My questions on Supplementary Retirement Scheme (SRS)

time to spend money? donate

If I have not opened an SRS account, should I?

My simple is YES (and quickly). I opened the account on the basis that I wish to lock in on the current mandatory retirement age before I can make my first withdrawal. There are signals from the government that the official retirement age could be raised. While we won't see the kind of riots and unrests in France replicated here in Singapore, personally we need to take that in consideration.

The much touted immediate benefits of tax savings from deposits into SRS would depend on your tax bracket and availability of taxable income / free cash.

The usefulness of an SRS account would also depend on the age group. During the early part of our working life, we are living in a stage of intense spendings with little of  savings ie. repaying study loans, travelling, dating, getting married, babies, home renovation, parents etc etc Thus should we need to call upon some monies for emergency reasons, your savings in SRS is an option but an expensive one (penalty of 5% and immediate taxability of amount withdrawn).

Thus you would have noticed that my recommendation to open the account is different from recommending regular amount to be deposited.

I would think twice before using the SRS account to house my investments. Please check on the service charges that the bank may levy. Given my experience with the CDP account ie. $10.70 per transaction (I think) regardless of the nature of transaction (I think), it is very expensive indeed when I am just receiving dividend.

Lorna Tan cited the example of yearly contribution of $11,475 to an SRS account for 20 years, this would translate to $2960 monthly withdrawal for 10 years ASSUMING you are able to manage your nest age to generate a return of 4% per year. Governments of the world, fund managers and insurance companies are all trying very hard to do the same, if not better.

Buyers beware, always.

Reference - Lorna Tan, "Saving a little today will go a long way", Sunday Times, Nov14, 2010.

Warren Buffet - Giving away his wealth

My last posting on Warren Buffet was on how he made his money. In this posting, I wish to share with you his well-thought way of giving away his wealth.

His Philosophy on Wealth and Distribution
Buffett has donated much of his wealth to the Gates Foundation ie. 85% of Berkshire stock, worth about $40 billion back in June 2006.

Why donates away most of his wealth?
As he states: "The idea of passing wealth from generation to generation so that hundreds of your descendants can command the resources of other people simply because they came from the right womb flies in the face of a meritocratic society."

Buffett believes that children should not inherit money just because of the lottery of their birth. He says children should be left "enough money so that they feel they could do anything, but not so much that they could do nothing."

How do he and the Gates want the Foundation to manage the money donated?
Objectives

• Together with Bill and Melinda Gates, the wealth will be used to try and fulfill shared goals of eradicating major diseases like malaria and HIV/AIDS in developing countries, and improving high school education standards in the U.S.
• The monies must all be spent over 20 years on health and education.

It is one of the few philanthropic donations where the money will run out relatively quickly, contrary to the self-interest of foundation bureaucracies to survive as long as they can. He does not want the managers of the Foundation to become big fat cats ie. to preserve their cushy jobs and thus holding back on putting the money to good use.

Buffett has not set up a foundation nor paid for buildings at hospitals or museums to try to perpetuate his name.

"Buffett's ideal was a world in which winners were free to strive, but narrowed the gap by helping the losers," writes Alice Schroeder.

Source - Alice Schroeder, Buffett: Rock Star of American Capitalism, Knowledge at Wharton

Who is Warren Buffet?

He is the chief icon of Bershire Hathaway. About 30 years ago, Buffett spent $15.4 million to buy 46% of Berkshire (a textile entity) including 3% for his wife Susan, paying an average $32.45 per share. With Berkshire shares recently traded around $87,200, Buffett has grown his wealth nearly 3,000-fold in some 30 years.

How did he do it?
Technically, he learned this massive capital accumulation discipline from Benjamin Graham, investment GURU of Columbia University in 1951.

Buffett's approach to investment involves using seventh grade math and common sense to analyze a company's underlying economics ie.

1. “buying a business not a stock”,
2. “ignoring the fluctuations of the stock market”; and,
3. most importantly, Graham’s main principle “maintaining a margin of safety.”

In frothy bull markets, Buffett is fearful while others are greedy, taking profits on some holdings and piling up the cash generated by businesses. Example - Berkshire sold its stake in PetroChina for $4 billion in 2007 amid rapidly rising oil prices and the craze for investing in emerging markets, having bought it in 2002 and 2003 for $488 million.

Then, during severe stock market or industry declines, he is greedy when others are fearful, buying good businesses at attractive prices. Example - Berkshire secured favourable terms in deals with Goldman Sachs and General Electric during last year's stock market panic.

Buffett's three rules of portfolio management are:-
1. Don't lose money;
2. Don't forget rule one and;
3. Don't go into debt.

Buffet’s personal traits required do the job:-

• His focus,
• an intellect which is a perpetual learning machine,
• rationality,
• an ambition from childhood to become rich,
• family is secondary,
• he attracts talented people to work, partner and deal with him due to his honesty, fairness, letting them do their job without interference and crediting them for success and;
• he freely acknowledges making several errors.

Source - Alice Schroeder, Buffett: Rock Star of American Capitalism, Knowledge at Wharton

Quoted out of context twice?

my thursday's dinner

On Tuesday this week, MayBank Singapore slashed its three-year fixed home loan rates from 3.58% for all three years to 1.68% for the first year, 2.68% for the second and 3.38% for the third year. The new first-year interest rate is about 40% lower than similar packages being offered in the market.

Guess what was the headline on Friday's BT...

"Maybank's home loan promotion creates a buzz
Other banks won't get into price war, says OCBC's chief executive."

A couple of questions come to my mind when I saw that.
Has the editing process misquoted Mr Conner ie. quoted out of context?
For otherwise, can he speak on behalf of other banks? I am sure he was not trying to suggest that there is some sort of collective agreement with other banks not to cut rates.

Another incident of Mr Conner being quoted out of context was highlighted on Saturday's BT.

The letter by OCBC PR entitled "OCBC chief was speaking in jest" attempts to clarify Mr Conner's response when asked by a journalist at OCBC Bank's 2007 final results briefing what Mr Conner thought of DBS's incoming chief executive Richard Stanley.

Mr Conner responded in jest and said, 'You mean since I trained him?', drawing laughter from the audience. The quote in the article had implied that Mr Conner said 'I trained him' in a definitive manner.

Moral of the story - Beware of the danger of being quoted out of context when one speaks as a public figure.

The big picture impacts on Singapore companies

looking for light in gloomy days

Ms Teh Hooi Ling, in this weekend's BT, attempted to answer 2 huge questions as follows:-

• What kind of impact do macroeconomic factors have on companies?


• What are the companies which will suffer the most in an unexpected downturn?

This is the list of characteristics she has highlighted.

• Companies with high levels of debt ie. financial leverage.


• Companies with high fixed costs in relation to total costs in running the business ie. operating leverage.


• Companies with loooonng cash conversion cycle and consequence of credit crunch by their suppliers.


• For external characteristics, inflation and foreign exchange movements would impact negatively.

She atttempted to back up her Econs 101 presentation with data analysis of winners and losers during market upheavals in 1987, 1997 and 2007.

But as the circumstances of excesses were different for different upheavals, the market responses were thus different. She had observed the public listed companies. How about private business entities? Thus inconclusive.

Panacea?
She ended her article with strategies that were generally adopted and proven effective by 750 Finnish companies during the recession in 1989-93.
In the medium term, companies should:-

• continue to invest in new product development


• continue your effort to acquire new customers.

Edgar's closing remarks
Ms Teh attempted to address 2 huge questions very very briefly in an article. It may serve as a quick read and be adopted for many out there.

Her study of Singapore companies' experience in the last 3 upheavals could be developed further and acts as standalone materials. It does not seem to fit in flow of arguments that she has presented in the preceding portion.

In the long run, similar for companies and for individual like you and I, we should generally maintain a healthy lifestyle for higher probability of longetivity.

No guarantee in life.

Recently in an investment briefing by a company going for an IPO, we were told in an “unofficial” way that the buying company can’t really rely on profit guarantees issued by ex-shareholders of the company that was acquired, especially if the target companies were from third world countries.

Take for example.
When Company A (who is going for IPO) buys Company B in China for a price tag of $50 million (with questionable assets with minimal book value) that come with a profit guarantee of $10 million a year for two years (when the real price could be $30 million).

Investors to an IPO also cannot be sure whether profit guarantees will result in actual profits or are merely used to make a purchase look good by playing the “PE game” and allow the buyer to have a decent-looking income statement for a few years while having purchased poorly performing assets.

What is the “PE game”? If Company A were to go for IPO at a PE of 8, the $10mio profit guarantee would translate to an additional $80mio in its valuation.

What could Company A do if the acquired entity did not achieve the guaranteed profit? In BT dated Nov 13, 2007, R Sivanithy asked what remedies investors have when guarantees fail to materialise.

They could try going after the sellers after 2 years’ of operating the business and possibly spend another few more years of being entangled in Courts with legal procedures. Assuming the buyers were to be finally successful in the Courts (after incurring heavy legal fees), the sellers may have disappeared completely or the sellers may have conveniently lost the ability to pay for the profit guarantee.

So we, the poor shareholders, end up with an emptied pocket.

Quarterly Financial Reporting - Pros and Cons

Dr Lee Kin Wai, associate professor in Nanyang Business School, presented his findings in an article in Singapore Accountant Jan 2007. I have summarised his conclusions as follows.

Advantages

• Stock prices do react to quarterly earnings announcement.


• He then investigated and concluded on the effect of voluntary disclosure in quarterly financial reporting. He defined "voluntary disclosure" as disclosure released by management over and above the mandatory requirement in the quarterly reporting.


• The more information presented in its voluntary disclosures, the lower its cost of equity capital and debt capital.

Disadvantages

• Investors, market and consequently the management of these companies are geared towards short term focus. For those with some experience in doing business, we are aware of the great difficulties in producing results in 3-month quarterly windows but yet investors and market will measure their performance as such.


• Management may be encouraged to "manage" ie. spread their earnings over the various quarters to generate "quarter-to-quarter growth" and "beat analysts' estimates".


• Dr Lee observed incremental costs to comply in terms of human hours to prepare and approve the accounts.


• The stronger a company's internal controls, the shorter the time to close the accounts. Case for corporate governance to be strengthened.

Meeting management a waste of time?

This is precisely the article's title by Ms TEH HOOI LING of Business Times dated 11 Nov 2006.

For the uninitiated, she referring to equity analysts or fund managers meeting with management of companies they are covering. Ms Teh reviewed Dresdner Kleinwort Wasserstein analyst James Montier's 100-page report on the seven sins of fund management last year.

The third sin is - Why waste time listening to company management?

Mr Montier cited it is a waste of time due to some inherent flaws in human.

• We tend to follow the instruction of the authority. He quoted an interesting study where more than 90% of students in various countries will do something to hurt themselves when told to do so by their teachers. This is despite the fact that action will hurt them. Translating that to investment environment, the more "god-like" the business personality or management is, the easier it is to influence the weak or inexperience minds of these analysts.

• Can you tell the difference when someone try to pull a fast one on you? Again the studies showed the general population would have about 50-50 chance of calling it right.
  

Meanwhile, Mr Montier's other six sins of fund management are:

• Our insistence on relying on forecasts when it has been proved time and again that we simply cannot forecast. Ed says - While I may agree to forecasts up to 2 years, anything longer would have a good chance of being rated "Fiction".
  

• The illusion that more information is better information. Ed says - My students may measure how good a lecturer is by the thickness of notes given to them.
  

• Thinking that you can outsmart everyone. Ed says - Who can blame us for that? We must be optimistic right?
  

• Being short-term focused. Ed says - Boh pian when short term is 6 months and long term is 1 year in this era where all things are disposable (including relationship).
  

• Believing everything you read. Ed says - This is definitely a no-no to me.
  

• Believing that group decision-making is better. Ed says - Someone ever use this as "common sense management" ie. when you are not sure, ask a few people and you will know what to do.
  

The list now confirms my gut feel that the stock analysts are no better than me.

Ha ha!!! Just kidding.