by Alvin on February 8, 2010
I believed you have heard of many versions of the story about 2 monks. No? Let me refresh your memory, and explain to you how it is applicable to trading.
There were two Buddhist monks walking along the bank of a river, making their way to back to the temple.
As they were walking, they came across a beautiful lady standing at the side of the river. She stopped them and asked if one of them is willing to help her across the river. The junior monk did not bulge but the senior monk without any doubt, carried her on his back and across the river. The senior monk put her down on the other side and she thanked him profusely and hurried off. The junior monk was taken aback by the gesture but kept to himself. The senior monk returned and they carried on with the journey.
As they walked, the junior monk kept brooding about the incident until it was unbearable and broke the silence, “why did you carry that woman across the river? Knowing that our religion forbid us to touch women!”
The senior monk replied peacefully, “I put her down a moment ago and you are still carrying her.”
Now back to you: Are you the junior monk? I believed at some point in time, we have this junior monk in us, such that we are not able to let go of the past, and let it affect our decision making and even our well being (since we will brood about it). Carrying emotional baggage is more tiring than carrying a physical baggage.
A successful trader is a senior monk, he will not carry the emotional baggage of a losing trade. He cut loss and move on with other trades. An amateur trader may cut loss but is emotionally affected by it. He will not be able to trade well subsequently and even worse, forgo the rule of cutting losses and end up with a loss bigger than what he can handle. The problem is no one likes to lose. But in this world, there is no 100% way of winning every trade that you made. Even Warren Buffett is wrong sometimes. If you cannot take the risk of losing, do not trade. If you want to trade, let go the fear of losing, and let go of the dejection when you lose.
by Alvin on February 5, 2010
This is a guest post from Dennis Ng, the founder of www.HousingLoanSG.com, who helps consumers to get the Best deal in Housing Loans in Singapore and he is a volunteer speaker for MAS’s moneysense program.
On 2 Feb 2010, I was invited by MAS to speak on News Radio 93.8 FM for its Moneysense program (National Financial Education Program) on the difference in getting Home Loans for investing vs Home Purchase.
I shared the differences, and the DJ Keith felt it was the first time someone explained it so simply to make it easy to understand.
Loan Amount
For most home buyers, if they have Cash/CPF, they actually try to minimize the Loan amount. For investors, they typically try to maximize the loan amount. Why? Firstly, Rental income adds to their personal income and thus, adds to their Personal Income Tax. Thus, by maximizing the Loan Amount, they can enjoy “maximum deduction” as Interest paid on Housing Loan can be deducted against the Rental Income they receive.
If they borrow more money, eg. 80% vs 70% of Purchase Price, they can also minimize the Upfront Cash they put into the property, thereby reducing the “capital” they invest, by doing so, with a smaller capital invested, they would enjoy a Higher Return on Capital, given the same increase in property value.
Eg. If a person bought a S$1 million property and price goes up to S$1.3 million, if he borrowed S$800,000 and only invested S$200,000 of his money, he would have enjoyed over 100% returns. On the other hand, if he had borrowed S$600,000 and invested S$400,000 of his money, his returns might drop to slightly over 50% instead.
Loan Period
If you are buying a property as a home, you might want to time your loan period to the time you plan to retire. Eg if you plan to retire at age 60, then the loan period should ends by when you reach age 60.
On the other hand, investors try to lengthen their loan period wherever possible. They might stretch the loan up to age 70 and for clients in their 50s, they can still stretch the loan period to say, 20 or 30 years by adding in a Younger relative as Owner and/or Borrower.
Lock-in Period
For investors who plan to sell their property within the next 1 to 2 years, they might want to choose Housing Loan period with a shorter lock-in period or even Housing Loan package with NO lock-in period (ZERO Penalty period).
On the other hand, home owners might choose Housing Loan packages with lock-in period of 2 year or longer as typically loans with lock-in period comes with lower interest rates.
Use More Cash, Less CPF
Most home owners use a lot of CPF to pay for their property. Investors might actually use Cash instead of CPF, as any CPF used have to be refunded back to CPF account when the property is sold, together with Acrrued interest of 2.5% on the CPF withdrawn. On the other hand, if a person uses Cash, when he sells the property, he can withdraw all the profits (gains) on the property without need to lock the money inside CPF account.
Thus, most investors use more cash and less CPF for their property investments. Furthermore, in future if the investor wants to get an additional loan on his property, he can do so, while the person who used CPF needs to deduct CPF used from the maximum additional loan amount he can obtained.
Using an example to illustrate.
A person bought a property for S$1 million. Value of property rose to S$1.5 million after a few years. His Housing Loan outstanding is S$500,000. He can easily obtain additional loan of S$500,000 if he did not use any CPF. If he had for example, used S$300,000 CPF for this property, this amount S$300,000 has to be deducted from the additional loan he can obtain, in this example might be just S$200,000 vs additional loan of S$500,000.
