How to measure your life?

Clayton Christenson, retired professor of Harvard Business School spoke to a group of students about life. He applied his business theories on life and offered some good advices on how to live a good and satisfying life. Prof. Christensen argued that, when we measure our lives, we always mistaken short term tangible indicators such as social hierarchy and wealth as the true measure of a successful life. i.e living in a capitalist society, we are nurtured, so to speak, to measure our lives the same way as how business firms measure profits and losses. In the end, as we are moving to the end of our life, it is how many people in life that we positively impacted and how we stand by our moral principles that are important. As Prof Christensen remarks "God is not an accountant!" He offered this lecture for the young people as an education about life.

Why I worry about retirement

Many close friends who read my blog often label me as a salty man. This has a negative connotation because in Hokkien context, it is “kiam” or scrooge in western terms. However, when I explained my rationale to them, suddenly they realize they either be prepared to work past 55 or be better off being more salty.

In today’s competitive workplace, there are not many people who are willing to work past 55 years old, even if they are ABLE to. Perhaps it is due to the increased pace of life and work pressure, many people just find it too stressful to cope mentally and physically beyond 55 years old.

The problem is exacerbated when the same group has ailing parents, growing kids and mortgages to repay monthly.

Life becomes much more stressful, simply because they need to work or they die (from debts and poverty).

In a nutshell, most people don’t retire at 55 simply because they cannot afford to do so, not because they choose not to.

Let’s work some simple figures here. Most Singaporean men with degrees start work at 25 years old. If they aim to retire at 55 years old, they have 30 years of working life. Assuming a life expectancy of 85 years old, they have another 30 years of income-less life to sustain after retirement.

This effectively means for every day we (men) work, we need to set aside funds for both the day we work and another day we do not work for the next 30 years.

And for the savings we put aside, we need to grow it at least at the prevailing 5.7% inflation rate in order to sustain the same kind of life style when we retire.

CPF only grows 2.5% PA, which is grossly not enough to cover inflation. Even if it is enough, most likely it is depleted to purchase HDBs which easily cost $500,000 at today’s prices.

Let’s assume again a modest lifestyle of $2,000 per month for a single at age 55. This works out to be $2,000 x 30 years = $720,000 cash balances in today’s dollars to sustain a modest life style. The amount will balloon to $900,000 if the single requires $2,500 a month for the next 30 years.

If we factor a conservative 4% inflation, today’s $720,000 will be worth $2.34M (future value) in 30 years time.

The same 4% inflation will make $900,000 today’s dollars worth $2.92M.

For people lost in reading, it simply means that you need $2.92M in 30 years time to buy something worth $900,000 today if inflation is 4%.

In order to enjoy the same modest lifestyle of between $2,000 to $2,500 per month, the individual who retires at 55 needs to set aside between $2.34M-$2.92M for him to call it quits at age 55, 30 years later.

This is not factoring if the individual lives beyond 85 and whether he can invest his retirement funds at the prevailing inflation rates. If he is unable to do so, he probably needs to sell off his house in order to exchange for food.

Most Singaporeans who buy houses today stretch their loans to 35 years. This means that a 30 year old couple will need to service their loans till they reach age 65 before they finally own their homes.

There are no prizes to guess why government is stretching the retirement age.

Some other observations I made as follows:

(1) Most singles out there probably spend more than $2500 a month, even if they just earn this much.

(2) Most people at age 55 now do not have $720,000 to $900,000 to lead a worry free life up to age 85. What makes you think we can achieve the equivalent amount in future value 30 years later?

(3) Medical costs and inflation rates are not at 4% only.

(4) You need to earn a minimum of $5,000 a month, save $2,500 a month and invest this sum at prevailing inflation of at least 5% consistently for the next 30 years in order to retire at 55.

(5) The sums required may increase 1.5x to 2x if you have a partner. If you have kids, you need to pray that they give u some allowance if you have not achieve the required by age 55

(6) You cannot afford to be retrenched or your retirement age stretches even further.

(7) You cannot depend on CPF for retirement if you have bought a house.

In my workplace, I do see many people earning high 4 figure salaries but have not much savings. They take for granted that health, wealth and career path will always be smooth sailing.

Let’s not be pessimistic about life but admit the fact that we can’t afford to retire if we are not prepared for it.

And I am not kiam, just getting prepared. :)

Patriotic to own a Beemer

One of my classmates bought a BMW recently. I know she earns about $10,000 a month and technically speaking, she is buying a car that cost roughly twice her annual salary. There is nothing wrong to enjoy the finer things in life though it means she is also patriotic as well.

Why patriotic?

In Singapore to own a car, you will be paying a huge load of tax to the government. Take my classmate’s BMW, she has paid the following to the government:

Open Market Value (OMV)= $58,000

Thus Additional Registration Fee (ARF) will cost 100% of OMV =$ 58,000

Excise Duty: 20% OMV= $11,600

Registration Fee: $140

Certificate of Entitlement= $45,000 (few months ago)

GST: OMV x 7% (approximate) = $ 4,000

Total tax payable to government coffers: $118,740

The total cost of her car was about $210,000 then, which means the gross profit margin for the car dealer was 43.4%.

In order to own her dream car, she has to contribute in excess of $100,000 to nation building, I have respect for that.

Good thing is that she only took a 1 year loan and has only a couple of months to fully pay up her car. As for me, it will be unlikely that I will ever own a BMW, probably the furthest I would go is a Toyota Camry.

My rationale is simple. Consider a $200,000 lump sum investment to grow on a compounded basis of 10% (1.1^10), this initial sum would grow to $518k after 10 years. The opportunity cost of $318k means that she might have to work another additional 3 years to fund her retirement. Coupled with her 2 years salary to purchase the car at the onset, she potentially could have retired 5 years earlier.

Yup, 10 % PA might not seem realistic. But if one has the investment horizon and purchase some China Equity fund, we should be looking around this level of returns. China will be overtaking America as largest economy in my lifetime, according to most analysts.

Well, to each his/her own. I prefer to retire earlier and spend my days reading, writing and travelling when I am still able. As for owning a nice car, I think I will hitch a ride when I meet up with her in school instead.

Life is tough, retire early. That’s for me.

What is the stock market to you?

My colleague thinks it is just an electronic platform to buy and sell shares.

Some believe it is a gambling table. Perhaps that’s why Genting is often the most traded stocks.

Another might think it is a place to park retirement funds in blue chips for steady return.

Yet another might think it is a place where the big crocodiles eat up the small fishes and avoid it at all costs.

I believe it is the best place to generate excess return amongst all asset classes.

My grandmother doesn’t know the existence of it.

It is subjective to define what a stock market is because different people have different experience and thus perceive it differently. Just like how the blind men describe an elephant:

The First approached the Elephant,

And happening to fall

Against his broad and sturdy side,

At once began to bawl:

“God bless me! but the Elephant

Is very like a wall!”

The Second, feeling of the tusk,

Cried, “Ho! what have we here

So very round and smooth and sharp?

To me ’tis mighty clear

This wonder of an Elephant

Is very like a spear!”

The Third approached the animal,

And happening to take

The squirming trunk within his hands,

Thus boldly up and spake:

“I see,” quoth he, “the Elephant

Is very like a snake!”

The Fourth reached out an eager hand,

And felt about the knee.

“What most this wondrous beast is like

Is mighty plain,” quoth he;

“ ‘Tis clear enough the Elephant

Is very like a tree!”

The Fifth, who chanced to touch the ear,

Said: “E’en the blindest man

Can tell what this resembles most;

Deny the fact who can

This marvel of an Elephant

Is very like a fan!”

The Sixth no sooner had begun

About the beast to grope,

Than, seizing on the swinging tail

That fell within his scope,

“I see,” quoth he, “the Elephant

Is very like a rope!”

And so these men of Indostan

Disputed loud and long,

Each in his own opinion

Exceeding stiff and strong,

Though each was partly in the right,

And all were in the wrong!

Poem by John Godfrey Saxe (1816-1887) based on Jainism and Buddhism. Udana 68-69: Parable of the Blind Men and the Elephant

We are still quite blind to the concept of stock market isn't it?

Investing in Singapore listed ETFs

ETFs is the acronym for exchange traded funds, which are basket of stocks traded over the exchange. Having invested nearly 0.5M in stocks I must agree that ETFs are not exciting products for people looking at supernormal returns. However, holding ETFs means sleeping better at night since I will probably not be losing my entire capital even during market crash.

Take the STI ETF for example. If I lose my entire capital invested, this would literally translate to DBS, UOB, OCBC, SIA, Singtel trading at zero dollars. For that to happen, I think putting money anywhere will mean total loss anyway.

Besides, STI ETF pays regular dividends as well. Historically, the dividends are about 4-6 cents per unit, which translates to miserable yield of 2%. Well, don’t expect Singpost or SPH dividends payout if you are buying STI ETFs. People mainly buy it for capital appreciation.

The sales charge is equal to brokerage charges (0.2%), management fee of about 1% and that’s it. No need to rebalance portfolio as fund manager does that for you, daily.

I have been through the Lehman crisis and it’s terrible to see my stock holdings bleed day after day. Fortunately, I was holding on to pure blue chips and that gave me conviction to hold. Dividends came in timely as I repurchase other even badly battered mid cap stocks that gave me more than 100% returns on hindsight.

Today as I looked back, I might not have fare much better if I invested in STI ETF. However, I definitely would have slept better during the crash in 2008. This is what portfolio theory explains: Invest according to risk tolerance and you will get an optimal portfolio that gives you the highest return based on your risk profile.

I want to blog more about ETFs as this is the next direction I am getting into. No more single large stock purchase, mainly diversified portfolio in different regions.

In Singapore, we can access to the worlds markets just by buying ETFs and paying the minimum brokerage of 0.2%. However for a start, I would like to constrain myself to buy plain vanilla ETFs instead of exotic new generation ETFs.

From SGX website:

Plain vanilla ETFs (as I termed it) are cash based ETFs that adopt either full replication methodology or representing sampling methodology

Full replication methodology
The ETF holds the same stocks in the same proportion as the weights of the constituent stocks in the benchmark index.

Representative sample methodology
The ETF holds a selected number of constituents stocks of the underlying index according to their degree of historical correlation with such index. In other words, the ETF holds a sample of constituent securities that statistically represents the index.

In other words, my invested captial is backed by shares of companies as underlying assets.

List of cash based ETFs

Cash-based ETFs
	SGX Stock Code
ABF Singapore Bond Index ETF	A35
CIMB FTSE ASEAN40 ETF	M62
Daiwa FTSE Shariah Japan 100 ETF	F1F
DBS Singapore STI ETF	G3B
iShares Dow Jones US Technology Sector Index ETF	I21
iShares MSCI Singapore Index ETF	I19
iShares S&P 500 Index ETF	I17
SPDR Dow Jones Industrial Average ETF	D07
SPDR® Gold Shares	O87
SPDRs® S&P 500® ETF	S27
streetTRACKS® Straits Times Index ETF	ES3

As I am only interested in investing in cash based ETFs, options to me are still quite limited. I have invested in STI ETF and will probably look into gold etf (O87, S27), American markets (I17, I21), ASEAN markets (M62).

Asean 40 ETFs invests mainly in Singapore stocks (40%) and the rest in Malaysia (31%), Indonesia (17%) and Thailand (11%). Quite an interesting combination.

As for exotic ETFs which I termed that myself because I don’t quite like the fact that I am not holding on to actual securities but rather options/notes of the underlying assets. If you want more info on this, check this link out: http://www.sgx.com/wps/portal/marketplace/mp-en/products/securities_products/etfs

Though counterparty risk may be low, but I still traditionally believe that investment should be simple and direct. I don’t mean to put new generation ETFs down, but it is just a personal preference to keep my investments simple. Even though that means I am losing out on buying Brazil, Russia, China index funds. Well, I may invest in an emerging market unit trust instead to ride the new commodities and BRIC wave.

Everyone should know everyone's pay!

According to columnist Matthew Lynn, everyone should be open about their pay.

1) Everyone will benefit because we aren't sure if we are fairly paid unless we know what our colleagues and bosses are getting. Our bosses can easily hookwink us because we don't have enough information. Knowing everyone's pay will allow us to seal a better salary package.

2) We tend to feel insecure of our earnings if we do not know how much others are making. We are likely to assume that they earn more than us and feel lousy about it. Truth is, you are probably above average and your self esteem will improve upon knowing your commercial value.

3) It will make us financially responsible. How many times have people bought LV, BMW, Patek Philippe, condominiums on credit without being able to afford it? This is because people don't really know how much you earn and thus some people buy more than they can afford to create an illusion of being highly paid and successful. If everyone knows how much you earn, you don't need to buy anything to create any illusions. Everyone will be humbled and purchase goods that match their income (since it is no secret).

Thus disclosing one's income may be embarrassing in the short run but beneficial for all in the long run. How much do I have and earn? It's all in my blog! Now tell me yours....

Analysis of Macquarie International Infrastructure Fund (MIIF)

Macquarie International Infrastructure Fund Ltd (MIIF) is a mutual fund company that has been formed to own, operate and invest in a diversified group of infrastructure businesses around the world.

It offers investors an opportunity to invest in the Macquarie Bank Group’s first listed infrastructure fund in the Asian region and to participate in the public ownership of infrastructure assets.

MIIF's investments include direct investments in airport infrastructure in Belgium and communications infrastructure and renewable energy assets in the United Kingdom. In addition, it will own interests in one unlisted and four listed infrastructure investment funds that have ownership interests in, amongst other things, airports, communications infrastructure, utility and energy assets, water and gas distribution assets and transport infrastructure assets located across the globe.

MIIF was listed on May 2005 at $1 per share. Its first day IPO price was $1.14. It currently trades at $0.525 (14/03/10). No rights shares were issued from its IPO till date.

Below figure A is a screen shot from MIIF 2H 2009 interim report. It shows the portfolio of MIIF:

Figure B shows the corporate structure and investment of MIIF

Figure B

Regular dividend payouts were given since it was listed on SGX

Dividends are paid semi annually, at 3 cents per annum payout, representing a yield of 5.7%. There is a drop in dividend yield over the years due to a larger conservation of cash to lower its corporate level debt (Source: Business Times Singapore May 2009). Arqiva which is the largest revenue contributor of MIIF contributed 62% lesser investment income on 2H 09 (based on 2H 09 interim report). Also, patronages for its China and Europe assets weaken possibly due to financial crisis across the globe.

It’s gearing ratio from 2H 2009 report stands at 63%, considered normal for an infrastructure fund. (Source: Lecture readings: AMP capital Newsletter)

MIIF has a diversified base of infrastructure, which is profitable and commands a high profit margin (before tax) of about 90% based on 2H 09 revenue and net income report.

At current share price of $0.525, book value of $0.80 and yield of 5.7% (before brokerage charges) MIIF presents a good investment opportunity to investors. The global market is set to recover, ease of borrow to resume, thus MIIF is poised to ride the uptrend.

Moreover, management fees of MIIF is a mere 1.5%, compared to many infrastructure unit trusts charging 2% and above for its management fees. As investors can purchase the MIIF on SGX, there is liquidity and transparent pricing of its funds. The brokerage charge is a mere 0.275%, compared to 2%-5% for other non listed unit trust infrastructure funds. All these will add up to a higher return for investors’ portfolio in the long run.

Analysis of SP Ausnet Part 2

It is observed from the 2h 2009/2010 interim report that Sp Ausnet has the following strong stable characteristics:

· 86% of revenues are regulated

· 100% of regulated revenues locked in until 2011; 62% locked in until 2013

· Prudent gearing & 99% of debt hedged against movements in interest rates

· ‘A’range credit rating enables access to competitive finance

· Distributions & maintenance capexpaid from operating cashflows

Performances over several quarters are also encouraging:

SP Ausnet has delivered steady dividends since listing. Table D below depicts the dividend payouts since listing

Table D

There was a drop in the dividend issued for 2010 (interim dividend) due to a dilution of equity. In June 2009, SP AusNet successfully completed an accelerated non-renounceable entitlement offer (1 for 4 offer@$0.86) raising a total of $408.4 million. Moreover, due to dividend reinvestment plan, more dilution will occur as the number of outstanding shares increase. Investors have a choice of cash or script dividends.

At current price of SGD$1.14, SP Ausnet provides a decent yield of 8.8% (A$1 to SGD$1.25) before taxes. It is also below its NAV of SGD$1.28, hence investors can purchase SP Ausnet below its IPO (offer adjusted) and NAV price.

Investors can also opt for script dividend which will enable him to accumulate more of SP Ausnet at a 2.5% discount.

Analysis of SP Ausnet Part 1

Background of SP Ausnet (Source: http://www.sp-ausnet.com.au and http://www.singaporepower.com.sg/)

SP Ausnet is a subsidiary of Singapore Power (with a 51% controlling stake) and its operations are managed by staff of Singapore Power in Australia. Singapore Power is a leading energy utility company in the Asia Pacific.

With assets of S$26.3 billion at end March 2009, it is one of the largest corporations in Singapore. It owns and operates electricity and gas transmission and distribution businesses.

SP Ausnet owns and operates electricity transmission and distribution networks and gas distribution assets in Victoria, Australia. It delivers a full range of energy related products and services to more than a million industrial and domestic customers. It was listed on SGX at $1.75 per share in Dec 2005. It current trades at $1.14 a share (03/02/10).

Electricity transmission network – carrying electricity from power stations to electricity distributors across all of Victoria via 12,800 high voltage towers and approximately 6,500 kilometres of transmission lines.

Electricity distribution network – carrying electricity from the high voltage transmission grid to over 600,000 customers across eastern Victoria. This network spans approximately 46,000 kilometres across an area of 80,000 square kilometres.

Gas distribution network – transporting gas to approximately 537,000 customers across central and western Victoria. This network spans approximately 9,400 kilometres across an area of 60,000 square kilometres.

In a nutshell, SP Ausnet derives its income from the follow sources (Figure 1):

SP Ausnet has achieved commendable revenue and EBITDA growth over the last 2 quarters. Below is a screen shot (Figure 2) of its latest 1H 2009/2010 financial highlights:

Part 2 will be devoted on the revenue characteristics of SP Ausnet

Is GDP a good measurement of life quality?

Consider the following (excerpted) statement by Robert Kennedy in 1968

“…And if the Gross National Product includes all this, there is much that it does not comprehend. It does not allow for the health of our families, the quality of their education, or the joy of their play. It is indifferent to the decency of our factories and the safety of our streets alike. It does not include the beauty of our poetry, or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials… the Gross National Product measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile….”

In Singapore, the government’s competency is assessed based on its ability to grow GDP year on year, quarter on quarter. Every civil servant’s bonus and salary increment depends largely on it. Does high GDP reflects high quality of living?

Consider that GDP is calculated using the following formula: Investment + Consumption + Government Expenditure + Net Exports

GDP measures the total income and total expenditure (since total income will equals total expenditure). It is also the total market value of all final goods and services provided within a country in a given period of time.

Intuitively if we compare countries with high GDP per capita over lower ones, we can see and feel the difference. If you have been to Japan, you will definitely find the quality of life there to be higher than Singapore. The reverse is true for Malaysia or China.

So how does GDP which is quantifiable able to measure quality of life which is not easily quantified?

GDP does not measure the health of Singaporeans. However, because of a larger GDP and high savings rate, Singaporeans are able to afford better quality healthcare. The budget for education has been growing (2^nd largest after defence), thanks to high GDP.

This results in bright students becoming top surgeons, enhancing our pole position as medical hub in Asia. With good education infrastructure in place, quality teachers are employed to produce bright students in local institutions. This in turn helps to increase the production output of our labour, thus increasing our GDP.

High GDP countries allow citizens to access to quality education systems, thus many would be able to admire the beauty of poetry, humanities and arts when given the opportunities and education.

Marriages in high GDP countries though tend to be more fragile as there are more interaction and distractions among people. In fact, high GDP countries tend to have lower birth rate (though not always). This by economics theory might suggest that children are in fact inferior goods! Do not forget that as income rises, consumers switch from inferior goods to normal goods. In our local context, Singaporeans switch from having babies to having pets. Hence humorously, children are inferior goods and pets are normal goods (at least for some people!). I do believe that some pets cost much more to keep than children though!

That said, GDP does not also take into account our wisdom, compassion and our devotion to our country. However, with our basic needs being fulfilled (due to high GDP), we will be able to move up the hierarchy of human needs and foster the above attributes.

There are many arguments that GDP is NOT an accurate or good tool of measurement of well being. I will leave the points of discussion for another day.