How does money grow for people
who want to create some wealth in their
family (over the long term)? (How Money
Grows Essays)
There is no limit to the ways through
which money will grow if given the proper
attention. Real estate development is
one way. Pursuing traditional business
activities is a 2nd. Investing in the
shares of listed companies is a 3rd and,
lending one’s savings to his government
is a 4th way through which to make one’s
money grow to create wealth, over the
long run. For those who want their ‘two
cents’ to work for them while they
themselves are still working, the key
for ‘growing’ may be in understanding
some ‘small but powerful’ strategies
that can make critical differences in
an investment programme, over time. Some
of these are:
a) wealth building impact of
time over the long run.
$10,000 invested in the shares of BNS Ja in 1984 for any baby born that year
would be worth about $5.9M at Dec 2004 when he/she is age 21 years if all bonus
units were kept and all dividends re-invested in the stock. While what happens
in the past is not prologue i.e. it provides no guarantee for the future, all
the research in long term investing is suggesting that investments in good equities
are likely to out-perform other types of investments. The lesson: invest in a
good stock whenever a baby is born and let the wealth building impact of time
grow some wealth for delivery as a 21st or 25th birthday present. Time (as measured
in decades is a powerful ‘secret’ in building wealth
b) the compounding magic of
interest rate over time. This
is another powerful secret of
wealth building. See at Q #,,,,,,,,,,,
c) growth of shares in a company
through ‘bonus compounding’.
One hundred shares bought in
BNS Ja in 1979 would be XXX at
Dec 2004 and XXX times 2 in April
2005 (2 for 1 bonus). In 1979
those 100 shares would have cost
$xxxxx. At Dec 2004 they would
have a market value of $XM See
at Q #,,,,,,,,,,,,,
d) growth of shares in a company
through ‘dividend compounding’.
If the dividend paid on all the
shares from that original 100
share purchased in 1979 were
used to buy more shares in BNS,
it would have bought an additional
XXXX shares. Together with the
original 100 shares, the value
at Dec 2004 would be $XXXXX
The wealth-building ‘secret’ to
understand in these illustrations is
that no new money was added to the
original $xxx for the 100 shares in
1979. Yet, look how the wealth has
grown!!! Many people have been using
these secrets to build wealth from
one
generation to the next. We, too, can do it….if we know it can be done,
and have the vision, and the discipline, to do it.
Why is the
concept of ‘over
the long term’ always stressed
in wealth creation strategies?
This is because time (as measured in
decades) is one of the most important
ingredients in every transaction involving
money, starting from the basic one year
period on which interest earning calculations
are made. We are all familiar with the
impact of time in other areas such as
construction and farming. In investing
however, the importance is even more
critical because, the same investment
could have a different value depending
on when (the time) a party might want
to buy, or sell, an investment. The shares
of GraceKennedy illustrate as follows
a) 100 shares sold in bear market
(end 1995) @ J$11.6/share =J$1,160
b) 100 shares sold in bull market
(end 2004) @ J$118.0/share = J$11,800
Because of this phenomenon, the
investing fraternity has generally
recognized three investing time
zones as follows
c) Short term…under three
year
d) Medium term …three up
to ten years
e) Long term…anything over
ten years
No one knows for sure what the future
holds. Whereas the illustration demonstrates
the tremendous impact of time (1995 vs.
2004) it reminds that money needed for
short term objectives are better not
put in ling term investments
Explain what
is meant by saying that poverty is
a ‘result’ phenomenon
Most incidents in life don’t just
happen...not even accidents. They are
the result of either a commission (what
we do) or an omission (what we neglect
to do). Many people feel it is the same
with poverty (or wealth). It (poverty)
does not happen by itself, and neither
does wealth. This recognition is one
of the first barriers to wealth that
those who aspire to it should observe.
Accordingly, today’s poverty is
the result of either a commission or
omission by a family (or some families)
somewhere in the past. Tomorrow’s
poverty will equally be the result of
a commission or omission by us, today’s
parents. Happily, the Caribbean is full
of people who started with nothing, and
have climbed the ladder of achievement
and have joined the ranks of the wealthy.
Their story (many of which will be highlighted
in our Special Projects) is testament
to the fact that whereas yesterday’s
poor can be today’s wealthy, similarly,
today’s poor can become tomorrow’s
wealthy. Following are some of the reasons
that lead to the poverty of the poor
a) Acceptance of status quo in which one is born. Is this a parental
problem?
b) No vision of self in a future of one’s choosing..parental/school
problem?
c) No savings strategy, however small the amount to be saved e.g.
salary deduction to a credit union, unit trust or mutual fund
d) Living above one’s means e.g. spending 100 cents out of
every dollar of income
e) No provision whatever for one’s own rainy day…however
small is the income
See Essay # 47 Why Some Have And Others
Don’t
How about
wealth? Is that a ‘result’ phenomenon
too?
Yes. Wealth is not by accident. Even where it is achieved through fraudulent
means, somebody planned for it. Whereas many individuals start from scratch
and become wealthy in their own lifetime, in many cases of today’s wealthy,
the seeds were sown by an earlier individual or family who:
a) cultivated the vision,
b) made the sacrifices of doing without some comfort
c) laid down the ground rules to encourage more wealth formation
by the new generation versus them eating out what was inherited.
See Essays:How they built the family
wealth” and “Lessons from today’s young Turks
Are there
any facilities that small investors
can use to grow their savings
over time?
There are many ways through which small
investors can multiply their savings
and investments over time. Some of these
are through commercial banks, building
societies and credit unions. Additionally,
in recent times, some specialized money
management companies (MMCs) have come
on the scene specifically to help small
savers and investors to invest like,
and get the same benefits, as big investors.
These specialized MMCs are called either
unit trusts or mutual funds. What they
do is collect the savings of many small
savers/investors into one big pool and
invest it, on their behalf, as though
it was coming from one big investor.
The company or person who manages this
pool of funds is called the fund manager
(FM) These FMs will usually invest these ‘small
savers’ funds either in real estate
projects, the stock market or the fixed
income market for their benefit. Following
are some of the unit trusts/mutual funds
in the CSME:
a) Jamaica……..Barita
Unit Trust Ltd, Capital & Credit
Fund Managers Ltd, DB&G
Unit Trust Ltd, & Pan
Caribbean Asset Management
Ltd
b) T&T…….
c) Barbados
d) Eastrn caribbean
I understand real estate but,
what are stocks and shares?
The financial industry uses many terms that obfuscate or confuse even if it did
not set out to do so deliberately With a little effort, however, the parts of
the
puzzle will fit into place. To more easily understand stocks and shares, think
of a house made of concrete blocks. Here, the house is the stock – just
like D&G (Red Stripe beer), National Commercial Bank (NCB) Capital and Credit
Merchant Bank (CCMB) or Dehring, Bunting & Golding (DB&G) And, the concrete
blocks are the shares In the same way that we say that the house is made of concrete
blocks, so too is a company (the stock) made up of shares. Depending on the size
house, it could have, let’s say, 1,000 blocks in a one bedroom house, 100,000
in a three bedroom, or 1,000,000 in a five bedroom house. Here each individual
concrete block in the house is equivalent to one share in a company such as any
of the four named above. Where one person or family, or less than XX persons
own all the shares (i.e. all concrete blocks) in a company, it is said to be
a private company. Where many different persons/families own different amounts
of shares in it (concrete blocks in the house) it is called a Publicly held company.
At the end of 2003, these stocks had the following numbr of shares D&G 2,809M;
NCB 2.466M; CCMB584.5M and DB&G 121.129M. Of the 2,466M shares in NCB, Mr.
Michael Lee Chin owns about 75% of them, but many other people own the rest of
25%. These other owners, and indeed Mr Lee Chin himself, can sell some or all
of the shares they have or buy more to increase their tally. When they do this
buying and selling, they do so through a person who is called a Stockbroker.
This stockbroker in turn does the selling through what is called a Stock Exchange.
There are presently four stock exchanges in the CSME. These are:
a) Jamaica Stock Exchange (JSE)
b) Trinidad & Tobago Stock Exchange
c) Barbados Stock Exchange
d) Stock Exchange of the Eastern Caribbean
See Essay # 1 Playing the Equities & Money Markets
What is a stock market?
In the not so ‘old days’ when
someone said ‘I am gone to the
market’, we knew exactly where
that was! It was a particular location
with physical boundaries at one street
corner or the other. This is where items
of food or clothing could be bought or
sold. In a stock market, items (shares
of different stocks) are bought and sold
also but this ‘market’ does
not have any physical boundaries. Instead,
it is just a facility for the organized
trading (buying and selling) in the shares
of listed companies (stocks). This organized
trading means that there is a stock exchange
over which the ‘buyers and sellers’ can
do their trading. Interestingly, these ‘buyers
and sellers, called stockbrokers, are
not (usually) buying and selling shares
for themselves but, instead, for their
clients (you and I) who will pay them
a commission to do this buying and selling
for us. The reason for this is that people
who handle the trading of shares must
have a license to do so from the regulatory
authority, something that most owners
of shares do not usually have, or need.
In today’s high tech world, the
buyer of shares in any listed company
in the CSME could be living in England,
Canada or the USA. And, the shareholder
who wants to sell some shares could be
living in London, Miami or Toronto (No!
Not Michael Lee Chin. He is a ‘buy
and hold’ investor…he hates
to sell good shares from his portfolio
of stocks) The stockbroker could be living
in Jamaica and they could all talk on
the telephone and over the internet and
do business in any of the four stock
markets in the Caribbean. The actual
place where stockbrokers or their representatives
meet to ‘haggle’ on our behalf
is called the floor of the Exchange.
Today, stock markets are one of the driving
forces of all economies because, apart
from facilitating the buying and selling
of shares between shareholders, it also
facilitates the raising of money to finance
both new and existing businesses. There
are four small stock markets in the CSME.
Many people expect that they will come
together to form one stronger market
which will provide benefits from the
economy of scale.
What is a stock exchange?
Every stock market needs an exchange because, this is where the trading (actual
buying and selling) of stocks is done. Unlike the market, a stock exchange
has a physical location that anyone can visit. It is really the electronic
nerve centre of a stock market. In our digital world however, this ‘physical
place’ is more and more becoming an electronic place. This is where the
actual facilities exit to make trading possible in the shares of stock In addition,
exchanges formulate and implement the rules and regulations that govern trading
and provide the record keeping to facilitate stock market reports and analyses.
The stock Exchanges in the CSME are:
a) Jamaica Stock Exchange http://www.jamstockex.com
b) TSE http://www.stockex.co.tt/
c) Barbados http://www.bse.com.
Eastern Caribbean
See Playing the Equities & Money Markets.
What is a bond?
If you are not financially savvy (have money/investment awareness) don’t
even go to a Financial Dictionary for explanation of a bond. It will tell you
that a Bond is a debt instrument! Trouble is, it really is! But, what is a debt
instrument?. To enable you to more easily understand it, think of it this way… a
bond is really what you and I know as a “borrows” – straight
and simple. When you run short of cash in mid-month and take a loan from parents,
friends, or your employer, you have just “sold or issued” them a
bond! That is, they lend you money now in exchange for your written undertaking
(promise) to pay them back end of month with interest! Nobody borrows money like
governments and, accordingly, nobody pays out interest like them either. Many
individuals and families build their wealth either by buying and selling stocks
and/or by lending their money to their government and earning interest income
from this lending. When they lend this money to the government, the financial
trade says that they have ‘bought a bond’ Sounds crazy, doesn’t
it? But that’s how it is! Since Caribbean governments are among the biggest
per capita borrowers in the world, Caribbean citizens, from wherever in the world
they live and, can lend some of their money to our CSME governments and earn
good interest income also. This is one of the wealth creation ‘secrets’ that
many people use to become wealthy and every, and anybody, can use the ‘secret’ too.
Even small people can use it by going to a unit trust or mutual fund. The managers
of these funds will lump the savings from small savers into one big pool and
buy bonds on their behalf , that is, lend it (their money) to the government
and get the same rate of interest as the big individual lenders Put another way,
all Caribbean citizens, whether very rich or not so rich, from home and abroad,
can buy the ‘sovereign debt’ either of their own individual country
or any of the other Caribbean countries and earn good interest income just like
very big individual investors.
What is a money market fund (MMF)?
See Essay # 24 How Money Grows Part 1
There are many types of investment instruments.
There is one for investing in real estate
development (REITs). Another for investing
in the shares of companies (Equity Fund)
And another one for investing in debt
(which we call bonds) and other ‘liquid’ instruments.
This type of fund is called a Money Market
Fund (MMF) because it invests only in
liquid assets. ‘Liquid’ means
the asset can be easily converted back
into cash so that, if the investor in
this kind of fund wants back his money ‘before
time’, it will be relatively easy
for this to happen. This is done by the
FM buying back the saver’s units,
usually with him making something on
the investment, depending on how long
his money was in the Fund. Most money
market funds are said to be ‘open
ended’. This means that there is
no limit to the number of people, (or
amount of money) who can invest in them.
Pretty much in the same way that a company
is divided up into individual shares
of ownership, a money market funds is
divided up into units of ownership. An
investor will buy x number of these units
when he invests in it. The opposite to
an open ended fund is a closed end one
which does not accept any more funds
or investors (called members)
What is a unit trust?
Many people have enough money to invest
on their own. The rest of us may not
have that much but, if a person or
company could design a fund into which
many different small investors could
invest and combine their savings, he
would enable us to invest collectively
in any of the funds mentioned at Ques
# 26. This way, small saver/investors
could earn the same investment returns
as the big individual investors. That
person, called a fund manager, could
then manage our investment for us.
To make this worth his while, we would
pay him a fee for his management and
supervision. Management and supervision
means that he could spread (diversify)
out where he invests our money to ‘protect
our flanks’ from loss. This fund
that he creates to accommodate and
manage our investment is called a unit
trust in the English financial lexicon.
Unit trusts are normally open ended
funds. An important characteristic
of unit trusts is that, in order to
accommodate the many different small
investors, they are designed on the
basis of units of investment in pretty
much the same way that that a company
(a stock) is divided up into shares
to make it easy for many different
people to buy them. At writing, the
distribution of unit trusts in the
Caribbean are as follows:
a) Jamaica: Dehring Bunting & Golding
Ltd, (2 separate funds; Barita
Unit Trust Services (2 separate
funds; Capital & Credit Fund
Managers, (3 separate Funds;
Pan Caribbean Asset Managers,
(3 separate funds)
b) Trinidad & Tobago:
c) Barbados:
d) Eastern Caribbean :
A unit trust that invests only in liquid instruments is a money market fund
What is a mutual fund?
In America, unit trusts are called mutual
funds. The 2004 Jamaican Companies
Act recognizes mutual funds as legal
instruments in Jamaica. At writing
(Dec 2004) the distribution of mutual
funds is as follows:
a) Jamaica; Grace Caribbean Fixed Income
Fund, JMMB Select Index Fund
b) Trinidad & Tobago;
c) Barbados;
d) Eastern Caribbean;
What is a market index?
Once a Stock Market comes into operation, a way has to be found to measure the
trading activity and value of the stocks traded on the exchange. To do this,
the managers of Exchanges have devised a way to give a numerical value to this
trading activity. This numerical value is the Trading Index. In practical terms,
it is the addition of the value of all the stocks that are traded and then
this total value is divided by the number (divisor) of units traded. In recent
times however, some Exchanges have refined their divisor to a figure other
than the exact number of units traded to suit the peculiarities of their own
situation. Following are the starting indices of the exchanges in the CSME:
The JSE, for example, has three indices as follows: (1) main index which includes
all the stocks listed on the exchange, (2) the All-Jamaica index which contains
stocks which are majority owned by Jamaicans and (3) the JSE Select which is
made up of the most heavily traded (called liquid) stocks be they Jamaican majority
owned or not
What is an index fund?
An index fund is a specially selected
bundle of stocks that trade together
as one unit. Think of Siamese twins…bound
together and doing everything as one
unit!. Every stock market is, in essence,
a market index. There are many ways
for people who invest in the shares
of listed companies to make their investment
in these markets. Some people keep
buying and selling the shares of any
companies in the index. Other investors
do the same buying and selling but
with a smaller number of specially
selected companies. The purpose of
this buying and selling is to beat’ the
main market index and make as much
profit as possible. Instead of buying
randomly from the main index, some
investors prefer to buy a smaller bundle
of stocks (from the main index) based
on a criteria of their choice, which
are traded together pretty much like
they are a ‘baby’ market
index (which is exactly what they are).
Usually, this ‘baby index’ is
a special bundle of stocks selected
to represent the various sectors of
a market but which, the person who
selects them, believes will out perform
the main index. Normally, the stocks
in this ‘baby index’ fund
remain bundled together and is treated
as one unit of investment. An important
characteristic of index funds is that
there is no constant trading (buying
and selling) of the bundle of stocks
and, as a result, there is very little
transaction costs involved in its management.
The essence of this ‘little transaction
cost’ is that, since a lot of
money is not paid out for management
and other transaction fees, more money
stays ‘within the index’ and
helps push up returns to investors.
At writing, the Index Funds in the
CSME are:
a) Jamaica; Mayberry Performance Index
Fund, JMMB Select Index Fund
b) Trinidad & Tobago;
c) Barbados;
d) Eastern Caribbean;
