Unwanted Children - UAA and AMD

Every month end I will update my spreadsheet on status of our investment portfolio and cash equivalent. There are a lot of higher high for my core portfolio. I thought JC Option Fund can outperform as well but I have stepped onto not one but two time bombs.

 This will wiped out USD 500 plus of the profit as I sell put 5 contracts at 12.

Did you see the little gap down red cross at USD 14.13? UAA was downgraded and earnings expectation is lower than estimate. This one is going to wipe out USD 2k profit. This happens when you don't follow the rules, greed gets the better of you. My Sketchers got a 30% increase in share price but gain was capped by 3 stupid sell call options. 

I am starting to redeploy in Hong Kong shares.

I reached out to Thomas of 15 Hours Work Week and he shared with me on his journey from being an employee to self employed. I am simply unhappy @ work. I need to map out a plan to become self employed.

2/11/2017

I closed UAA put option and locked in USD 4,100 of losses. I did not wish to roll this because the fundamental of the stock has deteriorated. The branding is diluted. I learnt an important lesson in options, you need to spend time to study the underlying derivative. If you ask me whether I have conduct fundamental analysis on UAA in the first place? No.

Where is my trade diary? I need to start recording my trades.

Opportunity Cost of an Employee

My mentor who is one of the top remisier boast to me that his net worth will be increased by SGD 1 million this year. His method is pure value investing only. Sometimes, he will use CFD to short a few counters. His CFD trades are for "kopi" money or just for fun. Maybe by next year, he will cross the SGD 4 million mark. He is 36 years old only.

I need to compare again, he can spend bulk of his time to research on undervalued stocks. He has a war chest of investing ideas and portfolio of stocks from the best companies spanning from Europe, Japan, Hong Kong, USA and Singapore. 

He is setting out to start his own hedge fund and wish me all the best in my investing journey. As I am not an Accredited Investor in 2017 but I believe I will meet the requirement by 2018. Nevertheless, I will choose not to invest in his hedge fund because I believe in DIY. Nobody is more concerned of your finances than you. If I invest my own money and I lose it, it is solely my responsibility. I won't want to leave my money in an active managed fund without having the control and not knowing what is the money been used for. 

I was on a plane when I draft this. I started reading financial reports after my boss return to his seat. I realize reading financial report is a very time consuming activity in order to understand the transaction history, growth story, and background of the business. It will probably take 1 full day to digest one single company's financial reports and conduct the company's SWOT analysis. In fact, there are a lot tools which I learn from my MBA that can be applied on stock analysis. 

I felt that there are a lot of investment opportunities are lost because of working as an employee. Every working day, I spend 3 hours commuting to and fro (I will read on MRT or take a nap), another 8 hours in meetings, toilets, lunch and some work, another 2-3 hours at night trying to wrap up my tasks for the day. Probably left with another 1-1.5 hrs at midnight to read a book or a financial report. Due to the lack of time, when I chance upon a good company and the stock price had just doubled in the last 3 months, I will feel upset.  

  

If my option income can achieve at SGD 10k per month, I will become a full time investor cum options trader. My testing model will be SGD 10k per month for 3 months consecutively and sustainability test after a major share price correction. It is no good if all the profits are wiped out after a crisis and back to square one.

• 3 consecutive months of SGD 10k options income
• Survive and sustain 1 crisis

 

SRS can help to reduce Tax and increase Investment

SRS represents Supplementary Retirement Scheme was introduced in 2001 but not alot people are familiar with it By putting your money in SRS, you can use it to offset your taxes and the money can be used for investment. It is a win and win. Reduce tax and increase your money. Seems like a no brainer deal, I will explain the pros and the cons. Then you evaluate whether this tool is suitable for yourself.

According to statistics from the SG government, there are only 127,753 SRS accounts in Singapore based on end of 2016. It is not even close to 10% of the tax paying population. 

The greatest advantage of SRS is the ability to reduce taxable income. Maximum annual contribution of S$15,300 for Singaporeans and PRs, and S$35,700 for Foreigners. Upon reaching the retirement age, you can use 10 years to withdraw the money in SRS account. You will be to be taxed based on half the amount you withdraw. How does this benefit you then? For example, if you deposit $10,000 into your SRS account this year. For the next taxable year, your taxable income will be reduced by $10,000. If the original taxable income is $50,000 it will now be reduced to $40,000. See below image which I extract from DBS website for illustration purpose.

Note: This is not an advertisement. I am not paid by DBS for this.

After 62 years old, if you withdraw S$40,000 each year, the taxable amount is S$20,000. However in Singapore, taxable income is $20,000 and above. Hence, you do not need to pay any tax. So S$40,000 x 10 years = $400,000 for the SRS account. This is the target amount you want to reach and you will not be subjected to any taxes. Do note, if you withdraw a lumpsum more than S$40,000 in a single year, your tax can be considerably high.

What if I withdraw before 62 years old?

You can withdraw from SRS account before the age of 62 years old but you will be subjected to penalty of 5% and your full withdrawal amount will be taxable (not half of it will be taxed!). 

Awas! Therefore you need to weigh this, whether you want to lock your money for 20-30 years just for the sake of tax reduction. Utilise SRS account only when you don't need this amount of money. You will only see it after 62 years old. Boy, where will I be then? Will I be in the graves?

The nature of SRS account is more well received by the middle-aged group. Ages between 46 - 55 years old represents 33% of the SRS accounts. The 2nd largest group is from 36 - 45 years old, they represents between 29% - 31%. 

This is not surprising because those in 40+ years old should reach the highest income bracket group. SRS helps the high income group to reduce their taxes. Furthermore, a 30 years old guy will need to wait for 32 years before he can utilise the money from SRS account. Hence, condo price drops to S$500 psf and you cannot use the money to buy it. It will be an opportunity loss. Whereas a 50 years old man just need to wait for another 12 year in order to withdraw from SRS account.

Use SRS account as a tool for Retirement Planning
You can open an account with 3 local banks DBS, OCBC and UOB to enjoy the benefit of tax savings.

1. Try to put in the maximum amount. For now it is S$15,300.
2. Plan to cap it at S$400,000. Pace yourself to reach that amount. Nothing more nothing less. In future, this amount may increase based on inflation requirement.
3. Invest to increase your return.

See below image from DBS for further illustration. This is based on above example, if you place S$10,000 per annum in SRS for the next 27 years.

I will beg to differ for the Balanced portfolio as DBS is trying to sell you Unit Trusts. In short, if you park your money there and do nothing, you will get S$270k. If you take a balanced approach, you can achieve about S$388k. If you are aggressive and put in stocks, you can get S$489k. 4% per annum is average return over 27 years.

SRS account can be used for fixed deposit, single premium product, equities, REITs, Unit Trust, Bond, etc.

Annual Income lesser than S$40k will benefit less 
In order to benefit from SRS account, your taxable income needs to achieve a certain level of comfort. In Singapore, the tax system is a progressive approach in different tax bracket. SRS serves to bring down the taxable income to a lower tax bracket. 

For example, if a guy has an income of S$90,000. Without SRS, first S$80,000 will be subjected to a tax of S$3,350. The rest of S$10,000 will be subjected to S$1,150 which is 11.5%. Total tax is S$4,500.

If he pumped S$15,300 and his taxable income is reduced to S$74,700. His tax bracket is shifted down by one level. The first S$40,000 will be subjected to tax S$550. The remaining S$34,700 will be subjected to 7% tax which is S$2429. Total tax is S$2979. This means a saving amount of S$1521 which is equivalent to 34% tax savings.

Cons

1) SRS is not flexible
Remember the penalty upon early withdrawal. The full amount will be subjected to taxes.

2) You see the money but you cannot touch
Similar to Special Account in your CPF. I do not need to add more to explain.

3) Do leave your money in SRS and not do anything to it
If you leave it there as Fixed Deposit, you make only 0.1% interest. This is losing money to inflation. You need to put it to use. Put it in equities or give me the money.

Alpha Lab Investment Mastermind Group and Revelation

What do you do after work and during your free time determines how successful you will become in life. A few friends who are interested in investing came together on a Saturday afternoon to discuss individual investment approach, circle of competence and various stocks we are interested in. It has been very insightful and always refreshing to meet like-minded friends.

Going forward, we are going to share our individual research so that we can gain access to more good stocks. This can help us expand our warchest of ideas. Then when the opportunity presents itself, we can utilise our warchest of money to respective stocks.

After the event, I had dinner with my friend to catch up on his latest business endeavors. I shared with him our family project which is for my wife to retire in 4 years time. He pointed out that this should not be the goal post but I should look into the definition of financial freedom. 

Financial Freedom is when your passive income exceeds your expenses. 

I explained that my active income from Options Trading has reached about USD 2,500 and I hope to replace my work income so that I can stop working for someone. He reminded me of the original definition of Financial Freedom, I should work on getting the Options Trading income to exceed my total expenses instead.

I came home and reworked my household Cashflow Statement.

Total Monthly Cash Outflow S$6,207

Rental Income S$400
Dividend Income S$3,333 (Assume I deploy S$1m and just 4% yield)
Option Income S$3,712
Total Monthly Alternative Income Inflow S$7,445.83 

Damnit! We are already FINANCIALLY FREE! What a revelation!

Then I should be asking myself what I should be pursuing next - my passion. Recently, I am reading Ray Dalio - Principles and his definition of Work is to do something that you enjoy and be paid for it. Also, who you choose to work with and spend time together at work will determine your happiness.  

*Disclaimer - Option Income needs to be stable at this level. Losses will disturb this equilibrium. At the end, it is still active income. You can consider this as money you put in your Opportunistic Fund.

After thinking through, I will not just throw in my resignation letter on Monday, I will wait at least a few more months to make sure my Options Income can be stable and need to test a crisis model on JC Options Fund.

20/10/2017
Last night, I met up with my trusted financial planner friend. He felt that my definition of Financial Freedom has some room for errors. He thinks that as a family man, my expense is still fluctuating and there is a strong likelihood that it will increase in the near future. This depends on whether I will send my children to enrichment classes and tuition.  His advise is Financial Freedom is not the end goal but the journey matters more. 

His advise is continue to work hard, we are too young to retire, do what you believe in and increase your income level to cater for unexpected situations. 

He showed me his trade of 200 contracts of MOS SP 22. That is USD 440,000! He has many multi-baggers. Wow, the session humbled me. Stay humble, stay foolish, stay hungry!

JC Options Fund 5th Month Results

This month result is slightly special as I have previously recognized wrongly in terms of the expiry date. Some of my older trades expired on 13th October 2017 and there are a few other trades which will expire on 20th October 2017. Options trading is creating another source of income for us but it is still considered an active income as I need to do some work on the last day of option expiry. 

See below Figure for an update of the options income. Past performance does not represent future performance and profit can be easily wiped out if I am greedy.

I foresee that October Options Income can be increased after I close the trades expiring on 20th October. With the free up money, I can deploy to other trades when there is an opportunity.  

Correction

Definition of correction is when the stock price falls 10% from the peak price. Correction usually occurs at least once a year. So far in 2017, I have not experienced a correction or maybe I missed it. 

Nobody can predict with consistency whether a market will rise or fall. The stock market rises over time despite temporary set back. Despite a major drop in a share price correction, one still can emerge with high returns as the share price generally rise higher over time due to inflation. For example, your mixed vegetable rice has increased from S$2.50 in 2015 to $3.30 in 2017. Say a listed company called Ah Boy Vege Rice will record higher revenue from 2015 to 2017 and share price will hit a higher price.

Historically, bear markets will happen every 3-5 years. I am still waiting earnestly for Mr Bear to come by keeping cash. Cash is the lousiest return asset class. Please come fast as I want to deploy my cash. Like all seasons, winter will eventually turn to spring. Bear Market will turn Bull Market. Everything has a cycle.

The greatest danger for an investor is to be completely out of the market. I will always remain invested.

A few reasons why I prefer USA companies.

1) High market cap will reduce market manipulation
2) High volume and high liquidity
3) Market with most research and news coverage
4) US has the most successful global companies
5) Key mover for stock markets
6) Good transparency for companies' corporate governance  

My personal investment strategy follows a pyramid style. The base consists of low risk investments with a diversified stocks in at least 10-15 blue chips companies, in the middle of the pyramid consists of 2-5 growth stocks and at the tip of the pyramid, I am using options trading to increase the return of stocks, high returns with short term trades and hedging purposes through bonds ETFs.