World War III?

With U.S and Europe deeply in debt crisis and helpful China coming along to save them, more and more assets that once belonged to the mighty West will be used as collateral to China as a promise to repay the borrowed relief funds.

A sensible 5 year old kid will understand that if you spend more than you what you earn, you will never have anything to save, in fact, you will need to borrow more to cover your future spending.

When the root cause of debt is not resolved, no matter how much money U.S and Europe borrow, they will never solve the problem. The promise to repay is as good as void.

So when the Western powers fails to repay the money, the collateral that was used to secure the loan will rightfully belongs to China.

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Imagine this:

Because you are such a big spender, you have to borrow money from your wealthy neighbour to satisfy your spending spree. At first, your neighbour accepted your IOUs and loaned you money at minimal interest. But as you need to constantly borrow to get ahead, your promise to repay the loan becomes less and less reliable.

Sensing the problem, your neighbour became reluctant to loan you money. Desperate to obtain the cash needed for your spending, you increased your interest rate and decided to use the sofa in your living room as collateral. Your neighbour reluctantly accepted and loaned you more money.

But the money you borrowed never seemed to be enough, so you decided to use your televsion, fridge, chairs, table and anything valuable you can use as collateral to obtain a loan.

Though your neighbour is generous, he is not a philanthropist. Soon, he became impatient and started to ask you for his money.

To pacify him, you decided to write more IOUs that promises a higher interest for the entire loan balance. Your neighbour rejected your offer and asked that you put your house, which is the only thing that is not used as collateral yet to extend the repayment period by a year. You heaved a sigh of relief and accepted the terms.

Finally realizing that your spending habits will not enable you to repay your loans, you decided to cut back on your spending. However, your income could not be increased significantly to allow you to cover the entire loan amount plus interest.

Time slipped by and 1 year has passed, you do not even have enough cash to cover the interest. Your neighbour has come to claim what is rightfully his: Your entire house.

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Now, imagine that you are actually U.S and Europe and your neighbour is China, when it comes to a point when China has literally owned everything that belonged to U.S and Europe, do you think the Western powers and their ego will bow down and hand everything over quietly?

Then, if the western powers refuses to surrendering whatever that was used as collateral to China and instead disowns the promise and retract all foreign ownership of their property, do you think China will just sit back and cry?

When diplomacy and trust failed, conflicts of interest will usually escalate to the use of force. That is what could potentially spark the next World War.

The war between the Debtor and Creditor is more likely than a war caused by religious differences.

China, with its vast resources in terms of raw material and manpower could easily flex their muscles and cause the world to shiver. The Western powers on the other hand, have difficulty feeding themselves without borrowing, let alone sustain a war.

If a war really breaks out because the debtor denied its creditor of what is rightfully his, the moral weight will lean towards the creditors which would amplify their already obvious advantage by many fold. Bear in mind that China is not the only country that the West owes money to. An enemy of an enemy is a friend. Alliances could be easily forged to reclaim what was denied.

Ultimately, countries would be forced to choose sides, and it is not hard to see which side would stand to gain more if they win the war. A debt ridden super power or an opportunity to reclaim what is owed.

Despite warning by so many gurus on the need to change their spending habits and living within their means, the people of the west continues to be ignorant and nonchalant. Why should they care? Nobody would willingly give up a life of luxury for a life of toil and labour.

For the rest of us who is wiser, let's grab a coupon to redeem the pie when its ready to be transferred from its original owner.

Better To Be Approximately Right Than Precisely Wrong

To illustrate a concept of true investing:

Fast forward to the year 2050. Imagine there are 2 companies with equal book value of $1 billion. (book value refers to the amount of cash that the company can raise by selling everything in the business). Both have 100 million common shares held by shareholders.

SNS and FNF (acronym for slow and steady; fast and furious) are the names of these 2 businesses.

SNS is a simple business that does distribution of mineral drinking water obtained from mountain streams owned by SNS and purified at their facilities. Net worth derived mainly from the value of the mountain and SNS’s purification facilities.

FNF is a technological development and research facility that has successfully invented the very first Interstellar Spacepod. Its net worth is derived from its R&D facilities, factories, and inventories.

There is steady demand for purified mineral water as Earth is becoming more polluted by heavy industrialisation and healthy living increases in awareness for more people. Sales have been consistent and net profit from sale of mineral water amounted to $500 million. The fair value of SNS shares is $100 per share, but the market price is only $50 per share due to uninteresting prospect of the business and rumours that government is recalling land for building nature reserves.

On the other hand, due to FNF's previous success from the development of their Interstellar Spacepod, investors were hyped when FNF announced their Teleportation Device Development Project (TDDP). To fund the project, FNF decided to issue a $50 billion zero-coupon bond that promises return of 8% per year with a 10 year maturity date. (A zero-coupon bond is a bond bought at a price lower than its face value, with the face value repaid at the time of maturity) FNF will raise $23.2 billion through this issue and will redeem the bonds for $50 billion 10 years later. The bonds sold like hot pies.

Net profit from the sale of the Interstellar Spacepod in previous financial year amounted to only $50 million as it is only affordable by the minority rich and development cost was extremely high. However, due to the prospective potential of FNF, share price before the announcement of the TDDP was $1000 per share. After the announcement, in a single day, FNF shares closed at $10,000 per share.

Needless to say, many so called investors felt mighty rich after buying FNF shares, many became unsolicited promoters of FNF shares, recommending it to everyone they met on the streets.

If we make a comparison between SNS and FNF, we can conclude that SNS is under valued and FNF is highly speculative. The so called investors of FNF shares must be justly labeled as speculators and buyers of SNS shares can be referred to bargain hunters.

To present this in numbers, assume that both company are funded purely by equity (before FNF issued its zero-coupon bond) which they raised with an IPO of $10 per share, translated into the book value mention at the beginning. SNS's return on equity (ROE) is 50% and FNF's is 5%. While SNS earns 10 times more than FNF, its share price is only 5% of FNF's. It is either FNF being overvalued or SNS is undervalued, but in this instance, it is both.

Paying too much for a mediocre business because the share price is rising is a phenomenon known as the greater fool theory. It is like paying double the price for the last concert ticket, thinking that someone else will pay you a higher price for it.

Buying a business because it has high projected earnings is speculating because the projected earnings are not support by past records. The increased debt burden from the issue of zero-coupon not only virtually destroyed all profits of FNF, it puts the balance sheet in negative. For a company earning only $50 million a year to incur a debt of $26.8 billion($50 billion - $23.2 billion), it is suicide. Even if the project is a success and Teleportation devices are a hit, net profit needs to be at $5 billion a year in the first year and be consistent throughout for the next 10 years in order for FNF to cover the redemption of the bond. This is in a case where zero profit is retained or distributed to existing common shareholders.

To make matters worst, the soaring share price diminished the little value that was the worth of FNF share. In numbers, if FNF was to sell everything it owns at face value, even without depreciation charges, compensation will only amount to $241 per share. Compared to the purchase price of $10,000, speculators would make a minimum lost of $9759 for every share they own.

In contrast, while SNS does not seem to offer much explosive growth in net income, its steady profit and low costs offered dependable returns to shareholders. A demand for supply that is shrinking allows SNS to command higher price without fear of losing revenue. Net profit can be increased without increase in capital employed. Therefore, SNS is unlikely to become unprofitable suddenly.

As for concerns regarding rumours of government recalling land, in the event that SNS has to be put out of business, fair compensation can be expected to be made to SNS for the sale of its mountain by the Government. Every shareholder will then receive the proper compensation, perhaps with additional benefits like exemption from taxation of capital gains. In any case, the shareholder can stand to gain more than intrinsic value of the investment from the liquidation. The fear that drove the price down due to uninformed panic selling presents an opportunity for bargain hunter to capitalise on.

True investing is the allocation of capital in investments that offers safety of principle and expects reasonable rate of return. Though the above example is the extreme, its purpose is to serve as a guideline for investors to evaluate a company. Too many people fell to the allure of high returns over short period of time and end up with nothing.

As Warren Buffett says: It is better to be approximately right than precisely wrong.

What is Money?

In my quest to find wealth, I came across a need to understand the main component that symbolizes wealth, and that is money.

To understand money in today’s context, let me try to illustrate in an easy to understand fashion using Singapore as the main reference.

There is an island on the planet of Gaia called Merlion City. This city is run by a central government under a democratic political system. It has a relatively short history of less than a century, compared to other nations on Gaia which were built on civilizations over millennia.

To run the city, the government needs revenue, which means income/money. This money is used for things that makes Merlion city a better place to live in, things like building of roads, feeding an army, maintaining of law and order, supplying of water, transport and everything nice.

The form that this money takes is called a currency. For ease of reference, let’s just use “$”. Different nation has different types of currency, after millennia of evolution, currency has evolved from sea shells, to ingots, to paper, to today’s synthetic polymer notes and alloy coins. To sum it short, a currency is a medium of exchange that is accepted by the general population. It is redeemable of something else that is of an equivalent value.

Merlion city has an approximately $20 billion worth of notes, coins and demand deposit circulating in the economy.

The nature of this currency is Fiat money, which means money that does not have any intrinsic value determined by a physical commodity, and derives its value by being declared by a government to be legal tender. In another word, the worth of the currency is determined by the government and all will accept it is as a mode of exchange by law.

This is opposed to the original form of money known as commodity money. Basically, money that derives it worth based on a physical commodity (e.g. gold).

My first encounter with this difference between the 2 types of money nature inspired me to further inquire about the differences and the consequences of each nature. 1 of the biggest difference between the 2 types of money is their Seigniorage Gap.

In essence, the nature of fiat money allows unlimited production of money so long as the general population still has faith in the value of the currency as a means for the government to settle its liabilities. This often causes greed for more from nothing, which results in hyperinflation (money becoming worthless, countless civilizations had fallen because of this).

On the contrary, commodity money runs the risk of being converted to their material use when the token is worth more as a commodity than as money (e.g. receipt that redeems 1gram of gold is only worth 0.9gram of gold; owner of 1gram of gold becomes unwilling to exchange it with the receipt and uses that gold as a material instead, resulting in insufficient tokens to represent measurement of exchange)

There are of course many more significant pros and cons for both nature of money, but to list them here would be too space consuming. For the sake of not making this too dry, let’s jump to the optimum nature that money theoretically should take: Fiat money that is strictly monitored and disciplinarily managed by wise government with sound fiscal policies of selfless interest.

Let’s assume that Merlion City has such wise government and the fiat money system is safe. This puts confidence into the people holding onto the currency, and thus encourages people to save. Knowing that the money they possess today can be exchanged for something of similar value in future allows people to confidently deposit the synthetic polymer notes and coins in banks instead of hoarding food, clothes, water, oil and anything tangible in their store.

However, money of today is never equal to the money of future. Value of money rarely remains stagnant. It is either eroded by Inflation; or growing by earning interest.

Inflation: A bowl of noodle that costs 25 cents 20 years ago, costs $2.50 today.

Interest: $100 in a bank account giving 0.1% interest per annum (p.a) will become $101 in 10 years.

Over the past 50 years, Merlion City has an average inflation rate of 2.7% and interest rate of 1.7% (note that the interest rate here refers to the rate of government bonds and not interests given by banks in saving accounts). To simplify, a $100 placed in a fifty years bond will have a future value of $378.90(2.7% growth compounded over 50 yrs) but monetary value equivalent to $60.50(1.7 - 2.7 = -1% growth compounded over 50yrs) of 50 years ago.

We can derive 3 meanings from this calculation:

#1) Future value of money increases as it earns interest in investments.

#2) Intrinsic value of money is eroded over time by inflation from $100 to $60.50.

#3) Purchasing power of money decreases by inflation, $378.90 = $60.50 fifty years ago

This is one concept of money today that we have to understand before we move on other concepts. You have to understand this basic concept which is known as Time Value of Money and realize that $1 today will not be equal to $1 tomorrow.

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http://www.tradingeconomics.com/
http://www.singstat.gov.sg/stats/themes/economy/hist/histbop.html
http://www.guidemesingapore.com/relocation/introduction/singapores-economy
http://wfhummel.cnchost.com/unifiedview.html
Sources where data was collected for reference

Money Management

THIS system was derived from T. Harv Eker's money management system that he shared during his seminar which I attended in June 2009 @KL MINES.

I modified it to suit my purposes.
Each month, the active income that I received will be divided as such:

15% into Financial Freedom Fund(FFF)
15% into Long Term Spending Fund
15% into Education Fund
30% into Necessities Fund
15% into Play Fund
10% into Give Fund

Money in the Financial Freedom Fund will never, Never, NEVER ever be spent. It will only be used to acquire assets that generates positive cashflow. The dividends or interests or returns from the investments will be reinvested into the fund until such a time when I have achieved financial independence. After which they may then be channeled else where.

Money in the Long Term Spending Fund is for me to buy or pay for costly things that are important but not urgent. Things like getting my braces, getting a tablet, etc etc.

Money in the Education Fund is for me if I wish to enroll for a course which I believe will aid me in making more money or for me to pursue my passion.

Money in Necessities Fund is for everyday expenses. The reason why I modified it to 30% instead of the 50 to 55% is because I am currently still residing with my parents and there aren't a lot of miscellaneous stuff that I have to pay for. In fact, 30% of my current income could have left overs which will be channeled into the FFF.

Money in the Play Fund is for luxuries that I lavish on me and my girlfriend. It can be a dinner at a classy restaurant or a trip to somewhere fun. Bottom line is, the money in this fund must be expended every month and no guilt must come from spending the money.

Money in the Give Fund is for me to give to my parents. I will give them 5% each.

I have more or less followed this money management plan since the day I learnt about it, just that there wasn't any official records which I should have kept. What I would be doing from now on is to actively record the amount of money in the separate funds and more actively manage my money.

You should do too. This is one big step towards growing your wealth.

Hedge Against The Coming Storm

GOLD price at all time high! Protect your savings before the market crashes!

Close this mail/window if u have no interest in knowing how to preserve your hard earn savings.

As you should be aware, the United States(US) is in debt. And debt not in million or billions but in trillions! That's $1,000,000,000,000!

Ever since the US-Dollar un-pegged from gold in response to decrease the burden of debt in 1935, gold price and US$ value went opposite ways.

Why?

Because when US$ was un-pegged from gold, it meant that the piece of paper money is no longer equal to something tangible owned by those who issued the note but a promise that it can be exchanged for something of equal value in future.

The difference lies in that for the latter, they can keep printing money so long as those who receives the note believes in that promise.

That is the reason US is deeply in debt, because they keep promising and they keep printing.

So What?

The answer is simple, once people stops believing in the promise, the note is as good as toilet paper, and there goes your hard earned savings.

But that's USD, I own SGD

Well, imagine you own a business and you have a customer who appears to be very rich. So you extend credit to him whenever he buys stuff from u. You think he can pay you back since he is so rich, so you didn't not mind holding onto his IOUs. You are Singapore and US is the customer. And Singapore is holding onto a lot of US IOUs. If the customer is unable to pay, what do you think will happen to e business?

Let's not concern ourselves with the solution to US debt problems. What's more important is the things we can do to minimize the damage when the roof really comes crashing down.

So How?

For those who are already aware, I'm sure you would have identified the crisis and done something to hedge yourself against losses. But for those who are not aware, I offer some basic advice and some simple actions to take.

From a logical point of view, when the intangible is unstable, own the stable and tangible.

The answer is simply: buy & hold gold until this crisis is over.

To be honest, I have 2 agenda that motivated me to write this article.
1. Educate those who are still unaware and hope that they would save themselves.
2. Offer those who are willing to join me in making the best of the current crisis a chance to make some cash.

If you feel that what was said were all nonsense, I sincerely hope that you will at least realize some shit is going to happen and do something about it.

The reason why gold price is rising is because there are more people buying than selling.

Gold is the universal form of money. It has been so since ancient times.

There are a few ways you can own gold or profit from the benefits of it.

1) Buying n holding real gold
-gold bars
-gold bullion
-gold leaf etc

2) Own a gold savings account

3) Buy gold certs or gold shares

More on how to go about each option can be found with a few minutes of Googling.

What I'm more interested in sharing with you is the opportunity to not only own real gold but also profit whenever someone you know buys gold.

The best thing is, you don't need to have a large capital. Less than S$1,000.

For those who feel uneasy making money from others, no worries. By holding onto the gold itself is in a way protecting your money. Think of it like savings, just that this pool of saving is illiquid and no interest given. But at the rate gold is appreciating in value, your "money" is growing many times more than what a bank offers. And your money is more protected from inflation than the sturdiest vaults in any bank can offer.

1 ounce of limited edition, pure 999.9gold collection coin cost US$1,400 5years ago(intrinsic worth=US$750). Today, intrinsic value of 1oz 999.9 gold is US$1,750 . Meaning, discounting the collector's value of the coin, the coin is worth US$1,750 for the amount of gold it possess.

The additional incentive of buying the gold I'm sharing with you are:
-a platform to build your very own passive income stream
-a means to help friends in need of money
-actively take control of your money n increase your income.

For those who are interested to own gold but do not wish to take up my offer, you can find out more about owning gold from UOB. I myself purchased gold from there and that gold has appreciated 16% in merely 5 months.

As for those who are interested in what I offered, you can post in comments, write in the chat box or drop me an e-mail(wei_ge_1989@hotmail.com) and we can discuss in-depth the biz opportunity present.

1 thing I learn from my 1 year 10months of serving the army is: When in doubt, ask! Don't assume.

Its free to send email or post a comment by the way, so feel free to ask me as many questions as possible!

All the best and hope you are ready when crisis calls.