Saturday, May 30, 2020

5 Financial Health Test That Determine Your Financial Robustness

The Sunday Invest Section came out today with an interesting Financial Health Test to determine our financial health check conditions.

There are 5 sets of criteria that were used to test the financial robustness of a person's financial condition.

Let's go over them one by one.





1.) Total Debt Servicing Ratio (Monthly Loan Installment / Salary)

The debt servicing coverage ratio is a measurement of the cashflow available to pay current debt obligations for interest, principal and monthly installment payments.

This is a popular benchmark to measure the person's ability to produce enough cash to cover its ongoing debt payments.

For the majority of Singaporeans, most of the debt servicing is likely to come in the form of home mortgage, car and renovation loan. To ensure that Singaporeans are not over-leveraging, the TDSR ratio for property loans is set at a maximum of 60% while similar practice is being applied to other loans too. This is to ensure that most Singaporeans are not over-leveraging.

Verdict (for me): Pass

Comment: I feel like the ratio should extend just beyond salary because it is not the only income one might have. Nevertheless, using salary as a gauge seems conservative for now although I feel like the ratio should consider also the like of rental income, dividend and interest.

2.) Household Liquidity Ratio (Total Cash Savings / Total Monthly Commitment)

The household liquidity ratio is very similar to a corporation's current ratio, which measures the immediate needs for current assets over current liability.

For an individual, this will mean taking a person's cash availability over the total monthly expenses which includes not just the loan repayment obligation but also other spending categories such as grocery, transportation and utility charges.

The writer recommend that having 6 months worth of liquidity is a prudent gauge to have.

Verdict (for me): Fail

Comment: While I don't usually keep a lot of emergency cash lying around, my focus is catered towards accumulating more cashflow generating assets such as stocks, bonds and properties. For emergency requirement, I tend to rely on other immediate access tools such as credit cards or balance transfer account. This option is probably not as prudent enough as having 6 months worth of emergency requirement.

3.) Cash to Net Worth Ratio (Cash - Debt)

The cash to net worth ratio is very similar to the NCAV concept where you take in the good part of the assets (i.e cash) less all the liabilities that you owe.

Once again, you can see that the focus is very much on the amount of cash that you are holding so that alone stresses the importance of having sufficient cash in your overall portfolio allocation.

The writer recommends the ratio to be in excess of 15% to be considered good enough.

Verdict (for me): Fail

Comment: The same principle as above for me in terms of keeping cash requirement.

4.) Savings Ratio (Monthly Savings / Salary)

The savings ratio is a measurement of a person's savings rate from your salary.

In my opinion, this is the easiest requirement to meet because the writer recommended 10% as the minimum to save and I think most of us would have saved more than 10% of our take-home-pay.

Verdict (for me): Pass

Comment: It should measure take-home pay instead of gross salary because most Singaporeans will have automatic savings of minimally 37% through CPF (both employers and employees). The ratio should also be staggered increase over time to account for higher salaries or increase assets over time through inflation.

5.) Debt to Asset Ratio (Total Debt / Total Assets)

The debt to asset ratio is a measurement of the overall gearing allowance and a financial indicator of a person's financial leverage.

The writer recommends that this ratio should not exceed 50% and that he recommends reducing loan exposure where possible.

Verdict (for me): Pass

Comment: The ratio of 50% looks fair to me as you certainly don't want to be in a position where you over-leverage of things that doesn't generate enough returns for you. Still, with debt borrowings at an all time low these days, I can see a lot of people borrowing more debts to fund more generating assets in the years to come.

Conclusion

That's a score of 3 out of 5 for me.

Through this simple financial exercise, I can quickly see where my weak point is and that I should continue to work towards having more cash buffer as emergency as an overall part of my portfolio.

What about you? Did you check to see how your financial conditions are? Are there anyone who scored 5 out of the 5 based on recommended criteria?

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Adyen NV (AMS: Adyen) - Payment Gateway Riding On The Rise of E-Commerce

This is an attempt to read up more on global companies, in particular looking at some of the disruptors in tech space.

In this article, I will be talking about a payment gateway solution company called Adyen NV, which has been around since 2010 but only really boom at the back of e-commerce trend two years ago. The company is listed in the Amsterdam Stock Exchange since 2018.

Adyen NV is a company I've been dealing a lot at my current workplace (almost on a daily basis) since I joined my e-commerce company. Before that, I've had to deal with another company called Stripe which does pretty much the same thing but is based and headquartered in the US.

To have a better understanding on how I can enrich some value for the company through the negotiation process, I figured that I would spend my weekends reading up on the company to have a deeper understanding of their value proposition.

About The Business

Adyen NV (AMS: Adyen) is a Dutch payment platform company that allows businesses to accept point-of-sale payments for their e-commerce business.

The unified single platform is built with an API interchange for integration for a holistic view of all payment transactions irrespective of channel.

In other words, the model works similarly like how our NETS work for our local branding but with a much larger API network to integrate behind the scene.

Adyen debuted its IPO in Jun 2018 at EUR 240/share and its share price rises by 90% on the first trading day. 

Management has guided that they would strive to achieve revenue growth of between mid-twenties and low thirties in the medium term while improving EBITDA margin through optimization of efficiency to levels above 55% in the long term. 

Thus far, they have achieved their financial target of what they aimed to become.


Business Model

Payment Gateway Solutions such as Adyen, Boost, Worldline, Paypal, Alipay or Grabpay come in and complement the direct approach scheme of card processors such as Visa, Mastercard and AMEX.

To understand better how these payment gateway platform works, we must first understand how the business model of credit card processors work.

Credit card processors such as Visa or Mastercard usually charge 3 different types of fees:
  • Processing Fees - Charged by your payment provider (e.g Visa/Mastercard/AMEX/Discover) based on the MDR for processing the payment
  • Card Scheme Fees - Charged by the card schemes for using their network
  • Interchange Fees - Charged by the customer's bank
When it comes to interchange fees, there are ways to bring it down because it depends on the issuing bank and location of the bank and this is where global gateway like Adyen comes in.

As a local acquirer, interchange fees are usually cheaper because they are a global platform catered to merchants in each of the acquiring country, hence they can offer a much cheaper rate than the traditional issuing bank.



Revenue Segment

The company's business revenue segment is dividend into 4 parts:

Settlement Fees:

Settlement Fees are the Merchant Discounted Rates (MDR) fees paid by merchants, similar to how credit card processors like Visa or Master are charging their merchants. The difference is that costs passed on to merchants is a mark-up charged by Adyen for its master acquiring services as a result of very huge consolidation volume and lower interchange fees.

To illustrate an example, Adyen will charge MDR of 2% to a particular merchant while paying only 1.1% processing fees to Visa. The difference is their direct revenue to the pocket.

The growth of this revenue segment will depend on the company acquiring more merchants and also the increasing Gross Merchandising Value (GMV) transacted by merchants through volume transactions.

Processing Fees:

The processing fees is a fixed fee per transaction for the use of the platform.

It is usually fixed at 2 to 3 cents for each transaction and used to enhance the processing capability of the platform over time.

Sales of Goods:

Adyen segregates the sales of the terminals (POS) from the payment services as the latter is subject to IFRS15 based on the revenue recognition at the time of the obligation performed. For this segment, the company recognizes revenue at the time of the sale of the POS terminals and related accessories.

Other Services:

The last segment is to categorize all the other revenue that doesn't fit into the above 3 segments such as foreign exchange service fees, third party commission, referrals, etc.

Financials

The company has grown its volume transactions from just over 100 billions in 2017 to over 230 billions in 2019. While faced with an economic uncertainty in 2020 because of the Covid, the company still manage to amass an increase in growth to over 67 billion in Q1 2020, which is a 38% increase year on year growth as compared to Q1 2019.

Revenue from contracts have also grown correspondingly to the increase in volume transactions processed over time while gross profit margins are stable at between 19% to 22%.

Net profit margin ranged between 33% and 41% and the good trend seems to continue in Q1 FY2020 with NPM margins coming in at 46%. The company has a goal of increasing the NPM margins to over 55% in the mid term.



The company is not trading cheap at about 100x of forward PE earnings but this is a company that is still growing at over 30% in the next few years as it opens up new regional market (they just opened up new markets in Africa in 2019).

The growing EBITDA margin also shows that the company is moving in the right direction when it comes to rationalizing its operating efficiencies to enhance better use of their productivity and platform to merchants.

For a case comparison in reference, Paypal is trading at 98x PER while Square Inc is trading at over 150x PER. These are growing names with growing businesses so they are likely to continue their uptrend until growth is plateuing.

Risks

To balance the article, I feel that we should also take note of these few risk factors.

Reliance On Merchants Growth

As the gateway to the payments platform, much of its volume and size of transactions will very much depend on how much merchants can grow their business organically and through acquisitions.

During boom period, we should see an increase in both demand and supply needs which will transcend with increase volume over time. However, during recession or economic uncertainty like Covid, we will see a drop in spending from both merchants and transactions. 

Competition

The company faces a wide array of competitions in this space with the likes of Stripe, PayPal, Grab, World line all narrowing into this space of digital point of payment solutions.

The race to capturing market share and offering a competitive MDRs and having the best API integration as a platform will be key for these gateway companies. Most of these payment gateways are also on a T+1 so working capital requirement and liquidity will be absolutely key to acquiring new merchants.

Final Thoughts

You can see how these tech companies have rebounded quickly since Covid has rattled the market a couple of months back.

This is for good reasons because if there's anything about Covid, it has just accelerated the movement into more digital and more cashless payments for merchants. During the Fortitude budget, DPM Heng has even announced the Digital Resilience Bonus that targeted every hawkers, wet markets, coffee shops and retail into signing with NETS as a master acquirer. This will set the scene into a cashless payment scheme in the near future as we move into a more digital era world.

For now, I'll continue to study more tech companies every week in the hope of getting into some of these positions in the portfolio to prepare for the next decade of stock investing.


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Friday, May 29, 2020

A Story of 4 Friends: Who Had The Last Laugh?

It's been a while since I last wrote on a fiction story to think about on a Friday leading to weekends.

Once upon a time, there were 4 friends who were once classmates when they were in school.

Because of circuit breaker, they were bored with their daily routines so decided to do video conference to keep each other updated on their respective situation.

You know, just an update sort of thing or so, just to ensure everyone is "okay", they promised.




Person A

The first person (let's call him Person A) is a business owner.

Since young, he's been the most adventurous out of the four classmates, striving to always think out of the box and consistently rank one of the last few in his class.

He was doing well in his business, opening up new store after store each year in different mall locations.

However, because of Covid, his business was severely impacted when the government announced mandatory closure during the Circuit Breaker as he's not able to operate his retail business in full fledge. 

Thankfully, there was a law mandate that allow landlords to pass down some rental rebates to tenants and as beneficiary he was thankful to the government for helping out businesses like his. The law also mandates that tenants who can proof that they are facing financial difficulties can apply to MOL to assess the situation that will allow them to defer their rental payment until Oct'20. 

This allowed him some breathing space while he's cautiously hoping things would settle down soon.

Person B 

The second person (let's call him Person B) is an early financial independence person. 

He quit his job when he achieved lean financial independent at the age of 35 because he just wanted to live on his dividend for the rest of his life.

Being a dividend investor, his portfolio is made up mostly of REITS, which technically made him sort of a landlord in this situation.

Coincidentally, the retail REIT he owns happens to be the landlord of the tenant of Person A's business.

He lamented that his REIT is conserving cashflow to help the tenants out during the circuit breaker hence he is receiving a much lower dividends as a result. Still, he believes that he's a long term investor and tough period will be over soon and he will be able to get his usual BAU dividends once everything returns to normalcy in at most a year's time.

Person C

The third person (let's call him Person C) is the most down to earth among the four friends.

He lives a life like what most people do, working as an employee of a corporation from 9 to 6 on a 5-day work week.

Coincidentally, the corporation that he's working for happens to be the same retail REIT which Person B owns. This also means that he's indirectly related to Person A because of his company landlord-tenant situation.

During Circuit Breaker, the company announced a 30% pay cut through all levels in the organization. Management cited these are extraordinary times hence tough measures were implemented. 

"Tough times don't last but tough people do" is one of the key message that management tried to rally.

There are no other options but to agree so there's really not much room for discussion here.

While disappointed with the news, he believes that he is doing all he can to help out the company during these extraordinary times. 

Person D

The fourth person (let's call her Person D) is a housewife.

She's married young since she graduated so she never really had experience working in an outside world.

She's mostly in charge of handling the kids at home and during the circuit breaker, she has to double up her role as a teacher and also as a wife to the husband working at home.

Being a housewife, she doesn't contribute much to the expenses incurred in the household.

Still, she felt like she had a bigger role to play in the household so she started her own small online business that doesn't take her physical time away from the children.

She was the least affected during the circuit breaker out of the four friends but that's primarily because she comes from a low base low risk business.

Still, the fact that her children and husband are everyday at home are driving her crazy at times. Well, I am guessing she needs her own private time too.

The End Of The Story

The four friends had a good time together throughout the call - supporting, listening and showing empathy to one another.

While all of them acknowledged that these are tough times, they were all hoping that things will return to normalcy soon so everyone can get on with their normal lives.

They had a good laugh (some were half-baked laughing) and ended the call after an hour and twenty minutes.

P.S: Who's Had The Last Laugh At The End?

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Monday, May 25, 2020

Silverlake Axis (SGX: 5CP) - Why I Think This Company Is Severely Undervalued

Silverlake Axis (SGX: 5CP) has a rough performance this year so far.

Just by looking at the chart, share price has dropped by almost half since the start of this year from 40 cents to the current 21.5 cents.

If we take its performance from one year back, it has dropped a lot more from 54 cents/share.

For those who does not understand what the company does, one might misunderstood thinking that the company is related to aviation or tourism industry because of the level the share price is descending.

With share price hovering at an all time low valuation (with exception to 2017, I'll explain why), the question is if there is light at the end of the tunnel and if the company represents an opportunity buy to investors.


Business Segment


The company's business segment is divided into two parts: recurring and non-recurring in nature.

The recurring aspect of the business is referring to the maintenance and enhancement services that it provides to banking institutions as well as Software as a service (SaaS) while the rest are more project based related.


Maintenance and Enhancement Services:


The maintenance and enhancement services segment focuses on providing software support to banking institutions.

The company performs maintenance services for the software solutions that they have implemented for their customers. Enhancements are also planned and deployed per the required software release schedule.

From FY2014 to FY2019, the maintenance and enhancement services segment have doubled from Rm 210m to Rm 421m. For the period ending Q3 FY2020, the segment has also outperformed the Q3 FY2019 period by 10%. 

This is what the company described as sticky moat because the digital banking back end are generally complex and contracts procured are generally long term in nature, thus contributing to a high level of retention of the same customers. Margins are also high for this segment as most of the operating costs incurred are human capital in nature, providing round the clock solutions to customers.

This segment will continue to grow as they continued to win small marginal contracts.

Software as a Service (SaaS)

I'm a big fan of SaaS business because of the high profit margins, positive operating cashflow and easy visibility on the revenue.

Providers usually capitalize software and amortize it over a period of time over the length of the useful lives. They would then do a mark-up to charge a subscription fee to customers who depend on these services.

It is great for cashflow because not only will the company be able to generate a positive cashflow from this segment but also easily plan for the next 6 to 12 months with clear visibility.

The insurance processing business, undertaken by Merimem Group, focuses on providing cloud computing SaaS platform for policy claim processing for the insurance industry.

In the past recent years, the Group has established its operations and services in the ASEAN. The next few years the Group will see growth in North Asian countries like Japan.

In FY2019, revenue from this segment grew 10% from Rm30.3m to Rm33.4m with contributions coming from the expansion in Philippines, Vietnam, Thailand, Hongkong and Indonesia from its analytic software suite called Truesight. 

Software Project Services

This is project services which the Group has to bid and tender for implementation or customization of software services.

While 9M FY2020 revenues are down to Rm51m versus Rm67m in the previous year due to completion of projects, the Group is optimistic that the digital banking license assessment, which MAS has delayed to 2H2020 will be a one to watch out for.

Software Licensing

This segment is highly correlated to the software project services.

Software licensing contributed about 15% of the overall Group's revenue.

In 2019, the Group also acquired 80% of SIA X Infotech Group's shares, enabling them to offer Digital Identify and Security Technologies such as biometric verification and enrolment to existing and new customers.

Licensing fee is highly dependent on securing new contracts from existing and new customers so this segment will be lumpy in nature.

For the 9M ending FY2020, this segments were already down to Rm 52m from Rm66 last year for the same period due to completion of projects in Thailand.

Sales of Software and Hardware Products

Although this constitutes a smaller portion of the Group's overall revenue, 9M FY2020 numbers have increased significantly to Rm 21m versus Rm 5m last year due to one sale of high value hardware to support technology advancement for existing customer.

The Group is an authorised reseller of IBM hardware products and system software in Malaysia.

As a reseller of products, this is a lower margin business as compared to the other segments.

Credit Cards Processing

This is one segment that I think the Group is trying to unwind down because it's a low margin business with many competitive areas from other competitors.

Two of the Group's main customers in Japan has decided to terminate and this results in the huge drop from this segment for this year and previous year.

Financials

The Group's financials are healthy and fairly stable over the years, although you could argue that topline doesn't grow by much over the years.

What has really changed for me is that the nature of the revenue has switched from more project work (which tends to be more lumpy) to more on maintenance and enhancement, which are more recurring in nature. 

This provides visibility on financial planning, capex and cashflow needs.

Both GP margins and NP Margins have been fairly healthy over the years, with exception to FY2020 where they lost the tax concession pioneer status due to expiry for the Malaysian subsidiary effective Q1 FY2020. The pioneer status allows for income tax exemption of up to 70% to 100% of statutory income for 5 to 10 years. It also allows any unabsorbed capital allowances and accumulated losses incurred during the pioneer period to be carry-forward. It remains to be seen if the Group can apply for extension on this pioneer status validity for the next 2 to 3 years.


Valuation

Earnings per share for FY2020 annualised looks to be at around SGD 1.88 cents/share, which translates to about 10x PER.

That's the cheapest it has ever been (excluding FY2017 due to one-off disposal of marked to market interests in associates) from a valuation perspective in the last 10 years.

In fact, for a company with a such a predictive and sticky moat, it is hard to imagine that the market is pricing the shares at 10x price to Covid-earnings. There's a lot of bad news that is baked into the current share price and I think what investors need from the company is really just patience, and time for its value to be realized. 

With so much software, tech and SaaS company outside trading at crazy multiples, it is quite a steal to be getting such a valuation for a company that I think we know will be around for a number of years and will prosper as we move towards more digitalization, fintech and banking licensing needs from both banking and non-banking institutions.

Conclusion

I believe why the market is attributing such low valuation right now is because there is currently no catalyst in play.

While management has cited that they are still winning the smaller contracts, larger contracts are harder to come by as most banking institutions are conserving their cash to delay some of the capex projects in hand in view of the economic uncertainty. As a result, this lack of catalysts calls for a drop in the valuation which investors are currently switching their money elsewhere in mind.

Nevertheless, I believe that the market has overly discounted the resilience of the business in mind, the stickiness of the moat and how the business can take advantage of the upcoming digital banking and considering they are trading at a valuation of 10x PER, this will continue to be an accumulation play for me.

Target price would be 32 cents, which represents a 50% upside in the next 12 months with either new contract announcement, or post-covid return to normalcy whichever is earlier. 

Disclaimer: Author is vested in the abovementioned company as of writing

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Friday, May 22, 2020

Stock Market Crash Is Normal But Our Mentality Is Not

Stock market crashed again on Friday.

This time round, it is not due to the Covid-19 but news that Beijing is governing stricter laws on Hongkong.

Public Holiday next Monday, and I extended another day for myself by utilizing my leave on Tuesday.

As a result of that, I received my salaries earlier than the usual.

It's been a while since the stars are aligned. I don't usually get such combination very often over the years.

I logged in to my brokerage account, took a 5 minute look at the market, put in my order and logged out of my brokerage account.

The next thing I know, I received a message notifying that my orders got filled.




Stock Market Crash vs Participant's Mentality

One minute, the market is green giving speculation on market participants about a potential V-share recovery on the economy.

The next second we know, the market crashed again, like today, after finally hitting a stumbling block over the past couple of days.

This time round, the news is that Beijing is putting stricter policy on Hongkong, which have been invaded by protesters.

This is the stock market.

We don't know how the stock market is going to react and its precise correlative nature to the economy. A lot of news are currently sentiments driven, such as the announcement regarding the phase 1 trial from Moderna or news on Hongkong protests that will send markets on the reverse run.

The stock market crash is normal, it happens all the time for the past 70 years for various reasons.

On the other hand, market participants' mentality are usually not so...normal.

They are constantly bogged down by decisions on when is the best time to enter with more time spent on predicting the correlation of the share price to the news they saw on the screen instead of using that time to research more on the fundamentals of solid companies.

Contrary to many people's beliefs, I think the next 1 to 2 years will be an extremely opportune time to accumulate more equity in the portfolio because we have such a fragile economy that is looking to falter any time that we can't help but feeling the market will also crash any time.

But that is when the best entry points are usually made.

Investors often get the best value out from their investments when there are macro uncertainties happening because this will then impact most earnings in the next two to three quarters, which we already know that it is going to get really ugly in the short term but will return to better times ahead.

There are usually a lot of people, including some which I know that are waiting on the sideline and are waiting for things to return to normalcy. I'm not exactly sure what are they waiting for but I presume some sorts of vaccine or alike before things would get better.

Many gave suggestions that we should be holding on to cash to ride through this crisis and that we should wait to dip our toes in the stock market only when things get better.

All these points to a decision of uncertainty.

It is not stock market or economic uncertainty but rather our very own mental block of not knowing what to do when shit hits the fans.

Most people are looking for some sort of guidance - from the news they read, the herds around them and the green bars in the stock market. 

For anyone who's starting young and is at the accumulation phase, the pandemic outbreak and market volatility right now gives an opportunity to accelerate our FIRE plan because we are buying into a market that is currently having some issues right now. In other words, the market is at a reasonable valuation which will average out just fine over time.

Have our emergency funds ready. Maximize our human capital.

Increase our side gigs income. Continue saving hard.

Keep pumping any excess savings into the stock market and buy the dip.

We too can become normal by accepting what is normal in the stock market.


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Thursday, May 21, 2020

Why Do Reits Have Several Types of Distributional Income?

The REITS asset class have been gaining popularity fast amongst the local investor scene since we have our first investment trust back in 2002.

The earliest investment trust was CapitaLand Mall Trust (CMT) when it IPO in 2002 and today its market cap has since jumped 16 times to $9b over a period of 18 years through the issuance of new shares and growing asset portfolio.

Today, all the Singapore REITs, stapled and property trusts are a combined number of 35 with a total combined market value of over $100b, which is approximately 10% of the overall Singapore stock market capitalization.

The STI now includes five REITS which have a combined index weighting close to 10%.

Mapletree Commercial Trust (MCT) and Mapletree Logistic Trust (MLT) were the latest joiners in 2019, joining other earlier companies like CapitaLand Mall Trust (CMT), CapitaLand Commercial Trust (CCT) and Ascendas Reit (A-Reit).

To be fair, they've hold up the STI pretty well, given the dismaying performance of the other counters in the STI.

Most investors treat their REITS investments as their cash cow, providing them with stable dividend income on a quarter or semi-annual basis at the very least.

Today, this article is about dissecting the different types of distributional income that REITS have on their books and why each type is different.

Distribution Type

Let's take the announcement details by First Reit which was announced a few weeks ago.

There are 3 different distributional type of dividends that were declared.




The first is taxable income which amounted to 0.07 cents/share and is a choice.

The second is tax-exempt income which amounted to 1.02 cents/share and is a mandatory.

The third is a capital distribution which amounted to 0.77 cents/share.

It sums up to a total of 1.87 cents/share declared.

Taxable Income - These dividends declared are by choice since it is taxable in nature. These are dividends that the trust received from its' respective SPCs (Special Purpose Vehicle) which are tax residents of Singapore.

The dividends will be taxed at the company level but exempted in the hands of unitholders based on the one-tiered rule. For foreign trust like First Reit who derived their income from a foreign SPCs, It will further be subjected to the withholding tax in their respective holding country.

Tax-Exempt Income - These income relates to the disposal of ordinary / redeemable preference shares in the SPCs where such capital gain tax are tax exempted in Singapore. This is also usually the bigger portion and one which many Reits are currently withholding the distribution in lieu of the Covid situation after MAS ruling was allowed.

Capital - These income represents a return of capital to the respective SPCs, who may choose to redeem on a periodic basis. Depending on the Reit's distribution policy and earnings payout they choose to give out, a portion of the dividend may be returned as this would deferred the amount of tax to be paid and reduce the cost basis for the units, which translate into lower taxes and hence higher dividends for unitholders.

The more diversified the assets in different countries, the more SPCs they would have to carve out in order to receive these funds before they go to the trustee for execution.

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Tuesday, May 19, 2020

Components of Passive Income

According to Wikipedia, "Passive income is income resulting from cashflow received on a regular basis, requiring minimal to little effort by the recipient to maintain it."

It is a source of income that most people in this world strives to achieve because of the attributes that I will be going through below.

Almost few people to none started off with having passive income as their first main source of income but this should become each and every single individual's first choice source of income in the years to come.

Here, we'll go through some of the components and traits of passive income and dissect why it is so special.



Component 1: High Effort Now, Low Effort Later

If you re-read the definition of passive income from Wikipedia in my opening paragraph, the key word that stands out is "minimal to little effort".

This is probably one of the most, if not THE most singled out factor on why passive income is so attractive to many people who's striving to achieve it.

But don't get it mixed all up.

Low effort later does not means low effort put in the beginning.

In fact, it requires a huge amount of effort to start the ball rolling for the first few years until the system that you've built have become a giant on its own.

Take rental properties for instance.

Rental properties can be a great source of passive income once you have invested enough money into the properties and get the rental up and running. There might be a few maintenance works or administrative paper works that as landlord you might still have a role to play at times, but the amount of time spent comparatively to salaried workers working is mostly negligible.

The high efforts in this case allude to the amount of capital that you have to save up over the years before being able to afford your own investment property.

It might take years or even a decade or two to do so but it'll be a worthwhile effort. 

Component 2: Physically Discretionary

There is a quote from the famous Warren Buffet that says "If you don't find a way to make money while you sleep, you will work until you die".

I'll do a follow-up to that piece of advice by adding "Count your ROI while you sleep until it's worth a positive number".

The idea behind this quote is basically saying that you don't have to exchange your physical time for money for it to be worth. Built a system such that you'll continue to get paid even while you are resting, eating or even sleeping.

This is almost not possible for salaried blue or white collar workers because they actually have to turn up to office or sites from 9 to 6 in order to get an exchange for their pay-check. 

It's okay to have this as a starting point as most people did (including myself) but the system has to gradually switch gear.

Okay, we'll exclude the anomaly of the current situation because everyone is WFH-ing. 

Component 3: Regular Basis

The third component of passive income is to have the source coming in on a regular basis.

I wanted to say this usually happens regardless of rain or shine but again the anomaly of the pandemic we are facing today throw this into uncertainty.

For example, we've seen some companies in the retail or hospitality sectors that are slashing or deferring their dividend payout to shareholders because they wanted to conserve some bullets to weather the storm.

Nevertheless, when things return to normalcy, strong companies should see a return of their fundamentals and dividend payout should also return back to the norm.

Conclusion

Passive income is probably one of the most exciting project in my lifetime that I've managed to figure out early in my career.

For all the plus and minuses, I like what it has to offer in terms of predictability, stability and liberty for freedom.

It's probably a concept that I would be teaching my own children too in future because I wanted them to rationalize this concept as an option when they grow up and start their career.


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Thursday, May 14, 2020

How Much Are You Paying For Financial Independence?

For a long time, I've been thinking why I had pursued the niche path to financial independence.

Since I started working 12 years back, I've been trying to push aggressively my agenda for financial independence.

I scrimped, saved and invest really hard for years just to try and get out of the rat race so that I can finally breathe some slow pace of air outside.

Not many people chose the same path as I did. 

The millennials of today chose jobs that seems like they are enjoying it very much. Sometimes, I can't help but feel envy right there.

It appears to me that my reason for deciding to go for financial independence may have been biased and skewed right from the start.

But for exactly that reason, I am able to achieve the outcome that I have achieved today.



In the past recent weeks, I have been tasked to work tirelessly non-stop even while at home.

Weekdays and public holidays were blurred as I had to log in to my computer to clear my incoming emails during weekends and public holidays that I can't seem to clear while working on weekdays.

On some days, I felt so exhausted that a part of me feels like giving up.

One of my equivalent peers that were based in Malaysia resigned two weeks ago.

Instead of finding a replacement, my direct boss and hr conveniently slotted me in for the role and then send out an introductory email to everyone to congratulate me for taking up a step role.

A few people came to congratulate me and I just texted back a brief thank you in reply.

The inside of me was fuming, thinking hard why I deserved a congratulatory message in the first place - double the work, same income (or maybe including a potential paycut). That's not really something that's worth congratulatory for me.

I understand that during this period everyone was toughing it out and many businesses were trying to reduce their overhead, hence for this reason I have remained quiet for now.

But still I don't think I had it happy taking it up like this.

My coverage increased by double, meeting and conference can stretch up to 2 to 3 hours a day and the endless tasks coming in from both countries that I am handling. All this means lesser time to spend with my families and rest. In fact, I had not dined in with my children for a while now for both lunch and dinner, and this is considering we are all at home together!

As an introvert, I don't usually voice my unhappiness during the one on one session with my direct boss. As an introvert, neither do I enjoy endless meetings and phone calls because it tires me out. 

Most of my tasks require analysis and time alone to work on my spreadsheet so it requires plenty of concentration time to be alone.

This is probably the reason why I don't seem to enjoy working for the most part of my life.

Because work is something which typically drags from time to time and I become unhappy when it started to take away time for me to rest and spend time with my families.

I wrote this post not as an avenue to complain but rather this has been my only avenue channel to freely voice out my real thoughts and to relieve me from the pressure I had.

Some day, perhaps, I can truly enjoy doing what I do for the most remainder part of my working life.

Not now.

Financial independence had a price and I continue paying that price for now.

How much are you paying for financial independence?

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