Top 10 Reasons I Invest in Capital Malls Malaysia Trust

The thing about Penang properties: the rentals are (relatively) cheap compared to their (speculative?heh) values. Absolutely absurd when it comes to the soaring properties price for the past 3 years. Bear in mind properties investment is illiquid, and huge upfront capital is required. And there's always hassle of managing your properties unless you are full time into properties investment. Another rule of thumb is a return of at least 6 percent per annum rental yield, else experts say it is just not worth the trouble.


So I recently started to invest in Real Estate Properties Trust (REIT). Capital Malls Malaysia Trust (CMMT) to be exact. Consider REITs as the unit trust in commercial/residential properties which trade on the stock exchange. Here are the top 10 reasons why I see potential in Malaysia's largest pure-play shopping mall REIT for long term holdings and dividend income. I thought it as a good way to balance the risk and return with regard to my US stocks portfolio.


1. Three iconic shopping malls
Its main portfolio includes Gurney Plaza, largest mall in the northern region. The other two are The Mines Seri Kembangan and Sungai Wang Plaza Kuala Lumpur.

The layman's explanation of: Why Switch to Fixed Income Fund during Recession

Assume that I wish to borrow a lump sum of money from you, which I am going to repay 2 years later. In return, you think you need 10 percent return for the trouble.  On top of that, you require a bonus payment of $ 1,000 at the end of each year to sweeten the deal.


We put this in a contract. To recap, the conditions are:
1. You lend me a sum of money for 2 years. 
2. I will repay this principal amount in full, exactly 2 years from the date you transfer the money to me.
3. I will pay you $ 1,000 for the 1st year, and another $ 1,000 for the 2nd year.

Of RIM Blackberry, Value Investing and Leverage

I am sure you read of longest ever worldwide Blackberry network outage last week. The three-day blackout interrupted email and Internet services for tens of millions of frustrated users and inflicted more damage on an already tarnished brand. It is definitely threatening to cost the granddaddy of all smartphones more business when it's already struggling to keep up in a crowded marketplace. Even for many Blackberry loyalists, this could be the straw that broke the camel's back.

BlackBerrys get their email through RIM's centralized setup, allowing the company to offer a high level of security. But when something goes wrong, it affects millions of people at the same time. Blackouts are not localized to one company or one carrier, as other outages are.

When I read this, I personally feel the sentiment - no, I have never used any Blackberry but my relationships with RIM stocks had been turbulent to say the least.

When I first delved into the world of stock investing, value investing is only belief I held on. It still is, but that's just one among the many things in my list. 

3 basic must-ask questions to a Unit Trust Consultant

1. How much could I possibly lose?
2. What are the upfront and hidden costs?
3. How long can I double my money compared to FD rate?


WHY?


1. Test your agent's honesty. If he/she guarantees you not to lose money, you can ask him/her if he/she is going to compensate you with his/her own money when you DO lose money. The point is, I expect the agent to give me honest info on the performance of the fund, especially in 2008, without sugar-coating or with manipulated marketing material. As an investor, I know I got to be realistic; for instance, no equity fund will make money during recession. But if you are an agent with integrity, I might end up buying the same fund from you than someone who's misleading me or giving me empty promises.

Be calculative of your unit trust investment return

Say, you invest $ P in the best unit trust exactly for 1 year. You read that your unit trust profited by A % per annum the same year.

Digest this...

Your profit is A LOT LESS than A%

Signs of 2008 economic recession approaching?

BCI for Q2 2011

Unit Trust Risk-Return Part 1: The Sharpe Ratio

In any financial investment, risk and return go in parallel. Guaranteed return is known as risk-free return, and almost always refer to either Fixed Deposit rate or Malaysian Government Securities coupon rate. If you are buying government bond such as Greece, it is no longer risk free anyway! FD rate seldom goes beyond 4%; here's a summary of the current risk free rate of return (FD).


Sharpe ratio of an investment refers to how well the investment generates a return taking into consideration the risk. Risk is high when the investment nature has high volatility - tendency for its value to soar or to plunge excessively within a specific timeframe when benchmarked against the overall market activity.

The Grim Reaper Investment Fund

...aka the controversial Life Settlement Fund.

What happens is this:

1. A life insurance policy owner has coverage of $1 million, and has paid a total of $200k premiums for the last 20 years.
2. The policy owner offers to sell his policy at $500k.
3. A third party pays the policy owner $500k cash, and essentially becomes the legal beneficiary of this policy.

Motivation for policy owner to do this

1. No longer need the policy, but instead of letting it to lapse, which essentially means insurance company pocket up the $ 200k premium, he can make immediate cash out of it.
2. The surrender value of the policy is way lower than its sale value or total premiums paid.
3. No longer can afford to pay the premiums - but reselling it for quick moolah is better than letting it lapse.
4. Need additional, immediate cash for medical treatment after exhausting every financial channels.

Imagine you are the third party who purchased this policy - you rate of return is directly related to how soon the policy owner dies. I was like "WTF?, there is not other investment more ghoulish than this!" And this is actually near to risk-free, say if he dies after 1 year, your rate of return is (1 mil/0.5 mil) x 100% = 200%!. Even if he dies after 5 years, your rate of return would have been 14.9%, guaranteed! 

They say, there are only 2 things in life are certain- death and taxes!

Seems like a win-win situation? Not so.In most investments, either the seller or the buyer will be the loser in a zero-sum game but here, the biggest loser is the rightful beneficiaries of the policy owner - the spouse (if still alive) or the children (that's if the policy owner intends to leave the $1 mil as an estate to them). Still, I think if there's no surviving spouse or children, then this could be close to a win-win scenario. However, another argument is, if there's advancement in medical technology which prolongs the life expectancy of the population, then investors' rate of return would be drastically reduced. In other words, the key to profitability is an accurate projection of life span.From investor standpoint, the risk is reduced if the policy owners are those in their twilight years. Ah, how morbid!

Again, Malaysia being a conservative nation, you don't have this. Then again, would you be able sleep to sleep at night knowing there is someone out there who is eager to see you kick the bucket ASAP so he can reap a profit? That's why it is almost irrational to trade these investments Over The Counter; in reality, they are managed as mutual funds. Hey, those funds are somehow as good as high grade corporate bonds, but with higher yield! Better yet, they are absolutely negatively correlated with the business cycle. You still get your ROI, albeit variable - due to one and only factor - how soon people die! Widespread, unexpected early deaths (a pandemic of sorts, more deadly swine flu anyone?) will result in windfall for life settlement funds investors.

I bet if this is legalized in Malaysia, Ah Longs' drastic shift in their modus operandi would be to buy their borrowers' policies, and when borrowers failed to pay up, they will happily chop you up, no questions asked! No more taunting or splashing red paints or hanging pigs head!

The Final Verdict: ESPP Part 3 - Employee: 0, Company: 1

A recap on previous post: Part1 and Part2

Due to the change in Malaysian taxation system on ESPP, some companies restructured their ESPP (known as "Scenario 2" outlined here) with regard to the applicable subscription price.

Recall,however, that "Scenario 1" is the norm, and it is as such from previous example in Part2, as below:

*****************************************************************

Subscription price: $30
Subscription price less 15% discount: $25.50
Purchase (subscription) period last trading day closing price: $50



Taxable gain takes into account the purchase period last trading day closing price, AND the actual discounted purchase price.
In this case:  (50-25.50) x 50 = $1,225
*****************************************************************


Of course, if you are aware of this, first thing which comes to mind --> your company is short-changing you, and the next thing you will do is to call your HR to complain. Then HR will probably need to explain to you it's not their mistake but it is due to LHDN. But HR doesn't have that much time to entertain the same enquiry by all "self-aware" staff. Issuing a memo highlighting LHDN new idiotic implementation isn't their cup of tea. HR is always the good guys *Cough*


A smart C&B director will instead, alter the ESPP policy regarding the applicable subscription price. What happened now is this: Your company will fix the rule that, for any purchase period in question, the corresponding last trading day stock closing price, less 15%, IS the Purchase Price.
In this case, it is $42.50


However, remember that, previously, if you were to purchase 50 shares at the price of $25.50, it means your accumulated salary deduction allocated for ESPP is $1,275. 


With the purchase price now fixed at $42.50, you can only purchase 30 shares units with $1,275, compared to 50 units previously.


Now, your total taxable income here is 30 x (50-42.50) = $225 !!!


Do you see the play of numbers here? Your taxable income is similar to the previous taxation scheme, but you, as an employee, still loses out because you just purchased the shares at a relatively higher price in this new company ESPP scheme. Not that you have a choice anyway!


This is what my (ex) company ESPP prospectus says:

Oopss...I mean, this.

Indeed this takes into effect starting Nov 2008.


In ChampDog's words, "...you hide a problem without people realizing it."


Again, HS Ooi's remarkable comment on this


From company standpoint, a company will save more by using the average window closing price because they only need to pay you the 15% discount of market price. Of course, when a company is using the lower window price, most probably the company will buy some call options to make sure that in case the market is going up very high(hence the call options are in-the-money) their ESPP cost is still fixed. But this also means that the company have to pay additional premium for the options position they are taking. In a downward market when the call options are out-of-money, they will lose all the premium of the call options position. I think companies will have to spend more if they choose to use the lower window subscription price instead of window closing price. You will probably see more and more companies change to window closing price. So, enjoy the extra benefits while you still can :-)

It is a win-win for company and government to use the window closing average price instead of lowest price of the windows. This move make smart sense for them, though it is not good for employees. 


As a employee, the only control you have over this situation is to set a reminder 2 weeks before the purchase period last share trading day. Pull out your accumulated salary deduction from ESPP to be refunded back to you if the current stock price/trend shows possibility of dropping in short term. Even if you let company purchase the stocks for you, it is not worth to hold ESPP stocks for long term unless huge potential of capital appreciation (but there's always market risk which you cannot foresee). One cannot be a passive "investor" anymore in this! Understand that the system (company + Government) works against you if you are not smart in managing your own money! At the end of the day, you will likely end up in a higher tax bracket and your net gain could be negative!!


SHARE THIS INFO WITH YOUR COLLEAGUE AND FRIENDS IN MNCs. ALL OF US DESERVE TO KNOW, THE LAST TIME I CHECKED, NO ONE TOLD ME AND NO INFO CAN BE FOUND ONLINE, EXCEPT CHAMPDOG'S ORIGINAL POST.

Employee Stock Purchase Plan Part 2 - Employee: 0, Government: 1

In my previous post on differing implementation of Employee Stock Purchase Plan, I quoted on an amendment in Malaysia taxation system on ESPP being the probable reason behind the change in the determination of applicable stock purchase price and date from Scenario 1 to Scenario 2.


Quoting ChampDog's original posting on this, lets assume the following constants.


Your company practises Scenario 1
Subscription price: $30
Subscription price less 15% discount: $25.50
Purchase (subscription) period last trading day closing price: $50
Number of shares purchased: 50 units


Previous Tax Scheme for ESPP
Taxable gain is the total discount in purchasing the shares. This is straightforward.
In this case: (30-25.50) x 50 = $225


Current Tax Scheme for ESPP
Taxable gain takes into account the purchase period last trading day closing price, AND the actual discounted purchase price.
In this case:  (50-25.50) x 50 = $1,225


Regardless whether you realize your capital gain (sell the shares) or not, you will be taxed upfront for the paper gain. This may not appear on monthly pay slip but it will show in the EA form.
However, we knew that capital gain is not taxable in Malaysia, so isn't this just plain idiotic? 


Abso-fucking-lutely

And what if the share price drops a lot after the purchase date, and you are still holding onto your shares purchased via ESPP? Doesn't matter, LHDN already locked onto your $1,225 worth of taxable income.
If so, it makes ESPP much less an attractive, especially if you plan to hold onto your stocks for long period, and the share is prone to price drop in the short term. It is very likely that you will be taxed more in this case for the Year of Assessment in question. Of course, if the share price appreciates further after that, you will feel less of an impact.


In the same posting at Journey to Become Financially Independent, financial consultant HS Ooi explained this well in his comments to this.


The government is finally getting smarter in catching up with the loophole of ESPP. It shows that how much lost revenue the government had suffered in the past!


In the past, when the government was taxing the "profit" of 15% subscription price discount enjoyed by employees, the government treated the discount as benefits received by employees. However, they forgot to take into consideration of "market gain" enjoyed by employees. You may argue that the market gain is a capital appreciation which shouldn't be taxed by the government. However, who is actually giving the employees the "market gain"? Is it truly market gain or employees compensation in the form of market gain?

If a company is giving out ESPP at a lower price of the offering window, in an upward market, the company is actually have to "compensate" employees for the gain. You haven't actually owned the stocks yet but you are able to buy the stocks at a lower price (plus 15% discount). The company is selling you the stocks at lower price when market price is higher at closing of the offering window. So, by definition, you are receiving "extra benefits" from the company. You are not getting capital appreciation from the stocks you owned. By taxing you based on the average price on the window closing day, the government is maximizing their tax revenue, which is a smart move by them. :-)

Key takeaway - LHDN screwed us big time. No surprise, though.

Warren Buffet Invests Like A Girl...

I am not demeaning the value investing guru of all time here. It is the actual title of a book by Motley Fool.

Here's the excerpt from the review at Goodreads.


Warren Buffett and all of the women of the world have one thing in common: They are better investors than the average man, a fact proven by psychologists, scientists, and the value of their portfolios. In this well-researched, eye-opening, and wonderfully witty must-have book, the impresarios at The Motley Fool show that women, with their capability for patience and good decision-making, epitomize the Foolish investment philosophy, and the investment practices of the most successful investor in history: Warren Buffett. While men tend to be too confident, compulsive, and overly daring, women tend to be more studious, skeptical, and reasonable - traits that have led them to consistently outperform their male counterparts as investors. Unlike men, women spend more time researching their investment choices - knowledge that helps them avoid hot tips and trading on whims. Women trade less than men; their lack of confidence actually helps them choose more wisely and results in higher dividends and lower costs. And women consider more than just the numbers when making trading decisions. They invest in companies they feel good about ethically and personally -companies with good products, good services, and ethics that tend to have better long-term prospects and face fewer lawsuits. 


For those with XY chromosomes (myself included), drop your masculine armor and herd mentality right now.  Heed this advice and adopt a more 'feminine temperament' in investing.

Employee Stock Purchase Plan Part 1 - Differing Implementation

Scenario 1 & 2 below are the past and present methods of implementation for Employee Stock Purchase Plan (ESPP) at a US multinational company in Penang, let's call it X. However, Scenario 1 is still practised in at least another MNC, let's call it Y.

*****************

In this purchase period, assume I have enrolled into the plan and accumulated a sizeable amount of money via monthly salary deduction. And according to company's ESPP plan, staff is entitled to purchase the share at 15% discount.

Scenario 1

At the end of Purchase Period, company will purchase the shares at the lower of these 2 prices - Entry Stock Price on 1 Jan or Last Day Purchase Period Stock Closing Price, at 15% discount.  

Here's an example, an actual screenshot of my own ESPP shares purchase calculation. See the phrase "Your purchase price is 85% of the lower price", which happened to be the stock price on 31 Oct 2008.

Scenario 2

See a different phrase for the below - "Your purchase price is 85% of the Fair Market Value on purchase price", which always refer to the closing stock price on the last stock trading date within the defined Purchase Period. In this case, it is the stock closing price on 30 April 2009, which, coincidentally, is lower than its entry price on 1 Nov 2009.

Malaysia Government Bond Rating benchmark

So what's the deal on those ratings on government debt? By now, we all know that the US sterling creditworthiness rating since 1917 has been downgraded from triple As to double As -  by one of the rating agencies, S&P. Another 2 agencies, Moody's and Fitch, maintained the ratings at Aaa, highest in the rating list.


A lower rating implies there is more risk involved in lending money to the government. Here's a legend on the ratings, from Wikipedia.

Investment grade

• AAA: Moody judges obligations rated AAA to be the highest quality, with the "smallest degree of risk".
• AA (AA1, AA2, AA3): Moody judges obligations rated AA to be high quality, with "very low credit risk", but "their susceptibility to long-term risks appears somewhat greater". (AA+, AA and AA- in S&P)
• A (A1, A2, A3): Moody judges obligations rated A as "upper-medium grade", subject to "low credit risk", but that have elements "present that suggest a susceptibility to impairment over the long term". (A+, A and A- in S&P)
• BAA1, BAA2, BAA3: Moody judges obligations rated BAA to be "moderate credit risk". They are considered medium-grade and as such "protective elements may be lacking or may be characteristically unreliable"

Speculative grade (also known as "High Yield" or "Junk")

• BA1, BA2, BA3: Moody judges obligations rated Ba to have "questionable credit quality."
• B1, B2, B3: Moody judges obligations rated B as speculative and "subject to high credit risk", and have "generally poor credit quality."
• CAA1, CAA2, CAA3: Moody judges obligations rated CAA as of "poor standing and are subject to very high credit risk", and have "extremely poor credit quality. Such banks may be in default..."
• CA: Moody judges obligations rated Ca as "highly speculative" and are "usually in default on their deposit obligations".
• C: Moody judges obligations rated C as "the lowest rated class of bonds and are typically in default," and "potential recovery values are low".

Where does Malaysia stand?

Answer: A3

How about Greece?

Answer: Ca

And despite he fact that our leaders keep on admitting that Bolehland is "mightier" than our neighbour down South, Singapore is the nearest safe haven in terms of Government bond. 

Answer: Aaa

There is profit to be made in a falling market

You don't get to see this often. The date is 4 August 2011.

Are you emotionally ready for such day? Do you...

a) cower in fear and pray that the market will somehow rebound the next day (or perhaps, never?).

b) execute panic-selling to prevent further sleepless nights.

c) spit it all out at your local mamak stall, be the know-it-all on the economy and what will happen in the next few months, but your money is still in Fixed Deposits, earning a measly interest of 3 percent per year.

d) take some calculative risk and be the contrarian.

If you tell put the phrases "making profit" and "falling market" in the same sentence few years ago, I wouldn't be able to comprehend.

I do, now. Having said that, it is not without its risk. Quite high risks actually. Not for the faint-hearted, but that's another post for another day.

The first is by short-selling.

Lesson 1: Annual Percentage Rate vs Annual Effective Rate - Can you differentiate?

Statement of the Day : Understand that banks are sneaky

When a product provider quotes an interest rate, it is not always immediately apparent how much you will be paying - or be paid - if you take out the product.

Einstein said it best - 'if you can't explain it simply, you don't understand it well enough'.

Finance firms love selling complex products. That way customers don't know what they're buying, won't understand the potential downside risks, or realise the true costs, many of which will be expertly hidden in the small print.

Bank profits are big because as Andrew Ellson, Personal Finance Editor of The Times, perfectly sums up:

 "All Banks employ every trick in the book to disguise the true cost of almost every financial product they sell"

Let's get to this 2 terms before I illustrate examples in my subsequent posts.

Annual Percentage Rate (APR) 

• Also known as nominal rate or simple interest rate per annum
• Does not take into account the effect of intra-year compounding

Housing Loan Reduction from EPF Account II - To withdraw or not to withdraw?

Question I have been asking: Is it always wise to withdraw EPF Account 2 for Home Mortgage Capital Repayment or in layman terms, reducing housing loan?

In the The Do’s and Don’t’s of EPF Withdrawal during an interview session at ntv7, Mr Yap Ming Hui stated that generally, if the “mortgage interest rate far exceed 5% (EPF dividend return)”, then it is advisable to do so.

Next question is, how much is “far exceeding” in this case?

I have been doing some simulation.

Referring to the table here:

Investment Diversification

The concept of diversification in investment can mean in terms of asset class or sectors.

To simplify things, let's take local mutual fund as an example.

Funds classified as "Mixed Asset" or "Balanced" type are essentially diversification in terms of asset class and sectors. See the excerpt from OSK-UOB Smart Balanced Fund. Asset class here consists of Cash/Deposits, Real Estate Investment Trust (REIT), Bonds, Equities and derivatives. In terms of sectors diversification, there's construction, consumer products, industrial products, and trading/services.

Equity Fund, as the name suggests, mostly consist of shares and derivatives only - hence, only sector diversification, not so much on asset class diversification. From OSK-UOB Smart Treasure Fund Fact Sheet, observe there are various sectors where the money is invested.

Fixed Income Fund focuses primarily on fixed income securities - mostly on Government or Corporate Bonds. This is mainly asset class diversification - bonds having the lion's share of the pie chart per fund investment objective, followed by 3 equities sector and derivatives.

A more advanced type of diversification can refer to geographic diversification. It often means investing in foreign assets - most commonly, international share market. However, speaking from experience, there is a limitation on how much you can diversify investments, especially in non-local scenario due to limited budget. On top of that, there's currency exchange risk involved.

Anticipating the price of goods in "n" years

Approximate this by calculating the Future Value, FV using financial calculator or excel.

Say, GSC  movie ticket at RM 10.00. Ignoring personal inflation rate, we take CPI increment of 3% per year, in 10 years.

In Excel, type "=fv(", then you will key in "0.03" for "rate", "10" for "nper" which mean n number of periods, "0" for "pmt" which stands for periodic payment, and "-10" for "[pv],  present value for which it must be negative.

You will get the answer RM 14.80. This is the expected movie ticket price in 2022 if inflation remains constant each year.

Rate of Return - the Right Way to Determine

Also known as the average annualized return or geometric mean of return, a potentially confusing term in the mathematics of finance.

Compared to simple arithmetic mean, geometric mean takes into account the time period and the effect of compounding, and is a more accurate representation of investment return.

Let's take an example something we can all relate to - unit trust fund. A hypothetical fund - Fund LCF has the rate of return as below:

Year 1: 15%    Year 2: -15%

At a glance, the "too-casual observer" will conclude that over the 2 years period, the investment return is 0% of your capital. This is arithmetic mean of return calculation. You break even.

Not true actually. Say, if you invested RM 10,000, you investment will be at RM 11,500 by end of Year 1. By end of Year 2, your money would have reduced to RM 9,775 (0.85 x 11,500). So you actually lose RM 225, or 2.25% of your initial capital.

The more accurate method to know the rate of return within the 2 years is by using geometric mean. It's really no rocket science. The calculation is as such:

[ (1+ r1) x (1 + r2) ]^(1/n) - 1, whereby r1 = 0.15 and r2 = -0.15, n = number of years, 2

...and you will get, -1.13%. This is the annual averaged loss over the time frame of 2 years. "WTF?" you asked. Unfortunately, this is the number that represents the reality in this case.

What is bond?

Bond is a fixed income securities. If issued by private sector, it is known as corporate bond whereas government bond is also known as Malaysia Government Securities (MGS). It is considered a debt instruments to raise capital to finance expenditure or working capital, without diluting the ownership rights (unlike shares).

Bonds are usually risk free investment, especially for government bonds unless you are living in nation like Greece where government could default on its debt. From investor perspective, they will lend an amount of money to the bond issuer, and in return they will get a predetermined rate of return (coupon payment, usually within 5 to 10 percent) from their capital annually/semi-annually/quarterly. In addition to this, the capital will be repaid to the investor when the bond 'matures', normally within 1 year for short-term bond (aka Treasury Bills) and 10 years for long-term bond (MGS) . This final capital repayment actually be more or less than the initial capital invested, the former known as discount bond and the latter as premium bond. In short, investor is guaranteed to be compensated in periodical coupon payment in addition to the value of discount of the bond 'price'.