Priceless

Okay.. so i bought a new old car recently.. and I'm going to do a price comparism/cost analysis as to changes in costs.

I bought the car for X dollars, which is a SUNK cost, meaning that the cost will not be factored into the decision making process.

So, before I had a car, I had to trouble somoebody to give me a lift to the train station everyday, which does not entail a real cost BUT there is still an intrinsic economic cost to that someone's time and effort; no matter; we can assume this cost to be zero at the moment for simple calculation purposes.

And everyday, I would have to take the taxi from the train station back home. This usually cost me about 7-10 dollars. And there is the problem of waiting time as taxis may not be readily available at certain times of the night, which would translate to a cost - opportunity costs, and the intrinsic value of the waiting time.

To sum it up simply, pre car, the cost of getting to and back from the train station would be 10 dollars sans all the intrinsic costs.

Post car:
Weekly petrol: $50 (mostly used up on the weekends driving around)
I would have to say that getting to and from work would cost about.. 30dollars MaX? which would work out to 6dollars a day for 5 workin days(but i seriously think it is less thant $6).

Parking fees: $3 per day.

Total costs to get to n from the station: 3+6=$9
still one dollar ahead of pre car...

The option to drive all around as and when I want to:
PRICELESS

For everything else in life...

=D

Read also:
Option to ride
Option to ride II
Riding a bus Read more ...

Option to ride II

I wouldn't call it a problem, but I had a potential issue. I had to fork out a premium of RM$0.10 for the option to ride. To some "investors" (or LRT riders... haha..) it may seem like an okay deal because there is potential savings to be made for a 10cents initial payout. For more demanding 'investors' like me(Aka poor working man with no money!), well, I was always looking for a way to address this "issue". HAHA...

Okay... so the solution may have been obvious to many who have had experience living in Kuala Lumpur, but for me, it was the perfect solution in everyways! =D I discovered the wonders of.... Touch 'N Go! Huh what?

Well, in a nutshell, Touch 'N Go is a prepaid card system that can be used to take the train, pay highway toll, more recently, buy doughnuts from some donut place, very much like the EZ link card system in Singapore or cashcard system in many other countries.

Well, okay, no AHA moment there... but still, I was pretty happy to have found out about the Touch 'N Go system, saving me time and hassle, as I do not need to join the queues to buy a ticket nor suffer machine malfunction where your 10 dollar bill will get eaten up and you can't get a refund because the station staff 'do not' have access, and well of course because I don't have to fork out an extra 10cents should I not need to head down to Taman Paramount.

Of course, if you would want to discuss the time value of money of pre-paying money versus forking out the 10 cents at a later date. Well, I could and probably would put everything down on a timeline and give a detailed analysis on a later date, however, I can safely say that, the benefits would outweigh the initial outlay, and besides, the initial outlay is up to you as you can choose to top up your card with any amount above 5RM, so time value of money is not a big factor.

In every "investment", and when I say investment i refer to anything in life really, you not only have to weigh the pros n cons financially, but also the amount of work and time and effort you are willing to put in or save in order to achieve your goals.

So, my life example is all nice and good, but how could such a no cost option actually exist in the investment world?! Well... Actually... there is! hehheh... It's called a zero cost collar. Well it basically is a exotic derivative based upon a "the purchase of a put option and the sale of a call option with a lower strike price." (investopedia.com) Whats all this mumbo jumbo?! I think I'll have to go into them in another post... If not I have to write a realllly HUGE post. But basically, its a combination of two options to come up with a derivative that protects you from losses but also caps your earnings potential, basically a hedging tool.

So there you have it... Finance is every where in our daily lives! I hope you gleaned another piece of sense n cents from this... As follow up, I will do up an analysis of the payouts, talk more in depth about the different types of options, and update this post soon with collar options diagrams when I get back to my own laptop! And of course... I WILL do the hot air balloon soon! =D Read more ...

20,000 BC

The past 2 weeks have been frantic as I scrambled around Singapore getting my clients to invest their Central Provident Fund (CPF) before the 20,000 BC rule kicks in on April 1st. Once the 20,000 Be Cashed-into-government-coffers rule starts, one may not invest the first $20,000 of both the Ordinary Account and the Special Account.

Now I should probably mention that this post concerns Singaporeans and Permanent Residents of our wonderful republic and you should probably give it a miss if you have never heard of CPF (alternatively you can stay around and be amazed at the intricacy of the CPF scheme).

I will not go into the specifics and details and other boring stuff that I usually steer clear of but you can access them here: http://mycpf.cpf.gov.sg/
Instead this post is about what and how you stand to lose out after this rule kicks in or better known as opportunity costs.

Now what are the implications of 20,000 BC? For a fresh graduate, it could take 3 years or more to amass $20,000 in a single account before the spillover can be invested (assuming an annual income of $30,000).
The key to note is that the interest rates paid out by the CPF Board hardly hedges against inflation. The current rules in place already restrict investors to investments that charge minimal management fees and are generally less risky. At American International Assurance (AIA), funds labeled 'Adventurous' are mostly not allowed under the CPF Investment Scheme (CPFIS).

Yes, there are risks in investing but as a young graduate with more than 30 years of investment time horizon (before I reach 55), I am definitely missing out the chance to maximize my returns once my funds are locked in. The annualized yield of the AIA investment funds of the past 5 years averages at about 20%.

Alas the 1st of April draws nigh. If you have not invested your CPF yet, its probably too late to do it anyway (if you have less than $20,000 in your Ordinary Account or Special Account). The lesson to learn from this is that we should always be on the lookout for changes to investment regulations and financial tools to help us minimize our opportunity costs and maximize our returns.


This post reflects the author's views and is in no way representative of AIA or the CPF Board. Read more ...

Time value of money

To try to explain how financial instruments/institutions work, we have to cover one of the cornerstone of finance, Time value of money! Ever recalled how your parents nagged at you about how precious time was? Well, that basic principle applies here to investment and business... Warren Buffet fundamental investment relies on this too!

When you invest your money and gain dividends/interest payouts, risk factor aside, essentially these financial institutions are paying you for the time value of your money, ie, the lost opportunity of not being able to spend your money today.

The principal behind Time value is that one dollar received today is not the same as one dollar received some time in the future. A simple example would be putting your money in a bank for one month at an interest rate of 5%, if it is compounded monthly, your dollar savings would grow to a $1.05!

So the present value of that $1.05 future value, based on a 5% monthly interest would be $1.00. Assuming that is the only rate of interest in the market, and if someone were to offer to pay you back $1.04 in a month's time or $1 now, you would choose to have $1 today because you can put it into the bank and invest it at 5%.

You must be thinking.. "Ha! captain Obvious! This guy is nuts, anyone knows that!" How true! But putting some theory behind intuition, this very basic idea is the rationale behind all investments. Stocks valued using the dividend discount model and even options pricing model all require analyst to find the present value of all future forecasted dividends to perpetuity or the risk neutral value of options; which we will save for another discussion...

So for Mr Warren Buffet,a high powered investing mogul, he has a high opportunity cost because at any one time he would have lots of investment options to choose from and choosing one means having to forgo the next best.

Acknowledgement: image courtesy of Ernest von Rosen, www.amgmedia.com Read more ...