Just got back from waiting for 2nd daughter after school (did not get to catch her). The reason was I was busy talking to a man who was there to pick his son from same school.
We talked about various things like the 'stress' today's children have in school. On 'stress' I said that there is no need for children to score 'top marks' like 90-100% or spend all their time on homework , tuition etc. (although those scoring below 60% may need some help through tuitions). Children should spend some time playing, on hobbies and learning other things outside school because that is also learning, just no marks in school exams.
The man agreed and said that that's why he will be taking his son fishing this weekend. The reason is he wanted to teach his son the saying 'teach a man how to fish and he feeds himself a lifetime but give a man a fish and he eats for only a day'.
I wanted to share with him a better idea but did not have the opportunity as the conversation went into other areas like Singapore's politics and what I wrote about in the posting on Pareto Principle.
That was the idea of 'Planting a Financial Tree' which I try to share with others whenever I can especially Singaporeans who live in a country where land is so scarce and expensive that planting real trees for a living or to survive is close to impossible (most of them live in flats & what Malaysians call 'hutan semen' or 'cement jungle').
In countries where there is plenty of land, many people survive just by living off their land. They own a few (and in come cases, tens to hundreds) acres of land where they plant crops like oil palm and all sorts of fruit trees and vegetables and rear livestocks like chicken, goats etc.
With even a small piece of land (say 1 acre), they can still survive without work for some time. All they have to do is plant some vegetables and fruit trees and live ooff them. After the planting, in a good land those trees would by nature grow by themselves even if the owners sit around and do nothing!
However, in places like Singapore the closest thing to surviving by planting fruit trees is to plant what I call 'financial trees'.
A 'financial tree' is an investment in some real assets that produce continous streams of income much like a fruit tree producing fruits continuously for decades. That can be done by buying things like properties, real estate investment trusts, or shares in companies that own 'financial trees' i.e. companies that own real and income producing assets like lands/properties or good strong businesses with 'high barriers of entry'.
An example of a business with 'high barrier of entry' is telecom or banking business where the startup (investment) costs are high and the operator must have a 'licence' before they can operate (which may be difficult for potential competitors to obtain). Compare that to say a starting a food stall business where anyone with some money can start one.
A person that starts to plant a series of 'financial trees' early in life will get to reap their 'fruits' for many years to come and may not even have to work or work as long (or as many hours) as others who do not have financial trees.
Those financial trees like real fruit trees will give their owner confidence in life knowing that they will not have to rely on the next salary payment to survive. In the worse case scenarios, they can still survive on the fruits of those financial trees.
In addition, that person will achieve personal freedom like being able to choose how they spend their time on instead of just working everyday.
For example, a person with a good stream of regular income from a portfolio of good financial trees can choose a job they enjoy doing even though that job may not be as well paying i.e. they can afford to compromise lower income with greater satisfaction from doing something the person enjoys. Or even choose to stop working or work shorter hours so that he/she can spend more time on things of personal interest.
That is the confidence and freedom that planting financial trees bring.
Now, compare planting financial trees to teaching a person how to fish. Which do you think is better?
Even if I teach a person how to fish, that person must still have to rely on the vagaries of the pond, river or ocean. Will the supply of fish be as regular as that of a tree's fruit output?
Even if a person knows how to fish well, he will still have to spend time doing the fishing (in that sense, fishing is more like working)! The more fish one needs the longer time one will have to spend fishing. In addition and unless the person owns a pond/river etc. that person would still have to compete with other fishermen. In contrast, with some good fruit trees in one's own farm one only needs to wait for the fruits to ripe and pluck them off. One has little fear of others 'competing' for those output.
And even though fishes in the ocean multiply, the additional fishes are not yours by right and you will still have to compete with others to catch them. But if you multiply the number of trees in your own garden, their future produce is yours only.
That is why 'teaching a man to plant a tree' is better than 'teaching a man how to fish'....
Some key principles to remember :
- Plant Some Trees Even if You are a Fisherman
Fishing is 'active income' while having one's own fruit trees is more like 'passive income'. So even when one is earning income from a job (active income), one should make sure that there are alternative sources of income that do not take up much of one's time and effort (passive income) and that can become one's supply of money in case one loses his/her job.
- Start Even with One Tree
In all investments, it is never too small an amount to start. The excuse people frequently give for not actively investing their money is that they do not have 'enough capital'. There is no such thing as not enough capital. Just not enough effort or focus into it.
Quote: A journey of a thousand miles begins with a single step - Lao Tzu
- Start Planting Early
If one starts planting one's financial trees early but use some of the fruits produced to grow more trees instead of consuming them, over time one will have many more trees than one started with. The concept of 'compound interest' is a good example of this.
- Save Some Fruits for Unexpected Visitors
In farming, there may be unexpected floods or droughts when crops would be destroyed. So, farmers always keep a granary where stocks from perviuos seasons are kept for later use. Similarly for finances. Always save some money for emergencies like when one has a sudden unexpected expense (e.g. medical) or when income from regular job is affected (e.g. job loss).
Rule: The general rule to follow is to have enough emergency cash to last 6 months. However, an investor building up cash while patiently waiting for the right time to invest should have a bigger pool of cash (see below).
- Let the Trees Multiply
It is OK to start with a small base. What is important is to grow it over time. That way, even a fruit garden with one tree will become one with many trees (i.e. more future income).
- Be Patient and Plant/Harvest at the Right Time
As with growing real trees, there is a right season to start planting new trees. Farmers know that late winter or early spring is the best time to start growing. Trees planted in autumn will not survive through winter. They also know when is the best time to pick the fruits (in late summer or autumn).
It is the same with investment management. The world economy and markets go through cycles (like that of seasons). Things like prices of investments go up and down and up again over time. Smart investors therefore monitor the big picture (macro economy) to know what is happening in the world and time when they buy or sell.
For example, the best time to make good solid investments is when the world economy has gone through a down cycle (e.g. after a huge market crash like that of 1997/8 and 2008/9).
The couple of years just before a crash is usually characterised by 'investment frenzies' where every Tom, Dick and Harry were buying even when prices were ridiculously high prices (when measured in ROR - see below). Because prices had been rising for many years they thought prices will continue to go up some more.
Rule: Do not follow the herd. When everyone (the Ah Peks and Ah Sohs in market) is talking about buying shares, it is the time to consider selling.
At the peak of the crises, many people sold what they had at low prices and most dared not buy because of fear - that's why prices collapsed. But people that bought around that time would have bought at prices 60-70% cheaper than 2 years before and locked in investments that generate rate of returns (ROR) of more than 10% per year. People who bought at the high of 2 years before and sold at low prices during the crisis due to fear would have suffered massive losses of 60-70%!
Rule: Be fearful when others are greedy, be greedy when others are fearful - Warren Buffet.
- Not All trees Are the Same
Even though they may be of the same type, some trees of better strains produce more fruits than others. Farmers that know which strain is better would plant new trees using seeds from that strain but not that from other lower producing strains.
In investment, the concept used is Rate of Return or ROR. Other similar concepts are Return on Equity (ROE) and Return on Investment (ROI). ROR is the income one gets from each dollar of investment or capital. E.g. an investment that returns 10% per year is better than one with 5% return (assuming all things being equal).
Note: In general, investments with higher returns tend to have higher risks. But if one buys an investment at a low price (say during crises), one can get a much better ROR for the same investment than if one had bought it during 'herd frenzies'.
Also, one way to find good tree strains is to watch what the top producing farmers do! The equivalaent in investment world are the insiders who knows best about what is happening in their company. E.g. when substantial owners of a major company or its top executives keep buying their company's shares, it suggests that the price at that time may be cheap and one should consider following.
Note: insider actions is just an indicator. One should not follow blindly but do some homework. Never follow insiders of small companies - they may be manipulating the price!
- Do Not Rely on Just One Type of Tree
Good farmers know that they should never plant only 1 type of crop on their land. The main reason being diversification of risks because they know that although infections and infestations that may destroy their crops are beyond their control, they do not affect all type of trees at the same time. Some types may be unaffected and thus continue to bear fruit when others die. Also, crop prices may change depending on market conditions. Single crop farmers will be more affected by large drops in prices than others.
Same with investments. Do not put all your money into 1 or 2 investments. Diversify by investing in different companies, industries and regions around the world so that if one company/industry/region is in trouble, you can still get income from others.
Also, never buy shares in the company that you work in for obvious reason. If your company is in trouble you may lose both your job and investment!
[I know of a case like that. When a local IT company went public, their staff were given priority to buy those shares. One staff apparently bought $80,000 worth using family money. A few years later when the internet bubble burst in 2001, the company was badly affected, its share price dropped way below IPO price, and they had to retrench people. That staff was among them. He ended up losing his job and a big chunk of his family's investment.]
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