Friday, December 28, 2007

How to play Call Warrant?

When I told one of my friends that I was doing analysis on Call Warrants, he told me that it was better to go to Genting Highland to gamble using probability. Well, I did not agree with him as the following reasons:-

1. Most games in Genting Highland, you are playing against the house. The boss of Genting Highland might uses millions of dollars to hire experts to design a system to make sure that your chances of winning are greatly reduced.
2. On the other side, buying call warrants is you are playing against all ordinary people which I believe less than 30% are exactly know what they are doing. The rest are just the followers.

People say Call Warrant is a risky investment vehicle. There is no doubt it is risky when you buy it when you know nothing about it. It is more risky if you buy it when you have a little knowledge about it (A little knowledge is more dangerous than no knowledge).

In my opinion, to start off with the Call Warrant, you will need to understand a few basic things:-
1. Maturity/ Expire date for Call Warrant
2. Exercise price
3. Premium or Discount of the current Call Warrant Market price

Please refer to my other post for information (Malaysia Warrants and Call Warrants)

The above 3 items are the most basic that a Call Warrant player MUST understand. The next thing that someone needs to learn is his/her own risk appetite or risk tolerance. The rule of thumb:- Only invest the money that you can afford to lose.

For example, My friend and I bought SINOPEC-C1 2 weeks ago and we earn money from it. We came to the decision to buy after doing some analysis.
What we have done?
1. Comparing the Market price of Call Warrant and found it was at 3 cents discount.
2. We knew the maturity date was near (1 month)
3. We knew the mother share very well, it was an Oil and Gas company. So, we would expect that its price might be a bit volatile and the changes of the oil price might move the share price.

Our risk Tolerance:-
1. Since the maturity of SINOPEC-C1 was near, we will not give it much room.
2. The Mother share was HKD 11.98 at the time we bought the SINOPEC-C1 at RM0.23( 2 cents discount). We calculated our risk as below.
Refer to my other post on Intrinsic value of SINOPEC-C1,

The intrinsic value of SINOPEC-C1 should be as below:-
Let RM 1 = HKD 2.34.
Exercise price = HKD 9.00
Entitlement Ratio = 5:1
(HKD 11.98 - HKD 9)/ 5 /2.34= RM 0.2547 (Each of the warrants worth about RM 0.25, 3 cents discount).

We assume that the mother share will drop the day after we bought. What will be the price of the mother share if we were to break even on the Call Warrant.

RM0.23 = (HKD BE - HKD 9) /5 / 2.34
HKD BE = (RM 0.23 * 2.34 * 5) + HKD 9
BE = HKD 11.691

So, our break even point was at about HKD 11.70.
HKD 11.98 - HKD 11.70 = HKD 0.28 (2.34%), From here, we have the risk for the mother share to drop more than HKD 0.28 or 2.34%.

We have closely monitor the mother share of the day we bought and the next day and luck was on our side as the mother share was bullish on those 2 days. The oil price was going up also on those 2 days.

If you were to ask me how to play Call Warrant?
It is all depends on your Risk Tolerance and your Expectation of Return. In our SINOPEC-C1 case, we were able to have the risk for the mother share to drop HKD0.28 ( or 2 cents for each warrant) and we have expected to earn at least 3 cents (by exercise it).

In my next post on Call Warrants, I will compare some of the risky Call Warrants(out of money too much) and some Warrants which are near to their intrinsic values.

Intrinsic value for Sinopec Call Warrant (SINOPEC-C1)

Last 2 weekends, I tried to calculate the intrinsic value of APPLE-C1 and comparing with a few other call Warrants. I found out that there was one Call warrant (SINOPEC-C1) which was undervalued. The mother closing price on last 2 Friday was HKD 11.98 and the closing price from SINOPEC-C1 was 0.225.

My calculation is as below:-
Let RM 1 = HKD 2.34.
Exercise price = HKD 9.00
Entitlement Ratio = 5:1
(HKD 11.98 - HKD 9)/ 5 /2.34= RM 0.2547 (Each of the warrants worth about RM 0.25, 3 cents discount).

Initially I thought my calculation was wrong and I have double and triple checked on my formula and I found nothing was wrong. The next morning, I discussed with my friend on this and told him that I found this undervalued Call Warrant. Although the maturity date for SINOPEC-C1 was near(1 month from now), I told him that if we buy and straight away exercise we will earn 3 cents arbitrage profit from each warrant we have. Without much delay, he decided to give it a try and he bought 80k of Call Warrant and I said that I would share the profit and loss for 10% with him as that was his money. We bought the SINOPEC-C1 at RM0.23. Total = RM0.23 * 80k = RM18,400. We also checked the performance of mother share on that day and the mother share was going up exceed HKD 12 and the intrinsic value of the warrant became about RM 0.255. Shortly after we bought, the price of the SINOPEC-C1 went up to RM 0.26. We believe that that was the moment people realized about the intrinsic value of SINOPEC-C1. We were so lucky to buy the Call Warrant before other people realized about it. We already earned 3 cents from it on that day.

The next day, the Hong Kong market was Bullish and Sinopec was going up again, the intrinsic value for SINOPEC-C1 was going to RM 0.265 and my friend called his dealer to try to queue the selling the Call Warrant at RM0.275. We could not believe that during the trading hour, the mother share went up to HKD 12.40 (up 40 cents) on that day and the intrinsic value for Call Warrant went up to RM0.29 and our sale has been matched. However, the mother share closed at HKD 12.18 on that day and the intrinsic value of the SINOPEC-C1 was about RM 0.27.

We were happy as we made contra profit of RM 3.3k after deducting all the charges. We made RM3300/RM18400 * 100% = 17.93% in 2 days. Not Bad!

My Trades on 28 December 2007

I had many good trades on 28 December and only a few small losing trades.

Name of the Company: AMR Corp
Symbol: (NYSE: AMR)
Sector: Transportation
Industry: Airlines
Position: Short
Status: Success!

Short AMR Corp ChartReason: Dow was positive but I saw that Airlines Index was negative and some airlines were coming down. AMR seemed to continue yesterday's downward trend. I took profit when I think that it has made a major move.

Name of the Company: Northwest Airlines Corp.
Symbol: (NYSE: NWA)
Sector: Transportation
Industry: Airlines
Position: Short
Status: Success!

Short Northwest Airlines ChartReason: Following the AMR trade, I saw that NWA has good downward trend, I shorted it and took profit when it was near the $14 figure as I afraid it would bound back. It did bound back HARD after broke through $14 and touched the low of the day at $13.91

Name of the Company: Bricker International Inc.
Symbol: (NYSE: EAT)
Sector: Services
Industry: Restaurants
Position: Short
Status: Success!

Short Bricker International ChartReason: Dow looked weak and it was almost negative, EAT had good downward trend. I shorted and took profit quick as it was still a low volume market

Name of the Company: General Motor Corporation
Symbol: (NYSE: GM)
Sector: Consumer Cyclical
Industry: Auto & Truck Manufacturers
Position: Short
Status: Success!

General Motor ChartReason: Toyota Took away market share from GM, it had downward trend on 27 December 2007 and it continued again on 28 December.

GM happened to be my biggest winner of the day, although it has made a major move in the morning, it was still in a good downward at about 11:45pm until the low of the day at 12:45 pm. I shorted GM and sized in when I saw the trend was good.

Name of the Company: Sovereign Bancorp Inc.
Symbol: (NYSE: SOV)
Sector: Consumer Financial
Industry: S&Ls/Savings Banks
Position: Short
Status: Success!

Short Sovereign Bancorp ChartReason: My colleague shorted this share and I saw that it was in a good downward trend and it has spiking volume before I got it. I took a quick profit from it at the point it started to change trend

*Please be informed that all the charts above are extracted from

My Trades on 27 December 2007

I had 2 good trades and 2 losing trades on 27 December. So, I just earned a little bit over the break even point.

Name of the Company: AMR Corp
Symbol: (NYSE: AMR)
Sector: Transportation
Industry: Airlines
Position: Short
Status: Success!

Short AMR Corp ChartReason: Oil price was up and most airlines share were dropping, I saw AMR had better trend

Name of the Company: General Motor Corporation
Symbol: (NYSE: GM)
Sector: Consumer Cyclical
Industry: Auto & Truck Manufacturers
Position: Short
Status: Success!

Short General Motor ChartReason: Toyota took away market share from GM.

Name of the Company: American Eagle Outfitters Inc.
Symbol: (NYSE: AEO)
Sector: Services
Industry: Retail (Apparel)
Position: Short
Status: Failed

Short American Eagle Outfitters ChartReason of losing: It was initially in a good downward trend but it bounded back when I shorted, my timing of shorting was not right. It had make a major move.

Name of the Company: Mbia Inc
Symbol: (NYSE: MBI)
Sector: Financial
Industry: Insurance (Property and Casualty)
Position: Short
Status: Failed

Short Mbia Inc ChartReason of losing: It was in a good downward trend, I shorted MBI when more people wanted to take profit so I was hurt in this trade

*Please be informed that all the charts above are extracted from

Thursday, December 27, 2007

My Trades on 26 December 2007

26 December was another slow market day and it was a good day to short the Retail stocks. Belows were some of my trades on that day.

Name of the Company: Circuit City Stores Inc.
Symbol: (NYSE: CC)
Sector: Services
Industry: Retail (Technology)
Position: Short
Status: Success!

Short Circuit City Stores ChartReason: Retail index was in negative and CC was weak

Name of the Company: Family Dollar Stores
Symbol: (NYSE: FDO)
Sector: Services
Industry: Retail (Specialty)
Position: Short
Status: Success!

Short Family Dollar Stores ChartReason: Most retail were down, FDO was in good downward trend but I took profit too quick

Name of the Company: Payless Shoesource
Symbol: (NYSE: PSS)
Sector: Services
Industry: Retail (Apparel)
Position: Short
Status: Success!

Short Payless Shoesource ChartReason: I shorted PSS and put a STOP at $17.53 but it never triggered. I took profit before it bounded back

*Please be informed that all the charts above are extracted from

Tuesday, December 25, 2007

Why I choose Apple Call Warrant?

I have missed the opportunity to subscribe to Google Call Warrant which was listed on 14 November 2007. Since then, I asked my Remisier to alert me if there is any good Call Warrant that will be listed in future. On 27 November 2007, my Remisier called me and let me know that there were 4 new Call Warrants that will be listed on 11 December 2007. The closing date was 27 November 2007 (4 pm) and I must deposit money to buy on that day. There are 2 Call Warrants that drew my attention which were: Apple Call Warrant and Exxon Mobil Call Warrant.

I used some time to do my own research on these 2 Call Warrants and below are some comparisons that I made during that day.

Underlaying ShareApple Inc. (Nasdaq:AAPL)Exxon Mobil Corp. (NYSE:XOM)
Entitlement Ratio1200 Warrants to 1 Share500 Warrants to 1 Share
Exercise PriceUSD $171.50USD $86.00
Issue PriceRM0.11RM0.09

At the first glance, Apple Call Warrant seems like more expensive than Exxon Mobile Call Warrant as it has higher Premium and the issue price for Apple is 2 cents more than Exxon Mobile.

I did some simple calculations as below:-
(Let Currency conversion USD $1 = RM 3.33)

Underlaying ShareApple Inc. (Nasdaq:AAPL)Exxon Mobil Corp. (NYSE:XOM)
Entitlement Ratio1200 * RM0.11 / 3.33 = $39.64500 * RM0.09 / 3.33 = $13.51
Exercise Price$171.50$86.00
Total Amount$39.64 + $171.50 = $211.14$13.51 + $86.00 = $99.51
Market Price on 26 November 2007$172.54$85.68
The difference$211.14 - $172.54 = $38.6$99.51 - $85.68 = $13.83
Percentage difference$38.6 / $172.54 * 100 = 22.37%$13.83 / $85.68 * 100 = 16.14%

From the table above, I learned that for the Apple Call warrant to have the value of RM 0.11, the Apple share needs to increase by $38.6 or 22.37% within 7 months while for Exxon Mobil Call Warrant to have the value of RM 0.09, the Exxon Mobil share needs to increase by $13.83 or 16.14% within 7 months. If looking for the calculation perspective, most people will choose to buy Exxon Mobil Call Warrant.

I was pondering for a while on my calculation and I decided to look at the technical analysis of both the shares.

apple 26nov07
The above was the Apple Chart that I saw on 27 November 2007. The share price was consistently stayed above the 144 Moving Average and it rarely touched the 55 21 Moving Average. To me, it is a very strong Stock.

exxon 26nov07
The above was the Exxon Mobil Chart that I saw on 27 November 2007. The share price was volatile and I think that the share price is heavily depends on the oil price. I did a quick search on for any news on the oil price and I found that Saudi Arabia Saudi oil minister, convinced the rest of Opec to agree an output increase of 500,000 barrels a day, as a contribution to the world’s economic stability. This news might not be good for Exxon Mobil.

As a result from that, I also knew that Apple has many strong products like IPod, IPhone and most importantly the Christmas Day is coming soon! The strong revenue on December could bring the Apple share to the new High which I would expect it to break the Natural Resistance at USD $200. I have decided to buy Apple Call Warrant on that while while my Remisier told me that most of his clients chose Exxon Mobil Call Warrant.

I have a strong feeling that I will be Right. The moment of truth will be in the next few months. I will keep posting update on this.

Google Call Warrant (GOOGLE-C1)

IssuerOSK Investment Bank Berhad ("OSK")
Underlaying ShareGoogle Inc. (Nasdaq:GOOG)
Entitlement Ratio3000 Warrants to 1 Share
Listing Date14 November 2007
Expiry Date7 Months (6 June 2008)
Exercise PriceUSD $680.00(100.4% of the Reference Price)
Issue PriceRM0.11
Reference PriceUSD $677.07
SettlementCash Settlement [Cash Settlement Amount = (Settlement Price – Exercise Price) / 3000 – Exercise Expenses]

Exxon Mobil Call Warrant (EXMOBIL-C1)

IssuerOSK Investment Bank Berhad ("OSK")
Underlaying ShareExxon Mobil Corp. (NYSE:XOM)
Entitlement Ratio500 Warrants to 1 Share
Listing Date11 December 2007
Expiry Date7 Months (3 July 2008)
Exercise PriceUSD $86.00(98.90% of the Reference Price)
Issue PriceRM0.09
Reference PriceUSD $86.96
SettlementCash Settlement [Cash Settlement Amount = (Settlement Price – Exercise Price) / 800 – Exercise Expenses]

Apple Call Warrant (APPLE-C1)

IssuerOSK Investment Bank Berhad ("OSK")
Underlaying ShareApple Inc. (Nasdaq:AAPL)
Entitlement Ratio1200 Warrants to 1 Share
Listing Date11 December 2007
Expiry Date7 Months (3 July 2008)
Exercise PriceUSD $171.50(97.97% of the Reference Price)
Issue PriceRM0.11
Reference PriceUSD $175.06
SettlementCash Settlement [Cash Settlement Amount = (Settlement Price – Exercise Price) / 1200 – Exercise Expenses]

My Trades on 24 December 2007

Name of the Company: Delta Airlines Inc.
Symbol: DAL(NYSE)
Sector: Transportation
Industry: Airline
Position: Long
Status: Success!

Long DELTA AIR LINES ChartReason: Dow was strong, Airline Index was positive, most airlines were hitting High.

The market opened strong on 24 Dec but I expected it would be a low volume market as it was Christmas Eve. I Longed DAL because I think that DAL had more rooms to go up comparing with other Airlines like CAL and AMR which have already made a major move. I was right and I sized in 2 times(shown in chart) and put a tight STOP to secure my profit.

This was just another of my decent positive day, nothing big towards the end of the half day Trading. Stock market closed at 1 pm.

*Please be informed that all the charts above are extracted from

Monday, December 24, 2007

My Trades on 19,20,21 December 2007

I have not been doing well on these 3 days.
Here are some of my trades:-

Trades on 19 December 2007

Name of the Company: Circuit City Stores Inc.
Symbol: (NYSE: CC)
Sector: Services
Industry: Retail (Technology)
Position: Short
Status: Failed

My entry point as below:-
Short Circuit City Stores ChartCC has been a weak stock for some time and it opened lower on 19 Dec compare with the previous day. After market opened for about 5 minutes, I shorted the stock. I earned some money in the beginning but after about 8 minutes, the stock just rally up in front of my face and I was hurt and got out from CC.
This has taught me not to enter a position once the market opens, I should have waited for at least 15 minutes before entering a position.

Name of the Company: Amdocs Ltd
Symbol: (NYSE: DOX)
Sector: Technology
Industry: Software & Programming
Position: Long
Status: Failed

Short Amdocs Ltd ChartReason: It was upgraded to BUY on that day.
After I got out from CC, I found this stock kept on hitting my HIGH filter. I entered the long position for this stock and it went on my way and then I sized in and put a stop to secure some profit.
After a while, it triggered my STOP but I got a Bad print as there was a spread between BID and ASK and I lose money in this trade.

Trades on 20,21 December 2007
My trades on 20 and 21 were not too bad compare with 19. But still, I lose money on these 2 days.

*Please be informed that all the charts above are extracted from

Malaysia Warrants and Call Warrants

I have involved in Malaysia Stock Market for sometime but I did not trade actively. Comparing with NYSE, Bursa Malaysia is a relatively small market and people say that it can be easily manipulated by some fund managers. Therefore, some serious investors in Malaysia only invest their money in Blue chip companies. Well, Learning USA market is my major focus as I think that USA market is more efficient compare with Malaysia Market. But I will still look into Malaysia's market to improve my general knowledge and to look for good opportunity to invest in some good stocks or products.

Recently, I did a research on Warrants and Call Warrants in Malaysia Market. Some people without much knowledge on the Warrants would say that it is risky to buy Warrants or Call Warrants. Actually I think that it is an interesting product that you need to spend sometime to understand before buying and the return could be many times greater than the ordinary share. It is only risky if you do know what you are buying. For your information, Malaysia Market does not allowed short selling, so, there is Call Warrants but not Put Warrants in Bursa Malaysia.

What are Warrants or Call Warrants?
Basically, these Warrants and Call Warrants are mainly for investors to have more choices in deciding their investment. These 2 products give the holder the right but not the obligation to subscribe a specific number of ordinary shares(Mother shares) at a specified price within a specific period.

Differences between Warrant and Call Warrants are as below:-

WarrantsCall Warrants
Maturity DateLonger(up to 10 years)Shorter(up to 2 years)
Issued CompanyThe Company itselfThird Parties

These 2 product must be exercised on or before the maturity date, if not it will expire and becomes worthless.

There are 2 categories of warrants:-
a. American-style - Warrants can be exercised at any time until the maturity date.
b. Europeans-style - Warrants can be exercised only at the maturity date.

As far as I know, there are 2 different types of settlement of warrants:-
a. Cash settled - you will get cash after you exercise the warrants
b. Share settle - you will get the mother shares after you exercise the warrants

Tuesday, December 18, 2007

My Trades on 18 December 2007

Today the DOW JONES opened positively and it just took a while to rally up and stayed between +50 to +80 level before 12 pm. I was looking for a strong stock to Long and I found DIS.

My best trade for today was

Name of the Company: Disney (Walt) Co
Symbol: (NYSE: DIS)
Sector: Services
Industry: Broadcasting & Cable TV
Position: Long
Status: Success!

Long Disney (Walt) ChartReason: It has been mentioned positively in Barron and it is upgraded by UBS to BUY.

I Long the DIS at $33.06 then it went against me and I sized out part of my shares. After waited for some time, DIS slowly climbed up. I sized in some shares and put a tight stop when it broke through Natural Resistance at $33.25 and I got out at $33.28 which was almost the high of the day.

*Please be informed that all the charts above are extracted from

Monday, December 17, 2007

My Trades on 17 December 2007

2 good trades that I have made today were BMC and MU.

Name of the Company: BMC Software Inc
Symbol: BMC (NYSE)
Sector: Technology
Industry: Software and Programming
Position: Short
Status: Success!

BMC software came out in the Barron Report as the following link, so I have included the stock inside my quote board.

BMC Software Set for Fatter Margins
Word Count: 413 | Companies Featured in This Article: BMC Software, International Business Machines, CA

BMC Software (BMC: NYSE) By Credit Suisse ($35.30, Dec. 13, 2007)

WE ARE UPGRADING BMC Software from Neutral to Outperform and raising our target price to $41 from $34, based on an improving mainframe-software-pricing environment, our expectation for growth in mainframe software over the next several years, the upcoming release of the next generation of International Business Machines mainframe hardware, as well as the opportunity to expand operating margins above consensus expectations.

Our channel checks suggest that CA and BMC have experienced more pricing ...

When the market opened, BMC was dropping in a nice downward trend ( even through it was upgraded). So, I have decided to short the stock and gave it a try. The stock just kept on sliding down and I have shorted more. When I was in the money, I put a tight stop at around $35.15 in case other people wanted to take profit or the trend reversed. It triggered my Stop and it went down further to $34.71.

Short BMC Software  Chart

Name of the Company: Micron Technology
Symbol: MU(NYSE)
Sector: Technology
Industry: Computer Storage Devices
Position: Short
Status: Success!

The next Trade was MU. Before I traded MU (MICRON TECHNOLOGY), I knew that it will announce its earning on coming Thursday after the Market close. When I first took a look at the stock, it was about 10:30 am. I was not happy as I missed out the downward trend in the morning. So, I just shorted 100 shares to try it out. After I have shorted, my boss shorted more shares and I just followed him to short more shares on MU. We waited for some time as it was consolidating at the figure ($8) and after a while when there was not more buy pressure, it just tanked and we slowly sized out to take profit from MU.

Short Micron Technology Chart

News on MU at 11:56am I know that I was part of the traders who have shorted the stock!

*Please be informed that all the charts above are extracted from

Sunday, December 16, 2007

How an IT Manager feels about Investment

Some time ago, I had a chance to meet an IT manager of a multinational company. I had a short discussion with him on Investment. He is late 30 and he just started to learn to invest in stock market. He told me that it is very important to learn investment and he is now learning investment so that his investment could prepare him for retirement. When I told him that I am from IT background and I just changed my career to Investment line and he said that he should have followed my footstep 10 years ago. He told me also that staying in IT line could only prepare him as a salaried worker, while working in Investment line, he could start his own business by helping other people to invest - Fund management.

Actually what he said is exactly what I am preparing for. I have taken a big step by changing my field from IT to Investment. I have let go a lot of things:- my working experience, my achievements in IT and even my qualifications in IT. My parents and sibling were against my decision at first. But when they saw that I am really serious about this and understand my reasons of changing field, then only they slowly accepted my decision. Most of my friends were surprised at first when learning about my decision. I am not sure how they think about my decision. May be they think that I am brave enough to do so or may be some of them think that I am stupid to let go so many things. Anyway, I am the only who will take control of my own life, so, I will not let other people's thoughts affect my decision. What I am sure is that they will see my achievements in investment after a few years.

What I need to do now is focus on building my foundation in Investment. Learn as much as I can in as short time as possible, push myself to complete 2 papers of CFA in 3 years time and another paper in another 2 years. Hopefully about 5-10 years down the road, after I complete me CFA, I could become a fund manager.

Update on 5 April 2008:- I have involved in Investment industry for more than 6 months. I have seen people with CFA but they are not as successful as I thought before. I am now a full time Equity Trading Analyst and I have seen people without CFA that are very successful as they really have a wide knowledge about the market and they earn a lot of money from the stock market. This made think that CFA might not be a necessity to be successful in this line. I am still considering on taking CFA. I might take it just to gain more knowledge.

Saturday, December 15, 2007

Einstein IQ Test Answer

The answer is German. If you got the right answer: Congratulations! You are the top 2 % smartest people in the world. If not, you may try again or use the following table to help you get the answer.

Yellow Blue Red Green White
Water Tea Milk Coffee Beer
Dunhill Blend Pall Mal Prince Blue Master
Cats Horses Birds Fish Dogs
Norwegian Dane Brit German Swede

Einstein IQ Test

Below is a quiz written by Einstein last century. He said that 98% of the people in the world cannot solve the quiz. Are you among the other 2%?
  1. There are 5 houses in 5 different colours
  2. In each house lives a person with a different nationality..
  3. These 5 owners drink a certain beverage, smoke a certain brand of cigar and keep a certain pet.
  4. No owners have the same pet, smoke the same brand of cigar or drink the same drink
  1. The Brit lives in a red house.
  2. The Swede keeps dogs as pets.
  3. The Dane drinks tea.
  4. The green house is on the left of the white house.
  5. The green house owner drinks coffee.
  6. The person who smokes Pall Mall rears birds.
  7. The owner of the yellow house smokes Dunhill.
  8. The man living in the house right in the centre drinks milk.
  9. The Norwegian lives in the first house.
  10. The man who smokes Blend lives next to the one who keeps cats.
  11. The man who keeps horses lives next to the man who smokes Dunhill.
  12. The owner who smokes Blue Master drinks beer.
  13. The German smokes Prince.
  14. The Norwegian lives next to the blue house.
  15. The man who smokes Blend has a neighbour who drinks water.
The question for the Einstein test is ... WHO KEEPS THE FISH?
The answer is here.

Friday, December 7, 2007

Financial Quotient (FQ)

I guess every one knows what is Intelligence Quotient (IQ) and may be some of you know the meaning of Emotional Quotient (EQ). But does anyone know what is Financial Quotient (FQ)?

Basically, Intelligence Quotient (IQ) is to measure the intellectual of a person in solving problems especially in Mathematics related problems. It was first used about 100 years ago by Alfred Binet to identify students who needed special help in coping with the school curriculum. Since IQ first appeared, it has been evolved to many forms. There are many IQ tests that you can find from The Internet and some of them are just for entertainment purpose. I found an interesting IQ test designed by Einstein, you might want to try it out (Einstein IQ Test).

Next, Emotional Quotient (EQ) or Emotional Intelligence (EI) was first used in 1985 but it was only popularized after Daniel Goleman published his best seller book "Emotional Intelligence: Why It Can Matter More Than IQ" in 1996.

Goleman's model outlines four main EI constructs:
1. Self-awareness - the ability to read one's emotions and recognize their impact while using gut feelings to guide decisions.
2. Self-management - involves controlling one's emotions and impulses and adapting to changing circumstances.
3. Social awareness - the ability to sense, understand, and react to other's emotions while comprehending social networks.
4. Relationship management - the ability to inspire, influence, and develop others while managing conflict.

There are debates that EQ is more important than IQ which I am agree with. I personally know a guy with very high IQ ( he scored CGPA of 3.99 in University) but his EQ is very low. He can easily become angry over small things and can easily get insulted when people make joke on him.

Since IQ and EQ are not the main subjects in my post, I leave them for you to explore on your own.

Financial Quotient (FQ)
It is a new phrase that I could not even find its meaning from Wikipedia. Financial Quotient is about the intelligence on managing your money, income, expenses, investment and just anything else that involves money (eg: Mortgage payment, Credit card interest, housing loan, study loan, income tax, insurance and more).

Some common questions that may come across your mind daily.
1. Should I rent a house or buy a house and get a loan?
2. Should I buy the $1 million house or the $500k house?
3. How much housing loan should I take and how much should I pay every month?
4. Should I spend using credit card? Should I pay in full for credit card debt before month end or pay it slowly?
5. Should I pay the study loan at once after I graduated? or should I pay it slowly every month.
6. Show I change to a better pay job but less free time spent for family? or stay in a job that has less pay but have more free time for family and have time to plan for my own business?
7. Insurance Policy A or B is better to prepare for retirement?
8. How much income tax should I pay?

My answer for question 5: I have 2 study loans, one has been converted to scholarship and the other I am paying very little amount monthly as it has very low interest (3% pa),

My answer for question 6: I prefer a low pay job so that I have more free time to think of any opportunity for me to start up my own business and use my free time to learn more about investment.

My answer for question 7: At the moment, I have only Personal Accident Insurance Policy. I am still considering to buy another insurance (Investment-linked Life Insurance Policy).

I do not have answer for the other 5 questions. The reason is I am just graduated from university about a year ago, I am not buying any house at the moment, I do not have credit card yet and my income is not enough for me to declare income tax. But I know that I will have to answer all the above questions not far in the future, so I am now preparing myself for them and this is also the purpose I create this blog and share my journey in improving my Financial Quotient and achieving Financial Freedom.

I found one self Assessment about ones Financial Quotient (FQ), it is call Wheel of Financial Freedom. It is using 10 criteria (Debt, Retire, Reserves, Save, Budget, Taxes, Financial Plan, Career, Worth, Will) to assess how financially free is a person. I personally think that the criteria are good but the scoring system is not clearly defined. I tried to e-mail the author but my e-mail bound back due to "Mailbox quote exceeded" and I think the web site has not been updated for a while (may be since year 2003).

I also found another Financial Quotient test over here. If you want to, after you have done the test, just send in comment and let me know your score.

Saturday, December 1, 2007

What is Financial Freedom?

What is Financial Freedom?
To me, Financial Freedom is when you earn enough that you are able to live a comfortable life. Everyone has different definitions of "Comfortable Life". Some people want to own luxurious car and house. Some people want to have more than $ 1 million of cash and asset. Some people would like to earn enough so that they can do something else that they like which need some fundings (eg: George Soros). His initial intention to establish his own private investment company was to earn enough money to support himself as an author and philosopher (please see under Move to United States in Wikipedia). Some people simply want to become Financial Freedom because they think that this is the only way of living.

As per Wikipedia definition of Financial Freedom, Financial Freedom describes a well-planned lifestyle where one no longer is required to work for income to cover their expenses. It also states some popular routes to achieve Financial Freedom are Real Estate Investment, Internet Marketing, Trading and Owning a Business System. Out of these 4 routes, some of them might need a large amount of initial capital to kick start. One might has higher risk compare to the other.

My opinion on the popular routes to achieve Financial Freedom:-

1. Real Estate Investment
Basically, it is about buying properties not for own use but lease or rent out the properties for a good rental. People who invest properties normally do not have enough money to actually buy them. They have to pay the down payment for the property and get a loan from bank or lending institution to pay for the rest. Then in future, they slowly pay the loan (including the interest) back to bank.

Example 1 (no down payment) :
A house is selling at $200k
Down payment : 0%, $0k
Loan: 100%, $200k
Interest rate: 5.75%

Monthly payment: $1167.15 (for 30 years)

Example 2 (10% down payment) :
A house is selling at $ 200k
Down payment : 10%, $20k
Loan: 90%, $180k
Interest rate: 5.75%

Monthly payment: $1050.43 (for 30 years)

Normally people, who invest in properties, have the thought that they are able to rent out their properties. The owner of the house in example 1 and 2 might want to rent out the house for $1400 per month, so that he/she are able to earn some money from the properties and after 30 years he/she can own the house while other people are helping him/her to pay for it.

However, it may be too optimistic to think like this as many things need to be considered before starting to invest in real estate (eg: location, price of the house and the likelihood to appreciate in future, interest rate, demand vs supply of the properties, terms and conditions of loan and more). Invest in real estate without a proper research will pay a high price as real estate is not liquid. You can not convert the real estate to cash overnight. Credit crunch is now happening in United States because financial institutions lend money to people who have bad credit. They invest the money in real estate and they are not able to pay the loan back. Thus, the loans turns to bad debt and most financial institutions are getting kill because of this. I will discuss this topic further in another post.

2. Internet Marketing
As contrast with real estate investment, internet marketing needs lower capital to kick start. With the easy access to The Internet nowadays, many new business models by using The Internet are mushrooming. Internet Marketing can be categorized into large-scale(run by a big organization) and small-scale (run by anyone from maybe 8 years old to 80 years old). eBay is one of the very successful large-scale Internet marketing websites. Although eBay is a large-scale Internet Marketing website now, it was all started from small-scale by Pierre Omidyar. The success of eBay makes him the 76th richest person in the world as of 2007. On the other hand, setting up a Small-scale Internet Marketing might need platform from large-scale Internet marketing website. For example, a trader in eBay. He buys/sells things on eBay.

Example of large-scale Internet Marketing Websites:
1. Marketing it products primarily books
2. (Google Adwords)- Offering to advertise for some companies
eBay - Offering a platform for people to trade among themselves

Examples of small-scale Internet Marketing:
1. Use eBay to buy low and sell high
2. Put on advertisement on your personal website/blog and earn money from each clicks on the advertisement (eg: Google Adsense). Please click on "Generate revenue from your site with Google Adsense" on the top right if you would like to register for Google Adsense"
3. Create a website/forum for a particular interest group (eg: anime - Naruto)

There are so many different ways to do Internet Marketing as The Internet offers unlimited of resources and it connects people from every part of the world. You just need to turn your brain on to think of a unique business model and start from there.

I found one interesting article on The Ten Keys to Success on eBay, this information might be useful for someone who wants to start learning how to do Internet Marketing on eBay.

Please be aware that there are some hoax Internet marketing websites especially the business model is Multi-level Marketing like or Pyramid Scheme like. Please do your own research on the web sites before joining them.

3. Trading
I believe that the term "Trading" here includes investing. If a person who has a high salary job (eg: $10k per month), after minus all the expenses ($7k), where should him put his excessive money ($3k)? Saving account ? fixed deposit account? Invest the money in Bonds/Stocks? People with low Financial Quotient(FQ) might put the money into saving account or fixed deposit account as he thinks that it is safer to do so. But the truth is putting the money into saving/fixed deposit has some risks(eg: inflation risk). If the saving account has interest rate of 1% per annum, the inflation on that year is 3.5%, he actually loses 2.5% of time value of money.

If you do not know what is inflation or what is time value of money, it is not too late to start learning from now. It is very important for everyone to understand these terms because we need to deal with money every day.

To achieve Financial Freedom, you will need to learn to make your money gains the compounding interest rather than putting money into saving account (eg: interest rate of 1 %) or fixed deposit
(eg: interest rate of 3.5 %). To make your money gains the compounding, there are many different ways. I shall discuss more in another post.

4. Owning a Business System
Other than the Internet Marketing that has been discussed, you might want to start up your own business to achieve Financial Freedom. But here, you need to invest a large capital and it takes some time before you can see a positive cash flow. A well plan of budgeting is very important to determine a success or a failure of your business.

1. Open a restaurant
2. Setup a consulting firm
3. Open a business to sell products

In my opinion, out of the four
popular routes to achieve Financial Freedom, there are 2 routes which I think anyone can easily start off - Internet Marketing and Trading/Investing.

These 2 routes require very little capital to kick start but one needs to put some efforts and self disciplined in learning them before he can achieve Financial Freedom.

How I come to this point of life?

Poor Family
I was born in a poor family. My parents were hawkers then and we were living in a rented house. The only transportation that we had at that time was a motorcycle. The life has not been easy and I remembered that my mother always had tears in her eyes due to uncertainty of future. Sometimes, during rainy session, there were less customers and our life became tougher. Still, my parents tried to give us( my 2 elder sisters, my elder brother and me) the best food they could provide but they themselves barely ate anything because they wanted to save some money.

Mathematic Lesson
I learned my first lesson of mathematic from my parents' fruits and juice stall. I was about 3/4 years old at that time and I was my parents' best helper. Sometime, I helped to take care of the stall alone and I could remember the prices of the food and knew how to count and to give the exact change back to the customers. Nothing could be better for a 3 years old kid to learn this real life "Practical Mathematics Lesson".

Things that I learned
Actually later in life, my experience going through a tough life gave me a lot of advantages comparing with my peers . My thinking has been more mature as I know the feeling for being in a poor family. Unnecessary spending is a no no to me. I possess the spirit of Working hard and determination from my parents. And of course, I also learned my first Mathematic Lesson. :-)

Some Small Achievements in the past
I have won a few Mathematic Awards(school level) during primary school and have been selected to compete in state level(never win any prize though). I was a straight A students for all Mathematics subjects during secondary school and University. I work my butt off when I was in university and I was placed into the Dean's list every semester. After graduated, I was offered to convert my university loan to scholarship. During my University's convocation, I was awarded a Gold Medal Award and a Book Award. These few small achievements helped me to give me some motivations to move on my life. Now, I am looking forward to achieve something in the Investment Industry.

To Wrap Up
My parents have gone through a tough life since they were young because their family were poor and they did not have chance to exposure to higher education. Therefore, they always advised us to study hard for a better future. I personally believe that education is very important to secure a good pay job. But education does not teach us how to earn and live a comfortable life (in other word: Financial Freedom). Many people might have very high IQ (Intelligence Quotient) or EQ (Emotional Quotient) but not FQ (Financial Quotient). [Blog about FQ is coming soon]

People who has high level of education(IQ) normally only live pay check to pay check. They only know how to work hard for money and do not know how to make money work for them. Most of the money they earn are used to pay debt, while they should have pay themselves first.

I believe that learning how to diversify your incomes, minimize your living cost and invest your money are some important skills that you would ever need to learn in your live if you want to become Financial Freedom. I hope that this blog will give some people a good starting point in learning how to become Financial Freedom. Please enjoy my blog and please feel free to give me comments so that I can further improve on my blog. Thanks.

Please click on Financial Freedom if you would like to to know more about it.