Friday 29 Mar 2024
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This article first appeared in Personal Wealth, The Edge Malaysia Weekly on September 9, 2019 - September 15, 2019

The narrative in global markets has been gloomy of late. Talk of a potential recession has become increasingly commonplace, especially after the key yield curve inverted (when the yield of the 10-year US Treasury note fell below that of the 2-year note) last month. Some see this phenomenon as an indicator that a recession will occur within 22 months (on average) of the inversion.

These developments may provoke fear among millennials, who have never been directly affected by a recession in their professional lives. According to Pew Research Centre’s definition, the oldest and youngest millennial would have been 16 and 1 during the 1997 Asian financial crisis and 27 and 16 during the 2008 global financial crisis.

If a recession were to occur, what should they do with their savings and investments? And what can they do to have extra cash to tide them over in the bad times, especially since the younger generation in Malaysia has weak financial management skills and high debt levels?

Personal Wealth spoke to four industry veterans about their experience and lessons learnt during the previous two financial crises.

 

FINANCIAL LITERACY MAKES A DIFFERENCE

For Linnet Lee, CEO of the Financial Planning Association of Malaysia, the two financial crises marked drastically different periods of her life. In 1997, she was going through a divorce and had scant knowledge about investments. In 2008, she was working in the financial industry and was able to use her knowledge of finance to plan for her needs.

It was not an easy journey for Lee, but improving her financial literacy made all the difference. In 1997, as a single parent, she had to learn to be financially independent. But a bad experience had made her wary about investing.

“[Back then] my ex-husband had a share trading account under my name. I knew nothing about share trading and I did not know the risks it entailed. I had no interest in it as I was busy with my work,” says Lee, who was working as an associate sales manager at an electrical and electronic goods company at the time.

“But one day, I discovered what margin trading was and I began to sweat buckets. The amount [in the margin trading account] was RM300,000. Even if I sold everything I had, I would not have that kind of money. I had sleepless nights wondering where I was going to get the money to pay it back if they made a margin call.”

So, she took refuge in her work, which turned out to be a good move because her division managed to break some sales records. When the recession hit, the company’s bottom line was affected. But her job was secure.

Another good thing was that the couple’s divorce proceedings were concluded that year. Lee’s ex-husband had to transfer the trading account back into his name. So, when the financial crisis hit, he suffered badly.

“I felt sorry for him, but I was thankful for myself because my daughter was under my custody. If I had got into financial difficulty, she and I would have suffered. So, it was a blessing in disguise,” says Lee.

“But because of this, I had a bad experience with stocks. I thought it was all very high risk.”

When she became a single parent, she had to make changes in her lifestyle to support her family. She even considered quitting her job to become a full-time unit trust consultant.

“When you are working [a 9-to-5 job], you do not have the time to take your child to school and fetch her afterwards. I also could not afford a maid at the time,” says Lee.

“I told my daughter, who was 10 years old, that we needed to make some life changes. I asked her, ‘Do you want more money or more of my time? If you want more money, then mum has to work more and you will see less of me. If you want my time, I will have less time to do my business, so we will have to be thriftier.’ She thought for a minute and said, ‘Ma, I want more of your time.’”

She was surprised and touched by her daughter’s response. So, they had meals at home to save costs and they did not go on holidays because money was tight as Lee was also supporting her parents at the time.

“I racked up debt on my credit card and I was worried that I would go bankrupt. So, I went to the bank and negotiated with them,” she says.

“There is a lesson to be learnt from that. Until today, if I want to apply for a credit card from that bank, the only way they will give it to me is if I set up an auto-debit from my account every month. That is because my track record is there. People who are contemplating using a credit card should think twice because their history will affect their creditworthiness.”

Lee discussed her financial situation with her daughter as well. During both financial crises, she told her daughter that they had to cut down on expenses.

“I told her that I could not afford things. It is a difficult thing to do because every mother wants to give their children the best. But when a time like this comes, you need to get your children involved. It pays off,” says Lee.

For instance, when she brought her daughter to the night market to buy a watch back in 1997, her daughter — who had many primary school classmates from rich families — showed that she understood their situation. “She pointed to a watch and said, ‘This looks like a branded watch. We can buy this. It is good enough. We do not need to buy the real one because it is very expensive.’ I was very touched by that as she had the ability to understand [our situation] at such a young age,” says Lee.

When the 2008 global financial crisis hit, Lee was progressing well in her career and finances. She was assistant vice-president of training at CWA, the wealth management and distribution arm of CIMB-Principal Asset Management Bhd (now known as Principal Asset Management Bhd). She also became a certified financial planner that year.

By then, Lee had put away some money in unit trusts according to her financial plan. She had two portfolios, one for her daughter’s education and the other for her retirement.

“My small-cap funds tanked [during the crisis], but I was not too worried because I could understand what was going on. We listened to fund managers who explained the situation to us and I had my own financial plan. I started saving for an emergency fund and I had reserves. So, I was not as concerned as I was in 1997,” says Lee.

“I had savings in gold, bond funds, equity funds and fixed deposits. I also bought into dividend-yielding stocks for my retirement.”

She only had to rework her budget and scale down expenses during the crisis. “Things became more expensive and loans went up by a bit, but I was prepared for it with my emergency fund. Compared with 1997, my basic salary was also higher, so it was easier for me,” she says.

Learning from mistakes

The biggest lesson Lee learnt from her experience was the importance of financial literacy. This is also her advice for the public.

“We have to take responsibility for our finances. I think it is very important to be prepared. If you can learn from someone else’s mistakes, please do,” she says.

“For instance, in my case, I am not saying that margin trading is bad. But if you do not understand the product and it hits you, it can affect you badly.”

Lee advises those who have not gone through a financial crisis before to start saving now by cutting down on their expenses. “Start thinking about propping up your savings. Putting money in stocks is good, but bear in mind that if the share prices come down, you will be affected and may not be able to sell your shares. So, whatever it is, the humble fixed deposit still has its place as you can keep money that you cannot touch,” she says.

In view of a potential recession, one can also put aside some money to buy shares when prices fall. “I remember looking at how cheap some stocks were back in 2000. But I did not have the money to buy them. If I had the money, the investments would have contributed significantly to my retirement fund. So now, I am keeping my money for an emergency fund and for investments as well,” says Lee.

Regardless, you must ensure that there is enough cash flow to tide you over in tough times. Some may try to keep track of their money by logging every expense while others, like Lee, transfer a fixed amount into an e-wallet every month. “If you have to transfer more, then you know you are overspending,” she says.  — By Tan Zhai Yun

 

 

THE PATH TO GROWING WEALTH

Entrepreneur Gary Yeow was knee-deep in debt despite the fact that he had spent the previous 10 years accumulating wealth. The 2008 global financial crisis hit his business and personal finances badly. On top of losing almost all of his money, he had to spend the next seven years paying what he owed the banks.

“At first, I thought I was all right. I still had some savings. However, when the bank notified me that it had pulled my bridging loan, I was forced to sell both my factories and the two properties I had bought for investment purposes. My family and I had to move from a three-storey link house to a small condominium,” says Yeow, director of 8VIC Malaysia Sdn Bhd, which offers value investing courses to the public.

At the time, he was in the building materials business. So, when the market crashed, most construction work stopped and the subcontractors ran away, leaving him with no payments to collect.

To make things worse, Yeow had just spent a lot of money on shares after listening to friends’ recommendations. He suffered a loss of about 80% from his investments in the stock market.

Yeow thought he could get the Inland Revenue Board to write off the payments he could not collect as bad debt. In Malaysia, trade debts are written off as bad debts and are tax-deductible if the debtors are dead, bankrupt, have absconded or are in liquidation.

“I was told I could not get a tax deduction because I did not sue the people who did not make payments. As a result, the bad debts were considered as company assets. So, I was taxed further. I was devastated after doing my calculations and finding out that my deficit was up to RM400,000, which included my Credit Guarantee Corporation loan,” says Yeow.

He had to pay RM4,000 a month for the next seven years to settle his debt. A few years ago, he managed to negotiate with the bank to make a full settlement at a discount and finally put an end to the episode.

“This is one thing that I want young people to know. Borrowing money is easy, but paying it back is very difficult. When times are bad, you will wish that you had not taken a single sen,” says Yeow.

What kept him going at the time was the thought of how his family depended on him to survive. Determined to re-accumulate wealth and not repeat the mistake of making bad investment decisions, he attended a lot of classes on investing, motivation and skill-building.

While Yeow’s business was in recovery mode, he learnt about auctions, how to trade foreign exchange and gold and even how to get started in internet marketing. Along the way, he discovered value investing and fell in love with the concept.

“I decided to consolidate my businesses and sell them. With the money, I invested in five companies. Ideally, I wanted these companies to provide me with an average return of 20% a year,” says Yeow.

“My life eventually became more stable. I did not have to run a business to make a net profit of 30% anymore. Then, I started doing what I loved, which is teaching the benefits of value investing. By doing so, I hope that I can help prevent the younger generation from facing the same problems I had.”

He urges young people to start saving money today to prepare for a potential recession and ensure that they have enough to survive for at least six months. “If they have a lot of debt commitments, then they need to save more. If something happens, they need to take full responsibility. They cannot blame others or hope that some form of help will make its way to them,” he says.

“It is never too late for them to learn about investing if they have not yet started. They do not necessarily have to make investments if they are not ready, but they have to know at least the basics. When they are ready, they can make informed decisions and not be swayed by herd mentality.” — By Khairani Afifi Noordin

 

 

BUILDING A BUSINESS FROM THE LESSONS LEARNT

Robert Foo, founder of MyFP Services Sdn Bhd, the lone fee-only financial planning firm in Malaysia, was working in the financial industry when the Asian and global financial crises struck. While he escaped relatively unscathed both times, he learnt valuable lessons that have contributed to his philosophy of life.

For instance, Foo’s strong conviction that financial planning services should be fee-based rather than commission-based was strengthened after the 2008 global financial crisis. As MyFP was not tied to any fund house, he encouraged clients to diversify their investments across many providers.

“When the market was crashing, we were not too badly affected. That was because from day one, we asked our clients to diversify. We cannot just follow one fund house. When the market was down 40% to 50%, some of our clients were only down 10% to 15%. Many of them are still with us now. After that experience, our diversification became more elaborate,” says Foo.

This meant diversifying across sectors, asset classes and countries, including investing in offshore funds. Foo and his team had discussions with clients on the firm’s need to be 100% commission-free and to diversify their assets.

“We became more intense with this messaging. In the past, we used to say that you only needed to spread your investments across five fund houses and asset classes. But now, we want exposure to at least 10 fund houses,” he says.

Another reason Foo was adamant about providing fee-only services was that he wanted to provide value to clients through advice rather than just products. The emphasis on adding value is something he had learnt from his observations of the financial markets since 1997.

Back then, there were rapid changes in the banking industry, including the emergence of internet banking and convergence of the financial sector. Banks were beginning to sell insurance and unit trusts in addition to their usual functions.

From Foo’s observations of the banks abroad, he realised that they were going to be leaner due to automation and that one had to take proactive steps to stay relevant. “I saw that banks in Europe only had a few people working in the branch. I saw automated teller and cash-dispensing machines everywhere. I told my branch manager that he had better improve his sales and marketing skills because some of his operations may be made redundant, which was what happened,” he says.

When the Asian financial crisis struck in 1997, Foo was head of retail banking at RHB Bank Bhd. But because he had taken note of the trends and created valuable products for the bank, his job was secure. The financial crisis hastened the speed of reforms in the banks, which were trying to cut costs to stay alive.

Foo was already thinking ahead. He wanted to be a financial planner to help clients navigate their way through all the financial products. “We wanted to be independent for everyone. That was the idea that got us started,” he says.

Foo’s advice for those who have not experienced a financial crisis before is that they should manage their cash flow by cutting down on expenses. After doing so, they should determine whether their revenue is sufficient to help them achieve their goals.

“If your cash flow depends on only one source of income, it is not a very good idea. That is why you need to diversify your income. It could be with property rentals or the gig economy. So, if anything happens to your main source of income, you have something to fall back on,” he says. — By Tan Zhai Yun

 

 

MAKING THE BEST OF A TOUGH SITUATION

Technopreneur and angel investor Datuk Wei Chuan Beng started his company, REDtone International Bhd (formerly known as VMS Technology Sdn Bhd), in 1996. He and his partners had pooled together RM100,000 to set up the business. While it may not sound like much today, it was their life savings at the time.

The 1997/98 Asian financial crisis was not kind to Wei. He describes it as the most difficult time of his life. Not only was the business badly hit, he was also deep in debt because of his margin trading portfolio.

“I held some Malaysian commodity stocks. Back then, we did not have the luxury of buying foreign stocks. The ones that I held tanked like crazy. It took me three years to settle the debt,” says Wei.

“Being in debt was truly a lousy feeling. There was no way for me to push the price back up. There was nothing I could do other than swallow the pain and deal with the aftermath.”

At the time, the company’s first product had just been developed. Wei was desperate to bring it to market, so he went to a government agency tasked with promoting exports to ask for financial assistance in the form of a market development grant. The reimbursable grant is aimed at helping small and medium enterprises undertake export promotion activities.

To Wei’s dismay, his application was rejected. He was told that the company had to own a factory to qualify for the grant. “At the time, we were speaking to one of the directors of the agency. I asked him whether, as a director, he could make some kind of provision for us as we were a genuine company. He told me no because it was simply against the rules,” he says.

“I got very emotional and told him that I expected him, as a director, to provide an opportunity to small businesses such as ourselves by amending the rules as he deems necessary. If he was just going to follow whatever was written in a book without thinking, then he may as well call himself a clerk.”

The director became extremely furious and Wei had to leave the room. That was when he realised that entrepreneurs could not expect any organisation to extend its assistance when a difficult situation arises.

“Be prepared to not get much support in bad times. This was the reality that people like us had to face because during a crisis, the resources may not be sufficient for all of us,” he says.

A second blow

By pooling their resources, Wei and his team managed to go to the US in 1998 to showcase the product. It won an award in the “Best of Teleconnect Computer” category. As the company had demonstrated its ability to get business, it was able to stay afloat via venture capital investment.

Then came the dotcom crash. The product was not stable yet, so the company was stuck with high overheads and extremely low revenue. “It was very painful for me, but we had to let go two-thirds of our people, including my best friend in university,” says Wei.

But he kept on going. The team came up with a new plan to turn the company around. They set monthly revenue and collection targets. If the company could not achieve those targets, the management team (including Wei) would get a pay cut of 10%. And if their pay was cut for six consecutive months, there would be nothing left to cut. That meant the company would have to close its doors.

“That plan worked wonders for us. Everyone in the company knew that the market was facing a very bad situation. There was no other way to go. The unemployment rate was at its peak. So, everyone worked very hard to sail the ship that they were already in,” says Wei.

“It was quite miraculous. Every month, we achieved the revenue and collection targets. None of us got further pay cuts. We were able to build momentum in a truly difficult time. We were in extreme growth mode in the subsequent years, to the point that we were able to list the company a few years later, in 2004.”

While this was going on at work, he and his family had to tighten their belts at home. The experience really taught them to lead a frugal lifestyle. There were no luxuries — just simple, honest living, says Wei.

“I had to pay off my debts. It was tough, but not so difficult that we had to walk 10km to work. We could still have normal meals, but we often cooked our own meals. The children were still young, so their needs were very simple.

“I think young people should practise an affordable lifestyle regardless of the market conditions to prepare themselves for the worst. Oftentimes, we do not have the ability to generate income in an adverse situation. When it hits, we never know how long it will last. Can you believe that I had to sustain that lifestyle from 1997 until the dotcom crash subsided? I finally had the courage to enter the stock market again after the company was listed.”

He says those who have not experienced a financial crisis should make use of the good times to invest in themselves. “Young people should have the initiative to take up new skills and improve their knowledge. By practising lifelong learning, they will be able to mitigate the risk of being unemployed. If they are entrepreneurs, they should be able to find doors of opportunities that cannot be detected by others.” — By Khairani Afifi Noordin

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