Warren Buffett ..... Gems of Wisdom!
On November 12, 2005 students from the Applied Security Analysis Program at the University of Wisconsin had a once in a lifetime opportunity to spend a day with Warren Buffett. The students had a private meeting with Mr. Buffett at the Field Club in Omaha, Nebraska that included a question and answer session, lunch, and a tour and meeting with management at the Nebraska Furniture Mart.
In the meeting, Mr. Buffett discussed with the students investing advice, politics, career guidance, and life in general. The insights and comments are lessons the students will remember throughout their life and be able to carry with them as they embark on their careers.
Transcript from the Question and Answer Session :
Q: What keeps you up at night?
WB: The Gen Re situation keeps me up. Nothing in business really. If one of my family members is sick. Something in life that is out of my control. Do not agonize over your mistakes. You can make so many and still do well. Mistakes should not eat at you. Mistakes that hurt other people. That’s bad news. If you do lose sleep over your job, move on. Surround yourself with people you trust and you’ll do fine. I’ve turned down businesses that were very profitable that made my stomach turn. Don’t do anything for money. Some people marry for money. That really does not make sense if you have more money. If I marry for money that is pretty a-yoyo stupid.
Q: Do you believe that increased hurricane activity is permanent and what does that mean for insurance?
WB: There have been 35 6.0 earthquakes in California in the last 100 years. There is no reason to think that there will be more earthquakes. If you look at the number of hurricanes in Florida it was off the charts. But you also had a hurricane in Missouri which never happens. If you look at global warming and atmospheric changes things are changing. We do not have to write insurance for this stuff. We did not write in 2004. We have changed our attitude on writing risk. We have seen more activity in 2005. Rita could have been bad, but then you also had Katrina and Wilma. But we just wrote a big policy at 3 to 4 times the rate that we were seeing last year. But it is hard. The 4-5 degree temperature rise in water temperatures. We will still write insurance but yes I think the world has changed. If I owned beach front property I would be worried, but most property is not beach front. I do not know if it is permanent global warming but something has changed. We do not lay off any risk like most. We wrote a billion dollar policy for Pepsi – the present value was $250 MM.
Q: You have said that someone should use a punch card with 20 punches on it so that you could only make 20 investments in your life. What would you say to someone who has yet to make his first punch?
WB: I believe if you could only make 20 investing decisions you would think harder about those decisions and make more money. You’re not going have an unlimited amount of good ideas. You have to have the discipline to make few investments. I always say that investing is like baseball except that you don’t get any called strikes. You can sit at the plate and wait as long as you like.Ted Williams wrote a book and he divided his strike zone into smaller divisions. If he only took a swing at the pitches in his favorite zone that he would hit .400. If he swung at other pitches he would hit .220. He only wanted to swing at the pitches that he would hit the best. Now if he gets two strikes he may have to swing even if it’s not a fat pitch. You do not have to swing. Berkshire once owned a department store. It was not a great pitch. If our competitors had a sale, we had to have a sale. If they installed air conditioning, we installed air conditioning. It had no competitive advantage. The lesson is that we only look for fat pitches. There is a dilemma in money management. They have to swing. You get inclined to do things. I lived in New York. There was an incredible amount of over stimulus in New York. You get pressured to do things. If you get 20 good ideas you will set the world record. I would like one good idea next year. But when you find that good idea you have to take a big cut. My partner Charlie Munger is better at that than I am. We have a joke when I do make a decision we call it the thumb sucking rule. Do not use up your punch card too early. Use a blank piece of paper. If you are going to buy MSFT at 26 write down the reasons that you want to buy MSFT at 26. I want to buy the MSFT business for xx billion for these reasons. If you do not know enough to buy the whole business then you should not own the stock. That way you will not get carried away with stock splits and other non sense. What difference does a stock split make if you own the whole thing. You need temperament and discipline not I
Q. You need extraordinary discipline. That is the hard thing. Q: What do you look for in a business leader?
WB: The first time I met Bill Gates at a dinner that his father had he had everyone answer a question: What is the most important factor that you look for? Bill and I both said the exact same thing. Focus. Focus is very important. The ability to get people to march. It takes the projection of confidence. You are asking people to trust you. Who would you trust? That is what I ask. Some of them understand accounting, some don’t. Some of them are peculiar individuals. Ronald Regan was a great leader. I did not agree with him on everything but he was a great leader. FDR was the same way. My father could not stand him. They have to project some kind of vision. People really are looking for someone to lead. When Hitler came into power in Germany, the German people needed a leader. People will do almost anything when they are willing to be led. So Focus, Mission, and Projected confidence.
Q: What do think the future is for the life insurance settlement business?
WB: Yeah. This business started out with very sick people with AIDS. Basically people had these life insurance settlements and were willing to cash them because it was better for them to spend the money now. They would sell their policy to an investor at a favorable return. Now it is evolved and more and more people are using this. They want the return of the policy now instead of waiting until death. The business has changed. A woman had a 70-80 million policy that we just took a part of. We paid her 8-9 million. Frictional costs are extremely high. The middleman gets much more money than they really should. It would be nice for everyone to get rid of the middleman. There is a lot of value in the policies. It makes sense to have a secondary market, to reduce frictions. The market is fairly new and is very inefficient. Berkshire is not actively searching in this market yet. If clients come to Berkshire, we require taped interviews when we do these deals so we make sure we get it right. This reminds me about my partner Charlie, he is getting pretty old. I thought that maybe he was losing his hearing but I did not want to say anything so I went to the doctor and asked ‘I have this friend and I am afraid is losing his hearing. How can I know.’ The doctor said ‘Stand across the room and talk at a normal conversational level and see if he can hear you’ So I stood across the room from Charlie and asked him ‘Hey Charlie, do you think we should buy MSFT at 26?’ No answer. I moved up ‘Charlie do you think we should by MSFT at 26?’ Still no answer. I finally got right front of him ‘I said do you think we should buy MSFT at 26?’ Finally Charlie yelled ‘For the third time, yes’
Q: Being in your position, you give lots of advice. What is your advice on giving good advice?
WB: Wow that is a tricky question. That is kind of a puzzle. Honesty. If someone told me they wanted to be a movie star and they looked like me I’d tell them to get another profession. Pick good heros. Who your heros are determines who you will be. Treat your kids and family well. My father was a huge hero for me throughout my life. He never lectured. Your inner score card matters more than your outer score card. You can’t determine some things. I cannot be a good baseball player. But you can determine what kind of person you will be husband, father. Start early. Generosity is something that will not change when you are 50-60 years old. Some days I will say to students: When you leave this room “You can pick the person to get 10% of their earnings.” You will not pick the smartest person. You will pick the person who functions the best. The DNA your given may determine the horse power your given. You all have it. But it really has nothing to do with intelligence. People want to be around them. Now conversely you can also short 10% of someone. That sounds odd, I want to short sell that guy, but it’s true. You know who you want to short. Something turns you off about them. Try to be like the people you admire and take in their traits. It is not in your DNA. You already won the DNA lottery. In the end if you follow the 10% you picked you will do well. If I was born in Bangladesh things would be different. I was born in the U.S. where allocating capital is extremely important. I am just picking off crumbs off the table. If I was born 100 years ago I would have been some guy’s lunch. We all won the lottery. How much potential are we really realizing?
Q: If you could do one thing over again, what would it be?
WB: I have been very lucky. I would have thought more about it while I was doing it. Living life and raising kids there is no rewind button. You cannot go back. These are the important things so you have to get them right now. I once asked a person from Harvard what he was going to do after school. He said “Well I went to work in accounting. Now I am in the Harvard Business School. Probably the best thing to do is a management consulting firm.” To me that is like saving up sex for old age. The time to do it is today. You may not be doing it in 30 years. Do not do something because you feel the need to do it. Do it because you want to do it. I was 23 when I went to work for Ben Graham. I never asked what my salary was going to be. It was a tough choice. I was married with a kid, but my wife knew that I wanted to do it. It was the best choice. It all worked out perfectly. Seize the moment.
Q: Can you talk about how Charlie has influenced you?
WB: Well Ben Graham was a major influence on me, I began studying him at 19. He taught a highly qualitative approach at the time. I was doing crazy things. Graham focused on quantitatively cheap, companies selling for less than working capital. It worked. Now the universe is much smaller. Phil Fisher was a major influence. I only met him twice but I researched him. At the time I was cigar butt investing. You find a cigar butt on the ground and one puff is free. Its profitable investing but it’s a dying business. Phil Fisher “Look for one business that you never sell.” That really set in for me. I used some old and some new. Charlie basically got me to take large amounts and really taught me the value of a good business. Buy a wonderful business even at a stiff price. See’s Candy was the first business that I really used this on in 1972. It worked well with Coca-Cola. The product and business has not really changed much since 1886. Every year the market for soft-drinks increases and Coca-Cola has half the market. One penny is 13 million dollars a day. Most people have paid at least a penny. You can basically keep riding, and riding, and riding. The world keeps handing you money. We look for businesses that the economics will look similar in 5-10-15 or 20 years from now. I cannot do that in tech. It changes too much. Wrigley’s Chewing Gum and Gillette, how much will they really change? Shaving and chewing gum will never go out. Snickers is the number one selling candy bar for 60 years. People do not mess around with candy bars. If you go to the store and they offer you a no name candy bar for half the price you probably will still buy a Snickers. You do not mess around with what you put in your mouth. I know in tech when I search I go to Google. This drives Bill Gates nuts. I look for absence of change. Change scares the hell out of me as an investor. Change may be good in life. The airline business is an example of a bad business. Capitalists should have shot down Orville at Kitty Hawk. I’m looking for businesses with moats. Coca-Cola loses the taste tests, but you cannot account for their moat. I brushed my teeth with Coca-Cola in China. If you get in early on these businesses you will get very rich.
Q: Do you have any advice on networking?
WB: I have been very lucky finding friends and keeping them. You want to be with people who are better than you. That may be hard for you guys but it is easy for me. When I was young and I use to go to camp in Wisconsin, I would be with these kids and by the time I would come home my vocabulary was down to four words. You always want to marry up. I do not even like the term “networking”. It sounds dirty to me like you are using someone or manipulating them. I have a dozen or more really close friends. I have a really close friend who was at Auschwitz. She basically is alive due to random chance. She has a very hard time making friends, because she is always asking herself “would they hide me”. If you find a lot of friends that will hide you, that is true success. The real test is having a lot of people who like you. You and I know some people that fail that test. If they are coming from you and your children (pointing up) say “my dad is in the attic, my dad is in the attic” you are in trouble. If people will hide you, you are a success.
Q: I am thinking for the people that are not here and I have to write the graduation speech. Is there one important message that I can take back?
WB: It’s a tough thing. I have a friend Art. His commencement speech was “I am giving you a perfect world, don’t screw it up.” Munger gave a great speech. I’ll get it for you actually. It was great. It was “How to fail”. He goes through all the ways that you can fail, and at the end he tells you not to do any of those. I would use the inner vs. outer score card. That is important. The message is would you rather be the best lover and be known as the worst or the worst lover and be known as the best. That is how you get to the inner score card. I would talk about how they should behave as a citizen. Here is how I get to my political philosophy: Imagine you are in the womb right before birth and a genie appears. He says “you look wise, you have an enormous responsibility. You get to design the world in 24 hours and you get to have anything you want. But there is a catch as you emerge you will have a lottery to decide what type of person you will be. You have the same odds of being a genius or being retarded, rich or poor, any race or sex. What kind of world would you design?” We all got good slips. What kind of world would you design if you had a lottery to come back? You would want a system that works, one with equality of opportunity and equality of education. The world should provide for people who get lousy tickets. We won the ovarian lottery really. How many people would redraw? Not many. Everyone thinks they have the best of it. Only a fraction will be born in the U.S., have a high IQ, or be born their desired sex. You are the luckiest 1%. People that won the pool have an obligation. The U.S. has a GDP of 40K per person.
Q: How do you determine the people who will lead your businesses?
WB: You look for people who are extremely passionate. How do you determine passion? I got a call on June 2, actually a fax, from Indiana about a company that I had never heard of (Forest River Inc.) from a fellow I never heard of. See the WSJ today, it’s in there. The fax showed the six criteria in the annual report that I look for and the business fit. Pete Liegl is the businessman. It sounded like Pete was my type of guy. I called him and said here is what I am willing to pay if you are interested come see me. It was a good business. One week later, Pete Liegl brought his wife and daughter out to visit me and we sealed the deal during a 20-minute meeting. As the meeting wrapped up, I told Mr. Liegl not to expect to hear from me more than once a year. Mr. Liegl told me, "It was easier to sell my business than to renew my driver's license." Would Pete who is 61 still run the business even though it is owned by Berkshire? Does he love the money or does he love the business? He may sign and never work, and then the deal will not work. I look for people who would rather run the business than do anything else in life. That is what is going through my mind. They have to prefer going to work over everything else. Pete Liegl has got all the money in the world. Pete Liegl will run the business with the same passion as he did when he owned 100% of the business. I love going to work. I tap dance to work. I look at it from my perspective. Why do I continue to love work? I want to paint my own painting. If someone was saying that there is too much blue ink or telling me what to do, I would say to hell with it. I need to do my own thing. I also like applause. Not just any applause, but intelligent applause. We are providing good analysis. I think my managers enjoy that. Berkshire can provide that. We have one guy who is 91. Mrs. B ran The Furniture Mart until she was 103. She quit and one year later died. We tell the others that is why you cannot quit. She was really a remarkable woman. Rose Blumkin. She came to the U.S. from Russia. She sent $50 to bring her family to this country. She could not read or write. She started the Furniture Mart with $500. You will get to see it this afternoon. It is an amazing business. It took her sixteen years to save up. She kept the price tags on the furniture in her house to make her feel more comfortable. She got a PHD from NYU. I love Jack Welch, but I believe that he if he had to compete with Mrs. B that she would run him out of business. A business school could really teach a class on Mrs. B.
Q: How do you find a good investment? What business information do you use?
WB: I only need one good idea. The Universe is a big thing. My universe use to be 10,000 and now it is 200. I love this business because all of the knowledge is cumulative. The world does not change. If you understand Coca-Cola or Gillette you can understand similar businesses. I understand the business and it is a manageable universe that I am interested in. I read the Moody’s manual. I just bought an old copy off of Amazon.com as a collector’s item. I went through every business in the manual. It was like a treasure hunt literally. I used the Banking and Finance manual. Western Insurance Securities had an EPS of $28 and a P/E of 13. It was right there. No one told me about that. No one was going to tell me. I just had to find it. It really is a game. It is fun. I continue to do it. In my own account (it’s too small for Berkshire) for fun I just did that same thing with Korean stocks. Dae Han Flour Mills was $40 a share and had $200 marketable securities. It did not take long to find at all. It was on the Korean Stock Exchange. Five brokers were the largest buyers and sellers. It was just for old time’s sake. Just to say “The old boy has a few more swings left in him”. There is information overload today. I listen occasionally. The information is out there. Where are the journalism students? Investing is journalism. Bob Woodward from the Washington post is a friend. Do you know who Bob Woodward is? I met him for breakfast. I told him that if he wanted to succeed in investing just to assign himself the right story. If you write a pretty good story about a business and you find out the things you like and all the details like a good journalist, you can pick up good investing ideas. Buy $5 bills for one dollar. You cannot look where others look.
Q: If you had to choose one currency Gold, Silver, or any paper currency what currency would you choose?
WB: Well if I had to put the currency in a drawer the answer is easy: Gold. But fortunately I do not have to put it in a drawer. We have treasury securities so currency earns interest, while gold does not. Gold is really a terrible investment. It just stares at you. My father was a gold bug. Paper money isn’t worth a a-yoyo either. But the truth is you can buy Treasuries. We own more assets that are U.S. based. I think our currency will be weak for the next ten years. The U.S. is the best country in the world, but our currency in my view is likely to shrink in value. I believe the Yuan will appreciate more than the Euro. Gold is interesting. I have some Gold in my teeth, but really it is not very useful. They dig it up in South America at great expense and risk of life. It does not have a lot of utility. For sure Gold will do well in a shock. People will run to it when they are scared. A nuclear bomb will cause gold to go up. But long term, gold is not where you want to be.
Q: We just had a meeting with Steve Miller from Delphi. What do you think of what is going on in that industry?
WB: Steve Miller is a very intelligent guy, very Sharp. I wish I could have been there. We have been in shoes and textiles. Any area where labor is a large part of costs is hard. I would not own Coca-Cola if labor was a huge cost. How many shoes does the U.S. buy? Four shoes for every man, woman, and child per year. 1.2 billion. I bought Dexter Shoes, which was the biggest mistake that I ever made. We got killed because of labor. There are not many shoes made any more in the United States. There are massive changes going on. Mohawk Carpet is 15% labor. Delphi has huge labor costs. The pension system cannot hold up. Pay two people from the past for every one person now and that is a cost that the competition does not have to pay. They cannot compete. That will not work. Newspapers are good enough to make up for high labor costs. The auto business is not good enough and has huge social problems. When the costs for textiles got out of line there were huge costs for retraining. Those people did not speak English. They got a losing ticket. You really need a national policy to take care of those people. We are rich enough to take care of those people. Miller faced reality when he said that this will not work. UAW has got to figure out how we can get as much as possible. I can see both sides. The U.S. cannot produce bananas and compete with Guatemala and Honduras. You cannot do it. China and Mexico do a lot that they could not do 40 years ago. Airlines have the same problems, as well as landline phones, VOIP, and cell phones. Enduring competitive advantage is so important. Men do not change.
Q: What are your biggest triumphs and why?
WB: Being born in the United States. Partnering with Charlie, which was an accident. 59 years we have worked together. We are mental partners. We have never had an argument and we never will. We do not even talk to each other much any more. Just knowing what he would say on something without even talking about it is important. Gates and I were in China. People were pulling a boat over sand. An IQ of 150 would never see the light of day. There is no equality of opportunity. I was lucky. Half the talent pool in the U.S. when I was growing up was in the service industry, teachers, and nurses, which was due to how this country treated women. I had better teachers than I deserved just do to that. There was no market system and same in terms of color. If I was born black my life could not have been the same.
Q: What did you think of the Long Term Capital debacle?
WB: They were captured by their training in stochastics and mathematics. By their math it was a 1 in 10,000 years or a 5 sigma event that the discount widened between the 29 year treasury and the 30 year treasury. LTCM was long the 29 year and short the 30 year. LTCM got killed on the mark-to-market because everyone knew their positions. To quote Mark Twain, “History doesn’t repeat itself, it rhymes.” I had a $250 million offer to take all their positions, but at the last moment John Merriweather, my friend, out bluffed me and another consortium ended up buying the positions. I sent some one else to close the deal, but if I had been in New York that day I would have closed the deal. Quite a bit of this story is in Roger Lowenstein’s book, “When Genius Fails.” That day was a punch card.
posted by ikaira @ 2:57 PM,
,
d.o.g.
Forum Sage
Posts: 711 Registered: 10-12-2003 Member Is Online Mood: No Mood
posted on 12-11-2007 at 17:45
Quote:
mantrahaving a centralised pension fund is a great idea, but people need to be educated on what they will realistically need moving forward into their golden years, otherwise, when their funds run out they will be a burden to society if their familes do not step up to the plate ...
THE RETURN OF THE LONG POST
*cue Stars Wars music*
Unfortunately the government itself is responsible for this "money no enough" mess. Why? We must go back in time, to the inception of the CPF in 1955.
Once upon a time...
When the CPF was created, the contribution rate was 25% EACH for employer and employee, with no upper limit. This meant that every employee got a 50% matching rate regardless of his income level, which basically allowed everyone to have a decent chance of maintaining their current lifestyle upon retirement, even if they were not good at investing their cash, and inflation was bad.
This was a great idea because the employee's future lifestyle would be matched to his earnings over his lifetime, rather than decided arbitrarily by some pension committee doling out government funds. There would be no potential pension fund solvency problems, where future retirees might draw out more than current workers were contributing.
Turn on the CPF tap!
However, as Singapore prospered and housing prices rose, in 1968 someone got the bright idea of making housing "affordable" not by holding down prices, but by allowing CPF money to be used. What happened? There was an extended one-off "windfall" as people rushed to tap CPF money to buy homes.
What happened after that?
We are back at square one with expensive homes, and worse, little or nothing in CPF. At least before allowing the use of CPF, homes were expensive, but you had a tidy sum to look forward to in retirement.
Recession = cut CPF
Later still, someone decided to make Singaporeans "affordable" for employers by cutting the employer's matching rate and by capping the CPF contribution ceiling, first at $6,000, and then down to the current $4,500. What this means is that those earning above $4,500 today have basically no chance of maintaining their current lifestyle solely from CPF funds when they retire, as their effective salary matching rate was less than 34.5%. For people earning $4,500 or less, even though their CPF contributions over time would have matched their income levels, a full 34.5% match is still a very far cry from a 50% match.
As an example:
School principals who retired 20 years ago could have $1-2m in their CPF, since at their peak they could have a 50% match on a $10,000+ salary i.e. $5,000+ a month into CPF. Many could and do live in landed property. Today's school principals often earn a higher wage but will not have anywhere near this amount upon retirement, because their matching rate tops out at 34.5% of $4,500, or $1,552.50.
Today's landed property costs 5-10 times more than 20 years ago, and for top earners the CPF contribution is 3 times less. Translation: forget it. Even living in a condo would be a stretch if you don't supplement the monthly payments with cash - and doing so means your CPF is empty.
Now, with the majority of CPF accounts basically emptied to pay for housing, there is a sudden realization that we will soon face a retirement crisis, as hundreds of thousands of Singaporeans retire with little or no money in their CPF. Among the various solutions offered by the government, there have been:
1. Minimum Sum Scheme
Created in 1987, this aims to prevent you from spending what little you have within a few years - instead, you will eke out a pauper's existence on the allowance doled out by the CPF.
Don't believe me? Pretend you're 62 NOW, and try living on the $498 a month the CPF will pay you from the current $65,000 Minimum Sum. Not much of a life, is it?
Suppose you'll be 62 in 30 years' time. Your Minimum Sum will be $156,600 after adjusting for inflation. Your monthly payout? $1,237. That's not much today. Imagine what it will be like in 30 years' time. Let's be charitable and assume 2% p.a. inflation. After 30 years, your $1,237 buys 1.81x LESS i.e. it's the same as $683 today. Try living on $683 a month now. Not much better than $498, is it?
The payout numbers are taken from the retirement calculator on the CPF website. Check and see for yourself. Note that the retirement calculator does not take into account recent changes that push back your drawdown age to 63 or later - it assumes 62 for everyone.
Bottomline: Money from the Minimum Sum is a poverty allowance. Don't even THINK about surviving on it unless you literally become a monk or a nun. Of course, if you then set up a charity, maybe you can still draw a salary and even have generous donors let you fly first class, but that's clearly not something that everyone can (or should) aspire to.
2. Later Retirement
Obviously, given the same life expectancy, the later you stop work, the less time you have left to live. With the same amount of money, you can spend more during each remaining day, thus improving your quality of life. Also, while you work, your employer may provide some medical benefits which would delay the time when you have to pay for yourself, making your Medisave money last longer.
This also partially alleviates the labour shortage in Singapore, though it remains to be seen how many jobs can be "re-made" for older workers. Being willing to work for less money is not enough - foreign workers are also willing to work for less, and many of them are younger and willing to work for longer hours.
The government is certainly not taking the first step to employing older Singaporeans - witness the recent letter to the Straits Times forum from an ex-SAF regular who was a warrant officer (eligible to work until 55) but was laid off anyway at 50. I also know people in the public service who were still productive but told to leave anyway when they hit 55. Since the private sector tends to take its cue from the government, I have little hope that older Singaporeans will easily find work.
Bottomline: Don't aim to retire later. Aim to accumulate enough assets to be ABLE to retire in the first place. Even if you WANT to work longer, you may not be able to FIND work.
3. Private Pension Plans (PPP)
In 2005 the government put out a call for the private sector to invest CPF money in the hope of better returns than the guaranteed 2.5%/4%. This would achieve 2 things. First, it would make it easier for Singaporeans to fund their retirement. Second, which was somewhat less well publicised, it would take the burden of guaranteeing the returns off the government's shoulders.
The CPF Special Account guarantees a rate of 4%, but for the last several years, SGS, which are the only things the CPF can invest in, have been paying less than 3%. This shortfall is clearly being met from either the Budget or reserves. Transferring the burden of the guarantee to the private sector would remove this annoyance completely.
This PPP thing failed when the private sector decided not to work for peanuts. Apparently, the government wanted to have its cake (low fees) and eat it (high returns) too. Good investment managers dictate their terms, not the other way around!
The government's first priority was low costs rather than high returns. Unsurprisingly, nobody wanted to do this kind of national service. The government position had a basis in logic, of course - costs are guaranteed, but returns are not, so keeping costs low is important. But if you pay too little, can you get any returns at all? And if you can get good returns, why complain about paying high fees?
It's the net returns that matter, not the fees you paid in the process. Who should you give money to, a manager charging 5% who earns you 20% net of fees, or a manager charging 0.5% who earns you 6% net of fees? The answer is obvious. I'm talking about managers with long-established records, of course, not wannabes who wave "projections" or "backtested results" in your face. And 5% is very rare even among the top managers. 1% and some sort of performance fee is much more common.
Funnily enough, the government has had no qualms about paying new ministers millions of dollars to attract and retain "honest and capable people" but balks at doing the same for established fund managers who would manage billions of dollars ($56bn in Ordinary Accounts as of Apr 2005) on behalf of millions of Singaporeans.
Bottomline: Don't expect anyone to invest your CPF for you. The government can't do it, and won't pay for those who can. You have to do it yourself.
4. HUGE increase of 1% in CPF interest rates
If you have any mathematical sense at all you will realize how laughable this is. If you will have a shortfall in your CPF money for retirement, compounding it at 1% more over 30 years will leave you with... a smaller shortfall! Either you'll run out of money a couple of years later, or the CPF will give you a bit more each month, enough for one extra bus ride a day, perhaps.
Calculate it yourself. The CPF Cartoon Booklet about this extra 1% mentions you can get "up to" $17,900 more. Here's news for you - when you are 62 in 30 years' time and the Minimum Sum is $156,600, $17,900 is an increase of just 11.4%. You will *still* be receiving a pauper's wage from the CPF.
If you have 5 times the Minimum Sum i.e. $783,000, then $17,900 is irrelevant. If you have much less than the Minimum Sum e.g. $78,300, such that $17,900 will make a big difference (22.3%), you will still be living in poverty.
Bottomline: This 1% is much ado about nothing. It makes basically no difference - if you will have enough money, it's not significant. If you won't have enough money, you still won't have enough money.
In the end, the burden falls back on ourselves. Since the government has cut the contribution rates via salary caps and matching percentages, all of us will have less money in our CPF over time. This reduced sum can only compound at 3.5%/5% if left with the CPF. This is not enough to safely beat inflation, let alone accumulate purchasing power. Therefore, we have to invest it ourselves, and wisely at that.
Furthermore, since there's less to start with, there will also be less to end with, which means we must also save aggressively and invest wisely with our cash savings, for CPF will surely be insufficient for retirement.
This will be true whether or not you buy a house. If you rent, your CPF will not be touched, but your cash will be drained. If you buy, your CPF will be drained, but your cash will not be touched. Since there are fewer investment choices for CPF versus cash, ALL THINGS BEING EQUAL (which they seldom are) it is better to buy a house with CPF and invest with cash.
This of course ignores the fluctuations in house prices, which will make a significant difference to net worth if you choose to buy. Buy low and you're way ahead for retirement, buy high and you're screwed for life. If you rent, it should average out over the long term, but then your investment choices for CPF money are very limited. Choices, choices...
As usual, YMMV.
Quote:
xinqundont trust all those insurance or financial analyst that sell you carrot of 5% return. I want to laugh. The most possible return are about 3% the most but hard to sustain that level too and you need to include the service charge they bill to you.If you have an income of $4k and below and have family , you can forget about retirement. It never exit and wake up. take care of your health and pray no major sickness.
I personally wouldn't be so negative. You have to do your homework with regards to unit trusts. The well-run ones can and do return 5-10% per year, sometimes more, sometimes less. But you should take a long-term view, ideally 10 years or more. If your time frame is short, and you trade in and out of the funds, your returns will be eroded by the sales charges.
In fact, at least one study in the US found that although mutual funds in aggregate earned something like 6-7% p.a. over the very long term (30 years), the investors themselves only earned about 3% p.a. due to excessive trading. In their trading, they paid sales charges multiple times, and very often they bought in bull markets and sold in bear markets, so they got most of the losses and very little of the gains. Buy-and-hold investors would pay sales charges only once, and while they got 100% of the losses, they also got 100% of the gains, so they came out ahead.
As for trying to retire while raising a family on $4,000 a month, I do not think it is impossible. If you are willing to lead a modest lifestyle now, you should still be able to set aside some savings each month. Wisely investing these savings should allow at least a decent retirement, certainly one better than what the CPF's payouts alone would imply.
IMHO a 10% savings rate should be achievable for anyone except those living below the poverty line. Anyone earning five figures monthly should be able to save 20%, and those in the six figure zone should be able to save 50% or more.
It's a matter of priorities. We all have to eat, but we can choose to eat at Lau Pa Sat instead of Lei Garden. We have to get to work, but we can choose to go by bus or MRT instead of by car. We have to wear clothes, but we can choose Giordano instead of Gucci.
Let's take the $4,000 per family case. Put aside $400 monthly, and invest it at 6% for 30 years. In 30 years, you will have $401,806. Compare this to the future Minimum Sum of $156,600. It's about 2.5x the Minimum Sum! Let's add the $17,900 from the bonus 1% to the Minimum Sum to get $174,500. Your investment assets are still 2.3x the new Minimum Sum amount. Clearly, this would support a MUCH better lifestyle than that from the Minimum Sum alone.
But is $576,306 (investment assets + Minimum Sum + $17,900) enough for a couple to retire on? Suppose we use the same drawdown rate as the CPF, which is calculated to last 20 years - $1,237 monthly from $156,600. So:
$576,306 / $156,600 * $1,237
= $4,552 pre-inflation, or $2,500 post-inflation
As you can see, this is not too bad at all. $2,500 per couple per month is not enough to travel continuously round the world, but it's sufficient for daily expenses and probably a modest holiday once or twice a year. Not rich, but certainly not poor.
Now let's suppose we save more aggressively and can manage a 20% savings rate i.e. $800 per month. We end up with $803,612. Together with the Minimum Sum and the bonus $17,900 we have $978,112.
This works out to $7,726 per month pre-inflation and $4,268 post-inflation. In other words, you can IMPROVE on your current lifestyle ($4,000 income) and quality of life if you are willing to save 20% of your income and invest it wisely.
Here's a spanner in the works: suppose you have NOTHING in your CPF because it all went to paying the house. Assuming you don't want to eat bricks, your investment assets will be all you have. What kind of lifestyle does that mean?
Invested nothing= you have nothing. Duh.
Invested $400/mth= $401,806 in assets
= $3,173/mth pre-inflation
= $1,753 post-inflation
Invested $800/mth
= $802,613 in assets
= $6,346/mth pre-inflation
= $3,506 post-inflation
Clearly, $1,753/month beats nothing, and $3,506 sure beats $1,753...
The data above also imply that WHATEVER you earn now, if you can invest $400 a month for 30 years at 6%, you can fund AT LEAST a $1,700/month lifestyle in retirement (assuming NOTHING from CPF). If you can invest $800/month, you can get AT LEAST a $3,500/month lifestyle
....and if you and your spouse EACH invest $800, together you can support a $7,000/month retirement lifestyle without problems. This would allow frequent holidays overseas, even for months at a time.
Note that although I assumed a 6% p.a. return, I also subtracted 2% p.a. for inflation, so the net real return was in fact only 4% per year. This is NOT demanding! It just requires some common sense when investing. Especially: don't trade your funds, and don't time the market. Either invest the same amount regularly, or invest less in bull markets and more in bear markets.
Bottomline: Save hard and invest wisely. The harder you save now, the easier you will live later. And yes, you CAN retire despite supporting a family on $4,000 a month.
Labels: q
posted by ikaira @ 12:10 PM,
,
Dying of a "broken heart"
It has been the stuff of great romantic novels and blockbuster films. Doctors have long suspected it. A study of 9000 British civil servants has at last established it is possible to die of a “broken heart”.
The study, reported in the Archives of Internal Medicine, found the stress and anxiety of hostile, angry relationships can boost the risk of developing heart disease. “A person’s heart condition seems to be influenced by negative intimate relationships/” researchers wrote. “We showed that the negative aspects of close relationships… are associated with coronary heart disease.”
Other research has shown more social connections can mean a healthier life – the “protective effect” – but few studies have looked at how close friendships or marriages affect health, said Roberto De Vogli, an epidemiologist at University College London, who led the study.
The researchers studied civil servants who completed questionnaires about negative aspects of their relationships with a spouse or close friend between 1989 and 1990 or between 1985 and 1988. The questions asked whether people had emotional support, a chance to talk with someone about problems or whether they could count on a partner or close friend for something as simple as a ride to the grocery store, De Vogli said.
The team followed up over a 12-year period and found that people who reported that arguments and other types of conflict were common had a 34 percent greater risk of heart attacks or chest pain.
It has been the stuff of great romantic novels and blockbuster films. Doctors have long suspected it. A study of 9000 British civil servants has at last established it is possible to die of a “broken heart”.
The study, reported in the Archives of Internal Medicine, found the stress and anxiety of hostile, angry relationships can boost the risk of developing heart disease. “A person’s heart condition seems to be influenced by negative intimate relationships/” researchers wrote. “We showed that the negative aspects of close relationships… are associated with coronary heart disease.”
Other research has shown more social connections can mean a healthier life – the “protective effect” – but few studies have looked at how close friendships or marriages affect health, said Roberto De Vogli, an epidemiologist at University College London, who led the study.
The researchers studied civil servants who completed questionnaires about negative aspects of their relationships with a spouse or close friend between 1989 and 1990 or between 1985 and 1988. The questions asked whether people had emotional support, a chance to talk with someone about problems or whether they could count on a partner or close friend for something as simple as a ride to the grocery store, De Vogli said.
The team followed up over a 12-year period and found that people who reported that arguments and other types of conflict were common had a 34 percent greater risk of heart attacks or chest pain.
posted by ikaira @ 11:47 AM,
,
finally, and like most cases eventually, things have gotten back to normal.
the tv's been fixed,
the monitor has been sent for servicing,
the 3 papers are over and done with,
all the small goals have been met.
so now, theres 2 months left to play, its time to start have fun. woot
posted by ikaira @ 12:50 PM,
,
