Saturday, 30 March 2013

Scam - Sunshine Empire

While looking for passive income streams, I had a close encounter with Sunshine Empire and its "MLM" (Multi-Level Marketing) products.

I stayed in Toa Payoh then and on one fine day at HDB Hub, I saw a grand new office/company.  Looking into Sunshine Empire's office to check what they are selling, I was invited in by a sales person for product presentation.

I could not remember the product details now, but I remember in the presentation, we were told that Sunshine Empire had attractive product packages with high rates of return.  I remember a "Silver Product" and a "Gold Product" that enables a investor to recoup his investment within 1 year.

The minimum investment was $12K, and the investor gets $1000 back every month, and this monthly payout continues for the next 8 years.

Also, I was told that Sunshine Empire was not just an MLM company.  They are also developing theme parks and underwater hotels (Wow!) in Malaysia and Asia.  The high returns were generated from these investments and businesses.

We were also asked to introduced family members and friends, so that we can enjoy rebates on the products that we purchased.

I did not want to purchase their investment products on the spot and told them I would go home and "think about it".

After going home, I did some research and found that Sunshine Empire was open for business only in 2006.  This is a new company, no history and track record.  I do not even know whether their products are legitimate or not? 

The return on investment (ROI) just sounds too good to be true; and in such cases, usually it would not be true. 

I have decided against investing in Sunshine Empire and my money stayed in the low interest paying Fixed Deposit.

Later, it was found out that Sunshine Empire ran a Ponzi scheme using funds from new investors to pay existing ones.  Using slick marketing and hard-selling technique from a team of well dressed sales people, Sunshine Empire actually amassed up to $180 million from 20,000 people in their 15 months of operation. 

Sunshine Empire's founders were tried and sentenced in court, but the investors have lost their money in this ponzi scheme, some with their life savings.

Lesson learnt -
When investing in any investment scheme, especially those that promised high returns and short investment time, find out the following:
1. Is the investment product legitimate?
2. Is the company subject to regulation?
3. How are the returns generated? From new inflows of funds or from actual investments?
4. When will returns be paid? How much is guaranteed and who is the provider for the guarantee?
5. How long is the period of investment? Are there any penalties for early withdrawal?
6. Any way to monitor the investment’s performance? Any reports?

Still, the best investment plan would be staying out of these abnormally high ROI products.

Thursday, 28 March 2013

Unit Trusts

In my early investment days, I have invested in a few counters of unit trust.  I was a newbie then and naively listened to advices given by those bank relationship managers.

Those advices included:
1. Stocks are volatile and not safe
2. You do not have experience or time to actively manage your stock portfolio.
3. Unit trusts are not so volatile and safe, as they invested into high yield bonds and blue chip stocks.
4. Experienced fund managers actively manage the unit trust portfolio.

Those days I thought it was a good deal.  The fixed deposit interest is so low that it cannot beat the inflation rate, and so basically the money is just rotting away inside the FD.

Moreover, I needed to travel frequently then and so have limited time to monitor the stock market.

I have invested into 3 funds, Asia Ex Japan (70%), Pan-European (15%) and a technology fund (15%).  I can't remember those fund names now after more than 10 years has passed.

However, later I discovered it is not really the case for unit trusts as per those advices from bank relationship managers.

Firstly, there is a substantial sales fees.  The investor needs to pay 2-5% sales charge upfront on initial purchase.  Meaning for a capital sum of $10K, you could lose up to $500 even before you make a single cent.

Secondly, there is an annual management fees, typically about 1-2%, which the fund manager get it directly from the unit trust (dividends received from bonds and blue chips).  Irrespective of the unit trust's performance, we need to pay the management fees.  So, in this way, the Passive Income portions from the unit trust investments go to the fund managers.  The unit trust investors just get the capital gains, provided that the unit trust appreciate in unit cost.  Therefore, the investors take all the risks for capital gain, while the fund managers get steady incomes.

Thirdly, unit trusts are not safe harbour at bad times.  They also fell like stones to the bottom of the seas during SARS.  One of my unit trusts fell from $10+ per unit to just $1+ per unit.  I think the most likely cause was a lot of panic selling from investors redeeming that unit trust, and the fund manager has no choice but to sell off the stocks in the unit trust's portfolio even though those stocks were at rock bottom values.  Therefore, a unit trust investor who does not panic and does not want to sell during those crises could only watch helplessly the panic selling off by fellow investors, which drags the unit trust value lower and lower.  And worst, the fund managers do not have fund for opportunity investment into those rock bottom blue chips. 

Fourthly, after the crisis is over and the fund managers receive fresh funds as investors return.  However, the stock market has already rebound and they already missed the boat as the best investment chance is long gone.  Therefore, the upward recovery of unit trusts is slow and always lagged behind recovery of the stock market.

My Asia Ex Japan fund recovered fastest and I sold off all my unit trusts at break even point.

Lesson learnt from this experience:
1. We have to take charge of our own investment.  Nobody care more about your investment than you youself.
2. Unit trusts do not qualified as a viable passive income source for me.

Saturday, 23 March 2013

JP Morgan Asia Confidence Notes - Lesson Learnt

We are supposed to diversify our investments, or not putting all eggs into one basket.  This could reduce exposed risk, and in case one investment failed badly, will not affect the overall health of the full portfolio.  Definitely we would not want one bad egg to affect all the eggs in the basket.

However, those toxic structured products that were sold before Lehman Brothers' collapse, although having many component companies in their fund structures, did not work this way.  Just one bad egg (Lehman Brothers) and the whole product failed.

Same with JP Morgan Asia Confidence Notes.  When we invest money into 4 markets, we hope to diversify.  And if one market fared badly, we do not want it to affect the whole investment. 

However, in JP Morgan Asia Confidence Notes's structure, any one market will drag the whole portfolio down.  Since if any one market fall 50%., the trigger event would activate, and does not take into consideration performance of the other 3 markets.

In this way, instead of one chance for failure, we have actually exposure to 4 times chance for failure.

There are just too many factors that would affect the market.  Some we can think of, and some we may not imagine yet.
1. Regional or World-wide financial crisis.
2. Regional conflict (war) that have potential to drag in more and more countries.
3. A superbug that is more virulent than SARS.

4. Freak election that overthrow the Singapore government 

Of course not all structured products are bad, we need careful consideration before investing.  Definitely, purchasing one with your life savings, on the spur of the moment, during a short bank visit is a big no-no.

Thursday, 21 March 2013

JP Morgan Asia Confidence Notes (Part 3)

I invested $50K into JP Morgan Asia Confidence Notes in June 2008.  I received the first quarterly payout of $937.50 in September 2008.

Almost immediately after I received my first quarterly payout, in mid September, Lehman Brothers collapsed.  After that event, the global financial market began a period of extreme volatility and all the stock indices fell sharply.

Suddenly, most of the structured products, which were previously promoted and sold as "high returns and low risks" have became hot potatoes and their risks greatly escalated. 

On Sep 18, 2008, The Straits Times reported that a structured product sold by DBS, High Notes 5 - with a promised annual return of about 5 per cent, was at great risk and warned that the investors may lose their entire principal in that Lehman-linked product.

Subsequently, other structured products have fallen one by one.  News received that another DBS structured products - High Notes 2 have fallen and investors may received just about 10% of their principal.

Then, more important to me, the structured products from JP Morgan are failing.  Pinnacle Notes Series 3 has fallen and Series 2 and 6 are also sinking.

Finally, I received a call from my "personal banker" that one of the indices in JP Morgan Asia Confidence Notes has dipped below the 50% barrier, and the "trigger event" may happen on the next observation date.  See attached graph below.

What options do I have?

1. I can hold the product until 2.5 years and hope that the worst index is above the 50% barrier then.  No loss to my principal in such event.

2. I can redeem the product immediately, but will suffer about 20% loss on my principal.

Although option 2 is undesirable, I still need to consider it because if the worst index ends below 50% initial level, I will  lose more than 50% of my invested principal.

At that time, I was on overseas assignment and the second option was not available to me, as I could not sign an agreement for early redrawal.

A small miracle happened for me and other JP Morgan Asia Confidence Notes investors, the worst index climbed back above the 50% barrier at the December observation date.  I received the second quarterly payout of $937.50 in December 2008.

I thought the worst was behind for JP Morgan Asia Confidence Notes, as the indices were rising slowly after Dec 2008.

However, the roller coaster ride was not over.  In February 2009, the indices fell again.  The worst index was teetering close to the 50% barrier as the March 2009 observation date approached.

Another miracle happened at the March observation date.  The worst index was just above the 50% barrier, an even more close shave and narrower escape than at the December observation date.

After March 2009, the worst was really over and all the indices rose slowly and steadily.  There was no more danger at the remaining observation dates.

During the 2.5 years tenure of JP Morgan Asia Confidence Notes, none of the indices ever reach their initial index values. 

I have collected the full 10 quarterly payouts, a total of $9,375 and the full principal of $50K on the product's maturity.

One last note, my "personal banker" did not survive through this crisis and was no longer at the bank when I withdrew my principal when JP Morgan Asia Confidence Notes matured in December 2010.

Wednesday, 20 March 2013

JP Morgan Asia Confidence Notes (Part 2)

How exactly did JP Morgan Asia Confidence Notes work?  I have thrown away the product brochure.  But I remembered it was something like:

JP Morgan Asia Confidence Notes are tied to Singapore, Malaysia, Thailand and Taiwan stock indices and pay 7.5% p.a. coupon fixed on a quarterly basis, but is callable every quarter.

Scenario 1 : If the indices go above the initial index values

At the quarterly observation date, if all the 4 indices have gone above the initial index values, the bank has the right to "call" the product, i.e., the bank will redeem the product by returning the investors the principal with that quarter's coupon payment.   In more details, the notes would end if the closing levels of all four indices at the observation date - either concurrently or separately on different valuation dates including preceding ones - is higher than their respective initial levels.

For example, at observation date 1, if just Singapore and Malaysia indices are above their initial levels, the notes continue the quarterly payout.  At observation date 2, Thailand and Taiwan indices are above their initial levels, even though Singapore and Malaysia indices have fallen below the initial levels, it would trigger the "call" or "buy-back" event.

Outcome: Investors receive 100% principal, with quarterly payouts until early "call" of the product.

Naturally, investors will not wish for this scenario as they will not receive the full quarterly payouts for 2.5 years, a total of 10 quarterly payouts.

Scenario 2: If the indices stay between 50% and 100% of initial index values

If scenario 1 did not occur, at all quarterly observation dates during the 2.5 years, if all the 4 indices are below the initial index values, and above 50% initial index values, the bank will continue to the quarterly payouts.

Outcome: This is the best case scenario.  Investors receive 100% principal after 2.5 years, with a total of 10 quarterly payouts.

Scenario 3: If any of the indices fall below 50% at observation date

During the 2.5 years, if any one of the indices fell 50% from the initial index value at the quarter observation date, then the trigger event happens.  At this point in time, the product will stop quarterly coupon payment.  Investors do not know their loss, because they need to wait till the end of the 2.5 years to see where does the worst index ends.   

Scenario 3A: If the worst index ends above the initial index value

At the end of the 2.5 years (Final Valuation Date), if the worst index ends above the initial price, then no loss is incurred.  Investors receive 100% principal.

Outcome: Investors receive 100% principal, with quarterly payouts until trigger event.

Scenario 3B: If the worst index ends below the initial index value

If the worst index ends below the initial price, the loss will be the difference between the initial index value and the index value at the end of 2.5 years.  In other words, if worst index is 40% initial value, investors would get 40% principal.

Outcome: Investors receive (Final Index Value / Initial Index Value) x Principal, with quarterly payouts until trigger event.

This would be the worst case scenario, but no chance that the indices would fall to zero.

The next post will talk about how my JP Morgan Asia Confidence Notes actually performed during the 2.5 years. 

I never know that it is going to be a journey on the Knight Bus of Harry Potter tales, where you never quite know what will happen next.

(Part 3 to come...)

Tuesday, 19 March 2013

JP Morgan Asia Confidence Notes (Part 1)

Let's talk about my experience with the purchase of a structured product.  Of course that was before the collapse of Lehman Brothers, Sep 2008.

It was one day in June 2008 when I renewed my fixed deposit at the bank.  That day I learnt that the bank have assigned a "personal banker" to "take care of all my financial matters" with the bank.  This "personal banker" told me that interest rate for FD was too low, and introduced a structured product for better returns.

The JP Morgan Asia Confidence Notes has the following structure:

1. Tenure of 2.5 years
2. 7.5% p.a coupon fixed – payable quarterly.
3. Based on Singapore, Malaysia, Thailand and Taiwan Indices movement.  The buffer level for Principal to be affected is 50% of index (index level at start of tenure) for any of the 4 countries.   Meaning one of the indices must fall by 50% (at observation date) for the Principal to be affected.

4. Early callable every quarter (at observation date), if all of the indices go above the initial index level.

The minimum investment amount was $50K.  Although the "personal banker" told me that the principal is not protected, I was given a strong impression that it was safe and low-risk.

This was also the opinion of most of the financial "gurus" and analysts at that time.  Most people did not believe that the indices would drop by 50% during the next 2.5 years.   Most people thought that the most likely outcome was that the bank would "call" the notes early before the 2.5 years tenure is up because all indices go above the initial index level.  One analyst even regretted that the minimum investment amount was too high, so that not more people can reap the benefits.  

Decided against putting all my eggs in one basket, I invested $50K from my FD into this JP Morgan Asia Confidence Notes, while the remainder stayed in the FD account.

This portion of investment with JP Morgan Asia Confidence Notes will be earning 7.5% p.a, with payment every quarter.  The portion with FD will be earning a miserable 1%.

But in this world, anything can happen......

(To be continued......)

Saturday, 16 March 2013

Stamps selling at ebay-Singapore

In my previous post, I have stopped stamp collecting at about the millennium year (2000).

At about 2004, I came to know that ebay-Singapore has started operation.  There is no listing or insertion fees when seller lists in ebay-Singapore, meaning that listing items on is completely free.

However, we have to bear in mind that our items will not be available to the majority of people when they search under or at other overseas ebay sites.   Potential buyers have to come specifically to before they can see your listing.  That means your listing is not internationally listed.

My thinking was that rather than leaving my stamps in cold storage, why not test the water and see how the selling process works in ebay-Singapore.

I have created an eBay-Singapore Seller Account and started listing some of my stamps for sale on eBay-Singapore.

To be a good seller, you need to be clear about what you’re selling.  Use a good and simple title that explains in a few words what you have and the conditions of the stamps.  Then you need to show people what you’re selling.  For this, you’ll need a decent photo of the product.  Then, choose the most appropriate category in eBay so people can easily find it

For overseas buyers, as Paypal is the recommended method of payment on ebay (transactions are instant and linked to the buyer/seller's bank accounts securely), I have also created a Paypal account.

As there is no listing fees, if there is no bid on your item, you could just re-list it as many times as you wish.  As I do not require urgent money from my stamp collection, I just repeat the process of listing and re-listing.

I made the first sales in 2004 and as my stamps in my ebay listing were sold off, I listed new stamps for sales.  I have also made a record for the sales that went through in ebay.

Recently, I was curious how much I have sold in ebay-Singapore and tallied up my record.

Since the first sales in 2004, I have made over 1200+ sales and about $32,500 in values, averaging about $2,700 a year.  I have no idea so much money was locked up in my stamp collection.

My stamp collection is about half-way gone and selling stamps as one way of passive incomes will dry up one day.  .

Thursday, 14 March 2013

Stamp Collecting - A child's Play

You may wonder why stamp collecting has anything to do with passive income.  Let me explain.

After I started my "Save at School" Stamps/POSB Saving Account, I developed a liking for those beautiful stamps and began my journey as a stamp collector.

Both my parents are from China and we have quite a lot of relatives there.  In those days before the telephone/cellphone era, the only mode of communication between Singapore and China was writing letters.

When the letters arrived, I eagerly cut out the stamps from the envelops, soaked the stamps off the papers in water, dried and aired them, then sorted and placed them in a small album.  I was young and had little skills then; and some stamps were inevitably destroyed in the process.

Those days we did not have electronic/video/computer games and most of the kids had simple hobbies such as collecting stamps, match boxes, bus tickets (those were colourful unlike the plain ones nowadays), etc.

Our group of friends then exchanged the excess stamps in our possessions to some other stamps that we liked.  It was just one-to-one exchange as we did not have idea on the value of the stamps then.

My stamps collection mainly concentrated on China and Singapore stamps.  I received a scolding from my parents when I paid $8 for the China 8c monkey stamp issued in 1978.

After I started work, I continued adding on to my China stamp collection.  I stopped about year 2000.  Partly because my collection was almost complete (except a few of those rare gems), and I found it not worthwhile to continue because the number of new stamp issues are too huge, practically making the new issues worthless.

To be continued......

Saturday, 9 March 2013

My First Saving Account - POSB

I opened my first bank account at Post Office Savings Bank (POSB) when I was in primary school. In those days, we could buy postage stamps from our form teacher and paste them onto a card. That was the "Save at School" card with empty boxes where you could paste the stamps. After completing the stamp card, the teacher would collect it, hand it to the bank and deposit into our POSB account.

POSB was also a pioneer in a number of industry innovations, such as the GIRO electronic payment system, direct salary crediting and the automated teller machine (ATM), of which it had the largest network. POSB was truly the "people's bank" then.

After I started working, I continued to use POSB for all my banking transactions, including salary crediting, GIRO, current account with free cheque book, NETS, etc. POSB at those days was also the only bank with tax exemptions on interest paid to savers.

The "people's bank" came to an end in 1998 when POSB was brought over by DBS. Over the next few years, DBS came out with several measures that destroyed POSB's long held image of the "people's bank".

The introduction of monthly service fees for small accounts drew great unhappiness for many people, as depositors were incensed that DBS would sacrifice poor Singaporeans for its bottom line.

Then, DBS started charging monthly service for current accounts and we also have to pay for new cheque book issuance.

A government tax change also meant that POSB was no longer the only bank with tax exemptions on interest paid to savers.

Many Singaporeans spoke against the merger and against POSB's new parent, DBS.

I have closed my current account with POSB immediately and over the years, also transferred my salary crediting, GIRO payments, to other banks. I just maintain my POSB saving account with a small sum over the minimum sum, so that I can still use the POSB/DBS ATM network when necessary.

I have this irrational dislike for DBS that over the years, I do not have any account (other than the original POSB account), credit card, or any other products by DBS.

This really prevents me from buying into the toxic DBS high notes during the Lehman's saga.

My Stock Portfolio @ end February 2013

CapitaMall Trust
CDL HTrust
Sing Tel
SP Ausnet
Suntec Reit
Starhill Global
FE Orchard
CapitaMalls Asia
FE HTrust
HPH Trust
Yeo Hiap Seng

Movement in my portfolio in February:-
Sold:- SMRT, Global YellowPages.
Bought:- SPH.

Dividends collected in Feb: $401.72
2013 Avg Dividends/month: $290.57

Monday, 4 March 2013

My Stock Investment Journey

After the lesson of the CLOB shares, I did not stop from investing into the stock markets.  Because regular dividends payment from stocks are one of the passive income streams that I wish to set up.

However, I want to invest into stocks only on my extra cash, and on those blue chips in the Singapore stock market.  I want to make sure that even in the event that my whole stock portfolio is badly hit, there is no immediate impact on mine and my family's livelihood and commitments.

My holdings include companies that pay regular dividends, such as Starhub, SPH, SGX, Capitaland, CapitaMall Trust, SingTel, SP Ausnet, Suntec Reit and a few others.

That was just the case during the sub-prime crisis, I did not lose any sleep when my stock portfolio contracted by 50% and I was also holding a structured deposit (principal not protected) that was dangerously teetering on the brink of collapse.

I used some of my extra cash to invest into more stocks.  On hindsight, I regret that I was not aggressive enough then. 

On the other side, my structured deposit just managed to survive and I also collected the full payout of interest when it matured.

Saturday, 2 March 2013

The CLOB shares saga

Although I am Singaporean, the first shares that I had were Malaysian shares.

In the old days, we could purchase Malaysian shares in Singapore through over-the-counter trade, the so-called Central Limit Order Book, or CLOB, as the market was known.

When I ventured out from the safe harbour of Fixed Deposit, I brought into CLOB shares, as they were very "hot", "affordable" and "have huge growth potential" at that time.  I brought into several counters and if I remember correctly, one of the counters was UEM.  I can't remember the other two counters now as the companies are probably no longer in existence.

Unluckily, a couple of months after I brought into CLOB shares, Malaysia unexpectedly introduced capital controls on Sept 1, 1998 (Asian Financial Crisis) and declared the trading of Malaysian shares on Singapore's Clob International to be illegal.  This caused the value of Malaysian shares traded on CLOB to freeze and we watched helplessly and in horror their values nose-dived steeply.

Or maybe luckily for me, I had just a short "incursion" into Malaysian shares and had just a small investment there.  Some of my friends and relatives are not so fortunate, they had their majority of fortune and stock portfolio in CLOB shares.

I lost 15K and this was a painful tuition fee for me.

My Poor Fixed Deposits

After I started working, I followed my parent's old path on savings.  Due to busy work schedules and occasional regional duties, I did not have much time to manage my finance actively.  I saved whatever I could and deposited the money into bank Fixed Deposit accounts.  At one point, I have 150K in FDs.

However, the FD interest rates kept dropping and FD was no longer the "cash cow" that it was in the old days.  Over the years, the interest rate finally dropped below the inflation rate and it became obvious that my money got eroded just by idling in the bank.

I tried to look around and there were several options:
1. Stock Investment to gain regular dividends.
2. Endowments and long term saving plans
3. Unit Trusts and Investment Linked Products.
4. Bonds
5. Property
6. Structured deposits offered by the banks (which they said "have high returns" and  are "perfectly safe" --- how could those giant US banks and the trusty old Lehman Brothers fail?  They tried to convince me into buying)
7. Multi-level Marketing.

I will blog on my experience with the above options in later posts.