tiny Personal Finance Survey Result

A personal finance survey was conducted on http://klsmihosting.com/pfp/survey20080919b.asp/ for about a month.  People who participated range from 19 - 46 years old, with mostly under 30 years old.

They were asked where they put their money in right now and what worry them most in their future.

See below pie chart that most people keep money in bank which is quite common.  Follows by insurance, mutual fund and stock market.  This is quite consistent with general public risk profile.  So this is a good allocation.

(click the chart to view larger picture)

In the question of "what do you worry most" is actually prioritizing one's personal finance need.  Where priority 1 is the most important ( most worry ) and 5 is the least.

See below 3D chart for the result.  It shows that Most People want to Get Richer ( Wealth ) and the least concern is Live Too Long.

Most said : "I'll be happy if I live 'too' long ...  "

This result is consistent with human psychology where people are mostly thinking about 'Current Needs' and tends to under estimate 'Future Needs'.

(click the chart to view larger picture)

Derivative - Options

Just to emphasize, this is not the FULL picture yet ... so dont make impulse decision that you want to go trade options straight away ... it will require quite long a study ...

source from http://teraoptions.com/stock1.html

Reduce EPF from 11% to 8%

Recently zzzz "New" finance minister aka "Next March" prime minister announced some measures to "Save" our economy, shortly after he said our economy didn't need to be saved.  Anyway, this time around I don't have much complains.  Most of the measures are acceptable for the purpose to 'Improve' economy.  Although not perfect and some measures are "Arguable" but nevertheless none is definitely stupid.

One of the measures is to allow salary earners to reduce EPF contribution from 11% to 8%.  This particular announcement has attracted quite some debates.  Basically general public response is that we should save for our retirement and should NOT use our future money.  I cann't held to be so delighted when this respond comes from the public.  It shows that we are indeed having better senses and sensitive in planning our future.  ( But there is a higher chance that people just want to complain no matter what the announcement is ) 

I over heard from radio this morning that if 50% of the people does reduce contribution, we will have $24,000,000,000 to circulate in market which will help 'simulate' the market.  The radio hosts talk with excitement and as if that is the solution of all our problems.

if ALL reduce 3% would give $48 billions

so that means total salary drawn is $1.6 trillions or $1,600 billions

zzzz population is 24,821,286 as of July 2007.

So even if we assume all population are working and the 24 billions are allocation for 2 years, then average montly income of a person is $2,778 

Actually working population is about 18 millions which comes to an average salary of $3,074

So it is quite obvious that the figure of 24 billions fund to 'boost' economy is a false figure.  This is not the first time this radio host publish wrong figures.  She tends to be very self center and simply announce figures that comes in her hand without proper analysis.  I am fine if she is just announcing it.  But the thing is she use that figure to justify the conclusion and reject all other callers opinion. 

So ... whatever offer you get or numbers you heard, do the math ... you will soon discover many things that seems to be 'Right' are actually ambigously 'Wrong' ...  

Compare by numbers, not the rate

Sometimes ago I share a "Capital Guarantee Investment Link Insurance Plan" that sounds almost perfect :

. Your Investment Capital is Guaranteed to increase even at Bad times,

.  At good times, you will get all the extra returns,

.  Free insurance covers.

There were 2 scenarios shared in that post 

1) When market drops, you get back $139,200 out of the $120,000 you invest in.  And this $139,200 is paid out monthly in next 20 years.  If you run the numbers, you will discover this is equivalent to a compound interest rate of 0.75%.

That's right !  Instead of 5.8% or any big return numbers you see, the actual rate of that deal is 0.75%.

2)  Like wise, if your investment is accumulating at 6% for the first 20 years, then the whole 40 years plan return rate is actually 4.08% !!

However, don't be too negative yet.  Insurance is not All About return but its main objective is about Protection ( read this old blog ).  So if you really want to compare with a FD rate, you should deduct some amount from your saving to buy an equivalent insurance protection.

The above plan's protection is $84,000 Sum Assured.  Someone quoted me a Term Insurance of $505 for that.  So I should deduct out $505 from my $6,000 yearly saving (see Buy Term Invest The Rest method) and then see what return rate do I required in order to get paid $580 monthly from 21st to 40th year.  The return rate is 1.55%.  So its not as bad as 0.75%

Likewise, in good time, the return needed is 4.73% and not 4.08%.

If you think someone has eaten your pie, that is true but lets be fair.  These pie eaters also helped you reduce some hassles;

1. No need to seperate payment of $505 to insurnace company and then the rest to other company,

2. No need to worry about the timing of payment,

3. No need to get different quotes, different analysis from different parties

etc.

So they get paid for all these work they did for you.

And you ... your decision is whether you want to pay someone to do the job for you.  If not, then you better buckle up and do all those work yourself.  Don't ask for both world ... pay nothing and ask for all the services ...

Calculate Future Living Cost

I mention before that the Real Inflation you should care about is Your Own Inflation Rate, not those published by goverment or experts ... ( read here for old post )

In other to calculate future living cost, first you list down your living cost now.  The 4 basis of living standard are Cloth you wear, Food you eat, Place you stay in and Transport that brings you around.

Then determine your own inflation rate.

Lastly using the FV formula to calculate your future living cost.

PV - Present Value ie. $570 x 12

i - interest rate ie. 3% or 0.03

n - number of years ie. 17 and 20

FV - Future Value, ie. the results I shared below

( more on FV formula )

For exampe, using above figures, the cost of living for

17 years later is $11,305.48

20 years later is $12,353.80

instead of only $6,840 a year today.

if you don't have calculator at hand, you can also use Rule of 72 to do a quick estimation in your head.

where to get EPS, PE ?

Where to get historical data like EPS and PE you used in your stock valuation example ?

1.  As I think buying stock is like buying a business, where is the best place to get information about the business before I invest into it ?  Yeap !  From the business owner itself !  If the current business owner is NOT able to give you the data you ask for, probably this business is not the one you should invest in.  I was searching for Genting data and within 1-2 minutes, I got this link http://www.genting.com/financial/images/2007_gb10years.gif

2.  All companies listed in stock exchange needs to submit their financial data periodically, so you could also obtain all listed companies data from your stock exchange, ie. KLSE.  Some may not have it online but most definitely have compiled a publication and sell them at a small fee.

3.  If you trade stocks using brokers, online trading site etc.  You should ask for these data from them too.  All these form part of the services you get and why you pay the fees for.

4.  Some business news web site provide some data too.  I was searching for Genting from The Star and this is what I get http://biz.thestar.com.my/marketwatch/fundamentals.asp?searchstr=3182

Sometimes I get the data from different sources to cross check their data too.

why EPS, PE in stock valuation ?

Earlier I shared How to value a stock and decide when to buy at what price, and then give a real life example.

There are 2 main factors why a stock price goes up and down:

1) fundamental strength of that business ( Strong or Weak )

2) general public view points ( Positive or Negative )

So there are 4 combinations:

Weak Company Negative Views : Price Drops Continously

Weak Company Positive Views : Price Up and Fluctuate

Strong Company Negative Views : Price Drops to substanable level

Strong Company Positive Views : Price Up and Substain

You BUY Strong Company 

during its Negative Views time (3)

and 

You SELL during Positive Views ( 2 & 4 )

EPS or Earning Per Share shows you how much the business earn during a particular period.  Over the years, the EPS growth rate shows you how 'STRONG' the business is.  A consistently grown EPS shows that the business is able to conduct good business despite good or bad times.

PE or Price Earning ratio basically describes how many times a stock price is traded comparing to its earning.  For example, a business may be earning $1 now but its stock price is traded at $10, PE = 10x.

One of the usefulness of this PE is to show confidence level.  For example if I compare 2 businesses of the same nature, one is traded at 10x while another is only 5x.  That shows that general public is more confidence with one business than the other.

I can also examine all the PE numbers for all plantation stocks ( same industry ) and come up with an average or normalize PE, says 8x.  Then compare to the PE of the particular stock I am planning to buy, says 10x.  Then I know many others are also interested in this stock compare to other stocks within the same industry.

If I keep a historical record of PEs, I can also understand the stock price trend better.

So that is why I use EPS and PE, this combination tells me both the company strength and what the market thinks about this business.