Tuesday, November 13, 2018

What have I been spending on ?

Having lived on dividend income for the past 4 years, my household is relieved to have earned income flowing in again. I am personally quite happy, but mainly for the "perverse" reason that I will be paying income taxes again next year.

The big question for financially independent folks who find a way towards earned income again is what should a person do with it ?

My hobbies are relatively cheap. I buy tabletop RPG PDF books and then read I them like a book of Statutes. I have relatively little wants and my household spending is as lean as ever.

My problem is largely solved by the pact I have with my course attendees. I put in slightly more than half my earnings into a leveraged account on a portfolio we jointly co-create together. That still leaves the other half to be spent.

A large part of the remaining amounts is just given to my wife because it increases the quality of life for my household immediately. She has gone crazy hunting for deals online.

One of her most ridiculous coups is a Coffee Capsule machine that was sold by Coffee Bean Tea Leaf on their 22nd Anniversary. This model was supposed to sell at over $300+ but we bought it at $22. After testing it, we loved it so much, we bought another machine for my brother in law.

We have since gone a little crazy during the 11.11 since I am an Amazon Prime member. I've spent over $400 buying stuff from Amazon last week. Even worse, last week there was a rare Moleskine stationery sale where I could get designer stationery at half price, so I did as much Christmas shopping as I could so we don't have to worry about buying gifts later.

One of the problems of adopting a highly disciplined lifestyle but splurging during heavy discount days is that you lack control over how your life will turn out. You basically have to go with the flow and enjoy whatever the stores are discounting at that time.

We only get to upgrade our coffee because we lucked out on a coffee machine. I also got a lot of junk toys, my daughter got silly Operation game with a Finding Nemo theme. My son got a pair of Nerf swords.

If you want something cheap, you don't really have a choice to get what you truly desire. You will need to adapt yourself to whatever you can buy.

Just for fun and to show that I am human, I'm going to talk about what I hopefully will be buying for myself over the next six months :

a) Google Pixel 3 XL

I've been using my OnePlus 2 phone for close to 4 years and even tried to install new batteries about half a year ago, but the phone would still lose a charge after 6 hours and I'm getting quite sick of that. I've been meaning to go back to a pure Google phone for quite a while and this is my chance to do that. Sadly, the Pixel is priced as a flagship product and I expect to pay possibly $1,500 for it. It's probably since I have a habit of using phones for 4-5 years anyway.

b) Creative Super X-Fi Air

There is always a special place in my heart for Creative because I did my engineering internship there and it was one of my first paid engineering gigs ever.

While I'm not really into audio, the idea of adopting sound waves to an image of your ears is really exciting to me. The other reason why I am excited is because I have been introduced to the world of high-end audio by other friends who talk about "auditioning" audio equipment. The potential of getting $15,000 sound at maybe $300-$500 is intriguing and may even lead to a long term position in Creative Technologies.

c) Next Generation Ipad Pro

I am very likely to stick to the Apple ecosystem for my tablet because of Goodreader. I expect to pay through my nose for a 1 TB version because it lets me lug my entire RPG library around.

Of course the prospect of playing Diablo on a tablet is an exciting one.

I will still prioritise developing my human and financial capital over these new shiny toys, so I'm not sure whether I can act on my wants. Ahead of these gadgets is a course on Improvisation and Voice training - since I use my mouth to make money these days, I should be investing to ensure that I get better at it.

Sunday, November 11, 2018

The Art of the Good Life #48 : The Secretary's Problem.

Image result for hot secretary

I've written about the Secretary's Problem before.

Suppose you are in the look-out for a piece of real estate. Different gurus have a different approach towards buying the house, but the most optimal solution is to first determine when you will need to move into your new house and then spend about 37% of that time looking at homes without committing to any purchase. The purpose of this search phase is to actually get acquainted with the range of properties that are on sale and give you a better idea of your own personal preferences. So if you have 100 days to search for a house, spend 37 days just shopping around without making a commitment.

( 37% being 100% divided by e where e is the natural number at 2.718 )

In practice, you need to be strong-willed to adopt this approach because real estate agents will try to cajole you to make a purchase. You have to hold back and resist an offer until you have a database of houses for sale.

After 37 days is reached, you should have a basic idea of the kind of house you are looking for, so when you view a house after 37 days and you find it is superior to the set of houses you have viewed during that 37 days, you should make a commitment to buy the house.

The Secretary's Problem is designed to minimise regret. It prevents you from being too hasty or overly cautious when you have a search problem.

There are problems with using this heuristic to find something :

Suppose you apply the Secretary's Problem to find a significant other and expect to have 100 dates before settling down with someone. After 37 casual dates, you finally have an idea of what kind of person you are looking for. Even after you find a person that you'd be happy to commit to, she might be also using this heuristic and still in the process of forming her own 37%.

It is also relatively hard to apply this to investing, a good equity screen can easily select the top 10 market leaders in the Singapore Stock Market.

A cursory application may make sense for a beginner. If you want to launch your own portfolio next year, maybe you should spend approximately 4 months reading up on investing and attending classes without committing to a strategy. The problem with doing that is that different trainers are not mutually exclusive to each other. You can launch multiple portfolios and have them fight each other in your arena until you find something that you like the most.

Saturday, November 10, 2018

CPF Life Necromancy

Image result for diablo necromancer

We don't really know how long we will live although the projection is currently around 85 years. Of our remaining years, we're not even sure if these years are spent living healthy lives. Quite a decent number of years may be spent in a hospital in a zombie-like state.

So building on the previous articles on 1M65 idea, a question arises as to whether we are confident that we can actually get back that $500,000 that we have so painstakingly saved in our CPF program. 

In my opinion, if you want to get to experience your CPF savings, you need to figure out how CPF Life works.

The best analogy for CPF Life for the fantasy gamer is that it is Necromancy, a Black Art involving channeling the energies of dead people. Annuities channel derive wealth not just from the the underlying bond-like instruments it invests in for the annuity holder but also grants mortality credits from dead annuity holders. The wealth of dead annuity holders are channelled towards the those who are still alive. 

This is why these payouts often exceed that of what you normally get from a bond portfolio. 

a) If you are a confident investor or expect a short life, choose the Basic Plan and keep only the Basic Retirement Sum in your CPF Retirement account.

Even a very naive strategy of buying and holding the STI ETF has yielded annual returns of 6.55% since inception. Bank preference shares and bonds can return north of 4% for retail investors. If you can handle volatility in the markets, it may be better to manage the money yourself.

Another reason is if you expect to live a short life. If you have two or more of the high blood pressure, high cholesterol or diabetes, you are not likely going to enjoy a long life. One way of figuring out whether you will have a long life is to just look at your parents or grandparents. Even being left-handed will give you a lifespan 9 years shorter than a right-handed person. As a diabetic myself, I expect a 15 year reduction compared to most of you readers.

If you belong to this category, then by all means keep the least amount of money in the CPF scheme. The Basic Plan plan reduces the amount of annuities you will buy giving you a lower payout but can maximise the amount of money left for your spouse or kids after you pass on. You should also keep the bare minimum BRS sum in your account which is around $90,500 for those reaching 55 in 2020. The worst case scenario is that your kids migrate and you find a way to follow suit and take out your CPF money.

Of course, if you take this path, you have to look after yourself using your own investments.

[ Note : If you adopt this belief about your lifespan, you should also make sure you buy plenty of term life insurance so your family can "strike lottery" when you pass on. ]

b) If you expect live very long, choose the Escalating Plan and maintain the Full Retirement Sum in CPF.

Some Singaporeans will die before their average life expectancy, but others can outlive the average. If you believe that you will lead a long life, earning mortality credits from the annuity plan is the way to go because you will be sustained by your dead fellow citizens. 

In such a case, keeping the Full Retirement Sum (FRS) and following the Escalating plan is your best bet because payments start smaller but grow over time. If you are not very confident about investing, you can push beyond the FRS so that your monthly payouts would be even larger.

Again, if you are the kind of person who has no health issues even in your early 50s and have parents who lived till a very ripe old age, you might stand a chance to benefit more from your portfolio of life annuities. You will be paid so long as you remain alive. Even if you are in a state of living death like a Lich or a Zombie.

Sadly, we don't really have an idea when we will die. Some of us will luck out, but others may get into an accident and pass on very early in life. 

This is ultimately the biggest problem with CPF Life : It provides options that can only be truly optimised only if we have no illusions of the state of our health, something that most Singaporeans, even those with advanced degrees, are unable to firmly grasp.

It is actually quite cruel to leave this decision making to citizens.
  • Can Metformin lengthen a healthy person's lifespan as postulated by Tim Ferriss? 
  • Does intermittent fasting help a person live longer? 
  • What about early retirement as it reduces exposure to a stressful workplace? 
  • How much of health and wellness information is real and not a result of corporate sponsorship or balderdash from MLM companies? 

I suppose health the the domain of an entirely different group of bloggers. 

When the mobile version of Diablo comes out, I expect to play a Necromancer. 

The question is whether it is best to play a Necromancer when you play the game of CPF Life.

Wednesday, November 07, 2018

The Art of the Good Life #47 : Making Friends with Weirdos.

This is a chapter that resonates with me because I have considered myself as an outcast and weirdo. I grew up playing Dungeons and Dragons which was possibly the geekiest hobby you can have in the 1980s. I also spent the greater part of my life as an Internet Troll on YPAP BBS.

Just last week, I met up with an old secondary school classmate and we large spoke about how alienated and out of touch we were with our classmates.

The chapter concludes that a weirdoes life is not a good one, although they belonged to the group of unreasonable men who made a difference to this world. Galileo supported the heliocentric model of the Solar system but was tried by the Inquisition for his troubles.

The formula for the Good Life according to this chapter is to befriend the weirdoes but do not be seen as one. This way, a person can be one of the first to exploit a paradigm shift and yet would remain chummy with the status quo. It's a little hypocritical, but it is a good way to have the best of both worlds.

Within part of the FIRE community, the BIGScribe Facebook group can be considered the status quo even though we would be weirdoes when you take the view of the average Singaporean.

The two blogs that are canonical for the FIRE community are obviously the blogs written by Kyith Ng of Investment Moats and anything that contains the musings of AK71. This is classic FIRE at its best. Nothing more needs to be said.

But equally important are two "outcast" blogs/bloggers that are often shared in this BIGS group :

Money Maverick

One is the Money Maverick blog which I find highly entertaining because it is written completely supported by commissioned sales interests. I actually treasure its articles of late because it gives me a glimpse of what commissioned sales personnel are thinking and keeps me updated on the products that the industry is peddling to most citizens. While I do not agree with it's logic most of the time, it is at least an attempt to provide a different point of view from the FIRE movement.

Needless to day, whenever Money Maverick appears on BigScribe, it gets a frosty reception from the FIRE fanatics of social media. After some deliberation, I think we're all better off if we encourage Money Maverick moving forward.

I'd rather have something novel to read even though I may not agree with it.

Marcus Neo of Dr Wealth

To be fair, Dr Wealth is generally a mainstream blog that shares decent personal finance articles. But one contributor, specifically Marcus Neo, deserves special mention because he has a gift for polarising readers.

One of my favourite episodes was when Marcus started a shit-storm over whether it was to earn more money or save more money. You don't have to agree with his logic, but it made people passionate about whether folks should buy Starbucks coffee.

My personal wish for the financial blogosphere is for a FIRE troll blog to emerge from our midst. The best guy to do this is a super-successful salesperson or businessman who lives a life completely antithetical to FIRE. He shows off his Lamborgini, Rolex watches, and scoffs at people who buy low expense ETFs. Bonus points if he is short and looks a little like Jho Low.

This kind of blog would be the enemy that our FIRE movement deserves.


Sunday, November 04, 2018

A gentle critique of Loo Cheng Chuan's 1M65 idea.

Everything I do with my finances is based on my own readings and self-study. I never had a mentor or a Sifu when it came to money. In similar vein, I seldom attend financial talks unless I have to give a talk myself and get to listen to other speakers on that day.

Very recently, one of my ex-NS buddies contacted me after reading about commentary at Channel News Asia and as it turns out, he now works with the Institute of Financial Literacy so he sent me an invite for a free lunch. During that event, I was very fortunate to listen to talk by Loo Cheng Chuan. Perhaps not coincidentally, Loo is also going be featured in Seedly on their next AMA session which can be found here.

On the whole, I enjoyed Loo's presentation. It was logical, and I can relate to him because he spoke candidly about having to cope with the Anti-PAP trolls after he shared his message.

The essence of his message is quite simple : Transfer your CPF-OA to your CPF-SA. Over time, a married couple can accumulate $1,000,000 in their CPF-SA accounts on the 4% interest rate and retire as a millionaire household.

( As a point to note, I myself have maxed out my CPF-SA in my early 30s and can attest to the effectiveness this strategy. The reason why I did that is a humorous anecdote I share with all my workshop attendees. )

a) Is this achievable by an ordinary family ?

The median income of a family is $9,023 per month. 37% of that figure is $3,338.51 or approximately $40,000 a year. Compounding an annual contribution of $40,000 at 4% can allow an account to reach $500,000, or twice the FRS assuming it is $250,000, within 10 years.

Once the CPF-SA is maxed out, CPF-OA returns can be enhanced further with CPF-IS. Putting 35% of your CPF-OA into the STI ETF or the SREIT ETF has a decent probability of achieving 4% in blended returns, so about eight more years of accumulation may be required to reach $1,000,000.

So it is definitely possible for a couple to max out the CPF-OA to CPF-SA over the medium term and attain $1,000,000 over the long term.

Is this achievable before 50 years old ? Very possibly !

b) Why is this not ordinarily done in practice ?

Another point raised by Loo is that this is often not done in practice because we draw out the CPF for many reasons. Most couples use up their CPF-OA to lock into a piece of property. Other couples use it to pay for medical expenses and children's tertiary tuition expenses. So Loo is definitely correct to point out that housing and retirement are trade-offs against each other.

Critique of 1M65

Naturally, even though I approve of most of what Loo shared with us,  I have some concerns over some of the smaller aspects of his ideas.

a) The assurance of millionaire status allows a person to persist through market downturns.

This is a very novel idea, but I'm not sure whether it works in practice.

While I did max out my CPF-SA to its minimum sum early in life, I don't remember having an easy time during all of the recessions. I did survive the 2008 recession and accumulated during that era but I was as unhappy as any other investor.While I was relieved that my CPF-SA could generate 4% during these two years, I persisted mainly because I had data that market downturns eventually end and whoever was left in the markets will be rewarded with an early retirement REGARDLESS WHAT HAPPEN TO CPF.

b) Voluntary Contributions to CPF to max out the CPF-SA earlier may not be optimal use of your money

I felt that a line is crossed when Loo made the suggestion to voluntarily contribute to CPF using his hard earned money. Initially, I liked that this can reduce income taxes, but I question whether in the grander scheme of things, a 4% guaranteed return is such a big deal.

If you are money unsavvy Millenial, 4% looks like a steal compared to what you can get from an endowment fund or deposit account like DBS multiplier. But for most savvy investors, 4% is chump change. Also note that from 2008 - 2012, based on government surveys, retiree households face an inflation above 5% and I am eagerly waiting for 2018 figures to see if this persists.

Getting 4% with a decent probability is child's play if you are willing to guy direct from SGX. Astrea IV Bonds yield more than 4%. Ditto for banking preference shares. Long term returns for the STI ETF is in the region of 6-7%. The CPF is a long term investment and over the long term, it is way better to be fully invested in equities.

c) This hinges on whether the CPF policy remains constant.

Over the short term, I can safely say that we have a stable government. But over the long term, it may be too much to expect CPF policy to remain stable. This may not be a fair expectation in any society.

What happens when the CPF-SA returns get pegged to 1% above 10 year bonds ? This will result in an instant drop in returns.

And what happens if a future government delays CPF Life payouts to 70 years old ?

Nothing under the CPF program is guaranteed for citizens by the Constitution.

d) Even if you do this, you are at best a faux millionaire.

Can you consider yourself a real millionaire if your assets are stuck in CPF Life and the only way to extract the entire set of benefits is to literally outlive your fellow Singaporeans ?

This is the fundamental feature of annuities. Folks who die early end up contributing their assets to support those folks who are left alive. A large CPF Life allocation merely guarantees that you are making other Singaporeans who live longer than you richer.

The real CPF SA millionaire is a long lived Singaporean. I think that is critically missing from Loo's presentation is the importance of staying healthy to beat the actuarial assumptions of those who designed CPF Life.

I have made several controversial suggestions in the past on this blog, like taking Metformin and getting into a regime of intermittent fasting as it has worked to extend the life of laboratory animals and choosing escalating premiums to beat the actuarial tables designed by the CPF folks.

( Note : My suggestion has been shot down by a close relative who is a medical doctor who does not believe that Metformin can extend a healthy person's lifespan. )

On balance, I think Loo Cheng Chuan is the real deal, and I encourage you guys to engage him for his next public appearance.

Friday, November 02, 2018

The Investment Book of 5 Rings

One of the my favourite RPGs of the moment is Legend of the 5 Rings and one of the really cool design elements of the game is that it deviates from Western themed RPGs by not using the typical character attributes like Strength, Intelligence.

Instead your attributes are based on the 5 Rings of Air, Earth, Fire, Water and Void.

The elements are used to resolve dice rolls when you adopt a stance in combat or an approach to solve a problem. As it turns out, this is a pretty useful system to think about investing.

We all have some kind of emphasis and weaknesses when it comes to investing. Sometimes this can come in the form of being particularly strong in an element.

People with the gift of Fire are passionate and inventive but folks endowed with Earth are emotional stable and calm.

Let's run through this 5 element system and adapt this to field of investing.

a) Air

Air is the element of subtlety and precision. We tap into Ring of Air to refine something.

When it comes to investing, Air determines your analytical skill and how deeply you can go into investment research. A person strong in Air can read the footnotes of a balance sheet and determine whether his investment thesis is likely to achieve fruition. Those strong in the Ring of Air know the key attributes of management and how each company department will generate revenue in the next quarter.

Too little Air and your understanding of your investments would be shallow. Too much Air and you will be paralysed by your analysis and would not be able to build a diversified portfolio to meet your needs.

b) Fire

Fire is the element of passion and invention. We tap into the Ring of Fire when we want to form an investment hypothesis.

When it comes to investing, Fire determines how inventive you are. Perhaps cryptocurrencies are correlated with Gold. Fire allows you to make a clear guess on something that is not obvious to others.

Fire is also the element for leverage. Use leverage properly and it can speed up your journey towards financial independence. Use it wrongly and it will spell your financial demise.

c) Earth

Earth is the element of stability and restoration. We tap into the Ring of Earth when we want to defend from bad consequences.

When it comes to hedging, Earth is the element of the historical understanding of financial events. It covers the use of bonds, dividends, insurance and various hedging tools to reduce the volatility of the portfolio.

Too little Earth and you will not have a great sleep at night as your portfolio is rocked by volatility. Too much Earth and inflation will sap your investment returns.

d) Water

Water is the element of adaptation and change. We tap into the Ring of Water to understand present trends and transform our portfolio to meet them.

Water governs the importance of asset allocation and thematic investing. Understanding and reacting to market cycles is governed by the Ring of Water.

To little Water and your portfolio becomes resistant to change, locking you into too much equities in a recession. Too much Water and you lose out to brokerage expenses.

e) Void

The Ring of the Void is about nothing and everything. It is the Ring of meditation.

The Ring of Void governs financial mathematics and the raw theories of economics and finance. At the personal level, the Rung of Void determines how much you can link up your personal happiness with your material wealth. What personal sacrifices you will need to make to attain your target wealth is governed by the Ring of the Void.

Too little Void and your money becomes meaningless to you as you are unable to appreciate your financial achievements. Too much Void and you find yourself motivated by the importance of money but did not put any emphasis on how to actually achieve it.

One useful way of employing this framework is to think about approach to investing based on these five elements.

My approach is has a stronger Ring of Earth, Fire and Void. Earth comes from my emphasis of keeping a portfolio volatility as low as possible and my love for dividends. Fire comes from my new found confidence in my leveraged portfolio. Void covers my willingness to embrace financial theory and tie it my existential needs.

I am weak in Air and Water. I eschew financial statements and have no time for deeper analysis, preferring to read the research reports from others. I am also not very good at assessing the skill and integrity of managers. As for Water, I tend to stick to an equity portfolio even in bad times an experience a decent amount of pain during a recession.

Therefore, my investment journey would be greatly improved if I can improve my Rings of Air and Water.

Try this exercise to figure out your own approach towards investing.

Tuesday, October 30, 2018

The Art of the Good Life #46 : The Arms Race.

This chapter reminds us to avoid the Arms Race.

This advice is particularly relevant in Singapore.

The biggest arms race in Singapore is the game of buying tuition for your kids. Parents are fighting an arms race that sees their children studying much harder but being unable to meaningfully do better than their peers because the other kids also have a lot of tuition. The only effect of playing this game is to enrich tuition centres.

At the professional level, the legal industry is also big red ocean that sees the top A level students being thrown into an industry that is facing disruption from technology. This means that, across the generations, lawyers are getting smarter, putting in more hours at work, but getting the same amount of salary when divided by the number of working hours they put in. The Supreme Court has put up a bombshell consultation paper that nay see significant changes to how much lawyers can charge clients for large civil cases. There is a possibility that billings may go down from these set of reforms.

If you find yourself in an arms race, the best strategy would be to put yourself into a smaller pond where you can win consistently. The wiser and richer parents today are relocating their children to Australia where they can have a happy childhood and enjoy an economy that has ever seen a recession for the past 27 years.

The same advice applies to freshly minted legal associates. If you find yourself stuck in an office full of brilliant colleagues, you need to know that making partner would require a lot of personal sacrifice with a huge chance of failure. One alternative would be to specialise in an area and cultivate your own pool of customers to eventually strike out on your own. The other would be to start thinking about how you can transition into becoming legal counsel for a multi national.

Even financial blogs face the same kind of competition against each other.

There are a lot  bloggers who excel at explaining financial concepts to beginning investors. Others may become experts in the new age bank accounts that give higher returns. Also popular are articles on how to optimise the use of a credit card.

These are areas which I cannot possibly be good.

Thankfully, there are plenty of things that I can write about for intermediate investors who want a deeper insight into the deeper workings of the Singapore Stock Market. By now you should know that I mainly write for myself. The articles are areas which I have a deep personal interest in.