We often receive emails from our readers. We had an interesting one last month. There is a fair bit of learning involved, so I thought I would share it with everyone.
1. Financial Idiot? No Way!
First of all, J, you are not a financial idiot. You are a star and you deserve a medal. Allow me to explain why.
[Free Ebook] How should you invest your first $20,000?
We asked 14 Singapore finance bloggers to share what they would do if they could go back in time and invest their first $20,000. They can no longer rewind time, but you can learn from their experience and hopefully start with a better footing.
Psychologists have identified four stages in which all learners of knowledge and skills go through. Everyone starts off with being Unconscious Incompetent. At this stage, we do not understand or know how to do something. We do not even know about the skill we are about to learn, and many a time, we end up denying the importance of it.
In other words, one does not know what he does not know. In order to progress to the next stage, the individual has to recognise and accept his own incompetence.
As the learner progresses, he becomes Consciously Competent. Understanding is demonstrated, and the task can be completed, but a lot of attention is demanded and the level of concentration required is high.
In the final Unconscious Competence stage, the skill becomes second nature. It becomes so simple that we can do it blindfolded or while multi tasking.
Think back to the time you first learnt how to drive. Before driving lessons, I had no idea what driving a car entails. While learning, I became Consciously Incompetence – for example, I discovered that parallel parking is tough, almost impossible.
After getting my license, each drive is an exciting adventure, I am confident, but driving still requires a lot of concentration, especially when merging lanes or approaching a major junction. It takes a while but eventually driving became second nature and I can now chat and sing along to music simultaneously while driving safely.
It can be driving, learning how to bowl or picking up the guitar. It can even be investing in the financial markets.
Investing is a Skill
The issue with the majority of retail investors is that they remain stuck in the Unconscious Incompetence phase. They never outgrow it. Many think that putting money into a stock, a commodity, a property or even an alternative investment like bitcoins makes them an ‘investor’. They make little effort to find out more, to read more and to learn more. Many eschew skill and pray for luck.
Investing is a skill. It can be learned. Or rather, it has to be learnt.
As with all skills and games, there are rules and regulations to comply with. There are techniques and strategies to follow.
So J, by stating what you do not know, you are already way past that Unconscious Incompetence stage. You are conscious and fully aware of what you do not know.
Not only that, you actively forge forward to seek out information. Just based on that alone you will come up tops against the majority of retail investors out there. A financial idiot you are definitely not. Keep up the good work my friend!
2. The Monetary Authority of Singapore Investor Alert List.
I have been wanting to write about the Investor Alert List for the longest time. Here is a quick one before a more detailed post in the future.
According to MAS, the list consist of ‘unregulated persons, who, based on information received by the MAS, may have been wrongly perceived as being regulated or licensed by the MAS’.
A word for word translation would be this – ‘dodgy people, who have been ‘reported’ by others, who have no license to do what they are doing despite looking and sounding credible’.
MAS has stopped short of labelling companies on the list scams. Neither will we, but we will take one little step further. We think that the Central Bank has better things to do than to go around adding companies frivolously. There must have been substantial justification for these companies to be included.
At this moment there are a total of 208 companies on the list. Many of them have serious sounding names. Some of them have very established downtown big office addresses. When I dug further, I realised that many of these are but serviced offices.
Out of these two hundred over companies, many familar names popped up. They include Profitable Plots, The Gold Gaurantee and Sunshine Empire. These companies have all folded and closed up, leaving retail investors out of the pocket by hundreds of millions of dollars.
The Alert List is a great resource. When in doubt, the list should be consulted without hesitation.
3. To invest or not to invest – Three Questions to Ask Yourself
When I come up against seemingly dodgy investment schemes, here are three questions I ask myself. I will never invest unless I am able to derive satisfactory answers to ALL of them.
Where is the money coming from?
What are the risks?
Where is the Money Coming From?
Many years ago, a colleague excitedly informed me that he recently met up with a friend. The lady whom he met happens to be in land banking. She is doing very well it seems, driving a new Mini Cooper and dressing sharply.
My colleague was rather impressed, and he required little convincing to part with some spare cash towards a land banking project. The incident happened when I first started working in the early 2000s. It was my first exposure to the power of impression.
I can understand my friend’s motivation. Landbanker is rich and successful. To be rich and successful like her, all I need is to landbank. You cannot fault him for being ‘logical’.
My ‘logic’ extends in the other direction though. The more important question I would ask myself is this – where does the money come from? Someone must be paying for her powersuits and her flashy car. In this case, that someone is none other than my friend. His investment and the resulting commission from it would have settled her instalment payment for months.
J, in your case the same question is highly applicable. 1.25 percent per month is 15 percent per year. Where does this 15% come from? Who is paying for this?
Is the business really that profitable that they can live with a 15% financing cost? Do not forget this is excluding marketing costs, salesperson commissions, legal expenses and travel monies. They all add up.
Unless an extremely satisfactory answer can be obtained, I would suggest to proceed with care.
Allow me to share yet another episode that left a lasting impression on me. In 2007 the property market was booming and we were looking to buy another property for investment.
Show flat launches were super hot. Agents would ask for blank cheques just to secure a spot for you in the queue when the show house opens.
I remembered being in the queue for a development in Alexander and frantically calling the agent who was inside the showflat. She had my cheque and had promised to do her best to secure the unit we picked out previously.
Nevertheless, the unit was gone before I could even enter the showroom. Not all cheques are equal it seems, and not all agents get the first bite. The best units went to the closest circle of family and friends. The entire development was sold out in hours.
I am not saying that queues imply good deals. Many of these queues are in fact ‘induced’. In retrospect, I am sort of glad we did not end up buying, even though we would have made some good money off that one.
The point I want to make is this – if the deal is really so good, why is it coming to you? If I had a ‘lobang’ to make 15% per annum guaranteed I would have gone to my family and friends. They would have gone to their family and friends. I would have gone to angels, VCs and sophisticated high net worth investors who can easily see the value I am bringing to the table.
If the ‘real’ nature of the business is a capital intensive one, the company would have gone to the bank for a revolving line of credit from Day One. To say that banks are slow is a load of bull. If a company is credit worthy, banks will be queuing up to stuff money in their faces and into their clothes like drunk men in a strip club.
Why would they even bother to fly halfway across the world to market to a bunch of folks, most of who cannot even place North Dakota on a map?
What is the risk?
We have written about risk and rewards many times. We have written about how despite them being instrinsically joined at the hips many investors always end up being seduced by the rewards and end up overlooking the risk.
Here is a thought exercise to help eveyone wrap your minds around it. If the same investment opportunity is offered at 1% per annum, similarly to your fixed deposit rates, would you be tempted to part with your money?
Crazy, I hear you say. I might as well put the money in FD. It is much safer.
Now what happens when the promised returns go up to 5% per year? A little better, but there are many REITS or blue chips or even corporate bonds that can easily yield 5%. Again, it is still safer to park the money in these established places rather than going along with an unknown company investing in an unknown product. If it turns out to be a scam, there is a chance of losing the entire sum of money.
Why is it then, when a 15% (or 20% or 30%) return is dangled ahead of you, all these considerations go out of the window?
Risk is seldom mispriced
That in essence is what the risk reward ratio is all about. There is a reason why high returns are promised. It is to compensate for risk. Unfortunately when investors hear about outlandish returns, their concept of risk goes out of the window.
Any mispricing of risk would be exploited in no time. If the company can raise funds at 5%, they would. The only reason why they do not is because they cannot. And the only reason why they cannot is because they are risky and dodgy. Risk is priced in. Returns commensurate with risk.
Only invest if you are informed and willing to bear the risk.
J, thank you once again for writing in and sharing. I hope my reply paints a clearer picture. I am sure you will make a sound decision.
image: bobby-c-blog, condonewlaunches, inmagine, singledudetravel