However, by basing your decisions on which fund to invest simply only on a fund’s historical return is in my opinion, not a very wise action to take. Mutual fund companies know that know that past returns sell funds, precisely is the reason why advertisements in print media like newspapers and financial magazines specifically show past returns. Most may not find it easy to believe, it is actually the low expenses of a fund that is more predictive of its return, though a fund’s return is still to a certain extent reveal to you whether it is worth owning. To make an informed decision on whether a fund is good to invest for you, you need to take note of the following points,

1. What is return anyway?

We talk about returns in businesses and investments, and in many finance literature. And when we invest, we want returns, it is therefore important to know the definition of two types of returns commonly used in many places. These two are total returns and annualized returns.

Total return is simply that capital gains (or losses) in the market value of the stocks and/or bonds that the fund owns and the income that is received from those stocks and bonds. Stocks got pay dividends, though not every regular interval got, unlike bonds got a relatively stable income from coupon payments every six months.

In equation form, the total return is,

Total return = capital returns + income returns

There is another return terminology that is related to total return. An annualized return is return expressed in percentage form, over one or more years. It is sort of an average return over a period of time. The period of time can be 3, 5 or 10 years and annualized return takes into account compounding effect. A fund with a four years annualized return of 8% does not mean that it made exactly 8% every year of course since that is almost impossible in reality for a mutual fund managed by humans and given market conditions. It may made 12% in year 1, lost 29% in year 2 and then return another 40% in the last two years. The annualized return means that if you buy into the fund during year 1 and hold on to it until end of year 4; you would have like earned 8% every year on the initial capital.

2. Long term returns matter, not short term high returns.

In many mutual funds advertisements, one usually does not discover their advertised returns for more than 8 years as the figures may not look good. You need to look at the fund’s returns for at least the past 5 years and compare it with two types of benchmarks, namely its respective indexes and funds that invest in the “same area”, in order to have a better perspective on performance. For instance, almost every technology funds clocked impressive returns during the dot com bubble, lasting a few short years but their long term returns are dismay ever since the dot com bubble burst.

A fund that performs not that well in one year but do good in more than 5 years is not necessarily a bad buy since even Warren Buffett does not achieve a 20% return every year but its annualized return ever since the inception of Berkshire Hathaway is more than 20%. In the extreme end, it is not advisable to invest in a fund that performs poorly consistently over many time periods again since Warren Buffett also did not do worse than the market for most of the last 30 years.

In many cases, it is the fund manager behind the fund that matters or responsible for producing superior returns, If the feller dies or jump ship and work in other mutual fund companies, then the satisfactory return in the past 10 years will most probably not materialised in the future.

3. Indexes as benchmark to compare mutual fund returns

The most commonly used yardstick for comparing how well the mutual fund managers do their jobs is simply by comparing fund’s return to its related index. Almost every fund’s shareholder report compares its returns to one or more indexes, the misrepresentation comes when a wrong index is chosen for comparison, and it will be like comparing apples with oranges.

Stocks are classified based on many parameters, the most common of which is their market capitalisations. The S&P 500 is a good index to benchmark against when the active managed fund focus on large cap and Brand Name United States Company. Although it may not be that ideal also, since the S&P 500 index is built in such a way that companies with larger market cap make up a larger percentage of the index and hence, the performance of companies like Microsoft and Exxon Mobil and General Electric will be reflected in S&P 500 also.

Given that small cap and large cap usually go their separate ways in terms of performance given any time periods, one commonly misrepresentation used by some mutual funds companies is that comparing a large cap value fund performance with Russell 2000 – index made of small caps when it does not do well relative to the large caps index and/or its similar peers. As a result, you have to ensure that an appropriate index is used for comparing mutual funds performance.

4. Peer groups as benchmark to compare mutual fund returns

Peer groups in this case mean other mutual funds that invest a large part of in the “same area”. The same area in this case does not only refer to geographic area but also cap size, value or growth, sectors, and maybe other less commonly used parameters like dividend yields.

In some cases, using indexes only may not be effective or even non applicable, a fund that invest in technology stocks in the United States may perform worse than the S&P 500 but this index is diversified into many different sectors and the technology fund did not load up on financial stocks before the economic crisis of 2008, and hence may not do well relative to S&P 500 during years 2006 and 2007. As a result, comparing to other mutual funds that invest in technology stocks makes more sense in gaining into insight of its performance.

5. Beware of chasing after returns

I know that it does not feel good watching your large cap fund achieving negative returns or lag seriously behind other categories. This happens during the dot com bubble when technology funds do very well relative to old economy stocks. But by the time you jump inside the bubble is already waiting to be burst. In other words, there are really no clear signals on when to buy and sell this or that hot fund. When it comes to mutual fund investing, it is better to be a contrarian investor, when everyone is investing in a fund category, that means that category is about to cool off and when everyone is selling in another fund category, that means it is about to rebound to some higher prices. Note that contrarian investing does not always applies to individual stocks as some times, prices drop and remain low due to fundamental business reasons whereas a mutual fund usually holds quite a large number of stocks from many different companies. There is one investment company that blindly jumps into buying large stakes in Australia ABC Learning Centre because it is like what Warren Buffett is doing when American Express prices fall due to a scandal.

In view of the pitfalls of chasing after this or that hot fund, it is recommended that most investors construct a portfolio of funds in different categories so that in any market conditions, there are some portions of your portfolio that aren’t do too bad.

6. How much do taxes reduce returns?

There is a saying that there are only two certainties in life – one is death and the other is taxes. Returns are mentioned earlier but that does not account the “take home pay” after taxes. When capital gains are realised and income is received from either dividends or coupon payments, you have to pay taxes on them. Investing in what type of funds depends on whether you are investing through a taxable or non taxable account.

Related posts:

1. Risks inherent in mutual funds
2. Essential 7 guidelines for actively managed mutual funds investing
3. Deciding between actively managed mutual funds and passive index funds

Fundamental analysis involves looking over and analyzing the company three types of financial statements and business models while technical analysis is more towards observing and detecting price patterns and trends and developing strategies to exploit them. No amount of candlestick charting, dow theory or wave patterns can save Enron stock owners during 2001 because these tools did not tell them anything about why shares of companies eventually fall and never go up again. Conversely, the same technical analysis tools will also not tell you which companies will become the Coca Cola or Microsoft of tomorrow.

This post will mention a relatively effortless way to find out whether a company has cooked its book. It is a simple screening test for companies that you will not want to touch with a ten feet pole.

What is the cash flow statement?

In layman terms, cash flow statement listed out the exact amount of cash that enter and exit the company during the period which the financial statement is reporting. Compared to income statement and balance sheet, cash flow statement is much more difficult to cook, or that in other words, it takes more creative thinking and innovation on the part of the accountants to manipulate, for the simple reason it is based on how much cash a company has.

With the Internet, there is a relatively easy way to determine the free cash flow and net income of any listed company. What is mentioning here is most probably the first task that investment professionals do before they decide to invest or short a company’s share. When I was studying financial accounting some time ago, I recalled my tutor, an accountant by training and with a bachelor degree (honors) in accountancy, once said that how much profit the company makes is what the company CEO wants it to be. By a stroke of the pen, the entire expenses can be booked under capital expenditure and what is loss of millions can become profit of millions.

But what cannot be easily changed is the cash flow statement as it is based on the amount of cold hard cash that a company owns at the end of the day. As a result, by comparing and contrasting the income statement with the cash flow statement, one can detect the creativity exhibited by accountants working for the company. To put it simply,

If a listed company reports substantial profit on income statement but the free cash flow from cash flow statement does not paint an equally good rosy picture, then there is a warning flag.

The rationale for using free cash flow instead of operating cash flow is its more conservative, reason being that it accounts for using real cash in capital expenditure. To calculate free cash flow of any listed companies, one can use the following procedure.

1. Sourcing for the company financial data.

Go to Yahoo Finance and enter the stock ticker code. Click on Get Quotes on the right of the search box. This will brings you to the summary page of the company financial.

2. Getting into the company cash flow statements.

Under the Financial heading at the bottom left hand corner, click on Cash Flow. Take note that for the case of Yahoo Finance, there are also quarterly data available, for the latest last four quarters.

3. Calculating free cash flow required of a company.

This will be a simple arithmetic exercise; you just need two figures to determine free cash flow.

Free Cash Flow = Total Cash Flow from Operating Activities – Total Cash Flows from Investing Activities

4. Finding out the net income or net profit after taxes

Under the Financials heading at the bottom left hand corner, click on Income Statement, at the bottom of the Income Statement is the net income.

Well, after getting the figures for free cash flow and net income, one can easily estimate the quality of the business earnings but do take note that it is to be used in conjunction with other valuation models or analytical methods.

If net income > free cash flow, especially if there is significant difference, then there is a potential creative accounting and you will need to analyze the company more deeply. If all you are involved in is technical investing, you will do well to not carrying out technical trading on this company as there may be a relatively higher chance that candlestick charting, dow theory or wave patterns do not predict the outcome accurately.

If net income < free cash flow, or around the same, then relative to the above, the quality of earnings is definitely better since the company brings in around the same or more cash than what is reported as net profit.

This simple exercise saved some people from the Enron scandal, and they felt relieved that they did in the aftermath of the incident. Follow this link to Enron financial statement during the year 2000, and you will discovered that there is much more net income than free cash flows for three years running, from 1998 leading to 2000, especially by the first quarter of 2001, when free cash flow is almost doubled that of net income reported but you need to add a negative sign in front of the figure for free cash flow.

Related posts:

1. Detecting creative accounting 201
2. Detecting creative accounting 101
3. How to detect stock market bubble?

The stated asset allocation model is based on a single assumption.

As will be expected from historical data and the causations behind, trends favouring either small or large caps will continue for at least a few years most of the time.

As a consequence of the above, there is only one simple rule to follow when doing asset allocation between small and large caps, which is to cash out from current holdings in small or large caps and invest in either one that returned more in the preceding year. The challenge now lies in choosing suitable benchmarks and ETFs that tracked them for use in this simple asset allocation exercise between small and large caps. The first step in implementing this asset allocation model is to choose a suitable benchmark to represent both the small and large caps respectively. There are two factors to consider for choosing the best benchmark for doing this asset allocation exercise. The first is that it is best or even essential that the indexes contain almost all the listed small and large caps stocks listed on the various stock exchanges as the fundamental reasons for the large differences in return between small and large caps is due to four reasons affecting their earnings in various economic climates. Indexes like the Dow Jones Industrial Average and S&P500 are definitely not a good representative of the whole large caps stocks due to their relatively small numbers of large caps include compared to how much large caps there are in the whole country. After which is choosing the index that has the longest history. Finally, still needs to choose a suitable ETF that track the index chosen from among many others.

When the above mentioned steps have been done, the next is to analyze historical results and see whether historical data conforms to this theory for the case of your country. For the sake of illustrations, we will choose the Russell 1000 for large caps and Russell 2000 for small caps. With these two indexes or benchmarks in mind, then take the following steps to decide which market caps stocks to invest in.

1. For simplicity, we will use the last day of the calendar year, as in last trading day of the calendar year to ascertain the total returns.

2. There are only two possibilities, either the small or large caps returned more, which to invest in for the coming year will depends on which one return more for the preceding year. For instance, if small caps returned more at the end of the year, then continue staying invested in small caps or switched to small caps for the coming next year if hold large caps currently.

We can analyze the results from past returns data, compare and contrast two investing strategies, having a fixed asset allocation and holds small and large caps all the way, that is buy and hold for a really very long term versus a slightly more active method but still not active to the extent of spending your life watching stock tickers of basing investment decisions on which market caps returned more during the year at the end of the year. That is if you observe, will give significantly higher returns than just simply buy and hold.

Translating into physical actions by implementing the above asset allocation plan with ETFs,

There are some slight differences between the returns of indexes and the ETFs that tracked them, returns from market indexes do not consider tax effects and distributions from capital gains when the ETF involved needs to sell a stock when the company is removed from its index, though it does includes dividends and that capital gains distributions are relatively minor. In addition, see that ETFs historical and current price information can be easily obtained from Yahoo Finance or other similar websites. Do take note that ETFs returns will match pretty close to but still less than their underlying indexes since there is this expense ratio, though still much smaller than actively managed mutual funds.

In conclusion, the reason behind this asset allocation is to increase returns significantly relative to just buy and hold a fixed percentage of asset allocation between small and large caps for decades, without corresponding increase in risk. Another crucial point to take note is that in any statistical game of chance, one still needs to stay in the game long enough to reap its rewards, even if the odds is in your flavor. In this case, as you can find out for yourself, by following the above two steps or strategy, you will be correct around 70% of the time, from historical data, a pretty high success rate. But to be correct 70% of the time, one needs to follow the strategy consistently through the decades. But since past performance is not guarantee of future results and if you are a high net worth individual, there is no need to do this asset allocation using 100% of funds intended to invest in equities. Like if worth more than $10 million and got $5 million invested in stocks, can use $1 million or less for this particular asset allocation model.

Related posts:

1. Why doing asset allocation between large and small caps is better than not doing so
2. Exchange Traded Funds 101 – a simple introduction
3. Concepts in managing portfolio and asset allocation

Professional wealth management is really a great business to be in, just look at the number of financial advisers on the streets, gathering contact numbers for financial consultations. Investors tend to be less aware of the relatively large figure spent in asking someone to manage your money. The reasons are not hard to understand, there is no bill or receipts showing how much you owe for managing money, fees are even out during the year and investors’ tendency to focus on returns since at any given year, there is a good chance that the returns are either significant larger or smaller than the costs of management. However, please know that these fees being not small in the first place, will add up to quite a lot decades later, given the compounding effect.

There are costs in managing a fund, be it active or passively managed, these costs are, including but not limited to, management fees, administrative expenses, marketing and distribution costs. A particular fund’s expense ratio basically tells you the percentage of a fund’s assets that is used to cover all the various costs as listed out above. A $10 million dollars mutual fund with 1% expense ratio means that it is charging all the shareholders of that fund $100 000 each year to manage their money.

1. Considering expense ratios

If all the fund’s expense ratios are the same, then there is no need to think much about this point. The fact is that not all the fund’s expense ratio are the same, or not all higher expense ratio translate into equally high quality management. Do take note that the highest expense ratio in the world does not have the best fund managers; neither do the lowest expense ratio has the lousiest fund manager.

Most investors tend to look at the charts showing all the wonderful past returns and assumed that since the fund can achieve great returns and more than enough cover its higher expense ratio, there is no reason or at least a good chance that it will be able to in the foreseeable future. This is a reasoning fallacy that you should overcome if you were to attain greater wealth, as the rationale behind is simple to understand. The statistics is that for every high cost fund, together with higher risk, that managed to make great returns, there are at least ten more others who fail. But those who fail get sweep under the carpet, television and other forms of mass media rarely give coverage to losers. This is like you always hear success stories of Bill Gates but there are many others who fail in businesses and never to succeed in making millions throughout their life and that only lottery winners receive press coverage, but not the millions who win nothing. Funds that kept losing most probably close down already, where got let you see the past returns and feels impressed by its track record.

In general, expense ratio seldom if ever changes with time passes, as a result, they are one sure indicator of future returns since with the effect of compound interest, a fund with much lower expense ratio generates much greater return for the same annualized return over more than 20 years period. The difference between a cheap and not so cheap fund does not add up to a few dollars for a cup of Starbucks coffee after more than 20 years, the difference can be a few thousands or more, depending on your investment capital. This is not a hypothetical situation; in fact, this is what happens in practice also. A study performed by Morningstar shows that for all categories of mutual funds, funds with lower expense ratios already outperformed those with high costs over a five years period already.

There is an implicit assumption that if you want higher quality, you have to pay more. A belief that most people, including myself holds for other things in life, but this is not the case in the universe of mutual funds. The probability that an outstanding individual runs a low cost fund is actually around the same as a fuck out manager running a much more expensive fund. Anyway, there are many examples in other aspects that paying more does not translate into higher quality, one does not have to look far from at Windows and Linux or even the government of a small city state.

Always check the expense ratio of the funds you intend to buy or already own, if there are some that are more expensive than what is the norms for their respective categories, see and check whether you can switch to a lower annual fees alternative.

2. Knowing the market rate for expense ratios

By right, economically and theoretically speaking, one should not pay more than is necessary for a given mutual fund type. In general, the lower the expected return of a particular asset class, the lower one should fork out in expense ratio or annual fees. This is not hard to see, fund managers know that it is not easy to beat other fund managers when it comes to bonds and the fact that it really does not take much time and effort to select triple A bonds with the required maturities. As trading of bonds is mostly done by institutional investors, and institutional investors are people with first class honors degree from Harvard or MIT (the institutions is staffed by people with that qualifications), it is easy to see that why there are relatively few opportunities to achieve returns by a big margin than other fellow fund managers. As a result, for a bond mutual fund, there is a very good chance that funds with much higher annual fees do worse than those with lower annual fees.

In general, you should not invest in a bond fund with expense ratio higher than 1%, as the total return is likely to be in the area of 5% return. If the fund cost more than 1%, you can see that the return can go very low, coupled with the fact that it is unlikely the fund manager can do much work to justify the higher than 1% fees, even for bond funds targeting emerging economies.

3 Keep a lid on sales charge

For those uninformed, sales charge is the upfront cost when buying a mutual fund, though there are other cost structures associated with mutual funds. Let us look at the following distinct cost structures of mutual funds and some advices on which are suitable in which circumstances.

a. No-load funds

No-load funds are simply those that carry zero sales charge, meaning to say that there are no fees levied when buying and selling. This is suitable for those who can build an outstanding portfolio in a one man show, all by yourself. But there are people who are not very familiar with asset allocation and the time to constantly monitor portfolio, especially if you are an A list celebrities like Tom Cruise, top surgeons or lawyers with obscene income. In this case, paying for a good financial adviser or broker and spending on sales charge will be better and wiser.

b. Front-end load funds

The name already tells us that for this type of funds, sales charge is simply the upfront cost. That means if you invest $1000 and the load is 5%, you will ended up paying $50 in sales charge and investing $950 into the fund only. This type of cost structure is suitable for long term investors who purchase through a financial adviser or broker, if and only of the annual expenses is low enough to justify the higher upfront commissions.

c. Deferred load funds

The name also tells you that there is no sales charge at the time when the fund is bought but of course the sales charges is still going to be charged on you, later when you sell the fund. In addition, the sales charge decrease each year that you holds on to the fund. But this is only one side of the equation, there is still another side which is its annual expense, deferred load funds usually include high annual fees commonly known as 12b-I fees which contribute to the fund’s expense ratio. The high priests of finance like brokers like to sell this type of mutual funds and kept emphasizing on its favorable sales charge structure because they receive income every year from this 12b-I fees but these high annual fees can drastically reduce returns even though the sales charges deal sounds like a good deal. In general, front-end load funds have lower 12b-I fees and hence lower annual fees.

d. Level load funds

They have either zero or relatively low sales charges and a level 1% annual fees which may be high for a particular fund. They are more suitable for a very short term investor and definitely not good for a long term investor. With totally no sales charges, a short term investor can buy and sell in short time period in a volatile market and make quick buck.

Last but not least, for every load fund, there will be a no-load alternative.

4. Be aware of hidden costs

Other than obvious and stated costs like sales charge and annual fees which is the expense ratio, there are two types of hidden costs that can be a large drag on bottom lines. These two types of hidden costs will of course eat into your return, though they are not included inside expense ratio in the first place.

a. Market Impacting Costs

There is a difference between fund managers selling large blocks of share and small files like you and I selling a few lots of shares from time to time. For a large block of shares that belong to a single company, selling it in a matter of few days’ means that there is a high chance that the selling price is less advantageous with each lot being sold, the reason being that of simple supply and demand. At any one time, only a finite number of people will want to buy the stocks of a company at a certain price. If there is an increased supply of shares, offer prices have to drop before other the same or other buyers will want to buy as they also have finite money for purchasing them. In other words, if only around 1 million shares of a stock changes hand on a day and the fund manager needs to sell 10 million shares as a result of some strategies that he is using, it will take him at least 10 days to complete the transaction. In addition, by flooding the market with oversupply of stocks means that the sales price becomes less and less.

Since market impacting costs are so called hidden costs or more hidden than stated sales charge and expense ratio, the only way to discover whether a particular fund is at a higher risk from higher market impacting costs is to based on three characteristics. First point to take note is that small caps have much lower trading volume and outstanding shares; hence funds that focus on them stand a good chance of impact market costs reducing returns. Second is that fund with larger asset base will of course have more of this problem than that with smaller asset base, the rationale behind is easy to understand. A fund with a large asset base will have a much greater number of outstanding shares to buy or sell for a given company’s stock or bond than one with a far smaller asset base. Thirdly and lastly, for high turnover funds that trade too much, it is not difficult to see that they stand an excellent chance of experiencing more of this market impacting costs.

c. Brokerage Commissions Costs

When we buy and sell stocks, we need to pay brokerage commissions. When fund managers buy and sell stocks, they also have to pay commissions. By right, since fund managers trade in far larger volume, they should be entitled to volume discounts, but there is a practice known as directed brokerage which regulators of financial industry banned a few years ago in the year 2004, whereby funds opt to pay more for the trading fees in exchange for placing their mutual funds on the brokerage’s preferred list. Some may still preferred to pay more for research data as of now, though the research data may at the end of the day be useful in achieving higher returns for the fund involved.

5. Strategic Tax Consideration

You can choose to buy mutual funds through yourself which is taxable or a tax shelter vehicle like 401(K). In the simplest sense, it is wise to buy mutual funds with high turnover rate through tax shelter vehicle like the 401(K) instead of through yourself. Vice versa, considering holding municipal bond funds, low turnover funds and mutual funds that are tax managed by yourself and need not through 401(K).

Related posts:

1. Deciding between actively managed mutual funds and passive index funds
2. Essential 7 guidelines for actively managed mutual funds investing
3. Are you aware of what your mutual funds own?

There is a Chinese saying of life experiences reflect movie stories and movie stories reflect life experiences, (人生如戏，戏如人生), it is due to the meanings and principles (and of course Donnie Yen and Wing Chun) that I found in Ip Man 1 movie that if I were to decide between Ip Man 2 and Iron Man 2, I would choose the former but since the price of a movie ticket is not really out of the world, unlike housing, it will not be much of a dilemma to watch both in the movie theaters.

You need to listen to this music as you read this post in order to have the feel.

1. Being in a crisis forces creativity thinking and innovation out of you

Ip Man is a movie about Wing Chun superb techniques, the history and story of Wing Chun holds important implications for us all. Without the crisis in Shaolin Temple around 400 years ago, Reverend Ng Mui will not have escape and force to innovate and there will not be no Wing Chun, no Ip Man and no Bruce Lee. While it is unfortunate that the Shaolin Temple is destroyed by the Qing Government at that time, along with some profound Shaolin martial arts, the great blessing in disguises is that one of the world’s greatest martial arts is born as a result of it.

Think about it, without retrenchments, without job security, with iron rice bowl, will you have venture out and eventually business multi-millionaires.

2. There is a formula for success

One of the key reasons behind the success of Ip Man movies, other than good plot, theme music and fighting scenes, is the stirring up of nationalistic feelings among the Chinese. The first person to use this strategy to boost box office sales in the Chinese movie market is none other than Bruce Lee in his 1972 Fist of Fury. The whole story line is similar to the first movie in the sense that got the bad guys belong to some races that oppress the Chinese during the turbulence last 100 years of China history. The difference between the first and second movies’ bad guys is none other than the first is Japanese and the second is a British. Also got around the same number of fight scenes with a final showdown and family oriented scenes.

I know that got people with surname Yip, feel very proud of their surnames after watching Ip Man 2, when the profound blocks, punches, kicks and techniques enables a shorter and smaller sized Chinese to defeat a larger westerner, the Chinese whole world over felt that Kungfu belong to the world but Wong Feihong, Huo Yuanjia, Yip Man and Bruce Lee belong to the Chinese people.

为了生活我可以忍，但污辱中国武术就不行 – I can endure to earn a living but cannot stand insult to Chinese Kungfu

Hung Jan Nam(Sammo Hung’s Character in Ip Man 2)

Ironically, it is the British controlled Hong Kong that saves Wing Chun from extinction as due to a man (by the surname of Mao) and his cock ideas, Cultural Revolution, that almost destroys the rich heritage of Chinese Culture, including and especially Chinese martial arts like Wing Chun.

Be it movie or other fields of endeavor, there is a formula for success.

3. Philosophy or beliefs of a person leads to different outcomes

The distinctive differences in fighting style between Taekando and Wing Chun are evident. In Taekando, it is believed that legs are the strongest weapon of the human body and hence the using of legs more often. While Wing Chun is designed for a weaker person and supposedly shorter in height also, to overcome a stronger person and it doesn’t make sense to use legs often since, you are supposedly physically weaker than the other feller and his legs are most probably stronger and longer than you.

In addition, when you are shorter and kick higher than waist level, not only center of gravity is temporally raised higher, reducing stability, more vital parts are exposed to attacks. While the beliefs behind Wing Chun is that kicks above waist level reduces stability by raising the body centre of gravity and if the kicks, especially high kicks does not happen to strike, a Wing Chun expert can easily advance close to him and finish off with double quick bong san, tan sou, etc., or 来留去送 which is why Donnie Yen in the Ip Man 1 and 2 fight scenes only use kicks as a finishing move, after Jin ShanZhao, Japanese General or Mr Twister has been traumatized by machine gun punches.

As a result of differences in the thinking and philosophy between these two schools of martial arts, there is different in outcomes of the way practitioners of them react to the same fight scenarios.

The extreme opposite between Eastern and Western Philosophy leads to wide differences in the practice of medicine and martial arts. Western Philosophy is traced back to Aristotle reductionist thinking, that is reducing them to the interactions of their parts, or to simpler or more fundamental things while Eastern Philosophy is more of influenced by Taoism concept of wholeness, yin and yang, and that all living and non-living things interact and counteract one another.

We can see the difference in medicine, in the treatment of poisonous bite by a snake. Western medicine may sought to develop an organic compound to neutralize the snake poison by analyzing molecular formula of the snake poison and then synthesis another organic compound to neutralize it. Traditional Chinese Medicine from one of the core Taoism philosophy, 五形三界，相冲相克，all the biological and non-biological objects interacts and counteracts one another in this realm, means that within the vicinity of where the snake lives lay the antidote for the snake’s poison, most probably in some of the plants.

In the movie Ip Man 2, the Mr Twister martial arts skills – western boxing is none other than some simple blocks and punches. A result of reductionist thinking? While that of Ip Man’s Wing Chun is more complicated when the whole martial arts system spring from considering the whole system and of course built on existing Shaolin martial arts at that time. Which is also why Bruce Lee decides to use the Taosim Yin Yang symbol for his Jee Kune Do as the philosophy and concepts draws heavily from Taosim philosophy.

The moral of the story at the end of the day is adopt different philosophies so that one can use each when problem solving because sometimes reductionist thinking in more effective in this circumstances and sometimes, expansionist thinking is more effective in another circumstances, like mixed martial arts, using skills and techniques from different styles for different fight scenarios. The practice of medicine today is also moving towards using western and traditional Chinese medicine in the treatment of various diseases.

We can see this in two different thoughts when it comes to investing in equities, like some feel technical investing is better while others prefer fundamental analysis. Both can actually combine and use at the same time.

4. Using of mantra to simplify learning, remembering and application of whatever things you learn in life

Unlike martial arts from other countries like Japan and Korea, Chinese martial arts, including Wing Chun, usually contain mantras to summaries all the key philosophies, core concepts and principles in four letter Chinese words. The beauty of China girls Chinese language lies in four words can transmit deep and profound meanings that will take more than four English words to convey. We shall see some of these four words mantra from Wing Chun and their meanings, together with all the life lessons that can be reflected from it.

Think about it, be it creative thinking, critical thinking, programming, engineering problem solving, real world business problems, aren’t that we need to go through certain thoughts processes, methods of analysis, as a result, coming up with mantras for methods of solutions enables fast and effective recall of the mental processing strategies required.

5. 永春绝技，源起少林 – Wing Chun Superb techniques, originally originates from Shaolin

The first line of the mantra recognizes Wing Chun roots in Shaolin. As mentioned before, the acquisitions of appropriate knowledge of a field must come first before innovations in that field can occur. Reverend Ng Mui study Shaolin martial arts throughout all her life. As such, the knowledge and insights gained would be deep, profound and enlightening because she literally faces martial arts every day. It is by standing on the shoulder of giants that she can see further. In other words, it is by sitting on a large pile of knowledge that Ng Mui is able to derive and invent a much better fighting system than previous versions.

6. 拳打中线, 两点之间, 直线最短, 以弱胜强, 拳入三关,　任我行走 – Fist hit centerline, shortest distance between two points is a straight line, the weakness can overcome strong, once cut into centerline, can attack anyhow I want

When you are fighting with someone much larger in size and taller in height and with muscles here, there and everywhere, like Mr Twister, it is obvious that the only way to survive is by attacking the person vital points which lie along the centerline. If you are much large in size and height, and opponent does not know any martial arts, you anyhow beat can also win by common sense. However, this is not the case in real life situations as in not every time the other feller is of smaller size and shorter height than you. In addition, the shortest distance between two points is a straight line, when not only your legs are shorter but hands also; it makes sense to deliver punches using a straight punch along the straight line.

We can see this in the jobs and careers that we pursue, just like a physically weaker person need to hit along the centerline so that there is much higher probability of winning, if one is not that good in talking and sales, it is also wiser that he or she does not involve himself in things like network marketing and commission based financial adviser, and screw himself because the most crucial element require for success happens to be his greatest weakness. There are many ways to make millions, one do not necessarily have to be in network marketing or financial adviser that needs to requires excellent verbal communications skills for success.

In the movie Ip Man 2, in the final showdown between Yip Man and Mr Twister, the grandmaster eventually win by cutting into Mr Twister centerline and whacks aggressively using some techniques and forms from Hong Gar. As you can see, once one cut into centerline using Wing Chun techniques, Yip Man can use the more damaging Hong Gar forms to impact greater injuries.

This is like in investing in stock markets, when various benchmarks showed that stocks are seriously undervalued, it is time to start aggressively buying into.

7.连消带打, 以攻为守,　以守为攻 – Simultaneous attack and defend, attack is defend and defend is attack

To merge attack and defend together is a novel concept at that time and to this day, there are not many martial arts styles that stress and emphasize much or contain techniques of simultaneous attack and defend.

As with actual fighting, look at the job scope or task in your everyday job and businesses, are there two tasks that can be done at the same time without sacrificing the quality of work.

6.招无虎鹤, 法无五行, 只谈线位, 力与角度, 蓄劲似蛇,　发劲似猫,　朝形似鸡 – Forms contain no Tiger and crane hand forms, no specific patterns, only about relative positions, strength of force and angle in the application of force, preparing to exert force like snake, applying force like cat, standing stance like chicken.

While history has it that Reverend Ng Mui invent Wing Chun after observing how a crane fight, Wing Chun does not contain any Crane hand forms, unlike Hong Gar which still retains the five animals hand forms from which the Hong Fist style is derived. Wing Chun deviates substantially from the martial arts of that time in that it do away with directly mimic the movements of animals and choose certain elements from animals fight for applications in human fights. One can see Crane in Bong sau, ding sau and snake in Huen sau, bill gee, etc, but the hand movements in Wing Chun do away with crane and snake hand forms, Tiger hand can be seem in Hong Gar used by Sammo Hung when he is fighting with both Yip Man and Mr Twister but Wing Chun has do away with unnecessary forms and movements that directly mimic animals movements.

There are many aspects or elements of an area that can be applied onto another area or field of studies. One should recognize whether if certain elements can totally do away and only apply those that are the most suitable.

9. Importance of mastering the basics, 永春小念头 – Little Idea

所为永春真妙法，必需先从小念头开始

Wing Chun Siu Nian Tou contains some of the most important blocks and punches which aspiring Yip Man and Bruce Lee must learn and master well in order to fight like them in real world actual fighting. At first sight, it seems that the patterns of Siu Nian Tou are nothing much impressive and one at first really wonders if they are of practical usage in actual fighting.

We can see that in investing and engineering, mastering the basics is also equally important for success. It is by understanding what are light transmittance and the unique properties of fiber optics., all the fundamental Physics concepts that the following NUS students can come up a device to capture Sunlight and only transmit the light minus the heat energy of sun.

Before you can be like Warren Buffet, one must first understand and grasp the concept of time value of money well, the basic terminologies used in financial statements and concepts like price-earnings ratio, dividends yield, etc.

10. 下三路手,　以脚消脚 – When kicks are below waistline, use legs to neutralize legs (or kicks)

One of the fundamental Wing Chun principles is when kicks toward you are below your waistline, you use legs to neutralize the leg attacks. This illustrates the importance of systematic problem solving. Fighting is like creative problem solving in the sense that both are dealing with a dynamic situation. So that when a certain problem situation is similar to another, one can always use the same techniques.

11. 禅宗绝学,　旨在修身 – main objective of Wing Chun is to cultivate oneself

While Wing Chun got deadly effects when truly mastered, one should aware of benevolent and compassion. The Chinese word for martial arts is actually made up of two words, one is stop and the other is war. The original intention of martial arts is to stop warring.

In the wet market fights, when Ip Man finally got a chance to display Wing Chun Butterfly knifes, we can see that he flipped over the knifes to the blunt side just before the hacking begins remembering that they most probably have a mother or wife at home, because he knows that the group of them will most probably not be his match.

One should always be aware of the original intentions and sacred duties of various professions (if you belong to them), graduates from Medicine faculty need to take a meaningful Hippocratic Oath, future lawyers also need to take a similar oath of upholding the justice while engineers need to remind of their duties in life – that of improving the life of humanity through science and technology.

Too often, however and unfortunately, people learn martial arts and develop more violent tendency, lawyers instead of upholding justice ended up only help rich people to win court cases regardless of actual circumstances, doctors knowingly prescribing Subutex even though it is an addictive drug.

12. 肉身成佛 古今几人 无为无我 无界无终 – since the beginning of ages, how many people ever become invincible in fighting, (exact words meaning are how many people ever become Buddha since the beginning of ages) there is no boundary to the ultimate level of martial arts, no boundary where learning stop

The final words of Wing Chun mantra mention another profound fact of life, that of lifelong learning, one should live until old and learn until old. Knowing all the Siu Nim Tao, Chum Kiu, Biu Tze and Muk Yan Jong does not make you a Yip Man and Bruce Lee, neither to attaining black belts a few dans in Karate or Taekando. As what academic professors say even though they already got Phd or doctoral degrees in their respective fields of study – the more I know, the more I don’t know. There is really no boundary to the degree of knowledge that one can acquire.

We now know why Bruce Lee made a certain statement, given the profoundness of Chinese Kungfu.

I am here to tell you that China is the ancestral homeland of all martial arts.

International Kungfu Superstar Bruce Lee, during a speech given in Edison Technical School

13. Everyone got a God-given talent and a place where the heart is

Had Sammo Hung being born in a particular city state, he will most probably ended up as a doctor or lawyer if he is good is his academic studies or as a toilet cleaner/taxi driver if he does not fare too well. If the career option available to Sammo Hung is university or it’s the end, not only will there be no Ip Man, there will also not have the hugely successful vampire series of movies during the 1980s and early 1990s which create an iconic character of a vampire expert that up to this day, they still cannot find someone to replace Lam Ching Ying as the vampire and ghost expert.

There is a Chinese saying; 十年树木，百年树人- it takes ten years to grow a tree but 100 years to know the outcome of an educational system. It is a joke that barely less than half a century when a particular education system has yet to produce a single Nobel Prize winner, some people can self congratulates them for creating a good class education system when cracks or problems already started to surface.

Had you seem and realize that more wealth is created for humanity if the education system is more of helping to discover each child inborn talent and passion rather than one that overly stresses on academic achievements. Had Reverend Ng Mui not devoted herself to deep study of martial arts (a supposedly non-economical activity by today’s perspective), due to passion and gained a deep understanding of Shaolin martial arts due to talent none other than commonly defined notion of academic achievements, there will be no 永春绝技. The Japanese feller who compose this piece of music for Ip Man may well become retarded if he were forced to study some courses like Medicine, Lawyer and Accountancy that were supposedly brings better career prospects and earn more money.

I will write the word Kungfu into English Dictionary.

International Kungfu Superstar Bruce Lee, during a speech given in Edison Technical School

Bruce Lee almost graduated with a first class honors in Philosophy from  University of Washington when he decides to quite school and open martial arts school,

He said, if my life purpose is to let the whole world know what Chinese Kungfu is, what do I have to afraid to lose?

14. Morality and professions should not have differences in status

“今天的胜负，我不是想证明我们中国的武术，比西洋拳更加优胜。我只是想说，人的地位，虽然有高低之分，但是人格不该有贵贱之别。我很希望，从这一刻开始，我们大家可以学会懂得怎样去互相尊重”

Yip Man(Donnie Yen’s character in Ip Man 2)

In today materialistic society, people have the tendency to value fellow humans on the basis of his monthly income and net worth, or by his profession, or even by the way he look. But since morality should not have the distinction of high and low, so should job and profession. In some country, even engineers are deemed to be of lower status than doctors and lawyers by virtue of income and stability in income.

This is very similar in meanings, though not entirely similar to “one of the best well known sentences in the English Language”, from United States Declaration of Independence.

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights that among these are Life, Liberty and the pursuit of Happiness.

Conclusion

In conclusion, Ip Man should wear Iron Man suit and Iron Man should learn Wing Chun so that they will become invincible. The combination can be called Ipron Man 2 so that people will not have to become indecisive as to watch which movie.

Related posts:

1. Finance Lessons from Wing Chun
2. Finance and Business lessons from online quizzes
3. Acquisitions of knowledge and asking good questions and innovations for gaining wealth

Economics 101 tells you that when there are too much money running after too few goods, prices of goods will rise. The same logic holds true for immovable properties also. Whether there will be significant appreciation in houses or any other types of properties depends on whether there are many dollars chasing after limited number of properties.

It is not hard to see that the big three, jobs, incomes and population, (not General Motors, Ford and Chrysler), accounts very much for how much price appreciate for more than 5 years down the road. However, this is only one part of the equation; the other part is supply and costs of land for housing and other types of real estate purposes.

“Buy land – they ain’t making it anymore.” Will Rogers.

Adding on to the fact that there is only a finite area of land on Earth, there is also environmental regulation that prohibits development that clearly endangers those already endangered species, from various plants to animals. This further adds in to the benefits of investing in real estate compared with stocks and especially bonds.

That is, assuming that supply of land is limited and costs of land also rises with time, then the following equation holds true,

Increase in Jobs + Increase in Income + More Humans = Higher Real Estate Values

This relation is easily seen and will be obvious to people involved in area of investment. The more people in a particular geographic area with jobs plus high income, rent levels and subsequently property values will be pushed up. People need a roof over their heads and places to shop and other avenues of entertainment. In short, employment is the basic foundation of purchasing power.

In another sense, what you are really investing is not really the real estate, but local and regional economy of that real estate. Other than growth, stability is also crucial, I think so far, no one invest a cool US$1 millions in war torn Afghanistan yet. In the case of a stable city, state and country, it is wise to check with respective places’ economic development agencies certain key data like whether the area is greatly cyclical in its economies and if the local area “GDP” increase with only little downturns.

It is not difficult to verify this fact from historical data, just take a look at cities with rapid growth in both jobs and incomes, and with limited supply of land, like Seattle, Washington and of course Hollywood.

As a result, the first thing to do when deciding to invest in a piece of property is to check the geographic area potential and its likelihood for expected growth in the three main parameters.

Related posts:

1. Value investing principles in using debt for real estate investments
2. Value investing benchmarks for real estate investors
3. Is dividend yield a good indicator of value for a 3 to 5 years holding period?

The distinctive key of value investing lies in it using multiple benchmarks when deciding on the value of an asset, instead of subscribing to modern finance theory of prices of asset already reflect the value of that asset, assuming perfect information to all people participating in the market. Other features of value investing includes margin of safety for the required rate of return and risk. Margin of safety got a similar meaning to safety factor in engineering.

In other words, most people subscribed to modern finance theory that a piece of real estate or stock is undervalued simply because it is lower than the prices of its related peer’s market prices.

In addition, when it comes to real estate, people always have the idea that due to population increases and increases in construction costs as a result of inflation, the value of a property always goes up. That is true in the long run, but how long is long? Don’t forget that the causation of recent financial crisis is due to everybody believing in this idea, both owners and lenders alike. The fact is that in the short run, at least within 5 years of time, prices of property did not really go up.

This post is an overview of some other benchmarks used to determine the intrinsic value of a physical property. They will of course be different for stocks. They will be further elaborate in future posts.

1. Cost of rebuilding the same property

This will examine the short run causation that will cost houses and buildings to drop and rise in prices. New houses and buildings are constructed by large corporations listed on stock exchanges; however, supply of new housings usually does not meet demand exactly, eventually they are not building computers and can be like Dell, built to order.

2. Per unit cost measures (similar to net asset value per share for stocks)

Examples of commonly used per unit cost measure for properties include price per square foot, price per apartment and price per front foot. Just like financial ratios are not to be used in isolation when deciding on buys and sells, figures of per unit cost should also not be used in isolation when doing property investment.

But they are still meaningful numbers for comparison.

3. Cash flow – current cash return on investment in the property (similar to dividend yields for stocks)

This basically expressed the positive cash flows per month/year as a percentage of down payments, like for the case of stocks the dividends receive as a percentage of price paid for the stocks, i.e. dividend yield.

4. Discounted cash flow (present value of future cash flows from rental income net of all mortgages and expenses)

This is perhaps the best measure of value; Warren Buffett has already defined the intrinsic value of an asset as the present value of its future positive cash flows that can be retrieved from that asset during its remaining life.

The same holds true for physical properties, just that in this case, the future positive cash flows are simply its rental income. To understand this concept, one must first comprehend time value of money concepts.

5. Monthly gross rent multipliers (similar to price earnings ratio for stocks)

This simple mathematical operation is to check whether price is too high or rent is too low.

Monthly gross rent multiplier = sale price of property / gross monthly rent

Where gross monthly rent is rental income before deducting all mortgages and expenses.

The simple rule resulting from this ratio definition is that monthly gross rent multiplier above 140 usually results in negative cash flows (unless down payment is in increased) which is not wise for a wise and value investor.

5. Probability of appreciation in potential

Whether a piece of asset, be it stock or real estate, can increase in value in future, depends totally on whether they can generate more revenue than now when future comes.

There is no doubt that it is much easier to predict the future for real estate than for individual stocks. For the case of real estate, basically more jobs, incomes and population in future for that particular geographic area where the property lies means that value of real estate will increase.

6. Can more value be created?

One of the reasons why Detroit big three (General Motors, Ford Motor Company and Dysler) sinks while Toyota and Honda manages to survive and excel during both economic boom and recession times is that they kept prices of automobile the same while increase value by innovation in engineering, i.e. lean manufacturing, just-in-time, improved fuel efficiency etc.

In a similar sense, there are many ways that slight physical touch ups to properties can increase its price more than what it cost to improve that property.

As you can see, by reviewing these benchmarks, sometimes, paying more than market value can generate high return with suitable margin of safety, as what Buffett does for Coca Cola during the 1980s, and paying less than market value can give low return with no margin of safety, like overpaying for large and brand name companies like Citibank, Merrill Lynch and General Motors.

This is true for stocks as much as it is for physical properties.

Related posts:

1. Value investing principles in using debt for real estate investments
2. Predicting appreciation of real estate value 5 years down the road
3. Why investing in structured products is like being screwed

Why it is that market capitalization of companies affects their performance in various economic climates?

While it is a fact that both small and large caps represent a wide range of industries, with so called different performances in different economic and financial conditions. The following four factors do affect the relative performance of both small and large caps stocks, as can be seen historically. As a result, it follows that the same effect by the same causation will persist in future.

1. Rate of growth in corporate profits

Small caps have a much greater sensitivity to changes in main factors affecting profitability, one of which is labour costs, a slower rate of growth in labour cost translates into much greater profitability of small and medium sized businesses than is for the large ones.

2. Broad economic conditions and growth

During times of strong economic growth, small caps and their stocks are benefiting more than large caps. In other words, they are able to expand more rapidly than large companies. In the reverse sense, during recession, small businesses faced a higher chance of failure and/or their earnings shrink faster.

3. General credit conditions

Businesses seldom don’t need credit from banks and financial institutions to operate. Even large, cash rich companies like Microsoft still got make a bank loan, for reasons of leverage while small and medium businesses are no choices have to borrow money. When times are good, banks are more likely to lend to small companies without too high an interest rate or premium, relative to a large and well known company with strong balance sheet. This can be seem before the subprime mortgage crisis, whereby any Tom, Dick and Harry can loan 100% to finance the purchase of a house, which ultimately causes the subprime mortgage crisis. During periods of financial crisis, prolonged recession and great depression, banks and financial institutions are very reluctant to make loans to small companies, especially just after getting burned, like after the economic crisis during the year 2008. Large companies during hard times are relatively easier to get loans as they are generally perceived to be more stable.

4. Local, regional and international political stability

Theoretically speaking, at least according to this feller, Pradhuman, in his book called Small Caps Dynamics, large caps are good defensive stocks during periods of local, regional and international instability. Common sense will tell you that when the Earth is stable, the general public will feel safe investing in riskier assets such as small caps as they are also potentially able to generate higher returns. However, what is supposed to be true theoretically may not be true sometimes, due to unknown reasons. For instance, after the 911 incident, small caps unexpectedly perform better than large caps until end of the year 2006.

The four conditions result in differences in performances of small and large caps such that periods of time that flavours either of them can last a few years so that you can recognise the trend and profit from it. As you shall see from historical data, there is really a large disparity between returns from large and small caps for any given year. Fortunately, there is a simple asset allocation model that any person of average intelligence can used to increase overall returns from wise and timely shift between large and small caps stocks, no need to have first class honours.

Related posts:

1. A simple asset allocation model for deciding between small and large caps
2. A more comprehensive analytical framework for analysing asset classes
3. Three different and essential ways to measure an asset rate of return

Warren Buffett’s million dollar charity bet

During the year 2008, Warren Buffett famously made a million-dollar bet with a fund that consisted of hedge funds, net of fees, an S&P500 index fund will beat the expensive hedge fund over the next 10 years. The winner can decide which charity the one million dollars will be donated to.

It is a well known fact that the sage of Omaha once rejected a $2 bet in a golf course when the odds are not in his flavor, what caused him to have such a high conviction that most actively managed mutual funds, not only hedge funds will do worse than the markets in the long run like 10 years?

Bill Sharpe, a Nobel laureate, wrote a very common sense paper in 1991 that the average dollar invested in the stock market from all the investors will equal the market’s return minus expenses. This is a simple mathematical fact, the conclusion that the market must equal itself. Think about it, if MacDonald is still there 10 years later, any exchanges of its shares among investors during these 10 years will not and does not affect the underlying economic profits of its businesses. The price of Macdonald’s stock 10 years later depends on what investors are willing to pay for it 10 years later regardless of how many exchanges done between investors themselves during these 10 years – the market must equal itself.

In almost every marketing message of actively managed mutual funds, there is always this message of “long term investing”, however, this is not always what the fund does in reality. The fact is that if the fund will to do better than the market, the fund managers cannot simply buy and hold, in doing this, the funds will most probably achieve market returns, and then you don’t really need their expensive services. You can buy and hold on your own. As a result, they need to constantly trade securities. However, this will increase transactions costs, though their costs of buy and selling stocks are less than what we paid through brokers. This results in turnover of more than 100% in any one year when they tell you about the benefits of “long term investing.”

But how can your fund manager beat the market when fellow fund managers are also as smart as your guy?

The conclusion is that the reality of the funds contradicts their marketing messages of “long term investing.” And when you trade too much, you are subjecting yourself to Newton’s fourth law of motion, which states that returns decreases as motion increases. (Be it an average person or a fund manger with state of the art software and Bloomberg terminals)

Next look at all the costs associated with an actively managed mutual fund, initial fees, management fees, expense ratios, A much higher return is required to be generated by fund managers given that after paying so much costs, I think one cannot expect just a positive return that is around the same as bank fixed deposits, nor even market returns (as you may as well invest in index funds).

The problem is that actively managed mutual funds need to generate a 50% more return than the market just to give a decent return, as need to deduct all the initial and ongoing costs. For example, if only got 10% return, net of costs, most probably the return is less than market, though still a positive return. Anything less than maybe 6% return of the fund means that you have made a lost investing in it.

Any return less than that means that one will be better of investing in passively managed index funds.

You can look at historical returns of some mutual funds/unit trusts in Singapore and United States to justify what I said.

Of course, this is inconclusive that every active managed and high cost mutual funds will do worse than the market but the odds are there given the causations and what history tells us.

Assume the following for a fair comparison,

1. Using a holding period of 5 years

2. The mutual fund/unit trust has an initial charge of 6% and annual fees of 1.5%.

As you can see, the professional fund manager needs to achieve average return for these 5 years of 7.5% to match market’s return or investor’s return of 5%, which is around 50% better.

What are the odds of that, coupled with all that I mentioned?

In the next post, I will further elaborate on market cycle investing using index funds rather than buy and hold until cash out 40 years later. This will significantly increase returns than just simply buy and hold index funds.

Related posts:

1. Essential 7 guidelines for actively managed mutual funds investing
2. How to choose from among so many Index funds and exchanged traded funds?
3. Danger of leveraged and inverse index funds and ETFs

“I look for businesses in which I think I can predict what they’re going to look like in ten to fifteen years’ time. Take Wrigley’s chewing gum. I don’t think the Internet is going to change how people chew gum.”

People say that investing is risky. When they hear the word – invest, they usually think that it is another synonym for gambling. While there are two words that mean the same thing in English Language, investing and gambling definitely do not mean the same.

There is no certainty in gambling; only increase the odds in your flavor using Kelly Optimization Model and stay in the game long enough to reap its rewards, as in Blackjack and Poker.

While there is not much opportunity to tilt the odds in your favor on casino tables, there are many when it comes to starting own businesses and investing in various asset classes. In other words, the risk in investing is inversely proportional to the amount of research and other types of work performed to reduce uncertainty. If you know what you are doing, there will be discoveries of many high probability events for you to bet high. What happens when you only bet on high probability events and over a long time such as over a lifetime, is that there is a statistical certainty that you will reaped the positive expected return.

There is certainty in investing, properties in some areas certainly go up 10 years later, same for certain stocks also. How do you identify them in the first place?

The Internet may change a lot of things, but it sure do not change the way people have sex, do not change how people smoke, do not change how people drink beer and what brand they drink, do change a need to shave in the morning, do not change the need to wear underwear, do not change the need to have insurance, do not change how people chew gum.

Some products will almost be there 10 years later and so do the businesses producing and selling them. If the same companies will still be selling the same things in 15 years down the road, their earnings will also be there. The good news is, you don’t really need a crystal ball to see the demand that is satisfied by some businesses in 15 years time.

In addition, if the products did not change much, unlike General Motors or even Apple which need to consistently introduce new products, then the companies involved can save all the research and development costs, retooling costs etc.

Remember not only these products become their target markets’ needs already; their brands have also own a piece of their minds. Certainty of revenue is equal to certainty of their loyalty to those brands and needs. There is certainty in change, though someone said that the only constant is change.

Related posts:

1. The Certainty in Uncertainty
2. Why investing in dividend paying stocks is good?
3. Are dividends yields a good measure of stocks value?