Goodies for 2012

I have planned for some goodies, just for you readers, for 2012…

1) The blog is going to sparkle with a new theme. It’s like putting on new clothes for the brand new year. The current theme has been ongoing ever since this blog started in May 2010 and I thought it’s time a new look. The new theme will be an iPhone notepad inspired theme. Below is an exclusive preview of the new theme come 1st Jan 2012:

2) I’m thinking of purchasing my own domain. This is still in the process of being finalized and nothing is concrete now. What does this mean for you readers? A shorter URL address to type in instead of the long and “wordy” https://financiallyfreenow.wordpress.com. (I know it can be tiring to type such a long URL address especially after a day of hard work in the office!). I’m also planning to incorporate more stuff after purchasing my own domain. All these are still in the planning process but it will look likely take place.

3) Last but surely not the least, I’m working on a huge project just for you readers in 2012. It involves well-established investing bloggers, businessmen, authors, trainers or just anyone established in the investing and personal finance arena. If this really takes off, it will spin-off into something larger. That’s all I can reveal for now. Do look out for for revelations in my future blog posts…

I’m just as excited as you are for things to roll out in the new year! Happy 2012, hunks and babes!

Cheers,
FFN

Book Review – “Delivering Happiness” by Tony Hsieh

“Delivering Happiness” is a book written by Tony Hsieh, CEO of Zappos.com. I came to know about this book when I was in Kinokuniya a few weeks back and I saw this book staring at me from one of the shelves. It seemed like an interesting read from the blurb (and the cover looked different from the norm).  I went on to Amazon.com (incidentally, Zappos.com was acquired by Amazon.com in 2009) to read the reviews of the book and it had good reviews. I don’t buy books nowadays so I decided to borrow this book from the library instead. Luckily, this book was available and not on loan when I wanted to borrow it.

This book is about Tony Hsieh’s journey to creating a company that delivers happiness for both employees and customers. The book starts off with his school-going days and how he liked doing business at such a young age. It then goes on to talk about his days in LinkExchange and after that, how he started Zappos. Zappos is a variation of “zapatos,” the Spanish word for “shoes”. More than half of the book talks about his days in Zappos and how he created a mega shoe empire amid lots of challenges. Zappos focuses on two aspects of business – branding through customer service and enhancing company culture.

Customer Service

Even though I have not bought anything from Zappos.com, I feel that after reading this book, Zappos.com has one of the best customer experience ever. It offers free shipping, 365-day return policy, surprises for loyal repeat customers such as overnight shipping, warehouse working 24/7, call centres running 24/7 (Zappos.com places lots of emphasis on customer experience through the telephone), among others.

Company culture

Zappos.com was ranked the 6th “Best Company to Work For” by Fortune magazine in 2011.  This is not surprising if you had read this book. The whole company culture revolves around having a fun and weird working environment and also strengthening the bond between employees. For example, when employees login to their company account, instead of just typing in the userid and password alone, they need to identify the photo of a randomly selected employee in the form of a multiple-choice question. Afterwards, a profile of that employee is shown so that everyone can learn about each other. The employees are also looking everyday on how to create a “WOW” experience for both customers and themselves. There was an instance where a customer acted a little weird on purpose over the telephone and the employee at Zappos.com played along with the customer. There’s a transcript of the conversation in the book and it’s hilarious. This is how the employees think out of the box and are encouraged to do so.

The company also came up with a “Culture Book” where the employees talk about what they like and don’t like about working in Zappos. The book is published yearly and given to employees, customers and those who request for it. It’s a raw and unedited book that captures the essence of Zappos.

Tony says that the best businesses are the ones that figure out how to combine profits, passion and purpose and the vision and culture to do that and I feel Zappos exemplifies this accurately. The core values of Zappos are as follows and it has 10 of them:

  • Deliver WOW Through Service
  • Embrace and Drive Change
  • Create Fun and A Little Weirdness
  • Be Adventurous, Creative, and Open-Minded
  • Pursue Growth and Learning
  • Build Open and Honest Relationships With Communication
  • Build a Positive Team and Family Spirit
  • Do More With Less
  • Be Passionate and Determined
  • Be Humble

The employees are encouraged to internalize them and practice it in their daily lives as well.

To see how Zappos WOWs people, take a look at:

To see how crazy the employees can be, take a look at the following video:

How is the Zappos culture related to investing?

I strongly believe in the Zappos values and culture. Customer service is essential in any business-to-consumer (B2C) business. Having an exceptional customer service likes Zappos’s keeps the customers craving for more and locks in the customers.  Exceptional customer service cannot be built overnight and it takes time. It also cannot be easily replicated by competitors as a lot of things must come in the right place. This actually creates a moat around the business.

By having a strong company culture, employees will be “stuck” to their company and would love coming to work. Monday blues will be replaced by Friday blues as they would not be able to see their fellow colleagues over the weekend in their office. Work will not seem mundane anymore and productivity will increase. It’s the wonderful friends made at the workplace that keeps the employees psychologically healthy. Also, by having a vision and purpose that are aligned to their own, employees will push themselves to go further and feel more satiated.

I believe that when investors invest in a retail business, they should look out for a strong company culture and an outstanding customer service on top of the usual financial numbers for the reasons cited above. When the customers and employees are happy, profits will automatically flow in and the company grows consistently.

Lastly, everyone should read this book. Even if you are not into business and investing, this book can really help you in your personal life as it can teach you how to deliver happiness into your own life.

The Federal Reserve and Money Creation Magic

“There are some things money can’t buy. For everything else, there’s MasterCard” is a famous advertising slogan associated with credit and debit card company, MasterCard. Have you ever wondered how this money is created for you to purchase goods and services? Are all the money in the world just printed from the mint or is there a more sophisticated way of how the money we use is created?

To understand how money is created, we need to look at the US monetary system. The US monetary system is controlled by the Federal Reserve Bank (the Fed), which was established in 1913 via the Federal Reserve Act. The Fed, despite its name, is not part of the government. The Fed is a central bank that consists of several secretive, private banks  (yes, u read it right, private banks). The Fed has several goals. Firstly, it loans money, with interest, to the federal government. Secondly, it adjusts interest rates according to the economic situation. Thirdly, it prints fiat currency to be used as legal tender. Fiat currency is money that gets its value from government regulations. In a US dollar bill, you can find the following phrase and it’s this phrase in all its bills that gives value to the US dollar:

(Image courtesy of http://epiac1216.wordpress.com)

Let’s say the US Congress needs money to fund certain projects. The US Treasury prints treasury bonds and these bonds are sold to the Fed in exchange for money. This money from the Fed is then used to fund the government projects. The money lent by the Fed is accounted for only digitally and is not physically printed (only around 5% of the money in the world exists as paper currency and the rest of the 95% of the money is all in digital form).

The Fed, like all other banks, uses fractional reserve banking system. It’s a system where 10% of the money deposited by someone is kept and the 90% of it is loaned out. By using this system, a mind-boggling 9 times the money deposited can be created out of thin air for others to borrow. To illustrate the fractional reserve banking system, let’s say a new bank started off with a $1000 deposit. This $100 deposit can then go on to create $9000 in the banking system (not the same bank as money flows). If you don’t believe what I have just said, take a look at the Excel spreadsheet that I created to make myself believe.

This fractional reserve banking system is made to work because not every single person in the world will withdraw his/her money at the same time. If this really happens, it will cause catastrophic failure to the whole banking system. This is called a “bank run” and it’s a dirty word among bankers.

Let’s sidetrack a bit. Why did the fractional reserve system come about in the first place? Why can’t we use the full-reserve banking system which is the opposite of fractional reserve system? The full reserve system (Gold Standard where each dollar is fixed to a mass of gold) was being utilized till 1971 when President Richard Nixon decoupled the dollar bill from the gold backing.  Banks make money by charging a higher interest on loans given out than on the interest given to money deposited in the bank. The difference in interest earned is the revenue of the bank. By having a full reserve banking system, the banks revenues are minimized as they cannot loan out more money than they have. By switching to the fractional reserve banking system, the profits of banks can be maximized as not everyone will withdraw their money at the same time.

By creating 9 times more money when using the fractional reserve banking system, you would have noticed something astonishing. When people borrow, money is created. So, essentially money circulating in the world is all debt. We are living in a debt-based monetary system. Yes, it is true. Money = Debt. Since all the money for the past 30 years (since 1971 when Gold Standard ceased) is debt, when all the debt is paid up, money will cease to exist. Ironically, debt is needed for the economy to flourish.

When a person cannot afford to pay his/her debts (together with the interest owed), default looms. This gives immense pressure to the person on the brink of default as the amount owed will always be more than the amount borrowed. Let’s now shift our attention to a country. When a country cannot pay debt, it just simply prints more money. This creates more debt at an exponential rate. An apt analogy will be digging a deeper hole to bury oneself. This is what is happening in Europe and US. These debt problems were created after adopting the fractional reserve system. The world leaders are working hard to control this debt bubble from bursting. If it bursts, it will create a complete failure to the whole banking system!

Can this problem be solved if we go back to the Gold Standard? I think it can be since every dollar will be equivalent to a certain mass of gold and since gold is a limited resource, it cannot be “printed” as and when the government needs.

For a detailed understanding and to get a better picture of what I have just mentioned, you need to invest 47 minutes of your time to watch the following video. It will be absolutely worth the time (I promise!).

The next video is basically the same as the previous video but it’s a shorter version:

A brief U.S. history of money:

The problems the money creation method is creating and what does it mean in the future (must watch videos!):

Market Timing – Worthwhile?

Time and again, there has been a debate whether market timing works. Market timing is termed as predicting the future direction of the stock market by using technical charts and economic data.

There is one camp that believes that investors can move in and out of the stock market and by doing so, maximize their returns. They do this by using moving averages and support and resistance lines on the charts, amongst others. While this might work sometimes, at other times, these investors might miss the sudden gains that the stock market makes out of nowhere. This was the case in March 2009 where the stock market suddenly sprang off its lows and never looked back.

The other camp believes that market timing is futile predicting the direction of the stock market. There are numerous studies showing that being out of the market during only a few of the best days or months can ruin a portfolio’s long-term returns. Here are some of them:

  • Had you put $1,000 in the S&P 500 at the end of 1981, your stake would have grown to $25,584 (including reinvested dividends) by the end of 1998. But if you had missed the 30 best days (defined as the days with the highest percentage gain) of those 4,400 trading days, you would have ended up with $4,549, 82% less. (Source: Dow 100,000: Fact or Fiction.)
  • Consider three people who each invested $1,000 per year in the S&P 500 Index from 1965 to 1995. Investor A bought on the first day of each year, Investor B — the world’s best market timer — bought at the lowest price each year, and unlucky Investor C bought at the market’s peak each year. Here are the results:
  • Investor A (invests on first day of the year): 11.0%
  • Investor B (invests at market nadir each year): 11.7%
  • Investor C (invests at market peak each year): 10.6%
  • As you can see, the differences among the compound annual returns earned by each investor are small. (Source: Peter Lynch, Fidelity Investments brochure, “Key Things Every Investor Should Know.”)

Some of the astute minds of the investing world like Warren Buffett and Peter Lynch are certainly against market timing. Here are some quotes by them:

Warren Buffett –

  • “The only value of stock forecasters is to make fortune-tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.”
  • “We continue to make more money when snoring than when active.”

Peter Lynch –

  • “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”­
  • “I can’t recall ever once having seen the name of a market timer on Forbes‘ annual list of the richest people in the world. If it were truly possible to predict corrections, you’d think somebody would have made billions by doing it.”
  • “I don’t believe in predicting markets. I believe in buying great companies — especially companies that are undervalued and/or underappreciated…. Pick the right stocks and the market will take care of itself.”
I also read a research paper called “Black Swans and Market Timing: How Not To Generate Alpha” by Javier Estrada (right-click and “Save link as…”). In it, there’s ample evidence showing why market timing is pointless. I shall quote some information from there:
  • The evidence, based on more than 160,000 daily returns from 15 international equity markets, is clear: Outliers have a massive impact on long-term performance. On average across all 15 markets, missing the best 10 days resulted in portfolios 50.8% less valuable than a passive investment; and avoiding the worst 10 days resulted in portfolios 150.4% more valuable than a passive investment. Given that 10 days represent, in the average market, less than 0.1% of the days considered, the odds against successful market timing are staggering. Hence, of the countless strategies that academics and practitioners have devised to generate alpha, market timing does not seem to be the one most likely to succeed.
  • A very small number of days account for the bulk of returns delivered by equity markets. Investors do not obtain their long-term returns smoothly and steadily over time but largely as a result of booms and busts. Being invested on the good days and not invested on the bad days is key to long-term performance. But the odds of successfully predicting the days to be in and out of the markets are, unfortunately, close to negligible.

I feel market timing is not worth an investor’s effort as seen from the examples, researches and quotes above. I, too, have been guilty of market timing recently and I can strongly concur that market timing doesn’t work (at least for me)! I have learnt to just add on to my positions whenever there’s a significant dip in price. However, if my stock doesn’t move much, I will gladly hold on to my stock amid a financial meltdown and cash in on the dividends!

“The Money Masters” Movie

I just watched a long documentary on the money system of the world today. The movie is called “The Money Masters” and it traces back history to find out how the current monetary system came about. It is also revealed (a widely known truth now) that the United States Federal Reserve is not a government entity but is actually a private bank and shows how the Fed came about.

I was really intrigued by the history of money and the controllers of money. It says in the movie that it’s these controllers of money or “money changers” who cause the recessions and depressions by manipulating the money supply!

You can watch the movie in entirety here. For abridged text-version of the movie, you can refer to this website.

Warning: The movie can get a bit draggy and boring for those who dislike history.

Investments risky? Saving in a bank is “riskier”

Last week, I was watching a drama show on TV and in a particular scene, the husband and wife were talking about investments. The husband said his friend is making $10,000 a month on top of his regular office hours job. He said his friend asked him to invest with him. The problem was that the capital needed would be $50,000. The husband said that the investment involves stocks. The husband suggested that he put in 50% of the capital and his wife, the other 50%. Upon hearing this and the insurmountable capital needed, the wife got astonished and was strongly against the idea of investing such a huge sum in stocks. She reasoned out that stocks are extremely risky, stocks are equivalent to gambling, she doesn’t have enough capital and she would not allow her husband to invest $50,000 in such a venture. The young couple has a pre-school daughter as well.

This whole scene perplexed me. What intrigued me the most was that the wife said stocks are risky and they are the same as gambling. Since they have a kid, they certainly have to finance for her needs as well. So, doing proper investment is one of the way to grow money.After the show was over, I asked my Mom how do the layman finance their personal needs, for example, for kids’ education, house, car, etc if they view investments as risky. My Mom replied that most do not really know how to invest and view investments as risky. They rather sock cash away in the bank as it’s “safer”.

My take on this whole drama scene is that saving money in a bank is actually “riskier” than doing prudent investments. By just saving money in a bank, inflation will be eating our money away. The average historical inflation is around 3% per year. Thus, our money is being eaten away at 3% yearly.

Warren Buffett once affirmed that risk comes from not knowing what you’re doing. Lack of knowledge promotes risk. So, since many do not know that $50k today is not worth $50k tomorrow, just saving money in a bank is “riskier”. We should educate ourselves by reading books on personal finance and look for alternative prudent investments that will allow our money to grow. Investments are certainly not risky if you know what you are doing.

What are your thoughts on this issue?

3 Essential Things for a Meaningful Kitty

Many of us want to retire comfortably, retire rich and retire without having to worry about money anymore. For a meaningful retirement, we must have a substantial amount of money to tide us through our retirement years. Even for short-term goals such as to finance a house, finance your child’s education or to finance a new care, we need to have enough moolah. For wealth accumulation to take place, three things are paramount. They are:

  • Investing as long as possible (time)
  • Amount invested and to be invested in the future ($)
  • Investing in instruments that give a substantial yield (returns on investment or ROI)

All three elements must be fulfilled before we can reach our financial goal. We will look at each element in detail below.

Time

The earlier we start investing, the better our returns can be due to the effect of compounding. Albert Einstein once said that compound interest in the eighth wonder of the world. Compounding allows our money to increase exponentially for the long-term. This can be seen from the graph below. By compounding, the graph shoots to infinity towards the later part of the investing timeline, although gains are minimal at the start. Thus, a young investor in his twenties will have more time to compound his money over a person in his forties who just starts investing.

Image courtesy of http://www.tvmcalcs.com/tvm/lumpsums_fv

Money

To start investing, we need capital. This can come from your savings mainly. As working adults, we should aim to save at least 10% of our monthly salary and we can slowly increase this percentage as our income increases. Without savings to start with, one cannot make more money by investing in the stock market.

Yield

Leaving money in the bank yields less than 1% in current market situations. Couple that with raging inflation that is around 5% currently, we are getting negative returns on our money. This makes the case for investing much stronger. The general stock market has yielded around 9-10% historically. By investing in fundamentally strong companies, your returns can be higher. However, don’t be cheated by claims cited by certain investment companies that can give u phenomenal 50% returns per annum. If it’s too good to be true, it probably is.

Below is a table with three different scenarios to illustrate my points above.

If you want to play around with the various figures to suit your financial life, you can visit the online “Compound Interest Calculator”.

To use the calculator,

1. Key in the current amount that you have currently invested under “Current Principal”. If you don’t have any money invested currently, type in “zero”.

2. Key in the amount you will invest yearly (take note: not monthly). For example, if you are going to invest $200 monthly, key in “2400”.

3. Key in the number of years you plan to invest.

4. Key in the yield of the instrument. You can key in 9% as that’s the historical stock market return.

5. Key in “1” in the next row.

6. Select “end of compounding period” in the following row and click “Calculate”. You can see the future value (how much you will have at the end of your investing period).

Happy compounding!