A Very Important Term

It took me a few weeks to really understand what this word meant. I knew the definition of it in terms of accounting but I never knew this word was that powerful until recently. Robert Kiyosaki no doubt has done me one of the biggest favours I could ever ask for. The fact that I am lucky to be able to connect with his books also gave me the word I am about to talk about today. He mentioned it is the biggest distinction between the rich and poor. Everyone of you know this word but it has brought greater meaning to me in the last few weeks. The word is LEVERAGE. Originating from the word lever, which allows you to gain an 'advantage'. Scientifically we use the lever concept to help us do something by using less resources. In accounting/finance terms, leverage is associated with borrowings which allows us to pay for something using less of our own money. And in other context, leverage is something you gain advantage from and gives bargaining power. Robert gave the simplest definition to understand, "doing more with less".

First of all, the concept of leverage I will discuss about today is not about persuading you to borrow money or taking a margin loan. And I promise you I am not about to introduce you some leveraged product to invest in. What I am focusing on is more of why you need leverage and the importance of it. Let me give you the simplest examples to understand the concept of leverage I am trying to talk about. Two people work eight hours a day, but one earns more than the other. Why? One of them has more leverage. Another example, two students study for 20 hours prior to the exam. One does better than the other. Why? Leverage. In investing, two people buy the same shares at the same time at the same price, one makes a higher profit/loss. Why? Leverage. I hope you haven't got sick of the word yet. In short, people can gain leverage in the easiest known ways, doing more and working harder than the others. All of us have 24 hours in a day, the people who are at the top spend those 24 hours better than anyone else. Now you know why your boss works less hours than you but gets maybe a few times your pay, your boss has leverage!!

I hope you have gained a different dimension to word by now. So what does this mean for you? What can you do? As always I am just trying to open up people's minds just a bit more so they can benefit from it. I would be happy if anyone could actually understand what I've written. It make complete sense to me but it may not to the next person.

This is partially an investing topic, but before I proceed, I would like give you the answer to this question. What is a person's biggest leverage ? Well, there's no doubt about this answer, it is your mind/brain. Your brain can do wonders if you really explore and it is truly your biggest leverage. I am not talking about being smart or stupid, it is the way you position yourself and your nature of approach. I've always believed that with the right attitude and approach, there's really so much a person can do. I am not going to discuss what type of attitudes are right or wrong, but just keep in mind every time when you're doing something, make sure you give yourself the opportunity to make it. Your mind is practically the thing that makes EVERYTHING work, it has to start from there. Any hint of success comes from that very first thought in the mind.

Gaining Leverage
There are many ways to gain leverage, it may come from obtaining a new skill, new knowledge or anything that can enhance your return on something. For example,if you are a builder, if you are able to build both commercial and residential buildings, then you got leverage as most other builders may only do one. In terms of knowledge, some people take two degrees or further on postgrad studies for the same reason. Gaining leverage in terms of being more employable.Financially, there are hundreds of ways to make more money. You can start an online business, do a part-time job, work on weekends or you can make some investments in various instruments. Referring to my to my last post, I mentioned about generating other forms of income. Considering the working environment and the commitments people have today, it is really hard to do a second job or work on a part-time business. For example in a developing country like in Malaysia, working till late night and on weekends are common sights. At the end of the month, if you receive a good pay cheque, it compensates, but what if that pay cheque is insufficient and you simply do not have time anything else?

One of the important characteristics about investing is it gives you leverage. You AND your money are working at the same time! And that is doing more with less. The part whereby I feel investing is very attractive is because it doesn't take you much time and it is extremely convenient. With the internet and a phone, it is more than enough to do some investments.

Stages of Investing

At the beginning, we know very little or almost nothing about making investments. One of the best source of information is the business section of the newspapers. That will tell you a lot about economic news and corporate happenings. Even if you find it hard to understand at least read some of it. And when you come across similar news or terms, there's when you start to take more notice and understand. The internet has also ample of financial news available.

At the same time, I would recommend some personal finance or investing books which will tell two very important things. One will tell you why to invest and how to go about it. The investing books will tell you a lot about history and trends. I believe history is one of the most important part of an investor's guide. This is simply because number one, history tends to repeat itself. And number two, making sure you don't make the exact same mistakes that have been made before. For people who don't take note on history, they will make unnecessary errors and would waste some time making corrections. If you take note of history right from after the Great Depression at least, you would have seen a lot of trends through numerous economic and market cycles. And that will probably save you from making the most common errors. It's sort of a fast track.

The starting I would say is the most tedious part, learning everything from zero and having the difficulty of trying to understand something very different. And as I said many times, once you cross that starting part, your opportunities are endless. You could choose to "specialise" in certain classes of investments or you could try and do a few at the same time. Once you built your foundations, this is the time where you can see the benefits of investing in terms of your time.

The maintenance stage, is the time whereby you spend about 15 minutes catching up on news and movements everyday. That's just about how much time you need a day. And maybe once a month, spending about a few hours evaluating your portfolio and probably learning from a new book.

Will I Lose Money?
In investing, losing money is similar to making mistakes. To be brutally honest, making mistakes is the best education you will ever receive. Yes, you may read as much as you can about things to avoid doing, but the truth is you can never avoid making mistakes . But the biggest consolation is that it will be the one step along the way to succeeding. Donald Trump lost a lot of his fortune before recovering and making it even bigger. Robert Kiyosaki failed a FEW times before actually succeeding in his business. And even the great Warren Buffett made some silly errors along the way like selling too early or buying on spiraling prices (ConocoPhillips). Making mistakes and building from it is an evident success story for all.

Something You Should Know
I learnt this recently I do agree with the writer. There's a misconception in people when their share prices fall they haven't incurred a loss until they SELL it. For people who believe this statement I advise you remove this misconception immediately. Here's why.

You have $1000 and you bought 1000 shares for $1. If the share price falls to $0.90, the value of your investment is $900. Have you made a loss? YES! The fact is whether you keep the stock or sell it for cash, your net worth is $900. If the share prices returns to $1 tomorrow, it's another case because that has hasn't happened. But what has already happened when your share price fell is that you've already made a loss. Please don't live in denial. So next time DO NOT be FOOLED about not making a loss by not selling.

So what does it mean? My biggest gift for you today. Only hold stocks that you think will give you the best return from this point of time. Let's say the price of your share fell, ONLY IF you feel when it recovers it will outperform the others should you KEEP it. If you feel you've made mistake, sell it and buy something better that could give you a better return from this point of time. Remember!! The moment your share price fell WAS the time you made a loss NOT the time you sold it.

Leverage is the ability to do more with less

~deyao~

Will The Bull Market Continue in 2010?

This is probably one of the most asked questions in the financial world today. Traders and investors are all so eager to find out whether the market will continue to sustain the incredible bull market since March 2009. Will it happen? I have a prediction. But you have a prediction, analyst in Wall Street have their predictions, big timers like George Soros, Jim Rogers all have their opinions. All these predictions combined can range from one side to the other, meaning no one is right for sure. But does it matter? I'll get to it a little later.

In this post, I am not fully writing about forecasting the financial markets or the economy in 2010. But as always, whenever I come up with something valuable to share I'll do it. I'm not sure how much more of these "educational" posts I can continue writing but with the world moving at a faster pace and in different directions more frequently than before, I'm pretty sure there's no end to learning. It's taken a few months of planning and compiling this topic in my head, trying to figure out how to summarise things so that it won't take much time and understanding to read. And for the ending, a short paragraph on the outlook for this year,

About 20 years ago, with job security, it was enough to provide people with comfortable lives. With a job, everything is taken care of. Flash forward to today, job security no longer gives you that comfort margin,it has shrunk significantly. In many cases your job/work is just enough for you to keep a minimum portion for savings and the rest for paying expenses, leaving you with almost nothing. Reason for this, wages has not kept up with inflation and the purchasing power of money has continued to tumble. In growing countries with negative real interest rates, placing money in money markets will cause people to continually lose out.Who are the ones least affected? The upper class. Here's why. Economics 101 taught us income distribution is determined by ownership of resources. The more resources you own, the richer you are. And because many people in the middle class lack any ownership in real estate, businesses or investments, they are unable to outpace inflation. The people in the upper class who own the majority of the resources are able to consistently keep ahead of inflation and in best scenarios PROFIT from it.

RELYING ON WAGES IS DANGEROUS
First of all, like I mentioned previously, a lot of what I have written is through reading and personal opinions. I don't expect anyone to believe me entirely.
I've just mentioned the huge enemy "inflation" that erodes the value of money. Now looking at the situation today, in terms of wages how many percent of the employees make the big bucks?I think I could relate to one of Rich Dad's lesson's ,the 90/10 rule. It says 90% of the money is owned by 10% of the people.I don't have the official figures, but I think it could be a very similar proportion if a number is put on the distribution of wages among the entire working class. What does this mean? In simple terms, all other factors constant, if you don't earn a high wage, you are financially at risk.

Now who earns to big bucks? Top management of course, directors, CEOs, outstanding individuals. Look at football for example, we are so envious of footballer's salaries as many of them earn at least $50k a week! We saw the best part of things on the front pages and we forgot to turn to the back pages. There are 20 clubs in the Premier League, let's say 15 clubs are able to pay those staggering wages and 5 clubs from the other 6 leagues in Europe can do the same. That makes a total of 45 clubs. If there are 20 players in a team, that makes 900 players in the world that could make those sort of money. How many people play football to make a living? If the 90/10 rule is true , there are 90000 people playing football for a job. But wait, all the people in South America, Africa and Asia only summing up to 90000 people? It is an underestimation. I think I won't be far off saying top 5% of the footballers make 90% of the money. This concept also applies in the corporate world, only the top few percent make the big bucks. Lesson of the day, it is a rat-race out there and you shouldn't put ALL your hope on making the big bucks.If you're in, congratulations, if you're out,it's time to do something about it.

THE LINE BETWEEN BEING POSITIVE AND REALISTIC
In life, you always have a draw a line at one point saying, that's the most I can do or that's the limit. This should not be confused as being negative. Continuing on the issue of making the big bucks. In reality, many of us work the hardest and do the best we can. We don't limit our success and should always try to do one better than before. We must always try to keep a positive attitude and that will get us very far. But even being positive in the real world also requires limits. There are things we must accept we can't do or have very small chance or succeeding. Again don't relate this to being negative or quitting because this is being realistic. We all have to accept the fact that not everyone is will get the big bucks in the future. I can always aim to become CEO one day but I have to accept the possibility it might not happen. That's being realistic. You can plan to study in Harvard from the age of 8 and there's a high chance it might not happen. In relation to wages, there's a possibility we might not get right up the pyramid or earn $200,000 a year.And if we lose our jobs, what happens? How do we pay the mortgage, bills and bring food to the table.Is there enough savings to even last you a few months?The idea I'm trying to bring here is all of us need a supplementary plan to help us generate other forms of income. The idea is basically is lowering the risk of depending on your monthly paycheck. Most of Robert Kiyosaki's books will help you on this.

CASH FLOW AND CAPITAL
If you have alternate forms of income, cash flow will be definitely be better and raising capital will be easier. I asked myself, if I needed money to buy a real estate, is there another way do go about other than a bank. In a business there are two most common ways of raising capital, debt or equity. If I as an individual is trying to avoid a lot of debt and is unable to issue equity, what other choices do I have? Assuming we are on our own, I simply haven't found a feasible way for financing other than debt. When you are in need of money to fund a lucrative investment you'll realise if your bank account does not have that amount, you got no way. Unless its a piece of real estate, the bank may be unwilling to lend you any money. This means you're on your own and you got to find a way of making more money. And I suggest is the need to build a base of assets producing cash flows as soon as possible. The positive cash flow will give you the more opportunity and freedom depending on the size of your base. The bigger picture, if your base grows to a certain level of size and is able to consistently generate stable cash flows, financial freedom is awaiting you. Definition of financial freedom? The ability of not requiring to work another day in your life. Well to reach financial freedom requires a lot of additional work and effort. And one more important factor, it requires time. How much of it depends on your performance. Some people take 15 , 20 years and even more. And in many cases, some take till retirement age. And this brings me back again to my brief mention of time value of money. The longer time the time you have, the higher the time value of money. Every day is time value, banks pay you interest on your deposits right on the exact date, if they were to accidently pay everyone 1 day earlier, they would have lost a lot of money. If you are 20 years old and haven't started investing, its not bad news, you've got a lot time ahead of you. But the fact is, you started at the age of 15, you money would have gained an additional 5 years of time value. Warren Buffett started at the age of 12 and he said he wished he started at 7.It might not seem a lot now, but when you reach a age maybe 10 years before retirement, that 5 years would be priceless.

Well, suddenly I've thought of something else to write on my next post. Robert uses this word to distinguish rich and the rest. It took me sometime to really understand what he meant. So I guess I'll leave it to the next post. Now for an outlook for this year.

Bull Market or Bear Market?
I've learned in the past that both market conditions are out of my control and so I've got to work with it. Knowing this factor, it means the rest is down to myself. For this year, if the bulls were to match the all time highs of 2007, it would require the same degree of push like in 2009. But my opinion, choppy recovery with the danger of inflation would test central banks in the world to raise interest rates. I won't doubt the Dow will push through 11,000 or even 12,000 by the end of the year. In between, I'm seeing a few periods of consolidation but an overall trend of an increase. Commodities and energy prices will have a positive year meaning inflation has caught up again. Danger of a bear market? A huge downtrend below 9000 is not likely and I believe the bulls have not done all the dashing yet. Authors Stephen Leeb and Donna Leeb's oil indicator suggest that if oil prices does not break $100/barrel, there is little danger of a bear market. In Australia, interest rates will continue to rise approximately near 5% which is considered neutral stance. A weakening Dollar will lend support to higher commodity prices and the All Ords will no doubt break 5500. In Malaysia, the gradual lifting of sugar and petrol subsidies will bring inflation to higher levels. The removal of subsidies which I believe will happen before 2014 will be excellent in the long run. I'm not sure how the govt. will decide how to award subsidies in the coming months but it is a move in the right direction. In the coming years GST will also contribute to additional cost to the people. But liberalisation also does a country well, AFTA (Asean Free Trade Area) will bring the cost of many goods down, softening the blow of inflation. We would even see cheaper cars in the coming years and this would be a wake up call to the inefficient portion of the country. The move to promote efficiency and liberalisation will definitely be a good move in the long run. So the final word, an upward trend but cautious growth.

~deyao~