A Blog Posted by Singapore's Youngest Millionaire

A Blog Posted by Singapore 's Youngest Millionaire
By Adam Khoo

Some of you may already know that I travel around the region pretty frequently, having to visit and conduct seminars at my offices in Malaysia, Indonesia, Thailand and Suzhou (China). I am in the airport almost every other week so I get to bump into many people who have attended my seminars or have read my books.

Recently, someone came up to me on a plane to KL and looked rather shocked. He asked, 'How come a millionaire like you is travelling economy?' My reply was, 'That's why I am a millionaire.' He still looked pretty confused. This again confirms that greatest lie ever told about wealth (which I wrote about in my latest book 'Secrets of Self Made Millionaires'). Many people have been brainwashed to think that millionaires have to wear Gucci, Hugo Boss, Rolex, and sit on first class in air travel. This is why so many people never become rich because the moment that earn more money, they think that it is only natural that they spend more, putting them back to square one.

The truth is that most self-made millionaires are frugal and only spend on what is necessary and of value. That is why they are able to accumulate and multiply their wealth so much faster. Over the last 7 years, I have saved about 80% of my income while today I save only about 60% (because I have my wife, mother in law, 2 maids, 2 kids, etc. to support). Still, it is way above most people who save 10% of their income (if they are lucky). I refuse to buy a first class ticket or to buy a $300 shirt because I think that it is a complete waste of money. However, I happily pay $1,300 to send my 2-year old daughter to Julia Gabriel Speech and Drama without thinking twice.

When I joined the YEO (Young Entrepreneur's Organization) a few years back (YEO is an exclusive club open to those who are under 40 and make over $1m a year in their own business), I discovered that those who were self-made thought like me. Many of them with net worths well over $5m, travelled economy class and some even drove Toyota's and Nissans (not Audis, Mercs, BMWs).

I noticed that it was only those who never had to work hard to build their own wealth (there were also a few ministers' and tycoons' sons in the club) who spent like there was no tomorrow. Somehow, when you did not have to build everything from scratch, you do not really value money. This is precisely the reason why a family's wealth (no matter how much) rarely lasts past the third generation. Thank God my rich dad (oh no! I sound like Kiyosaki) foresaw this terrible possibility and refused to give me a cent to start my business.

Then some people ask me, 'What is the point in making so much money if you don't enjoy it?' The thing is that I don't really find happiness in buying branded clothes, jewellery or sitting first class. Even if buying something makes me happy it is only for a while, it does not last. Material happiness never lasts, it just give you a quick fix. After a while you feel lousy again and have to buy the next thing which you think will make you happy. I always think that if you need material things to make you happy, then you live a pretty sad and unfulfilled life.

Instead, what make ME happy is when I see my children laughing and playing and learning so fast. What makes me happy is when I see my companies and trainers reaching more and more people every year in so many more countries. What makes me really happy is when I read all the emails about how my books and seminars have touched and inspired someone's life. What makes me really happy is reading all your wonderful posts about how this BLOG is inspiring you. This happiness makes me feel really good for a long time, much much more than what a Rolex would do for me.

I think the point I want to put across is that happiness must come from doing your life's work (be in teaching, building homes, designing, trading, winning tournaments etc.) and the money that comes is only a by-product. If you hate what you are doing and rely on the money you earn to make you happy by buying stuff, then I think that you are living a meaningless life.

Failures on many fronts

Thursday, October 2, 2008

Failures on many fronts
Oct 1, 2008
ST-NUS BUSINESS SCHOOL SERIES ON FINANCIAL CRISIS
By Bernard Yeung

THE United States sub-prime mortgage crisis has occasioned a deep economic winter. How did it come about?

The crisis is related to international payment imbalances and US economic policies. After the bursting of the dot.com bubble, the US Federal Reserve ran a loose monetary policy for several years. The Fed fund rate, for instance, dropped from 5.98 per cent in January 2001 to 1.73 per cent in January 2002, and stayed in that neighbourhood till the end of 2005. Easy credit fuelled US consumption, reduced savings and created high current account deficits.

The world, especially Asia, absorbed the US inflationary pressure partly by producing more. Also, Asian countries used their savings to purchase US securities to support the dollar so that they could avoid revaluing their currencies.

When capital markets are informed and rational, international imbalances can be self-correcting. A review of the events that led to the current crisis would help us understand why it wasn't so in this case.

The US government encouraged home ownership. That is generally good public policy. But in this instance, it led to the extension of mortgage lending to people who did not meet prime credit quality requirements - hence the term 'sub-prime' mortgages.

Moreover, the mortgages were 'securitised' - that is, bundled and sold as financial instruments to investors for immediate cash. This created an incentive problem: The institutions that originated the mortgages - commercial banks, savings and loans, etc - did not end up holding the mortgages. This led to excessive and irresponsible mortgage lending.


The investment banks that repackaged and sold the 'expected' mortgage payments as securities were able to do so because they enjoyed high credit ratings. Their activity appeared to be old-fashioned financial intermediation, but it was not.

The problem was that US rating agencies assigned ratings based on the investment banks' histories. But the instruments the banks were peddling - mortgage payments from lower-quality borrowers - were new. They carried credit ratings that did not reflect their high underlying default risks. Investment banks could not resist the temptation to make a quick buck. They made a quick buck aggressively.

Additionally, high savings from China and other countries continued to flood US markets. Foreign savers could not resist the lure of apparently safe US returns better than in their own markets. Foreigners did not necessarily invest in sub-prime instruments. But their investments increased liquidity nevertheless in US financial markets.

This translated to more money for Americans for sub-prime mortgages and other kinds of consumption. And investment banks found the profits from derivatives like mortgage-backed securities even more irresistible because they could get cheap credit to refinance. The delinquency risks of low-grade instruments were temporarily camouflaged by high liquidity.

The bubble had to burst. Because of inflation worries caused by high energy prices, the Federal Reserve raised interest rates in 2006. Some households had difficulties meeting their mortgage and other payments. The bubble was burst.

Fears set in and investment banks could not borrow to meet their payment obligations. There was a liquidity problem. In March this year, Bear Stearns was sold under pressure to JPMorgan Chase. The government-sponsored Freddie Mac and Fannie Mae issued most of the mortgage securities sold in the first half of this year because investors would not trust investment banks anymore. Still, the fears lingered on. On Sept 8, the US government took over Fannie and Freddie in the midst of foreign investors' concern that the companies' debt might not be repaid.

The asset values of investment banks continued to plummet. The liquidity crisis turned into a solvency crisis. Lehman Brothers filed for liquidation on Sept 14. After refusing to bail out Lehman, the US government decided to support American International Group. The saga, dotted with such sudden U-turns, is still unfolding. Markets are now worried about a global credit crunch.

The sub-prime crisis has its roots in international payment imbalances, made worse by capital markets imprudence, which in turn became endemic because of regulatory failures.

First, investors, particularly foreigners, were swayed by US rating agencies, apparently sound institutions and US economic performance. Getting good returns first made them happy, then made them enthusiastic, and finally made them lose their common sense.

Second, there was a fundamental problem with corporate governance. Wall Street executives enjoyed extremely handsome compensations. Their fiduciary responsibilities to shareholders and investors were pushed to a corner.

And third, these common ingredients of manias - blindfolded investors and poor corporate governance - were amplified by a failure of government. How could such a colossal failure of corporate governance and of rating agencies not have generated early government action? The US authorities' lack of sensitivity to the warning signs is shocking.

Liquidity was already drying up last year. The US authorities, however, still played the interest rate game, reducing the Fed Fund rate in August and September last year. But by then, the liquidity crisis had turned into a systemic crisis of confidence: Investors did not want to throw more good money at investment banks holding potentially rotten liabilities. Early government action to force them to recognise their mistakes and accept losses might have stemmed the bleeding. Intervention then would have been affordable.

The US likes to lecture others of the need for transparency and good corporate governance. Its failure to apply at home what it preaches abroad has serious global negative economic externalities. The question is not just whether US taxpayers should or should not bail out careless financial institutions. It is about admitting regulatory failures, accepting responsibility and rectifying failures in governance.

Apparently, US politicians do not agree. Congress has rejected Treasury Secretary Henry Paulson's US$700 billion (S$1 trillion) bailout package. The world has been denied any sign of relief.

The writer is Dean and Stephen Riady Distinguished Professor of Finance at the NUS Business School. This is the first of eight articles in the Straits Times-NUS Business School series on the financial crisis.