Profit Margin -- Apple Analogy

There are 2 types of Profit Margin, Gross Profit Margin and Net Profit Margin. Here's my analogy used to explain it to one of the graduates at MIP today:

I bought an apple at $0.60 and my staff sell it at $1.

So my gross profit is $0.40, hence the gross profit margin is $0.40/$1 * 100% = 40%.

I paid my staff $0.10 to sell that apple. So my net profit is actually $0.30. Hence, my net profit margin is $0.30/$1 * 100% = 30%.

I'm glad that it helps in her understanding. :)

Comments on Jiki Life Aka Japan Life

My friend once shared with me about Jiki Life (Japan Life). They basically managed medical devices in a way similar to real estate. 

E.g. Jiki Life sells me some medical devices (about $3K worth) and I'll get the "title deed" of the medical devices and become the owner of it. After which, I'll entrust Jiki Life to rent it out for me at 6% p.a. (about $15/mth). After 20 years, I either get back the $3K that I've paid for the devices or $3K worth of medical devices and it continues. During this period, the medical devices' maintenance fee will be paid by Jiki Life as they'll do all the fixing and repairing if there's any issue with them. The "tenant" will pay for the rental commission, the fees required to handle all the rental and other rental related issues. [This is the usual deal]

During that sharing, there's this promotion on the deal:

1. Half Price: I pay $1.5K and own $3K worth of medical devices so my rent is 12% p.a. (About $30/mth).
2. 1 for 1: I pay $3K and own $6K worth of medical devices so my rent is 12% p.a. (About $60/mth).
3. 2 for 3: I pay $6K and own $15K worth of medical devices so my rent is 15% p.a. (About $75/mth).

For these promotion, after 20 years, I can only get back the amount that I've paid for or the equivalent worth of medical products.

For this plan, the bet is that Jiki Life will always be in business and the medical devices are highly sought for so that it'll always be rented by some hospital / clinic, etc. Should Jiki Life not be in business, my agent is the only person that can help me continue to collect the rent for the equipment, so my agent has to be very trustworthy and it'll help me in terms of my bet in this investment. I'm not sure if the promotion is still valid 'cos it's been quite a long time since I heard about it. And promotion 1 and 2 is actually the same thing.

Companies Affected During Economic Downturn

According to the book "Your First $1,000,000" By Dr Michael Leong, there are various type of companies that are likely to be affected in the event of economic downturn:-

• Highly leveraged companies
• I quite agree with it as such companies have large amount of debts. During a downturn, there's a slight chance that if their business is not good enough, they might not have the funds to pay off even the installments to the banks. Even if they do have enough to pay the installments, if the bank decides that the value of their collateral (e.g. property and other assets) has a much lower value than the amount they have borrowed. The bank may call upon them to top up the difference in value between the value of the property and the amount they have loaned. Which may result in the company being adversely affected.
• World-wide goods manufacturer
• The author thinks that it's so as the demands may drop and affect their business while they may not be able to reduce their overheads in time. But I think that it depends on what is the goods that the company manufactures. If it's a necessity type of product, there's actually nothing much to worry about, as whichever the economic condition, we still will need the products. But if it's those luxury type of product then it will be more affected, especially if the target market is people from the middle class whom are usually most affected by economic downturn I think.
• Oil-related companies
• The author thinks that the demand will  be reduced and need for oil is likely to ease. But actually, even if the need reduces, a lot of time, a lot of business and people will still need oil to function, hence, I don't see that much a drop in terms of demand. On the other hand, I think such companies are more affected by the raise and drop in oil prices more than economic crisis, although their stock price will dropped a lot during the crisis but once it's over, the price will go up all over again, even to a new high, hence, it's not much of a worry in my opinion if the company's fundamental is strong and they know how to hedge against the oil price fluctuation. But I'm not sure how to gauge that yet so I'll just leave such companies out in my analysis.
• REITs (Real Estate Investment Trust)
• Although the property price and rental will drop but I felt that during the mist of economic downturn, especially during recession, it's when the price of such companies that's very attractive due to the type of dividend return they will be able to provide when the economic recovered. However, when buying such companies, we need to ensure that we have better cashflow and have excess cash on hand as they might take the chance to get rights issue and increase their capital. Most of the REITs does that the last economic downturn recently.
• Retail-related companies
• Their business will of course be affected as the demand will drop and times will be tough during the downturn, which I totally agreed with.

Lessons from the Cashflow Game

After playing and facilitating Cashflow Games, I understand more about the various ways to achieve financial freedom. There are really many lessons that I've learned from the game itself. For those that does not know about the game, here's a brief description, the main aim of the game is to get out of the rat race and into fast track. Which is like get out from our employee cycle (rat race) to achieve financial freedom (fast track) in reality. There's still a pint of luck that's required to win, but the key to it is still in identifying the good deals from the bad deals.

Some of the lessons I've learnt are:

• It'll be much easier to get out of the rat race if we, the players can collaborate with each other during the game. 
• The lower our expenses, the easier to get out of the rat race.
• If my monthly cashflow is low, I would need to aim for higher "savings" amount to buy the good deals that I want.
• If I have a monthly cashflow is higher, usually, my pay might be higher and same goes for my expenses and hence, sometimes, I need to use higher leverage to make things work better when I do get a good deal.
• If I keep taking small deals, it'll take a much longer time to get out of the rat race as compared to taking a bigger deal when I have enough money to do it.

The main lesson you will learn from the game is that how you play the game is actually a reflection of how you are playing the money game in reality. By understanding yourself more, it does help in fixing issues that you may not have realized on your own.

In fact, there's even a version for kids that I think parents should get for their kids so that they are educated in the way rich thinks from a younger age. Last time when I'm young, there's only monopoly and I only get to pay at my cousin's house as we couldn't get one. In fact, no one ever gave us a debrief on how to win that game and we really need to figure everything out ourselves. How I wish that I get to play such a game when I'm just a kid!

But do take note that in reality, things are not as simplified as the game itself. It's the idea that's important and when we know about the strategy, it actually takes much longer in reality to get the results when applied as our loan system isn't that simple. I'm still wondering, is there a Singapore version to this game?

Things about Private Residence's cooling measures

With the new cooling down measures that our government implements recently, there are a few things that we may need to be aware of before investing in private residential properties (e.g. landed bungalows, semi-d, terrace house, condos, etc).

• Seller's Stamp Duty (SSD) is now imposed on residential properties sold within 3 years (used to be 1 year this Feb). [I think it's to encourage the residential properties owner to hold their properties for longer duration so as to reduce speculation]
• Within 1 year - Full SSD
• Between 1 to 2 years - 2/3 SSD
• Between 2 to 3 years - 1/3 SSD
• According to one of my mentors, the SSD is calculated from the date the Option to Purchase is being exercised. So do take note on that if you didn't want to incur the fees. Because it's a date that few people will remember.
• For property buyers with 1 or more outstanding  housing loans
• There's also a new rule that increased the minimum cash payment from 5% to 10%. [So more cash is required to buy such properties, especially for property investors, those CPF richer investors with less cash on hand will need to be aware of this]
• The loan amount has dropped from 80% to 70% [So now, more CPF or cash is required for down-payment. As a result, those that didn't have enough cash or CPF due to the new rules may take longer to enter the market]
• Overseas private property investors will need to take note that having such properties directly under their names will affect their eligibility in buying even resale HDB flats, as they will need to sell off their overseas property within 6 months. (The same goes for locate private property owners.)

Although the price hasn't drop yet, but I think with the new measures, it should decrease gradually until the market is more stabilize and sustainable. During the course I attended on Saturday, one of the instructors mentioned that due to this ruling, our stock market went up as funds are redirected. Hence, I think if that's the case, when those investors accumulate enough funds through whichever other means of investments, like the stock market, the redirection of such funds back into the property market might probably affect the stock market more than the property market, due to the liquidity level of stocks. Which means, the stock market might become even more fluctuating.

I personally do hope that our government can release the new measures much earlier than on the effective date itself so that we can have more emotional preparation when the time comes. So that it's a more gradual process.

Reference:
Measures to Maintain a Stable and Sustainable Property Market

Things about HDB flat's cooling measures

Our government has announced some new measures to ensure that our property market to be more stable and sustainable on 30 Aug 2010. I think their aim is to cool down the property market so that middle and low income group can afford the property in the long run and to reduce over speculations. Here's my summary of the overall picture in my knowledge:

• Concessionary HDB Loans (as in direct loan from HDB themselves)
• Still granted at up to 90% of the valuation limit¹. [I think it's good]
• Only offered to eligible 1st time flat buyers and 2nd time buyers that are right-sizing their flats to meet their housing needs. [Looks like not change here to me]
  
• For 2nd time buyers must use 100% of their CPF refund and 50% of the cash proceeds from their 1st HDB flat sales to pay off the new flat before they can get a loan. [This is something you may want to take note of. I think they are just trying to reduce speculations.]
• 10% down-payment is required
• Bank Loan
• 20% down-payment is required. [I personally find it strange that the person can loan more money from HDB than from the bank.]
• General:
  
• For Build to Order flat (Aka BTO, DBSS - Design, Build and Sell Scheme) and EC, your option fee is 5% of the purchase price to be paid in cash only.
• As HDB flats owners needs to stay in the flat for at least 3 years before they can sell, they are not affected by the new Seller's Stamp Duty (SSD)'s regulations.
• Additional HDB Housing Grant is available to help the lower income family buy their 1st subsidized flat. (Only for those family with annual average gross income of less than $5K/month, subsidy varies from $5K to $40K)
• For private residential property owners, they must dispose off their private residential property within 6 months after they buying their resale flat. (Even overseas property must be disposed, if it's under their name.)
• For such owners, they will only be allowed to take up bank loans and if they currently have any outstanding loan from the bank, they can only take up to 70% of the valuation limit. Of which, 10% of the down-payment must be made in cash! [I think that this rule is to deter the private property owners from buying HDB properties so that the prices will cool down more as usually such owners have more money to buy flats]

*Note: Please note that my comments are in [...]. Feel free to correct me if you have any opinions. :)

Footnotes:

1. Valuation Limit is the purchase price of the property or the valuation of the property at the purchased date, whichever is lower.

Reference:
Measures to Maintain a Stable and Sustainable Property Market
Additional CPF Housing Grant
Buy Resale Flat Finances
Foreign Homes, Same Rules

Glad to know of my dream financial advisory service

http://money.cnn.com

Recently, a new friend from some networking session shared with me that my dream type of financial advisory service is actually available! He's currently a director for an independent financial advisory firm, called Financial Alliance. From what he told me, the way he services his clients, and the way he educates his staff sounds a lot better than most other financial advisory firms. I should say that it's a new way of doing things.

I'm pretty amazed that he enjoys his career and loves sharing with others genuinely about what they really need and willingly helps them to solve their financial issues if any. But as what he said, not ever issue can be resolved without compromising the goals. Because some things are just impossible to achieve through the insurance / fund management type of financial advisory service, such as trying to retire with $0 savings and within 5 years. They share with their clients, only if they want to become more financially savvy personally. And he claimed that they don't force sell and don't even need to beg for appointments. He has a mailing list type of site which I shall subscribe to it 1st, if the contents is interesting, I will share it here, otherwise, there's no point in doing so.

From my point of view, it's not really impossible to achieve such goals. It's rather a matter of how to do it and how committed the person is in wanting to achieve the goal. Of course, just by buying insurance, it's impossible. And such person don't even have money to buy any funds to multiply their wealth, even if they have anything less than $200K, it's also very hard to achieve as it still need to depend on the economic market conditions and other factors. And the only way to achieve such a goal is really by doing business and really go all out to make it big! But of course, 1st of all the person must be willing to educate himself / herself and be willing to spend a certain amount of money to learn from more successful people, go for networking sessions to look for people that will help him / her attain success in the business itself. Sitting there and doing nothing or even dreaming about success or retirement just doesn't work. :)