Capital Gain vs Cash Flow

When it comes to making a decision on investing, would you choose one based on the criteria of capital gain or cash flow? It's a tough one, isn't it? Frankly, the answer varies from person to person. However, i would say that for most ordinary people, they would prefer capital gain.

Let's quote an example, suppose you purchase an asset for x amount of dollar and sold it for a nice 40% gain in 3 years, versus you purchase an asset for the same amount that gives you say 8% annual return in the form of dividend or rental for instance, and the asset only appreciates less than 5% a year. For most people, they would probably go for the first example, where higher capital gain is made. After all, it sounds more convincing and exciting when you tell your friends or business partners that you have pocketed handsomely in this deal!

Question is, what do you do with the money gained thereafter? Most commonly, there is always a lurking temptation to spend on luxury items when you have spare cash in hand, be it a luxury holiday, fancy car, watches, etc. After all, why wouldn't you want to pamper yourself a "little" for closing a wonderful deal! Nothing wrong with pampering yourself sometimes (good way to recharge the batteries!), but it's the quantum of spending unecessarily that you would want to take caution of. Bear in mind, spending unnecessarily means you are giving away an opportunity to make money work for you in the future!

On the other hand, can you find another opportunity that can give you similarly good financial returns after this? Chances are you may not. So you will end up with plenty of cash on hand and as time passes, the temptation to spend grows!

For me personally, although short term capital gain sounds sweet and exciting, there is no guarantee that a particular investment will yield the expected capital gain. Therefore the risk increases. On the other hand, human nature to spend unnecessarily is also a lurking danger. On the contrary, an investment that can generate a regular streams of income (cash flow) is perceived to be lower risk and helps to sustain your own personal financial position in the longer term. To take one step further, go for investments which generate positive cash flows.

Positive cash flow simply refers to the excess regular income generated by an asset after deducting all the relevant expenses in deriving the particular income. A good example is property rental income where the tenant will pay the property owner rental every month as long as the property remains tenanted.

A good point of comparison is between landed property and rental yield property such as high rise residential apartment. Landed property has bigger potential for capital gain (but not guaranteed) but poor rental yield. That means extra burden having to regularly service the commitment from your own pocket and opportunity cost! On the contrary, good high rise apartment may not generate as high capital gain but gives much better return when it comes to rental yield. In this case, the tenant will finance your property but the property is still owned by you!

A long lasting positive cash flow will help a person or a business to survive and sustain longer, without the need to continuously spend more money and therefore sacrificing other opportunities. As you build more businesses or acquire assets that generate positive cash flows over time, you will find that you have truly gained the ultimate goal of financial freedom!

Nevertheless, that doesn't mean you should ignore capital gain all together! Why not the best of both worlds? According to Robert Kiyosaki, the key to financial intelligence is how to use both cash flow and capital gains to grow wealthy. So many people are not successful, because they’re generally focusing on only one of the two.

Crude Oil...the Beauty and The Beast

Now that the price of crude oil has more or less double up from the lows of $30s per barrel at the beginning of the year to the current $70 range, everyone seems to be cheering, as reflected in the optimisms in the global stockmarket performances to-date, and many were making bold conclusions that the worst of the state of economy is over. However, questions remain as to the real cause of the price hike...could it be pure speculation at play or fundamentally driven? It could well be a combination of both, of course. The next fundamental question to be asked is that have the price run ahead of its fundamental too soon? What if the price of crude oil continue to rise above $80 for instance?

Not forgetting it was only not too long ago (last year in 2008) when crude oil price was driven up to $140 per barrel and there was massive problem in global inflationary pressures on all goods and services and subsequently caused havoc to global economies!

It is therefore important for the price of crude oil to maintain stability (around $50 to %70) and avoid catching the rocket (of over speculation)! If that happens, it will surely introduce another set of massive inflationary issues just when the global economy is barely trying to find its footing of recovery. More so, we are probably ahead of the fundamentals right now and nothing solid (such as corporate earnings and positive growth, increased demand, lower unemployment rate, etc) has come out of the whirlwind. Moreover, there is also the problem of potential US dollar devaluation and the possible hyperinflation the world has to tackle with, given the massive quantitative easing measures taken by the U.S!

So, beware of the beauty and the beast!

Discovering Relationship Between Dollar & Oil

Do you ever wonder if the strength of US Dollar that you are holding affects the price of oil or vice-versa? Here's an interesting article written on its likely relationship and perhaps put you in a better guidance when you should invest in the commodity of crude oil and/or gold.

Since the beginning of the year, the price of crude oil has increased by more than 30% from US$43 a barrel in January to a high of US$60 in mid-May. This could boil down to multiple factors, including improved growth prospects, speculation and the weakness of the US dollar. In addition, the outlook for economic giants the US and China has improved materially over the past month, leading many people to believe that the worst of the global recession is almost over.

US and Chinese economic data, along with comments from central bankers seem to support this rosy outlook. Early this month, US Federal Reserve chairman Ben Bernanke told the US Congress that the recession is easing and that growth should take place by year-end. Most other central bankers expect their countries to return to positive growth in 2010. Given that oil prices
plummeted in the second half of 2008 because of deleveraging and the fear of a deep
recession, the promise of a brighter tomorrow is driving oil prices higher. However, a slower pace of contraction and the prospect of increased demand are not the only reasons oil prices are higher.

Recent US dollar weakness is contributing to the recovery. Of course, many people will argue
that the US dollar is weaker because the US economy is doing better, which is true, but the
relationship between oil prices and the US dollar’s value is too significant to ignore.

Since the beginning of 2008, the correlation between oil prices and the US-dollar index has
been roughly -0.90. In other words, 90% of the time, when the US-dollar index falls, oil prices
rise.

The chart below shows the tight correlation between the two instruments:
Here's the argument for dollar driving the price of oil:
- Oil is priced in US dollars. According to OPEC, the relationship between oil prices and the dollar is almost mechanical. When the dollar falls, oil prices have to go up in dollar terms to stay constant in euro terms. Oil producers receive their oil revenues in US dollars and need to be compensated for the fluctuations of the greenback. This does not always hold true, of course, otherwise the correlation would not have broken in the beginning of the year.

Here's the argument for oil price driving the dollar:
- A study by the IMF in 1996 found that a 10% rise in the real price of oil induces a 2% real depreciation in a typical OPEC's real exchange rate. This should not be completely surprising because higher oil prices do result in higher cost of oil imports for the US, leading to a higher current account and trade deficit, which is US-dollar bearish. It also affects growth. When oil prices were nearing US$150 a barrel, gasoline prices in the US went as high as US$4 a gallon or more. It's like a tax on consumers and significantly affected companies!

The conclusion is that the relationship between oil prices and the US dollar is both schizophrenic and symbiotic. When oil prices were hitting record highs in July 2008, it can be argued that the price of oil was driving the value of the US dollar because of concerns about the strain it would have on the US economy. However, currently it is more likely that the dollar is driving the price of oil because the outlook for global demand is not clear and investors are less focused on the impact that higher oil prices can have on trade than they are on its signal of stronger growth.

The full article can be found at Moneyshow.com.

Money-printing Caused Market Rally?

What has caused the recent stock market rally across the globe? Too fast, too soon, as there are hardly sufficient evidence to fundamentally support a market euphoria? Here's another theory by the well-known commodity investor, Jim Rogers.

According to Rogers, the recent market rally is flooded with "artificial" liquidity as a result of the various printing money (technically known as Quantitative Easing) initiatives taken by central banks of certain developed countries, particularly U.S. As such, Rogers believe that the next financial meltdown will be in the currency markets.

Rogers claimed that he has bought the Yen because he expects the Japanese currency to withstand future problems, but he does not have short positions in any currency and is currently not buying the yen any more. However, Rogers has not shorted the U.S. dollar at the moment, although it may be at the peak.

Nevertheless, Rogers also believe that for the moment, currencies may look safer than anything else in the markets, as stocks may face a new bottom since they were artificially lifted by the amount of money created by central banks, but there are pitfalls ahead.

Rogers's view seem to coincide with the views of other legendary investors such as Warren Buffett....

Beware of the potential next currency crisis, particularly if you have exposure to multiple foreign currencies!

Malaysia Stockmarket - Upcoming Changes You Need To Know

If you are an investor of equity stocks in Malaysia's stock market, you should be aware of the following impending changes taking place soon. First and foremost, on 6th July 2009, Bursa Malaysia will change the market’s primary benchmark index from the 100-stock Kuala Lumpur Composite Index (KLCI) to the FTSE-Bursa Malaysia KLCI which comprises just 30 stocks. 73 stocks will thus fall out of the new benchmark index while three new stocks will be added.

The transition will be seamless, i.e., the new FBM KLCI will start off with an index value equal to the closing value of the current KLCI on 3 July 2009.
















Secondly, the main board and second board of Bursa Malaysia will be merged and be known as the "Main Market" while the Mesdaq market will be transformed into a sponsor-driven market known as "ACE Market" from 3rd August 2009.

The requirement for listing on the Main Market will also be eased with companies needing only an aggregate after-tax profit of RM20 million over three to five years with at least RM6million in after-tax profit in the latest financial year. This compares with current requirements to have aggregate post-tax profit of RM30 million with at least RM8 million in the latest financial year.

The Mesdaq market, which was reserved for technology companies, will be transformed into an alternative market open to companies of all sizes and from economic sectors.

All equity-based proposals, such as share placements, rights offerings and restricted share issuances will no longer require the SC's approval.

In order to attract both local and foreign companies to list in Bursa Malaysia, the Securities Commission is also relaxing rules on secondary listings of foreign corporations, effective 3rd August 2009. The relaxed rules include foreign companies no longer need to have at least RM1.0 billion in market capitalization with RM60 million in after-tax profit in the latest financial year for a secondary listing.

In order to encourage private equity activities and corporate mergers and acquisitions, SC will also allow the listing of shell companies that have no operations but have intentions to merge with or acquire operating companies or businesses with their IPO proceeds. However, a shell company seeking a listing must raise a minimum of RM150 million through its IPO and must complete an acquisition within 36 months of listing.