Can I not go to work today?

People used to ask, "if you have all the money in the world, what would you do with it?" I think that is not a good question. The idea of being rich is a relative notion rather than absolute. After all, a millionaire is still poorer than a billionaire.

I prefer to ask the question, "if you have enough money to stop going to work, would you still be going to work? If not, what will you be doing?" This question raise the issue of whether work is just to pay bills or do your enjoy what you are doing at work. This is important considering the length of time you spend at work. Even if we take salary out of the equation, I still believe that we all have to 'work'. Nobody can actually do nothing for their entire life.

Finding your passion is an important step to make. In my view, passion at work can either be achieved by enjoying the activity or you are so good at it, it's enjoyable. That said, if you are passionate about what you are doing, it's natural that you will excel in it. Some people also think that you can't possibly enjoy working, work is serious stuff. Accordingly, we live 2 different lives (at work and at home). But I think that's a compromise.

So the next question is "Can we do what we are passionate about and be paid for it?" Truth is, not everyone's passion can become a business, but how do you know if you haven't try. My view is that as individual, it is sad to think we are 'robots' doing repetitions everyday for sake of paying our bills. I was told that someone who repeats the same actions expecting a different result are mad. So in the same way, how can we expect our lives to be different if we are doing the same thing every day.

You might say to me, "But I have bills to pay. We are slaves to money. We all need to pay rent/ mortgage, finance our car, buy the things we like, or go for a holiday." But I think we are slaves to ourselves. The 'ideal' standard of living each of us expect and maintaining is a result of advertising, peer pressures and the enviroment.

I am not suggesting anyone to resign from their job tomorrow (although that may be tempting to some and I have been there). The point is, the first step is to find your passion. And if you are lucky enough to find it, the sad thing to do is to ignore it and continue with our uneventful lives. You don't have to do anything drastic, but you must have a plan and start working towards it.

Australian Stock to watch in 2011

Roger Montgomery's blog ran a nomination of stock to watch in 2011. "What are your Twelves Stocks of Christmas?" You will find very good analysis on good businesses listed in Australia.

The results have just been release, and Roger has posted a list of how each recommendations stands against his quality rating and whether they are currently trading at a discount to intrinsic value.
"Who made the Value.able grade?"

TED Steve Jobs: How to live before you die

TED Steve Jobs: How to live before you die

This is truly inspirational. "Stay Hungry, stay foolish."

Back to Basic

After the article about money matters but we fail the test, I thought it's a good idea to go back to basic.

Below are the key question everyone should consider:

1) How much money do I need for my emergency fund?
It's easy to dismiss the idea that we all need an emergency fund. "Nothing bad can happen to nice people like you and me", right? But the fact is we really don't know what will happen tomorrow. It may not be an accident (typically what a financial planner tells you). It could be a family member becoming sick and you need to stop work to take care of him/her. Or simply, you want to know that you can quit your job right now, knowing you have enough to get by while you are looking for a new job.

In terms of amount, how much you need will depend on your circumstances. If you have mortgage or rent obligations, you will need to set aside more. Personally, I prefer to put aside enough money to get me through 6 months of obligations.

2) How do I start saving?
Knowing and taking control of your cash inflow and outflows is the key (see Making ends meet). That is, how much salary am I getting and how much am I spending each month. Don't forget things that happens once or a few times a year (for example, annual holiday trips, car maintenance / road tax, insurance premium) (see Managing one-off). These items can be missed easily because it doesn't happen every month.

3) Having multiple cash account for different purposes
You may consider having different cash accounts for different reasons. Simply, a transactional account, a compulsory saving account, and a surplus saving account. Some have creative names for these account, but essentially below is the purpose of each account.

• Transactional account: Account use to make all payments, withdrawals. Typically, you don't earn much interest even if you have cash balances in this account.
• Compulsory saving account: Amount you set aside each month which earns a higher interest rate. Here, you are saving for something in the long term (for example, initial deposit on your house, children's education, retirement). I have come across products that linked such saving to an investment strategy so that you can earn beyond the deposit interest rate. Depending on which country you are in, such products may be attractive. Personally, I prefer to have control over my savings and invest them myself.
• Surplus saving account: Surplus you saved each month which you can spend it anytime you want to reward yourself.

Arranging your cash this way allows you to visually see how much you have and helps you mentally organise your money. See the barefoot investor, who has alot more insight.

4) Consolidating your superannuation
This could be an Australia specific point. Over here, your superannuation contribution changes every time you change job. Not consolidating your super will result in unnecessary fees incurred. You may think it's not a significant amount, but over your career life the amount build up and compound significantly. Personally, I did went through the exercise of consolidating my super. It was easy to do. Although it can be a hassle, but knowing that you are in control of your own finances is important.

One of main resistance to managing our finances properly is that we tend to associate them with chores, and if we can, we will sweep it under the carpet. But I prefer to see it as "A dollar saved is a dollar earned."

Surfing the trend vs Scuba Diving to find good companies that are cheap

I came up with this analogy after my holiday at a beach resort.

If charting (technical analysis) is similar to surfing and riding the waves, then value investing is similar to scuba diving. You dive deep in the water and look long and hard for corals/ fishes. Once you discover them, it's amazing!

Having no margin of safety is like snorkeling, there's a limit to what you can find in the water and big waves does not help at all.

Money matters but we fail the test

This is an interesting article from SMH today.

My takeaway:
1) Financial literacy is a important subject affecting every individual, but it is not taught in school.

2) We are not always rational when dealing with money matters for ourselves.

Does all 'investment' road leads to Rome?

I believe that every investment strategy has 'a chance' of making money. Whether you use charts, rely on analyst reports, use a dartboard, or listen to recommendations from friends. However, the key problem to consider is capital preservation. That is how many time can you afford to get it wrong before you get it right.

Personally, I rather 'be safe then be sorry' (a term I have repeated many times to my daughter when I read the story of the three little pigs)

More broadly, here's my take on two main investment strategy for shares... Fundamentals vs Technicals (Charts).

Looking at Fndamentals, most people think of Warren Buffet. Although it make sense, some people find it difficult to use it. Reading financial reports and following news about a company may not necessary mean that you know what its worth. Additionally, this process is often time consuming and involves 'complex' valuation technique which is 'unsuitable' for individuals.

In contrast, Charts seek to explain the price action of shares. Share price (a basic level) is about demand and supply. By looking at historical share price movements, a Chartist can develop patterns and look for trends. Correspondingly, this allow a Chartist to predict future movement in share prices. To some, looking at pictures may be easier than numbers.

Some suggest using Fundamentals for stock picks and Charts to time entry and exit point. The bit that doesn't make sense to me is that if a Chartist to want to follow trends, he/she would want to see some initial increase volume and share price before going in. However, a Value investor knows the Intrinsic value and if it is significantly higher than current share price, wouldn't he/she want to buy it at it's cheapest price, rather than to wait for a slight increase in share price and follow others?

As I dig deeper and discover my own strategy in investing, I find myself using both approaches for different reasons. Charts are used to explain the historical movements in share price (i.e. what happen today?). Fundamentals are used as the basis of my investment decisions (i.e. am I going to do anything about it?).

I have also discovered that value investing is actually very easy. There are no complicated valuation (well , relatively). However, the time consuming part is I spent alot of time reading annual reports and understanding the business/industry.

In terms of valuation, I focus alot on 'Return on Equity (ROE)'. ROE is a measurement that reflects the performance of a business (as a shareholder). One of the key advantage is that it is independent to the performance of its share price. To me, this removes any biases or sentiments of the market (this is important in order to find out what a business is truly worth). But the most important aspect of being a Value Investor is understanding and finding exceptional businesses (whether a company truly has sustainable competitive advantage). That is an art.