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Why a meaningful emergency fund is important?

Saturday, October 19, 2013

This seems like a rhetorical question since the answer seems obvious enough. It is so obvious that I do not recall having a blog post dedicated to the topic.

So, when I came across a blogger who thinks that an emergency fund is not important to him, it got my attention. This is a contrarian and I always like to find out why contrarians think the way they do.


In summary, the reasons why he does not keep an emergency fund are:

1. His family has adequate insurance coverage.
2. His family's expenses are relatively low.
3. His family's investment portfolio is sizable.*

*Current value is about $150,000, generating about $10,000 of passive income annually. This is taken from the regular updates provided in his blog.

Anyway, have a read as I don't want to poison the well:
Why we don't keep an emergency fund?

An esteemed blogger, CW, had this to say:

No emergency fund? Never mind. But still have to maintain adequate level of liquidity to meet unforeseen multiple life events happening.

It is never one hole that sinks a ship. It is several holes happening one after another that sinks that ship.

The blogger, My 15 HWW, replied:

I admit my life experience is lacking compared to many qianbeis like you but I do hope that life would not be so harsh as to sink my small boat. Because it’s small, it could also be nimble and flexible enough to steer clear of impending danger (unlike Titanic)?

If several holes happen, think the emergency fund might not be enough too and one might have to liquidate other assets.

To which, AK says:

I get where you are coming from.

However, I would really encourage some kind of demarcation and even a blurry one is useful. Why?

Let us say that Mr. Market gives us that correction some of us have been waiting for, how much of your cash on hand would you put to work? Doing what you do, if we put in 100%, then, we would have no money left for emergencies.

A small craft might be nimble but try watching “The Perfect Storm” instead of “Titanic” to see the other side of the coin.



"We never want to count on the kindness of strangers in order to meet tomorrow’s obligations." Warren Buffett

A perfect storm could sink us if we did not have a meaningful emergency fund.

Update (29 May 2015):
How much should we have in our emergency fund?


Related post:
Don't think and grow rich.

How much for hospital and surgical insurance?

The renewal certificate for my hospital and surgical insurance just arrived. So, what is the cost?




Total: $904.00.

$665.00 will be deducted from my CPF Medisave Account and $239.00 will be deducted from my designated savings account.

The importance of having good hospital and surgical insurance cannot be over-emphasized. We are not being frugal if we save money by not having such insurance. There is another word that starts with the letter "F" to describe those who do.

The insurance premium will increase as we age. My mother's yearly H&S premium is in excess of $2,000 now. Yes, we pay more as we age but don't let this scare you. What should scare you is the size of hospital bills which will surely come one day (although we could continue to hope that they don't).

My mom told me that my uncle who is almost 60 was thinking of cancelling his H&S insurance due to financial difficulties. I told her to dissuade him from doing so. We could help with the premium. It is only a few hundred dollars a year in his case as he opted for the least expensive plan available. If he should be hospitalised, we could help pay the deductible and co-insurance but without the H&S insurance, it would be a much heftier burden.

I remember when an uncle was hospitalised for cancer a few years ago, my dad had to help to pay his bills. It amounted to a rather hefty 5 figure sum. My dad's bank account took a long time to recover but my uncle never did.

Suggested checklist:

If you don't yet have H&S insurance, go get it.

If you have basic H&S insurance but can afford a better one, consider upgrading.

If people you care about don't have H&S insurance, make them get it.

H&S insurance might just be the best investment we could ever make in life. How so? I am sure you have the answer to this one.

Related post:
Enhanced Incomeshield (H&S) for my mom.
"...I only have to pay 10% of my total medical bills if I were to be hospitalised and this 10% has an annual cap of $3,000 in my case. So, if my hospitalisation and related bills were to total more than $30,000 in any year, I would still pay a maximum of only $3,000."

Atas and healthy lunch.

Friday, October 18, 2013

I decided that I should treat myself to an atas and healthy lunch once or twice a week from now on.




What is in the box?


One.


Two.


Three.


Time's up!




Salad!

Price? An atas $3.50.

Related post:
What's for lunch?

Sabana REIT: 3Q 2013 results and outlook.

Thursday, October 17, 2013


Sabana REIT has announced a DPU of 2.38c which is slightly higher, year on year, but slightly lower, quarter on quarter. Some other numbers:

NAV/unit: $1.06
Aggregate leverage: 37.5%
Interest cover ratio: 5.0x

The recent decision by Sabana REIT to purchase a half vacant property from AMD generated quite a bit of concern. Although the management of the REIT suggested that they are quite confident that they would be able to find tenants to fill up the space, it remains to be seen if they could deliver.

Well, you know what they say about how it never rains but it pours? It now seems that Sabana REIT's management will have more vacant space to deal with come 25 November 2013. This is because 4 of the expiring Master Leases will not be renewed.


Now, before we go into a hysteria, the vacant space represents only 6.6% of the REIT's NLA.

As investors for income, we are really concerned with how income distributions could be impacted by all these. Realistically, we have to expect some downward revision.

Taking the DPU of 0.18c from 24 Sep to 30 Sep 13 as a guide, I estimate a DPU of 2.16c for 4Q 2013. This is a 10% reduction from 2.38c for 3Q 2013.

There is nothing rigorous in this estimate. It really is just 0.18c x 12 weeks.

If I were to instil a bit more rigor in this non-rigorous exercise, I would say the DPU could be closer to 0.18c x 7weeks + 0.168c x 5 weeks = 2.1c. This is to account for the loss of income from the 6.6% of NLA vacated through the non renewal of the 4 Master Leases mentioned earlier.

Based on the closing price of $1.10 per unit, this gives us a distribution yield of just 7.64% which brings us closer to the distribution yield offered by AIMS AMP Capital Industrial REIT currently. It seems that Mr. Market is quite efficient. Does this mean that Mr. Market will not go into a manic depression tomorrow? Your guess is as good as mine.

There is a chance that Sabana REIT could manage some positive rental reversions with the sub-tenants and command a higher psf rental for the vacated space in 2014 relative to what the Master Leases were paying. If we are level headed, we will realise that as long as Sabana REIT achieves higher occupancy again, DPU will improve from my back of the envelope estimate. While there exist a chance that Sabana REIT might not achieve higher occupancy again, this probability is rather low.

At the current unit price of $1.10, I believe that Mr. Market has priced in the negatives. If there should be a 10% or so decline in unit price, I would consider it a mispricing which would give interested investors an opportunity to buy in for an attractive yield of about 8.5% with a possibility of some upside in 2014 thrown in.

See presentation slides: here.

Related post:
Sabana REIT: 2Q 2013 results.

Is that stock a bargain or a value trap?

Not long ago, I asked how can we tell the difference between a real bargain and a value trap in stock investing.


I recently came across a video by Pat Dorsey which I believe answers this question really nicely:





Thinking of any particular stock now?


Related posts:
1. 3 points in stock investing.
2. Tea with Solace: Valuation, PER and Value Trap.
3. Be cautious as we accept higher risks.

3 points in stock investing.

Tuesday, October 15, 2013

I like to keep my life simple. I try to avoid complications. 

Life, unfortunately, is rarely as simple as we would like it to be, isn't it?

I am sure we want to keep stock investing simple as well but can it be simple?

1.  Focus on values and not prices.
"Price is what you pay. Value is what you get."

2.  Focus on competitive advantage (economic moats).
“In business, I look for economic castles protected by unbreachable moats."

3.  Focus on having a margin of safety.
"The dumbest reason in the world to buy a stock is because it is going up."





All quotations are, of course, Warren Buffett's.

Distilled to just 3 points, stock investing can be simple. Simple but it definitely requires work.

It can be simple but it is not easy.

Some related posts:
1. 5 rules for successful stock investing.
2. When to BUY, HOLD or SELL?
3. Tea with Solace: Getting ready for investment.
4. Interview with Matthew Seah: Value Investing.
5. Why is Warren Buffett the greatest money maker?

Lending money to someone you care about? Ask questions!

Monday, October 14, 2013

Not too long ago, I blogged about how anyone should have to think like a donor if he was to be a lender of money. 

If we are not comfortable with donating, say, $2,000 to a charity, then, we should not feel comfortable lending $2,000 to anyone! To me, it is quite simple. Why complicate things?



However, a friend who took my advice to heart, quite surprisingly, told me that he lent $10,000 to a cousin recently. Now, he worries that he will not see his money again since the cousin has been borrowing from other relatives as well in the last few months.



I asked him why does his cousin need to constantly borrow so much money. He said he didn't know. Huh?

Why did he lend $10,000 to his cousin if he did not know the reason why the cousin needs to borrow? "Oh, because we are family and we are very close."

I told him to write off the debt right away. He struggled with this idea and I don't know if he has managed to do this.

It makes perfect sense to write off the debt and it is consistent with my belief.

Imagine that the money has vaporised and gone to a better place. If it should come back one day, well, go celebrate!

I am not heartless. I quite understand that there could be certain situations when we might feel obliged to lend money especially to family members.

However, as a prospective lender of money, I have the right to know why a loan is required and why the would be borrower is short of money.

Of course, knowing the answers to these questions will not guarantee loan repayment. Then, why ask the questions? 

Well, if you are asking me this question, then, my earlier point about thinking like a donor when lending money is lost on you.

Just throwing money at a problem might not make it go away. If we understand the problem, we might be able to offer a better or more permanent solution. 

If we truly care for the borrower (why would we even contemplate lending money to the person, otherwise?), we would ask the questions that need asking. 

There is nothing to be embarrassed about.

Related post:
The difference between lending and donating.


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