Reflections on my investing journey so far - "It is still cash flow that triumphs".

As I reflect on my past three years plus of investing in stocks and shares, I learnt many lessons, some slightly bitter ones and some are good ones. So far, I am glad to say that I have not made any realised losses from the stock market yet. In fact, I have made steady returns of approximately 13% per annum over the past 3 years plus of investing mainly through recurring cash flows from dividends received from my stocks investments and some gains through selling of shares (a lesser amount though compared to dividends received). This figure of returns may not be exceptionally significant, but it is already better than most other alternative forms of investments. Also, I have not made a single realised loss on my investments so far.

I have learnt through my humble experience in investing so far that it is better to have the mindset of building assets that return stable continuous cash flow than to invest for quick returns. Even if one is going for an accelerated way of investing by investing for appreciation in value of assets (be it paper assets like stocks and shares or physical assets like real estate properties), one must still own an increasing amount of assets through the years that provides recurring and increasing cash flow that can beat inflation over the years.

Getting positive cash flow through owning assets is really everything about successful investing. Appreciation in value of assets is an icing on the cake. Even after one sells off an asset that has appreciated in value and made a gain, he is still faced with the decision to reinvest his gains and original capital into another asset. If he does not reinvest his cash, then cash will depreciate in value over time. By not investing one's cash, one is getting poorer by the days.

Ultimately, I believe the distinction between rich and poor people is just in the mentality of how they view money. The rich becomes financially educated and invests to control or own assets that provide them recurring and increasing cash flow that fights inflation. Of course, any appreciation in value of the assets is also welcomed. The poor views investing as risky or is just ignorant of the merits of doing proper investments. The simple key to successful investing is just to continue learning how to invest and just do it and really learn from mistakes and successes whenever investment decisions are made.

The more learning and experience one gains through own research and learning from mentors, the better it becomes as one matures in his investing journey. As I have already expressed in an earlier post quite sometime ago, my view on successful investing has not changed now. Building up the amount of high quality assets one can have the most control (be it paper assets - this tends to have lesser control for the investor as shares are just meager part-ownership of an invested company unless one is a major shareholder, physical assets or business) over time and getting increasing recurring cash flow which beats inflation will allow one to reach financial freedom sometime in life. Cash flow received from assets is further plough back to reinvest in more quality assets which further increases cash flow. This is a virtuous cycle of increasing cash flow over time (by compounding), cash flow that further feeds more cash flow.

Patience and endurance to resist instant gratification in seeing immediate gains is important. Surprisingly, I learnt through these three years plus of investing that money goes to the one who is not greedy for it. The more one is not greedy for money, the more rational and composed one is when it comes to long term financial planning and constantly making the right investment decisions. It is all about the mindset of the investor. The success and failure of investing is not so much affected by the economy, but often it is the wrong emotions of greed and fear that causes the investor to make unwise investing decisions.

I will continue to look out first and foremost for quality assets (be it in paper or physical assets or business) to invest for good quality cash flow while secondly welcoming the idea of appreciation in value of invested assets. Building cash flow through owning and controlling more and more quality assets over time that beat inflation heads down is the crux of successful investing that will enable one to reach financial freedom. Better yet is that the quality assets one has owned can appreciate in value over time. This simple rule of successful investing has not changed through the ages. I believe it will not in future too.

Are you into building more and more positive cash flow (by owning and controlling more quality assets) or "building" more and more negative cash flow over time (by spending more than one's income, chalking up bad debts or making unwise investment not in cash flow producing assets but in investments that may lose their value in the end resulting in a loss)? If 'cash' thinks that it is really king, 'cash flow' will be laughing his heads off at 'cash'. Perhaps, the mindset of wanting cash flow is probably better than the mindset of wanting cash when it comes to successful investing?

Think of cash flow investing as installing more and more taps that can be opened to provide more and more cash inflows. The choice of the right taps to install is important so that the right taps (quality cash flow positive assets) can continually provide more and more cash inflows over a long period of time to build one's passive income.

Differentiate - For it does not pay to be a copycat!

In the business world and our lives, there are so many different things happening around us constantly. Everyone of us is in one way or another trading our time, effort and knowledge for a living. Time, effort and knowledge can be seen as forms of products and services offered to help answer another's needs or problems. Businesses are providing products and services and getting paid by their customers for such provision. Employees are being paid by their employers for their services. There are so many businesses vying for market share for their products and services as well as job-seekers going around looking for potential employers to persuade them to consider employing their services in order to secure a living.

With so much competition between businesses, job-seekers and even employees on their jobs, what makes a winner stands out among the crowd. The magic element is "differentiation". There is no incentive in being a copycat, an exact replica of another. By being a copycat, an individual or business can only at best be as good as the original and nothing better. To be a copycat also means being a follower, one who has no leadership in pushing frontiers to always explore better ways of doing things and improving oneself. The only means to a copycat is to imitate another leader. The copycat may survive for a while by imitation, but since there is no real innovation and tenacity to constantly better oneself, the copycat will sooner or later cease to survive once it cannot catch up with being a copycat of the leader.   

As such, the only means to keep improving oneself or even to survive in this competitive environment of business and life is to "differentiate". In businesses, differentiation means having a unique selling point, how the business can be seen as different from it's competitors. To be different just for the sake of being different does not work. What works in differentiation is to differentiate in ways that better serve the needs of a target niche market.

There is no such thing as a forever market leader. There is also no such thing as a perfect market leader that can always serve their niche market in all perfectness. There are always unanswered avenues for innovation and improvement of products and services to better answer the needs of a niche market. The business that fails to constantly differentiate in ways that better serve their niche market will eventually lose out to another business that is able to differentiate their products and services to better answer the needs of their niche market.  

What are the ways a business can differentiate? There are five strategies of differentiation as follows:-

1. Differentiate by being the leader.

2. Differentiate by being the specialist.

3. Differentiate by pricing.

4. Differentiate by design.

5. Differentiate by polarity positioning.

Differentiate by being the leader

A business can differentiate by being a leader of it's niche market. This means being the first in the market to offer a new solution to an existing problem. This new solution is in the form of a new product/ service that will better solve an existing problem. By being a leader in one's niche market, the new solutions in the form of new products/ services will gain market share rapidly since these new products/ services can indeed better solve an existing problem or answer a need of the niche market better than other products/ services around.

An example of such differentiation by being the leader can be found in the health and wellness industry where chairs are no longer just for sitting, but have gone through innovation to include massage capabilities so one not only sits but sitting becomes relaxation and enjoyment for consumers of such massage chairs.

Another example of differentiation by being the leader is in Apple's invention of it's first Apple iphones to include the keypad within the screen of the phone so it becomes a touchscreen and some computer desktop capabilities are also merged into the small touchscreen. Thus, one can operate the smartphone as both a phone and computer but at so much smaller size and with the natural convenience of touch using fingers on touchscreens.

Differentiate by being the specialist

A business can also differentiate by being the specialist in it's niche market. The niche market always look out for the best specialist which is the best in solving an existing problem compared to other competitors around. Usually, this involves a company focusing on one point in it's product or service offering and working to become the best in the market in that critical selling point. This selling point may not necessarily be a unique one, but it is definitely the best selling point for the specialist.

For example, a transport company can differentiate by being a specialist in providing the fastest transport service around. Another transport company can focus by being a specialist in providing the most reliable transport service around, making sure it maintains a clean track record of no damage ever to any goods transported under it's service.

Differentiate by pricing

Another way a business can differentiate itself is by pricing of it's products or services. A business should try not to compete based on prices alone. Mere competition by price wars does more harm than good to the business profit margins. In order not to compete on prices, businesses must offer unique products and services of premium quality so as to charge higher premium prices on the unique products and services.

The niche market may not readily accept higher prices for premium products and services offered. Thus, a company must communicate clearly and carefully to justify the higher price that it's niche market is paying for an added premium value of the superior products and services that can better solve their existing problems.

Differentiate by design

Differentiating by design involves a company aligning the ways it work to it's brand image. A company can focus on a few major qualities that are congruent to it's brand image and make sure it keeps to delivering on the qualities.

For example, a pizza company wants to project a brand image of always being polite and understanding the needs of it's customers. It can train it's employees to greet it's customers with a certain style and manner that projects politeness. It can also train it's employees on particular ways to handle complaints from customers that still project politeness even in difficult situations. To understand the needs of it's customers, the pizza company can have a customer feedback system to receive feedback ratings and suggestions on ways the company can better it's pizza products and customer services.

Thus, a company that can constantly deliver on the promises and qualities of it's brand image will be able to differentiate itself by design.

Differentiate by polarity positioning

Differentiating by polarity positioning involves doing things differently from one's competitors to achieve the same desired solution to an existing problem for one's niche market.

For example, airline companies provide the same solution to their market which is to carry their customers (their passengers) safely from one destination to another within reasonable travelling time. However, airline companies do not deliver this solution in the same way. Singapore airlines pride itself on providing it's customers with luxurious and premium quality flight experience while budget airlines provide their customers with a low cost and simple but still reasonable air travel experience. 

Thus, businesses can do things very differently from their competitors by different polarity positioning while achieving similar promise of solution to the niche market's problem. 

Conclusion

To increase business profit margins and expand market share, businesses must differentiate themselves from their competitors. It is damaging to businesses serving the same niche market to be competiting on similar terms and prices.

I recall a biology topic of interest that also provides an analogy to survival by differentiation. It is the topic of natural selection. In the harsh living environment, individuals of the same species (e.g. we humans) are found to be not exactly the same with one another. This differences in the individuals allow some individuals of the species to still survive when the harsh environment changes. Such individuals are the fitter ones with desirable characteristics that are able to survive in the changed environment. Should the original members of the same species be exact copies of one another, a sudden change in the environment would have wipe out the entire species. Thus, we see the merit of being different in the correct ways (for the fitter individuals) according to the rules of the changed environment, working out to ensure survival of these members of the species.

Differentiation in the correct manner is not only desirable, but necessary for survival in the harsh environment of life and business. Differentiation is also about a business providing unique and better experiences for it's customers that they cannot find elsewhere from the competitors.

Be similarly crowded out and suffocate or be different from the crowd in better ways.

Differentiate.......do it or die.

Share consolidation/ Reverse stock split.

Recently one of my invested Real Estate Investment Trust (REIT) announced an intended unit consolidation exercise. This REIT is proposing that every five of it's existing units to be consolidated into one consolidated unit. For example, this means that an investor who has 5000 units of this REIT currently will see his number of units at the end of this exercise reduced to 1000 units. This is the basic idea of the term consolidation.

Common misconceptions regarding share/ unit consolidation

There are some common misconceptions to a share or unit consolidation (or otherwise known as a reverse stock split). Common misconceptions include the following:-

1. The investor will see a dilution of his holdings after the share/ unit consolidation.

2. The net asset value of the invested company will decrease after the share/ unit consolidation.

Share/ unit consolidation does not reduce the percentage interest of the investor in the invested company. There is no dilution to his holdings after the share/ unit consolidation. Let me illustrate with an example. Imagine there are four investors who intend to share 20 equal slices of a cake. Each investor is entitled to receive 5 slices of the cake (each investor gets 25% of the whole cake). Just before the cake is cut into 20 slices one of the investors suggests that it is too much of a hassle to cut the cake into 20 slices. Thus, all the investors together agree to do a cake slice consolidation of 5 slices to become 1 slice. Thus, each investor will only get 1 slice of the cake. This means the cake will now be cut into 4 equal slices instead of 20 equal slices. Each investor now gets 1 slice which is still 25% of the cake, just that the one slice has become a bigger slice by 5 times (since 5 smaller slices get consolidated into 1 big slice).

Also, in doing the cake cutting with consolidation of the cake slices, the total size of the cake has not dwindled or expanded. It is still the same old cake, just that it is divided into 4 equal bigger slices instead of 20 smaller slices to be distributed equally to each investor. Thus, the net asset value of a company remained unchanged after a share/ unit consolidation (compare this with the example of the total size of the cake which has not changed since no extra materials has been put into the cake to make it bigger nor any part of the cake taken away before dividing the cake for the four investors).

Reasons for share/ unit consolidation by a company/ investment trust

If a share/ unit consolidation has no material effect on the company and it's investors, then why does a company do share/ unit consolidation? Is it justifiable for such an exercise?

Any company can do a share consolidation or otherwise known as reverse stock split for various reasons. One of the reasons is to increase the share/ unit price of the company/ investment trust. Some stock exchanges do not permit stock price to be traded below a certain price, so a company that has too low a stock price has to do share/ unit consolidation in order to continue to be listed on the stock exchange. For example, a company share which is currently traded at $1/ share will see it's share price increase to approximately $5/ share after a 5-for-1 share consolidation. The total number of outstanding shares in the company will decrease by approximately 5 times since every 5 shares is consolidated into 1 share (eg. total outstanding shares of 5 million shares will be reduced to 1 million shares).

Another reason why companies do stock/ unit consolidation is to attract instituition investors. Institution investors mainly invest in companies with higher traded stock price (as such companies are "seen to be stable blue chips"). As such, there is more analyst coverage and institutional interest in such higher traded stock price companies (if one assumes higher traded share/ unit price equates to a blue-chip status). Thus, some companies can do share/ unit consolidation to increase their share/ unit price so as to gain institutional interest and analyst coverage. This is what I call, "to put on a premium branded suit on a man" so as to let the man look more attractive and gain higher prestige. However, the man is still the same man with same abilities and personality. Nothing much has changed except that he has donned a good looking suit.

Conclusion

In conclusion, when companies/ investment trusts do share/ unit consolidation, there is no material impact on their investors. There is no dilution of investor holdings in the company nor any change in the net asset value of the company after the share/ unit consolidation.

A share/ unit consolidation may be carried out by companies to gain institutional interest and analyst coverage. However, the investor must be careful to see that the fundamentals of the company has not changed for the better after the share/ unit consolidation (if one sees a share/ unit consolidation like a man who dons a good looking suit to make himself more attractive, but he is still the same person and has not necessarily become better in his personality and abilities). In such situations, I will still adopt a cautious attitude towards the company to continue to see that they do the right things to constantly improve their business as such share/ unit consolidation exercise may be just a "one-time putting on make-up" event.

"Excuse me sir, how will you like your cake to be cut?

20 equal small slices or 4 equal bigger slices?

We do not add extra materials or take away any part of the cake.

The cake is still the same total size no matter how you want it to be cut." 

I BELIEVE.

I read this book "Millionaire Upgrade" by Richard Parkes Cordock recently which revealed the important attributes that self-made millionaires or successful entreprenuers possess. These attributes are depicted by the book as eight important principles for anyone who aspires towards being successful in life and business.

The eight important principles are listed in an acronym fashion namely, I BELIEVE.

I = I believe in myself.

B = Be passionate and want it.

E = Extend your comfort zone.

L = Lies and luck don't work.

I = Install goals.

E = Enjoy hard work.

V = Very, very persistent.

E = Expect failure.

I = I believe in myself

The first "I" sets the stage for these principles of success to work. In order to be successful, one must believe that he can become successful. This positive self-belief in making things work out is not based on an arrogant faith in oneself being the smartest in knowing everything and how to achieve success in having pride in one's way of doing things which always is seen to be superior than others.

This positive self-belief is instead a consistent belief in oneself that he can persevere through all odds and challenges, and keep on trying one's best without giving up until he succeeds in what he seeks to achieve. This is an entreprenuerial mindset, one that has great endurance and tenacity to strive towards the end-goal without giving up despite disappointments and failures along the way.

Easy said than done. That is why not many people pursue the tough route of entreprenuership which puts the hardest test to one's life in making tough decisions and actions, and accepting the many failures and sometimes small successes before seeing the final great success of one's work. I see entreprenuership as the toughest examination of all the many examinations one takes in his student and even corporate years. To graduate as a successful entreprenuer, he will have to face the failures of many papers in this examination and learn from each failure in order to proceed until the end of the whole series of examination to become a successful entreprenuer both in maturity of knowledge and spirit of enterprise.

B = Be passionate and want it

To be a successful entreprenuer, one has to be 100% passionate in pursuing a great entreprenuerial purpose. A successful entreprenuer is passionate in living out his life in providing a meaningful product or service to value add in other people's life. His great entreprenuerial passion is in always innovating better ways to answer people's problems and make life better for people he is serving (in the provision of products or services). Pursuit of money through going an entreprenuerial route is not a strong motivator. Passion in doing what one enjoys that will bring about benefits to others he serve is an enduring motivator.

I see this similarity of the principle of passion with the ideas from the book "From Good to Great" by Jim Collins. Great organisations have great culture of passion in all its people in serving a great meaningful purpose. They continue to be great as they have passion in living out and serving their great meaningful purpose, the purpose for their existence.  

As such, there is no point in doing something great and ambitious when one has no belief and passion in what one is doing. Find one's passion in life and become great in serving others through this meaningful purpose with an entreprenuerial heart.

E = Extend your comfort zone

Humans are creatures of habits of comfort. We have this tendency to keep repeating the same familiar habits that bring comfort to oneself. A successful entreprenuer needs to constantly extend beyond his comfort zone. It is through experiencing new things each day that one constantly learns. A baby who wants to walk the way adults walk has to extend beyond his comfort zone by actually trying to walk. He will never learn walking if he insists on his comfort zone keeping to familiar habits of doing a baby crawl.

To extend beyond comfort zone means conquering over one's fears and self-doubts. Everyone has fears of trying something new. It is the successful entreprenuer who is able to master courage to confront his fears head on and push boundaries to take on the new challenge and learn from it. Many great entreprenuers like Thomas Edison (in the constant invention of new things such as electric light bulbs), Henry Ford (in making available widely the automobiles to the masses) and the United State's project in puting the first man on the moon are examples of individuals and nations extending beyond their comfort zone not knowing whether what they aim to achieve will be successful or not. You never know until you try your very best.

L = Lies and luck don't work

If one thinks great entreprenuers are lucky chaps who got their way because they are simply born lucky, one will be extremely surprised. A successful entreprenuer does not rely on luck. What an onlooker views as luck is a duration of preparation which consumates with a great opportunity by the willingness and passion of the successful entreprenuer to pursue the opportunity that is presented. Tiger Woods, the world championship golfer did not got his lucky break all of a sudden to become world champion. It is through many years of preparation in golf training and taking part in many competitions that he manages to be known eventually as world champion. Thus, luck is the crossroads of preparation and opportunity.

Lies also has no place in a successful entreprenuer's belief. A successful entreprenuer does not hope for things to happen. He does not lie to himself and gives excuses that things will happen the way he hopes without taking any actions. Instead, he takes purposeful actions to make things happen the way he wants. Sometimes, things will not happen the way he wants after taking actions. However, he will still persevere on and keep trying different ways to reach his goals.

I = Install goals

To become successful, one needs to have goals and works towards them. Some have big goals. Some have small goals. Some have noble goals while others have more trivial goals. No matter what, it is important to constantly remind oneself of the goals one has passion in pursuing.

One can break down his goal into small steps and achieve one step at a time towards fulfiling the final goal. A successful person install goals and has clarity on what goals he wants to achieve in life. He is always taking actions to strain towards his goal in steps. A goal is thus fulfiling a dream with a disciplined deadline.

E = Enjoy hard work

A successful entreprenuer enjoys hard work. His work is not work to him but doing something he is passionate and believes in. As such, he enjoys what he is doing and does not mind going the extra mile to make sacrifices for what he is doing. Many a times, we have heard of great entreprenuers who put in many long hours of sacrifice into building up their business. For an onlooker, we may think such entreprenuers are overworked. However, to these successful entreprenuers, they just simply enjoy their hard work as they are working on their passion in life to serve a great meaningful purpose.

It is important to find one's true passion in life and then enjoy working hard at it until one reaches success in his goals (founded upon his passion). I read up elsewhere that successful people put in at least 10,000 hours of consistent hard work at learning and practising a particular trade in order to become an expert in the trade. This translates to approximately 3 hours every day of consistent learning and practice for 10 years to reach expertise in a trade.  One really needs passion in a trade to enjoy this level of consistent hard work!

V = Very, very persistent

Successful people which includes successful entreprenuers are very, very persistent individuals. Their passion in pursuing their goals is so strong that they will not give up until they reach their goals. They will not take "no' for an answer, but will find means and ways to reach their goals. They are passion driven people who will do what it takes (personal sacrifices of time, effort and confronting their fears, failures and disappointments) to reach their goals.

One great inventor and entreprenuer who displays such great persistence is Thomas Alva Edison who despite failing many times in his many attempts for every new invention, never gives up and continues trying until he successfully invented every new invention. One of the products of his extreme persistence is his greatest invention, the electric light bulb which has lighted up the world since his time. Had he given up easily, the world may not see an electric light bulb today (unless another inventor of great persistence comes along somewhere in ages past to discover an electric light bulb).

E = Expect failure

All successful people including successful entreprenuers have failed many times. Such people know that one cannot win all the time. Failures are part and parcel of the learning journey towards success. It is in failing that one can learn from his mistakes and better oneself. The more failures one make, the more opportunities of learning and growing in wisdom and judgement. A successful learned man has gone through a robust experience of learning from many failures. As such, he constantly learns from mistakes and do not commit his mistakes again while finding better improved ways to do things.

It is the ones who are afraid to fail that never extend beyond their comfort zone to become better at their trade. Failure is a great teacher. Learn to expect failure. But, do not forget to learn well from this great teacher who is "failure" so as to constantly grow to become better after each failure.

A magic ingredient that binds all 8 principles

In conclusion, I will also like to share from this book that there is an essential ingredient for success apart from these eight principles. This magic ingredient that binds all the above eight principles is teamwork. It is not enough for one person alone to embrace all these eight princples to have success. Every successful entreprenuer knows he cannot achieve success on his own. He needs a team to work together with him pursuing the same passion and belief.

In a team, there is synergy and everyone can leverage on one anothers' expertise, time, effort, capital and all other shared resources for a common meaningful purpose they are serving. A successful entreprenuer surrounds himself with successful people who can work together with him with common passion and belief. He can also learn from other people in a team as everyone has their unique strengths, areas of expertise and even weaknesses.

It is not an easy route to success, "Do I BELIEVE?"

So you want to retire in Singapore?

As I was going through my daily activities recently, the thought of retirement came through my mind. Do not get me wrong. I am not thinking of retiring anytime soon. Even if I do reach financial freedom before age 65, I will still find work to do, meaningful work especially. This is because I believe one should contribute his time to meaningful activities (providing a product or service) to help others since he is financially free with available time. Even if such work does not receive remuneration, as long as it is serving a meaningful purpose, I will still work for a meaningful cause.

Financial freedom is a blessing received and not to be taken for granted. I believe one who is in this special status of life should start living for others to commit his freed up time (since he is no longer financially burdened and need to restrict his time to working for a paid salary) to help others in need (in whichever meaningful ways).

Leaving financial freedom aside (which not many people eventually reach due to one reason or another), the more important issue of concern is retirement planning. Most people will live long enough to reach their retirement age. For Singaporeans, our retirement age is seen to be age 65 (at least by our government since the official age to receive our Central Provident Fund, CPF monies is at age 65). Assuming as a benchmark many people do work until age 65 and thereafter retire from work, how much does it cost to retire in Singapore?

I did an estimation of the cost of retirement in Singapore. I was shocked by my finding. This made me realise that it is difficult for many people to retire in Singapore, not to mention retire comfortably.

I provide a few case scenarios as follows:-

For a Singaporean aged 20 currently

Depending on individual's needs, let's assume an average comfortable living expense for an individual is around $2000 per month currently. When the individual reaches age 65, he will need around $7563.19 per month in year 2056 upon his retirement to continue living at his same living standards as of today. This is assuming an annual inflation rate of 3% over a period of 45 years until his retirement.

He will continue to live another 20 years of retirement (assuming the average lifespan is around 85 years). Assuming the same annual inflation rate of 3% over his retirement period, his total retirement funds needed is approximately $2,438,708.88. A $2.4 million sum need for retirement! What a staggering amount!

For a Singaporean aged 30 currently

Assuming the same comfortable living expense of $2000 per month currently, the individual will need around $5627.72 per month upon his retirement at age 65 (assuming an annual inflation rate of 3% over 35 years until retirement) for living expense to maintain similar living standards.

Over his retirement period of 20 years, his total retirement funds needed is approximately $1,814,627.21 (assuming an annual inflation rate of 3% over his retirement period). Ok. This is slightly better compared to the younger folk mentioned earlier who needs more in total retirement funds. However, a $1.8 million sum is not a small sum either.

For a Singaporean aged 40 currently

Assuming the same comfortable living expense of $2000 per month currently, the individual will need around $4187.55 per month upon his retirement at age 65 (assuming an annual inflation rate of 3% over 25 years until retirement) for living expense to maintain similar living standards.

Over his retirement period of 20 years, his total retirement funds needed is approximately $1,350,252.36 (assuming an annual inflation rate of 3% over his retirement period). This $1.3 million sum is not a small sum also for a slightly older folk currently to retire at.

Conclusion

As we can see, the older the Singaporean is currently, the lesser the total amount of retirement funds needed for his retirement. However, even at age 40 currently, the total retirement funds (approximately $1.3 million) needed to set aside is by no means a small sum to be overlooked.

I leave the reader to draw your own conclusion whether it is an easy feat to retire in Singapore or not. Are we prepared for the better or worst to come upon our retirement days? It is no wonder why our government keep increasing the retirement age (now already standing at age 65) and encourage Singaporeans to continue working as long as they are able to till they die. This leaves one thinking whether this is just a passing statement for the government to say encouraging older workers to stay active in their golden years by working, or that the harsh realities of retirement living dictates one's neccesity to keep on working until one drops dead.

Downgrade one's living standards during retirement days with whatever limited savings left? "Continue working" during "retirement days" to maintain current living standards or just to meet basic living needs? Be not financially burdened during retirement days by saving up and investing early during younger days? One needs to consider carefully his choice now as the consequence of his choice will unfold definitely in time to come.

Assumptions in my estimation

Please note the following assumptions in my estimation of the total retirement funds needed.

1. An average annual inflation rate of 3% at least over the next 65 years.

2. An average monthly living expense of $2000 currently for decent living standards.
3. Retirement age of Singaporeans at 65 years.
4. Average lifespan of Singaporeans at 85 years.

Level 5 leadership: A necessity for organisations to go from good to great.

We have examined according to Jim Collins and his research team what the good qualities that good to great organisations possess, as well as the poor qualities that organisations on decline possess.

A large part of the success or failure in any organisation depends on it's leadership. It is necessary according to Jim Collins and his team's research findings that any organisation that aspires towards lasting greatness have level 5 leadership at their helm.

What exactly makes a level 5 leader?

There are 5 levels of leadership, namely:

Level 1: Highly Capable Individual.

Level 2: Contributing Team Member.

Level 3: Competent Manager.

Level 4: Effective Leader.

Level 5: Level 5 Executive.

Level 1: Highly Capable Individual 

A level 1 leader is a highly capable individual who makes effective contributions at work through own personal knowledge, talents and skills. Such individual also possesses good working attitude and habits. However, the amount of contribution is only limited at an individual level.

Level 2: Contributing Team Member

A level 2 leader is an effective contributing team member. Such leaders are able to work effectively with other people in a group setting to achieve group objectives. As such, the level of contribution is higher at a group level.

Level 3: Competent Manager

A level 3 leader is one who is a competent manager. He is able to effectively plan and organise people and resources in the achieving of work objectives. His level of contribution is thus higher as he is not only a contributing team member, he is also the team leader of his team.

Level 4: Effective Leader

A level 4 leader is an effective leader. He not only fulfils the ability to lead his people and use resources to achieve work objectives and tasks. On top of that, he is able to drive and excite his team towards a clear vision. When directing his team towards a strong vision, he is also able to constantly stimulate his team towards giving their best to high performance standards. Such a leader contributes at even higher level in having a clear vision and taking his team towards fulfiling this strong meaningful vision while executing at high performance standards.

Level 5: Level 5 Executive

A level 5 leader is one who possesses a strong professional will in building his team of people and organisation towards lasting greatness. His ambition is not small but is great beyond measure. He aspires for his organsiation to be the best in the world that they can be and to have enduring greatness through time. Such great leaders are humble, for their ambition is never for personal interests or gains but only for his people and organisation to become the best they can be at serving their great meaningful purpose.

A level 5 leader is one who thus brings out the very best in his people and organisation in fulfiling their great purpose that the organisation is serving. He is a builder who builds lasting greatness into his people and his organisation. He builds greatness not for himself, but for his organisation to continue through time to be great and even better at serving their great purpose, the very purpose for the organisation's existence. His contributions to his organisation will carry on through time (even for many generations of leaders after him) even as he is gone.

Conclusion

An individual can proceed through the 5 levels of leadership to become a level 5 leader of greatness. This progress may not necessarily be through each level in sequence. A level 5 leader will possess all the capabilities of the other lower levels of leadership. In addition to these capabilities, he also possesses the special characteristics of greatness evident of a level 5 leader.

From Good to Great.

If "even the mighty can fall", how do organisations ensure they tread carefully each step to go from being good to great and maintain their greatness to last. According to Jim Collins in his team's research findings in the books "Good to Great" and "Built to Last", there are 4 stages to transit from being good to great and to continue in greatness.

Stage 1: Disciplined people.

Stage 2: Disciplined thought.

Stage 3: Disciplined action.

Stage 4: Building greatness to last.

Stage 1: Disciplined people

Great lasting organisations have continual succession of level 5 leadership to carry on guiding their people and organisation towards greatness. Level 5 leaders are not commonly found (looking at how few the number of great organisations that have truly stand the test of time). Level 5 leaders are highly ambitious, but not for themselves. They are ambitious in championing the mission and purpose of their organisation. They will do whatever it takes to live out the mission and purpose of their organisation and ensures others in their organisation do likewise. Such level 5 leaders are humble but possess an exceptionally strong will to ensure their organisation work their best to live out their mission and purpose they are serving. Such level 5 leaders in their humility, look not inwardly to themselves for personal gains, but instead look outwards to build the best out of their people and organisation.

Great lasting organisations ensure they have the right people in their organisation (people who live out their organisational values, mission and purpose). They focus first and foremost on recruiting the right people to their key seats before deciding what these right people should do. The right people in key positions will naturally work together to ensure they take their organisation in the direction of fulfiling their mission and purpose. The wrong people in the organisation who do not live out the values, mission and purpose are promptly taken off the organisation.

Stage 2: Disciplined thought

Great lasting organisations do not avoid any confrontations of their problems and difficulties. They will do whatever they can to deal with and find solutions to their most brutal problems, mistakes and difficulties they face.

Such organisations also stick to the "hedgehog concept". The hedgehog concept embodies three principles:-

1. Continue to do what one can be the best in the world at doing (and keep improving in doing it).

2. Continue to do what one is deeply passionate about.

3. Continue to do what best drives one's economic or resource engine.

Stage 3: Disciplined action 

Great lasting organisations have disciplined people. Such organisations enjoy a culture of freedom as their disciplined people work within a framework of responsibilities. Disciplined people take on responsibilities instead of jobs.

Such organisations function as though they are pushing steadily onto a giant flywheel, making turns upon turns, building up the momentum of the flywheel until they see a breakthrough. They are not hasty in trying to make quick breakthroughs with some grandiose program or actions. They understand the need to carefully build up their organisation towards greatness.

Stage 4: Building greatness to last

Great lasting organisations are built through many generations of level 5 leaders in succession. Level 5 leaders over many generations have built into their organisation mechanisms that stimulate progress. The success of the organisation does not depend solely upon the charisma of any one single leader or great idea. 

Such organisations are able to continue in existence as they remain in living out their core values, mission and purpose which stand the test of time. However, they are also able to make significant progress by constantly adapting to the changing world in their operating strategies and cultural practices. 

Conclusion

Building a great lasting organisation requires discipline, humility and a strong professional will of it's people to live out a set of timeless core values to commit to greatness in fulfilling meaningful purpose(s) in it's service. 

Disciplined people. Disciplined thought. Disciplined action. Building greatness to last.

How even the mighty can fall!

I like the series of books written by Jim Collins, "Built to Last", "From Good to Great" and "How the Mighty Fall". This series of books has it's content based on solid extensive research of examples of companies that succeed and fall. It gives a good insight into how some companies can become great and long lasting well known names, while others go into oblivion. 

In this book, "How the Mighty Fall", I am impressed again by how Jim shared about their team's research findings of how every company, whether small or large enterprises can suffer the fate of becoming obselete and non-existent if they are not careful about continuing to be commited to being great.

The fall of any company, small and great alike according to Jim Collins seems to go through five stages (though some companies may not encounter all of 5 stages before capitulation to death), namely:-

Stage 1: Hubris Born of Success.

Stage 2: Undisciplined Pursuit of More.

Stage 3: Denial of Risk and Peril.

Stage 4: Grasping for Salvation.

Stage 5: Capitulation to Irrelevance or Death.

Stage 1 (Hubris Born of Success)

A search of the word 'Hubris' from Wikipedia comes up with the following meaning, " extreme haughtiness, pride or arrogance. Hubris often indicates a loss of contact with reality and an overestimation of one's own competence or capabilities, especially when the person exhibiting it is in a position of power."

These are various symptoms of stage 1 (Hubris Born of Success) in any organisations. Organisations may not display all of the symptoms, but many of them may be found in this early stage 1 of decline. Symptoms include people in an organisation taking success in their organisation for granted, believing that success in their organisation will continue indefinitely, no matter what they do or not do.

Leaders in an organisation become distracted from constantly strengthening and improving upon the core business that the organisation is already strong in doing. Leaders get distracted by pursuing new adventures, opportunities or being too absorbed in thinking about non-essential threats to their organisation.

The people in the organisation may also tend towards the "what and how" their success came about instead of cherishing "why" they got their success. People lose focus on their core values, mission and purpose of their organisation that got them successful in the first place and instead just base their success on their ability to carry out specific things or tasks in their organisation.

There is also a loss of learning culture in such organisations in stage 1 of decline. Since understanding of success is now based on what things and tasks to carry out, there is no longer any growth in pursuing learning. The organisation can only maintain status quo, and be at most as good as when their learning last stopped. Keep in mind that there is no such thing as 100% complete knowledge. The World contains a vast amount of knowledge beyond measure. The only successful individual or organisation is one that is constantly learning new things and value adding to themselves and others they serve.

Furthermore, such organisation in stage 1 of decline thinks highly of themselves, that they owe their success solely to the superior qualities of their organisation and leadership, instead of adopting humility and acknowledging that their success may have also arised from good circumstances and turn of events.

Stage 2 (Undisciplined Pursuit of More)

Organisations that proceed to stage 2 of decline confuse growth with becoming great. Such organisations in a bid to become great overstretch their people, systems and operations beyond what they can bear. Often, the dramatic actions such organisations carry out do not fit into their core values and do not enhance their core business. 

Such organisations also lose the right people in important positions that ensures the success of the organisation. When pursuing undisciplined growth, organisations may also not be able to fill up enough right people into important positions as they grow and expand.

Such organisations in pursuit of undisciplined growth, may also respond to increasing cost of operations by increasing their prices of products or services to maintain profit margin instead of increasing their discipline at questioning carefully whether their growth is good growth or bad growth.

There is also an increase in bureaucracy in such organisations marked by rules governing actions, instead of maintaining a culture of freedom of expression fueled by strong cherished responsibility of every individual in the organisation, seeing that they do their best to be responsible for their work rather than seeing their work only as a 'job' they have no choice but to complete.

Furthermore, such organisations also face poor succession of leadership. There is no excellent succession plan in mind, no grooming of talented individuals within the organisation who live out the core values and purpose of the organisation for taking over the helm of the organisation.

People in organisations facing stage 2 decline may also look to their own personal interests more than the organisational interests. People pursue personal fame, popularity and power in the organisation more than investing their time in building up their organisation towards greatness for the long term.

Stage 3 (Denial of Risk and Peril) 

In organisations facing the next stage of decline, there is a tendency to ignore the negative warnings (in the form of any negative data) that surface within the organisation. Leaders tend to also highlight every positive results to receive praises and publicity while ignoring or discounting any potential negative warnings in their organisation. 

Leaders also tend to pursue big ambitious goals that are not founded on good analysis and past experiences. When presented with vague data that do not support well the pursuit of an ambitious goal or decision, leaders choose to ignore the potential significant downside while taking an overly optimsitic view of their decision which is not founded on good thought and analysis.

There is also a tendency towards a dictatorial style of leadership for organisations in stage 3 of decline. There is no evidence of much healthy debate or discussions when making decisions. People become mere followers of one or two leaders, and there is no generation of much ideas and opinions to ensure the best ideas and opinions can benefit the organisation.

Leaders in such organisations also push failures and mistakes to being caused by external factors and other people. They do not take any blame for their poor leadership.

When organisations are faced with stage 3 decline, they do not confront their problems and external conditions face on. Instead, people in such organisations are entangled in politics while their organisation keep reorganising in a bid to deal with their problems.

Furthermore, leaders in such organisations also face much detachment from their people in the organisation. They may get caught up with their executive status (good bonuses and nice offices) more than cherishing their commitment and responsibility to build their people and organisation.  

Stage 4 (Grasping for Salvation)

Organisations in stage 4 of decline keep trying out different strategies and programs or acqusitions in a bid to get themselves back on progress. The leaders indulge in ways to motivate their organisation with buzzwords or taglines. However, they do not have a solid recovery long term plan in mind. So, there is inconsistency in that their strategies for salvation keep on changing in a series of highly-sought after silver bullets.

Often, such organisations employ an outside leader (CEO) as a saviour who is charismatic in a bid to help the organisation turn around.

The people in such organisations often display habits of panic and uncertainty instead of discipline and a calm resolve to support their organisation to make a turn around.

Leaders refuse to acknowledge their current underperformance. Instead, they try to sell their people the vision of a bright future admist the difficult times that the organisation is currently facing that may potentially lead to their permanent downfall.

There may be some respite when the series of random silver bullets are carried out in a bid to save the organisation, but these positive changes are not lasting. There is no real build up of recovery momentum in the organisation.

When an organisation has reached this stage of decline, the people in the organisation have lost their cherished core values in the organisation. They no longer remember and understand what is the values, mission and purpose of their organisation, why their organisation exist in the first place.

In a bid to save such organisations by administering random inconsistent strategies and programs, together with organisational restructurings, with each strategy being carried out, the resources (financial and manpower etc.) of the organisation are further drained out. This accelerates the decline of the organisation.

Stage 5 (Capitulation to Irrelevance or Death)

As organisations reach stage 5 of decline, the certainty of death of an organisation is pronounced. Organisations in this stage of decline keep deteriorating as cash continues to tighten and hope disappears.

Such organisations should prepare for their death by doing what is best for their employees and shareholders with whatever limited resources left. This may involve returning whatever left over cash as compensations to their employees and shareholders after settling all debts. Some organisations facing impending death may seek a take over by another suitable company. Hopefully, with the take over, the already fallen organisation may be injected into good hands of the acquirer.

Conclusion

The rise and fall of great enterprises is fascinating. Any organisation should continue to exist and seek to become great in fulfiling their values, mission and purpose. Once an organisation can no longer serve great meaningful mission and purpose (in the provision of their products and/or services to value add to their market they are serving) thus securing their competitive advantage as market leaders, the organisation will proceed with most certainty the path of decline followed by death. This happens when another organisation which is better able to live out their values to serve similar meaningful mission and purpose takes over from the dying organisation.

All creatures (or organisations) small and large can fall when they do not tread each step carefully. It is alright to encounter small slips sometimes when each slip provides a learning lesson. The danger comes when one ignores the slips and never learn to walk properly which eventually leads to a great fall to one's death.

Leverage - A double edged sword!

Leverage is a neutral tool available to the investor. It neither favours helping the investor nor harming him. It is a double edged sword. The outcome of using leverage depends on how it is being used by the investor. So, the investor solely controls and is responsible for the outcome of using leverage, whether leverage will help or harm him.

Leverage is powerful in magnifying returns for the investor when it is used in certain situations and on the other hand destructive in magnifying losses when used in uncertain situations. Thus, leverage is a double edged sword and the wielder of this sword has to be trained in understanding how the sword can be used safety so as to help an experienced and knowledgeable wielder of the sword and not harm an unwary novice wielder instead.

One situation that poses uncertainty in using leverage is in trading of stocks. Stock prices fluctuate and when an investor is taking a position to long a stock or short a stock, there is no certainty that the stock will indeed rise (in the case of longing) or fall (in the case of shorting). No matter how an investor can boast of using technical analytic tools as a basis to enter into a trade, there is no absolute certainty that he can always have his way in terms of predicting the exact movement of a stock price. Thus, we hear of the saying "stop loss" and "cut loss" which are simply measures to minimise the impact of loss due to a stock price moving contrary to what is expected by an investor. In such uncertain situation of stock price movement, there is a hidden potential of leverage unleashing it's destructive nature despite having "stop loss" and "cut loss" measures in place as an investor cannot control stock price movements. As soon as a loss is incurred no matter big or small, leverage will magnify the losses further. 

However, in special situations such as a high probability of an arbitrage deal being completed, much risk would have been removed though a small risk that the deal may not be completed is still inherent as one cannot remove all risks. In addition, the more certain an investor can ascertain the time of completion of an arbitrage deal, he will be able to determine his adjusted projected annual rate of return (see previous post "A look at arbitrage deals using arbitrage risk equation from Benjamin Graham."). Using leverage in such certain arbitrage deal situations will help to magnify the returns for an investor.

I shall present here an example of how leverage can be used in such certain arbitrage deal situations. ABC company offers to buy all shares of DEF company at $10 per share in an acquisition exercise. DEF company agrees to tender all it's shares to ABC company at this price. Public announcements have been made by both companies and many investors of DEF company have tendered their shares and there is no objections from any major investors to block the acquisition. The acquisition exercise is expected to close in four months. Immediately after the public announcement, shares of DEF company are trading at around $ 9.70 per share.

For an investor who bought DEF shares immediately after the public announcement at around $9.70 per share, he will stand to make a return of about 3% in four months when the deal closes. His annual rate of return will be approximately 9%.

                                         = 3% in four months

                                           Annual rate of return = 3 X 3% = 9%

An annual rate of return of 9% may not make this deal overly attractive. However, the situation becomes different when leverage comes into the picture. Imagine that an investor can finance the buying of shares of DEF company at 8% borrowing interest rate per annum. This equates to a borrowing interest rate of around 2.7% for the four months period of the arbitrage deal. This translates to an interest cost at around $0.27.

Interest cost for the four months = 2.7% X cost of shares
                                                         = 2.7% X $9.70
                                                         = $0.27

Having an interest cost of around $0.27 per share and a potential profit of $0.30 per share from the arbitrage deal ($10 - $9.70 = $0.30), there will be a projected profit of $0.03 per share ($0.30 - $0.27 = $0.03).

Note that the cost of a share of DEF company is $9.70 per share, but the investor using leverage is borrowing this $9.70 at an interest cost of $0.27. So, his real investment cost is only $0.27 per share. He will earn a projected profit of $0.03 per share from our earlier calculations.

Thus, his rate of return for the four months is approximately 11%.

                                                                                    = 11% for four months

This translates to a whopping annual rate of return of 33% (11% X 3 = 33% in a year). With leverage, the investor can receive an annual rate of return of 33% compared to without leverage at an annual rate of return of 9%. His actual rate of return in four months time from the arbitrage deal is also higher at 11% with leverage compared to 3% without leverage. In this case, using leverage will approximately triple his returns in the same time period.

In conclusion, certainty when combined with leverage greatly magnifies returns for an investor. When leverage is used in certain situations such as a very high probability of consummation of an arbitrage deal within an announced known time period to completion of deal, an investor can determine his projected profit for the time period with high certainty. Leverage can thus be used as a powerful tool to greatly magnify an investor's returns in situations of high certainty. Wield this double edged sword properly with understanding and knowledge and it will greatly reward it's careful user.  

Leverage - A double edged sword!

To the knowledgeable wielder who wields the sword (leverage) with understanding, it rewards him greatly!

A look at arbitrage deals using arbitrage risk equation from Benjamin Graham.

There is a class of investors known as arbitrageurs who invest in arbitrage situations. There are two general types of arbitrage namely "market arbitrage" and "time arbitrage".

For market arbitrage, arbitrageurs seek to profit from price differences in the same security or investment being traded in two different markets. For example, if a company ABC's stock is concurrently being listed and traded in the London stock exchange at $10 per share and the Paris stock exchange at $12 per share, arbitrageurs will step in to sell the ABC's stock at Paris stock exchange while at the same time buy the stock at London stock exchange in order to pocket the profit of $2 per share in price difference. By the act of arbitrageurs, it is rare to see large price differences in any security or investment traded concurrently in different markets since any price differences will be immediately capitalised by arbitrageurs to profit from the price difference and thus the stock price of the same security will be brought towards approximately the same price by selling in one market and buying in another market simultaneously.

For time arbitrage, investors are arbitraging the price difference between what the stock price is today to what it will be at a future time. Many investors are already doing time arbitrage when we seek to buy a stock at today's price and hopefully sell it to another investor who will pay a higher price for the same stock in future (longing a stock) or borrowing and selling a stock at today's price and buying back the same stock at lower price in future (shorting a stock). The future time to fully transact an arbitrage in this case can be as short as one day to months or years.

Time arbitrage (longing shares - buy low sell high, 

or shorting shares - sell high buy low)

There are also special situations that will create arbitrage opportunities for the investor. These situations include mergers and acquisitions, securities buybacks or self tender offers, corporate reorganisations, corporate liquidations, corporate spin-offs and corporate stubs. With every potential arbitrage opportunity that comes on scene, there is also an element of risk that the arbitrage deal may not follow through to the end. An arbitrage deal that is created but does not follow through in the end may spell losses for investors who have invested their money into the deal to find that the deal does not work out. Thus, it is important to assess every arbitrage situation carefully to minimise the probability of entering into a losing deal.

Benjamin Graham, Warren Buffet's mentor and friend has an equation that can be used to assess the rate of return based on factoring in risk and reward of an arbitrage situation.

The first part of the equation is to determine the projected profit from an arbitrage situation (e.g. ABC company has announced a tender offer to buy all of DEF company's shares at $10 per share. DEF's shares are currently trading at $9 per share.)

Thus, the projected profit is $10 - $9 = $1 per share.

Next, we determine the probability that this tender offer deal will follow through to completion. Let's say there is a 90% chance of this deal completing. Note that the determination of the probability of the deal completing is more of an art than science since the investor has to assess all information available to him on the arbitrage situation carefully and come to a meaningful conclusion. His probability may differ from another investor's probability due to different views on the same arbitrage situation. We multiply our probability by the earlier projected profit.

Thus, the adjusted projected profit = 0.90 X $1 = $0.90 per share.

Next, we factor in the risk that the deal may fall apart and assume that the share price will return to the trading price before announcement of the tender offer. The risk is a projected loss between the current share price we pay and share price before announcement of tender offer. The current share price is at $9 per share for DEF's shares. Let's say the share price was $8 per share before the announcement of the tender offer.

Thus, the projected loss is $9 - $8 = $1 per share.

Next, we determine the adjusted projected loss. Since there is a 90% chance of the deal completing, there will be a 10% chance of the deal falling apart. We multiply this probability by the earlier projected loss.

Thus, adjusted projected loss = 0.10 X $1 = $0.10 per share.

Next, we determine the risk adjusted projected profit (after factoring in the risk involved in making the profit) by subtracting our adjusted projected loss from adjusted projected profit.

Thus, risk adjusted projected profit
         = adjusted projected profit - adjusted projected loss
         = $0.90 - $0.10
         = $0.80 per share

Lastly, we calculate our risk adjusted projected rate of return (in %) by dividing the risk adjusted projected profit over our original investment of $9 per share if we were to buy DEF's shares to enter into this arbitrage deal.

Thus, risk adjusted projected rate of return
          = ($0.80 / $9) X 100%
          = 8.9%

An 8.9% return on this arbitrage may not be too attractive over a year. However, if this arbitrage deal can be fully completed and the investor gets his profits in shorter time of six months, then the annual rate of return becomes 8.9% X 2 = 17.8%. This postulated annual rate of return is assuming that the investor can continue to keep his original capital reinvested after completion of the arbitrage deal at the same rate of return (for next six months to make up a full year). An annual rate of return of 17.8% now becomes attractive for an investor. Thus we see that an arbitrage deal becomes attractive should the arbitrage be completed in as short a time as possible.

In using this arbitrage risk equation, one is not trying to be precise in determining the rate of return on the arbitrage as no one can predict perfectly the outcome of any arbitrage situation. Therefore, the principle is to invest in arbitrage deals that have a very high probability of completion. One can be more certain of an arbitrage deal being completed if public announcements are already made and legal documents have been filed to the relevant authorities of securities exchanges.

As an arbitrage deal becomes more certain of being completed with passage of time, the gap in the traded share price to the tender offered share price (for example in the case of tender offers) closes and the traded share price in the open market will come close to the tender offer share price. The careful investor who waits for certainty before commiting his capital into buying the shares will see lesser rate of return.

However, an investor can still magnify his rate of return by using leverage (buying shares on margin) on such certain arbitrage deals. This is where the use of leverage (conventionally thought to be dangerous and destructive) works well in such certain deals to magnify returns. By combining certainty with leverage, this certainly beats uncertainty in the earlier stages of arbitrage when an investor buys on rumors and risk having the arbitrage deal falling apart and the loss on his capital.