Sunday 27 April 2014

Inflation – The Silent Killer

At the end of every year, I will compute the gains and losses on my investments. As part of the exercise, I will also compute the real gains or losses after inflation. Being human, I tend to focus on the larger nominal gains rather than the smaller real gains. However, the real gains after inflation does have an important story to tell. After reading "Beating the Street" by Peter Lynch, I decided to look further into the effects of inflation on my investment gains and investment policies.

In the 15 years of investing with my own money since 1998, the inflation rates have been as follows:

Year Inflation
1999 0.0%
2000 1.3%
2001 1.0%
2002 -0.4%
2003 0.5%
2004 1.7%
2005 0.5%
2006 1.0%
2007 2.1%
2008 6.6%
2009 0.6%
2010 2.8%
2011 5.2%
2012 4.6%
2013 2.4%
Average 2.0%

Over the 15-year period, the average annual inflation was 2.0%, which looks quite reasonable and in line with expectations of 2% to 3% based on historical inflation. Yet, guess what is the cumulative losses to inflation over the 15-year period? It is a staggering $218K!

It is interesting to compare the losses to inflation to the losses in investment at the depth of the Global Financial Crisis. Then, the investment losses were estimated to be around $175K out of an invested capital of $270K invested in shares, Real Estate Investment Trusts and Business Trusts. This worked out to be a loss of 65%. This was a very painful loss, yet, in terms of magnitude, it is actually smaller than the cumulative losses to inflation. A 2% annual inflation over a 15-year period can actually result in a larger loss than a one-time 65% drop in share prices during a severe market crash! The reason why inflation is a bigger monster than market crashes is because inflation affects the entire capital base every year whereas market crashes only affect the portion of the capital invested and only for the duration of the market crash.

Many people have been fearful of losing money in investments, which can be difficult to recoup. Personally, I have also kept a significant portion of my capital in cash yielding next to zero interest rates so that there is capital available for investing at the depth of the next market crash. Yet, oblivious to us, inflation is slowly but surely eroding our capital to a similar extent as the very market crash that we are trying to avoid.

Emotionally, it is a lot easier to cope with a 2% annual inflation than a one-time 65% drop in share prices. With inflation, the amount of our capital does not reduce, only the value of it gets smaller. With investment losses, the amount of our capital reduces. Yet, the net effect is much the same in both cases. We are like the frog which immediately jumps out of boiling water but does nothing when the temperature of the water is slowly raised.

It should be highlighted that losses to inflation and investments are not mutually exclusive. It is possible to lose $200K to inflation and another $200K to investments. Whether you invest or not, the losses to inflation are guaranteed. If you invest, at least you have an opportunity to recoup the losses to inflation and maybe make a little more.

It also does not mean that you have to be 100% invested to guard against inflation losses. Past experience in market crashes have shown me the importance of having cash or cash-like instruments to recover from the severe market losses. I will still keep cash on hand, but perhaps not to such a significant portion. For my portfolios that are 100% invested, a portion is kept in bonds to be rebalanced into equities during a market crash.

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Saturday 19 April 2014

The Philosophy of Spending Money

This is a departure from the usual blog posts on how to save money. It discusses where to spend money. By knowing where to spend money, you will also know where not to spend money or to spend less money, leaving you with more money saved.

Instead of following a needs-based approach in spending money as discussed in the last blog post, another way of spending money is to follow a values-based approach. A values-based approach means knowing what is important to you and spend money in that area. This is best illustrated using an example. Being a boring and unromantic person, I think roses can be a waste of money. They are full of thorns and do not last for more than a couple of days. However, when you see the sparkle in the eyes of the girl whom you bought the roses for, you will think that the roses are worth every cent of the exorbitant price that the florist charged you for it. You will remember the MasterCard advertisements that run roughly like this: "Price of a bouquet of roses: $50. Price of your girlfriend's smile: Priceless". When people and things are important to you, it is worth spending money on them.

Of course, it is easy to get carried away and spend too much money on them. We have heard stories about young couples having lavish weddings and ending up in debts. The good news about values-based spending is that the outcome is independent of how much money you spend. You do not need to have a lavish wedding in order to live happily ever after. Our parents have simpler weddings and can be just as happy. In investment-speak, this is the land of multi-baggers, where a small cash outlay can yield returns many times over.

How do I reconcile the spend-bare-minimum needs-based approach with the spend-at-will values-based approach? In reality, there is not much contradiction. People and things important to you can have needs that justify the spending. And values provide a guiding principle for where to spend the money. In more concrete terms, when spending on my personal needs, I follow a needs-based approach. When spending on family and friends, I try to follow a values-based approach. Admittedly, there is a dominant mode, which for me is the needs-based approach. Occasionally, I do have to remind myself to loosen up a little.

There is a purpose that we work so hard for much of our lives. The purpose is not for hoarding money. It is for the people and things that are important to us. Spend wisely, and you will have a fulfilling life.

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Sunday 13 April 2014

Living a Frugal Life

This post is probably not for everyone. But if you are interested in reducing your expenditure, you may wish to read how I treat expenditures. Generally, the basic principle is that I will spend $2 on a $1 thing that I need but will not spend $1 on a $2 thing that I don't need. Despite having to "overspend" on things, there are actually a lot less $1 things that I need compared to $2 things that I don't need. Below, I describe some of the gimmicks that companies use to entice people to open up their wallets.


Coupons can provide great savings, but they are also advertising gimmicks for the $2 things that we do not need. Generally, we need to differentiate coupons that you actively seek out and coupons that are given to you on the street or when you participate in an event. In the former case, since the coupons are something that you seek out, they are really the things that you need and can provide great savings. In the latter case, they are just advertising gimmicks. While they can also provide great savings, you can probably save more without them. As an illustration, the coupon might have saved me $10 when I spend $50 at the shop, but without shopping using the coupon, I would have saved $40 more. How I treat coupons is to give them away to colleagues who might need them more.


For many things, the more you buy, the lower is the per-unit rate, thus given you a higher value for money or a bigger bang for the buck. As an example, broadband services could be priced as follows:

Bandwidth Monthly Fee
25Mbps $24.90
50Mbps $29.90
100Mbps $39.90

The higher the bandwidth, the lower is the per-unit rate. Such pricings might tempt people to pay a little more to get the higher quantity. But do you really need the higher quantity? If you don't, you are just paying more than is necessary.

Low Upfront Costs

If you have shopped for a printer before, you would notice that prices of printers are quite cheap. However, the price of an ink cartridge can easily cost up to 30% of the price of a printer. With printers using 2 or more ink cartridges, you could almost pay for a new printer every 2-3 years. For goods and services that have upfront costs and recurrent expenditure, it is best to compute costs on a Total Cost of Ownership basis and use that to compare between the various goods and services.

On a similar note, there are services that may appear attractive based on the promotional rates during an initial period of usage. But when the initial period expires, the rates will revert to higher levels. As an example,  I was recently offered to upgrade my broadband services from 2Mbps to 25Mbps when my contract expired. The promotional rate for the higher 25Mbps service was $24.90, which was slightly higher than the $23.10 for the 2Mbps service. On top of that, the promotion came with 3 months of free subscription and some free TV channels. It looked really attractive, especially when compared to the approximately $35 non-promotional rate for the 2Mbps service which was no longer available for re-contracting. But when the contract expires after 2 years, the non-promotional rate for the 25Mbps service would be $45. Whatever savings I would have from the promotional rates would be wiped out by the higher non-promotional rates after another 2.6 years of usage. Hence, it is best to see beyond the promotional rates and calculate the total cost that you would have to pay for a service. (For your info, I eventually decided to upgrade as the telemarketer convinced me that broadband prices would continue to drop, so I might not have to pay the non-promotional rate at $45.)


In the final analysis, you need to know what your needs are and spend only on those needs. Salesmen will always try to convince you that you need certain things. If it is something that you really need, you probably do not need anybody to tell you that. If somebody has to tell you that you need something, it is probably a want that you can live without.

Also, do not try to suppress your needs so that you can save a little money here and there. It is a long journey and you must be at ease with your needs. What's the value of life if you can't satisfy your needs? As mentioned in a related post, managing expenditure is not about being a miser; it is about knowing when to spend.

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Sunday 6 April 2014

A Year's Worth of Blog Posts

I've reached Post No. 52 for this blog. While this does not seem much compared to other blogs, it nonetheless represents a significant milestone for a weekly blog. It means that I have accumulated a year's worth of blog posts. Blogging is hard work for me; I spend about 2-3 hours on average writing and reviewing the posts, mostly in the middle of Saturday nights. When research on a particular topic is required, a lot more time is spent in gathering the data and analysing the results. Nevertheless, the outcome from blogging has been gratifying.

I first started the blog to record down investment ideas so that the knowledge will continue to stay on long after I've gone from this world, but blogging has not been solely a one-way traffic for me to communicate with the world. I've gained much from blogging and the constructive comments that readers leave on the blog.

Firstly, blogging strengthens the investment ideas. Previously, they were all conjured up and evaluated in the mind. Most of the time, the mind only hears what it wants to hear. But by putting down the ideas in writing and working out the numbers in Excel, it forces them to be re-examined in greater details. Some ideas that could not stand up to scrutiny were thrown away. Other ideas were strengthened and reinforced with the greater scrutiny. Examples of such ideas are Properties, the Population White Paper and the Land Use Plan and Housing Loan Servicing - Cash or CPF?

Secondly, blogging forces investment ideas to be investigated. This is usually in search of blog ideas to extend the longevity of this blog. Examples of investment ideas that are a result from such investigations include The Dogs and Puppies of STI and Do REITs Overpay for Their Acquisitions?

Thirdly, after I started blogging, I also began to read more investment blogs. Some of the blogs are very instructive. I've added the hyperlinks to these blogs so that other readers can benefit from their writings. In search of new blog ideas, I've also picked up from where I left off many years ago to read investment books found in the library. A couple of books were re-read, such as the Security Analysis and The Intelligent Investor. The post on The Lost Art of Bond Investment is the application of an investment concept found in the books.

Fourthly, after searching for 28 years for the holy grail of investing, I seemed to have stumbled upon it. At the time of searching, I didn't know how the holy grail would look like nor what form would it take. All I knew was the idea that if Risk was my friend, I would have found the holy grail. Why? Because if Risk was my friend, I would not have to worry about risk, about market crashes. In fact, I would welcome Risk whenever he comes visiting, for that would mean an opportunity to gain more profits. For the last 28 years, Risk wasn't really my friend. Whenever the market crashes, I would book paper losses. Sometimes, the losses could be so severe that they were painful to look at. Sometimes, some losses never recovered and remained as losses for many years. Over the years, as we aged, our emotions and animosity for each other have reduced, but I still couldn't call him my friend. It was not until that I investigated further into passive investing that I found a way to make friend with Risk, that I could welcome him whenever he comes visiting. The results of this analysis can be found in the trilogy of blog posts on Portfolio Rebalancing - A Fine Balancing Act, Volatility is Your Friend and The Passive Portfolio.

Finally, looking back at the very first post of this blog, The Beginning of the End, I had originally wanted to share ideas that the financial world is really a "Matrix", and investors could defy the rules of the Stock Matrix with real-world common sense. It is with some regrets that I have not been able to expound on this theme more, only managing to touch on it with Shareholding Disclosure and The Stock Market is a Voting Machine. I hope to be able to expand on this theme with future posts.

It has been a long journey thus far. I am not sure how long this blog can last. I hope this blog has made a small difference to the investing community.

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