Saturday, July 10, 2010

My Strategy: Roadmap To Financial Freedom

I kinda "browse through", Yap Ming Hui's Roadmap to Financial Freedom the other day and I find it pretty interesting. Okay, I am not cheap just thrifty - maybe. Anyway, it kinda reminds me of the process when I use to be hopeful, how I got myself frightened to realize how my hopes in only mere fantasies, how I start to take control of my personal finance and the courage I took to change. Well, it wasn't this book that gets me "enlightened" into that process, in fact I knew about this earlier and I believe many of us do, thanks to insurance agents, mutual fund agents and of course our friends. I always find the first part of their presentations interesting and mind opening regardless of products. Probably we should listen to one of these once a while taking it as some free personal finance education IF you are skeptical enough to the second part of the presentation.

If you wonder what the first and second part is, the first is normally the "Tahukah Anda" or "Don't You Know" part and the second is normally about the products.



Back to the book, it really takes us to look into the details of our own personal finances and I believe most of us who have done that might have realize how disastrous our current status is. What if you don't have the tool? You can actually program it with Excel which is what I'm doing now but yet to finish as I wrote this. Hopefully I can share that soon and don't get myself into a lawsuit. However, I would call it Roadmap to Financial Security rather Financial Freedom. Don't get me wrong, this books does help you to achieve financial security but it just isn't my idea of financial freedom.

Financial freedom to me is the state where I do not have to worry about finding income -- forever. If you look at his roadmap it builds your net worth initially and then reduces it bits by bits according to your expected annual expenses after your retirement. And it is limited until a certain age so basically I would have to assume how long could I live as accurate as possible and pray that I don't live that long or overstay. So it isn't the best idea.



My Strategy: I have thought of a simple strategy that could be added into the latter part of the existing roadmap which will get me into financial freedom. So instead of using my all net worth bits by bits after retirement, I'll use a portion of it say maybe 20%. The rest of my net worth will be invested in an income fund or businesses where I could almost certainly get dividend income quarterly or semi-annually. The amount of dividend has to be enough to support my annual expenses and I could use the 20% as cash reserves or use it for travel and indulgences. With this way I will be able to retain my net worth with minimal possible volatility.

That it just a high level strategy so, I'll leave it to you to work out on the details. I believe each of us has a different roadmap.

This comment is based on my personal thoughts, opinions and my risk tolerance. It should not be considered as an investment advise. Please consult your financial advisor or do some research of your own before making any decision. You might have your own thoughts. I would love to here from you. You can always place your comments here and or email me privately at luzeeker@gmail.com 
 

8 comments:

K C said...

Hi LuZeeker,
I love your road map to financial freedom as compared to that of Yap Ming Hui's and wish that I could be like you, enjoying a truly retirement (or future retirement) without any worry. However, I could not be living like your planned retirement life as I do not have a sum of RM2.5 million in my investment portfolio (sigh) which can give me a perpetual real annual income of RM50,000 (assuming a portfolio return of 8%, inflation at 6% and hence approximate real return of 2%)without capital depreciation. Besides, I still have children commitment. I believe most people planning for retirement has to follow YMH's approach, ie assume a net worth at retirement and slowly finished the net worth at death, or capital diminishing method. I hope YMH's so called 'net worth' does not include the house one stays in and depreciating items like car etc. The house will provide some equity for the retiree if he or his partner out live his life, or uncertainties such as children needing help, super inflation, big medical and health care bills etc.

K C said...

Hi LuSeeker,
I looked at your ‘the Great’ list and try to get some tips and at the same time, learn from your analysis. I am a fan of using discount cash flows method (DCF) in valuation too but I have not found one blog using this. I was lucky to find yours. I was interested in your stock of Job Street and tried to do an analysis myself and compared with yours. Job Street, as you have described, is no doubt an excellent company in terms of growths, profitability, ROIC, ROE, financial health etc, except that it is really too expensive at RM2.01 per share as on 11 July 2010. Price to earnings, sales, and book is very high at 24, 7 and 5 respectively. Are these metrics justifiable? Let’s say we invest in Job Street for a 5 years holding period. Using another way of doing DCF, say basing on last year earnings of 8.5 sen per share, a liberal compounded annual growth rate in earnings of 33% (its highest growth in the last 5 years) for the next 5 years, a dividend growth of 10%, a final PER of 10 and a discount rate of 10%, its present value is RM2.35 per share, very little margin of safety. I have also tried to do the analysis using 10 years projected free cash flows and bring them to present value but the results do not differ much. In this FCF method, too many assumptions are involved and results can vary widely. In your analysis, your assumptions seem reasonable in terms of growth in revenue and discount rate and I am surprised you can obtain a FCF of RM3.20 per share, or a market capitalization of more than RM 1 billion.
KC Chong

LuZeeker said...

Yes, I agree with you. There are too many assumptions made in DCF valuation. Probably that is the reason why conservative investor tries to find businesses that is as predictable as possible. Given that JobStreet an asset light player and low liabilities (D/E: 0.19), it should have generate pretty lots of free cash. The entire valuation is done base on existing businesses which are Msia, Singapore and Philippines where all facilities have been laid out. Erm..as far as I know, it wouldn't need much expansion, so whatever capex now is expected to stay. And if it were to grow like for the next 10 years, it might have just worth that much. But of course there are certain kind of risk to that assumption like maybe the facilities capacity in Philippine isn't enough to sustain the growth, the economy in those countries turn the other way around, FDI flows out, etc anything can happen in 10 years. So there is some kind of threat that is why I use a 20% margin of error to this valuation. Well, 20% is just my personal margin. Hmm...come to think of it, if we have a way to quantify risk maybe we can have a margin that is judge base on the likeliness such risks might happen.

LuZeeker said...

I was hoping that the market will think it is too expensive actually. If you look at it, PE of 24 may not be really that accurate. JobStreet business correlates global and those countries it resides in economies. The panic hit around Q408 and all along 2009. So it impacted JobStreet business. And EPS of 0.085 is based on FY09. If you ask me, I am pretty confident that they'll recover this year but the question is by how much? I don't have a good answer on this. Q1FY10 result saw revenue increased by 27% and EPS increased by 54% versus Q1FY09 result. Reason for much higher EPS increase is because its operating cost never really increased. So a slight increase in revenue would boost its bottom line and its free cash of course. So lets just say it is able to improve its earnings back to 0.122 (2009), its PE will look around 16 and if 54% it'll look around 15 which is roughly its average PE past 4 years. For me it looks justifiable PE wise in fact its pre-crash PE is actually around 20. Its hard to make decision based PE as it is a quite emotional. That's why I prefer using DCF.

K C said...

'A great business is not necessary a great investment'. Job Street has a great business, but is it a great investment at RM2.01? At this price is there adequate margin of safety? After reading your recommendations on this share, I tried to justify buying into this share. Considering if we ignore last year's financial because it is a 'bad' year for Job Street. Taking 2008's core EPS of 12.2 sen and earning growth the previous 4-year CAGR (again ignored last year 'bad' growth)of 19%, dividend growth at 10%, and a final PER of 12. The present value of Job Street is RM2.32 for a 5-year holding period and an IRR of 13.3%. This does not seem to have a lot of margin of safety, even though I feel that my assumptions are liberal. Using another method of FCF, using last year's FCF of RM30 m, 10% growth in FCF for the next 10 years and terminal growth rate of 3%, and with a discount rate of 10%, the present value of FCF per share is not much different from the above value. Again there are numerous assumptions in the computation, but I do not think my assumptions used are even conservative enough to be prudent. I hope I can get more information and analysis from you to convince me in investing in Job Street at this price.

LuZeeker said...

Thanks for your valuable feedback. Hope I don't sound like customer relation officer. But it is great for me to clear the air actually. I guess I might have mislead some of you with what I wrote with that "Buy" call. (Hehe, that is the first business I wrote perhaps I got carried away with research house of writing). It is never my intention to recommend "Buy, Sell or Hold" to anyone because not everyone does things like you. I do experience people who follow whatever my "call" and it is not the intention of this blog to make people follow whatever I wrote. The idea is to have people to do their research before making any decision. Because most of the time the "outside investors" are dealing with partial information. So if it is not enough, go find out more and if it is enough, well like you try to make sense out of the valuation. If it is not recommendation, what is "The List" for? What it does is that it serves as a guide or these are the business that should be kept under the radar and if opportunity comes people will be quick enough to react. Sort of like shorlist la haha. So I won't convince you to buy la:)
Thank you again for counter checking my valuation. I wish to share the details but there'll be too many grandma stories as like you said, lots of params are actually assumption that's the reason why I take certain margin of errrors depending on the certainty and my confidence on those params. So for JobStreet I am looking around RM2.60 instead of RM3.20 and benchmark safetiness based on RM2.60 as well. But I welcome every feedback because I don't wish to mislead others with wrong valuation :(. Erm...I am a little surprise because my last year FCF is around RM25mil vs yours RM30mil and you get lower valuation than mine. Correct me if I am wrong, it looks to me that you are using current FCF and compound it 10% over the next 10 years with 10% discount every year. Then to the terminal growth of 3% with discount. Is that what you are doing?

K C said...

LuZeeker,
As restated by you, those were exactly my assumptions were for my FCF computation. I hope you do not have the idea that I am trying to be smart and argue with you on your recommendation. 10 analysts would have come out with 10 different valuations and nobody can say who is right and who is wrong. Finance is an art. As I have said, I was lucky to find your blog which also tries to find out the intrinsic value of stocks based on other valuation method such as DCF, besides the simple but easy to understand PER etc. Your lists of the Great, the good and The ugly is great. Frankly, I am hoping to learn from you as I am not sure what I have been doing all this while is correct or not, and at the same time try to search for undervalued stocks for long term investment, hopefully. Cheers.

LuZeeker said...

I can't be more glad to exchange knowledge with someone. I see that is your assumption. In fact not long ago I did exactly the same and my valuations comes pretty close to yours. That's how I guess you use that way. Okay, this computation is a little too strict for me to certain companies especially those like JobStreet. Because what you did was you compute the current FCF and compound it to future value. You get current FCF from FCF=revenue-cost-SGA-.....etc. So if you compound it say 10% to currect FCF, your cost, SGA, capex and all other params will also increase by 10% which is a little hard done for JobStreet because its cost stays constant roughly around 15mil over the years and capex is roughly 5mil on average. With all these stay constant plus its high gross profit margin, a slight increase in revenue will boost its ultimately FCF even more. I guess there is where the difference is but yea, it is not rocket science. And any valuation is difference from individual to individual. Personal preference. You can try wiki DCF. The nice picture could explain it all and it is easy to understand :)