Volume 3 Issue 43: Intelligent Investing

Investing In Blue Chips or Bull Shit?

Nowadays, I have noticed some "pundits" who keep calling for the market to drop further just to show that they are smart. While they think that "normal" people would not want the market to drop, they think that they are "smarter" by wanting the market to drop further so that "good opportunities" present themselves. This is because their underlying mentality is that they want to "Buy Low, Sell High".

However, the question that is rarely answered is, "What to buy?". Sometimes, the market is just so low that they will tell you, "Just buy anything la...". This is very scary. Let me just show you a bunch of examples. Before the 2008 financial crisis, companies like Goldman Sachs, Morgan Stanley, Citigroup, Bank of America, Bear Stearns, Merill Lynch, etc are considered "the best" of their lot. I mean, in the financial industries, if you didn't know any of those names, you would be considered ignorant. So if you had purchased any one of those companies in 2007 in the midst of the "Buy anything la..." period, this is how much poorer you will look like today:

Investors in Goldman Sachs would have lost more than 50% of their money

Goldman Sachs

Investors in Morgan Stanley would have lost more than 75% of their money

Morgan Stanley

Investors in Bank of America would have lost 85% of their money

Bank of America

Investors in Citigroup would have lost 93% of their money!!!!

Citigroup

Investors in Bear Stearns, Lehman Brothers and Merill Lynch would have lost more than 90% of their money as well.

Now, many of these stocks are considered "blue chips" prior to the financial crisis. So, most people would not think twice about investing in them if I were to just bring up their names.  Sad to say, there is no such thing as "Just buy anything la...".

If you want to be in the stock market, you need to do your homework. There are no two ways about this. Just to illustrate how burnt you would be if you invested in Citigroup (once considered the largest bank in the world), if you invested USD100,000 in Citigroup in 2007, you would have lost 90% and be left with USD10,000. Not only that, to break even and get back what you lost, you would need to make 1,000%. That's right.

How hard is 1,000%? Well, assuming you can make 10% per year consistently, it would take you more than 24 years to break even. Yup, what you lost in one year can take you 24 years to make back. By that time, you would have sworn to stay away from the stock market forever.

HT: Brad DeLong

How Much Is Your College Degree Worth?

Some of us may have wondered if it really mattered if we went to college or not. Here is a study on the return on investment in a college degree (Where is the Best Place to Invest $102,000 -- In Stocks, Bonds, or a College Degree?). The charts in the link are very interesting and demonstrate the great returns by investing in your education.

However, personally, I feel there are areas that the study misses out on. Do you see any problems with the results? In the spirit of the logical thinking theme that is going on this week (and maybe in the near future), I would like to take this analysis one step further by analyzing what are the problems with such a study. Please feel free to drop comments and I will share my thoughts this Sunday.

Volume 3 Issue 11: Intelligent Investing

Return on Investments (some thoughts)

Today from the Star:

Penang Hill funicular trains to attract more tourists

GEORGE TOWN: Trips up Penang Hill by the upgraded funicular train service will be as fast as five minutes or less in air-conditioned coaches but the public will only experience that in a month when the service resumes.

Tourism Minister Datuk Seri Dr Ng Yen Yen said the faster speed and new coaches that can accommodate 100 passengers each would enable 2.4 million tourists to visit the hill annually compared to 607,198 in 2009.

She said the hill received 65,176 visitors in the first two months of last year before the service was halted for the ministry’s RM73mil-upgrade.

“With the new and faster system, we expect there will be an influx of local and foreign tourists,” she said after handing over the project to the Penang Hill Corporation (PHC) on Saturday.

She said the project was in line with the ministry’s aim to build more parks and gardens.

“Penang Hill is a unique place for botany enthusiasts who love nature. I hope PHC will fully utilise its potential and make Penang Hill an icon in the state,” she said.

Chief Minister Lim Guan Eng, who is the head of PHC’s board of directors, said they would make an announcement in a month’s time on when the train service would be reopened to the public.

“We need to sort out several matters after we take over the project,” he said.

Prior to the upgrading, it took 30 minutes to go up the hill on the funicular service with a change of train in the middle station.

No change of train is required in the upgraded service.

Here are some simple calculations about how ridiculous some of the calculations are.

The Tourism Minister believes that the number of visitors to Penang Hill will jump to 2.4 million. I suppose you can't really find any fault with her because she did not say by when. Let us estimate when that will happen with some back-of-the-envelope calculation. Assuming a 25% growth per annum, it would take a little bit more than SEVEN years for the number of visitors to reach 2.4 million per annum.

So is the investment worth it? First of all, RM73 million sounds pretty steep to begin with. Let us now estimate how long it would take for the investment to recoup itself. Based on the current ridership and a 25% annual growth as before, with the ticket priced at RM8, which is double the current ticket price, it would also take SEVEN years to break even. Now, assuming that the ticket price did not double, and perhaps raised to RM6, it would take a bit more than EIGHT years to break even.

This is not even including all the operating costs, which includes maintenance, spare parts, etc. Should they have invested in this upgrade? Probably. But should it cost RM73 million? Could we have cut the cost to a much smaller amount? I sure hope so.