My Decade-Long Journey To Five Million

I have to admit, I’m struggling with the Financial Reporting and Analysis (FRA, SS7 to SS10) part of CFA Level 1 curriculum. The available texts, both CFAI and Schweser, continue to read like Latin to me.

The big problem is that FRA is not like Quants or Econs, whose concepts you can wrap your head around. Instead, FRA, at least to me, is very much like a bunch of arbitrary rules that I just have to memorize blindly. 

Well, I hope you’re finding it easier than I am. If you’re struggling as well though, here’s something that may help: 

The Merrill Lynch Guide to Understanding Financial Reports (PDF)

Quote:

“This Guide to Understanding Financial Reports is an initiative by Merrill Lynch and its communications partner, Addison, to provide a clear, practical explanation on how to read and interpret a corporate report. We encourage you to use this resource to help you play a more active and informed role in working with your Financial Advisor—and ultimately gain better control of your investment activities.”

They really try to walk you through the basics there. I find this document very useful in just understanding the high-level concepts first, before delving further into the level of details presented in the CFAI and Schweser texts. 

Hope someone will find this document to be as useful as it is for me.

February 28th, 2009 | Category: CFA, Level 1 | Comments (1)

I don’t know how to write this post without sounding like I’m boasting, so I’ll write it anyway. 

To make a long story short, after cashing out my investments recently, I am sitting on an amount of cash that qualifies me to be a premier/priority banking client in Singapore.

Now, I know that premier/priority banking is just a poor man’s version of the true private banking, which is still in the future for me. Not now. But I’d be lying if I said that I wasn’t at least a bit excited though. 

I mean, hey, imagine not having to queue with 745 other people in front of me everytime I need to go to a bank! Imagine getting “personalized attention” thing from this “dedicated Relationship Manager” person! Imagine having a limousine fetching you from Changi airport to your home! (That last one is not there anymore.) 

Sounds good, no? 

Well… unfortunately, my experience with a few of the local banks that offer premier/priority banking turned out to be frustrating, humbling, and eye-opening, all at the same time.

In the grand scheme of things

They must've learned from this guy.

First of all, there are the Relationship Managers. My first impressions of those premier banking Relationship Managers (RMs) were terrible.

They are horrible, horrible listeners! Not a single one of them stopped for even a second to listen and understand what I need from them. Instead, throughout the whole discussions they were just aggressively trying to sell me products. It never felt like I was having a discussion. The whole conversation was just sales pitch after sales pitch after sales pitch after sales pitch after sales pitch. 

It was disappointing, really. I get better service from the tellers whom I see in my usual, decidedly non-premier, regular banking. 

It made me wonder, really. Aren’t premier banking RMs supposed to give you better service than this? Isn’t the service you get here supposed to be way above what you get from the POSB tellers? 

Then it dawned on me. In the grand scheme of things, SGD200k might be a big amount for you (it certainly is a big amount for me!). But in the world of premier banking, SGD200k is just an entry level, minimum amount, that puts you at the very bottom of the premier banking ladder. 

Now that explains a lot of things, doesn’t it? No wonder I get better service from the non-premier banking people! I was a reasonably-sized fish in the normal, non-premier pond. But in the premier banking pond, I am just one ikan bilis among the halibuts and the salmons swimming in this pond. Coming in at SGD200k, I am literally the poorest client they have! No wonder those RMs didn’t even bother to pretend that they care!

5m10y: "Premier Anchovy"

I’m guessing here, that those people who’ve just barely made it into the private banking pond are getting the same bottom-of-the-barrel treatment as well in the private pond. (Of course I might be wrong here–I’ll write about it in this blog when I’ve become a millionaire a few years from now.)

But back to premier banking. So what’s so special about it? If the only thing you get from becoming a premier banking customer is more sales calls, why bother at all? 

Well, the other things that premier banking is supposed to give you are: (a) preferential rates, and (b) access to products that “normal” banking customers don’t have access to, and (c) lifestyle privileges. 

Let’s see how big of a deal these things are.

Preferential victims

Preferential rates. The word preferential is supposed to make you feel warm and fuzzy inside. After working hard for all those years, now, after all, you are a preferred person. Ahhh… that feels good doesn’t it? 

Naw, sorry. Preferential rates, if my discussions with the premier RMs are any indicators, really mean that they prefer to screw you than other people.

Preferential? Why don't you kiss my... my potato!

Consider the deal I was offered, to buy a certain ETF with the “special rate commission” of only 0.5%. So if I buy USD100k, the commission is USD500. Quite small, isn’t it? Until you realize that in optionsxpress, you can get the same thing for USD68, and don’t even get me started on Interactive Brokers–those guys will only take around USD20.

Those dual currency deposit that they do is equally bad too. You’re basically selling a put option cheaply to them, quite a lot cheaper than what they could get from the market, and they’re still quote you a spot rate that is quite far from what they can get from the market. Here’s a very good post about this by icecold1967.

These preferential rates can vary widely from bank to bank too. At one point I got two offers for exactly the same product, same terms, and the interest for one offer is 20% higher than the other (close to 8% vs. 6+%, if I remember correctly).

Preferential? Not very much so, I’m afraid. 

How about those special products nobody else can have access to?

Early in 2008, I met up with my (now ex) financial advisor, who was “VERY excited” because she was able to “get me special access to products which, until recently, were only accessible to accredited investors“. The only condition was that I had to put in at least SGD50k, and the commission was way heftier than what I had been used to pay. 

I rejected it right there and then. In my experience, this kind of deal is almost always a rip off, especially for the little people. The price you’re paying is almost never worth whatever it is you’re supposed to get from those special, otherwise inaccessible things. Lucky me. If I had gone with that special deal of hers, I would have lost much, much more, than just exorbitant commissions. 

Look, here’s the thing, kay? There are certainly products that only certain people can have access to. And it is true that some of those products are better. People like Warren Buffett, for example, get a lot better deal when he invests in a company. Way better deal than what regular investors like me can ever hope to get. 

Hitting the high notes: not for DBS customers.

But products aren’t automatically better for you and me just because normally they are inaccessible to us! For instance, don’t you feel a bit lucky if you’re not one of the richer people who would have qualified to invest with Bernard Madoff, unlike this Singapore-based gentleman?

And of course, those of us in Singapore is very familiar with DBS High Notes, again one of those special products offered by these Relationship Managers to DBS’s wealthier clients–which, unfortunately, includes older people who don’t know anything about credit linked notes too.

All I’m saying is, drop the notion that just because something is inaccessible to us it is automatically better than the readily available options.

Sometimes, you’ll get screwed more, for less return. No good.

Lifestyle Privileges

Honestly, for my personality, among the “benefits” of premier banking, this is probably the most useless one. You’re not helping me one bit by giving me 5% discount if I spend 1000 dollars in some overpriced spa. Duh. Discount my bill by 20%, then we’ll talk. Okay?

Will I still go for priority banking?

Yes. But I’m not going all starry-eyed about this. I’m going in after comparing all the features, perks, and convenience that different banks can offer me. And when it comes to actually buying products, I will shop for the best deals, even if it means taking money off my balance with the bank and losing my “premier” status.

The only way those RMs can get commission out of me is if they have something that I really want, at a price that can’t be beaten anywhere else. Nobody can manage your money better than yourself! Only you are interested in you–your RM doesn’t give a damn about you! You shouldn’t give a damn about them either–just use whatever service and help they can give you. Now to me, that’s what this whole premier/priority banking is all about.

UPDATE (17 March, 2009): and be sure to read this article about private banking, written by my favourite author Doc Money. That article has convinced me even more that once I’ve reached the private banking level, I’ll be sorely disappointed again.  

(Images courtesy of rick @ flickr, the US Federal Government, Decadent @ flickr, and daveiam @ flickr in the order of appearance.)

February 22nd, 2009 | Category: Investing, Saving | Comments (4)

These days, hardly a day can go by without something about Wall Street bonuses in the news.

The fact that banks like Merrill Lynch paid out $15 billion bonuses after $42 billion losses, or that Citigroup paid out $4 billion after two multibillion-dollar rescues, have been discussed and beaten to death. 

People were outraged, politicians were in disbelief, and President Obama called it the height of irresponsibility and shameful. But the biggest surprise for me in this whole matter is finding out how stupid these erstwhile “financial masters of the universe” are with their own money. 

There are many articles about disgruntled bankers (like the ones working for Citigroup, who only got $4 billion dollars in bonuses this year) who spend way more than their salaries, and therefore are royally screwed when they find that their bonus for 2008 is nowhere near the ones in 2007. 

Weird, eh? On one hand, these Wall Street people are supposed to be a lot smarter than us financially. But talk about personal finance, and these guys are no different from Mike Tyson or Michael Jackson! I mean, honestly, I won’t be surprised to find that a lot of people are smarter financially than Mike or Michael (note to self: don’t name son Mike or Michael). But being smarter financially than a guy who makes 10 to 100 times what you make? That’s gotta make you stop and think for a while, eh? 

Do this so you can self-proclaim yourself smart

So what I, a self-proclaimed “financially smarter than Wall Street bankers” guy did with my bonus, which just came in a few days ago (in January)? Well, I (1) gave some money to my parents, (2) planned a nice dinner with my family and (3) am going for a simple holiday later this year with my family.

The rest of it (around 90% of it) will be allocated this way:

1. 25% will go into either a AUD or a GBP fixed deposit.
2. 15% will go into ready cash for investments, in case a good one comes along (been eyeing MSFT for sometime now).
3. The rest will go into strengthening my safety net. We don’t know whether we’ll still keep our jobs tomorrow these days.

I like to think that that plan of bonus usage is pretty smart (Please feel free to let me know if you have any other ideas though!)

One of my friends bought a high-end home entertainment system. One of them bought a freakin car (on credit! The bonus is used for down payment). Another planned a holiday to Japan (which is a freakin expensive country, not to mention the strength of the yen right now).

(It kinda made me wonder actually: am I the only one who’s feeling the urgency of this financial crisis?)

Later on I realized something: it’s not that they don’t feel the economic pressure. They do. But the way they experience pleasure is totally different from me. They need to spend bonuses and reward themselves to get motivated.

Whereas for me, seeing the bonus figure is all the motivation and reward I need. I don’t get any kick out of spending money–my kick is from earning and investing money. And no, I’m not saying this to boast or feel self-righteous. I’m not sure why I’m wired this way either.

Oh well. That’s probably why I liked uncle Scrooge McDuck so much as a kid :)

(Images courtesy of AMagill @ flickr and Kanou Hiroki @ flickr, in the order of appearance.)

February 3rd, 2009 | Tags: Salary, Saving, Wealth | Category: Salary, Saving, Wealth | Comments (2)

January 24th, 2009 | Tags: mindmap | Category: CFA, Level 1 | Comments (2)

In October 2008, I decided to register myself to take the Chartered Financial Analyst (CFA) Level 1 Exam in June 2009. This exam is widely known to be a daunting challenge, with very low passing rate (after 2000, there hasn’t been a single year/half-year where the passing rate is higher than 50%).

We don’t know the result of the December 2008 exam yet, but the passing rate for the June 2008 exam is a mere 35%. Daunting indeed! 

I was actually very excited when I found out about this passing rate. I was always one of the very top students in class, from elementary all the way to university. I loved the feeling of studying, understanding, and then acing a test or an exam. Since my graduation, I haven’t tested myself against a challenging test like this again, and I thought it’d be fun to do this like the old times, and ace the exam as always. 

So when I got the thick CFAI books (they weigh at 8 kgs–roughly 17.6lbs):

1. I immediately set up a plan to study those books. 
2. I even thought at that time that using commercially available study notes like Schweser was surely something that only a lazy bum would do. Smart, diligent people would surely read through the CFAI books and produce their own study notes!
3. I planned to go through the CFAI books in the order that I thought would give me the biggest bang for the buck.

I was very much looking forward to my study sessions! 

In the 3 months that followed, I read, and read, and read, and read the CFAI books. I updated the plan and created study notes. I started a Google group for CFA email study group. I hung around analystforum.com a lot. On top of that, I continued researching and reading more about the exam itself.

What 3 Months Have Taught Me

If I could go back 3 months and redo this all over again, would I?

Definitely not.

Because within this 3 months I learned quite a bit of things:

1. It’s not rocket science. The material itself is OK, even if you don’t have a finance background (I don’t). Sure, it can be quite hairy sometimes, but it ain’t rocket science. As long as you spend time to read and understand it, there shouldn’t be any problem with understanding. 
2. But there is a LOT of material to cover. Ha ha, oh, big surprise, right? Well the 3 months just made me realize how much was really there. You need to dig into each topic deep enough to be able to answer questions, which is OK, but here’s the main challenge: you need to maintain that depth for every topic for months, at least until the exam is over.
3. You WILL forget more than a few details in just a few weeks if you don’t keep revisiting the material. I really spent a lot of time reading up on quants. By the time I finished reading fixed income, I didn’t even remember what platykurtic was. And don’t even start talking about Ethics! 
4. The best-laid study plan will go awry. No matter how good a study plan sounds in the beginning, if you’re a married 30-something with a fulltime job like mine, trust me, there’ll be many occasions where you wouldn’t be able to stick to the plan.
5. Forget study notes. Creating your own study notes is actually very time-consuming, and worse, you don’t really know what you need to know and what you don’t need to know. You can follow the LOS, but the LOS can be quite broad sometimes. Schweser does a lot better job at this than one man doing this part time ever will.
6. Practice with lots of questions. You can only truly know what you don’t know by answering questions. Lots of questions. Breezing through bank discount yield, HPY, EAY, and money-market yield is easy. They are easy to understand. Having the definitions stored in your head so you can answer questions about them is a different thing. This is an exam. The best way to prepare is by taking lots of practice exams.
7. If you’re like me, you need study notes and practice questions. For the longest time I resisted even the idea of buying any kind of study notes and practice questions. After burning a few weekends studying, though, it dawned on me that paying around a thousand dollars to make sure that I don’t have to do this again is very much WORTH IT. The hours spent to repeat this the second time, the hours I’ll never get back, the hours I can use to research more investments and running my business, are worth much, much more than just a thousand dollars.

New Strategy: 140 Days To Go

So. with 140 days to go, I’ve only covered Quants, Ethics, Fixed Income, and half of Derivatives, and I’m changing my strategy:  

1. I’ve stopped updating my Study Notes. Sorry guys. I enjoyed writing down these notes, but it’s just not the right strategy for something like this. The majority of the time should be spent working on practice problems, not writing notes.
2. I’ve stopped planning using the waterfall model, and have switched to iterative model now. No more extended review at the end of a reading. Read everything, and reread again near to the exam. Read everything first once is my top priority now.
3. For reading, I’ll use the Schweser study notes. Have you seen how thin those Schweser notes are? We’re racing against time here. We can always go back to reading CFAI books after passing the exam.
4. I’ll use CFAI books only for: (a) the chapter summaries, (b) the exercise problems, and (c) further research in areas where the Schweser’s explanations aren’t clear enough. 
5. I’ve started doing practice questions everyday to cover areas that I have covered so far. This is mainly to help with retention–I don’t want to forget kurtosis again until July 2009

I will revisit this strategy again in March 2009. 140 Days To Go!!!

January 18th, 2009 | Tags: CFA | Category: CFA, Level 1 | Comments (21)

According to the researchers at the University of Cambridge, England, from the look of my fingers:

I am designed to be financially successful. How awesome is that? And it turned out that scientists have been talking about this digit ratio thing since the 1800s! 

So now I suppose I can apply to be a trader tomorrow. Or sire many children. Or start composing some legendary symphonies. The possibilities are endless!

(Seriously, naaah. Like the linked articles above, experience as well as things like ambition and drive obviously matter a lot more than just the length of your ring finger.)

January 13th, 2009 | Category: Uncategorized | Leave a comment

HP12c is so unloved. All CFA candidates I know seem to be using TI BAII Plus. Schweser Notes even says it right out: “If you don’t already own a calculator, go out and buy a TI BAII Plus!” 

If you see the examples in Study Session 2 of the Schweser Notes, it’s full of sentences such as “On the TI, enter…”

Darn RPN haters. Sigh.

Calculating EAR by following the formula

Anyway, today I’d like to share a shortcut that I had learned before encountering the Schweser examples on computing the Effective Annual Rate (EAR). The concept itself is quite straightforward: if a quoted annual rate of X% is compounded more than once annually–let’s say quarterly–then the effective annual rate is actually higher than X%.

The formula given is:

EAR = (1 + periodic rate)^m – 1

So in one Schweser example, where the stated annual rate is 12% and it’s compounded quarterly, it goes like this:

1. Compounding period is 4, so periodic rate is 12%/4 = 3%.
2. Realize that 3% = 0.03, so to calculate the EAR following the standard formula, in HP12c we should type this:
   

   1.03 [ENTER] 4 [y^x] 

3. Which, on default settings in HP12c, gives the result of 1.13, since by default the calculator displays to two decimal places.
4. Then we need to remember to subtract 1 from it, and realize that 0.13 is 13%, which is the effective annual rate. 
5. Except we realize that the answer given in that Schweser example is 12.55%, which is pretty bloody different from 13%.

So troublesome. Here’s a much faster and straightforward way to do it in HP12c–I suspect you can do it on TI BAII as well (note the slash “/” is used to represent the division key):

12 [ENTER] 4 [n] [/] [i] [CHS] [PMT] [FV]

Which I’m happy to report displays exactly 12.55.

Why does this work?

Let’s think for a while why this works. Here, instead of manually converting figures in percent to decimal, adding 1, raising to the m^th power, subtracting 1, and converting it back to percent, we’re turning this into a simple TMV calculation.

That is, when we type in:

12 [ENTER] 4 [n] [/] [i] [CHS] [PMT] [FV]

we’re doing these steps (see the picture below, too):

• setting 4 as compounding periods (n)
• setting 3% as the periodic rate (i)
• -3 as periodic payment (negative means money that is paid out by us).  
• calculating the Future Value (FV), which turns out to be the EAR.

So… why does this work? This works because this is the exact calculation that happens when we limit our calculation just to the interests alone, taking the original present value (assumed at $100 in this shortcut–remember that 3% out of 100 is 3 dollars) out of the calculation. 

That is, this calculation answers the following question: “Let’s say I put in $100 now. From now onwards, every 3 months, the bank is going to pay me 3% interest on the principal, which will be added back to the principal. At the end of 1 year, how much interest will the bank have paid me?”

The answer is $12.55, which, for a principal of $100, means an effective annual rate of 12.55%.

January 11th, 2009 | Tags: CFA | Category: CFA, Level 1 | Comments (9)

My 2009 resolutions:

1. Pass CFA Level 1 Exam in June 2009.
2. Increase my net worth by S$150k this year.
3. Lose 8kg of (hopefully mostly) fat. 

January 8th, 2009 | Tags: goals | Category: Goal Setting | Leave a comment

“What are your New Year resolutions?”

Probably one of the most frequently asked questions between Dec 31 and Jan 15, year after year after year after year.

Which leads me to my next question to you, dear reader:

Can you name one friend, just ONE friend, who has managed to achieve what he/she was set to do in the beginning of 2008?

Because I cannot name one.

I heard many beautiful, grand, noble resolutions in January 2008. Hearing them in 2008, it was almost as if by now, in 2009, I would be surrounded almost exclusively by slim, trilingual, very fit, healthy, and not to mention wealthy friends.

Fast forward 12 months, to January 1, 2009. What did I get? Still the same bunch of friends. Still not reaching their ideal weight. Still not speaking the foreign language. Still so far away from their million-dollar targets. Still having credit card debts. (In case you’re wondering, I still love you, friends.)

Pot, kettle. Kettle, pot.

And let’s not do the pot calling kettle black thing. Did you achieve at least one thing that you planned to achieve in the beginning of 2008?

If you did, from the bottom of my heart, I salute you. Because I cannot name even one.

Here are some of my last year’s resolutions:

1. Bring down my body fat percentage to 15% — nope, went down to 18%, now hovering around 19% again.
2. Being able to do 100 pushups, 100 situps, and 100 squats – nope, except for the last one (the squats).
3. Read 50 books – nope, stopped at 30+.
4. Create a passive income stream of at least S$500/month – nope, business still not earning close to that.
5. Learn to write and read 500 Mandarin characters – nope, abandoned entirely for my CFA preparation.

And the horrible thing about this is that even a resolution breaker like me is already ahead compared to most of my friends. Because at least I still remember what the resolutions I broke are. Most people I ask don’t even remember!

Schmesolutions

Resolutions, schmesolutions. What’s the point of having New Year resolutions, then? 

I say not much.

Not when for most of us–at least for most people I know, including me–”New Year resolution” really means “Something I wish will happen this year, somehow, without any particular effort on my part”. 

Not when we don’t actually stick to it for the whole year, which is very easy if we don’t have any way to know how well (or badly) we’re doing.

Not when we pick resolutions that don’t really matter to us (if you say you want to lose 10kg but you don’t do anything about it for the whole year, let’s face it: losing 10kg doesn’t matter that much to you.)

Not when the end point of the resolution is so far from where we are right now that we have no idea whatsoever how to get from here to there.

Might as well don’t have any resolutions. At least we don’t have anything to feel bad about in January 2010.

Meta-Resolutions

Since I want to feel good in January 2010, here are my meta-resolutions for 2009:

1. I shall come up with no more than 3 SMART resolutions, only in matters that are REALLY important for me. Just 3, and no more.
2. I shall do a monthly review of those resolutions, on the 8th of every month.
3. I shall adjust the goals and approaches as necessary as I learn more about those goals. But I shall not break them.

The New Year resolutions themselves are in another post, coming up on the 8th of January. Meanwhile… Happy New Year!

(Images courtesy of Mimi Kat @ flickr and It’sGreg @ flickr in the order of appearance.)

January 4th, 2009 | Tags: goals | Category: Goal Setting | Comments (6)