[My Story]: Confessions of a 20 years old thousandaire…

Hi everyone, this is my first post since I got back from being deployed overseas for a month in Australia. Happy to finally be able to have some time on hand to do things I like. Recently, I read this article on Medium called “Confessions of a 23-Year-old thousandaire”. In the article, he wrote about his financial journey as a 20 odd years old individual in the US. I was inspired by it and thought I should do a Singaporean edition based off my own experiences. I hope teenagers or even those in their 20s will glean something off my CONFESSIONS. Haha so here goes…


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Chapter 1: Who says you got no money?

There is always this common misconception that teenagers like us have no money. True enough we don’t draw a constant salary unlike our parents. But we do draw a steady stream of pocket money from them. One thing I regretted when I was drawing pocket money from my parents was to draw it daily instead of weekly or monthly.

Drawing your money weekly or monthly is a better arrangement as it forces you to learn BUDGETING. You will need to learn how to allocate your money wisely throughout the week or month in order to have sufficient for each day.

Budgeting is a critical first step in learning how to plan your money wisely.  It was only until NS when I stop taking pocket money from my parents and start living off my own NS salary that I realise the importance of budgeting. On some days, you can very well spend a few times more than you are supposed to, so remember to always BUDGET!

Like they say:

“Failing to plan is planning to fail.”

 


Chapter 2: Save yourself by saving…

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To tell you honestly, I didn’t even realise the importance of saving until I was 18.  I regret not saving up left overs of my pocket money into my savings account. Usually my leftover cash will stay in my wallet and mysteriously “disappear”.  Haha it probably went into my stomach with all the snacks or occasional Starbucks that I bought.

The lesson here is by not saving and leaving cash in the wallet, it exposes us to several dangers lurking out there. By dangers I mean temptations to buy things that you probably won’t need.

With the advent of cashless payment, it becomes even more important to be discipline in your budgeting and saving habits. You will not feel the pain when you just click a few buttons to purchase whatever things you see online. The pain only comes when you check your bank account at the end of the month.

Don’t belittle the small amount you save each day, be it from your pocket money or your monthly salary. It is these small amounts that will pave your way to financial freedom.

 

“The habit of saving is itself an education; it fosters every virtue, teaches self denial, cultivates the sense of order, trains to forethought, and so broaden the mind.” — T.T Munger


Chapter 3: Make your money work for you…

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Sadly, in our times, it is no longer enough to just save for retirement. Inflation is continuously eroding the value of our savings 10, 20 years down the road. Inflation is the reason why our $2.50 chicken rice is now $3.50. Here’s a chart showing the price of property for the past few decades.

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The one clear trend here is UP. Of course, wages have also been growing but the paramount question will be if wage growth can always outpace the rate of inflation. And even so, all those money you save up in the bank are only going to depreciate in value as inflation rate outstrips the interest rate gained on your savings.

Hence, we need to have some ways to make our money work for us. And that is through investing. Whenever I tell others about investing, many tend to look at me with fearful eyes. Even my mum advised me against investing, because to her its akin to gambling. What many don’t know is that investing can be a safe and fuss free way to grow your money.

Average inflation rate is about 2-4% per annum. Banks currently give you about 0.05% on normal savings account. To win the game of investing, all you need to do is to ensure your money grow at a higher rate than inflation. Sounds tough? It’s actually quite easy.

For those who don’t intend to actively manage their investments which usually yield higher returns albeit at a higher risks, index ETFs are safe and fuss free way to win the game of investing.

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The above are 2 of the indices that track a group of stocks. S&P 500 tracks the best 500 US stocks and FTSE tracks the best UK stocks. As you can see as long as you are able to hold it for a long time, the trend is only UP. S&P 500 annualised return since its inception is about 10% per annum which is much higher than the inflation rate. The FTSE return about 5% per annum for the past 20 years also higher than inflation rate. Hence putting your money in the best stocks in the world through index ETFs are definitely an easy way to make your money work for you.

There are also many other methods to invest for beginners which I shared in this article 

“An investment in knowledge pays the most interest.” — Benjamin Franklin


Chapter 4: Compounding is the key to financial freedom…

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The key to a fruitful retirement in the future is through compounding. Imagine someone were to give you 10% every year on the $1000 you put with them.

Screen Shot 2017-10-05 at 9.20.21 AM.png You will realise that you do not just get $100 every year. The amount earned increases exponentially with time!

Now imagine 2 individuals, Adam and Smith. Adam starts investing with his $5000 savings at the age of 20 by buying into the index ETF that return 10% per annum. On the other hand Smith started slightly later at 30 buying into the same investment product as Adam.

Assuming they both aim to retire by 65, how much retirement sum would they have?

For Adam:

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Wow a sum of $364,452.

As for Smith:

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The difference is HUGEEEE. A 10 year difference means your results are reduced to about HALFFFF!!

So who says you can’t start investing with a few thousand dollars? The magic of compounding usually sets in the longer you hold onto your position.

The lesson here is start picking up investing EARLY and have PATIENCE to let your money do the work for you.

“Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.” — Albert Einstein 


 

Chapter 5: Enjoy the process…

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The most important thing of it all is to enjoy the process. There’s no point to save up such a huge amount of money but lead a miserable life of cooping yourself at home in order to save up a few penny. At the end of the day, you can’t lug your bag of cash with you to the grave. I ever once tried to save 90% of my NS salary and only spend 10% of it. It was tough and I found that I wasn’t happy. That is not to say that you abandon saving altogether, but rather plan your budget around your lifestyle and find a healthy amount to save and invest.  This is so that you can both enjoy the PRESENT and the FUTURE!

“Enjoy the process. You will get there, you might as well enjoy the journey!” 


 

In conclusion,

the whole idea of me setting up this blog is to educate young people to take charge of their financial journey early. You don’t need a lot to start From Ground Zero, I started out with $300 in the stock market. You just need to be patient and disciplined in budgeting, saving, investing and the rest will take care of itself. Hopefully this will encourage more young people to take charge of their finances! 🙂

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[Building Blocks]: Understanding your FIRST step to financial freedom!

Hi all!! It’s been a while since I did a [Building Blocks] post. Haha if you were an avid reader of my blog, you will realise that I have been posting quite a bit in [Eye Candy], the segment where I do some analysis on stocks I am researching. Yup I have been rather busy digging through the stock market for gems that I could put my money into. As you can see from the title of the blog post, today I will be trying to help you understand your FIRST step to financial freedom. This FIRST step is essential as it lays a foundation for you to work your money. In other words, in order to INVEST your money you need to embark on this FIRST step.

So what is this FIRST step that is soooo important??

The answer is: SAVING!!

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All of you might go “Duh” but how many of us are actually able to really save up your salary or money? We often have the goal to save up this amount but most of the time we give in to certain pleasures and decide to spend almost all our salary away. I know this because I myself is guilty as charged haha!

When I entered the army, its the first time whereby I was drawing a constant stream of income (unlike those adhoc jobs I did last time). With sudden inflow of money every month, I did not have a concrete saving plan and hence my expenses were very high at the start. In some months, I may be broke without the month coming to an end. I also know of friends who are like that too! I only started taking charge of my savings when I started investing as I  realise how meagre my savings are.

So I started reading up and created a system to force me to save, but before that let’s look at

1) The importance of saving

Saving is an important first step to your financial freedom because without savings, you will not be able to use that money to work for you. Imagine yourself spending every dime of your monthly salary, how will you be able to put any money into investing in stocks, property and so on. So if we ourselves do not understand the importance of saving it’s hard for us to grasp the power of investing and compounding!

2) Saving can be automatic!

Yes it can be. Nowadays with the advent of technology, most of us definitely have an ibanking account with any of the banks in Singapore. And it’s super easy to automate the entire process of saving. Let me show you how.

First, you will first need to set up 2 bank accounts

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Yes, create 2 separate bank accounts, one for purely savings, the other for expenses only.

Secondly, credit your salary into your savings account. After doing that, calculate a rough percentage of your monthly expenses. For me, I save about 75% of my salary and spend the other 25%.

Finally, set up an automatic transfer between the two accounts. Transfer the percentage for your expenses from your savings account to your expenses account.

Automate saving

Yes the end result should look something like the flow chart above.

3) Don’t touch your nest egg for fun!

Yes! You read it right! Don’t touch your nest egg (savings) for fun (entertainment). Put it another way, don’t spend your savings!! For me, I practise that by not bringing out the ATM card that belongs to my savings account. That way I will not be tempted to dip my hands into my savings.

Of course with that said, what if its an emergency and you need the money? If it’s an emergency, then I guess there will be no choice but to tap on your savings. However, if possible try to reduce your expenses in the subsequent months to repay the amount you took from your savings.

One point to note is that you should always ensure you plan a right amount to be set for your expenses. I tried to save 90% of my salary before, but it’s just too tight on me and I tend to keep tapping onto my savings because I ran out of money. So plan the amount carefully so that it does not give you ANY temptations to tap into your savings!!

In conclusion,

you might say that as a young person, saving is very insignificant to you since you probably can only save a few hundred a month. But take that few hundred and multiply it by 12 or 24 months you are looking at a few thousands already. Think BIG! And that’s not all, use your nest egg to work for you through INVESTING! Slowly but surely, this small amount will grow and compound.

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I really like the picture above. In the very first picture I showed you a hand dropping coins into a jar which signifies saving. And with your savings, it forms the soil and fertiliser to grow your money just like the above picture. Savings is a cliche topic and whatever I shared above may be shared by many others too. But, what I think is most important to you is TAKING ACTION to really start your saving plan because saving is the FIRST step to your financial freedom!

** Haha side note before I end. I have been toying with the idea of helping people who are keen to get into investing. I am still working out how should I deliver it. So do stay tuned for more update on this! 🙂 **

 

[Building Blocks]: Dissecting the Annual Report (Part 2)

Hi all, today I will be continuing with Part 2 of Dissecting the Annual Report. In part 1, I shared about some ways to dissect the annual report in order to find the information that you need. For those who missed it, you can read Part 1 here. Today, I will be going more in depth into the financial statements portion of the annual report. The financial statements in the annual report is an important piece of document that shed light on how the company is doing and challenges that the company may face.

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The financial statements in the annual report always consist of 1) the Balance Sheet, 2) the Income Statement, 3) the Cash Flow statement and 4) the Statement of Equity. We will focus on the first 3 as the statement of equity is used less frequently.

My Strategy

Whenever I look into the financial statements of any company, I do it for 2 reasons. It’s either to identify if the company is fundamentally sound to invest or to evaluate the financial health of a company after every earnings report season that I am already vested in.

When deciding if a company is fundamentally sound, I would look for stability of earnings, debts level and their cash flow which I wrote about here. After, confirming that the company is a fundamentally sound company, I will scrutinise their financial statements further for any abnormal figures. This can come in the form sudden increase when compared to previous year’s figures or extremely high figures. As for companies that I am already vested, I always try to look out for abnormal figures when compared to the previous year.

By doing so, I am able to detect any drastic change that may happen to a company. This is because any abnormal figures usually have a huge impact on the company. For instance, when the company suddenly register a 50% decrease in Cash & Cash Equivalents in their balance sheet, you must find out what did the company spent the money on. Is it for expansion or paying down debts? Will this affect their operations etc etc. Hence it is important to always find out about abnormal figures that may puzzle you when you read their financial statements.

Alright, with that aside, we shall dive deeper into the financial statements. I will share with you the important things to look at and some basic calculations you can make to better understand the financial health of the company.

1) Income Statement

Let’s start with the income statement. The income statement is basically a summary of profit and loss for the company. It documents the revenue and expenses for the specific accounting period.

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The above is an example of the income statement of a company.

Things to know:

  • Revenue – a gauge of the amount of sales (look for stable or increasing revenue)
  • Gross Profit  – this is obtained after subtracting costs of goods from their revenue.
  • Gross Profit Margin – this is obtained from dividing the gross profit by the revenue (High GPM shows that the company have some form of competitive advantage over their rivals)
  • Operating Expenses – which consists of all expenditures that are not directly associated with the production of the good or services. Expenses like R&D costs, depreciation, amortization etc (Companies with durable competitive advantage have consistent operating expenses)
  • Earnings Per Share — EPS is based on net profit attributable to shareholders after deducting any provision for preference dividends and then divided by total shares outstanding. (An increasing or consistent EPS is always preferred)

 

The income statement is important in telling me if the company’s business have a form of moat around it and also if the company have been able to keep costs low.

 

2) Balance Sheet

The balance sheet documents the assets, liabilities and the shareholders’ equity of a business at a particular point of time.

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Things to note in a balance sheet:

  1. total assets = total liabilities + total equity
  2. Current assets refer to assets that can be liquidated into cash within a year
  3. Current liabilities refer to the money to be paid in less than a year
  4. Non-current assets refer to assets that takes more than a year to be converted to cash. For eg, property, factory buildings etc
  5. Non-current liabilities refer to the money payable after 1 year.
  6. Shareholders’ equity refer to the net worth of the company
  7. Current Ratio calculates the company’s abilities to meet their short term obligations. (Current Ratio = Current assets divided by Current Liabilities)

 

Important values:

  • Cash & Cash Equivalents > Total Debts – I always try to ensure that the company have enough cash on hand to pay off their total debts. An over-leveraged company is a troublesome company.
  • Current Ratio > 1.5

 

For me, the balance sheet is important in telling me if the company will have a problem of paying their dues.

3) Cash Flow Statement

The cash flow statement records the cash inflow and outflow of a business. The cash flow statement shows how changes in the balance sheet and the income statement affects the cash and cash equivalents.

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It consists of 3 parts. 1) Cash flow from Operating Activities which records the net cash into or out of the business from their main operations. 2) Cash flow from investing activities which records the cash movement from the company’s investment. For instance, purchase or sale of a property, subsidiary etc. 3) Cash flow from financing activities records the cash movement of financing activities in the company.

Cash Flow from Operating Activities

A positive cash flow from operating activities means that cash is flowing into the company from their business. This means that net of all the expenses, the company is receiving cash from the products they sell. This is important as you want a company to take in cash from the products they sell. A company with consistent negative cash flow from operating activities is burning through cash fast and may need to take on debt in the future to finance their expenses. Hence, we would want a company to have positive cash flow from operating activities.

Cash Flow from Investing Activities

Purchase of assets, company investing their money in the market etc. These are all counted as cash outflow from investing activities. Sale of an asset etc will be register as an inflow. This section can tell you if the company is spending money to expand their current infrastructure or expanding capacity through higher capital expenditures.

Cash Flow from Financing Activities

Financing activities include payment of dividends to shareholders, paying off debts, money used in share buyback etc. In this section, you will be able to find out what the cash is used for in their financial activities. For instance, a negative cash flow from financing activities can mean that the company is paying off its debt. A positive cash flow from financing activities could mean that the company is raising money through selling new shares in the market etc.

The sum of all three sections above will give the net change in cash and cash equivalents which will be added to the amount of cash they have at the beginning of the year. By understanding the functions of the different sections of the cash flow statement we can better understand what the company is doing with their cash.

Disclaimer

Not all companies’ financial statements follow to the template I describe above. A lot of them have to be evaluated in the context of their business. For instance, although I emphasised a lot on positive cash flow from operating activities,.property developers would register most of their cash flow in the investing portion than operating activities when they sell a completed property project. Hence, the financial statement should be read in context with the industry the company is in.

In conclusion,

the financial statement is a powerful tool to better understand a company. In fact, I am also still in the process of further deepening my understanding of the financial statements. The management may coat investors with nice narratives about the brilliance of the company but you can always cross check what the company is saying with their financial statements to gauge their reliability. Understanding the financial statements will definitely level up your investing many folds! 🙂

 

[Building Blocks]: Dissecting the Annual Report (Part 1)

Buying and selling stocks are easy, but the amount of research one puts into determines your profitability. One such place to find out more about a company current performance and future plans is through their annual reports. The sage of Omaha, Warren Buffett revealed that his success in investing comes from reading hundreds and hundreds of annual reports every year. If annual reports are this important, how do we go about understanding it and finding the information that we need. Today in part 1, I shall share a bit on how I dissect the annual report into digestible parts. In part 2, I will attempt to muster what little accounting knowledge I have to share with you how to look for specific measurements that indicates the health of the company through their financial statements.

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In my sharing, I will use the FY 2015 Annual Report of AEM Holdings. You can download it here to follow along as I dissect the annual report.

1) Where to find a company’s Annual Report?

Any public listed company will have to file their annual report with the stock exchange. This report can be found either from the website of the stock exchange it is listed on or in the investor relations segment in the company’s website. Here’s an example of where you can find the annual reports for AEM Holdings.

2) What to do with the 100+ pages monster?!

Yup, a company annual report tends to be 100 over pages long! (At least in the case of SG companies) Don’t worry, not every part of the annual report is equally important. Locating the parts that give you what you need is more essential.

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This is a typical contents page of a company’s annual report. It is almost a standard format of annual reports which is comparable to many other companies’.

3) What information is important to me?

When analysing a company’s annual report there are always some standard information that is important to a shareholder. This can range from their financial performance to who exactly is running the company. Below are some information which I always look out for when I read a company’s annual report.

  1. Present company’s performance
  2. Company’s outlook and future catalysts
  3. Management’s information

4) Where to find these information?

Present company’s performance

We want to understand how the company is doing for the past financial year and most importantly their financial statements for the FY. This information can usually be found in 1) The Chairman’s and CEO’s statement, 2) Business and Financial Review (some company may name it differently but it is basically just a summary of financial figures for the FY), 3) The full financial statement in corporate information

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Here’s a snippet of the present performance by the Chairman. You can likewise find the same from the CEO in the next page.

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Under the business and financial review, the company tends to show a quick summary of financial performance for the FY. They can come in the form of informative illustrations comparing their performance over the past few FYs. I tend to read this part with a pinch of salt. This is because the company may tend to cherry-picked “nicer” numbers to put here to impress shareholders. A in depth analysis into their full financial statement in the corporate information segment is needed to determine the reliability of their performance.

If you are lost. You can find the above information from page 36, 40 and 37 respectively. A financial statement usually includes the Balance Sheet, Income Statement and Cash Flow statement. I will touch on these in part 2, but just know that these 3 pages are one of the most important part of any Annual Report. You will also notice one whole bulk of information which occupies majority of the annual report in Notes to Financial Statement. Basically this part give additional pointers to how each segment in the financial statement were derived.

Company’s outlook and future catalysts

You can usually find a company’s future plans and outlook from the Chairman’s and CEO statements. This is usually found at the last few paragraphs of their statements. They will address challenges and the strategies going forward. Any upcoming plans are also explained here.

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During the FY 2016, you can stay tune to their announcements as they may announce some information about whatever plans they were set out to do in FY 2015. This can supplement your information about the company’s outlook and plans.

Management’s information

It is always important for me to know who are the people that are running the company. To find this information, you can look them up in the portion Board of Directors.

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They usually include a short write up about the achievements of the person and his previous experiences.

Knowing how much the management is earning is also important. This is because we want to ensure that the management have their interests aligned to ours’ and are not overpaying themselves. You can find out details about remuneration in Corporate Governance on page 23 of the annual report.

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In a board of any company, it is made up of the Chairman, CEO, the independent directors and some other position depending on the company. The independent directors are just people who are not related to the company but sitting in the board. This ensures that the Board do not do things that are beneficial to themselves only and in turn harming the shareholders. It is a common sight to have independent directors in any listed company. You should pay close attention to the payslip of the Chairman and CEO. Make sure they do not give themselves too high a pay.

One simple way to see if the Chairman and CEO have interests aligned to the shareholders is to see if they hold the company’s shares. You can find that either from the variable bonus component in the remuneration package above or from page 92, Information on Shareholdings.

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The CEO is one of the top 20 shareholders of the company’s shares. If the insiders of the company have rather large stakes in the company they should act in the interests of the shareholders.

In conclusion,

these are usually the information that I look for when I read into any companies’ annual report. By categorising the annual report into 3 key areas, we can effectively understand the company. In the next part, I will mainly talk about how to break down the financial statement in the annual report to help you understand some accounting jargon. Ohh and on the side note, if you have been a regular reader of this site, please do subscribe so I know roughly how many active readers I have and you can also comment below if there are any queries. Hahaha! Thank you! 🙂