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Lost $1m and left with $4.2m. What should I do?

Monday, November 24, 2014

Here is a long email exchange with a reader which might be of interest to other readers:

Dear AK, i followed your blogs constantly. Now I would like to write you so to seek seek your views on my situations. I am writing from my wife's account, so pardon me for the difference in email name.

I am 41, married and have 3 young school going kids with a home maker wife. Over the last 20 years, I worked my ass off to come to where I am today. I am a very frugal person where I do not spend on anything unnecessary in life except on my family members and my loves for cars. I do not invest in properties as I believe it is at the whims of the government policies, hence I stay in a 3 room flat since married bought resale. I do not like taking large debts nor insurance (other than health insurance for all family member) too. To date, I have S$4.2 million cash and S$400k CPF saved. It could have been more if I have not dabbled with STI stocks over the past 7 years. So this is my story and I hope to share with you perhaps to get some views on how do I move forward in life now.

 
My work life is reasonable well and not very stressful since about 10 years ago. I got promoted fast due to my capability and brains. But here comes the problem, due to the fact that it is quite relax as the top man in town, I began dabbling with shares in 2007 out of boredom and also in hope to 'fight' inflation. So there I was opened up the trading account and attempting my 'brains' at the local market. At first, it was some micro broken penny that lead to small cut lost of lesser than S$5k. Then come the 2008 August panic where I had to cut lost almost S$700k of 'specu-vestment' of s-shares and bluechips. Along the way, I am still in full cash and no other investment asset mindset have changed. Since the GFC completed in 2009, from 2010 to 2013, I 'made back' the lost S$700k using my sell-profit-keep-lost day trading last-in-first-out strategy. That is to say, I do not invest long term like you do in dividend generating stocks but scalp the market in big amount to make money. It was going well all along from Oct 2013 when the penny market in singapore to a turn for the worst due to the ABL saga, all liquidity seems drain from pennies in STI and there is when my paper lost in those pennies start amounting. And I cut lost again this year al the sick counters for a lost of S$600k and now still stuck with some holdings in a illiquid counter, DMX (5CH). Not willing to admit defeat, I went short on the SP500 and end up with another paper lost of S$100k now still running due to the Bull ramp this October.
 
So here I am, lost and shame. My wife understands and do not scold me for my mistake, same goes for my kids. I have many questions now that I am in my early forties and not having done any right thing in investment make a fool out of myself though no one in my circles of associates and friends knows. I have seek books for opinions but they don't seems to have my similar experience and how they deal with it. So after much thinking, I turn to you to seek a friendly view of what I should do now?
 
So I thought to myself at this juncture of my life:
 
1. Should I be messing around with stock speculation, or wait for the next recession to invest like you in value stocks? I have since stop taking positions in the market other than holding the illiquid counter.
 
2. Should I cut the paper lost in SP500 short and quit bucket shop for good? Many told me that bucket shop are made in such a way, that you will lost even if you win over the long run just like casino. Is this true? I feeling so now.
 
3. What are my chances with the illiquid counter DMX? Can you help do a review on it?
 
4. I read your blog and notice that as a investor, you do not bother about the share price and DCA down whenever there is lower price? Isn't this catching a dropping parang?
 
5. I am currently putting every saving in high deposit saving account of 1.35% pa to wait for the right opportunity.
 
6. Should I buy property in Singapore? I really dont like the small market here and the fact that the future may not hold well for singapore. Who is buying from us buyer whom herd into surplus supply of properties? Aging population or foreigners?
 
If it is not so much of a trouble for you, do hope to hear from you soon.

Cheers
L
 
 
 
 
AK's reply:
 
Hi L,

I have a friend who says that some of us have luck in some areas and some of us have luck in other areas. Although it is probably debatable, I feel that luck is very important in all areas of life.

In your case, I feel that hard work, brains and probably a dash of luck have helped you accumulate what is quite a bit of wealth. At 41, to have about $5 million in assets is admirable. The fact that you did not make any of the money from your investments and speculations makes the achievement even more admirable. Singapore needs more hard working people like you.

I know someone who told me before that if we had a good career that pays well, we will not need to invest for extra income. I look at what you have achieved and I am reminded of that. However, I would add to that by saying if we had a good career and saved most of our income, then, we might not need to invest for income. You have saved a lot of money, by any standards. I am impressed!

You seem a bit lost now and you have listed many questions for me but you will have the answers once you know what motivates you.

Are you investing for income which is what I do mostly?

Are you investing for growth or a mixture of income and growth?

Are you mostly a speculator?

Depending on what you are after, you will use different sets of tools. I won't tell you what you have to do because that is not my style but do you know what the tools are and do you know how to use them properly? If you don't, you want to get educated and there are tons of free resources online to help you.

For example, if you like what I have done, then, you have to subscribe to my philosophy as an income investor which is to invest in assets which can generate meaningful income sustainably. Try not to overpay for these assets and you should do well enough over time.

Finally, I could modify some personal information which you have revealed in your email to me and publish our email exchange in my blog to see if we might attract comments from others. There are hidden dragons amongst my readers, I believe, and you are one of them. ;)

Best wishes,
AK


Related posts:
1. Motivations and methods in investing.
2. How to make recovery from losses easier?

14 comments:

Ah John said...

Impressive! 5 millions by 41 from salary only!
I lost money too at beginning of investment journey, now better. The most successful investor in this planet is Warren Buffett, he must have something that really right. I will suggest you to read through his annual letters and I belive you will learn something, that takes time to read. As you have so much money now and live simply, I don't think you need any tricks to become more rich over night. Just make sure "don't loss money"!!!!!

Ah John said...

If you can "don't loss money", the only outcome is to win money.

yeh said...

I wonder what I can achieve when I am 40 years old.
Well, if i have 4.2Million and a fully paid hdb. I probably will buy a private house for rental income and the rest of money just buy good dividend stock.

Then still working just to pass time:)

victorlsl1 said...

I think the reader in this example should just put everything in FD. There is already enough for your lifetime and your family. why expose yourself to "any risk?"

SMK said...

Interestingly 3 room flat sgd400k cpf 4m cash do not reconcile unless he is getting about more than 600k a year. At that quantum, there is no need to play penny stocks. Just dca here and there is good enough.

it is mostly due to his personality that he has lost some money. Controlling natural inclinations is tough.

I suggest he give in to his temptations but use a smaller quantum. And place the rest in govt bonds and some cheap blue chips. Keep 3years of whole family spending in the 1.35% account.

The smaller quantum he use to play must be a small amount in terms of ratio of a normal person buying 4d or toto. Money to play.

Jac Lau said...

Whatever brains this person has, it is not suitable for trading. If he does not stop trying to recover his million dollar loss, it is likely that he will lose all or more of the $4.2M cash that he still has.

RayNg said...

He can consider to put 20% of his money to fund manager for longterm. 10~12% compounding.

He can also invest in perpetual bond which give 5~5,125% interest.

Since he is still young (41), consider to invest in property when the time is right.

Should learn his lesson and refrain from speculation.

owq said...

Speculating is fun and all, but guess who earns the most from your constant trading?

I think the reader has to relook his goals and look at his future cashflows. And see if whether he has any need to take on risk in stocks.

Because if I was the reader, capital preservation would be key priority and I would probably only buy investment-grade bonds just to beat inflation.

Lim Der Shing said...

Oh I won't short S&P right now. Not with 100k, unless I have a long position I am hedging which is worth much more and I am positive long term but negative short term.

Also, I hope he has a simple short on SPX and has not bought a put option on it for better gains.

pf said...

If i were this guy, i would put the money with a professional asset manager and go enjoy life.

Chua Poh Huat said...

Some advice from Warren Buffett Wealth book by Robert P Miles:-

Rule No 1: Don't Lost Capital.
Rule No 2: Don't forget rule Number 1.

Investment Principles:

I) Know what you Own.
ii) Research before you buy/invest.
iii) Own a Business, not a stock.
iv) Make a total of only Best twenty lifetime investments.
v) Make one decision to own a stock and be a long-term owner.

Recruit Ong said...

you must understand your own character and personality first before u choose to invest, speculate, trade, or watever methods u decide to go with.

-_-"

qook said...

Der Shing, you should never do a naked short. Your losses in naked shorts are unlimited, whereas your losses in a put option are defined and a fraction of the stock price. I have recently bought some S&P put options just for fun, but am fully prepared to lose the full investment if market doesn't go my way. Just remember the time decay of options and how volatility affects option premiums.

Cory said...

Seems so easy to manage with this amount of money. What I cannot comprehend is he can dabbles in those risky stocks without thinking much but refuse to buy a proper condo for his family to have better lifestyle. Time to get out of 3 room man. Is a home not just about value.

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