical leave due to a fracture in one of her bones. Another colleague informed me that she was tendering her resignation because she wanted to pursue full-time studies to get her qualification.

What does these seemingly unrelated and yet coincidental occurrences have to do with the picture above?

A World of Mini-Black Swans

After reading Nicholas Nassim Taleb’s books on “Fooled by Randomness” and “The Black Swan”, I realised that the human understanding of the predictability of life is grossly over-stated. We think we know more about the world than we actually do. In Taleb’s language, a black swan event is characterised by rarity, extreme impact and retrospective predictability.

It’s quite rare in my case for both my colleagues (and there are only three of us including myself in the team) – one having a serious fall through an innocuous activity of getting down the bus and the other resigning around the same time. The impact on the office could be big because if my injured colleague is on long-leave, by the time my other colleague is clearing her leave, I will have to man the fort alone until the new staff comes in which from experience lags a few weeks to a month after the staff has left the organisation.

This occurrence only serves to strengthen my belief that life is totally unpredictable and huge shocks can happen. My own life is filled with that as less than a month ago, I was facing a crisis in my own life, that of separation from my spouse. While we are for the time being reconciled, I cannot but feel that my own mini black swan is also lurking behind the corridors of time, and thus it is important that my life be measured by the experiences I have gone through rather than about the x or y dollars I have amassed while I live.

Being Prepared for A Totally Unpredictable World

The more I think about survivalism or TEOWAWKI scenarios, the more I realise we take for granted most things in life. Running water, a functioning state, security and health, career etc. Only when truly black swan events occur right in front of us and impacts us through the value of our homes, our equity (stocks and shares) portfolio or our own lives that we take stock about what we already enjoy and prepare ourselves for possible challenges ahead.

Being prepared means to have a scout’s mindset of always being ready. We cannot predict 100% of what happens in life and in the world but we can control ourselves in acquiring the useful skills and abilities that can see us through whatever comes.

I start to realise keeping healthy and fit is one way to make my body resilient and stronger to withstand the challenges of life. I start to realise cherishing the existing family relationships allow one to savour the sweetness of being in a family when it can be taken away. I also start to realise that I don’t want to live a life of regret and to start enjoying small luxuries within my means NOW before I reach a point when I am too old to enjoy them.

Even though my work staffing situation appears to be dire, it was fortunate that I have made some preparations. For instance, I got my staff to document her work and processes in electronic form to facilitate handover. I also am familiar with most of the things she is doing so can take over while she is away and before her replacement comes in. This is not because I had foresight or could predict this possibility but some months back my staff’s family member was very sick and she contemplated resigning to help take care of her family member. Fortunately, I managed to get her to rethink her decision and her family member’s condition improved enough that she managed to last another 9 months since that episode and she is leaving for other reasons.

In relation to my journey towards financial freedom, I am now still having 33% of my net worth in equities. I think the volatility in the market will continue with a tendency for a correction given that the economic fundamentals of our key markets, US, Europe and China not looking too rosy. The risk of deflation and double-dip recession in the US is very real and I cannot see how Singapore can be unaffected given our export oriented economy.

I have kept my cash and cash equivalents high as ammunition to fight the upcoming challenges that the global economy throws at me.  I sleep better knowing my cash position and am comfortable even if my equities go south as I am in a net asset position.

What mini black swans do you think about and how do you think you are managing it?

Share with Panzer.

Be well and prosper.

October brings back images of stock market crashes, the falling of the sky and other doomsday scenarios on the scale of apocalypses. It is not surprising that weak employment data last Friday in the US has made equity markets jumpy.

Currently, I’m adopting a nimble strategy of being overweight in cash and eyeing the bluest of blue chips for medium to long term growth and not over-committing to having up to 80-90% of my investible capital in equities (as I used to in the past) as I’ve learnt the value of having some portion of your investible capital in cash and cash equivalents because the world changes too fast. Even quick punts can net one returns exceeding 2 x fixed deposits.

What is your current strategy in the light of October volatility?

Share with Panzer in the comments page.

Be well and prosper.

These two countries are often compared because of similar geopolitical situations, racial compositions, approaches to economic growth and competitors to be the regional (if not world) class financial markets.

However, the recent Lehman mini-bonds fiasco has shown very different regulatory approaches in resolving the losses suffered by investors.

Hong Kong Monetary Authority: 1

Hong Kong’s recent actions by the Hong Kong Monetary Authorities as well as their Securities and Futures Commissioned has resulted in Lehman mini-bond holders who would be compensated as much as 70% of their principal amounts invested with the banks. About USD 1.6 b (SGD 2.4 b) was invested by Hong Kong investors in Lehman mini-bonds and around USD 800m or (SGD 1.2 b) or roughly 50% would be compensated.

Monetary Authority of Singapore: 0

Singapore’s banks on the other hand are compensating around SGD 107m (USD 71m) out of around SGD 508m (USD 352) or roughly 21% would be compensated. This is half the proportion that the Hong Kong authorities have managed to help broker for their own investors.  Interestingly enough, if the percentage paid by each financial institution in Hong Kong is similar, I suspect DBS in Hong Kong would likely be paying out a higher proportion than DBS Singapore for selling virtually the same product.

The Monetary Authority of Singapore on the other hand, had its Deputy Chairman and Minister for Trade and Industry, Mr. Lim Hng Kiang defending its actions in its supervision and not accepting that it had been lax in supervision.

Different Jurisdictions – Different Outcomes

The compensation obtained by Hong Kong investors is double that of Singapore for the same product and very similar circumstances. Why are Singapore investors suffering more than those in Hong Kong. Based on the news reports about the Lehman mini-bonds fiasco in these two countries, it appears that the Hong Kong authorities was more proactive in being an advocate for the retail investor compared to MAS’s more hands-off approach urging retail investors to avail themselves to first lodge their complaints to the banks and financial institutions before going to FIDReC.

While investors in the ill-fated Lehman related minibonds and other derivative products have suffered, the way their suffering unfolded has been quite different.

On one hand, banks in Hong Kong have to put up a US 200m fund “to help pay legal costs of trying to recover collateral that was backing many of the investments, possibly increasing the payout for investors“.

There were no such reports of similar initiatives in Singapore.

It seems ironic that Hong Kong, better known for its free-market type of approach to financial markets, has emerged to be seen as a stronger proponent for the retail investor.

Singapore, with its reputation of being tops in Corporate Governance in the region and in laws and regulations appear to be letting the Financial Institutions get away with a ban (ranging from six months to two years) on selling these structured notes that no-one aged 9 to 90 with a breath would touch with a ten-foot bamboo pole.

I guess the morale of this story is that perhaps one is better off investing in Hong Kong financial market because you seem to have more protection than as a retail investor in Singapore.

Be well and prosper.

The article by the Straits Times “CPFLife payouts for Life” is very misleading as the content of the article focuses on the questions raised by Mdm Halimah Yacob. Her concern is expressed here:

The remark was directed at Madam Halimah, chairman of the Government Parliamentary Committee for Manpower, who noted that the law allows the CPF Board to stop CPFLife payments unless the Lifelong Income Fund is solvent. ‘While I can understand the legal basis for this provision, I find it quite disturbing to have it reflected in the Bill,’ she said.

The Government never giveth but the Government can taketh away

So it appears that the Government is able to legally STOP paying you out of YOUR savings accumulated from YOUR hardwork and locked by a portion of YOUR MINIMUM SUM CPF balances if the Lifelong Income Fund is insolvent.

However, given that the Lifelong Income Fund is mandatory for most CPF members and that you don’t really have much of a choice, if the fund is at risk of being insolvent, that would speak volumes about the quality of the people paid to run it. If you were given a monopoly and could control how much expense (payouts) to incur and can take other people’s money to invest (unlimited upside), some risk takers may use that money to make bets on the market. If the bets turn out well, 8 month (or more bonuses). If the bets turn sour, quit and find a new job while the members payouts get cut?!

Is the scenario I imagine realistic? Did we go through the last year or so since the sub-prime where we learnt nothing about putting people in such scenarios?

Minister Gan didn’t mention what happens if it is the CPF Board itself that makes investment mistakes that causes the Lifelong Income Fund to be insolvent in the first place or if the CPF Board is unable to generate sufficient income from its investments using YOUR portion of MINIMUM SUM locked away for CPF Life.

Those are very real possibilities for the Lifelong Income Fund to be insolvent and to be unable to fund future payouts. Even MAS can lose $9 billion in 1 year from investments and Temasek/GIC can lose BILLIONS in a year. What happens if CPF Board makes use of GIC to invest and they lose millions (not to say BILLIONS) in a “bad” year.

Would CPF members be screwed because of the mistakes made by the CPF Board?

Would CPF members be deprived of their right to their CPF Life income payouts that come from their OWN SAVINGS that they have NO CHOICE but to participate as opposed to private insurance/annuities?

And more importantly, Minister Gan’s promise as stated:

MANPOWER Minister Gan Kim Yong has assured Singaporeans they will receive a monthly payout from the CPFLife annuity scheme for the rest of their lives, despite a ‘disturbing’ provision in the new law.

But I am not sure if our esteemed Minister is aware that even if the payout is reduced to $1 a month (which the CPF Board is legally empowered to do so under these amendments to keep the Lifelong Income Fund solvent), he would still be honouring his promise while CPF Life members starve to death?

I cannot understand how we have a system where our forced savings from contributing to the Central Provident Fund is being managed with the risk borne by members. Not only do we lose the ability to decide what we want to do with our retirement monies, we’ve given the Government so much power that even if they make mistakes with our hard-earned savings, we will have to suffer for it.

If the CPF Board cannot generate sufficient income from CPF Life, we the CPF members are well and royally SCREWED.

If this doesn’t convince you to save for retirement OUTSIDE the CPF system, nothing else will.

Be well and prosper.

Flickr image "Bicycle" by Julien Hery

I’m quite close to starting my “cycle your way to work” project as my workplace is about 10km away from my home. This is a realistic distance for commuting to work by bicycle.

I’ve decided to embark on this project because I don’t drive to work daily as my spouse uses the car to run errands with my daughter so I decided to look for an alternate and healthy mode of transport. There is a direct bus from my home to the workplace but the bus can take up to 45minutes in the morning to get to my destination.

I’ll be posting more on this development as it is a way to save money and to get exercise at the same time. I value my life so I’ll avoid the roads for most of the journey and make use of park connectors for 60-70% of the journey.

More when I get my gear and start my cycling adventures.

Be well and prosper.

Flickr image "Greed" by Muffet

I recently had lunch to catch up with ex-colleagues from my very first job. It was a pleasant lunch as we caught up with the developments with the organisation and how each of us were doing.

Towards the end of the lunch, one of the colleagues started to talk about a business opportunity. It turned out to be an multi-level marketing opportunity.

Immediately, the red flags and hazard lights in my mind flashed repeatedly!

*Warning* *Warning* *Bullshit filters ACTIVATED*.

The reality behind MLM is that most people do not make money from it. The ones that do are those at the top of the MLM chain who started the entire business so that their downlines are the ones working hard for them. There are many references about MLM and you should make up your own mind. But my personal experience has been horrible.

My spouse was once recruited by an MLM outfit and for the week that she was with them, she was a totally transformed person. She was even “brain-washed” to expect objections from family members to her involvement with such a business.

Thus, I view MLM opportunities with skepticism and cynicism. Most of the evidence I’ve seen points to it being exploitative and driven more by profits rather than genuine regard for customers.

After this experience, I now view my ex-colleague with a degree of suspicion in that does he want to meet up because of our relationship as ex-colleagues or does he see me as another potential recruit for his downline?

Have you ever been approached to join a MLM program?

What did you do and how did you feel?

Share with Panzer in the comments section.

Flickr image "Bernie Madoff by Yan Pei-Ming at San Francisco Art Institute - 159" by Steve Rhodes

The key to achieving financial freedom is to learn how to distinguish between genuine investment opportunities as opposed to financial scams, frauds and schemes.

I’ve recently discovered the powerful content of PBS programmes which aims to produced documentaries that we can learn and be entertained at the same time.

This video reveals the Madoff Affair – the largest Ponzi scheme uncovered that spans generations. Many of the people cheated in the scam were not unsophisticated investors. Still, they were taken in by Bernie Madoff’s ability to generate consistently high returns over many years.

In order to grow yourself towards financial freedom, it’s helpful to learn from the mistakes of others so that you can better travel on this journey to be financially free.

Be well and prosper.

—–

Related Articles

Madoff Sentence Cheered, Seen as ‘Strong’ Message

Google News related to Madoff Sentence

Elderly woman hands up - Issan, Thailand

The Government announced the CPF Life scheme sometime last year with mixed responses. What the CPF Life scheme does is to lock up part of  your CPF minimum sum away to fund an annuity, upon which the payouts from age 82 or 85 (depending on your draw down age) and above would come from this annuity.

Under the old CPF scheme, your CPF minimum sum would fund your retirement for 20 years from the draw-down age. But if you out-live that time and have no-other sources of retirement income or savings, then you would be a burden to society.

The CPF Life scheme was meant to address that issue by forcing you to buy an annuity whether you like it or not to fund the remaining years of your retirement living.

CPF Life: What you need to know

This post is not going to debate the advantages and disadvantages of the scheme, because for the majority of us, we have no choice as it is an auto opt-in scheme (without any option to opt out) if you reach 55 by 2013 with at least $40,000 in your CPF retirement account.

So for many of us who will be 55 by 2013, we are given 4 choices for the CPF Life plan, reduced from the previous 12 which is deemed to be confusing for us.

The new CPF Life Scheme really presents yourself with 2 decisions to make:

1) Do you want to leave any of the refundable annuity portion to your beneficiary?

2) How much do we want to do so for (1)?

Leaving nothing to the next generation

Once you decide, you don’t want to leave anything to your beneficiaries, then you only have 1 choice, i.e. to choose CPF Life Income plan which provides for the highest monthly payouts of the 4 plans at $640-$700 per month (assuming 3.75% to 4.25% interest rate and 1% extra interest is paid on first $60,000 of SMRA account balances with half minimum sum of $67,000).

The downside of this option is that should one pass early, then the entire minimum sum goes into the central pool to fund other people’s retirements. So you are taking a risk that if you do not outlive the payouts, you could potentially be donating your minimum sum to the Gahmen who at this point in time didn’t state if they will send you a nice bunch of flowers for doing so.

Leaving something to the next generation

Once you decide to leave something to your next generation, you then have to decide if you want to leave MORE or LESS for them. This is because the more payouts you want for your living expenses, the lesser the refundable portion of the annuity will come back to you. Essentially if you prefer to have higher payouts and leave less for your next generation, then you can consider CPF Life Plus. If you prefer to leave more for your next generation and can live on less payouts, then opt for CPF Life Basic plan.

My thinking now is I’ll probably chose CPF Life Basic as I intend to maximise the amount I leave to my beneficiaries and not the Gahmen. I plan to have retirement income sources beyond my CPF savings so leaving more to my beneficiaries is an important factor.

Leong Sze Hian warned about taking the CPF Life Income plan because of the risk of losing all your CPF minimum sum should you pass away earlier. The payout difference of $100+ per month doesn’t seem to warrant taking such risks.

Which CPF Life Plan would you choose and why?

Tell Panzer in the comment section!

Be well and prosper.

Even in Singapore, the man behind Sunshine Empire – a multi-level marketing scheme that is allegedly a ponzi scheme – is being charged in court for allegedly running a fradulent business and criminal breach of trust.

According to Deputy Public Prosecutor April Phang, the revenue generated by Sunshine, which has a paid-up capital of $150,000, between August 2006 and November 2007 totalled $189 million.

Their alleged Ponzi scheme attracted as much as $189 million by investors drawn by the returns!

My momma always told me….

My mother is as down-to-earth a person as you can get. She worked hard all her life and even during her retirement years, I thank God for her as she helps out with my daughter as well.

One of the useful advice given by my mother was really to be centred and not go for easy riches. Her words are so true given that my stock portfolio is 50% underwater even though I invested in blue-chip stocks that are in solid, fundamentally strong businesses and were listed on the SGX and regulated.

The fundamentals of investing are to:

[1] NOT LOSE MONEY

[2] REMEMBER RULE NUMBER 1.

Central to rules 1 and 2 are understanding what you invest in and knowing that there is always a risk-return trade-off in any investments. And the more you understand the risk-return trade-offs, the closer you are to keeping within rules 1 and 2.

The Sunshine Empire episode is not the first neither will it be the last. So long as human greed and ignorance abounds, there will be people drawn to it. More cynical friends even remarked that the listed stock exchange can be misused as a form of gambling as market prices may not always reflect underlying value of the assets and business of a company.

If you understand how ponzi scheme works, the proceeds from the investors of the current investors are used to pay the initial investors. The cycle works so long as new investors come in providing for fresh funds which can be used to pay off earlier investors. It’s borrowing from Peter to pay Paul with no real value-creation done.

How to avoid being a victim in a ponzi scheme

The key to avoiding being a victim is to be sceptical. There is no free lunch. This saying means there isn’t many opportunities to make high returns with low risk. In general, the higher returns you desire, the more risk you have to take. The risks could be losing all of your money, could be variability in returns, it could be time period that the money has to be tied up even in legitimate investments.

Another important factor is to know yourself. How ignorant or well-informed you are about the potential risks/returns of any venture, investment or scam. Knowing how susceptible to greed as well as fear to losing out when people are in a frenzy to buy/sell investments is to keep a cool head when the mob goes crazy.

Ultimately, it is about walking away from things you don’t understand even if you’ve done your homework in reading up, asking around and getting trusted advice from professions or people in the relevant industry.

Above all, understand human nature, in that if something is TOO GOOD TO BE TRUE, it usually is.

Have you heard of stories of people being scammed?

Share with Panzer in the comments section.

Be well and prosper.