Menarik kerana menyentuh bab kewangan. Terus terlintas dalam kepala otak aku pasal apa pelaburan emas yang TO (training officer) aku cakap masa attend kursus baru-baru ni tentang pelaburan emas menggunakan perkhidmatan Ar-Rahnu. Aku setuju dengan pendapat Azizi Ali. Aku pernah dengar pasal satu skim pelaburan emas ni dimana kita gadai emas kemudian dapat duit dari gadaian yang mula-mula sekali tu, gunakan duit tu untuk beli emas. So, bila dah dapat emas, gadaikan pulak emas yang baru dibeli tu untuk dapatkan cash dan kemudian repeat proses yang sama. Lepas tu tunggu masa yang sesuai, tak salah aku masa harga emas naik, jual dan tebus balik. Lebih kurang cam tu la. Nak explain tak pandai tapi aku faham apa yang dimaksudkan. Cumanya bak kata Azizi Ali, apa yang presented atas kertas ni nampak cantik, tapi bukan semua nya boleh diikut kerana situasi dalam dunia sebenar bukannya selalu akan berlaku seperti atas kertas. So, nasihat aku, berhati-hati dan lu pikir la sendiri. Baca dan fahamkan apa yang Azizi Ali cuba sampaikan. Happy reading.
A new coaching client of mine was thinking of remortgaging her current house. She bought the house more than 10 years ago, the amount of her mortgage has dropped while the market value of the property has risen considerably. So now, she wants to take advantage of the situation by taking on a higher loan from another bank, paying off the original loan and yes, have the balance at her disposal. “I can use the extra money as capital for investments so I make more money,” she added gleefully.
“Where did you get the idea of remortgaging the house?” I asked her.
She then showed me a three page worksheet that was given to her at a property seminar she attended. Basically, the numbers in the worksheet illustrated how one can take out the equity from an existing property and then use that money to buy more properties. In summary, she would be able to sail on to financial freedom by taking on multiple loans to buy more and more properties. What’s even more bewitching is that there appears to be no risk at all from the exercise. As she currently lacked capital, she is naturally very excited about the idea as that would give her not only the capital to buy more properties, but also some extra pocket money!
Fortunately, despite her excitement, my client also realized that it was a big move and so wanted to hear my thoughts about the worksheet and the idea behind it.
I took a quick look at the worksheet and saw a couple of errors instantly. In order to develop the worksheet, the author obviously had to make some data assumptions, which by the way is normal when making projections. Unfortunately, in this case, the author assumed a 6 percent mortgage interest for the next 30 years! That’s not all. He also assumed that all the properties would be rented out 12 months each year for the next 30 years! Whoa Nelly! Those are mighty generous assumptions.
We’ve all heard the term ‘garbage in, garbage out.’ Well, this is an example of the term in action. First, anyone can develop such worksheets. Even a kid in school can take out his laptop, run Microsoft Excel, punch in some figures and then dish out some impressive numbers. However, it does not mean the data is correct and more importantly, useful.
It is easy to come out with impressive data that shows the client will make money. To the uneducated and the novices, the data may look impressive, intimidating even. But once you look a little bit deeper, then cracks begin to appear.
For starters, is it sensible that interest rate would remain at a generous 6 percent for 20 years, let alone 30 years? While that figure may sound reasonable today, let me point out that the interest rate for a mortgage 20 years ago was 9.5 percent. Furthermore, the 6 percent figure will look even more absurd once we take into account of the current shaky situation of the world’s financial system and markets.
Coming back to the worksheet, I told my client the truth: Yes, she can make money from taking out the equity from her present house. The idea does hold water but, and this is a big but, it does not necessarily mean that she should do it. Remortgaging the property is the easy part because banks will be more than happy to lend her money. (One of the easiest things to do today is to borrow money – there are plenty of people are out there who are looking for people who want to get into debt!) But she has to be careful when doing so. First, she has to make sure that she can afford to pay off the higher mortgage. Next, she must ensure that she can still do this even when interest rate rises – and they will rise. Third, she has to make sure that she can put the excess money into an investment that will pay a higher return than the interest charged. In short, she has to find an investment that will give her about 10 percent annual return for the next 30 years! As you can see, it is not so easy to find such an investment.
Incidentally, I have seen such worksheets before. Some guy wakes up with a grand idea in his head and then starts punching in data into a table. He enters some formulas, press a button and hey presto, the result is better than what he thought it would be. So, there is a simple way to make money; after all, the table confirms it in black and white.
To be fair, it is not just the average Joe who falls into this trap. Let me bring you back to 1998 when a high-flying firm called Long Term Capital Management (LTCM) dominated the airwaves. LTCM was founded four years earlier by mathematical geniuses and economics Nobel Prize winners, and ran by John Meriwether, a former head of the bond arbitrage group at Salomon Brothers. The firm came up with complex mathematical models that made money by exploiting price discrepancies in multiple-markets: bonds, residential mortgages, interest rate swaps and options. Best of all, their models said that their risk was minimal as the chances of multiple markets failing at the same time was close to zero.
The firm did extremely well in the first two years, posting returns of 43 and 41 percent. In fact, by April 1998, their balance sheet had reached $134 billion!
And then out of the blue, the Russian capital system collapsed in mid-August, causing the government to default on its debts. This caused chaos in the world’s financial markets: stock markets collapsed, credit spreads spiked and equity volatility shot up. This wasn’t supposed to happen according to the models at LTCM. But it happened anyway and in the process, took out LTCM. By the end of August, the firm lost $1.8 billion or 44 percent of its capital. In fact, things went from bad to worse, to the extent that the Federal Reserve Bank quickly organized a bail-out of the firm by 14 Wall Street banks to prevent further meltdowns.
The point of the story is to be careful of fancy mathematical models, charts, tables and worksheets that show how you will be making tons of money while taking minimal risks. The calculations may be correct. However, real life markets do not necessarily behave like in the mathematical models as the brilliant economists at LTCM found out the hard way. It turned out that the models at LTCM were working with just five years of data. If the firm had gone back to 1987 when the world’s stock markets crashed, it would have given them a different answer. So this was a case of too much maths and not enough history.
The lesson for this month? Be careful of tables, charts, worksheets and projections – they can be bad for your financial health
Copyright © Azizi Ali 2011
Note : Artikel diatas adalah hak milik tuan empunya dan diambil dari langganan percuma 'MILLIONAIRESPLANET E-ZINE.' ISSUE #111 - November 2011
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