How To Invest in Individual Stocks Using EPF Money

Phillip Capital Management (PCM) is one such company licensed by Securities Commission and an approved Fund Manager for EPF. In order to invest your EPF money with Phillip Capital to buy individual stocks, you will need to first of all satisfy the criteria set by EPF as summarised in my previous article "Can You Invest In Individual Stocks Using EPF Money?"

Calculation example:

Procedure:

1. Fill up the application Form KWSP 9F (AHL) which you can download from EPF website or visit your nearest EPF office.
2. Download or obtain a copy of the latest EPF statement
3. In the Form, indicate the amount you are entitled to withdraw and submit it to PCM, together with a copy of your MyKad, and that's about all!
4. PCM will then submit the relevant documents to EPF for processing, which is expected to complete within 2 to 4 weeks.
   
5. Once completed, the funds will be transferred into your PCM trust account.
   
6. You may start to purchase any of your desirable stocks using PCM's online trading platform.

Upon disposing the stocks, the funds will be returned to the PCM trust account. Upon termination of account, the funds will be reverted back to your EPF Account 1.

Other noteworthy Terms & Conditions:
- upfront fee of 3% chargeable by PCM. Withdrawal from EPF is free of charge;
- annual management fee of 1.5% is chargeable by PCM;
- normal on-line trading brokerage & admin charges at about 0.55% of transaction amount is payable;
- minimum holding period is 1 year. Termination only upon one month's written notification thereafter;
- minimum investment is RM30k but can be broken down into trunks starting with RM10k, as long as the minimum amount is satisfied within one year;
- Stocks are only applicable for equity stocks, excluding warrants or any other preferential stocks

Do manage your risks before investing! Best to adopt defensive strategy as EPF money is not meant for excessive speculation!

Can You Invest In individual Stocks Using EPF Money?

Many people are probably aware that they can withdraw money from their EPF (Employees Provident Fund) savings to invest in ministry approved Unit Trust funds. However, many are probably not aware that there is also a way to invest the EPF money on individual Bursa Malaysia stocks!

Some people prefer the idea of leaving the tough decisions on choosing the right investments with Unit Trust Fund Managers but in doing so, they effectively relinquish control over how the money will be invested. Ironically, the objective of Fund Managers are often to safeguard their jobs, instead of looking after investors' best interest, i.e., make money and return on investments!

On average, EPF's average annual rate of dividend is between 5% to 6%. The rate of return is no doubt better than Fixed Desposits (FD) return but for the savvy or wise investors, this sort of return is barely sufficient to counter inflation! (By the way, forget about the so-called officially reported inflation rate of 2% to 3% because the reality is much higher than that!)

So instead of keeping all your money in EPF or leave the money with someone else, why not consider moving some money from EPF to investing in individual stocks of your choice? Without doubt, there are risks with this approach because one can potentially lose this hard earned money if the wrong choice of stocks is chosen! With the stock market being so volatile, you may think that this is extremely risky!

To mitigate the risk, one of the key success factor is through first of all doing a little bit of homework up-front and selecting stocks or companies that possess good quality and fundamentals, plus supported with decent dividend yield. To be comparable with the annual rate of dividend from EPF, one should look for dividend yield that can at least match EPF's if not better. A scan across some of the quality Bursa stocks will reveal that a number of companies under REITs and consumer businesses generally do fit such criteria!

So how do you qualify to withdraw funds from EPF for the above investment? Let's list down some of the salient points:

1. savings of at least RM5,000 more than the Basic Savings amount required in Account 1, and must be equal or below 55 years old. The basic savings is the minimum amount you must have in Account 1 before you can apply under this scheme. The table below shows the different minimum savings required for people of different ages:
   
   
   2) 20% from your savings in excess of your Basic Savings amount in your Account 1, that means the minimum amount for investment withdrawal is RM1,000.00, given the condition set in point (1).
   
   3) Formula of eligibility = (Account 1 – Basic Savings) x 20%.
   4) Investment can be made at the intervals of 3 months from the date of the last transfer, subject to the availability of the required balance in Account I.
   5) Investment must be through appointed external Fund Manager by the Ministry of Finance. Click here for the complete list.
   
   I hope this gives you an idea of an alternative form of investing, for your hard-earned savings that you can't simply screw up, i.e., EPF. In my next post, I shall touch on precisely how you can invest in individual Bursa stocks using your EPF funds and the inherent costs that you should be aware of.
   
   Here's the link to EPF should you require further clarification.

The Inevitable...Postage Rate Hike

After much speculation, I just got the confirmed news that POS Malaysia will increase the tariff or postage rate effective from 1st July 2010! Frankly, I foresee the rate hike is a matter of time, given that the last hike was way back in 1992!

As per the information that I have gathered so far, the postage increase will affect domestic postage stamps for standard mail below 50gram, non-standard mail below 100 gram, periodicals, and PosDokumen.

Here's the quantum of increase....
- For standard mail weighing up to 20 gram - RM0.60 to 0.70 (from the present RM0.30 to RM0.40).
- For others in general, the quantum of increase is 75%.

The higher postal tariffs effectively paves way for POS Malaysia to raise employees’ salaries (which is currently reported to be below the average government servant’s salary) by 30%.

In addition, the higher earnings will also pave the way for the company to undertake it's aggressive transformation plan such as potential mergers & acquisitions, revamping operational efficiency and cost reduction exercise.

No wonder it's share price has also shot up the past few days...let's take a look. "Someone" obviously knew this is coming for sure!

Is US stock market on verge of another big rally?

Some experts say investors are starting to believe that the U.S. stock market is on the verge of another big rally.

The fact is, Dow Jones Industrial Index have just posted new high above 10,800 compared to previous high posted in January 2010.

US's National Association of Realtors reported a drop in homes sales last month that wasn't as steep as forecast.

However, the report on housing was typical of recent economic numbers that have been somewhat better than expected but still point to a weak economy.

For now, it appears the sales numbers aren't disrupting hopes that the economy can recover even if there is only a slow stabilizing in the housing market.

A month ago, investors shrugged off an 11.2% drop in sales of new homes.

The market's continuing advance has been welcome but analysts are divided over whether stocks have run too far or if they have more to gain because of improvements in the economy. The story on investors is that they are afraid of missing out on further gains, after seeing the Dow making new highs.

On the other hand, investors seem optimistic about the health of corporate earnings for the January to March quarter.

Also, unlike the developed nations, Asia (excluding Japan) is still growing and certainly is the place to be at least for the next couple of decades. So despite America's and Europe's problems, it's a mere fact that there are certainly plenty of light at the end of tunnel elsewhere! It's a certainty that American companies will follow suit where the money is.

However, the issue on sovereign debts of Dubai and Greece has still not gone away, despite plenty or reassurances from various party.

As always, there are two sides of the coin to look at. One can be optimist or pessimist. May be one more for being neutral? Whatever it is, I always believe in following the trend, and that's where the smart money is. Current trend obviously still point to the north (up trend), supported by relatively strong volumes, amidst intermittent signals of danger looms!

Why do I say so? Well, simply the hot money (or better termed as liquidity) is still there, no matter what people say. The smart money has come to the realization that money has to be invested and parked somewhere (to counter inflationary stress), no matter fundamentally it's right or wrong!

However, the musical chair will stop one day of course....So until then, let the party moves on.

A Case of Reality Check

2009 was a stellar year for global stocks recovery. As I had written before, it was more hope than factual when global funds decided to take on an optimistic route. 2010 is expected to be a lot tougher, in the sense that what was expected last year must bear fruit this year, in order to sustain the bullish views across global economy and investments.

Last year (until the beginning of this year) we saw massive inflows of funds into emerging markets particularly like China, frenzily mopping up undervalued equity stocks and real estate properties. Property prices in Shanghai, for example, has even surpassed the previous highs made before the 2007 financial crisis! Things were beginning to look more bubblish and speculative than solid fundamental!

Problems began to emerge towards the end of 2009, in places like Dubai where they were not able to service their massive debts, to the point they need to be rescued by Abu Dhabi's sovereign funds.

Next in line comes some of the European countries commonly known as the PIIGS (being Portugal, Italy, Ireland, Greece and Spain) who appear increasingly unable to service their respective sovereign debts.

The key question in everyone's mind is that will this snowball into a global issue? Thus turning it into a double dip recession, as what some economists have predicted?

Worries about Europe caused the Euro to hit an eight-month low against the US dollar.

The perception of US Dollar may even turn to become a safe haven! Some analysts are also predicting a bullish rally on US Dollar this year against world major currencies!

Is Gold Truly A Safe Haven?

Following my post on "How To Invest In Gold?", I received a number of queries on whether investing in gold is truly safe as projected by many investors or analysts.

For the matter, i can assure you that all investments come with risks, with gold being no exception.

With gold prices reaching record highs and recently exceeding USD1,000 per ounce, there were many bullish calls for gold to scale even higher!

Before you decide to jump into the gold rush, i recommend you to first read this new book written by Doug Eberhardt. The title of the book is "Buy Gold Safely". The book reveals the importance of gold, how you can keep your gold investment secured, the underlying secrets of gold investing that the experts do not want you to know, common pitfalls to avoid while investing in gold and much more!

Click Here!

Although some of the information contained in this book are slightly outdated, it certainly pays to understand how gold mechanism works and why it is absolutely critical in preserving our wealth and maintaining a balanced investment portfolio!

On the other hand, do not make the mistake of simply assuming investing in gold at any time is good! Remember the big correction in gold prices in 2008 from the peak of 1000 to the low of 712? Understanding the state of affairs and a sense of timing are still essential!

Click Here!

How To Invest In Gold?

Arguably, gold is the only investment asset class in the world that is widely perceived to be the safe investment haven. Many investors will therefore choose to invest in this precious metal as part of their wealth preservation and creation strategy.

During last two years, when all the asset classes have failed to perform, gold is the only investment asset that has remained outperformed. As such, Gold is also widely believed to be the best hedge against the U.S. dollar and inflation. When U.S. Dollar falls, demand for gold is set to increase as investors sought to preserve their wealth. In addition, gold has a very low correlation with other asset classes like equity and debt thereby it's a very good asset to diversify for the overall portfolio.

The most direct way of investing in gold is to purchase the physical gold bullion directly from financial institutions or dealer. You can then choose to safe keep the gold yourself or the safer alternative is to keep them in a secured vault owned by third party such as banks.

Instead of holding physical gold bullion, there are a number of other forms of investment in gold without the need to hold physical stock. In Malaysia, both Maybank and Public Bank offer the convenience of gold investment account with a passbook, whereby every trade is done through the account without the involvement of physical stock. Transactions are highly liquid as the buying and selling are based on the bank's prevailing quoted buying and selling prices.

Other means of gold investment (without physical delivery) include Gold Exchange Traded Funds (ETFs), unit trusts (mutual funds) and also the choice of investing directly in gold mining companies.

Gold ETFs are open-ended mutual funds that are passively managed and they mirror the return of spot price of gold. Gold ETFs are listed and traded on stock exchanges just like stocks. As such, the cost of trading Gold ETFs is lower compared to mutual fund type of investment. Gold ETFs provide returns, which before expenses, closely correspond to the returns provided by physical gold. Each unit is approximately equal to the price of 1 gram.

Some of the most popular regional gold ETFs and mutual funds include:
- DWS Invest Gold and Precious metals Equities (listed in Singapore)
- United Gold & General Fund (listed in Singapore)
- DWS Noor Precious Metals Securities A USD (listed in Singapore)
- SPDR Gold Trust ETF (listed in U.S., Hong Kong, Singapore and Japan)

Here you are some of the gold investment vehicles available for your consideration, should you decide to get hold of one of the world's most highly sought after precious metal!

It's All About Liquidity

What happens when you have lots of money in the bank? Quite rightfully, the tendency is to either spend it or invest it wisely. In a macro scale and global financial terms, we call this liquidity.

Back in 2006 and 2007, global financial markets were flushed with liquidity, aided by the sub-zero interest Yen-carry trades. After all, funds were cheap and it was not surprising that investors took the risk to invest in assets with higher returns with lower cost of funds. However, many investors were caught badly burned as the global financial markets collapsed in the wake of the collapse of Lehman Brothers, followed by the massive loss of liquidity.

When funds dried up and there was a massive loss of confidence, investors naturally become risk averse. Markets continue to fall until the first quarter of 2009 amidst this phenomena.

Since March 2009, the outlook has changed drastically, due to massive pump priming by countries around the world and the huge injection of funds by the U.S. Government to bailout troubled financial institutions. Quantitative easing (printing of money) by countries such as U.S. and U.K. has certainly contributed massively to the availability of funds as well.

As a result, global financial markets are now flushed with liquidity. Whether this is artificially created or not is subject to your own interpretation though.

With U.S. economy showing signs of recovery, the U.S. Government has to decide whether it's time to gradually withdraw the stimulus plan. Indeed, this is what comes out of yesterday's FOMC meeting, however, with no specific timeline mentioned yet. Federal Reserve is not likely to do so until U.S. unemployment rate starts tapering off. Bear in mind that with all the talk about U.S. recovery, the unemployment rate is still hanging high at almost 10%!

With liquidity being the major driving factor, any move that could potentially dampen liquidity prematurely may spark another round of fear within the financial sector.

On the other hand, i believe the bull party is ain't over until there is a dramatic change in liquidity. As such, I am quite prepared to hold on to my positions until there is a clear sign of otherwise emerged.

Unlock The Equity Cross Road....

The word goes that when the U.S. sneezes, the rest of the world catches a cold. The above scenario is still pretty much valid, given how the financial troubles in U.S. had led to the global economic meltdown for the rest of the world! So despite all the speculation about the potential decoupling of world's economy from the U.S., it is simply not true as globalization has increasingly turned the world flat and like it or not, Americans are still the biggest spenders in the world, mopping up many products and services the rest of the world has to offer!

However, China has gradually and surely increased its role in the world's economy, given its huge domestic market (served by 1.4 billion people) and the enormous pace of growth averaging 8 to 10%. In time to come, it will not be exaggerating to say that if China sneezes, the world will likely catch a cold too!

Global stock markets have recovered strongly, against the odds, for the past 6 months. Major doubt is now being raised as whether the optimisms have run ahead of fundamentals or it's a mere speculation? The answer, I'm afraid, is highly subjective. Bear in mind that equity market is always forward looking, which essentially means that as an investor, we simply cannot wait until the event unfolds! Yes, it's a calculated risk that we all will have to take.

Recent data seem to have pointed to a sustainable recovery. However, whether one views it as a V, W, U or S shaped type of recovery is again highly subjective! Tan Teng Boo of iCapital Fund Management seems to believe we are at the beginning of another bull run and there will be a V-shaped recovery! However, most other analysts or financial gurus tend to take a more conservative view. Taking a long term view with China and likely India to spearhead future's economic growth, it is likely that we should have seen the worst for now provided U.S. do not spring more surprises or open up another can of worm!

Right now as we speak, global markets seem to be reaching a cross road where the next direction should be. It is understandable that investors are feeling nervy, having witness a dramatic bull rally for the past 6 months. An overheated bull will tend to follow with meaningful short term bear correction. Only then will the bull have an opportunity to recharge.

Mark Mobious, the well-known founder of Templeton Asset Management and investment guru, stated about a month ago that markets could decline between 20% to 30% following the recovery.

As a matter of fact, China's Shanghai market has corrected (or crashed?) about 20% the last couple of weeks, driven by fear of Chinese Government's plan to tighten the domestic credit market. Tightening credit at a time when China's export and unemployment are still weak does not seem to make sense. However, it is also a concern that excessive liquidity could lead to excessive speculation and unproductive output. As such, the latest measure is meant to ensure that credit resources are diverted to productive investments, which will strengthen real economic activities rather than continue to create bubbles in the stock market and the real estate.

To me, it's good to take a pause and re-assess the status quo, rather than taking the gung-ho approach. The faster one climbs, the harder one falls....

Perhaps, it's also a good time to re-assess your portfolio too. Some spring cleaning will always prove to be timely indeed in due course.

Is Margin Trading Right For You?

Leverage your money. That's what many of us have often been told or practising. However, not all forms of leveraging is good. For example, not repaying fully your credit card bills and servicing high amount of interests is not a good way of leveraging. To sum it up, you need to weigh the cost and benefits of such leveraging and the associated risk before jumping into it. If the cost outweighs the benefits and comes with high risk, such form of leveraging is obviously not for us!

In equity trading, there are generally two forms of account, being cash account and margin account. Cash account simply means you pay cash up front, before purchasing shares. In countries where settlement period (T+x day) is allowed, full settlement has to be made upon the maturity of the settlement period. Margin account, on the other hand, allows an investor to purchase more shares than his cash deposit allows, normally two times the amount. For example, supposed you have $10,000 in cash deposit, you are allowed to purchase up to $20,000 worth of shares. The other $10,000 is like a form of borrowing from you broker or securities firm, in which they will charge you interest (for the amount of borrowing) based on prescribed interest rates calculated on a daily basis.

Effectively, this is a form of leveraging. Question is, is this a good form of leveraging? Let's explore the advantages and the inherent risks.

Quite clearly, margin trading allows you to trade more than what you have, and therefore, allows you to make more money if your share price projection turns out to be correct. However, the same holds true (i.e., more losses) if the share price goes against your direction!

Here's the added risk when the direction of the share price goes against you. When the amount of shareholding falls below a certain predetermined amount (by the broker or securities firm), the broker is entitled to issue a margin call. What a margin call simply means is that you will need to top up the shortfall immediately or latest by the next business day.

For example, supposed you have cash deposit of $10,000 and you have bought shares worth $20,000. Let's say share prices have gone down by $6,000 and you now have $14,000 remaining. Your net cash position now is %$4,000 ($10k - $6k loss). Assuming margin requirement is 30%. you will need to maintain a minimum of $4,200 ($14k * 30%). In this case, there will be a margin call given your net cash position runs below the safety margin.

Failure to top up within the set timeline will render the broker disposing your shares. Worst of all, it can be done without your knowledge!

To further add salt to the wound, your losses could be blown out of proportion as you continue to top up your margin but the market further deteriorates against your expectation!

You need to be also aware that the amount borrowed incurs interest on a daily basis. As such, it is an added cost of investment. As such, there are holding costs should you decide to hold on to a stock.

In conclusion, my advice is do not trade margin account unless you absolutely understood the kind of risk that you are dealing with and is prepared to take on such risk without major adverse consequences. Personally, I do not and will never trade with a margin facility. Simply, it's way beyond my tolerance of risks!

How To Invest In Overseas Equity Market?

For those who would like to diversify their portfolio investments beyond the local shore, this article sets to explore the ways to do so. Just to emphasize, I am articulating on direct or active investment instead of passive investment such as investing in unit trusts.

Thanks to globalisation and increased investors' appetite for better investment returns, many Malaysians have started investing offshore (In part this is also due to the fact that Malaysia stock market is no longer favoured by foreigners and is lagging far behind stockmarkets in Hong Kong, China or even Singapore in both performance and liquidity).

If you are interested in investing in multiple key global markets, the one that instantly comes to my mind is Interactive Brokers (IB). IB offers a very comprehensive list of financial markets to invest in, ranging from North America (U.S, Canada, Mexico) to Europe and Asia Pacific (Australia, Hong Kong, India and Japan) region. The products offered are also wide ranging, from equity to forex, derivatives, bonds, ETFs, CFDs and so on.

IB's brokerage rate is also one of the lowest available. For instance, to trade in U.S. stocks, the brokerage charge is only US$0.50 per lot (of 100 shares) with a minimum $1 brokerage per order!

Application for an account can be done easily through the web (online). Even Agreements can be digitally "signed" online! The only manual work which you need to provide them is a copy of your Passport and a signed copy of certain local Authority Form such as W-8BEN in the case of trading in U.S. For added convenience, you may fax them a copy of these documents or simply scan and email a copy to them.

One word of caution though, the trading software for IB is not that user friendly. So it may take some time for you to get used to it. However, step-by-step guides are readily available from their website. All you need to do is to run the videos.

For those who are interested in trading in the U.S. market only, my preferred broker is ThinkorSwim (ToS). Brokerage rate is higher at $1.50 per lot or fixed at $9.95 per trade (whichever is lower and subject to a maximum of 50 lots for fixed rate) but the trading software is much more user friendly and feature packed. Among them include the ability to display multiple chart patterns all in one screen.

The beauty about these online brokers is that you can also do virtual trading, that is, trade without real money! This will give you a sense of better confidence before starting real trades, and is ideal for beginners who would like to get familiarise with the trading platform and/or test certain trading strategies.

To start real trading, you will need to deposit funds first into the trading account. In other words, there is no more T+x day type of settlement. All trades are cash up front but you may choose to trade with a margin facility.

Funds can be easily transferred from your local banking account to the U.S. designated account using wired transfer or more commonly known as Telegraphic Transfer (TT) in Malaysia. You will need to bear the TT charges (charged by both local and foreign banks) as you do the transfer. Just inform the broker about the transfer and they will notify you once the amount is successfully banked in. Normally, this should happen within the same business day.

Trading platform is much more sophisticated compared to our local markets as you can literally set your trading criteria (e.g., entry price, stop loss and profit target) and walk away without ever watching the screen again! You can even set orders such as market order, stop order with or without limit and OCO (One Cancel Other) orders. Once you learn how to do it, trading is very easy and a peace of mind in case you are busy at work or go to sleep!

Other than signing up with online brokers, the other viable option is to trade via your local investment bankers or stock brokers. A number of local Investment brokers have for the past couple of years rollout offshore trading in order to cater for this increased interests. Among the Investment Brokers offering this service include CIMB, OSK, Kenanga, Maybank and RHB Investment Bank.

However, do take note that this type of trading is not done online. The arrangement is between yourself and your local broker. Orders can be instructed by you and your broker will forward the trade instruction with their respective counterpart in the particular country of trade. Exchange rate is determined by the broker on the day of trade. There is no standard brokerage rates apply so you will need to verify with your preferred broker before trading. There will also be some signing of paperwork required before you want to start trading offshore.

Generally, this type of 3rd party or indirect trading will be more costly than online trading. It will probably be fine if you do not intend to trade offshore frequently and do not have the time or patience to learn a new trading platform. Also bear in mind that there will be a delayed trading execution given the offline mode of instruction and involvement of 3rd party.

Is Michael Jackson Worth Investing?

The news of Michael Jackson's death has caught many people by surprise. Right after the news were released, the memorabilia market instantly heated up. Copies of his best-selling album, "Thriller", worth normally US$10, were fetching 5 to 15 times more thereafter!

Bizarrely, a single Cheeto, a cheese-flavored, finger-sized snack, that purportedly resembled Jackson doing the moonwalk was sold for $35.18 on eBay on Jun 25th!

Prices for all things Jackson, from albums and tour posters to commemorative coins and more, popped up like a champagne cork and have shown little sign of coming back to earth.

People are so overcome with emotion that they are willing to pay almost anything rather than thinking they should wait for the spike in prices to disappear.

Other groups of people are now either looking to cashing in all things Jackson related or investing (buying) with the hope of holding on to it for future gain.

But this will come back to reality soon, most likely when the news stop producing Jackson's headlines or when people get tired of it. People are often fickle minded after all! They will move on to the next major headline after some time.

For the matter, anyone thinking of Jackson memorabilia as an investment, or with a spare copy of Thriller gathering dust in the basement, may want to move it now because the market is never likely to be this hot again.

However, if someone does hold on to something genuinely unique or rare items of Jackson's, then perhaps there is a higher chance that these unique or rare items can fetch a much higher price in the future. The same principle, however, is unlikely applicable to something like Jackson's Albums (eg., Thriller) though, where there were huge production supply in the market.

Also watch out for items that are fake or scam!

Ultimately, people should return to their senses.

Nevertheless, Michael, thank you for bringing to us your special brand of music and entertainment that will live with us forever!

For those who would like to catch a glimpse of one of Jackson's final moments, watch
this video of Michael Jackson's last concert rehearsal on June 23 2009, two days before his death, at the Staples Center in Los Angeles.

Liberalisation or Desperate Measure?

Finally, the 30% quota Bumiputera (Native) requirement for new listing of public companies in Malaysia has been abolished by the Government of Malaysia! This is in the wake of the country's diminishing competitiveness and the continued diminishing foreign interest in Malaysia's capital market. The Government labels the move as an economic liberatisation. To me it's more like a desperate measure (against potential political flak) to salvage the alarming situation!

Let's take a closer look at the equity side. The current weightings of 2.2% of foreign funds in Malaysia (as a percentage of their Emerging Asia exposure) pales in comparison to its own historical averages of 3.7% post crisis and 4.0% in the preceding upcycle of 2003-07. The resulting ratios of current exposure to previous historical averages are therefore the lowest ever recorded! (Source: CIMB Research).

Despite the recent 20+% market rally in Malaysia, the support is primarily coming from local funds. This shows that Malaysia market has been ignored by foreign investors thus far in this run up, and the exposure is clearly on a downtrend rather than up!

Nevertheless, with the new measure, what this has done is that it has freed both Malaysian and foreign entrepreneurs from having to worry about obtaining a 30% bumiputra equity participation before they can expand their businesses.

The 30% bumiputra equity requirement thus is no more an administrative micro target. Instead the government will keep that as an overall macro target leaving it to regulators in the respective sectors to decide how to do it.

The significance of this becomes more apparent if one considers the listing process. Previously, one had to get a 30% bumiputra partner and then float at least 25% of the issued capital on the market through an IPO. That effectively meant that a majority of 55% stake had to be given up!

If the bumiputra investors subsequently sold out, the major shareholder will most likely be required to top up the bumiputra equity stake at the next fund-raising exercise.

Now, all it takes is a 25% public float of which half or 12.5% of equity capital will be allocated to bumiputras via a public balloting process. If not enough bumiputra participants have applied, the bumiputra requirement is deemed to have been met.

Also all listed companies do not have to periodically increase their bumiputra stakes to previous levels when these are sold down, thus eliminating a recurrent headache!

A more interesting public statistics shows that of the RM54bil of equity distributed to bumiputras through these means between 1984 and 2005, only RM2bil are still in bumiputras' hands!

On the other hand, all property transactions, except for those involving a dilution of government or bumiputra interests for property valued at RM20mil and above, would no longer require Foreign Investment Committee (FIC) approval.

The role of FIC has also become obsolete...Way overdue!

The world is getting flat....It's time to heed the wake up call or face elimination!

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.

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.

Shall I Accept A Lower Loan Installment?

In view of the current low interest rates environment due to global economic crisis, costs of borrowings have become cheaper and if we were to base on the original loan facility agreement with the bank, the repayment period for the affected loans will be shortened, assuming the same amount of installment were to be paid each month. In some countries, banks are required to voluntarily reduce the monthly installment amount of loans so that the repayment period will not be shortened. In some cases, banks even allow troubled borrowers to stop payment for a specific period of time, or willingly negotiate with the borrower to restructure the terms of loan. The objective of this is simple, that is, reduce the burden on consumers and/or businesses in a challenging time like this.

Some people have sought my opinion whether to accept the reduction in installment amount. My answer to that is why not, even if one has no financial difficulties! After all, one could save a fair amount of commitment each month and assuming one has multiple loans (like myself), the amount of savings each month can be quite sizeable.

There are many advantages reduced commitment can bring to the equation. Among them include:
- excess funds for spending on goods and services. Flow of funds and spending are essential for the growth of economy. An environment without consumer and business spending will just make the already stale situation worse off!

- pay off debts which carry a higher interest rates than one's mortgage loan. Credit card debt is an obvious example. This could lead to significant savings in cost of debt.

- best of all, use the savings from the excess funds to invest wisely. Given that many investment grade assets have been bashed down badly during the past one to two years, great bargains are abundant! For instance, stockmarket is expected to give the best return once the global economy recovers. So for those who have not acquired the knowledge of investing, now is the best time to educate yourself, before it's too late!

Also, keeping extra cash in your pocket at the time of crisis is definitely a wise thing to do. After all, we will not know what may happen next. For instance, job retrenchment, business failure, etc, may just pop up down the road, especially if the economy gets worsen.

One word of caution though, do not expect every bank will voluntarily reduce the installment for you. I know for some banks, you will actually have to write in to request for the reduction. So do not just assume this will be done automatically. Go ASK YOUR BANK now!

Worst Ever Results For Berkshire: Warren Buffett

Berkshire Hathaway Inc. posted its worst results ever in 2008! Billionaire Warren Buffett said the economy “has fallen off a cliff” and that efforts to stimulate recovery may lead to inflation higher than the 1970s. Berkshire’s shares have lost almost half their value in the past year as the bear market dragged down financial assets and the recession put pressure on profit from the company’s more than 70 operating businesses. Berkshire’s fourth-quarter net income fell 96 percent to $117 million. Book value per share, slipped 9.6 percent for all of 2008, on the declining value of derivatives and the company’s stock portfolio.

He believes the bailouts of the banking system and “quasi-banks” such as AIG were necessary, even if everyone dislikes what’s been done to salvage the New York-based insurer. He favored insuring all bank deposits, and in response to a question about nationalizing lenders, Buffett said he doesn’t see any moral hazard in the U.S. seizing an institution when shareholders are already almost wiped out.

He also believes the root cause of the current crisis was that companies used too much leverage and “played games” such as creating special investment vehicles to keep producing earnings growth. The U.S. economy was not a "house of cards" over the past ten years, but mistakes were made when it came to borrowing money.

Other keynotes include the following:
- The American public is fearful, confused and changing their buying habits,
- The economy turnaround won't happen fast.
- Five years from now, the economy will be running fine. The strength of the American system will pull it through, just as it has many times in the past.
- Most banks are in "pretty good shape" and can "earn their way out" of the current problems given the low cost of funds. Banks, however, "need to get back to banking.";

- It is extremely important that the government make clear depositors won't lose their money if banks fail;

- Buffett wishes he had written the New York Times "Buy American" a few months later, but stands by the basic argument that one will do better over a ten-year period with stocks that one will with Treasuries. He said in the article he wasn't calling the bottom of the stock market, and he still isn't;

- Buffett says derivatives are not "evil" and to be avoided at all costs, but they are "dangerous" and should be used very carefully. He still expects to make money on the long-term "put option" equity derivative contracts Berkshire has written;

- Housing market could work through, or "sop up," its excess supply in as little as three years if new construction is reduced to a level below natural population growth;

- Mark-to-market accounting should be retained, but regulators shouldn't use it so much to require institutions to increase their reserves.

Here are the full videos of Warren Buffett's interview with CNBC. It's quite a long interview but well worth the time listening.

US Economy has fallen off the cliff


Q&A


Fear Affects Everyone


Banks should go back to basics


Crooks & Investment Advice


Investment Regrets


Automotive Bailouts


Deals and Opportunities


Finding the right solution


Advice for Obama


The rich to subsidize the poor


Final Thoughts

Warren Buffett's Words of Wisdom for 2009

Here's a special message from the one of the wealthiest man on earth and is worth your time reading and taking notes....It's simple yet powerful and meaningful.

"We begin this New Year with dampened enthusiasm and dented optimism. Our happiness is diluted and our peace is threatened by the financial illness that has infected our families, organisations and nations. Everyone is desperate to find a remedy that will cure their financial illness and help them recover their financial health.

They expect the financial experts to provide them with remedies, forgetting the fact that it is these experts who created this financial mess.

Every new year, I adopt a couple of old maxims as my beacons to guide my future. This self-prescribed therapy has ensured that with each passing year, I grow wiser and not older. This year, I invite you to tap into the financial wisdom of our elders along with me, and become financially wiser.

Spending: If you buy things you don't need, you'll soon sell things you need.

Savings: Don't save what is left after spending; spend what is left after saving.

Hard work: All hard work brings profit; but mere talk leads only to poverty.

Laziness: A sleeping lobster is carried away by the water current.

Earnings: Never depend on a single source of income.

Borrowings: The borrower becomes the lender's slave.

Accounting: It's no use carrying an umbrella, if your shoes are leaking.

Auditing: Beware of little expenses; a small leak can sink a large ship.

Risk-taking: Never test the depth of the river with both feet.

Investment: Don't put all your eggs in one basket.

I'm certain that those who have already been practicing these principles remain financially healthy.

I'm equally confident that those who resolve to start practicing these principles will quickly regain their financial health.

Let us become wiser and lead a happy, healthy, prosperous and peaceful life."

- Warren Buffet

Belated Santa Rally?

Just when the expected year-end (2008) window-dressing activity (or commonly known as Santa Rally) for global stock markets ended with much disappointment, global stock markets have surprisingly started the year with resolute intention! The chart below shows selective global market performance over the first 2 to 3 days of trading.


Having a sense of too good to be true, especially after so many false starts and suckers rally?

This may well be an exception! In my opinion, key global markets are possibly gearing up for a mini-rally this month, particularly after such a severe bear beating last year. So, there is a good chance we may experience more than just a technical rebound. After such a devastating and disappointing stock market performance in 2008, where key global markets plummeted from around 30% to more than 60%. The start of the year saw fund managers worldwide jostling to position their portfolios for the new year and the bombed out stocks worldwide, a scenario that has not happened for a very long time.

In Malaysia, the reasonably high average daily Bursa volume of about 700 million seem to support the notion too, suggesting there were plenty of buying support, on top of the more than 5% gain in 3 days.

However, bear in mind that this does not mean we have seen market bottom. It's just market "forces" at play at the moment.

While the US Government is doing what they possibly can to salvage the wreckage back home, the story in Asia may just be the beginning of a severe slowdown. Hence, the worst may have yet to happen in Asia. On a conservative note, economic recovery may be more realistic in 2010 than the second part of 2009.

No Pay Cut, Says Auto Union!

Here's the bad news....negotiations to approve U.S. automakers $14billion bailout plan had stalled, due to rejection from U.S. Senate. Strange decision for me, considering the amount was only a "fraction" of what the U.S. banking industry had sought earlier ($700billion)! Further digging revealed that the only reason the plan was rejected was due to the fact that the U.S. Auto Workers Union rejected the Republican demands to accepting a pay cut, in order to realign the wages with Japanese automakers, namely Toyota, Honda and Nissan.

Doesn't sound like an unreasonable demand, does it? Let's face it, in order for someone to gain (from continued employment), it's fair to expect that someone ought to give up something in return. So given the unrealistic nature of the union workers, the decision probably serve them right!

It is reported that both General Motors and Chrysler are experiencing severe cash flow problems and they may not even survive beyond the month of December without filing for bankruptcy.

I would imagine is probably wiser now to bite the bullet, and then demand for better package when business improves later down the road!

Nevertheless, the White House later said it was willing to consider using money initially set aside to shore up the banking sector to give these beleaguered auto makers urgent aid. However, whether such plan will materialize or not remains to be seen.

One other thing, the investment community may not have the patience to wait for the saga to unfold. It may just lead to another global market white wash!

Let's hope not!