Friday, April 30, 2010

Is it Better to Buy or Rent?

I found myself asking this question often ever since I started earning my own money. For many of us, the holy grail of independence is to own our own home (which is also one of the most important reasons why most Chinese save a significant portion of their income); if you’re on the wrong side of thirty and you’re still renting your apartment, you’re not yet “made.”

We all know that buying your own place provides several important intangible benefits like a sense of accomplishment and security that renting cannot provide, but is it really the best economic option? In making a financial decision as important and expensive as buying real estate, you’ll have to consider all relevant factors and perform due diligence analysis, which can easily overwhelm you with details and data. It’s a good thing the New York Times recently released an online, interactive tool that helps you decide which is the better option for you.

Basic Inputs

The graphic comes pre-loaded with default values that you’ll have to change to reflect your own specific circumstances. The first thing you have to realize is that while some of the input boxes are labeled with the US dollar sign ($), you can actually use any currency unit (like our beloved Philippine peso) as long as you’re thoroughly consistent.

On the left-hand side of the main page, you’ll have to enter basic information about the property and your finances:

1. Monthly rent – of the property you’re thinking of buying, or another property that’s comparable to it; the typical monthly rent for a 40-square meter condominium unit along Katipunan Avenue is around 20,000 pesos

2. Home price – current market value of the property if paid up front; note that this is not the same as the sum of your monthly payments if you get a mortgage (housing loan) to pay for the house; the market value of the condominium unit I’m using in this example is around 2.5 million pesos

3. Mortgage rate – the annual interest rate of the housing loan that’s available to you; for most banks, this is at around 10%; for Pag-Ibig, interest rates for lower loan amounts are substantially lower; a 2.5 million peso loan from Pag-Ibig goes at an annual interest rate of 10.5%

4. Annual property taxes – there’s no one percentage rate applied for property tax in the Philippines, and the computation is really quite convoluted, so I think leaving the default value as is should suffice.

On the top portion of the graph, you’ll find two slider bars for the following inputs:

5. Annual home price change – this should be the long-term annual percent change of the price of the property; for the sake of conservatism, I set this one to zero

6. Annual rent increase or decrease – in my experience, apartment rents increase at an average of 5% per year

Advanced Inputs

If you want a more customized analysis, click the “advanced settings” button at the upper right corner of the graph. The more relevant advanced settings include,

1. Condo fee/common charge (buying) – condo fees are around 40 pesos per square meter per month, so that’s 1,600 for my property

2. Rent deposit (renting) – rent deposit is anywhere from 2 to 3 times the monthly rent

3. Rate of return on investments (other) – this is your opportunity cost of capital, the answer to the question “how much annual interest would you earn from an available investment with similar risk?”; a good figure would be 8%, which is the typical yield of medium-term retail corporate bonds nowadays (more on that in a future post)

4. Marginal tax rate (other) – or income tax rate, anywhere from 20% to 35%, depending on your gross monthly income

5. Inflation rate (other) – the average annual percent increase in the price of basic goods and services; 5% should be a good enough estimate

I decided to leave other details as is.

The Output

After entering all the required information, the tool coughs up its recommendation. Based on the details I’ve entered, “Buying is better than renting after 11 years.” Well, that’s pretty clear, straightforward and useful. That means if I plan to stay and live in the Katipunan area for less than 11 years (an eternity in my book), I would be better off if I rented a condo for 20,000 pesos per month that if I buy the same property now for 2.5 million pesos (and sell it when I’m ready to move).

The tool also presents an organized summary of the annual and total costs of both alternatives, and a year-by-year analysis of the better decision based on how long you plan to live in your chosen place of residence (for example, renting the condo for ten years will save me a total of 60,617 pesos compared to buying).


I always ask my classes what they think this acronym means; the most common answer is “Go In, Go Out,” which up to now does not make sense to me. I guess IT professionals would be more familiar to the phrase “Garbage In, Garbage Out,” which just means the reliability of the any process’ output depends on the soundness of the inputs. So in using the NY Times’ Buy or Rent tool, you should remember that the usefulness of its recommendation is only as good as your input estimates and assumptions. Finally, while making important purchasing and financial decisions is best done objectively and quantitatively, sometimes intangible, intuitive factors are equally important.

Thursday, April 29, 2010

6 Interesting Things I Heard and Learned From My 2010 China Trip

When I went to Beijing on the first week of April, I was fortunate enough to attend lectures by prominent Chinese professors and foreign experts on China. Here are some of the more interesting things I’ve learned about doing business in China and Chinese policy, culture, and decision making.

1. From Elisa Oreglia, a Berkeley graduate student researching the role of information and communications technology in the rural economy and migrant workers of China.

In 2008, governments around the world needed to react swiftly and decisively to the threat posed by the financial meltdown. In the US, the newly installed Obama government decided to spend billions of dollars to bail out “unbankruptable” financial institutions and car manufacturers and stimulate the economy. China, which was threatened because of its overreliance on the US’ demand for its products, decided to take a more pragmatic approach: “The White Goods for the Countryside Recovery Plan of 2008” (not really what it’s called, but the essence is the same). To stimulate local demand, the government provided substantial discounts to rural families for TVs, refrigerators, personal computers, and other consumer durables. Guess what appliance these families bought the most? PCs? Nuh-uh, despite the purported 90% broadband coverage nationwide. Washing machines by a mile.

2. From Dr. Ming Men, Fulbright Scholar and Professor of Finance of the University of International Business and Economics in Beijing, China

Perhaps the most important advantage of China’s communist political model over Western-style democracy is the speed by which the Chinese government can react to situations like the recent financial crisis. In most democratic governments (like the one we have here), higher-ups usually take too much time debating things or pushing for their own agenda when the clear and obvious solution is right under their noses.

3. From Prof. Frank Hawke, regarded as one of the first and most highly regarded American experts on China

The Communist Party’s hold on power is more precarious than it seems. Factors like corruption, fraying safety nets coupled with an aging population, environmental issues, and ethnic tensions threaten the once-unshakeable rule of the Party on government.

4. From Dr. Jia Ning, Stanford PhD holder, Tsinghua University professor, and expert on venture capital studies in China

There’s actually just a small number of Chinese who pursued studies abroad actually came back either to go to the academe or start a business, contrary to what I originally believed; there are less of the former than the latter, again disproving what I once thought as infallible common wisdom.

5. From Mr. Albert Ng, Columbia MBA and founder and CEO of new age travel firm Wild China

The oft quoted and much maligned Chinese tenet of guanxi has less to do with bribes and corruption, as many of those who attempt to do business in China believe, and more with actual personal relationships. It’s no urban myth that businesses actually do rely on guanxi for success in the Chinese economic system; it is something any venture, most especially those founded by foreigners that are still unfamiliar with the nuances of the Chinese bureaucracy, cannot prosper (or even survive) without.

6. Mr. Charles Chen, China contact of The Beijing Center, the host organization of our trip

This one’s a direct quote:

“Leaves fall back to the root of the tree.”

Yeah, yeah. Our “Ang di lumingon sa pinanggalingan ay di makakarating sa paroroonan” is much wordier, sounds more profound, and a whole lotta more badass than that, but you got to give it to the Chinese for making simple ideas sound much more elegant even with just the use of a few plain words.

Sunday, April 25, 2010

Fundamental Analysis (Part 2)

A Guest Post by Ange Lim

A Primer on Valuation

At this point, let’s recap. You have your choice company and its benchmark, and you’ve computed some key ratios. So basically you already know how the company is performing relative to its closest competitor. If the financials look good, then it’s possible that the company may be a good investment. But before you put your money into the stock, there’s one last important step to take: valuation.

Valuation is a tool to know whether a stock is currently undervalued or overvalued. For example, if the stock’s intrinsic value is 20 pesos and it is currently trading at 15, then it is undervalued; buying the stock now will provide you with a margin of safety of 5 pesos, an amount you can potentially earn in the future. Conversely, assuming still that the intrinsic value is 20 pesos, the stock is overvalued if it is trading at 25; clearly, the rational thing to do is to not buy the stock (or sell it if you own it) since it is currently very expensive, selling for more than what it’s worth.

There are different valuation methods that you can use, depending on the factors you consider important and the depth of the analysis you want to make. The three most commonly used valuation methods are P/E Ratio Valuation, the Dividend Discount Model, and the Net Asset Value Approach.

P/E Ratio Valuation works under the assumption that firms of the same size in the same industry share the same P/E Ratio, which is computed by dividing a company’s current stock price by expected earnings per share (EPS), which in turn is computed by dividing a firm’s expected Net Income by the total number of outstanding shares of common stock. This method requires an assumed value for the industry P/E Ratio, which may be derived by getting the average P/E of the major players in the industry. To get an estimate of the intrinsic value of a stock, simply multiply the industry P/E ratio with the firm’s expected EPS next year. This approach’s simplicity unfortunately comes with two important caveats: one, by considering only next year’s expected earnings, the method does not completely capture the firm’s ability to generate earnings and cash flows in the future; two, remember that accounting data like Net Income is often a result of the creative interpretation of a professional auditor (sometimes at the behest of the company’s management), so you should always double check how this figure was computed.

The second method is the Dividend Discount Model, which is based on the general idea that the true worth of anything is equal to the present value of all cash flows that thing is expected to generate in the future, and the assumption that the company will continue to operate as a going concern in the indefinite future. A share of common stock that is planned to be sold in year t will generate dividends, D, every year up to year t, and an amount equal to the stock’s price in year t, Pt. Assuming that you can earn at an interest rate k from a similarly risky investment, then the intrinsic value of the stock is given by the equation:

Notice that to make the formula work, you’ll have to have estimates for future dividends, the stock price in year t, and the discount rate, k; you’ll have to rely on the points listed in the last post to make these estimates. You have been warned: fundamental analysis is a complicated process.

Finally, we have the Net Asset Value (NAV) Approach. This kind of valuation takes into account the company’s liquidation value, which is the amount you’ll get if you sell the company’s assets piecemeal. To do this, you’ll have to read the notes to the financial statements found in the latest annual report as well as the MD&A. Ideally, you should only consider the market value of the company’s assets, but more likely than not you’ll just end up using balance sheet book values instead. Which is not particularly bad, since NAV often just serves as a floor figure for the firm’s intrinsic value.

Why Even Bother

You might be wondering now why you should go through all the trouble of reading financial statements and analyzing macroeconomic variables and computing for intrinsic value when stock brokers can easily provide you with their own estimates. Here are some benefits of doing your own fundamental analysis (besides sounding smart when discussing trading techniques with friends):

1. You’ll get a clearer picture of the present condition of a company. No one’s going to be able to fool you into buying stocks being falsely marketed as good investments.

2. You’ll know at what price the stock should fall before it becomes a good buy and at what price you should start consider selling so you’ll be able to prepare yourself and your portfolio accordingly.

3. You’ll gain the confidence you’ll need to make basic investment decisions such as buy, hold, and sell (trading tends to affect people psychologically since it’s real money we’re dealing with here). The short-term price volatilities that will arise won’t heavily influence your rationality when it comes to decision-making.

4. You’ll have some form of independence. With this new skill, you won’t have to always rely on your brokers or their research (maybe just use them as reference afterwards). They couldn’t have made fundamental analyses of all possible stocks, right? Maybe the one you’re looking for hasn’t been detected by their radar yet.

5. You’ll increase the possibility of earning handsome profits from the stock market. Keep in mind that there are some stocks that people aren’t aware of yet but will prove to be a great bargain down the road. Like the fourth advantage, maybe you spot a stock that’s too small for major analysts to cover but has the makings of a value investment. In trading, timing is everything.

To sum things up, think of doing your own fundamental analysis as your source of competitive advantage—not many people will go the extra mile to earn more than they normally would sticking to what their brokers advise. Being equipped with the right tools will give you the advantage you need to outperform even your own expectations. After all, knowledge is a very powerful thing...especially when it comes to money matters. Happy analyzing!

Click here for Part 1.

Friday, April 23, 2010

Fundamental Analysis (Part 1)

A Guest Post by Ange Lim

First Things First

Before anything else, I’d like to begin by setting the parameters of this entry. My goal is not to fully educate readers on the concept of Fundamental Analysis. Rather, I hope to shed some light on the topic to show the usefulness of such a tool. I must warn you though: you can only get the most out of this if you have some background on the different financial statements, their functions, and their relevance. Fortunately, Investor Juan has already touched on those topics in his earlier posts about the balance sheet, the income statement, and the statement of cash flows.

Brief Background

Now let’s get down to business. Ever heard of Benjamin Graham, Warren Buffett, Walter Schloss, Peter Lynch, or John Templeton? I’m sure you know at least one of them—Buffett, the third richest man in the world. But Buffett did not become rich on his own. He took a class on security analysis, which provided him with sufficient knowledge to make it big investing in the right stocks. He credits his success to his teacher and mentor, Ben Graham, the “Father of Fundamental Analysis”. Graham more or less set the ground rules in investing profitably in the stock market, while the other three names mentioned above benefited so much from this that they eventually became recognized as some of the great equity investors of the century (Schloss was actually also Graham’s student).

But What is It Really?

Having given credit where credit is due, we can now define what “fundamental analysis” is in the context of the stock market. Simply put, it is a process of analyzing the fundamental factors that affect the profitability and value of a company: its financial status as shown in its financial statements, the economic conditions surrounding it, and the industry of which it is a part. The goal is to determine a company’s value relative to its current and future market price; by “value”, we are referring to its intrinsic value, which is what the company is really worth based on the future cash flows that it is expected to generate in the future. The result of this analysis is to determine whether or not it is profitable for the investor to buy or sell the company's stock.

Value investors use fundamental analysis to “pick” the stocks they can extract the most profit from. The trick here is to find a stock currently selling at a discount (when the intrinsic value is greater than the stock price) and buy it to earn what is called a “margin of safety.” When the stock price rises, then the investor can earn significant profit by selling the stock (note that I said “when” and not “if”; fundamental analysis assumes that a stock selling at a discount will eventually appreciate and catch up with its intrinsic value). That’s a contrarian strategy right there: to buy when the price is low and to sell when it is high. Sounds simple? This is just the start of it. It can get tedious, especially when it comes to computing for the intrinsic value of the stock; but all that tedium just ensures that the investor makes only rational and fundamentally sound investment decisions.

Because a List is a Great Way to See the Bigger Picture

Feel like you’re ready to take this on? It’s game time. Below are 5 simple steps to get you started on fundamental analysis.

1. Check the economy

Before you even think about investing in the stock market, you have to know if the present is such a good time to do so or if you’ll be better off investing elsewhere. The stock market doesn’t promise winners. In physics, it is said that for every action, there’s always an equal and opposite reaction. The same is true with stock investing: when someone wins, another person loses. So be careful about timing your investment: check macroeconomic vital signs like interest rates, inflation rates, and of course, the status of international markets. Only when you’re comfortable with the situation should you move forward.

2. Start with what you know

If you’re new to the stock market, you might get overwhelmed by the number of publicly listed companies. You might be initially interested in investing in more familiar stocks like this local telecommunications juggernaut or this rapidly expanding conglomerate controlled by one of the country’s top business magnates. But the best way to go about it is to start with a company or industry you’re genuinely interested in and the one you are most familiar with.

3. Narrow down your search

So you already have an industry in mind; the next step is to narrow down your search. Study your industry: its uniqueness and peculiarities, the major players, and the typical business cycle, among other things. Check out which companies perform better than others in terms of revenues, expenses, and net income. Pick one company you want to focus on and another to use as benchmark so that you will have a clear picture of how your choice company compares with others in the industry. Checking the income statement is probably the easiest thing to do for someone with limited exposure to financial statements, so we can go with this as a preliminary test—just to shortlist the candidates. Don’t worry, the information needed is pretty easy to obtain since publicly listed companies are required to regularly release financial statements. They post their annual reports either on their respective websites or on the Philippine Stock Exchange site.

4. Befriend annual reports

Now that you have your choice company, let’s level up a bit further. The financial statements of the company will be your close circle of friends. Normally, analysts use five years’ worth of financial statements so that trends can more easily be identified; this takes more time, yes, but at least you will be able to come up with a more sound analysis. Then compute for key financial ratios like the Profit Margin, Return on Equity, Return on Assets, Accounts Receivable Turnover Ratio, Inventory Turnover Ratio, Current Ratio, and the Price-to-Earnings Ratio. Some investors, though, are more interested in the company’s earnings growth rate so some ratios might not be applicable to them.

Apart from important financial data, the annual report also holds valuable qualitative information that is critical in fundamental analysis; most of these can be found in the Management Discussion and Analysis (MD&A) portion of the report. Here, management gives an explanation of the year’s performance and notifies readers of future expectations. You can also get other qualitative information from actual interviews with management and the board (a little food for thought: sometimes, prices positively move despite poor quantitative outlook because of certain people backing the stock), but that might be difficult to do if you’re not affiliated with the right people or institutions.

The proxy statement, required also by the Securities and Exchange Commission (SEC), is another source of qualitative information you might want to check out. It covers the compensation packages and benefits that managers, board members, and executives receive and how this is tied to the company’s actual earnings. If their salaries or benefits are based on the company’s performance, then rest assured that you won’t get surprised halfway through your analysis by self-serving moves made by management.

A third thing you should also consider when comparing companies’ performances in the same industry is brand equity. Just how well-known and big is this company to be able to face economic and business problems that should arise in the future?

5. Get your hands dirty with valuation

After making all the preliminary analyses and computing for the necessary ratios and figures, we are now ready to put everything together. We don’t take these ratios separately; they will make more sense when analyzed together. But the way the company’s stock will be valued will depend on the method you are most comfortable with and what is most applicable to the company you are analyzing.

Click here for Part 2.

Wednesday, April 21, 2010

Stock Investing Strategies

Dear Investor Juan

Dear Investor Juan,

Hello sir, how are you? I have an investment question for you. Last year I invested in BPI’s index fund, but I’m unsatisfied with the returns; I also own Globe Telecom bonds which I think yield only 6% for three years. I’m thinking of shifting my investment to one which provides higher returns, and I’m considering investing in individual stocks because of the possibility of better returns. Do you have any tips or suggestions? I used to love reading finance books by Benjamin Graham until I discovered how they can be too deep and complicated. And yeah, I don’t have any patience at all to read annual reports and financial statements of listed companies.

Take care, sir! More power to Investor Juan! :)

Your number one student,

Jane Lao Lim

Hi Jane!

If you still have your BPI Index Fund investment now, then you have already earned around 50% on your investment, so I really don’t understand how you’re unsatisfied with that. But your Globe investment does kind of suck, so you might want to shift that to another vehicle.

Yes, if you’re interested in better returns that what you’re currently earning, then one way to go about is by picking and investing in individual stocks (another is by buying high-risk derivative instruments that I’m currently still not very familiar with).

Choosing between stock picking and holding a diversified portfolio of stocks (like the index fund you own) is one very important decision point in stock investing. Stock pickers typically invest in the short run (although many also buy and hold stocks) and employ speculative investment strategies; index investors tend to invest in the longer term and rely on a general expectation that the stock market as a whole will appreciate in the long run.

Picking stocks often involve any one or a combination of two techniques: technical analysis and fundamental analysis. Technical analysts or chartists base stock price predictions exclusively on historical stock prices and stock price trends; the premise of this technique is that the stock prices go though cyclical (and therefore, predictable) movements that can be exploited by making correctly-timed buy and sell decisions. Technical analysts do not care at all about what business a particular company is in, or how attractive the prospects of a company are: all that matters are historical price movements and trends.

So does this strategy work? It depends on who you ask. If you ask my former boss and a couple of other friends I know, they’ll tell you that charting is based on gospel truth; you’ll often hear them brag about a couple of lucrative short term plays, but you’ll never hear anything about a bad loss. Which makes me wonder whether I’m actually talking to a true-blue investment whiz, a very, very lucky person, or someone who just knows when to shut up and keep his reputation (and that of his investing style) intact. Personally I think this strategy is baseless and ultimately futile: historical prices alone would not provide enough information about what will happen in the future. And I still have not seen an investor both here and abroad who was able to consistently beat the market index just by using charts.

Still, most of us know that the market can be beat, even a market as efficient (or maybe it isn’t as efficient as many academicians believe, but this is something better discussed in another post) as what they have in the US; most of us do know that Warren Buffet has been able to consistently and convincingly beat the S&P 500 index (something like our PSEi, but for the New York Stock Exchange and consisting of 500 stocks instead of 30) for more than three decades. But Warren Buffer is not a technical analyst: actually I would like to think of him as the anti-thesis of a technical analyst. He’s also a stock picker, yes (he thinks investing in diversified portfolios is for people who don’t know what they’re doing) but he employs a wholly different strategy called fundamental analysis, which is something he got from his mentor, Benjamin Graham, the person you mentioned in your question. I won’t go into the details of fundamental analysis (because our good friend Ange will discuss it in greater detail next post), but in a nutshell, it involves determining the “intrinsic” or “true” value of a stock by analyzing the company’s financial statements and annual reports (yes, even the best of them do this) and looking at the firm’s competitive and macroeconomic environment. Once you have this value, you compare it to the current stock price: if the intrinsic value is greater than the stock price, then the stock is underpriced and you should buy; if it’s the other way around, then the stock is overpriced and you should not buy or if you own the stock, you should sell (or if you can, short sell—that is, borrow the stock, sell it, and pay for it with the same stock in the future when the stock price drops). It’s actually even more complicated than it sounds, and takes a shitload of research and time to do. That’s why I don’t do it. Even if I decide to, if I just invest, say, 100,000 pesos, the returns that I could earn may not be worth the effort; it only makes sense to do this if you have a lot of money play with, either your own or other people’s (your clients if you are a fund manager, for example).

So if technical analysis is a no go, and so is fundamental analysis, then what are you to do? Warren Buffet had it right when he said that investing in diversified portfolios is for those who don’t know what they’re doing: the funny thing is that most of us really don’t know what we’re doing most of the time. That’s why I suggest that you just keep on doing what you’re doing and invest in a diversified, unmanaged portfolio of stocks and hold on to it in the long run (meaning after three decades or four). If you don’t want to take my word for it, maybe you would listen more to someone who definitely knows what he is doing: John C. Bogle is the 80-year-old founder of Vanguard Investments, one of America’s largest mutual fund companies. His advice is simple and concise: “Invest consistently and for the long haul in a widely diversified portfolio of stocks and bonds. Pay attention to taxes and costs. But leave your investments alone.” You’re still lacking on the bond side, but at least you’re halfway there. Happy investing! :)

Monday, April 19, 2010

On Consumption and Savings


I have just arrived in Manila from my China trip. I haven't had much free time in the past two weeks to work on articles, so I have to work doubly hard in the coming weeks to catch up. Fortunately, I was able to gather enough material for three to four articles about the nuances of Chinese financial decision making and the Chinese ecomony. I'll start by answering this comment from Hap about consumption and savings in the Philippines.

Dear Investor Juan

Hi Sir! Always good reading from you. Maybe you could find time to write a post about the "ideal" distribution of expenditures and savings in the Philippines. I've been reading how it differs between East and West, but I can't figure out which one has a better model. Thanks!


Dear Hap,

Before we talk about the “ideal” mix of consumption and savings in the Philippines, we must first understand how these two variables interact and how they affect economies, in general, and an individual’s well-being, in particular.

Macroeconomics Crash Course

Gross Domestic Product (GDP) in terms of inputs to the economy can be expressed with the following equation:

GDP = C + S + T

Where C is consumption, S is personal savings, and T is taxes. What this means is that citizens contribute to the economy by buying stuff, by saving a portion of their income, and by paying taxes to the government.

So where does everything go? C goes to businesses and is used to produce goods and render services for the consumption of individuals; S supplies capital to these businesses for investment, I; T is used by the government to spend for infrastructure and government services. When we have an open economy that can trade with other countries, we also have to account for exports (X) and imports (M). So GDP in terms of an economy’s output may also be stated as:

GDP = C + I + G + X – M

So equating the two equations for GDP above, we get:

GDP = C + S + T = C + I + G + X – M

Using this model, let’s try to determine the underlying reasons behind the significant gap between the consumption and savings mix of Western and Eastern economies, particularly in the US and China.

US Consumption

In the US, people are basically net consumers rather than savers: from the Bureau of Economic Analysis figures above, personal savings in the US have ranged from 1 to 5% in the past five years, which just amounts to just $1,000 to $5,000 on an annual salary of $100,000. Americans love to spend their income on anything and everything, from essentials like food, clothing, cars, and houses to the not-so-essential like gadgets, video games, and entertainment items. So, is having a high consumption rate and low savings rate bad for the economy? Well, at least from the example of the US, it does not seem so: remember, the US is still the largest economy in the world with Japan only at a far second (which China is poised to overtake in the near future). In fact, it is this remarkable appetite for consumption that has driven the US economy in the past decades; a high consumption level (high C) drives the demand for products and services upwards and boosts the profitability of businesses, which in turn leads to overall economic growth (high GDP). The danger of having a low personal savings rate, though, may be seen more clearly from the perspective of the individual; an American with low personal savings, or does not have anything invested in valuable assets like real property or securities, runs the risk of financial ruin in times of recession or economic crisis. What will you do if you get laid off and you don't have enough money in your bank account for your basic needs? You first try to live on whatever asset you have; if you are a home owner, you try to borrow against the value of your home (so you see how this gets worse when real estate prices plunge, as what also happened last year). And once you've used all of your assets up, where else can you go?

China Savings

Americans are fortunate in the sense that they have a relatively well-developed welfare system that citizens can turn to in case of dire need, especially with the recent passage of the Patient Protection and Affordable Care Act. In China where the health care and education infrastructure is still very much undeveloped for around 90% of the population, especially in rural areas, saving has become a matter of survival. To prepare for the future, something which the Chinese government can't help with, the Chinese are saving anywhere from 20 to 30% of their income (I've actually spoken to two Chinese nationals in Beijing who are able to save as much as 40% of their disposable income religiously), a far cry from the experience in the US. With the low consumption level this very high savings rate implies, how has the Chinese economy been able to grow at a staggering rate of 8 to 10% per year in the last 10 years? Even with this low consumption level, the Chinese economy is still able to grow at a fast clip because of high government spending, G, and high exports relative to imports, X - M.

The Effects of the Financial Crisis on Consumption and Savings

During the financial crisis of 2008 and 2009, what happened, happened: people in the US were either laid off or demoted, leading to lower disposable incomes; Americans reacted by saving a bit more and consuming less; since China's exports go mainly to US markets, the depressed US consumption lowered the demand for China's exports; to make up for this, the Chinese government tries to motivate its citizens to buy more, which leads to saving less; all of this leads to China experiencing a trade deficit, its first since 2004.

The Better Model and What This All Means for the Philippines

One of our China trip speakers, Dr. Men Ming, a finance professor at the University of International Business and Economics in Beijing and a Fulbright scholar, mentioned something very insightful about the ideal savings rate in China. When people save their income, the money most often just goes to savings deposits, which the banks, in turn, lend to individuals and businesses, and use for other financial services. In China, the predominant banks are those which are owned by the state; according to Dr. Men, decisions made by these banks are sometimes questionable and are often tainted by allegations of corruption. So, for both the economy as a whole and the welfare of the individual, he proposes to lower savings and increase consumption so that: (1), the consumption increase can help boost local demand for Chinese products and drive GDP growth, and (2), shift the decision-making applied to funds from banks back to the individual.

So what does this mean for us? I don't have exact savings figures for the Philippines, but I believe we save only a little more than Americans, probably from 7 to 8% of our income. We have the same appetite for consumption as Americans (ya gotta love those iProducts) even if our welfare, health care, and educational systems are probably just as bad as (if not more so than) China's. On the good side, our banks, in general, are more transparent and trustworthy than the state-owned banks in China (except those small, under-regulated rural banks, of course). Personally, I still advise that we save more than 10% of our income, if just to prepare for a rainy day; I think the government still has not reached that level of political maturity and will to pull off something like what Obama did for health care, and it would be stupid to solely rely on what government can provide.

But as we've discussed in several articles in the past, we have to remember that saving should just be the start; once we are able to accumulate enough capital, we should start looking for ways to earn better returns than those provided by savings accounts. More on this on the next post!

Monday, April 5, 2010


The American Dream

I think this comic beautifully captures everything that has happened and all that has been said in Investor Juan since we started two months ago, leading to Kat’s contribution in the last two posts.

Hasn’t this “American dream” also become the “Filipino dream” for most of us? Many of us have just gotten too used to and too comfortable with being rats in a race that we rarely complain anymore. As long as we can still take leaves from work to spend a week or two in Boracay or Bohol, as long as we can still eat lunch will all our fellow yuppies in Paseo Center, as long as we can still buy that latest gadget from Apple, even if it means we have to continue living with our parents even after we turn thirty (sometimes even after we get married and have our own kids), even if it means we have to pay 10% of our monthly salaries to credit card companies so that our debt balance does not balloon uncontrollably, even if it means we have to forego our dream of taking further studies just because we can’t afford to stop working, we are satisfied.

Fortunately, some of us actually do want out of the rat race, and first step in that direction involves being more financially literate, which is the primary goal of Investor Juan. Only after addressing this issue can we even start talking about things like “investment strategies” or “financial freedom.”

There are several reasons why I think I’m in a good position to help achieve this objective and facilitate discussions about personal finance. One, because I have studied, practiced, and now am teaching finance, I know enough things about the topic to share with you. Two, like many of you I am just a regular guy with a regular job who tries to squeeze every peso out of his disposable income for savings and looks for ways to make the most out of what he has. Three, while I still have not reached my financial goal, I have already achieved a few small victories when it comes to my finances: at the very least, I’m not into debt, I’m able to consistently save a significant portion of my earnings, my emergency fund is intact and I already have a modest amount tied-up in several investment vehicles.

Using the words of Kat, I just hope that this “community” flourishes in the months and years to come; I hope that we will be able to help each other be better off not only financially, but personally as well. So if you have a story to tell, a question or two to ask, or a funny thing to share, don’t hesitate to drop by, share your thoughts, and be among friends.

The Chinese Sojourn

I’ll be in China for work from April 5 to 18. And while Blogger is blocked in China, fortunately there is a way for me to post articles via email. During this time, I plan to tie loose ends and address some of your unanswered questions; while I’m there, I might as well talk about China, the way the Chinese deal with money and do business, how Chinese culture, tradition, and politics permeates into the business environment, and how all of these things can affect us, Filipinos. I might not be able to reply to your comments via the site, so if you have any questions please don’t hesitate to email

I’ll try to have a little something for everyone when I come back. Xie xie. Nihao. (Did I say that right?)

Sunday, April 4, 2010

Personal Finance Blogs from a Woman’s Perspective (Part 2 of 2)

A Guest Post by Kat

Click here for Part 1

Common Themes

In all of these blogs, you’ll see how last year’s financial crisis affected regular Americans: a lot of them were laid off or are fearing lay-offs, and most find themselves caught in a debt trap.

Thank god our parents paid for our college tuition. Imagine getting started with your working life with several hundred thousands of pesos in student loans? What kind of choices could we have made given that big constraint? I used to think I was not lucky because we were not as rich as my batchmates, but you know what, I took advantage of the freedom of being able to live happily on very little. I had the freedom to sign up for an eight thousand peso job a year out of college in exchange for the adventure of living in another province, learning another dialect, honing my research skills, and paying for my own expenses. That gig led to a lot of other opportunities for me, and I am still benefiting from the network that I have established until now. The point is, I would not have dared to pursue that career track had I graduated with big debt on my shoulders.

Blogging seems to work as a strategy towards attaining financial freedom. I started following most of the blogs I mentioned 3 years ago during their “gung-ho” debt payment phase. Some of them branched out into other topics when they have reached their financial goals and their finances have more or less stabilized already. I think blogging was an effective strategy for them because of two things: (1) the rigorous documentation of all financial activities, hence savings, expenses, investments, net worth data are all tracked in one form or another, and (2) an accountability system based on the community that is built around the blog (for example, the bloggers get trashed from commenters for their bad choices or they are encouraged when they are feeling down).

Finally, in most of these blogs, you’ll see bloggers highlight the “personal” in personal finance. Although this could just boil down to my voyeuristic tendencies, I appreciated most of the insights that one’s finances are but a reflection of one’s life choices: childhood traumas, teenage angst, a myriad of insecurities and fears all play a role in our choices. Our choices then define our financial status. Most of the time, realigning our mindset goes a long way towards improving our financial status.

Research Gaps

It was once emphasized that a review of literature discusses what the existing materials are talking about and what the existing materials are missing. From my perspective, here are the gaps in the current personal finance blog landscape:

The emphasis of most blogs are on reducing costs instead of increasing income. Ramit's blog is the only one I encountered who covered the topic on a regular basis. However, I also point that some of the get-rich blogs just reek too much of scams that I am skeptical of their message.

Dearth of material on Filipino personal finance. I used to read Salve's MoneySmarts blog, but she stopped posting last year. The only other Filipino PF blogger I know is The Digerati Life. But she is based in Sillicon Valley so still American in context: we do not have 401(k), student loans, and other American society features. What we do deal with are low paying jobs, corrupt government officials, extended family relations, and bankrupt social security systems that her blog almost always fails to talk about.

What does a Filipino young urban professional do when aiming for financial freedom given these constraints? Investor Juan is a good effort towards answering this question. But personal finance is a huge research area that needs more and more inputs to cover all the financial issues we face. IJ provided us already with comprehensive information on UITFs and investing. But what about buying a car? Choosing a house? Doing grocery in the city? Shopping for shoes and clothes?


Following personal finance blogs for the past three years gave me a unique perspective at understanding another culture. What we read in Time or Economist are usually condensed versions of the regular Joes' stories. The summaries are either quantitative (e.g. unemployment rate, inflation rate, GDP) or qualitative (e.g. an in-depth type of story about one specific family in general). But these personal finance blogs gave a human face to all those statistics and a credibility sensationalized or packaged news articles do not have.

What has been most fascinating for me is the fact that the underlying goals of those American personal finance bloggers remain the same with ours, despite the structural and contextual differences between our countries. They may be a 40 year old, overweight, frustrated writer, or a 26 year old tango aficionado, or a 30 year old resigned bachelor, but I, a 26 year old Filipino researcher can relate to them because we all aspire and work towards the same goal of financial freedom.

Freedoms are defined by the things that we are able to do. Being in debt or living paycheck to paycheck severely curtails our options. It does not matter if we live in a developed or a developing country, the fact remains that there are choices we make that either shackle us or free us. I like the way the personal finance blogs and the community supporting them generate their own debates (e.g. to rent or to own a house? pay debt first or build emergency fund first?), agree on certain strategies, and ultimately create their own knowledge of finance apart from those that the financial institutions fed them.

I contribute here in Investor Juan with the hope that a small community can form around this, supportive of each other and passionate about financial freedom. I just shared what I know: I’m looking forward to reading stories from the rest of you.

Thursday, April 1, 2010

Personal Finance Blogs from a Woman’s Perspective (Part 1 of 2)

A Guest Post by Kat


In my almost 7 years of working, I have taken on several labels: editor, technical staff, research assistant, training manager, project manager, consultant, specialist, project staff, etc. I hate to use the term, but 'raket scientist' does seem apt to describe me. Despite all of the hats I have put on (sometimes all at the same time), what I have always been at the crux of it all is a researcher.

I am naturally inclined to collect data, organize them into boxes, and arrange the boxes into a framework that makes sense to me. That thought process is applied in almost all aspects of my life from the sports I watch (no wonder I love baseball, every freaking thing there is measured), the clothes I purchase, the jobs I take on, and even the literature I read.

For the past three years, I have been hooked (well, not so much now anymore) on reading personal finance blogs, mostly written by Americans. These blogs all have the “big three” things that I look for in personal finance blogs: drama to engage my tsismosa instincts, relevance to the ongoing financial crisis, and lots and lots of data. On a personal level, three years ago, I met the One, and we started building a life together; these personal finance blogs provided very important inputs to developing the economic structures that my partner and I needed to support our growing family.

Review of Related Literature

I am geeky about personal finance, but from the looks of it, so are the readers of Investor Juan. So, to guide you through the bigger world of personal finance (at least according to my taste), I put together this list of what’s currently out there:

Single Female Personal Finance Blogger

I think her name is Wanda. She is in her mid-20s and has recently been laid off. Fortunately for her, she saved up enough that she can afford to be jobless for some time. Most of her debt came from student loans. Aside from talking about her situation, she also talks about her day-to-day personal decisions, from clothes shopping to food preparation to career choices. But lately, since she entered this “fun-employment phase” and has started to talk about mostly “fluffy” stuff, she has become a bit boring for me.

I have exchanged some emails with FB. Like Wanda, she’s in her mid-20s; she’s an IT consultant, which lets her have quite a bit of free time. It was fun to read her blog around 3 years ago when she had tens of thousands in debt which she was fighting her way out of. She had tips on career advancement, money hacks, and debt payment strategies. There were also rantings on the shopping she could not do and the recriminations on the financial mistakes she made. Now she has become debt-free, more financially secure with her emergency fund in place, and all her retirement savings are maximized. Nowadays, she interests me with her shopping picks on cheaper clothes, bags, shoes, and handmade jewelry. She provides too much information for me sometimes, though, so I find it impossible to read her on a regular basis.

Married Female Personal Finance Blogger

This one, I will always love just because of the high drama factor. Two years ago, Dog was earning $100,000 per year but had a negative net worth, mostly because of high student and credit card debts. The posts are a bit grating (the author keeps on ranting about buying a house, transferring to a better neighborhood, etc) and people in the comments section constantly bash her (which I find really very entertaining).

Single Male Personal Finance Blogger

I love Ramit, again even for the high entertainment value alone. He is a Stanford grad working in the IT industry, and as he claimed “he will teach you to be rich”. There are lots of fighting and bickering in the comments section. He also started to turn his blog into a marketing vehicle for his consultancy services. In general, his approach runs counter to the more pervasive “frugality” mentality of most personal finance blogs; he doesn't believe in cutting down on the lattes but he prefers that you go for big wins like getting promoted at work.

This guy is like my nutty, interesting, esoteric uncle. He caused a major ruckus a couple of months back when he said that his Filipina girlfriend claimed to be pregnant with his kid. It turned out to be untrue and the girlfriend ended up dumping him for a German guy willing to marry her (man, further bad press for us). He lives a spartan lifestyle, I think he can put all his stuff in one bag, and I do mean all his stuff. His investments are in place. But then in his last couple of posts, he talked about whether the frugal and thrifty life is really what man is made for. Then poof! He disappeared.

Debt Ninja packages his blog really well, but there’s hardly any real major drama. His only debt is his student loan which he wants to get rid of quickly. Well, I think dudes would enjoy reading him because he talks about his thoughts on dating, finances, relationships, etc. For the girls, I like reading him because he is cute, sweet to his mom and his girlfriend, and totally has the “boy next door vibe” going.

Married Male Personal Finance Blogger

J Money is the married version of Debt Ninja. I read him because he seems like a cool guy, he’s sweet with his wife, and he looks like someone who’s fun to chill with. Content wise, there’s nothing very original from him. Right now, he’s dealing with the threat of being laid off and how last year’s financial crisis depreciated the value of his house.

Part 2: Common Themes, Research Gaps, and Conclusion

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