Saturday, September 13, 2014

What would I do if a start-up exit made me a multi-millionaire ?

Of recent interest is that we are starting to hear about successful start-up exits in Singapore. I really enjoyed reading about the interviews with these successful entrepreneurs so I am writing this speculative piece. I think Tech is very much on the rise here and with more talent becoming engineers, we could be hearing about a lot more success stories in the future.

Of course, being a small-time finance author and university student, I don't expect a real start-up multi-millionaire to consult me, I'm merely speculating as to what would I do if I struck such a large jackpot, please please allow me to indulge in this speculative exercise.

Here's what I will do with my multi-million jackpot :

a) Buy a house without a loan.

Maybe these founders already have a home. But I think that the first priority is to clear all housing loans on your primary property. As much as some loans are classified as 'good debt'. Having no loans provide a peaceful state of mind.

We need to distinguish the ability, willingness and need to take risk. As a successful business who already exited, you have the ability and willingness to take on more debt. But in my view, you don't need to do it.

b) Ensure that you have a reasonably risk-free source of passive income.

Once the home is secure, the next step is to ensure that all your basic needs can be provided by passive income. The source of such income can vary, you can buy rental property but I prefer REITs, business trusts and high yielding stocks. A portfolio which yields 5-7% is a reasonable number and can even provide a reasonable amount of growth. You need to determine how much of monthly expenses you have and invest a sizeable portfolio to cover your needs. $1,000,000 at 6% is a pretty solid $60,000 or $5,000 a month.

If you are unsure about how to start, begin with a selection of the largest blue chip companies in Singapore or an index ETF.

c) Get yourself educated financially.

I think this is where my advice is the most unconventional. I think start-up successes are very confident individuals and many of them want to jump into becoming a venture capitalist. I think that is not a good decision. Start-up founders should be aware of how risky tech investing is and they need to account for the fact that their success may make them over-confident in their assessment of these tech businesses.

Once your basic needs are met, the next step is a solid and rigorous financial education. You need the knowledge to cope when your private banker or financial advisor throw you a curve ball. As such, an 18 month investment for a Masters in Applied Finance in SMU is a really cheap buy if you can rack up a high GMAT score. Private bankers won't teach you about option greeks, free-cash flow,  bond duration and convexity, but the good folks in SMU would.

I think that we should trust the bankers and financial advisors who try to give us advice. Bankers want you to keep your money with them, so they would prefer that you keep your risk low rather than you getting your high returns. I noticed that many HNW guys have a really conventional and low yielding blue chip portfolio - bankers just want to keep their businesses, they won't risk their capital. Financial advisers are worse - they only care about commissions.

If you want to take more risk, the only way is to educate yourself and eat your own dog-food.  

So this is all I have for now. In many of these articles on the successful exits, I think there is too much emphasis on jumping back into the tech world with guns blazing and venture capital funding. Perhaps it might be better to take steps to secure your victory and ensure that your family is looked after for life, then take steps to cope with the complexities of finance.

I'm fairly sure that the financial models you learn can be used to value your future investment into that start-up that will change the world.

Saturday, September 06, 2014

September 2014 Update : From Retiree to Law Student.

I've just survived three weeks of law school, just sharing a personal update to keep in touch with readers.

a) Drowning in legal cases.

Right now, the largest part of my my life is tackling legal cases. In SMU, merely reading up on cases and getting a general gist of it is not enough. As we can be called upon to introduce the cases on the fly, we will need to be able to demonstrate that we understand the cases well, so reading off text is not a good idea. A large part of my current life is figuring out what is the minimum reading I will need to convince myself that I know enough. If I get too obsessed with the details, I will not have time to cover all the cases. If I am too light on my reading and skim too much, it may affect class participation grades. As in all things, being absolute noobs, we are trying strike the perfect balance.

Although I can say that I'm actually happier spending all my time reading about cases which are really relevant to that investor part of me, this aspect of my return to University life has not met my personal expectations.

I was joking to my classmates that I see a law degree almost as a last bastion of liberal arts in pragmatic Singapore and want to pick up skills in rhetoric - career be damned - but the intensity and rigour of the course along the pressure to seek a training contract, internship and then a career is starting to weigh heavily in my mind.

b) Read Excellent Sheep by William Deresiewicz

I am glad that before bed and in the trains, I was able to read this piece of work which my cousin introduced to me. Perhaps in a later post I will contextualise this piece of work for Singaporeans.

The author paints Ivy League students as sheep who get shoehorned into society's definition of success and lack the courage to explore the world on their own terms. I think the law and medical students are the closest things to Ivy Leaguers in Singapore so it strikes a chord: I had a good read but I remain unconvinced by the author on many major points.

Success and accomplishment are as important as developing a philosophy of life. The author's insistence that students develop that bohemian outlook on life is laughable, Singaporeans do not live in a welfare state ( Unless you have dividends ) and neither do many Americans. Reading the Great Books is useful, but thinking deeply in a vacuum is worthless. Austen and Eliot would be much more useful if the reader can already write code, draft laws or create investment portfolios.

The same problem infects all the English Literature types who recently took up so much limelight in the Singapore news.

Taken to the extreme, English Literature is a religion, it has it holy books by Eliot, Austen and Shakespeare. Literature has it's own fundamentalists, fanatics and zealots. Science and engineering, at least, is falsifiability to keep scientists humble which distinguishes it from the literary arts.

Of course, on the other hand, legal education in SMU is the opposite extreme compared to the bohemian authenticity espoused by the author. The case load I get occupies so much of my time that I wish to have more time to reflect upon my views on humanity and philosophy towards life. So reading this book was done at the right time: It looks like me and my classmates are heading in the direction of becoming Excellent Sheep just as Deresiewicz had theorised.
c) Personal finances

September is a good paying month for dividends, I have already socked aside some cash to pay for next semester of fees. I have stopped tracking my net worth for now and will make minor changes to my portfolio to increase my diversification further. I think the newer REITs and Business trusts launched in 2014 may come under some selling pressure so I expect to do some bargain hunting before the month is over.

My aim so far is to retain or grow my net-worth throughout my stay in law school. This way I can reduce some of that pressure to get a training contract and really focus on thinking like a legal professional, which I think is the real holy grail of getting back to school in mid-life.

d) Other areas of my life

Of particular concern is that I have not been looking after my diet and exercise lately. Mooncake festival always gives me a sugar high and I've been neglecting my running to clear all my cases and consolidate my understanding of the law.

Looks like I need to buck up on my health next week.

Hopefully I can do up another blog article early next week.

Friday, August 29, 2014

Learning how to learn.

I enrolled into the course Learning How to Learn: Powerful mental tools to help you master tough subjects by Dr. Terrence Sejnowski and Dr. Barbara Oakley as part of my personal preparation to go back to law school. If you are an adult learner, I strongly recommend that you signed up for the course because there has been many new developments in field of adult learning since the last time I was at school.

This blog post is part of the project submission of this online course.

As part of the course requirement, I will talk about three major things I picked up from this course and how I am in the process of trying to apply myself in law school.

a) Focused and Diffused modes of learning.

The first key learning of learning that there are two modes of learning. When you are aggressively studying, like in my case, when I am trying to read a legal case or a text-book, what I am doing is focused learning. This is the hardest part about law school. Particularly alien to most engineers are Latin terms like Ejusdem Generis, Stare Decisis and Oribter Dictum. I would even go further to say that event he English terms are alien to most readers. What does it mean when something was based on a demurrer ? What happens during a promulgation ?

Prior to this online course, I was very old school when it comes to learning. Learning is rigorously attacking problems and solving sample test questions.

Fortunately for us, there is an alternative form of learning: Diffused learning is allowing your mind to rest. It occurs when you are taking a stroll and having a walk. This allows all the work that I've done during focused learning to settle down in my brain. With diffused learning, my mind is relaxed and allows me to form Eureka moments to link ideas together holistically.

My primary form of diffused learning is to play Dungeons & Dragons with my friends. In a tabletop RPG game, I play the role of a Dungeon Master (DM) , someone who referees a game and ensures that it runs smoothly. A role of Dungeon Master is very similar to that of a judge, except a whole lot more fun. Players will make up all sorts of rulings where an ambiguity takes places, it is up to the DM to arbitrate disputes.

One example in my game are the rules of a spell ( In D&D 1st Edition ) called Firetrap.

The rules state that:

You can cast a Firetrap at at any closeable item. Eg. A chest, a cover or a lid.

A mischievous player, reasoning that his mouth is closeable,  wanted to cast Firetrap spell on his mouth and bite a fellow player character.

In ordinary cases, most DMs would not have a sufficient to cover strange rule anachronisms in the game, unless this DM is also legally trained.

To resolve the issue, I was able to determine that a purposive interpretation of the rules mean that the spell was meant to be cast on inanimate objects. Using the concept of Ejusdem Generis, a reasonable ruling would be that a mouth is a living organ and is not the same category as a chest, cover or lid.

This is classic diffused thinking at work. I get to play part of a judge in a stress-free situation and my players constantly come up with crazy game rulings to test my powers of adjudication which reinforces my understanding of legal theory.

b) Metaphor, Visualization and Storytelling

The other concept I learnt in this class is the power of metaphor, visualization and storytelling. I have employed this concept to assist me in memorizing legal cases.

I noticed that a few classmates actually used Mind Maps to reinforce their recall of materials. I thought, how could I take this step further and turn the crunching of legal cases into a game. At the same time, I was playing with my daughter and noticed that my wife was having a hard time trying to get her to draw anything on a piece of paper.

Then I had an eureka moment - What if I could play Pictionary with legal professionals ?

I would draw a graphical depiction of the cases and get lawyers to guess what they are. The above diagram shows the various pre-Donoghue cases which leads to formation of the Law of Torts. From top to bottom they are as follows :  Winterbottom v Wright, Heaven v Pender, George v Skivington and the famous case of Donoghue v Stevenson.

As I move towards exam preparation, I will of course create mindmaps but I will also use pictionary to test my understanding of cases.

c) Life-long learning and broadening of one's passions.

The final point I would like to make is that is that the journey of learning never stops. Having done engineering and finance, many people would think that this is enough for a more than a lifetime.

I choose not to think that I have invested my time in three disparate fields but instead see my legal training as extensions to what I have learnt in engineering and finance school.

Ultimately, this can lead to interesting questions and developing new capabilities :

a) Can a random forest algorithm operate on a data-frame of key legal terms used by a prosecutor to predict the chances of a favorable verdict ?
b) How would a verdict of negligence affect the next dividend cash flow for a business trust ?
c) If you wish to draft a regulation to prevent the use of machine learning in a financial market, how would you word the regulation ?

Knowledge comes before Wealth.
Wealth comes before Power.
With power, you can have all the toys and fun you aspire to in your life.


Thursday, August 28, 2014

What does ASPIRE, plunging legal starting salaries and the ACS-LTA fracas have in common ?

As it turns out three recent events have something in common.

ASPIRE is government's much welcomed attempt to officially acknowledge the importance of Polytechnic and ITE graduates in our economy. I think investors will be very happy with this development because if executed correctly, Singapore will have a prosperous and vibrant middle-class and they won't feel very strongly about delaying their entrance into the working world just to get a piece of paper. My only caution is that for this to work, the foreign labor participation must be curbed. No sane employer will take on our Poly and ITE grads if Masters degree graduate from other parts of the world will cost half the price.

The second issue is that now we law students have been asked to keep our expectations low as the supply of incoming law graduates outstrip demand. Contrary to what you might think, I actually welcome this development. The over-supply is not due to foreigners but locals with overseas law degrees and we should not begrudge our fellow citizens. Singaporeans deserve a fair fight for a training contract. Imagine the kind of competition we engineers were made to face for the past 15 years : Foreign competition has been so relentless, engineering salaries have made technology one of the worse sectors to get into in this country.Compared to what engineers faced, what's happening to lawyers is nothing.

The third event is very interesting.

ACS gets their first Wee Shu Min incident !

There is a lot of public anger over ACS's booking of six MRT trains to get to a stadium. To ACS' credit, the transport was well thought-out and public inconvenience was minimized. But I doubt this issue is about public inconvenience. As my lecturer would have said, " How dare you ! " The public's concern is whether can a group perceived to be well-to-do, marshal state resources for their benefit simply because they can and have the funds to do so. I predict a very public rebuke directed at MRT to appease the masses, but I also expect private censure to be very minimal. LTA needs to play their cards well to handle this incident: The optimal move is public censure and private indifference.

To help you think about this issue further, let me ask you this :

a) If RI or HCI books the trains, how would react to this incident ?
b) If ITE booked the trains, how would you react differently ?
c) What if lawyers or the Adminsitrative Service booked an MRT train to attend a dinner and dance ?

I believe the reactions would all be very different.

There is a central thread in what policy makers are trying to do - That central thread in all these events is Game Balance.

Imagine Singapore as a Diablo III game, would it make sense to design a country like this :

a) If you are ACS, RI, doctor or a lawyer, you play the game at Easy Mode.
b) Other graduates play the game at Normal Mode.
c) If you are Poly, you play the game at Hard mode.
d) If you are ITE, you play at Torment 6.
e) If your are a scholar, you play at God mode.

It won't make sense to do this to people. You can only push us this far.

Good games require great game balance. That's why Diablo III repeatedly patches itself.

After 2011, to reduce social and economic inequality, the government has to do two things:

The first is to generate a better career path for ITE and Poly graduates with a better quality of life. I urge the investor community to welcome this change because our economy can benefit from a vibrant middle class. More money for middle class, more revenue, and for me, higher rents to collect. Support this out of self-interest.

The second and harder consequence to bear is that the strong will be nerfed or brought down. As the inequalities need to be addressed before the next elections, some people need to be brought to the average watermark.

It begins with lawyers, but it won't end there.

I predict the following :

a) Doctors will increasingly face foreign competition if only to keep medical costs down.
b) Regulation will make banking sector less attractive then the high tech sector.
c) Investors will face higher interest rates and lower tax breaks, but Singapore will only levy capital gains and dividend taxes as a last resort.
d) There is one Phd driving a cab. We have yet to see a lawyer or doctor do this.

In 2011, Singaporeans have started becoming very vocal against social inequality. In fact, I would want to believe that once we resolve our transport woes, that is the only thing Singaporeans have to gripe about.

What we are seeing is the beginnings of a resolution of this unhappiness.

This is only the tip of the ice-berg.

I leave you to decide if the second consequence is something that is fair to some Singaporeans. I am undecided for now.

[ A friend informed me that my article is very similar to this one :

But hey, let's not go there. In the Singaporean context it can be seditious.]

Monday, August 25, 2014

Beyond second skilling...

Thought I should share with everyone my view on NTUC PME's drive to promote second skilling amongst PMEs in Singapore.

Second-skilling is a straight forward concept. It encourages Singaporeans to develop hobbies which can be monetized. A manager in manufacturing plant can develop a hobby in photography and eventually gains a degree of protection against job loss when he starts taking professional photographs.

In the absence of actual data of folks monetizing their interests, I would like to share my personal experience.

My biggest success with second-skilling came with teaching myself how to invest. Investing is a great secondary skill to develop although the results can vary. What I felt worked for me was that I was willing to go all the way to become a competent investor. I was eager and happy to study all the qualifications out there using my leisure time because I wanted to become my own private banker and financial advisor. Of course, this success was also fueled by my willingness to pump capital into my portfolio.

However, not all of my hobbies end up earning a profit, I would consider my foray into writing a lukewarm success, or even a financial failure. Out of the three physical books I published, only one broke even. My e-book sales are very minimal, earning about $1.50 on a good month from Amazon. When I started writing,  I was mainly trying to crystallize my thoughts and investment ideas with the secondary objective of building up my personal brand, but my investment of time and money was small - only about $15,000 for all three books.

The jury is out on whether my third-skilling attempt of getting into Law School would pay-off over the long term. There are a lot of concerns on where the legal industry is heading over the next 10 years. But for reasons I will share later, I'm still optimistic that I can find a humble role in spite of the oversupply of lawyers in Singapore.

Ok, now the really theoretical part of this discussion.

I believe that a model on second skilling can be derived from Solow's Growth Model in economics.

Without getting into the gory details, imagine growth to be a function of three inputs Capital, Labor and Innovation.

In Solow's Growth model, under early phases of growth, you can keep injecting capital and labor into the effort and an economy will grow fairly quickly for a decade or so,  after which it will plateau unless you find ways to innovate and differentiate the economy from its peers.

If we apply this model to second skilling, here are some useful insights.

For second skilling to work, you need to put in time and money to get to this point when people will pay you to indulge in your hobby. If you are a photographer, you may need to practice your skills in shooting and composition. You may also need to constantly upgrade your gear and it can cost you loads of money. This  explains why some of my efforts bear fruit while other attempts fail. This also provides me with some optimistic feelings due to my substantial time and money commitments to crack legal cases in SMU.

The next insight is that hobbies are fun and a lot of people would drop their current day jobs if they can make money from what they perceive as fun : this limits how far you can go with your hobby. Monetizing a hobby can be Red Ocean territory.

The remedy for reaching a plateau to how much you can extract from your hobby is innovation. You need to apply your hobby in a novel or niche way. Example, folks who love painting Warhammer miniatures can differentiate from other by winning the Golden Daemon Award and even get into giving painting classes to secondary school kids. You can create a new product or seminar from your love of miniatures painting.

I'm not spared from the innovation requirement. Before I graduate, I will need to find a niche within the legal industry which would have to combine my technical skills, investment know-how and new found legal analysis skills to convince someone to take me in.

So in summary, do proceed to monetize your hobbies as recommended by NTUC, a secondary source of income is always a good thing :

a) You need to pour in money and time for your hobby to bear fruit, but there are physical limits to how far you can go with this. eg. Once you get the top of the line camera, paid for the Photoshop license, everything else is based on your skill.
b) If the hobby is especially common, you need to make your attempts unique and distinguish your product offering to the market.

Thursday, August 21, 2014

Pushing the Delay of Gratification to its logical extreme.

I'll start with a personal update.

I'm almost with my first week of school in SMU's Doctor of Jurisprudence or JD program.

This is, by far, the hardest course I've ever taken in my life considering that I have done NUS engineering school, NUS's Masters in Applied Finance and passed all three CFA exams.

Prior to the start of the semester, we would have already completed reading about 30 cases, done two online quizzes, and even attempted to tackle a few problems. SMU places a large emphasis on classroom participation, this means that going to a seminar with a vague understanding is not enough - I have to ensure that I make at least one intelligent ( high quality/ mind-blowing ) contribution every seminar or it will affect my grades. Every seminar is a mini-exam.

The differences in the way Universities conduct lessons has caused me and my friends to come up with this joke...

NUS students can think.
NTU students can do.
SMU students can... talk.

( For political correctness sake, I can't complete this joke. A philosopher friend added a fourth line which made the joke highly elitist.  )

In my past life as an Engineering undergrad, the joke was as follow:

Electrical engineers design the circuits.
Mechanical engineers design the casing.
Civil engineers carry it to the site.

Anyway I digress, I was so caught up, I could'nt blog for a while.

Ok, onto my main topic.

There exist a problem with the delay of gratification.

I call this the "What if you die?" problem.

I started re-examining the problem after a gruesome week in Law School. My life schedule is like clockwork, I wake up at 7am, crunched cases and read textbooks for the upcoming week, then attend school. After that, I spend about 2 hours with my daughter, swim and then I go home to do even more mugging.

This is also an issue faced by many investors. If all you do is keep saving, when would you actually enjoy the fruits of your labor? If you are dividends investor, the answer is obvious - you enjoy spending your dividend income so you are not completely delaying gratification if you buy stuff or travel with dividend income.

But that's not really a comfortable answer for me because I reinvest all excess dividends and spend only what is necessary to upkeep my family and living expenses. Spending my savings is my wife and daughter's problem long after I am gone.

Yes, I do get a kick when I get to study cases involving some of my investments or current affairs. My motivation is knowledge beyond what other engineer-investors have. Nothing feels better than when I read about a landlord who takes his tenant to court. These are issues which can potentially affect me. At least now I know how the local courts view such cases.

So why does a financially independent guy subject himself to an almost 15 hour-day just for the sake of knowledge and another roll of a die to have significant career ?

Now I have a possible answer.

When an investor farms his assets into a dividend yielding portfolio, he might not feel that cashing out to buy something is the reward. The reward is the security and confidence of having an asset which generates income for you.

A start-up founder enjoys building his company beyond the need for a secure income. If he cashes out, he will continue to support or build more companies. This is not delay of gratification. This is gratification.

The only way to delay gratification indefinitely is to enjoy it and view the act itself as an act of gratification.

There are interesting applications of this insight.

When you do something something unexpectedly heroic, like plunge into a risky business venture or engage in a new relationship or take on a new direction in your career, you will inevitably experience some pain. What if there is a way to reframe this as a pleasurable thing?

Anyway, that's all I have for the reader today.

Hope that I can do an update again over the weekend.

Friday, August 15, 2014

Is there a marriage strike going on right now ?

As I'm swamped with legal cases to process, I can't really do an in-depth analysis of this question. What we do know is that marriage rates have gone down quite drastically this year so it's time to ask ourselves this question :

Is there a marriage strike going on right now ?

Based on my cursory knowledge, I don't think women are responsible for this sudden dip. Marriages in Singapore are largely stable and with domestic help, Singapore is one of the best places in the world to raise kids. Could it be because women are performing better at work and have more financial autonomy ? I think not likely, as even if local men do not meet the expectations of women, foreign men do.

I am inclined to think that the problem lies with us men. More and more Singaporean men are not meeting women's expectations in pay and educational standards but suppose we take that out of the equation, I think we're entering this golden age where we guys can replicate an aspect of a good marriage without actually getting into ROM. Sex with prostitutes is legal here, and entertainment is one Steam download away from being fulfilled. The government has now given up and allows singles to obtain a BTO flat.

Effectively, we need to look at the problem of marriage rates differently from the past. In the past men and women want to get married, that was the only way to get sex and entertainment beyond TV. These days, singles are essentially married to themselves. Policy needs to give them reasons to divorce themselves and marry someone nice who comes by.

Singles give up autonomy when they go into ROM.

Sadly, I don't have a policy solution to the problem of marriage rates. Married couples have enough benefits from the tax-payer, it's the singles who have plenty of entertainment and no longer need marriage in their lives. One drastic possibility would be to reduce the work-week so that singles may get bored and marry out of boredom. ( Hypothetical, because the dudes can just play more computer games and spend more time at Geylang )

So thinking about this issue has largely been unproductive without a major breakthrough.

But I did achieve one single insight.

We married folks have a very irritating tendency to work this way : When we see two people who might have  similar flaws, we automatically think that potentially they might be soul-mates and so we try to introduce them to each other. The logic is that the pairing of the lowest denominator will take place once all options have been exhausted.

This almost never works.

Consider the decision tree from party A's perspective. Even though I have flaw, I am essentially giving up this fantastic relationship I have with myself to hook up with this other flawed individual.

In conclusion, A will stick with himself or herself, thank you.