Business

Saturday April 4, 2009

The wisdom of experience

Comment by TAY HAN CHONG


THERE is a Chinese saying that “if you have an elder in your home, then you possess a treasure”. This is a direct translation which does insufficient justice to the real meaning, which honours the wisdom of an elderly person and the wealth of experience from which we can draw upon.

I would go further to ask, why limit ourselves to just the “treasures” from home? We should extend the learning network to all wise and experienced people with whom we interact. There is a Confucius saying, “in a group of 3 people, there will be a teacher.”

I have been a great beneficiary of such learning opportunities. In the Malaysian real estate sector, there has been both new entrants and old guards. I have strong admiration for many and one in particular, has reinforced my learning in the area of risk management.

This veteran boasts of about 5 decades of experience! In his younger days, he learned risk management from playing poker. In two seconds, he had to decide if he would pay the price to see the opponents’ cards. Only two seconds, as further delays might give a hint to his opponents on the strengths of his own cards. It is a strategy game. I don’t play poker because my face will give the game away, but the lesson is one of pricing for risks.

While sharing more recent experience, he talks of how his company was able to get loans in the early 90s of up to 80% financing for land purchase. But being a long term player who understood the risks of leverage, he was reputed to have asked his financial controller to de-leverage from as early as 1994. You can imagine that he survived well during the Asian Financial Crisis in 97-98, and grew to be even stronger.

His experience may be that of company borrowings but there are good lessons for individuals as well. In my application of this learning to my banking discipline, leverage is like a fire – a good slave but a bad master.

Leverage is a good slave because it can open up opportunities. A loan is a simple form of leverage which allows you to buy things that you cannot otherwise afford. Instead of paying it upfront like how you would buy a shirt or a bag of rice, you only re-pay the loan over time with interest. Most of the time, we buy big ticket items like properties and cars. In recent times, we also use instalment payment mode to pay for white goods such as laptop and television. So a loan can be a good thing because it allows you to pursue a higher standard of living.

But leverage is a bad master because it actually magnifies your exposures and increases your risks. The magnification effect can be as much as 5-10 times. A loan with loan-to-value of 80% actually magnifies exposure by five times. With RM200,000 equity or principal, and a loan of RM800,000 you can purchase an asset worth RM1mil.

In the event that value of the asset decreases by 20%, there is a loss of RM200,000. It means that you have already lost 100% of your original principal as a result! A 20% asset value depreciation leads to 100% loss of initial principal!

Many of us may not have the foresight like this veteran, who de-leveraged before the times turned bad. So if you find yourself saddled with loans repayment obligations during this economic slowdown, I have a few pointers.

·Prioritise your loans early so that you can adjust your investments or lifestyle. Usually one would attempt to cut back on spending on credit so that they can upkeep their home loans repayment. Or in some cases, people have switched to public transport to clear their car loans. Some investors who have multiple properties or cars might consider selling one to help with their cash flows (cutting losses is still better than losing everything).

·Utilise your past savings carefully, especially EPF or cash savings. They can help tide over the short term depending on how much you have saved. But this is finite, so it is important to combine this with an earnest search for job, if you are unemployed. It is normal to spend more than you earn for short periods. After all savings are for rainy days, and for some a rainstorm has already begun.

·Discuss with your bank pro-actively. Banks would not want to see loans turn bad as much as you would not want to have your home re-possessed. In some cases, banks can help you with moratorium or re-structuring to alleviate your short term repayment woes. Hence banks can be a partner, but you must do it before your loans turn bad. More importantly, you must have the discipline to keep to the re-structured terms.

·Keep your CCRISS record clean. Malaysia has a very good credit bureau which is assessable to most financial institutions. This is important for your existing loans as it is for your future loans.

These may not qualify as words of wisdom, but I know that they do work as I have seen many win-win outcomes. But they are not miracle solutions if one is already over-extended. On the flip side, those who have accumulated savings and have little leverage, this may be an opportunity to bargain hunt instead.

Just like the two Chinese characters that form the word “Crisis”, they actually represents “danger” and “opportunity” respectively.

·Tay is senior vice-president and senior head of UOB’s personal financial services division

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