Singapore-based financial blog that aims to educate people on personal finance, investments, retirement and their Central Provident Fund (CPF) matters.

Tuesday, 14 January 2020

CPF Accumulated Accrued Interest



Today's topic will be on the interest you pay to CPF on your housing loan.
This is a follow-up article to our previous article.

When you pay your monthly mortgage via CPF Ordinary Account (OA), you are doing several things:
Here's what happens when you pay your mortgage via your CPF Ordinary Account (OA):

  1. You borrow money from a bank or HDB to pay for your home.
  2. Every month, you repay your loan with money from your CPF OA.
  3. The amount that you use to repay your loan will accumulate accrued interest.
  4. Upon selling your home in the future, you are required to pay back the amount that you had used from your CPF OA to pay for your loan PLUS the accumulated accrued interest, back into your CPF OA.
Step 1:
If you borrow from HDB (the stat board) to buy an HDB (the house) flat, HDB charges an interest of CPF OA rate + 0.1% (which is currently 2.6%).
If you borrow from a bank, the rates will vary.
This part is simple to understand (I hope).

Step 2:
You borrowed money to purchase your home, you will definitely need to repay your loan.
To repay your loan, you use money from your CPF OA (instead of paying via cash).
By using CPF, you pay it with money that is saved for your retirement - or money that you technically cannot touch.

Step 3:
Because you used money that is "meant" for your retirement, and that effectively reduces the ability for that money to earn CPF interest, that CPF money will start to accumulate accrued interest.
The accumulated accrued interest is meant to ensure that in the future if you were to sell your home, there would be sufficient balance left in your CPF for your retirement.

Step 4:
You sold your home; you can earn the price appreciation of your home (selling price greater than buying price).
However, if you used CPF OA to pay for your home, you are required to CONTRIBUTE back into your CPF
         a) the amount of money you took out over the years from your CPF OA to pay your mortgage.
         b) the amount of interest you could have earned if you had not used the money in your CPF OA
              to pay for your house (accrued interest).

I used the word to CONTRIBUTE instead of the word PAY.

Recommended Read: Your HDB is like a Call Stock Option

Case Study:
Assuming you used $100k of your CPF OA to pay for your home, and 30 years later you sold it.
If there was no accrued interest, $100k would be deposited into your CPF OA after you sold your home.
But that $100k would not hold the same value as the $100k you used 30 years ago - because of INFLATION!
The same as "last time fishball noodle 1 bowl $0.50, now $3.50".
Your $100k 30 years ago can buy 200,000 bowls of noodles.
Now in 2020, your $100k can buy only 28,600 bowls of noodles.
So to ensure that you can still buy 200,000 bowls of noodles in 2020 after you sold your home, there needs to be an increase in the amount of money that goes back into your CPF.
That's what the accrued interest portion, it is to ensure that the $100k you took out is able to retain its purchasing power.
However, CPF will only take the accrued interest from the profit you get from selling your home.
If you made no profit from selling your home, you need not pay the accrued interest in cash.

Conclusion:
In essence, you are not exactly paying to CPF with the profits of your house.
Instead, the money is actually sent to your CPF OA.
You can actually use the money from that account to invest, buy insurance, participate in schemes applicable for OA.
Think about it another way, you are "profit-sharing" with your retirement fund.
While it may be unpleasant, the greatness of it can only be seen in the future.

Recommended Read: CPF LIFE in the Year 2020

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Unhappy with your job? There's something you can do about it.
A. Save up enough money from your job so that you can fire your boss - the problem is it might take some time and some effort
B: Find a new job, search for new opportunities. A career coach might be able to help you with that. And if you are looking for a free career coach, visit Workforce Singapore via the link below.
They can link you up with the career coach and you might be able to find new opportunities on their jobs portal.
http://ow.ly/GY8150wlfrF

Monday, 13 January 2020

Your HDB is like a Call Stock Option


What is a Stock Option:
Before we begin, you need to understand what is a stock option first.
So here's a link to help you understand what is a stock option.
Continue reading after you understand what's a stock option 😉.

TDLR (Too Long Didn't Read) of a Stock Option
A stock option is a 'contract' that lets you buy a specific stock at a specific price by a specific date.
Eg; I pay $1 to buy a stock option that allows me to buy 1 Microsoft share at $50 before August 2020.

Scenario 1: I exercise my stock option
I can exercise the stock option to buy the Microsoft share, and my total cost of the share is $51 ($50 + $1).
It makes sense to exercise my stock option when Microsoft's share price is above $51 (eg; $52) because then I can sell it straight to the stock market and profit from the difference.

Scenario 2: I don't exercise my stock option
But if Microsoft's share price remains below $50 by August 2020, I will let my stock option expire, and I will lose $1 that I spent buying that option (cost of the stock option).

Scenario 3: I sell my stock option
I can also sell my stock option to other people in the market that are interested in it.
Eg; if Microsoft share price rises to $52, people can bid for my stock option for $1.50 (they can then exercise the stock option, sell the stock, and profit $0.50).
If I sell to them, I will earn $0.50 without going through the hassle of buying to exercise my stock option and then selling my shares to the market.

Recommended Read: CPF LIFE in the Year 2020

How is Owning an HDB like Owning a Call Option?
  • There is a time value to both HDB and Stock Option
    When the stock option reaches its expiry date, it becomes worthless. Before that date, however, there is a value associated with it.
    The same can be said for HDB also before it reaches the end of its 99-year lease, it has a value to it. Once it reaches the end of the 99-year, there is no more value to it.
  • You can sell your Stock Option or HDB to reap a profit (or loss)
    You bought a stock option for $1, after some time the price of the stock option increases to $2 before its expiry date. You can sell the stock option to earn $1 in profit. Similarly, if the price of the stock option drops to $0.50 and you sell it, you will incur a loss of $0.50.
    The same can be said for HDB as well, you can buy an HDB for $500k and sell it for $600k after 10 years and earn a $100k profit. You can also sell it for $450k 10 years later and incur a $50k loss.
  • You own the Stock Option or HDB, not the underlying asset
    In the case of a stock option, you own the stock option and not the underlying stock (the asset) the stock option is tracking. Eg; you buy a Microsoft stock option, you do not own any Microsoft share as a result, you merely own the stock option that allows you to purchase the Microsoft share.
    For the HDB, you own your HDB, but not the land it is built. 
  • The Difference?
    You can exercise the stock option to buy the underlying stock (eg; Microsoft). But you cannot exercise your HDB to buy the underlying land. Once the 99-year lease is up, there goes the HDB. So you either apply for Lease Buyback Scheme before the end of your HDB or sell it to someone before your 99-year lease expires.

Are there any other similarities that you have spotted between HDB and a Stock Option?
Let us know in the comments below 😉

Recommended Read: What is CPF Enhanced Retirement Sum (ERS)?

Remember to offer your opinions. If you don't put your two cents in, how can you expect to get change?

Have feedback? Tell us now!

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Unhappy with your job? There's something you can do about it.
A. Save up enough money from your job so that you can fire your boss - the problem is it might take some time and some effort
B: Find a new job, search for new opportunities. A career coach might be able to help you with that. And if you are looking for a free career coach, visit Workforce Singapore via the link below.
They can link you up with the career coach and you might be able to find new opportunities on their jobs portal.
http://ow.ly/GY8150wlfrF

Thursday, 9 January 2020

Best cashback credit cards to use with SimplyGo for paying Bus/MRT fares


Source: TransitLink
This article is a guest contribution from our friends over at WhatCard

Using Credit Cards To Pay for MRT/Bus

LTA launched SimplyGo 6 in May this year, enabling commuters to use credit cards to pay for their MRT/bus fares as an alternative to the trusty EZ-Link cards which have been a part of people’s wallets for more than a decade.
We had written about this new scheme in an earlier article 9, and it sparked some great discussions about the pros (you get credit card rewards, no longer have to carry an EZ-Link card around) and cons (you may drop your credit card, there is a short delay/lag when tapping) of using a credit card as opposed to Ez-Link to pay for your rides.
To add to this discussion, we thought that it would be good to do a more in-depth review of some of the best cashback cards compatible with SimplyGo, as we had not devoted much space to it in our earlier article.
For the miles lovers out there, a separate article for best miles cards will be coming soon as well!

The volume of comments on just one Facebook group

Best Cashback Cards for SimplyGo

We had shared this table in the earlier article:
Best Cashback CardsRewardsMinimum Monthly Spend
CIMB Platinum10% Cashback$800
DBS Live Fresh5% Cashback$600
Maybank Friends & Family5% / 8% Cashback$500 / $800
UOB One CardUp to 3.3/5% Cashback$500/$1000/$2000, it's complicated 27
While these listed cards all give really high cashback rates, the thing with all cashback cards is, it is all in the details. Here’s what to look out for and our assessment of these cards:

1. CIMB Platinum - Highest headline of 10% cashback, but there is a $20 cashback cap for each of the 5 categories

The CIMB Platinum is well known for its marketing of exceptionally high cashback rates (10%!!!) - far surpassing other cashback cards in the market which in comparison have paltry bonus cashback rates from 1.5% up to 5-6%. Furthermore, 10% bonus cash back is awarded across 5 really common spending categories:
  1. Wine & Dine
  2. Transport & Petrol
  3. Health & Medical
  4. Selected Electronics & Furnishing merchants (e.g. Harvey Norman, Best Denki, Challenger)
  5. Foreign Transactions
HOWEVER, we almost never recommend this card because the T&Cs are one of the most restrictive in its peer group of category cashback cards. Not only is there a rather high $800/month minimum spend, but the biggest issue is also that there is a cap of $20 cashback per category (or $200 spending on that category). Any spending above $200 per category gives a base 0.2% cashback. This implies that: to hit the minimum spend requirement AND maximise your 10% cashback, you have to split $800/month between 4-5 different categories, making sure to spend as close to $200 on each category
We can see a scenario where somewhere has quite a regular spending across these 5 categories and able to optimise their spending well enough to take advantage of the 10% cashback, but for us, it is just a tad bit too much effort to optimise spending to this level of detail. This card may suit you if you have the bandwidth to track expenses to be within a narrow $200 transaction range for each category consistently every month.

2. Maybank Friends & Family - 2nd highest headline of 5%/8% cashback, with a relatively higher $80 cashback cap across all the categories

The relatively less well-known Maybank F&F card went through a major upgrade 15 in Sept 2019, and with that, it has actually become a rather decent all rounded family spending card similar to the OCBC 360/BOC Family card. With a minimum monthly spend of $500 or $800, you get either 5% or 8% cashback across a wide range of common categories:
  • Dining
  • Telcos
  • Groceries
  • Petrol
  • Transport
  • Selected Learning & Retail merchants - Popular bookstore, Toys ‘R’ Us, Yamaha
The only thing to take note of is that there is an overall cashback cap of $80/month, regardless of whether you are getting the 5% or 8% cashback rate. That there is an overall cashback cap makes this a much easier card to optimize for than the CIMB Platinum and DBS Live Fresh (covered below) since you can get great cashback by more easily spending the full $500/$800 on whatever you are currently spending on, even if that is spending the full $800 on just Groceries and Petrol categories - for example for a family person who owns a car.
The bonus cash back categories are rather comprehensive and should cover most of your spending needs already, the only major category that it is missing is for Online Spending.

3. DBS Live Fresh - 3rd highest headline of 5% cashback, but again there is a dollar value cashback cap of $20 per category

The DBS Live Fresh card is very popular among Singaporeans who use cashback cards, and for good reason - it gives 5% cashback on two very common and easy to hit spend categoriesOnline and Contactless (which covers many offline places such as restaurants) spending. It definitely also does not hurt that any spending on this card helps with getting a bonus interest rate on the DBS Multiplier Account 6.
There are some limitations to note: On top of the minimum monthly spend of $600, cashback is capped at $20 per month per category (i.e. you only get 5% cashback on up to $400 spending on each of Online and Contactless category)
For those whom we worked with for our free 1-1 credit card consultation service 4 2 months back (we have changed it to a waitlist now for those who are still interested), you already know that DBS Live Fresh is one our favourite cashback cards to recommend. This card works best for those who have relatively low and regular monthly spending that can be funnelled to either online or contactless spending.
Spend at most $400 on each category (Online, Contactless) to this card to maximize the dollar cashback.

4. UOB One - Up to 3.33%/5% cashback, awarded on a quarterly basis based on hitting a minimum monthly spend each month for the quarter

The UOB One card works in a completely different way from other cards that give a percentage cashback of your spending amount. Instead, the UOB One Card gives a flat quarterly rebate based on you hitting the minimum monthly spending per month, for each month of the quarter. For example, to get the Q1 quarterly rebate you have to hit the minimum monthly spending in January, February, and March. There are 3 tiers of monthly spending which give different quarterly cashback amounts as below:
Spending TierQuarterly RebateMaximum Cashback of Up To
$500-$999 per month$503.33%
$1,000-$1,999 per month$1003.33%
$2,000 and above per month$3005%
Given these 3 tiers and the fixed quarterly rebate, the UOB One card gives the optimal cashback rate if you spend just above $500, $1,000, or $2,000 per month consistently. However, do note that if you miss the minimum spending for even 1 month in the quarter, you will lose the entire rebate for that quarter.
The big benefit of UOB One is that all spending counts, so you don’t need to worry about where you are spending your money, instead only worrying about how much you are spending total each month. Works best for those who prefer to just track their total spending each month without worrying about which category to spend on.

Summary

Given all the T&Cs around cashback cards, we encourage our readers to never just focus on the headline percentage when choosing a cashback card - especially so for category cashback cards like CIMB Platinum and Maybank F&F.
Readers should take note of the dollar value of the cashback caps, and determine a strategy to charge at least the minimum required monthly spend and at most up to the cashback cap (for e.g. $400 spending on the online category with the DBS Live Fresh Card gets the maximum $20 or 5% cashback, but this must be coupled with another $200 of spending elsewhere to hit the minimum monthly requirements of $600 for bonus cashback to be awarded.
You can use our affiliate links below if you are interested to apply for any of the cards listed above. WhatCard was set up to help the community get the most from their credit card rewards. We have been delivering objective commentary with no ads or sponsored content, and affiliate links help us to keep the site running :slight_smile:
If you would like to get the maximum rewards from your credit cards, do consider integrating WhatCard 20into your lifestyle to help you optimize your credit card rewards, and follow us on Facebook 1 to stay updated on the latest tips, tricks, and hacks (like this article!) to get the most out of your credit cards

About WhatCard
WhatCard was created by a group of credit card and personal finance enthusiasts with a simple mission - how can we build something that will help each person get the most value out of their credit card spending.
With the best credit cards willing to give up to 5% and more of the total amount spent back as rewards, typically either cashback or as airline miles, people who do not pay with a credit card (where available) or use a sub-optimal credit card strategy are essentially giving the credit card companies a free lunch on all their spending.

Monday, 6 January 2020

CPF LIFE in Year 2020


Source: CPF

What is CPF LIFE in the year 2020?
CPF LIFE is a scheme that is meant to provide you with a fixed monthly income from when you start your retirement at age 65 till when you are dead.

When you reach 55 years old, a Retirement Account is created and the Retirement Sum is transferred from your Ordinary and Special Account to this account.
The money will be used to fund your retirement when you reach the retirement payout age (currently 65).
It is like a one-time annuity insurance payment instead of a monthly annuity insurance payment like that one most people signed up for*.

Recommended Read: What is CPF Enhanced Retirement Sum (ERS)?

However, it has an embedded feature - sort of like life insurance.
In the event that you passed away before you fully utilised your CPF Retirement Sum, the amount remaining will be passed to your dependents/beneficiaries.
This sum of money is also known as 'Bequest'.

You will need to choose between 3 CPF LIFE Schemes: The Basic Plan, the Standard Plan, and the new Escalating Plan
Topics    Basic Plan       Standard Plan       Escalating Plan   
Monthly Payout  
Mid
High
Low
Bequest  
High
Low
Mid
Payout Growth  
NA
NA
2% PA**

*Annuity Plan is an insurance plan that pays you a monthly amount each month when you reach a certain age (usually when you retire). It will continue to pay you until you pass away.
**Your CPF LIFE monthly payout will increase by 2% every year. That increase will take place every year in the month your first payout was made.

Recommended Read: The "Apple of X" Investments

Remember to offer your opinions. If you don't put your two cents in, how can you expect to get change?

Have feedback? Tell us now!

Subscribe to us or
Follow us: Investment Stab on Facebook


Unhappy with your job? There's something you can do about it.
A. Save up enough money from your job so that you can fire your boss - the problem is it might take some time and some effort
B: Find a new job, search for new opportunities. A career coach might be able to help you with that. And if you are looking for a free career coach, visit Workforce Singapore via the link below.
They can link you up with the career coach and you might be able to find new opportunities on their jobs portal.
http://ow.ly/GY8150wlfrF

Friday, 3 January 2020

The "Apple of X" Investments

Source: Pixabay

Throwback to the early days of the 2010s where most startups are founded on the concept "We are the Uber of X", "We are the Tinder of X", etc.

Uber of X: a platform connecting service providers (cars, cabs, space) with customers.
Tinder of X: a platform for customers to select service providers by swiping.

AirBnB: Uber of Hospitality
WeWork: Uber of Office
BarkBuddy: Tinder for Dog
Blonk: Tinder for Jobs

These startups sucked up a large amount of capital from investors over the past decade - although not a lot of them became as successful as Uber or Tinder (the OGs).
It used to be if you were something like the OGs, it was easy to get funding or a successful IPO.
Now, it seems like if your business model is like the OGs, your stock is not going to perform well.
Uber, Lyft, and other unicorns listed this year have stock prices that are below their IPO prices.
Even WeWork had to cancel their IPO this year.

Then, there is the "Apple of X", or the group of companies that charges a premium for their products and services.
The "Apple of X" group seemed to perform fairly well in 2019.
Apple performed fairly well in 2019, up 82%.
Tesla: Apple of Cars - up 38.8%
LVMH: Apple of Hand Bags - up 64.8%
Marriott: Apple of Hotels - up 42.1%
Razor: Apple of Gaming Peripherals - up 20.5%
Goldman Sachs: Apple of Banking - up 31.0%

Of course, there are also those that did not do well
Bread Talk: Apple of Bread - down 23.5%

And there are those that are not listed
Dyson: Apple of Vacuum Cleaners - not listed


Then again, the S&P500 is up by 27.1% over the same period, so the "Apple of X" does not seem to perform significantly above the average - but they do perform better than average (or so it seems).
Of course, these are just a few of the "Apple of X" that I can think of.
There are definitely other "Apple of X" that we did not include here.
What other "Apple of X" can you think of?
Let us know in the comment below.

Recommended Read: CPF Home Protection Scheme is a Lousy Scheme You Probably Own

Remember to offer your opinions. If you don't put your two cents in, how can you expect to get change?

Have feedback? Tell us now!

Subscribe to us or
Follow us: Investment Stab on Facebook


Unhappy with your job? There's something you can do about it.
A. Save up enough money from your job so that you can fire your boss - the problem is it might take some time and some effort
B: Find a new job, search for new opportunities. A career coach might be able to help you with that. And if you are looking for a free career coach, visit Workforce Singapore via the link below.
They can link you up with the career coach and you might be able to find new opportunities on their jobs portal.
http://ow.ly/GY8150wlfrF

Thursday, 2 January 2020

What is CPF Enhanced Retirement Sum (ERS)?

Source: CPF

Today's post is about Enhanced Retirement Sum (ERS)
It is currently set at 1.5x the Full Retirement Sum (FRS)
Why would someone wish to put more money into their Retirement Account than necessary?
That will be what this post will answer.

For more information on the different types of Retirement Sums, click HERE
For more information on the amount on the different types of Retirement Sums, click HERE

Rationale
Finance theory states that as you grow older, you need to take less risk.
Hence as you grow older, your retirement portfolio should be fewer stocks & more bonds.
In recent years, Bonds' interest return has not been spectacular, especially high-quality bonds.
You also might not want to go into low rating bonds for higher returns (such as BBB rated bonds).
Most importantly, we need to understand that our retirement portfolio is meant to provide us with a stream of income (preferably steady income) during our retirement.
The CPF LIFE scheme (click HERE for more information) does that, the ERS adds on to what CPF LIFE can provide

Recommended Read: CPF Home Protection Scheme is a Lousy Scheme You Probably Own

Advantages of ERS
1) Higher Interest Returns - up to 6%
2) High-Rated "Investments" - since it is guaranteed by the Singapore Government which holds a AAA credit rating
3) Compounding Growth - Interests are compounded yearly, unlike bonds which do not compound
4) Fixed monthly income - it is like an investment that gives you a "payout" every month.
5) Its is auto-pilot - you do not have to do anything. You put your money in and expect money out every month. Unlike normal investments where you have to manage your funds actively.

Disadvantages of ERS
1) Low liquidity - you cannot wish to withdraw the whole amount out like you can with your private investment fund
2) Policy changes to CPF - changes might affect you from withdrawing any more money or getting higher monthly payouts or delaying your payout or something beyond what I can think of for now
3) Political Risk - because it is backed by the Singapore Government, if anything goes wrong in Singapore, it will affect the returns you get from CPF.

Recommended Read: How I Saved $1000 of my $2500 Salary

Remember to offer your opinions. If you don't put your two cents in, how can you expect to get change?

Have feedback? Tell us now!

Subscribe to us or
Follow us: Investment Stab on Facebook


Unhappy with your job? There's something you can do about it.
A. Save up enough money from your job so that you can fire your boss - the problem is it might take some time and some effort
B: Find a new job, search for new opportunities. A career coach might be able to help you with that. And if you are looking for a free career coach, visit Workforce Singapore via the link below.
They can link you up with the career coach and you might be able to find new opportunities on their jobs portal.
http://ow.ly/GY8150wlfrF

Monday, 30 December 2019

Should I Get Singapore Companies To Do More Share Buyback?


What is Share Buyback?
It is the company buying back shares of itself to reduce the number of shares outstanding, and in return increase the value each share is worth.
For a more in-depth explanation about it, refer to the Investopedia page HERE.

Why Companies (particularly US companies) Love Share Buyback?
The main reason: Tax
In the US and other countries, shareholders have to pay a dividend tax for the dividends they receive.
In the US, the nominal tax rate is 30%.
This causes shareholders to experience double taxation - once on the company's profits, then again on the dividends paid out of the profits.
To avoid double taxation, companies use share buybacks as a way of "giving" returns back to shareholders.

The math of Share Buybacks
You can skip this if you know how buyback works
A company made $1 million in profits, has 1 million shares outstanding, and a PE of 10.
The current share price of the company is $10, and the Earnings Per Share (EPS) is $1.
If the company bought back 10% of its shares (100,000 shares), the EPS will increase from $1 to $1.11 ($1m profits / 900k shares).
Assuming the PE of 10 does not change, the new share price will become $11.11 (an 11% increase just by reducing the share count by 10%).

Recommended Read: How I Saved $1000 of my $2500 Salary

The Math Portion of Why Buyback Is Better Than Dividend
A company made $1 million in profits, has 1 million shares outstanding, and a PE of 10.
The current share price of the company is $10.
Assuming the company grew earnings by 4% this year, the new share price will become $10.40.
Assuming that the company pays a 2% dividend, which means it will pay out $200,000 in dividends.
As a shareholder, you will earn 6% this year.

Now, instead of spending $200,000 in dividends, it used the $200,000 to reduce the shares outstanding via a share buyback.
At $10 per share, $200,000 will buy back 20,000 shares or 2% of the shares outstanding.
With a 4% growth rate, profit becomes $1.04 million, divide by 980,000 shares, the EPS becomes $1.06.
The new share price will become $10.60, you as the shareholder will still earn that 6% return.

Problem with Share Buybacks in Singapore
1. Dependence on the Company Performance
When you get a dividend, it is cash into your pocket you can use to invest in other companies or buy things you like.
When you get buyback, you get no cash, but your ownership in the company increases.
If the company grows and earns more, your increased ownership in the company will be worth more.
But if the company shrinks, your ownership in the company will be worth less - worse still, you have no dividends to help you cushion the blow or to use as funds to buy more of the company's shares at a lower price.

2. No Tax Efficiency
In the US (and other countries), dividends are taxed, but share buybacks are not.
Hence from the shareholders' perspective, it might be better to spend cash doing share buybacks than paying out as dividends to avoid taxation.
But in Singapore, dividends are tax-free.
So the idea that "buybacks are better than dividends because of tax advantages" no longer works in Singapore's context.

3. Management Problems
I often tell my friends the statement below when explaining why I prefer Singapore companies do dividend over buybacks.
"I much rather they give me the cash and let me decide what to do with the money than let management hoard the cash. Rather I make a mistake with my money and lose it than for management to make a mistake with my money and lose it."
Of course, there are good companies that really make great use of shareholders' money to reap even higher returns, like what Warren Buffett did for Berkshire Hathaway.
But then again, how many Warren Buffett and Berkshire Hathaway do you really see in the world?
The probability of investing into the next Warren Buffett or Berkshire Hathaway is fairly low actually.

4. Company Problems
IBM spent US$83 billion on share buybacks over the past decade, but the stock price and market capitalisation went nowhere.
As an investor of IBM, it might be better had they just gave all that US$83 billion out as dividends.
Even though shareholders have to pay taxes, but at least they will still have US$58 billion and a shrinking company, instead of now where they have no cash but huge ownership in a shrinking company.


Conclusion
Share buybacks can be great for shareholders if they are done correctly.
Except it is really difficult for it to be done correctly.
Warren Buffett (world's greatest investor) set a limit on his buyback activity - he would only buy back shares if the share price fell to below 1.2x his company's book value.
At 1.2x, he considers his company to be undervalued enough to justify buying back shares and benefiting those shareholders who held on to their shares.
Unfortunately, most management teams do not have such discipline - particularly so since almost no management will ever say their share price is undervalued, even if it is significantly overvalued.
Hence, it might be better, if we as shareholders demand higher dividend payouts and fewer share buybacks!

Recommended Read: CPF Home Protection Scheme is a Lousy Scheme You Probably Own

Remember to offer your opinions. If you don't put your two cents in, how can you expect to get change?

Have feedback? Tell us now!

Subscribe to us or
Follow us: Investment Stab on Facebook


Unhappy with your job? There's something you can do about it.
A. Save up enough money from your job so that you can fire your boss - the problem is it might take some time and some effort
B: Find a new job, search for new opportunities. A career coach might be able to help you with that. And if you are looking for a free career coach, visit Workforce Singapore via the link below.
They can link you up with the career coach and you might be able to find new opportunities on their jobs portal.
http://ow.ly/GY8150wlfrF