Watching Millionaire Inside

Originally Posted by Unregistered

Reading this brings back poignant memories, as I've had a similar career path (though not as an analyst). It took me almost as long to save my first million.

Fortunately, I got out of the sinking boat before it sank, else I'll become the equivalent of a test tube washer today, and probably take another 15 years to save the next million. It was a really close shave.

Most important lesson I learned - those who follow the Government's advice end in grief.

what's the government's advice now? is it the design and engineering hybrids that the 4th university is going to produce?

very good advice. thanks.

Originally Posted by whizzard---

OK, this is what I did, all in the spirit of sharing only. (1) I tried my best to spend within my means and have some spare cash left over each month. (2) I accumulated the spare cash and invested it instead of spending it off. I didn't make money on all my investments, but on the whole, I did well enough to grow this a little. (3) I re-invested most of the profits instead of rewarding myself by spending it all away. I did reward myself though, but sparingly.

I made the bulk of my money investing in properties and some of my equity investments multiplied e.g. Capitaland & Keppel Land. To provide some details: bought DBS Land (before it became Capitaland) at $2.95 on 19 July 99, Keppel Land at $2.31 on 22 Sep 99, ST Engineering at $1.93 on 23 Aug 99, Natsteel Electronics at $3.12 on 18 Oct 00 (was taken over at US$4.53), etc, etc. I held these for many years. I began pulling most of my money out of equity in May 07, after the 1st time China stocks corrected in Jan/Feb 07 as I felt that a bubble was forming (I heard stories of Chinese workers demanding to take time off during lunch to trade the markets, young executives and housewives borrowing to trade stocks, people quitting their jobs to trade full time in the market, etc - sounds familiar like 93-94 in Singapore, yeah?) and the markets were getting very dangerous due to the extremely high PEs in China and extreme volatility in the regional markets when the Shanghai Index corrected - but it recovered and continued marching northwards until sub-prime hit for the 1st time in July 07. I got out for the wrong reason but I was out and this accounted for my current cash holdings.

Of course there were some bad equity investments over the years which I realised losses. I do invest in what some may call speculative stocks (I'd rather term them as situational plays which I aim for 30% to 50% returns within a short time frame of 2-3 mths. For longer term equity investments, I look for blue chips and put in smaller amounts per counter but for shorter term situational plays, I do put in substantially more per counter. No prices for guessing which I lost money in.

I have held onto my globally diversified unit trust portfolio for the past 8 years, seeing it yo-yo up and down and am regretfully still holding onto it now. Very bad returns - up 5% based on today's market valuation - but who knows what tomorrow (1 year, 3 years, 5 years) may hold?

My 1st foray into the property market was from 1994 onwards, where I bought and sold a couple of condos. Made a few hundred thousand on those, funded by my wife and my savings and some bank loans. The house which I am staying in was bought in 1996 with those profits, a bank loan and CPF which was subsequently paid off over quite some years. I paid $2.4 mil for all 3 current investment properties which I bought direct from developers in 2002, 2004 and 2005, each time paying the progress payments with my savings from salary, bonus and rental income. I wouldn't want to reveal details of those properties here as I prefer to remain anonymous.

And yes, I had a good opportunity with my career which propelled my annual pay-out to btwn $300k to $750k pa since the last 5 years (depending on whether I had good or leaner years). There are others in my age-group who earn more, I am sure of that.

In short, I could have developed a lavish lifestyle (spent my investment profit/bonus to finance a Porsche, Maserati or even a Ferrari - you get the drift - spend all the easy money) and raised my "core expenses" but I chose to exercise restrain and invested substantially my profits, my salary and bonuses into properties, paying off the bank loan and meeting the progress payments. And I did say that luck and timing do play a role too. Touch wood, I have been lucky on properties thus far.

I also have some friends who have done much better financially and are worth much more, if they did not spend it all away. I pale in comparison but once you start comparing, there's no turning back. So to me, life is a journey. I chose to live carefully in my initial years and now I can take it easier (I think).

The take-away at least for me, is to spend within your means at all times and try to have some leftovers for investing. No matter how small, they can grow into something. All you need is 1 good cycle and not get shaken out during any downturn (and that is why capital is key - I could have invested by leveraging up highly but I may get shaken out during any downturn). Lastly, as long as you spend within your cashflow and don't drawdown on your accumulated capital, you will be OK for the rest of your life. For most, cashflow = salary. I have tried very hard over all these years to change that equation to cashflow = non-salaried income and I think I have finally reached there. Of course, salary is important but the comfort of knowing that you don't need to rely on it is very assuring, trust me on that.

The point I am trying to make is not about how to accumulate $1 mil or $5 mil or $10 mil but to get the formula right from day one and how far you go from there depends on your hardwork, perseverance, discipline, risk appetite, luck and timing. Firstly, spend within your means - if not, no spare cash. No spare cash, no investment. With spare cash, invest it and not spend it. With profit from investment, re-invest. If you made a wrong investment, you start again. If you don't build up the means to invest, you will never generate any returns. The only way to build up the ability to invest is to spend within your means. Otherwise, salary is the only cashflow and that would mean running the rat race for a long time. I don't have a shortcut though I wished I had one. Read the recent article on the guy who blew all his toto winnings away? If he had paid off his bank loan (which he did, wisely) and put the rest in his bank, he would have the means to invest - instead, he blew it all away on dinners, holidays, relatives, friends, etc. If the credit card promoter had saved up her earnings instead of splurging on expensive handbags, she would also have the means to invest. They "lost out" their new found wealth because they did not live within their means.

Equity valuations have gotten very cheap recently. Property prices have also been moderating. Imagine having spare cash around - you can start planning how to enter the markets.

[whizzard]

Wow! Very flattering and humbling at the same time to see the thread still alive after all these years.

I had a tumultous 2009, to say the least and disappeared to consolidate, recompose and recuperate. I fell victim to the recession and was retrenched at the end of 2008. It was the first time in my life I was ever retrenched and it felt horrible. In fact, it was kind of surreal when it happened. To cut a long story short, I mentally prepared myself to be out for at least a year. However, what I didn't realise then was I didn't completely understand the implication of being out of a job for a year. Today, I still hear of people who are still out of a job for a year and with the benefit of hindsight, I think being out for too long (i.e. 6 months or more) would make it even tougher to re-enter, even if you are willing to lower your expectations considerably. It has been an employers' market for the past 1 year and they have proven to be very choosy about who they hire.

Fortunately, I found a comparable job within 3 months from retrenchment but with less responsibilities and lower pay obviously. However, it's still a job which I am experienced at and enjoy doing. What's more important is that the job keeps me in the game and as the proverbial saying goes, as long as you are not out, you still stand a chance!

The market has certainly picked up again and the market has been hiring strongly. It's as if the recession never happened!

Hope to contribute to this forum again soon and learn from others here. Cheers!

Thanks for all your sharing, whizzard. It's impressive that you are able to bounce back in such a short time. Though you said you are earning less, I doubt it's significantly less - care to reveal a little more on your current income?

[whizzard]

May not be too appropriate to reveal the actual numbers but it was a painful cut.

I am now at 1/3 of what I used to earn on an annual basis. Though my base salary is approximately similar, I don't think they will be able to pay me the bonuses I used to get paid.

Well, as the Chinese saying goes "If your horse dies, you come down and walk".

Now, what is really important is to build my passive income up. In the past, the formula was:-

Passive Income + Salary > Total Household Expenditure

Now, the formula is:-

Passive Income > Total Household Expenditure (without lowering living standard, bearing in mind that inflation will drive up household expenditure)

Got to find ways to generate more passive income to compensate for salary, which can be transient.

My personal goal is to generate $500k - $1 mil in annual passive income. I will then seriously think of just quitting the ratrace. Its easy when you have loads of capital e.g. $10 mil, which means a steady 5% to 10% returns.

But, the tough bit is, when you don't have that much capital and you don't want to leverage unless absolutely necessary, how to get a steady $500k p.a.?

That's my quest for this year. And, if I do find the answer, I will also need to find the answer to what will I do with my free time instead of sitting at home and doing almost nothing if I quit my job.

Whizzard, I make even less than a third of my cash income compared to when I was at the top of my game in a bank, but after you get to a certain point where you have saved enough, the stress of top paying jobs is not worth the money and your health. Right now, I have a 9-5 job in my own office and can disappear at 4pm if I want.

A few ideas which might help you on your quest:

After I quit my job, I went through the same analysis as you i.e., generating passive income > expenditure and trying to ensure that I'm hedging against inflation. I was largely successful, but while your $10m in capital can generate $500K in returns per year, they may not be cash returns unless the $10m excludes equity in the property you live in. I have lower expenditure than you - $200+K per year - and my yield on all my equity and fixed income investments is around 6.5% (helped no doubt by wading into high yield stocks in Mar '09)

About half of my assets (not capital) are in a bungalow that I live in. I have a multi-million dollar loan on the bungalow (currently at around 35% loan to valuation) and the bungalow has more than doubled since I bought it giving me an incredible return. That is the power of Leverage. I think you should lever, but just not too much. For the bungalow, I was able to take what most people would consider a gigantic loan (but still a fraction of my net worth) at around 2% fixed interest rate. In my opinion, its easy to beat 2% in the market. I can pay off the bungalow loan with my capital, but why should I do that if I can easily beat 2% return on cheap leverage from DBS.

I'm already up about 500% off the downpayment on my bungalow, which is like 100 years at 5%. Going forward, I conservatively expect landed property to rise at about 3% pa long-term through the cycle so with a little leverage, I can easily beat inflation and generate an adequate return even without rental income.

However, since I actually live in the bungalow, the return is not cash. So while overall I have been generating waaaay more than a 5% return on my capital for the past few years, my passive cashflow is just around $200K+ and just enough for my family expenses. I've found that working a simple job, you feel better about it and keep busy while seeing your savings continue to pile up, which is a nice feeling. I experimented with retirement, but the boredom drove me nuts. Its better to work a simple easy job at low pay. I wouldn't go back to a difficult job that doesn't pay well. When you have been earning about $1m a year, its fairly easy to convince someone to pay you $200K to do just about anything. I'm fortunate to have found a simple management job in a small unlisted company. Part of the deal is that I get a fair bit of equity instead of cash. I'm prodding them to IPO Whatever you do, don't sit at home and waste away. Once you stop working, the body starts to prepare for death and I've seen so many people who retired and then dropped dead a little later. Keep active by working and you will live longer. Good luck.

[whizzard]

Originally Posted by anoldanalyst

Whizzard, I make even less than a third of my cash income compared to when I was at the top of my game in a bank, but after you get to a certain point where you have saved enough, the stress of top paying jobs is not worth the money and your health. Right now, I have a 9-5 job in my own office and can disappear at 4pm if I want.

A few ideas which might help you on your quest:

After I quit my job, I went through the same analysis as you i.e., generating passive income > expenditure and trying to ensure that I'm hedging against inflation. I was largely successful, but while your $10m in capital can generate $500K in returns per year, they may not be cash returns unless the $10m excludes equity in the property you live in. I have lower expenditure than you - $200+K per year - and my yield on all my equity and fixed income investments is around 6.5% (helped no doubt by wading into high yield stocks in Mar '09)

About half of my assets (not capital) are in a bungalow that I live in. I have a multi-million dollar loan on the bungalow (currently at around 35% loan to valuation) and the bungalow has more than doubled since I bought it giving me an incredible return. That is the power of Leverage. I think you should lever, but just not too much. For the bungalow, I was able to take what most people would consider a gigantic loan (but still a fraction of my net worth) at around 2% fixed interest rate. In my opinion, its easy to beat 2% in the market. I can pay off the bungalow loan with my capital, but why should I do that if I can easily beat 2% return on cheap leverage from DBS.

I'm already up about 500% off the downpayment on my bungalow, which is like 100 years at 5%. Going forward, I conservatively expect landed property to rise at about 3% pa long-term through the cycle so with a little leverage, I can easily beat inflation and generate an adequate return even without rental income.

However, since I actually live in the bungalow, the return is not cash. So while overall I have been generating waaaay more than a 5% return on my capital for the past few years, my passive cashflow is just around $200K+ and just enough for my family expenses. I've found that working a simple job, you feel better about it and keep busy while seeing your savings continue to pile up, which is a nice feeling. I experimented with retirement, but the boredom drove me nuts. Its better to work a simple easy job at low pay. I wouldn't go back to a difficult job that doesn't pay well. When you have been earning about $1m a year, its fairly easy to convince someone to pay you $200K to do just about anything. I'm fortunate to have found a simple management job in a small unlisted company. Part of the deal is that I get a fair bit of equity instead of cash. I'm prodding them to IPO Whatever you do, don't sit at home and waste away. Once you stop working, the body starts to prepare for death and I've seen so many people who retired and then dropped dead a little later. Keep active by working and you will live longer. Good luck.

Dear anoldanalyst,

Thanks for sharing. First off, I don't have $10 mil capital yet - wish I am there though Am working my way there .....

When I was out of job for a few months, I felt so unplugged. The business world was zooming around me and I was not part of it. Not a good feeling at all. Had loads of free time and not enough friends or activities to fill it up - maybe I didn't set out to establish a life without work during that period, whilst I was cracking my head as to how to get back in. Well, that's all water under the bridge now. Totally agree with you that one has to keep working. Am glad that I am gainfully engaged now. It's great to have work problems to resolve, targets to meet and friends coming up to me for advice on career or business matters and little wins to celebrate when a new mandate is secured. Suddenly, you are useful again!

Still, the lesson I learnt is to be able to fend for myself without the security of a regular employment income should one ever find oneself unexpectedly out of a job again. The only way is to build up a portfolio of income generating assets. My properties are giving me a stable set of rental income but are they worth the trouble - is there a better way of getting recurring in come e.g. REITS or beaten down blue chip bonds? Am still suspicious of the financial markets in general and still very convinced about physical assets especially properties.

I used to be more aggressive in stock investments ... now, I am sitting on more cash balance than I ever used to. Maybe I became a little conservative after the incident but being too conservative is not good since the most I can generate is a 1% pa returns on this riskfree money. But, I found I have become much more circumspect in investing ... in the past, I used to jump in quite easily but now, I tend to wait for pullbacks to get in and in a recovering market, the pullbacks tend to be shallow. Hence, I have not been able to get in as much as I would like but I am happy that I am much more disciplined now. No more buying high in the hopes of selling even higher. Most times, I think the market is range bound and I am patiently waiting to trade the range, which means not buying on the higher end and sitting on it when it corrects. Also, I knew of many who were well invested when the markets came tumbling down last year ... it was a good time to buy but they couldn't do it due to the psychological impact of carrying a severe paper loss in their existing portfolio. In summary, I think patience is a virtue and I am learning more of that each day. One doesn't need to be fully invested in the financial markets all the time ... and I don't believe in efficient market hypothesis. Too much is traded on inside info, just that not many have been caught.

Why this focus on money? Well, with sufficient money, one can build a life with meaning around oneself based solely on participating actively in one's interests. Some require more money, some less - but whatever the case, they still require money. I have a friend who retired from a high flying career when he was in his forties ... I am watching and learning how he has developed his new lifestyle and whether it is something I would emulate or adapt. He has a portfolio of real properties where he is collecting a chunk of rental income regularly, more than what his expenditure requires (this idea resonates well with me). He also does active trading in stocks, which I think replaces the highs and lows that you get in the workplace. But I still think he has yet to fill the void of having too much time. He needs to pick up some hobbies or participate actively in some interest groups.

In summary, as I gather ideas on how to build a portfolio of assets which will generate me a stable inflow of cash, I am also building a life that doesn't revolve around work, little by little.

Dear Whizzard, it very much seems like you and I are in the same boat.... and facing the same challenges.

On physical property versus REITS: They are similar in that they provide both capital appreciation and high yield. They are different in that the industrial/office/commercial property cycle is different from the residential property cycle and REITS through have generally higher yield than most property except HDB. I find that the physical property cycle can be just as volatile as property stocks (including REITs although REITS moved in a single direction for a long time). However, there are two differences: Property stocks can have several cycles within a single property cycle because they are affected by external events, while physical property can go into a plateau for a long time and are less senstive to external events. The other factor is that the bank is happy to lend you 80% against physical property but not REITS. Investing in both asset classes provides diversification even though both are property.

I find the Office REIT sector (say CCT, Suntec etc) near bottom in that office rentals (which drive capital values) are at a bottom. By 2013+ rentals should have recovered, capital values as well, leverage for these office REITS will be very low and they will be acquiring. Debt driven acquisitions and higher rentals will significantly boost DPU. Currently office REITS already give you 7% yield.

On the other side, residential property is IMHO in a bubble, while yields are around 3%, which is the same before the big 1997 property crash. Singapore's "global city" changes may sustain these prices, which are approaching or have exceeded the major cities in the world. IMHO the only reason to go in now is the 80% leverage you can get from the bank, but leverage is risk and leveraging to buy assets which are in a bubble can be disaster. Will address some of your other comments later.

[whizzard]

Originally Posted by anoldanalyst

Dear Whizzard, it very much seems like you and I are in the same boat.... and facing the same challenges.

On physical property versus REITS: They are similar in that they provide both capital appreciation and high yield. They are different in that the industrial/office/commercial property cycle is different from the residential property cycle and REITS through have generally higher yield than most property except HDB. I find that the physical property cycle can be just as volatile as property stocks (including REITs although REITS moved in a single direction for a long time). However, there are two differences: Property stocks can have several cycles within a single property cycle because they are affected by external events, while physical property can go into a plateau for a long time and are less senstive to external events. The other factor is that the bank is happy to lend you 80% against physical property but not REITS. Investing in both asset classes provides diversification even though both are property.

I find the Office REIT sector (say CCT, Suntec etc) near bottom in that office rentals (which drive capital values) are at a bottom. By 2013+ rentals should have recovered, capital values as well, leverage for these office REITS will be very low and they will be acquiring. Debt driven acquisitions and higher rentals will significantly boost DPU. Currently office REITS already give you 7% yield.

On the other side, residential property is IMHO in a bubble, while yields are around 3%, which is the same before the big 1997 property crash. Singapore's "global city" changes may sustain these prices, which are approaching or have exceeded the major cities in the world. IMHO the only reason to go in now is the 80% leverage you can get from the bank, but leverage is risk and leveraging to buy assets which are in a bubble can be disaster. Will address some of your other comments later.

Would you be looking at REITs then? I have added some to my portfolio last year and they have appreciated nicely. Am very, very tempted to take profit (50% capital appreciation equates to 6.25 years of 8% annualised yield which is really tempting for me to take upfront) but looking at the yields (vs what I paid for them), seems a bit of a waste to unload these good positions now and it would be difficult to get them back at those levels again. Then again, I told myself not to get sentimental over stocks. Take the profits, hold cash and wait for a correction to get back in. It's a lot of hard work though and means staying on my toes all the time and reading the markets, which I may not have the luxury to do so.

Hmmm ... money off the table is absolutely safe whilst those in the game can be lost - that's something I learnt when I found myself in the casino in Resorts World Sentosa (courtesy of my friends from overseas) for the 1st time earlier this month. Had a good run and made some money in baccarat (which requires luck and bet management rather than skills - my type of game since I am not the gambling sort), decided not to be greedy about making more and cashed my chips. There were 5 of us; 2 donated a few thousand each, 1 broke even, I was up and 1 was down but went back in the next day and according to him, managed to walk away with some money. That weekend, I took my wife to Les Amis for a nice dinner with a nice bottle of bordeaux, courtesy of the casino and it felt good! But, I am not visiting the casino again anytime soon! It was all pure luck and I was a lucky dude that night.

And with that in mind, I just unloaded my Keppel Land today and it closed even higher but, no regrets ... I have more than doubled my money on it! I am tempted to do likewise for the rest which are in the money (still mulling over what to do with those in the red) and just take my profits and cash up but money is still chasing stocks though - the retracements have been muted thus far. Morgan Stanley noted that the Asian markets saw an inflow of USD83 bil last year although they also noted that the rate of out performance vs earnings estimates has dropped for the 1st time in 1Q10 vs the previous few quarters in 2009.

On physical residential properties, I am also a bit concerned and agree with you that the upside is probably looking limited. Since what I have are all already funded by capital, I guess I am more prepared to ride out the cycles but to add another to it, likely not at this stage, though I may be tempted to do some switching. My own basis for investing in real properties is my own cash position and my reading of the stage of the property cycle, so that even if my read of the property cycle is wrong, I don't get shaken out that easily. I know its conservative and if I was a fund manager, I would be severely under-performing due to sub-optimal utilisation of leverage, but safety is my paramount concern. My life would probably not change much if I were to make a million or two from a few trades but I will seriously need to downgrade my lifestyle if I were to get it wrong and lose a few million.

Good exchange of ideas and experience. Stay cool!

On equity investments, I generally only by stocks with good dividend yield. For some excitement, I have some volatile stocks with good yield (e.g., small REITS), but I'm prepared to hold them for the long term. Over time, I do try to time the cycle. I got the cycle mostly right this time even though I started to buy in 4Q08 ie. too early after liquidating everything in mid-2007 when I thought the Singapore market was overvalued. I been buying steadily since early 4Q08, through the lows of 1Q09 and haven't really sold. Between mid-2007 and mid-2008, it was quite painful watching the market go up, while I earned less than 1% in the bank, but when everything started tumbling, I knew that it was time to get in. I made a decision to put about 8% of my investible cash per month for the next 12 months no matter how bad things got. By December 2008, I was facing huge losses, but I just closed my ears and bought and bought. Since 4Q08, the only stocks I sold were when I wanted to spend some money and feel good about it. If something doubled or tripled, you treat yourself otherwise investing gets so dreary when you do disciplined investing. Its like having that free day where you can eat anything when you are on a diet.

I'm continuing to buy REITS. The fact that Singapore REITS survived the incredible credit crunch has given me more confidence in them long-term. There were some rights issues, but overall return even on the freshly invested capital has been good. Like you, I have maintain too much cash in the bank as non-investible cash, but its nice to be able to handle cash calls without having to sell other things. Turns out the announcement of the REITs capital raising was generally the best time to buy them as their prices tanked during those times. Overall, the most important thing to me is risk-adjusted return. Not absolute returns. On the developers like Keppel Land, Citi Dev, Capitaland etc, I think the easy money has been made and they don't have that good yield.

Looking forward, I see global recovery. US companies are reporting solid earnings and Greece's problems is not about to bring on a global crisis. There is a little worry over China's property bubble but I think Chinese economic growth will remain close to 10% for some time. Hence I'm still bullish. Locally, I've still been buying laggard high yield Singapore and some Indonesian stocks, while nibbling at US banks (low dividends keeps me from being more agressive). Should the STI rise another 25% no matter how bullish the environment, I will likely start selling everything and moving into bonds or some structured instrument. It would need that sort of rise to make me give up the steady dividends that I'm getting.