Tan Kin Lian's Blog

Investment return, adjusted for inflation

2009-12-31T03:40:00.000+08:00

It is important to take account of inflation in looking at investment return. This is explained in this article. You should aim to get a real return of 2%, after deducting inflation, tax and expenses. Many investors get a negative return due to investing in the wrong asset class, e.g. safe investments with guaranteed return, and high expenses.

Financial institutions bet against their clients

2009-12-30T22:19:00.000+08:00

This article suggests that financial institutions made profits where their clients suffered large losses.

H1N1 - is it a scam?

2009-12-30T20:56:00.003+08:00

Read this opinion.

Y2K scam

2009-12-30T20:54:00.000+08:00

I decided to do some research to see if other people pointed out the Y2K scam. I found this website. Enjoy reading.

Don't worry. The next decade will bring new scams. Life will continue to be exciting and creative. You can also count on some talented people being able to create scams, which is easier than creating real wealth and happiness,

Approaching a new decade

2009-12-30T20:39:00.003+08:00

In two days time, we will enter a new decade. Many people have forgotten what was the big issue at the end of the last decade. It was the so called Y2K bug that never occurred. During the last two years of that decade, management consultants went round to spread the panic that if the Y2K bug was not fixed, computer systems around the world would collapse. This would happen not only to commercial systems but to military systems as well.

Several hundred millions, perhaps more, were paid in consultancy fees to fix the perceived Y2K problem. It frightened top management of big organisations, financial regulators and political leaders. It was a boom time for management and I.T. consultants who had the expertise to fix this imaginary problem. It reminded me of the fairy tale by Hans Christian Anderson told to children, about the emperor's imaginary new clothes.

I was one of very few who dared to argued that nothing would possibly happen and that the Y2K panic was exaggerated. I reasoned with I.T. experts and top accountants, but they argued back more strongly about the potential disasters that could happen. I concluded that they were extremely stupid or dishonest. As they were talented people, I concluded that it must be dishonesty, as they had pocketed large profits from providing the consultancy to fix the problem.

There were hundreds of millions of computers, big or small, around the world that needed to be fixed. Not all of them could be fixed in time and to the specification required by the consultants. It would be reasonable to expect several millions of them, which were not properly fixed, to fail with disastrous consequences. None of the failures occurred. All the computers continued to work fine on the turn of the century.

Companies that spent tens of millions to fix the Y2K problem gave a collective sigh of relief and congratulated their people for averting the disaster. Those who realised that they were conned by the scam of the century were too embarrassed to bring up the issue. This matter was best forgotten, which was what happened quickly.

The following decade brought about its own scams, in the form of the technology bubble, corporate scandals, housing bubble, financial innovation, derivatives, CDOs, CDS and the like. They made super wealth to the "talented" people but the rest of the world that much poorer.

What scams will the next decade bring?

Tan Kin Lian

Affordable HDB flats

2009-12-30T14:35:00.000+08:00

The Minister for National Development said that HDB flats can be sold at a lower, more affordable price if the buyer accept that they have to be sold back to the Government at cost. He asked if Singaporeans would prefer to have this system.

I suggest the following approach:
a) Offer both choices to the citizens. Some prefer to pay more and have market values for their HDB flats. Others prefer to pay less and forego the capital gain. It depends on the personal circumstances. The PM once said that we cannot have "one size fits all".
b) The resale price to the HDB should be adjusted for inflation and for the shorter lease.
c) There should be a sufficient margin (say 30% to 40%) between the sale price of the "affordable" flat and the "marketable" flat.

We should also consider the Swiss system, where most people rent their flats. They can invest in property REITS, but they do not need to own their property. The properties can be owned by the REIT. This will give them the flexibilty to move closer to their place of work, following a change of job. They are not tied to their own purchased property.

Tan Kin Lian

Over production

2009-12-30T08:17:00.002+08:00

The world is producing more goods than is really needed. The over production has lead to the wasteful use of energy and resources and damage to the environment. Through competition, more people are working harder to produce goods that are not really needed. We have too much clothes, electronic equipments and gadgets and too little time (due to long working hours) to enjoy them.

We work longer hours to keep our job, but in the process cause other people to lose their jobs, because they work in "less efficient" businesses or countries.

Is this called "prosperity and affluence" ?

Tan Kin Lian

Expressing my views

2009-12-30T08:11:00.001+08:00

I write in this blog to give my views and observations. Readers are free to give their views, which may differ from my views. In doing so, there is no need for them to criticize or attack my views, especially if they are doing so anonymously or under a fake name. I recognize one troublesome person, by his style of writing, who has a habit of being cynical and negative. I hope that he can create his own blog to write his views, rather than be a nuisance in my blog.

Loan shark menace

2009-12-30T08:06:00.001+08:00

A reader wrote to the Straits Times that there is a need to find a solution for people in need of cash, so that they do not have to rely on loan sharks. For these people, the loan sharks are the only source of cash, even though the interest rates are exorbitant, and the loan sharks have to resort to criminal activities to enforce the repayments.

Some people resort to loan sharks due to gambling debts (which can be avoided). Others are forced to borrow money due to unemployment or big medical bills.

I encourage people to have personal savings, so that they have money to draw down during these emergencies. There is a case for the community to provide funds for people who are in need of temporary cash due to factors beyond their control. They are required to pay back the borrowings, but the rate of interest should be kept modest.

Many developed countries have unemployment benefits, which are given to people who lose their jobs. The benefit is paid for a certain period, such as 12 months. Beyond that, they can receive a lower amount of welfare benefits to survive.

My proposal for a community-based borrowing is less generous that the safety net available in the advanced countries. But, it is better than a "loan shark" scheme that is practiced here.

Tan Kin Lian

Need for a minimum wage

2009-12-30T08:01:00.000+08:00

Here is a case to illustrate the need for a minimum wage to offset the harmful effects of free market competition.

Bus operators in Malaysia compete fiercely for business. They have to offer lower fares. To survive, they pay low wages to their bus drivers, who have to work long hours to make up for the inadequate pay. Due to insufficient sleep and rest, they are more prone to accidents, which is risky to the passengers.

There is a need for regulation on the minimum wage and maximum hours of work for bus drivers to ensure safety to the public. This principle can be extended to construction and production work. We should have a minimum wage and maximum working hours in most occupations.

Tan Kin Lian

Hassle given to travellers

2009-12-29T23:12:00.001+08:00

When I visit another country, I am usually asked to complete three detailed forms for immigration, custom and health. They ask a lot of detailed questions. It is quite troublesome to complete these forms.
I suspect that the authorities do not use the information in the forms, but they still ask the visitors to complete them anyway. It cost them nothing. They do not care about the hassle given to the visitor.

The immigration form was necessary in the days before computerisation. It was the only way for them to record who has visited their country. But, after computerisation was introduced, the information of the visitor was already automatically recorded into the computer. But the immigration authority continued to ask the visitor to fill up the form.

Have you wondered why they ask you to enter information on where you are staying? The only purpose is to contact you in an emergency. If this was the purpose, it would be easier to ask the visitor to give the mobile phone number. Anyway, the forms were introduced in the days before mobile phone was available, and has not been changed.

I wonder why all the governments around the world, including Singapore, employ highly paid civil servants, but they do not think, or do not care.

My Indonesian friend passed this remark. A civil servant had said that it is their job to make life more difficult (and not simpler) for the other people.

Alternative to Travel Insurance

2009-12-29T08:00:00.000+08:00

I took two long trips in 2009, to Alaska and to Sichuan. Each trip was for more than a week. I decided not to take travel insurance, and to bear my own risk. My wife wanted to take travel insurance (as she is more risk averse) but finally decided against it.

I already have a large cover under a personal accident insurance. If there is an accident, it will be covered under this annual policy.

The travel policy covers loss of luggage, flight delay and other risks. But the amount of compensation is quite rather small, say $100 or so. It will be quite troublesome to make a claim for such a small sum. If I fall ill during the holiday, the medical expenses may cost a few hundred dollars. But the chance of making a claim is rather low.

I have taken more than a 100 trips during the past years and have never had the need to make a claim. I do not buy travel insurance for these trips. If the chance of a claim is 1 in 100, it is worth taking the risk. The premium saved on 100 trips would more than cover any future claim.

Tan Kin Lian

A more responsive Government

2009-12-29T07:04:00.002+08:00

Read this article.

Bad experience with land banking plot

2009-12-28T19:10:00.003+08:00

Dear Mr. Tan,

Some years ago a good friend of mine purchased some UK Land Banking plots. She was so blinded by the opportunity that when I questioned it we fell out for a while. She could not believe that such opportunities could be allowed in Singpaore and advertised on the TV if they were not true. She was not particularly greedy in fact I found her to be a very kind and gentle person.

Like many of us she wanted an opportunity to help her get ahead in life and be secure. The upshot was she has lost a significant portion of her savings to a scheme that has no chance of success.

I felt ashamed that such things could happen in the UK. After investigating and contacting some UK local authorities I was horrified at the way these schemes are run. They are designed to have absolutely no chance of success and to extract as much money as possible from the unfortunate investor.

Unfortunately what i've also discovered is that defamation law makes it very difficult to criticise a scam unless it is almost 100% proved especially in Singapore. It seems the only way to prove a scam without time and huge resources is to wait for the company to fail.
Even then typically the company will restart 2 or 3 times under different names claim mismanagement by a single executive and take more money from their loyal customers.

SF

Financial planning - tips for young people

2009-12-28T08:00:00.001+08:00

The most important advice in financial planning is to save 15% to 25% of your earnings, in addition to CPF. This personal savings can be used for emergencies and for your retirement. If you draw down on your savings, you pay 0% interest. If you have to borrow from a bank for your urgent cash needs, you have to pay up to 24% interest.

Keep your savings in liquid form. It is all right to keep in a bank to earn 1% interest. When you have accumulated sufficient savings, you can invest in the an exchange traded fund, e.g. STI ETF, to enjoy diversification and professional management, or in a low cost unit trust (look for one with annual charge of less than 1%).

When you have started a family, you can buy term insurance for 5 to 10 years of your income. Do not pay more than 1% of your income in this insurance premium. If you are not able to get term insurance at a low cost or it is too troublesome to get it, you can buy personal accident insurance for this amount. At a young age, the biggest risk is due to accident which can be covered under this policy. You can change to a term insurance when it is readily available.

Do not worry about the other types of insurance. An insurance agent may tell you that they are necessary, but for most young people, you can live without them. It is more important that you have savings that can be withdrawn easily to meet unexpected cash needs. Even if you have invested in an ETF, you can withdraw it by paying only a small charge (i.e without paying the high penalty in a life insurance policy).

Join FISCA and attend the educational classes on financial planning. You can also read my financial planning book, which will be given to all FISCA members. This will be available in January.

Tan Kin Lian

The Talent Myth

2009-12-27T19:49:00.001+08:00

During the past decade, there was a belief that talents are important for the future of a business or a country. Common sense and practical experience were discarded in the "war for talent". Talent was richly rewarded at the expense of the ordinary workers. Here is an interesting story about a well known company that pursued this strategy to an extreme. It brings useful lessons of people who belief in this strategy.

Talent and fat bonuses

2009-12-27T17:16:00.000+08:00

For the past decade, there was a prevailing thinking that talented people cerated wealth and should be remunerated handsomely with fat bonuses and share options.

There was no distinction between the type of wealth and how they were created. In many cases, the wealth was created on top of a big asset bubble in properties and shares. The "talents" in the property and financial sector earned huge remuneration and bonuses.

When the asset bubble burst, these are the sectors that had to be bailed out. But, the fat bonuses are kept by the so-called "wealth creators".

The sad fact is that we are now going back into another asset bubble, with the low interest rate and bailout using taxpayer's funds. This will not be sustainable, and the world is likely to face another financial crisis - unless the asset bubbles can be reined in. But, that would be very difficult, given the low interest rate in the world today. In the meantime, the business leaders will continue to take the fat bonuses.

Tan Kin Lian

A good settlement mediated by FIDREC

2009-12-27T17:08:00.002+08:00

An investor told me that the FIDREC mediator was able to get the financial institution to buy back 50% of the Lehman mini-bonds at full value (less interest received). He retained the remaining 50% of the investment.

In my view, this settlement is fair and is in accordance with my suggestion that both parties (i.e. the distributor and the investor) should share the loss equally. Actually, the investor suffered a larger loss as the capital sum had been invested for a few years without any return.

Anyway, the investor was glad to receive this settlement and thanked me for advising him to go to FIDREC. I hope that the other financial institutions would make a similar offer to their investors.

Tan Kin Lian

Financial sector is too big and unproductive

2009-12-27T15:07:00.000+08:00

Several top economists have commented that the financial sector has grown to be too big. They do not create any value, in terms of actual production of goods and services to improve the quality of life. They are a drain on the productive economy and take away the best brains in recent years. They create bubbles and led to the collapse of the financial system.

I agree with these views. You can watch a video of the speeches given by these top economists in the academic section of Temasek Review.

Dangers of Big Banks

2009-12-26T16:06:00.002+08:00

Read this article.

Paul Volcker on Financial Innovation

2009-12-26T16:00:00.003+08:00

Speaking to a group of senior finance executives, as reported in The Wall Street Journal on Monday, Mr. Volcker made his point even more forcefully. There is no benefit to running our financial system in its current fashion, with high risks (for society) and high returns (for top bankers). Most of financial innovation, in his view, is not just worthless to society – it is downright dangerous to our broader economic health.

Temasek review reported on my views about MM Lee's remarks

2009-12-26T14:24:00.000+08:00

"Read this article in Temasek Review. I have posted a comment as follows:

Dear Editor of Temasek Review

You article does fairly report my view and the comments in my blog, but your headline is too strong and inappropriate. It is not in my character to condemn anyone, big or small. I only wish to express my own views. I hope that your readers will not be too distracted by this inappropriate headline.
Tan Kin Lian

Glass Stegall Act

2009-12-26T12:03:00.001+08:00

Last week, lawmakers including Senator John McCain proposed reinstating Glass-Steagall, which was struck in 1999 by the Gramm-Leach-Bliley Act.

The repeal led to a rise in conglomerates including Citigroup that were allowed to branch into insurance and proprietary trading.
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aaqerszXOPMU

Paul Volcker, a legendary former chairman of the Federal Reserve Board, was blunt: We need to break up our biggest banks and return to the basic split of activities that existed under the Glass-Steagall Act of 1933
http://economix.blogs.nytimes.com/2009/12/17/paul-volcker-finds-a-hammer

High retail price

2009-12-26T11:59:00.005+08:00

Some people are surprised that the retail price (e.g. of my books or torchlights) are so much higher than the wholesale price (e.g for sale to hotels) or for direct purchase from my office.

They are not aware about the high cost of distribution of these products. I have to pay to the distributor nearly 60% of the retail price. They have to give a large portion of this margin to the retail store. The goods are given on consignment. If they are not sold, they are returned to me. I have to bear the cost of production or purchase, delivery charge, GST and also take the risk of the obsolete, unsold products.

Many retailers also find it hard to survive. They have to pay high rental for their stores and wages for their sales employees. They do not get sufficient business and margin to cover their operating costs.

Many small businesses find it difficult to survive in this type of environment. In my case, I am not making any profit due to the high cost of doing business, but doing it partly for fun. (If you want a lower price for my torchlights, come to my office at get it for $5.50 if you buy more than 5 pieces).

My friend saw a rechargeable torchlight, with similar features, on sale at the airport store at $27.50.. So the price of $8 at the retail store is cheap, by comparision.

Advice on making insurance claims

2009-12-26T09:48:00.002+08:00

Thee are three types of insurance claims that can cause you a big surprise and out-of-pocket payment. They are:
a) health care
b) personal accident or travel
c) motor repair
d) home repair or reinstatement

Here is a common example. You have been paying premiums for an expensive health insurance policy for many years. You went into hospital thinking that the entire bill is covered. When you submit your claim for reimbursement, you are told of the items that are not covered, the caps, exclusions, deductibles and other items. Your claim can be less than half of the amount that you spent.

Your claim for personal accident or travel is also subject to exclusions, limits and deductibles. A similar situation can occur with a motor repair bill. You are told about the Excess, exclusion or other limits.
The hospital and motor repair bills can occur every few years, so many people have been taken aback by their poor claim experience.

A similar situation, but less frequently, can occur if you have to make a claim for damage to your property caused by some of the perils,such as fire, flood, theft and other disasters. When you submit your claim, you will be told about the items that cannot be claimed.

Here is my advice. Before you go for medical treatment, before you repair your car or home, before you spend money thinking that they can be claimed - check with the insurance company. Let them tell you about what is covered, and what is not covered. You can then decide on what to do about the treatment or repair.

Do not be shy to ask for an estimate of the treatment or repair bill, and send it to your insurance company for them to check against the insurance cover. The insurance company may be able to assist you to find a doctor or repairer that can do the work within the amount covered by the insurance policy.

Tan Kin Lian