Wednesday, January 14

What is CAGR ?

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CAGR in short, stands for Compounded Average Growth Rate. It stands for the average returns needed per annum to be able achieve the current amount of profits or losses from the original capital.

For example, you have invested $10,000 into an investment product for the past 3 years. For the past 3 years, the year to year returns were 10%, -6% and 15% respectively. Thus your initial capital would have grown to a level of $11,891 as given by the workings below.

Initial capital : $10,000
1st year return : $10,000 * 10% = $1,000
Final capital for 1st year : $10,000 + $1,000 = +$11,000
2nd year return : $11,000 * -6% = -$660
Final capital for 2nd year : $11,000 - $660 = $10,340
3rd year return : $10,340 * 15% = +$1,551
Final capital for 3rd year : $10,340 + $1,551 = $11,891

So what is the average returns for the past 3 years ? The formula is given below,



Thus for the previous examples, if we subsitute in the numbers, the formula will look like,


If we crunch the numbers and multiply by 100 to get the answer in terms of percentage, the answer will be 5.94%. To double-check the answer, we can do it by the long method again.

Initial capital : $10,000
1st year return : $10,000 * 5.94% = $594
Final capital for 1st year : $10,000 + $594 = +$10,594
2nd year return : $10,594 * 5.94% = $630
Final capital for 2nd year : $10,594 + $630 = $11,224
3rd year return : $11,224 * 5.94% = +$667
Final capital for 3rd year : $11,224 + $667 = $11,891

This means that on average, the initial capital of $10,000 grew at an average of 5.94% to achieve a final capital of $11,891. CAGR is often seen in the returns of stocks and funds where the returns is often given as CAGR as it is the average returns of the stocks and funds over a period of time.
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Tuesday, January 13

DBS helping with home loans

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A friend indeed
January 13, 2009 Tuesday, 10:31 AM
Goh Eng Yeow on DBS' move to help home-owners with their instalments.

LAST Monday, I wrote a Cai Jin column raising the possibility of banks bringing back interest-payment only loans for home borrowers who may have problems servicing their mortgages, as the economic gloom deepens.

In the column, I had recalled how DBS Bank came to the rescue of the rescue of cash-strapped Singaporeans by offering them a loan package which allowed them to pay only interest for the first three years.

To many people, the home is their most important asset – the nest where they spend their lives in matrimonial bliss and raised their families. It is not surprising to find the enormous sacrifice they are willing to make, in order to keep their home.

After so many years, I can still recall my parents saving a dollar here and a dollar there to ensure that they had sufficient money to pay off their monthly HDB instalments.

When it came to my turn to own a flat, I found myself doing the same thing. I did my sums to make sure that I had sufficient cash and CPF to pay the monthly housing instalment.

For much of last year, Singapore had been fortunate to escape the full fury of the global financial crisis that had inflicted heavy wounds on bigger economies such as the United States and Britain.

But since late last year, the business climate has turned noticeably chillier and the prospects of more job losses is mounting.

For the middle class, as writer Seah Chiang Nee described in an article last week, the biggest challenge is how to ride out the storm.

Unlike unemployed Indonesians or Thais who can leave for the countryside and live off the land, a jobless Singaporean, who has little or no financial safety net, has no hinterland to escape to.

It is against this grim backdrop of people tightening their belts and wondering where they can get the extra cash to put into their pockets that I got a call from DBS Bank late last week.

They would like to discuss the points raised in my Cai Jin column.

I met Mr Jeremy Soo, the head of consumer banking and Mr Koh Kar Siong, the head of secured lending from the bank yesterday.

Mr Koh assured me that the last thing DBS wants to do is to repossess the flats of home-owners who defaulted on their payments.

What is the point of taking the flat and trying to sell it? It would only dampen the property market further, he said.

The bank would like to help cash-short home-owners to vary the terms of their loan agreement to tide over this difficult period.

And the bank has a battery of options to help borrowers – interest-payment-only scheme for six to 18 months, extending the tenure of the loans for younger borrowers and etc.

The point is to communicate the bank’s desire to help its customers.

I suppose that this is a message which financially-strapped home-owners would like to hear. But no one will get to hear it, unless the bank specifically comes out to say so.

Many cash-strapped borrowers are probably in the dark as to what to do. Should they wait for the last drop of CPF money to dry up before they confess to their cashflow problems ? By then, it may be too late.

On its part, the bank will also have a trying time.

Because of the manner in which our monthly instalments are automatically deducted from our CPF and bank accounts, it has almost no contact with the borrower. There is no way it can tell if any home loan is in danger of defaulting, until the payments stop coming.

Imagine the shock it would have, if it suddenly gets a large number of defaults on monthly instalments, simply out of ignorance ?

I hope that other banks will take the cue from the DBS and encourage cash-strapped customers to open up as well. Don’t wait till the loan turns sour, before acting.

As I have noted many times, we will swim or sink in this financial crisis together.

What a bank can do is to make sure that the umbrella is extended to keep the borrower safe and dry, as the financial storm lashes our shores.

It will give a fresh meaning to the old saying: A friend in need is a friend indeed.
I think it's a pretty good move if DBS were to do this. After all, no one knows how long will this recession last. Given the spate of retrenchment these days, it will be tough for one to service their loans if they are jobless now. To add to that, it will be even harder to find a job nowadays. On the other hand, if a bank is willing to offer this scheme i.e. paying the interest of the loan only for a period of time, surely the HDB is able to introduce this scheme too ? After all, it is supposed to provide affordable housing all the public.

Sunday, January 11

New Ezlink card

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Do remember to change your ezlink card before the 30th September of 2009. I have attached pictures of the new card and a brochure on it. Currently, the replacement for the old card is free. The changes to the travel deposit is rather confusing actually but if you think about it, actually it is the same. 

For the old card, the travel deposit of $3 is not reflected in the card balance even though you actually have paid the amount. For example, if you spend $20 for the old card, $5 will be accounted as the cost of the card, $3 will go into the security deposit which is not reflected in the card balance, thus your card will have $12 in the card balance.

If you spend $20 for the new card, $5 will be accounted as the cost of the card and your card will have $15 in the card balance. Now the main difference is that of this $15, you can only spend $12 since $3 is the security balance or the minimum balance required to travel so actually it is still the same as the old card. It is only a matter of whether they wish to include the deposit in the card balance.

Other than that, the new card can store up to a maximum of $500 and it is supposedly that this new card can be used for other transcations such as a ERP transcations with a new generation In-Vehicle unit (IV), payments for parking in car parks which supports this card and payment in shops alithough the old card is already used for such purposes.

Saturday, January 10

Defining risk

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The definition of risk is an important concept since it plays an important role in deciding on the way which we do our investment. As taken from investopedia, risk is defined as the chance that an investment's actual return will be different than expected. This includes the possibility of losing some or all of the original investment. In the business academia, risk is usually measured by calculating the standard deviation of the historical returns or average returns of a specific investment or in other words, risk is also the volatility of the investment.

The above definitions explains why stocks are riskier than bonds and bonds are even more riskier than fixed deposits. For example, stock A has a volatility that has a price range from $4 to $8. It has a higher risk as there is always a chance that one could have bought the stock at at the peak of the range i.e. $8 and if the stock does not rebound, one could suffer losses. Furthermore, there is always the possibility that the company could collapse, leaving the stock of the company worthless. As such, bonds are less riskier as the price of bonds are much less volatile and in the event of the collapse of the company, the funds that are liquidated from the sale of the company will be paid to the bondholders before stockholders. Comparatively, fixed deposits offers capital protection but the returns is likely to be poor. Thus, fixed deposits are said to be the safest form of investment among the three.

What is not being said is that you will also be taking on a huge risk if you put your money in safe investments such as fixed deposits. This is because the returns offered by such form of investment is likely to be very poor and the return is unlikely to beat inflation in the long run. Effectively, you will be losing money since the buying power of your cash will be eroded over time. I have attached a chart of the historical inflation rate of Singapore below.


My definition of risk is rather different from the conventional definition. To me, risk is when one buys something without knowing and understanding throughly on what he is buying. If you think about it, it is a rather simple statement but one which has a lot of implications. I am rather surprised that when people buy electrical appliances such as a TV or a washing machine, they will often read about the specifications and do some thinking about whether that appliance is a worthy buy. However when it comes to investing their money, many of us often turn to friends or acquaintances to decide on what to invest in and often, even though they have may good intentions, they may not be the best people to consult on matters regarding investment.

I can't stress enough about knowing and fully understanding the investment that you are putting your money in. For example, stocks are considered to be risky in the conventional sense because it is volatile. However, what happens if you can buy it at the lower range of the volatility such as the current bear market now ? If you can buy it near the lower range, you are actually carrying less risk because the downside is rather limited already. What happens if you found a fundamentally strong and monopolistic company available whose stock is available at a very low price ? Will you still think that it is risky to buy this company given that this company is able to generate profits year after year due to the nature of its business ? I can just go on and on with the list of examples.

Thus it is of utmost importance to understand what you are investing in. If you are investing in stocks of companies, you should look through the annual report and financials of the company before deciding. If you are investing in an investment product, you should read through the prospectus thoroughly. Only then, you will be able to reduce the risk that you are carrying when you are investing.
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Thursday, January 8

STI Technical Analysis 07 Jan

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STI seems to have fail break the resistance level of around 1933 with a black candlestick on heavy volume. There is a minor support at around 1828 due to the gap and a trendline support indicated by the blue line if the gap support fails.
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