Sunday, June 24, 2018

Tuition as an investment



I read the news with increasing consternation that our society has created a monstrosity such as the tuition industry. The situation is now so bad that I think personal finance gurus need to put their heads together to formulate a better framework to decide whether kids should have tuition because the consequence to  your wallet is so dire that in the BIGS FB group, professional tutor La Papillon estimates about $1,500 spent per month for four subjects.

And this is only for one child.

Tutors have a guaranteed rice-bowl due to the systemic mess the education system has created for itself.

Teachers are overworked. They have administrative work to do and have to actually teach kids how to think and do their own research. This takes time away to teach kids how to pass exams.

At the other end of the spectrum, exams have to be pitched at a level harder than the material taught because the education system also has to sift through to the population to decide who gets to qualify for the most financially rewarding jobs. If exams test at the level of what was taught in school, we would need some kind of university entrance exam to sort out the cohort further.

This gives tutors an effective playground to operate on. Tutors don't ever have to teach critical thinking or how to even behave like a human being ( Although some do out of the goodness of their hearts ). Tutors specialise in helping kids survive the Academic Hunger Games of Singapore because that's what parents pay for. This means mechanically attacking every possible question that can come out in exams.

This is why rich families have a distinct advantage. Their kids have time to pick up critical thinking and new economy skills. Learning how to pass exams is simply a monthly pay-check to a tuition agency.

Not every parent has unlimited means. I will simply suggest a controversial idea here : Tuition is an investment. Basically, it is far superior to see tuition as a means of transferring your financial capital into your child's human capital. However, you need to understand that you are in essence converting your equity, cash and bond assets into a call option on the human capital owned by your child.

Your child needs to internalise what is being taught by a tutor for this call option to come into the money. This is the part which I can't really help with because every child is unique and I do know of some kids who simply don't benefit from tuition at all.

There are some consequences of employing such an approach to tuition :

a) The better you are as investor, the less tuition you should be willing  pay for.

This always gets parent's goat when I show them my numbers.

Suppose I take the $1,500 and invest it in a portfolio yielding 10% per annum for 15 years instead of paying for my child's tuition. As a consequence of that, the child fails to make it into a local university but gets a polytechnic diploma instead. I can, as a form of compensation, give him the entire portfolio of $630,000 on the day he starts his diploma job at $2,400. If the portfolio continues to generate 10% every year, your kid would have an effective starting salary of $2,400 per month + $63,000 per year.

This is way higher than the salary of a lawyer, doctor or engineer.

b) Even if you do not buy (a), limiting tuition can be profitable.

A lot of parents protest with my idea (a). One argument is that a fresh poly grad is the last person who should be handling such large sums of money. I can accept that. After all, parents know their kids best.

( I'm sure some kids will even declare financial independence and FIRE on the first day of work ! )

Suppose (a) is too hard to accept, then perhaps reducing tuition to just one key weak subject would some sense. This basically creates an asset allocation for your child that consists of tuition and the usual asset classes subject to the Mean-Variance portfolio concepts in Finance.

Future parents may even employ a tutor and a robo-advisor to look after their kids's future.

c) Even if you ignore this idea, you have to accept that tuition has limits.

The beauty of this idea is that investing in tuition now has logical limits. You will not invest in your children's education if returns to their human capital is too low compared to your returns on financial capital.  Otherwise, you are just subsidising a a tutor's lifestyle.

The value of a degree can be low if your kids insist on studying subjects which do not lead to steady professional jobs. There are NUS degrees with a starting pay as low as  that of a high-end private degree (many SIT degrees are worse). Worst, in the future, even a professional qualification may force some kids in the future to join the gig economy.

This is also balanced by existing high-paying jobs that do not require degrees such as real estate sales and being commercial pilots.

We need a new framework to assess a child's tuition needs and I would like to launch the first salvo in this new frontier in personal finance :

"Minimise tuition, invest the rest."

It is now time that we take the "Buy term, invest the rest" war-cry and drive it against the tuition industry !

The larger tuition franchises are now starting to sound like MLM companies and insurance firms, playing along the insecurities of parents to make an extra buck.

Before I end, I want to suggest a solution for policy makers. I think teachers should be allowed to get extra allowance for staying back in school to teach the weakest students in each subject. These students will have to pay for tuition within the school system but at a rate lower than the private sector, so it should be a voluntary scheme.

If every school transforms into a tuition agency after 3pm every day, the private enterprises will find it harder to wage psychological warfare against kiasu parents.







Thursday, June 21, 2018

My World Cup 2018 shenanigans...



Dungeons and Dragons geeks, as a general rule, are not into soccer.

Nerds and jocks do not mix.

For the life of me, I never understood why folks would bother so much about 22 guys kicking a ball while hordes of fans use the event as an opportunity to get drunk in a pub. It also irks me that whenever the English loses, wife abuse in England goes up.

After becoming an investor, though. I learnt that World Cup season is also bargain hunting season. So I started to follow the World Cup results because I wanted to know whether the market might recover during the semi-finals.

But this year, I have decided that things will be different.

To get some of my skin in the game, I started betting on the World Cup results.

Right now, I know nuts about football, but I do know that Brazil is the favorite to win  from the analysts in Goldman Sachs. I also know that the Economist seems to have projected Germany to be winners.

Being a total idiot to football betting.

I told my mum to buy $50 to bet on both Germany and Brazil to win the world cup, thinking to myself that if either team wins, I will be able to Wifi my home with Google Mesh technology.

But that was not to be.

Even in the best case scnario, a $50 bet on either Brazil or Germany would only win at best $200. My best case scenario would not even net one Google Wifi Router. In fact, it would not even cover the fees you pay to your cable provider to watch the World Cup in Singapore.

The MIT Technology review article pegs a Brazilian victory at 16.6% and a German victory at 12.8%.  Through the Kelly criterion, I can confirm that both my bets are a fools errand ( if you do it legally via Singapore Pools that is. )

The Kelly Criterion for the Brazilian bet is (4(0.166) - 0.834) / 4(0.166)) or -0.7%. The German bet will be even more disastrous.

Whenever the Kelly Criterion returns a negative number, it means that the bet is a pure gamble and investors are better off putting their money elsewhere.

So I guess I just have to appreciate the fact that I just bought myself a reason to follow World Cup 2018.

Anyway last Sunday, I finally gave up the idea of a Google Mesh Wifi, I bought a high end repeater at $150 and now enjoy a full 5 bars for my Home wifi.

Looks like I better stick to income investing.

Tuesday, June 19, 2018

The Art of the Good Life #27 : If you break on the outside.



The second part of the Circle of Dignity series is about maintaining the upper hand no matter what happens.

The example given was a story of a Vietnam veteran who was supposed to be paraded through the streets to show the world how well-treated US POWs were treated. Moments before he was supposed to be paraded, he bashed his face so hard against a stool, his face became bloodied so much so that the Vietnamese were no longer able to use him to make a public statement.

Although I sort of get this advice, I would hesitate to attempt such heroics. I mean, if I die, I would not be able to see my kids anymore. What's personal dignity anyway if you lose your chance to see your family in the end ? Instead, I think it's better to bend even if you sacrifice your personal dignity in the process.

But still, in my own little way, I am able to put a smaller principle into practice.

What I hate are sore losers when playing board games.

There is always this breed of gamer who overcompensates for his lack of real world achievementso he treats a gaming session as a matter of life and death.

My principle is that a sore loser should never be allowed to win board game, even if this means that I lose badly.

There was this Settlers of Catan game I played where the sore loser was on board. I clearly had the lowest point so I was losing badly. But before sore loser was about to win, I turned to a friend who was one point behind and asked him what resources he needed to get his last victory point. I then traded the resources for a nominal resource.

At my successful attempts at Kingmaking, the sore loser flew into a rage.

That remains one of the most satisfying board game experiences I ever had.

Saturday, June 16, 2018

Radical ideas on parenting.




This came about after I became triggered after reading Teo You Yenn's book when she created a false dichotomy on the various approaches to parenting found in Singapore.

For the folks that she did a lot of ethnographic research on, she labelled their approach towards children as seeing them as a "blessing". Children are almost like a gift from the Almighty. You take the children as they are and then do your best in raising them. Children for these folks are happy accidents.

Prof Teo had no mercy for the folks on the other side of the rich-poor divide. The label she applied to parents like myself is that we view our children as "projects". This is because we take a lot of pains to plan our families and put our kids through the education system.

By using two carefully chosen labels, Prof Teo was able to realign everyone's perspective on Singaporean parents. The good has become evil, and evil has become good.

If you have a kid out of wedlock, fail to get them into the best educational institutions and create the next generation of possibly very needy welfare recipients, you are forgiven because children are a "blessing" and society should ideally love every Singaporean unconditionally. If, like me, you take pains to ensure that your kids have a fully topped up Child Development account, we're suddenly soulless cogs in the machine who raise children our kids the same way a Project Manager meets a series of milestones. This is even when we're working hard so that our kids might become responsible tax payers in the future.

Another words, we're the 70% Sinkies responsible for everything horrible about Singaporean society today.

There are a lot of parenting gurus these days on social media. But to me, the only way to vindicate your ideas is that your own kids turn out well. And the truth is, there are no guarantees when it comes to our own kids. Kids are very creative in finding all sorts of ways to become a disappointment and disgrace to their families, so it's best to be humble, do your best but be prepared for the worst.

For today, I'm just going to offer alternatives from what you read from parenting gurus. I'm not trying to burst their bubble, because their kids may well win the Academic Hunger Games of Singapore. I just think that perhaps we can inject a lot more skepticism when we read what most of consider "common sense" when it common sense.

A key idea I take issue with is the idea that we should not give our children too much because it would sap their willingness to put in the hard work for their future and become overly entitled as Singapore citizens.

On careful inspection, it really does seem like common sense. We need to let children come to their own when they find work in the workplace. But I believe that I have valid reasons to be skeptical about this advice. I think that the folks spreading this idea, are the folks, who themselves, have received very much from their parents, so they might not be aware aware about how a little capital can go a long way in life.

Here are some of points that are worthy of consideration :

a) Children from richer families are better at delaying gratification.

This is possibly the most important discovery in social science of late. The orthodoxy is that children who can delay gratification seem to do very well in their adult lives. Buts someone tried to replicate the Stanford Marshmellow test lately,  and they found out in a bigger experiment that the kids who passed the marshmellow test came from richer families that was able to give them the stability and predictabiilty in their daily lives in such a way that they can delay something good to achieve something better in life.

b) Successful entrepreneurs tend to be rich kids with safety nets.

Another harsh truth is that the successful entrepreneurs are rich kids with safety nets. This actually makes sense if you are in the FIRE movement. The biggest risks I took throwing my IT career away to study Law in SMU simply cannot be performed by a family man who needs a day job. I need financial independence to be my enabler.

It's the same principle when you ask a young IT professional to forego a banking IT job to get into a startup. He'll do it if it is safe, otherwise, he needs an assurance if he were to survive a collapse of his startup. Coming from a rich family can provide that insurance from startup failure.

c) Investing requires experience and tuition fees.

This third point I have to share is that investing requires time. You need to have the courage to open a trading account, get a few trades out, lose a little money, but eventually figure out how to get a diversified dividend stream into your bank account.

It took me 14 years and over 7 digit portfolio to gain the courage to play with leverage. I have yet to even figure how to short a CFD.

Similarly, young investors might not be able to learn about all these tricks the Mr Market can offer to teach without a larger starting capital. Getting them to earn their way there can potentially work, but a larger starting capital can get them more comfortable to the idea of risk at a much earlier stage in life.

d) We may overestimate the job prospects for our children's generation.

It's very easy to say that Millenial's just need to be as hardworking and vicious as Gen X, but they are not coming into a job market with plenty of MNC and comfortable public sector jobs. Millenials may spend years holding jobs in the gig economy and face years of lumpy salary payments.

It's easy for me to say that kids should just build their passive income the same way I did, but I relied on decades of MNC employment to make it happen. Will these MNCs even be around in 25 years ?

P&G and HP are ghosts of their former selves.

In fact, I think believe the opposite compared to those "parenting gurus". I admit that given that my own kids are a work in progress, I can be wrong about parenting. But I believe that as it stands, what I am proposing is not inferior to what other parents are touting.

Rather than to just leave our kids to slug it out, I believe the following alternatives may work but might be controvesial:

a) Tuition money can invested into a financial portfolio if the gains in human capital are low compared to gains in financial capital.

For this point, you need to understand your kid's character.

Not all kids are academically brilliant. $1,500 invested in a top flight tuition every month may send some kids to Raffles Institution or GEP, but other kids with the same investment can still end up in Changkat Changi Secondary School.

Not all kids respond well to expensive tuition and hot-housing.

However, the opportunity cost of paying for tuition is investing in the financial markets. A good backtested portfolio can reasonably return 9% every year. If your kid cannot graduate from a good local university, he might do better with a portfolio that generates passive income along with a polytechnic diploma instead.

b) Give your kids an early inheritance while you are still alive to supervise them.

There are too many stories of useless adults in their 30s waiting for their parents to die so that they can become financially independent. The common sense solution is not to give these useless bastards anything.

But I think the solution may the opposite of that approach

While a parent is alive, why not give your children small amounts of capital so that they can learn how to handle larger sums of money, which really requires a different mindset from wage slavery anyway.

Personally, I would give around $50,000 on graduation day and negotiate a cash award for every level of CFA my kids are able to conquer. This would get them to become more confident with handling a market portfolio and given them an incentive to take on one of the hardest exams the world has to offer.

Imagine other Millenials struggling with their study loans but your kids are figuring out how diversified portfolio of REITs can pay off some of their daily expenses so they know that alternatives to earned employment exists. That's a genuine competitive advantage.

Anyway, do share your feedback on these controversial ideas I'm pretty open to criticism because I have two decades to refine these ideas while my own children grow up.







Monday, June 11, 2018

The Art of the Good Life #26 : But If Not

This is a really tough chapter for me to grasp, so I will keep it short.

The author believes that everyone should develop a circle of dignity. One component of this circle of dignity is to have a set of principles that you absolutely commit to,  so much so that even rational argument would not be able to displace it.

I struggle with this principle largely because I do not have a religion, so beyond my immediate family, I don't have many principles which are not subject to negotiation or rationalisation. I also believe that a large number of the world's problems comes from this form of inflexibility. Sooner or later, you will meet someone whose principles are diametrically opposite to yours.

For example, while I have steadfastly refused to spend my capital, this is not a principle I would stick to if my kids need to get an education.

Perhaps the reader can share with me some of the principles you hold so dear that even a logical argument will not cause you to violate this principal.

This is truly out of my depth !



Saturday, June 09, 2018

A deeper analysis of the Astrea IV Private Equity Bond Offerings.

There seems to be quite a bit of excitement on the Astrea IV Private Equity Bond Offerings.  These bonds have been described in great detail by other bloggers such as Investment Moats and Financial Horse.

I just wish to write a small article to plug the gaps in the analysis I find in the blogosphere. Compared to most investors, my personal interest lies in the Class B rather than the Class A offerings.

Here I am detailing the reasons why this is the case.

[ Feel free to critique my analysis. In practice, I do not have the money to move into this asset class this year but I expect some leveraged positions to be take place a few years later after more of such offerings start appearing in the market. This is definitely going to be a successful new asset class that retirees and income investors to flock to moving forward. ]

a) Class B offering actually has lower interest rate risk

Here's where some bond investing fundamentals taught in CFA class may come in useful. The biggest issue investing in bonds is rising interest rates over the next few years. This makes interest rates the primary consideration when you think about buying Astrea IV bonds.

A lot of bloggers miss out on a discussion about bond duration, which measures how sensitive the bond prices are to slight changes in interest rates. I used my spreadsheet and did a simple calculation of the Macaulay duration for the Class A1 and Class B bond offering.

For the Class A1 bonds, I estimated the bond duration to be around 8.31 years.

For the Class B bonds, I estimated the bond duration to be around 7.59 years.

What this means is that for every 1% rise in interest rates, your Class A1 bonds will lose about 8.31% in market value, but the Class B bonds will lose only 7.59%. This is because Class B bonds give out a higher coupon rate allowing you to recoup your costs at an earlier date resulting in a less swingy experience.

b) Class B bonds can achieve this lower interest rate risk at a higher risk of default

The other aspect of bond investing is credit risk. The Class A-1 bonds are rated A by Fitch. For this  A credit rating, I can't seem to find a default rate on Wikipedia, but I think it is reasonable estimate it at a cumulative 1% over 5 years or close to 2% over 10 years. For the Class B bonds, the rating is lower at BBB that gives it a default probability of around 2.11% over 5 years, we can round it up to 5% over 10 years.

After performing this analysis, I am actually a lot more attracted to the idea of buying Class B bonds for their higher coupons using 200%leverage. Kim Eng brokers are offering me at a financing rate of 2.5%, so at 200% leverage, I'm looking at a delicious 11% yield every year that offsets the rising interest rates that will affect the market price of these bonds. The downside is a 5% chance of busting out over the next decade and fluctuations in USD currency (which I have yet to quantify).

Anyway, my hands are still full trying to build my leveraged REIT portfolio. At a much later date, I will come back to to my duration calculations when I get an indicative price of how much these bonds will trade in the secondary markets.

My calculations also reveal that perhaps in future PE bond offerings, retail investors get exposure to the riskier tranches because the credit default risks are often offset by lower interest rate risk. The Class B bonds may require a position size of $100,000 for a 200% leveraged position which is an amount of money that most retail investors do not have.

Anyway, let me know what you think of my analysis.




Thursday, June 07, 2018

F.U. Money is about reinventing the Singapore Dream !

This post came about because Kyith Ng from Investment Moats was giving me feedback on my slides for the upcoming talk and he wants me to see if I can suggest some alternative lifestyles or schemes for people to choose from after they achieve their financial independence.

After some deliberation, I think we can do much than that.

I think by now, readers of this blog knows that I've been blogging about the Death of the Singaporean Dream for quite some time. In fact, I think the Dream is already Dead. My generation's leaders murdered the Singaporean Dream when hordes of foreigners were allowed in to keep our salaries depressed. Now the Millenials don't buy the Dream at all, they know it's a Faustian bargain which is why they chose work-life balance over career ambitions.

Why ?

Because Gen-X knew what betrayal feels like.

Opponents of inequality talk about small differences in a family environment being magnified into serious socio-economic gaps in adulthood.  So much so that Low SES and High SES jokes are quite the norm in social media. It also does not look good that folks in their 40s face a serious threat from automation and technological shifts.

The first victim of social upheaval at such a profound scale is the older model of successful Singapore living which is that idea that, upon graduation, we can have hold a job for about 30 years and then start a family in the meantime. In reality, most of our careers will not even be half as long as our mortgage tenures. And yet the prices of housing continue to edge up due to the presence of foreign buyers.

A new schema for the Singaporean Dream needs to incorporate the latest and greatest in the field of Personal Finance so much so that F.U. Money is now more important than ever if you wish to craft a New Singapore Dream for yourself.

Tools to create your own Singaporean Dream needs to incorporate the following :

a) It has to be achieved faster and not slower.

While its great to delay gratification, our generation has less time than before. Our STEM degrees become worthless in half the time compared to the 1990s. Humanities degrees do not even command value right off the gates. Mathematical models allow speed to be achieved with a reasonable risk of ruin. We're becoming obsolete by the minute even as we hold day jobs. This is because different parts of the industry automate at different rates.

b) It has to be indifferent to paper qualifications

The workplace is full of biases that pay private degree holders about $1,200 less than local degree holders. For the winners of the academic race, that's fine and good. For the losers, they need to find a playground where they can be safe from discrimination based on academic achievement. The markets are fair arbiters of investment skills. I have never seen a stock pay a lower dividend to a private degree holder than local degree holder. Of course, if you receive poor training, you might not have the knowledge to buy the right stock in the first place.

c) It should be rewarding even if it's not done 100% right

Shooting for $2,000 per month in passive income is sweet but a lot of people will fail in achieving this mission. The trick is not to mislead the audience into thinking that it's easy. Saving 80% of your take home pay is as hard as playing championship sports. The trick is that meeting 10% of your goal should be rewarding as well. $200 in passive income every month can pay off your public transport expenses.

I'm still in the process of refining my slides.

If there is anything you'd like me to specifically address, feel free to share about it here.