Sound Investing in Global Financial Crisis

By Peter Lim CFP, RFP

http://peterlim80.blogspot.com

About Peter Lim

• Started Financial Industry at early age of 21.

• 7 years experience in Loans, Insurance, Unit Trust, Will writing and Financial Planning

• Was a CFP lecturer for Module 5.

• Agency Manager – leading more than 50 Direct + Indirect agents for a Mutual Fund Company.

Personal Money Investment Game 2005

• Champion : Father-In-Law with 15.26%

• 3rd Runner-Up : Wife with 10.4%

• 5th Runner-Up : Peter Lim with 9.23%

Award winner for 2005 CFP Module 6 paper (Constructing a Financial Plan.)

Books about Value Investors

Books about Benjamin Graham / Valuation

Books about Warren Buffett

My Financial Books

Objective

• 5 Things to prepare before investing.

• Avoid costly investment mistakes.

• 7 Lessons for Sound Investing.– Learn which financial vehicle gives the

highest return over the long term.– How you can minimize risk (while maintaining

return).

1) Before you Invest, Prepare:

Live below your meansSet up emergency fund - (3 to 6 months

expenses)Don’t invest the money you need within 3

to 5 years.Pay off “Bad debts” Own a house (but doesn’t mean “paying

off the housing loans)

Difference between Good debts and Bad debts

0%

5%

10%

15%

20%

Housing Loan Car Loan Credit Cards

Effective Interest Rate

Current “Investment” - FD

New Investment Return

To Invest

Successfully

for the

Future,

Learn from the

Past

In 1926, If you had put $1,000 in each of the 4 investments below, 68

years later you’ll have:• Treasury Bills $ 11,680 (3.68%)• Government Bonds $ 28,360 (5.04%)• Corporate Bonds $ 40,340 (5.59%)• Common Stocks ?

$ 800,530 !! (10.33%)

(Source: 21st Century Investment, by Frank Armstrong)

Inflation Adjusted Returns from 1926 to 1993:

• Treasury Bills $ 1,430 (3.68%)• Government Bonds $ 3,480 (5.04%)• Corporate Bonds $ 4,940 (5.59%)• Common Stocks $ 98,100 (10.33%)

(Source: 21st Century Investment, by Frank Armstrong)

What if in 1926, your $ 1,000 earns these rates ?

Annualised Return Amount• 3.68% $ 11,680• 10.33% $ 800,530• 20% $ 242 Million• 30% $ 56 Billion• 40% $ 8.6 Trillion

Any “investments” that promises above 15% per year, should be screened with extreme caution.

3 Most Important Idea in Investing

Lesson 1• Common stocks (called as shares/

stocks/ equities) represents fractional ownership of a business.

• Over a long term, Common stocks gives the highest return, because you’ve got the company’s growth on your side.

• You’re a partner in a prosperous and expanding business.

Lesson 2

Risk

DECREASES

with time

Lesson 3

DiversificationReduces

portfolio fluctuation, while maintaining returns

(if both Assets earns the same returns)

How much should you Diversify ?

Which Path should you choose?

• 99% of the people who invest

• Extensively Diversify and not Trade

• Best option is a low-cost Index/ Equity Fund.

• Spread your purchases over time.

• 1% of the people who invest (or maybe less)

• Concentrate on the best 6 businesses.

• Should be willing to bring time, intensity end effort to the game.

• Believe that you can evaluate a business value better than the overall market.

The 1%1. Are you convinced to put at least 10% of your net worth

into that stock?

2. If the price drops by 30% since your purchase, will you get panic?

3. The price drops further to 50%. Are you convinced to buy more shares of the company?

4. When you monitor your investments, what do you “monitor”? Stock Price or the business performance?

5. Is reading annual reports your favourite past time?

Lesson 4For at least 99% of the people,

they are better off with a low cost Index/ Equity fund,

spreading their purchases over time than

choosing individual stocks.

Quotes from Benjamin Graham

"If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what's going to happen to the stock market."  

Quotes from Warren Buffett(in Berkshire Hathaway’s 1994 Annual Meeting)

“Charlie and I never have an opinion on the market because it wouldn’t be any good and it might interfere with the opinions we have that are good.”  

Lesson 5

• Forecasting the short term movement of the market is a Gambler’s game.

• Invest with a strategy, not guessing the direction of the market.

Emotions of a market “guesser”

Emotions of a passive investor

No emotions involved. Strictly disciplined Rebalancing

Recent Video of Warren Buffett(on 1st Oct 2008 in San Diego)

Lesson 6

• Be Fearful when others are greedy, and be Greedy only when others are fearful !

(In other words, he meant Sell when prices are High, and Buy when prices are Low)

Lesson 7: Time is money!

• Mr. Smart invest $ 1,000 per year for 8 consecutive years. After that, he never invest a single cent (and never withdraw anything).

• Mr. Procrastinate never invest anything for the 1st 8 years. After that, he invest $ 1,000 per year for 16 consecutive years.

• Assuming both person earns 10% on their investments, Who have more money at the end of 24 years?

Conclusion 1Before you invest:

Live below your meansSet up emergency fund - (3 to 6 months

expenses)Don’t invest the money you need within 3

to 5 years.Pay off “Bad debts” Own a house (but doesn’t mean “paying

off the housing loans)

Conclusion 2When you invest:

1. Over a long term, Common Stocks (or Equities) gives the highest return.

2. Risk reduces with time.

3. Diversification reduces portfolio fluctuation, while maintaining returns.

4. For 99% of the people, they are better off with a low cost Index Fund, spreading their purchases over time.

Conclusion 3When you invest:

5. Don’t forecast. Instead, invest with a strategy.

6. Be Fearful when others are greedy, and be Greedy only when others are fearful.

7. Time is money. Put time on your side!

Thank You

Questions &

Answers

Peter LimContact : 012 – 494 6124

Email: peterpmutual@yahoo.comWeb: http://peterlim80.blogspot.com