All that Glitters is not always Gold (16 Oct 2009)

Gold prices are now at 1050 USD per ounce. Ten years ago, in 1999, they were 288 USD per ounce. That’s a rise of 264% which works out to an annualized increase of 13.8% per year. This is far better than what the US stock market did. So, should we all be rushing into gold now? To be honest, I am cautious.

I am far more positive on equities than I am on gold. But firstly, here’s why gold is going through the roof. People are moving into gold right now because the US dollar is falling, and there is a fair amount of worry that it will crash. And the reasoning is that in a huge crash for the USD, then the only good of store of value would be gold. It also helps that a group of investors believe that there will be hyperinflation, and in that scenario, paper money will also see its value shrink while gold will not.

Now, here’s the reason why I am cautious, if you look at this history of actual gold prices, it is not an asset class for the faint hearted.

I ran some numbers. On a calendar year basis, over the last 88 years up till the year 2008, Gold had 44 positive years, 11 years of 0% returns, and another 33 years of negative returns. In percentage terms, this means that 50% of the years were positive, 12.5% of the years were absolutely flat, and 37.5% of the years were negative. It should also be noteworthy that including this year, gold has been on a 9 year bull run. The last time gold had a bull run similar to its current one, was in the seventies. Gold went from 35 USD per ounce in 1970 to 589 USD per ounce by 1980 (It hit a high of around 850 USD at its peak on 21 January 1980). After that, it fell all the way back down to ranges at 280 USD over the next 20 years before it started on its current bull run again.

The thing is, the asset class can go absolutely nowhere for 20 years! And this is not an isolated trend. From 1935 to 1967, gold price went absolutely nowhere! That is 32 years! I am all for long term investing, but 32 years of an investment going absolutely nowhere would be terrible even by long term investing standards.

When gold surges, it can charge up substantially over a few years, and after that, it could be a multi decade wait in the doldrums for its next bull run. This makes it extremely scary to hold as a main investment strategy. This is one of the main reasons why I hold a precious metals fund instead of just gold, and even my precious metals fund, which is up 33% since I bought it, is barely 1.6% of my total portfolio. It is more to hedge to a certain extent against hyperinflation and USD crashing rather than a main strategy.

The key thing is, I believe a recovery is in the works, and with that, company earnings will improve as the global economy gets back on its feet. Hence, I am bullish equities. However, what is gold? It is mainly a store of value. Its practical uses as jewelry is definitely not the reason why it should be surging to over 1000 USD per ounce. If people didn’t believe in gold as a store of value, its price would plummet. So, unlike companies, which are striving to improve their productivities, and have the leeway to adjust prices, go into new business, etc, gold is just gold. Its not even essential like oil, or rice, or bread. People can choose not to use gold as a store of value, and they won’t be any worse off, unlike how if people didn’t want to use oil, then everyone would have to stop driving, and all the machinery in the world would stop.

So, while I acknowledge that gold has had a tremendous run so far, I am cautious on it. I actually have a precious metals fund that would continue to go up if gold price continues to move up, but I am not betting the farm on this. The history of this asset class over the last 88 years makes it a scary one to hold. So, I would only have it in my portfolio as a form of hedging. If you want to make big bets on this yellow metal, then be prepared to be very nimble, because when the party ends on this, it could be a very long time, and I am talking about decades here before the next gold bull run revisits again! So, if you happen to be the last one holding on to gold assets when this gold bull run ends, its going to be very painful.

How much things actually cost - Part 2

This is the continuation on my previous posting of how much things actually cost. In short, we can calculate how things actually cost by considering their cost over the time in which we would effectively use them instead of just their upfront number. For example, a pair of movie tickets plus a popcorn combo for two costs $30 on a weekend. So, if we take a 2 hour movie, that works out to $15 per hour. That cup of coffee? (Its water, so let’s assume it gets digested in 2 hour). A Starbucks coffee would cost $3.5 an hour, while your kopitiam coffee would only cost $0.75 an hour. A restaurant meal costing $30 would work out to $5 per hour assuming you took 6 hours to digest the food.

Let’s touch on something close to people’s hearts here – housing. This is iffy because you can sell your house again subsequently, so many people do not see it as necessarily a cost. But for someone who is renting. Say you spend $3,000 per month renting a place. At most you would spend only 12 hours a day at your house. Rest of the time, you would be outside. So, on a per hour basis, it would cost (3000 divided by 12x30) = $8 per hour. This of course, doesn’t include things like your PUB bill, and cost of furniture and stuff.

Take a couch. Say you spent $3000 to buy a really expensive, nice sofa set. Give it 5 years usage, and assume you are a real TV buff, so you spend 3 hours watching TV every day (wow!). So, that sofa cost you 3000 divided by (3x365x5) = $0.55 per hour. Hey, its not that bad if you are a TV buff. Of course, if you are the type that buys a $3000 sofa set, but hardly use it at all because you watch TV in your bed. So, it gets used maybe 1 hour a week? Then your sofa set actually costs you 3000 divided by (1x56x5) = $10.71 per hour. That’s much more expensive now. Note that this is why I am willing to spend money buying an expensive nice bed, because we use the bed a lot. Even if it’s a $3,000 bed. If it lasts for 5 years, and we sleep on it an average of 8 hours a day, then its per hour usage is $3000 divided by (5x365x10) = $0.16, which is cheap! So, buy a good bed!

The same principle can be applied to electronic equipment like computers, handphones and TVs. So, if you spend 1 hour per day watching TV, then a $3000 TV set that lasts for 3 years would work out to 3000 divided by (365x3) = $2.74 per hour. If you spend 2 hours or even 3 hours a day paying computer games after work, then even if you spend $6000 on a top of the line computer that lasts for just 2 years, it would be only 6000 divided by (3x365x2) = 2.74 per hour only.

How about things like assessories? Again, it all depends on how often you use them. A diamond ring may cost a lot, but if the girl is so happy she wears it every day to work or play for the next 5 years (before she switches to another). Then, even if it costs $10,000, it would only work out to 10,000 divided by (300x10x5) = $0.66 per hour. Yes, you saw that right. It costs less than a cup of starbucks coffee. Of course, this is provided she wears it that often. If you are the hapless guy who sent even $10,000 on a diamond ring, and you gal only wore it a few times and then, kept it in her safe deposit box, then it would work out to say 10000 divided by (10x10) = $100 per hour! Now, that would be horrendously expensive. Of course, being a guy who actually did buy an engagement ring for my wife, I would advise that all guys do that regardless of how often they wear that ring after that. Because marriage is for life, and you wouldn’t want your wife to be mad at you for not buying her an engagement ring (even if she doesn’t wear it often).

Another common assesory, the watch, is actually pretty cheap too because we wear it so often. If you spend $5,000 buying an expensive branded watch, but you were willing to wear just that one watch for the next 10 years, to work and to play, again it would be cheap on a per hour basis, just $0.33 per hour. Of course, if you are going to end up wearing it just once each week for just 1 year before it starts to collect dust in the cupboard, then it would cost 5000 divided by 56x10 = $8.90 per hour. The worst would be if you wore it once, didn’t like the look, and never wear it again! Then, it would cost an astonishing $500 per hour! Of course, you could also buy a $100 watch and wear it for 5 years, and that would only cost $0.0054 per hour! In a similar vein, buying a $100 for a friend whom you know never ever wear watches, is a waste of money even if its $100.

How much do trips cost? Again, they can be calculated using this method. My honeymoon vacation was to Maldives, and cost nearly $10,000 for just six days or so. So, it cost $10000 divided by (6x24) = $69.44 per hour. This is obviously very expensive, which is why people can’t exactly afford to do nothing but travel all the time on holidays. Cheap trips though can be both fun, and very reasonable on the pocket. A $500 weekend trip to somewhere near, would only work out to 500 divided 3x24 = $6.94 per hour.

Ultimately, though this is just another way of looking at the cost of things, and doesn’t factor in the intangible benefit or enjoyment from things. I must emphasize that I am not encouraging people to do nothing but to scrimp and not spend any more at all. Life is going to be very tedious and boring if its all about saving and you don’t get to enjoy yourself at all. However, as with all things, things can be enjoyed in moderation. Is your enjoyment from sitting on a $3000 sofa set that much more than sitting on a $800 one? Only you can decide on that. Things that get a lot of usage are actually very cheap. So, that watch or assessory might actually work out to be really cheap if you wear it all the time. Take my wedding ring for example. It cost under $300 and is probably the cheapest assessory I ever bought on a per hour basis. This is because I have worn mine since I put it on and have never taken it off since, even in my sleep. So, as of now, I have worn it for 5 years and 7 months, or 2035 hours. So, it works out to just $0.147 per hour and its getting cheaper by the minute! On the other hand, I have realized that buying diamond rings for my wife is an extremely expensive affair because she hardly ever wears them. But diamond earrings are alright because she wears them all the time!

How Much Things Actually Cost - Part 1 (5 Oct 2009)

Back from my vacation! It cost a lot, but was fun and a good chance to get away from everything and just relax. But now that I am back, I would touch on something which is common to everyone everyday.

When ever we buy something, we often just look at the price. If this shirt cost $30, then that is all there is to it. But there is actually a slightly different way to look at this which I have thought about before. So, today, I will explore that way. Please note of course that this is a purely monetary method of looking at the cost of an item, and does not factor in how much personal satisfaction you get from using it, which can’t really be counted by money.

This method is to take the cost, add any repair maintenance that will ever be incurred, and divide the total figure by the number of hours you are actually going to use this item. For items like food, we can put a more arbitrary 6 hours to it, since its likely that it would all be fully digested by then.

So, let’s take that $30 shirt again. If I estimate that I am going to wear it to work once every two weeks for the next 2 years before I get tired of it (or expand such that I can’t wear it anymore!). And I normally wear it for ten hours on the days I do wear it to work. Then it would work out to 30 divided by (28x2x10) hours or $0.053 per hour of use. Obviously, this is very little. It also means that if I go for a slightly more expensive $50 shirt, it would still work out to a relatively small amount of $0.089 per hour.

However, if it’s a $50 casual shirt which I bought, which I ended up wearing just once, and I never wear it again after that. Then, this shirt would have cost far more. Assuming I wear it for even a full $10 on that day. Then it would work out to $5 per hour. Notice how much more expensive this now becomes compared to even a $50 working shirt. So, if you are the type that loves to buy new clothes, and end up wearing them just once, or worse, never at all! Its definitely not a very good deal.

Let’s look at something more complicated, like a car. There are all sorts of makes but let’s not take something too expensive. So, a 1.5 litre sedan.

Downpayment - $18,000, assuming use full 10 years, so $1,800 per year.
Monthly car loan installment payment -  $560 per month or 6720 per year.
Insurance - $1400 per year
Carpark – $65 per month, or $780 per year
Parking – $30 per month or $360 per year
Petrol – $300 per month or $3600 per year
Road tax – $700 per year
Maintenance – $250 per servicing, so $750 per year
Miscellaneous – $500 (accessories, car wash, replace parts).
Total – $16,110 per year.

Assuming you spend 1.5 hours on the road every day driving to work, etc. Then each year, you would spend 547.5 hours using your car. So, the cost per hour of a 1.5 litre car is ($16,110 divided by 547.5) = $29.42 per hour. Definitely not cheap. In comparision, most MRT trips won’t cost you over $2 per hour. And we are talking about a relatively cheap 1.5 litre car. Cars which are 1.8 litres and above are all much more expensive wither its maintenance, road tax, petrol, monthly payments. So, its all adds up.

We need to balance this with the amount we earn per hour as well. So, take your monthly pay, divide it by the number of hours you work per month. Let’s assume we work 8 hours a day, 20 days a month. (yes, some of us work longer, but let’s start with this). This works out to 160 hours per month. Here’s a table showing how much you earn per hour based on different salaries per month,

Monthly Salary	Amount earned per hour
$2000	$12.50 per hour
$4000	$25 per hour
$6000	$$37.5 per hour
$10000	$65.50 per hour
$15000	$93.75 per hour

So, now that we have this, you can look back and assess how expensive are the things you are spending money on relative to your earning power. If something costs $1 to $5, its probably either very frequently used, or its cheap. If it costs $10 an hour, its still affordable, but don’t buy or use too much of these things. And if something costs $30 or $70 an hour, then you either use these only once in a long while (like an expensive trip), or you better think long and hard before buying it (like an expensive luxury sedan). And as can be seen, cars are expensive!

I will touch on more daily examples like food, entertainment, and a favorite topic currently for many – property in my next blog update.

Going on a trip, added 6k before I leave (16 Sep 2009)

Next Wave Started, Looking at Laggards (11 Sep 2009)

It looks like the next wave up has started. Things were quiet up till yesterday when the STI index breached 2700 intraday. Concerns about the China market is subsiding as economic data from China continues to impress. The latest August data topped analyst’s forecasts. News that lending by Chinese banks rebounded in August (up 34.1% YoY) and that money supply rebounded gave much reassurance to fears that China’s banks would rein back lending.

China’s industrial output also grew 12.3% Yoy, the fastest rate of growth yet in the last 12 months, showing that it was well on track to its official target forecast  growth of 8% for the economy for the year of 2009. Asia is well on track to recovery, and while there are lots of detractors and people who refuse to believe that Asia can recover so fast. They fail to look at history.

Asia has always bounced back and recovered quickly from slumps.  And the bigger the slump, the stronger the eventual recovery. For 2008, we are talking about one of the biggest slumps in history, something that will be written in history books. A mega slump of massive proportions. Such global massive slumps where literally all markets fall by 40% to 50% are once in a lifetime occurrence. While the drop is very painful, the rebound is usually equally spectacular. The rise in stock markets over the last 6 months was not a freak event, and the trend will continue. It is backed by economic data that is starting to show that gradually, the developed countries are picking themselves up from their feet, and Asia economies are leading the way out of this recession.

I am in no hurry to sell. This rising trend based on the full global economic recovery has not been played out. Lately, I have been monitoring laggards as well. Europe for example, as the region is paying catch up. Many European funds have shown up on the top performing funds list over the last one month. I already hold Parvest Europe Alpha and FLF Eq Europe Emerging both of which have also surged recently. I will be monitoring Europe markets for bargains. I also have to admit I probably have too much in Asia at this point, and while it has certainly rewarded me over the last 6 months as Asian markets have outperformed most other markets quite conclusively. But from a diversification point of view, at some stage, I will need to rebalance away from Asia even though I remain very bullish on it. As always, it’s extremely difficult to follow what you tell others, and striving to remain diversified is probably the hardest task for many an investor, especially those with a high level of conviction in their views like me.

Gold has also surged, pushing the DWS Noor Precious metals fund higher. For me though, this fund, which I hold, and the FLF equity Russia fund which is an oil play are hedges against rising inflation. I would be perfectly happy though if gold, oil prices do not surge and these two funds which I hold creep along over the next two years. Because that would mean that inflation is kept under control, and if it happens, Asia’s economies will benefit the most from this and continue to surge forward. There is a reason why these two funds are less than 10% of my total portfolio.
Asia is showing great resilience in the face of this time’s recession and I am confident that we will experience a V- shaped recovery coming out of it. The coming 6 to 12 months are going to be very exciting ones.

Switched a Fund, Reluctantly (7 Sep 2009)

I just switched from one Asia ex Japan fund to another today. I would normally always advise against doing this. Chasing fund performance, especially within the same sector is not a thing one should usually do. Fund managers each have their own styles, and you should usually give them some time to really confirm that they are underperforming before you decide to switch.

In my case, it wasn’t a case of underperformance either. I was quite happy with the performance of DWS Asia Small/mid cap fund. It had returned me close to 40% since I bought it.

The problem was that the fund house itself wants to close the fund. Those of you who have the email should have received the email from us by now. They just had an EGM to close the fund, it didn’t pass. Now they are going to propose another one. Now, I actually like small caps right now. I think blue chips have gone up to a certain extent, and it’s many of the small caps that are lagging.

While the risks are higher for small caps, that is precisely why getting exposure to them via a small cap fund makes sense. Even if one or two fails, it would hardly impact the fund, and in the meantime, if the other small caps in the fund moves up strongly, it would more than make up for the few that fail.

But in this case, the fund house seems determined to close this fund. And if I were the fund manager, it would certainly come as an unwelcome distraction. How well can you concentrate on running a fund if it could potentially get closed within the next 3 months? As an investor, the uncertainty is also not a good thing. So, I decided to switch out of this fund. But because I still like Asian small caps, I had to do what I normally would not advise people to do. I switched from one Asia fund to another Asian fund, and their objectives are similar. Both are small cap focused.

The new fund I have switched to is Aberdeen Asia Smaller Companies. While it is not easy to run a small cap fund. I am confident that Aberdeen has the expertise to do it. I did not want to switch to a more typical Asian ex Japan fund because I already had those. I wanted specifically one that was focused on small caps.

Based on the overall performance that the fund has shown over the past few years, I chose Aberdeen Asia Smaller Companies. The fund has the best 3 year track record amongst the funds in this category. And it had also fell the least during the tough times in 2008. While it has underperformed in the initial run up compared to the other funds in this category, it was because the fund manager did not want to chase up the frothier sticks with no fundamentals. And I share a similar view in that in the medium term, the stocks with the stronger fundamentals will shine through.

Sometimes, Its The Money You Didn’t Spend That Counts (1 Sep 2009)

I bet most people bemoan not having enough money. Few people are ever in a position in which they claim that they have more than enough money and wouldn’t want more. That’s why so many of us want to invest. And indeed, investing will help to grow your wealth. Money that is invested is money which is working for you 24 hours a day, 7 days a week.

In contrast, debts, whether from credit cards, car loans, renovations loans are all draining money from you constantly. Before you even start investing, clear your short terms debts first. And sometimes, the best way is to not even incur them in the first place, so very often, it’s the money that you didn’t spend that will form the base capital for your investments.

We live in a materialistic society and it is almost impossible to keep away from spending. The key is moderation, and to be aware of your expenses so that you don’t spend more than what you can afford. In today’s world, where credit cards are readily available, and where there are many purchases which allow for installment repayments, awareness of how much you are spending is very important.

Furniture, and electronic items which allow 12 months or even 24 months repayment periods should not be seen in terms of their monthly cost. In the end, the total cost is what you will eventually pay, even if you get to pay that over 12 months instead of straight away. If a person couldn’t save up that money to pay it off right away to begin with, he may not be able to adjust his spending downwards in the subsequent 12 months for it either.

A car is one of the biggest-ticket items that you can spend your money on. So, be very careful when you are thinking of buying a car. It’s not just the upfront cash you may have to fork out, or even the monthly car installment payments, which are substantial. There is also petrol, parking fees, maintenance, road tax, ERP, car insurance, to name the most common costs. All these could easily add up to a few hundred dollars as well depending on the type of car you purchase. Personally, I believe I have managed to save a substantial amount of money simply because I did not buy a car the minute I started working. I still take the MRT to work and back every day.

Especially at the initial stage of building up your wealth, saving is very important. So, be aware of the big ticket items. Be it an extravagant wedding, expensive furniture, electronics, a car, sometimes, it’s the money you didn’t spend that will be key.