Wednesday, September 02, 2015

How to seek financial knowledge ?

Budget Babe was the first blogger to respond to the POSB advertisement which exhorts Millennials to surrender their financial futures to financial adviser.

You can find the posting here.

I'm going to post the next logical step which would take the reader towards building a basic foundation in personal finance.

Here are the bare basics before you even start on reading a financial book :

a) You run your life like a business.

A good way of framing your financial life is that you are running a business regardless of what kind of vocation you are in. Your salary is a result of you selling your time to an employer. The food, transport and luxury watches you buy for yourself are expenses. Everything that costs money is an expense : this includes your internet connection bills and management fees of unit trusts. The only thing of true value is what remains after your deduct your expenses every month.

This constitute your savings and investments.

b) Choosing your investment is like choosing an employer.

The second fundamental is that you need to choose a good investment the same way you choose  a good employer. You exchange your time for money so you should take steps to maximize this exchange rate. Always gun for jobs which give you the highest remuneration for your time. Upgrade your knowledge once you hit a plateau in your hourly income.

Similarly, it does not make sense to invest in something that subject you to high expenses and pay your less per unit time. ILPs. unit trusts and hedge funds are generally speaking high costs because not only do you need to pay your financial advisor, you have to pay your investment manager as well. Exchange traded funds and individual stocks are generally low cost if you can minimize brokerage by making bigger buys but they are not marketed aggressively so a lot of DIY effort is required.

c) Compounding makes you rich. 

The third fundamental is that compounding, and not trading, that makes you rich. Money grows exponentially at a compounded interest rate. When someone takes a risk at 8% over 25 years, he will be much richer than someone who takes no risk at 4%, he just needs to stomach more volatility.

To be able to stomach risk, you need a longer horizon which means that you need to start young and compound your assets at a higher rate in your twenties. If you surrender your financial fate to an advisor at a young age, your assets, which could have compounded for the next 40 years, are converted into his commissions, allowing him to reach financial independence and attend more MDRT conferences.

d) Read to build your knowledge.

Once you have these basics in place, in my opinion, your first step is not to jump on the Warren Buffett bandwagon. You should also avoid works which focus too much on motivation and too little on technique. ( Robert Kiyosaki and Harv Eker comes into mind )

A book which balances some motivation and gives you the basics to get started is George Clason's Richest Man in Babylon.

Many of us financial bloggers have products on sale which arms you in the basics on how to get started.

My own product here is Sowing Your Seeds of Prosperity. BigFatPurse has an excellent book on building a Singapore Permanent Portfolio can be found here.

But do not stop there : The holy grail of personal investing is to eventually be able to understand and apply principles in The Intelligent Investor. Mastering this book allows you to take charge of your own portfolio and financial life.

As money is a very interesting topic which I find pretty easy to get obsessed about, I also encourage every beginner to consider taking the CFA exams.

This exam has a ridiculously low pass rate but studying for it can result in a better looking resume - exactly what a young 24 year old would do instead of surrendering his financial future to a so-called advisor.

But generally most readers who are familiar to this program will consider this suggestion overkill.

If you are fresh graduate in your 20s, you are not too old to learn something new. The opportunity cost of picking up skills in personal finance is much lower as your are single and have few commitments.

Don't surrender your fate to a financial advisor.

Become a financial advisor for yourself.

Saturday, August 29, 2015

What about Engineers ?

If you want a study for a degree which is likely to see you in a bank doing Operations, you should study engineering. However, if you want to study for a degree which would land you into a job managing a hipster cafe or baking cupcakes, a Law degree is your surest bet.

If I can start my life all over again, I would still take Engineering as my first degree, the only change is that I will aggressively study software engineering, ignore electronics/hardware and try to slant my electives towards Data Analytics.

However, I would still not become an engineer. At least not an engineer in a traditional sense who looks at blueprints and direct maintenance for MRT trains. I will instead use my mathematical and programming skills towards solving problems which would make me more money. I see successful engineers programming GPUs to arbitrage financial markets.

The lack of engineers in Singapore have been on the radar lately and some folks have commented on the lack attention paid to this issue in this coming elections. This is a problem in Singapore because we will lose our competitiveness in key industries if we cannot graduate professionals who can understand and solve technical problems. The MRT breakdowns is a symptom of of this issue. Create a society which does not respect technical proficiency and underpays engineers, and you will be rewarded be frequent breakdowns and failing infrastructure.

That being said, I still think that we can incentivise more people to take up engineering in spite of low income prospects for the engineering profession. The trick is to address the hard truth that the most hardcore engineers are pragmatic people and these are guys who will choose money over passion if they cannot have both in their working lives.

Passionate people study media and the arts, pragmatic people study engineering.

Pragmatic people want to get paid - paid in a way which can command the respect of others.

Our preference is to be significantly overpaid - like lawyers and medical specialists, not like the cogs of the economic machine.

Here are some possibilities to explore to get more folks into engineering :

a) Encourage engineers to work abroad.

While this sounds counter-productive, engineers who to the US generally can get high salaries relative to even local degrees like Law or even Medicine. This requires some tinkering with the syllabus to get software elites to be able to operate as full stack engineers ( which might already be happening with the NUS Orbital programs ).

The advantage of this approach is that the problem of money disappears immediately and some engineers do come back to create jobs and startups. Engineers might face a local industry with poor prospects but with the proper skills they can come back to raise a family but continue to remotely work for US start-ups or build a start-up of their own.

Losing a few years to Silicon Valley is a small price to pay if some of these guys do return with the idea of building up the startup ecosystem.

We need to expand NUS Overseas College or maybe have a parallel program in the Engineering faculty. VCs might sponsor this program using equity tied to the salary of graduands ( This is part of  a new proposal by Marco Rubio on study loans in the US. )

b) Promote engineering as a superior first degree.

When I was an undergrad in NUS, my HR professor did something which I felt was wrong.

She was about to invite an ex-HP director who retooled himself as a GIC investment manager to speak to us but changed her mind because she said that she felt that she was doing a wrong thing because fewer people would become engineers once they met this guy.

Today I am still shocked at how much the authorities want engineers to sacrifice our own personal interests for the Singapore economy. I have not seen accountants, doctors or lawyers being asked to do this.

Another counter intuitive approach which can  be backed by salary information is that Engineering makes a pretty nifty bridging degree. Because life outcomes and salaries are sub-par, engineers can take on alternative professional roles. Accounting is rapidly becoming a Masters level course when SMU launched the MPA qualification, engineers can get a good raise when retool and join a big 4 company over an engineering paycheck.

A lot of folks in the finance industry get stuck at level II in their CFA preparations where multiple rounds of failed attempts are the norm. My experience with cracking the CFA is that engineers don't find level II particularly hard even though it has a reputation as killer exam. This is because we are already very quantitative and we are pretty good at statistics in the first place.

If you look carefully at the NUS engineering syllabus, every engineer studies a bit of everything. My financial accounting and statistics module helped me in CFA I. My law module taken 15 years ago made swallowing some concepts like contra-proferentum much easier. I would say that my degree is almost half of an MBA.

[[ My JD program has 3 engineers and at least so far, we are holding on our own quite well in spite of not being in our home ground and fighting the Humanities folks. ]]

[[  MBAs will be bullshit qualification in a few years once engineers start doing the Coursera specialization in their own spare time while CFA prepping. Do an MBA if you wanna network and choose a school which adopt a case approach, otherwise you should save your money. ]]

The trick of promoting engineering as a base degree which leads to bigger things is that even though some engineers do become lawyers, doctors and accountants,  You will have lawyers, accountants and doctors who understand technology intimately. But more importantly, there is a likelihood that engineers will remain engineers ! ( I spent a week helping out in family courts and I don't like the negativity associated with seeing couples in conflict, I rather code ! )

[[ As a side-note, I have committed to picking up some Python maybe when General Assembly touches down in Singapore because I believe that the legal industry is ripe for disruption and many processes can be converted into software as a service solutions. I am currently struggling with issues like legal Formalities and thinking about how technologies like Bitcoin could play into the next generation of corporate transactions. Imagine a contracts registry like our Land registry, backed by an assurance fund to assist our SMEs ! Very few lawyers think like that ! ]]

Anyway, I was one of those  IT guys who decided to stay in IT.  After I completed my masters in Finance, I voluntarily stayed in IT because my salary has been increasing quite steadily and I already figured out how to generate another source of income, Sometimes staying put may be the wiser course of action ( preferably made with the assistance of spreadsheets ! ).

The fear of engineers leaving the industry after getting another degree is overrated.

c) Patents as source of passive income.

I learnt this only in Law School because I met a classmate who is a top-flight engineer who has an income stream from his patents.

This idea warrants deeper thought. Passive income from patents is a powerful arsenal in one's portfolio because it is not highly correlated with financial markets. If I could have found a way to unlock my intellectual property from my University days, even a simple monthly cash flow of $500 a month requires a base portfolio size of $75,000 in the markets. ( Top blogger BudgetBabe saves $20,000 a year and she's infamous because of that ! )

Local universities may want actual modules on new product development with a pragmatic focus on IP monetization. If you think about it, this will generate refreshed interest in engineering.

Monetisation should be a core module. Heck, it should have been called a Bachelor in Monetisation.

Imagine a cash flow even before you start work which stacks on top of your salary.

No way a law or medical degree can top that ?

In summary, I think the tide can be turned with the right policies and incentives in place.

Folks who do engineering want a good life. A good life requires money,power and respect. Treating engineers and software developers like digital coolies takes away both money and respect from their lives. These societies will be rewarded with infrastructure failures if this goes unchecked.

Allowing some of the top engineers to become the top earners of society will attract more people to study engineering. Many of these folks may not end up being top earners, but they would at least have the opportunity to do some engineering work and have a middle class lifestyle.

Tuesday, August 25, 2015

What to do in this market downturn ?

Yesterday, everyone seemed to be having a reaction when the STI started on a free-fall which led it being 4% down.

Some of the folks had a "I told you so" episode, brazenly declaring that they have won because the market bear is upon us which is stupid because a savvy investor knows that bull markets don't last forever.

A least one person I know even went as far to declare that the Chinese Yuan would depreciate 10% and that this downturn was just the beginning. I checked into Yahoo finance, a 10% depreciation would mean that the USDRMB would be at the at the 6.82 territory. We are nowhere near that territory as of the moment so I would believe the markets only when I see it.

I attribute the feeling of triumph to the fact that the person probably has little skin the markets.  Even a broken clock is right twice a day.

Some of the other folks are openly panicking, some were sitting on paper losses and they were thinking about the opportunity costs of these losses. I lost about $40k+ over one trading session on Black Monday. That's half my school fees for my entire JD course. Even so, I don't have much to complain about : Buffett and gang probably lost even more. The beauty of investing is not that you have money to make, but that everyone has the opportunity to make losses. Losses means that sometimes, fear will strike the market and the result is a moment of truth when true wealth can be generated by buying bargains and holding them for generations to come.

This article is written for some of calmer folks asked me whether it was time to get back into the markets.

I think these folks are on the right track : Times like these are the best times to get into the markets and start investing.

As to what the market would do next is something which is beyond me. I would advise the reader not to believe anyone who claims to be an expert. For matters involving China the only true experts are those who study the CCP. The periodical of choice is not The Edge or The Business Times. You are best off reading the Economist for hints (I've already combed the most recent copy and got none the wiser).

Here's a strategy which I think is a reasonable one based on the ignorance of all parties including myself :

a) Split your war-chest into many parts.

Since no one knows what will happen next. It would be unwise to invest all you money in one go. The wise would consider the possibility that they are very likely to catch a falling knife if they invest tomorrow. So the prudent thing to do is to buy something with 5% of your war-chest if you make the decision to enter tomorrow.

b) Know the typical duration of recessions.

Several facts would be useful to understand how long a downturn would last. The Great Recession of 2009 lasted 18 months. Other recessions lasted about 8-16 months prior to Great Recession. The duration of economic cycles tends to be getting shorter so it is reasonable to assume that whatever we are experiencing would not last longer than one and a half years.

c) Time your market plays

Once you decide to make a move, starting thinking about what frequency would you inject into the markets. For example, you can split your war-chest into 6 parts and invest tomorrow and then every 3 months thereafter. Somebody else may split the war-chest into 18 parts and invest once a month.

This is the only way to avoid being cut by a falling knife.

d) Invest based on good market fundamentals

I can't recommend which stocks to get into at the moment because if I could, I should be managing a hedge fund and not writing a financial blog.

You may refer to other financial bloggers who are much savvier investors. What I do know is that this strategy is better for fundamental investors.

You need to decide on a theme for your investments. You may determine that you want a strategy to buy blue chips, deep value stocks, or growth stocks. A beginner should buy the STI index if they do not know which stocks to buy.

As for me, I will be bargain hunting high yield counters which give at least 8%.

In summary, at least for dividends investors, this is a great time to buy stocks. I will not be surprised that in the short term, we will experience a nastier downturn but we can collect cash from our investments until the markets recover.

As I have fees to pay in October, I am committing this round of dividends to completing all payments to SMU, thereafter, I will be farming about $2,000- $3,000 into the markets until I start my training contract in 2017.

Sunday, August 23, 2015

Technology disruption, marriage and the New Age bachelor.

I think new technology developments warrant a fresh look into marriage and bachelorhood in Singapore.

It started during the summer holidays when I was asked by my professor what is the most important app which was developed over the past 12 months. My answer was Tinder. I was unable to really come up with a strong argument for the app because I was not a user of the app and had to rely on articles from other folks who could not stop raving about it.

My only argument was that Gen-X guys in general struggled hard to get hitched 10 years ago - I had to learn multiple foreign languages and endure a few rounds of mathcmaking before I met my wife at Japanese school. It was tiring and demoralizing, Nothing beats the disappointing of heading for a matchmaking session then finally seeing the other party (Yes ! I am a  visual creature !).

The Millenials have it so easy these days because all they had to do was to swipe to the right.

It wasn't until  an article in Vanity Fair which spoke about the massive changes in dating behavior which confirmed my suspicion : Tinder is a revolutionary app which fundamentally alters the way we mate - Companionship as a Service ( CaaS ) or worse, Sexual Gratification as a Service ( SGaaS )

This has serious consequences for all societies.

A very articulate friend of my cousin's offered a much better argument today. In the past, dating was a complex ritual. You had to smile. She had to smile back. Then you need to have courage to ask. Then, she has to assess whether you are an axe murderer before agreeing to hang out together.

To supplement his points, I would add that the old school dating dance was slow and bureaucratic - If you end up meeting a Gen-X female battleaxe who "wants to take turns being the alpha", then maybe you need to crawl back to the pub and start again.

From the lens of the suffering of Gen X, Tinder is revolutionary. The matching was done almost real time. In the world of Tinder, there is no rejection.

I watched my lady cousins install the application just now and, within minutes, they were giggling at various male profiles and talking about how "cannot make it" they are. I can imagine women using Tinder just to make fun of guys but occasionally swiping right when they see a good looking hunk, but the guys will keep swiping just to try their luck on anything which is remotely attractive to them.

More importantly, I think it does not take a genius to figure out that Tinder plus the launch of female libidinal drug Addyi would have a serious impact on marriage and society today.

Imagine this new world where successful bachelors can get ready sexual access by simply swiping right on app. Female libidinal drugs ensure that someone would always be at the right mood. Asset securitization and finance decouples wealth from owning large pieces of land, allowing an single with $300,000 financial independence and absolute freedom to travel the world or play games forever on their PS4.

This new bachelorhood : PS4 + Dividend stocks + Tinder + Addyi will be a grave threat to the institution of marriage. The best guys now have a lot of incentive to take themselves out of the marriage market. Single men will get not just more variety and but also more action than (faithful) married men !

Who will  get married then ? Policy makers will contend with a lower replacement rate, maybe reaching numbers like 0.8.

I foresee several drastic policies which can possibly ameliorate this situation which we should start debating about right now :

a) The first idea is that the government  consider drastically strengthening the finance of families which consist of a couple and at least 2 children. One possibility is to allow them to purchase another flat from HDB for the purposes of renting out to foreigners.

b) The second idea from a letter to the Economist is to supplement annuity payments like CPF Life of the elderly with the income taxes generated by their working children. This is a truly fair system which rewards elderly parents for the hard work done turning their children into productive citizens.

Some advice for the younger readers :

a) If you are female, Tinder does not help you find men who are willing to commit to a long term relationship. You need to know what you want out of life and maybe decide to skip out on Tinder entirely.

b) If you are male : What the hell are you waiting for ? You can always shut it off when you ever decide to settle down.

Saturday, August 22, 2015

Should you panic with the STI below 3000 ?

A lot of folks are talking about the crash of the STI index and started contacting me out of the blue about what I plan to do so I thought I'd write a short post on this.

First off, local markets are down. At this point of time, most investors would have a suffered massive losses. I lost the school fees of my entire JD degree over the past week. This means that I would have been better off had I sold my entire stake before going into Law School and just ate my cash holdings.

But am I worried ? Not at all.

Here are the reasons :

a) Dividend holders are by nature already defensive investors.

Will I lose more money over the next few month ?. Highly likely.

But if I sell, I lose access to my quarterly cash flow from my holdings. I don't like to eat my capital so I will stick to eating my dividends for now. While REITs and Business Trusts are taking a slightly bigger beating than the rest of the market, the overall beta of my portfolio is historically low so I expect to lose less than someone who holds the STI ETF.

b) The China situation may be over-hyped.

The biggest bugbear is China. Greece is inconsequential.

If you read the Economist, The  purpose China's devaluation is to become a reserve currency of the IMF. China risks the ire of the US and Europe if devaluation was made to make their exports more competitive and this would just invite retaliation. I think the technocrats in the CCP would be smart enough to restrain themselves.

c) US will raise interest rates before year end.

The next bugbear are interest rates. While rates are likely to be up, we are looking at one rate change in 2015 so far. This has been priced into the markets ages ago.

I fail to see why investors are worried.

c) Markets really look good at the moment.

Yes, as markets are turning south, I'm not seeing a significant change in the dividends I collect. If anything, yields are spiking as we speak and I am looking at a big payout before end-September. My only disappointment is that I am not working right now as I would have been able to add quite a significant stake at 8.5-13% yields into my portfolio to make my cash flow much bigger in the future,

So instead, I 've chosen to ignore the markets and focus on my lawyer training. Startig next week, I will become a facilitator at the Family Courts to assist folks in getting a divorce. After October when my final fee installment has been paid, I might be able to push 2-4k of my dividends into the market every month so I hope that these bargains would still be around then.

But  what I learnt in the 2008/2009 crisis is this : You don't succeed in becoming rich by investing during good times. You get rich when you are in the markets when times are bad. The only way to do that is to keep each positions small, diversify and refuse to use leverage.

Our markets have been expensive as of late, I remember a year ago, people will look shocked when they hear that I only buy stock which yield at least 8%. I get challenged a lot about my understanding of the markets when people hear 8%.

I was using the SMU Bloomberg Terminals and am glad to say that a decent portfolio of sustainable yields of 6% - 10% is now possible right now. I tested these portfolios over 10 year and they return 15+% with a semi-variance of around 12%.

( I even replicated the filters in the HK market and got almost similar results. )

These are fantastic numbers by my book.

Monday, August 17, 2015

Recording of my my interview on Kiss 92.

As a League of Extraordinary Financial Bloggers, the community have really come pretty far and we are now getting some informal support for each other to promote our own independent form of financial planning for the masses who cannot bring themselves to trust commissioned agents.

This gig would not have been possible if not for cheerful.egg's  Lionel's introduction. Lionel is also the man of the week and has appeared in last weekend's Me and My Money.

Richard Ng of Invest Openly has managed to create a recording on my interview on Kiss 92 FM.

Clearly this is not the work of one individual and there is a very supportive community behind this event.

Try this link if the media player below does not work.

Thursday, August 13, 2015

Raffles is not a Bumiputra institution !

Only three courses have ever rejected me in my life.

The first institution which I applied to which dinged me was Massachusetts Institute of Technology. But who am I kidding to think that I even stood a chance. I thought a rejection letter from MIT was actually quite cool. At least they bothered to send me one.

The second program to reject me was NUS' Diploma Program in Arbitration by their faculty of Law when I attempted to sneak myself into its first intake because I thought that an IT guy who can arbitrate outsourcing disputes might put me in blue ocean territory. Turns out that the first intake for arbitrators is actually red ocean territory. After the rejection letter came, I figured out that getting into a second or subsequent intake would not be worth my time. Pioneer or bust.

The most painful rejection I ever experienced, which many Singaporeans can relate to, was a rejection by RI. I was aged 12. I got 255 for my PSLE and my neighbour who got 259 claimed that a donation allowed them to get in (this was 1986). I cried for days because my parents, who hardly understood the education system, knew only RI as one good school - every other school is a shit school.

So you can imagine that I may have a chip on my shoulder with regards to elite education in Singapore.

But as it turns out I don't.

My friends from RI has never made me feel excluded and are hardly elitist. I've always been assessed by the strength and quality of my ideas. And they make great intellectual conversation which I struggle to find anywhere else. So as I get to know more people, I actually want my RI friends to stay the same.

So the latest flavour of the day is Russell Tan Wah Jian who wrote a hilarious essay to defend the status quo of elite education. It was so entertaining that the New Nation, a troll website, was able to reproduce it without modification.

While I think that crowds are rightfully mad as Russell seems to think that Raffles has a monopoly over the future leadership in Singapore. But when I think about TT Durai, Kong Hee and Rev Ming Yi and I understand why Russell Tan deserves a cock punch from the rest of the Internet.

But the idea of keeping an institution an elite one based on academic intelligence is something which would be good for Singapore in the future. Having many smart people at one location would be a great place for educators to experiment with new and potentially game-changing ideas and benefit government schools later. The downside of risk taking in teaching is that smart folks can recover from bad initiatives. RI kids don't stay in RI forever, eventually, some come to NUS and face us Goblins champions in the battle of ideas and they don't necessary win all the time.

So I would actually want to reinforce Russell's main argument but in a much more palatable way.

I think that the root cause of the issue concerns the, Chan Poh Meng, the current principal who labelled his institution a 'middle class' institution. Mr Chan has promoted the idea that the rich can afford tuition and give their children a huge advantage during the PSLEs. As a consequence of that RI has become the stomping ground of the well heeled.

That is an unfair characterisation of students in elite institutions.

Rich kids may actually be smart kids.

Social scientists are studying a social phenomenon called assortative mating has occured in most advanced societies. When scholars marry other scholars, their children would generally have higher intelligence than average kids like me. Do this over a generation, and it is actually possible to show in studies that many smart kids may actually come from rich families. This is a common social phenomenon faced by all advanced societies. Take tuition out of the equation, and these kids would still excel, poorer kids may flounder.

The question then remains is what to do with rich but smart kids.

If we emphasise equality in our society, then there is the fear that affirmative action would take place to allow kids from poorer backgrounds to get into an elite school with lower grades.

This is a horrible idea. You are in effect, handicapping kids for being rich.

I don't think that is the way to go.

Raffles will become similar to Bumiputra institutions in Malaysia. Similar to graduates of Malaysian Universities, employers will know that some students are of the affirmative action variety and would moderate their decision making on hiring accordingly. The Raffles brand identity would be irrevocably destroyed.

( And the boys at Barker road will be laughing all the way to Goldman Sachs from their Maseratis. )

Russell Tan is, therefore, not completely wrong.

We should never sacrifice equity on the altar of equality. That is a foundation of the meritocracy that we are in.

Chan Poh Meng's concern should be reframed as follows :

a) A good school like RI should not accept a student who can, simply by being rich, hire scores of tutors to help them get into the school of their choice.
b) A student should be accepted for being smart, regardless of how rich he can be.
c) However, a smart student should not be denied a seat by virtue of being rich.

So I offer one possible solution :

PSLE is like hacked software. Tutors have found all sorts of ways to game it and can teach it for a fee. It is high time that all the top secondary schools create their own entrance examinations.

These examinations should be administered after the PSLE and be drawn from some PSLE material and some material from current affairs.

Students who score a high but reasonable PSLE score like 260 can attend a bootcamp and then take the entrance exam to determine whether he can get a seat in a top secondary school. He has one try for one school of his choice.

Different top schools administer different entrance exams with a different emphasis. Students cannot prepare for these exams.

Hwa Chong can administer a Chinese Physics paper. An RI entrance exam may expect the kids to take a bootcamp in basic chemistry in one year, and have them create a fantasy language from scratch in another year, extract logical fallacies from a blog article in a third year or write an app in a fourth year.

Exams are designed such that they are one-shot and cannot be replicated or taught by the tuition industry.

All exams test the student in applying knowledge to practical issues.

At the end of the day, there are conservatives like myself who are concerned about recent left-winged initiatives by the government.

Chan Poh Meng is just a phenomenon of the emerging political left from the PAP which has, of late, trying to enact policies which tinker with our concept of meritocracy in a way which may risk Singapore's competitiveness.