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.

Tuesday, June 05, 2018

The Art of the Good Life #25 : Hedonism and Eudemonia

My talk on F.U. Money is not just going to be a showcase of reams of data in my back-testing experiments. In fact, I'm spoiling one of my slides here ( I have close to 60 slides for the 30 minute presentation ).

Post- F.U. Money, most folks will focus on personal pleasure or Hedonism. These are the guys inflicting all that psychic damage on me right now, posting their wonderful June Holiday photos of them travelling with their kids in Europe. Hedonistic people will use their money to travel, procure more sex, or eat at a Michelin 3-star restaurant. It's their money, and they've earned the right to enjoy themselves.

But philosophers are not satisfied with a life filled with nothing but pleasure.

I was enlightened by an intern yesterday that the best movie on IMDB is the Shawshank Redemption. Movies like the Infinity War make a hell of a lot of money, but why do such movies never make it as great movies that withstand the test of time? Simple. The Shawshank Redemption is a lot more meaningful as compared to Infinity War which is just a CGI extravaganza.

A meaningful life explains why some people post financial independence would prefer to make a dent in the universe instead of retiring to a life of seeking endless pleasure.

After getting your F.U. Money, you should be seeking both Hedonia and Eudemonia. Do find things to do that make life pleasurable.

Your financial independence is also the time to ask the hard questions of what makes life meaningful to you. For many folks, it's raising their kids well. For others, it might be devoting to a cause greater than yourself. 

Sunday, June 03, 2018

An idea so dumb, only an intellectual will believe it !

The genesis of this article came from Alvin Chow of Dr Wealth who make this quote of social media. I was once reminded of the Efficient Markets Hypothesis (EMH). On Investopedia, the definition of EMH is as follows :

"The efficient market hypothesis (EMH) is an investment theory that states it is impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information."

This theory is broken down into three sub-forms:

  • The weak form of EMH posits that past movements and volume do not affect future stock prices. Believers in the weak form do not believe in Technical Analysis.
  • The semi-strong form of EMH posits that stock prices incorporate all public stock information. Believers in the semi-strong form do not believe in Fundamental Analysis and Technical Analysis.
  • The strong form of EMH posits that stock prices incorporate all public and private information. Believers in the strong form of EMH do not even believe in insider trading !
( I used to subscribe to the weak form of EMH until really recently, making myself one of the intellectuals who believe in this theory. )

But I'm not afraid to change my ways if more profitable approaches are out there.

For the past week, I have been going to library to prepare for the talk on F.U. Money, and I have some backtesting insights that I can leave for readers of this blog that would not detract from the really interesting findings for the paying customers of this upcoming event.

In short, here's what I found :

The baseline gains you can make from the STI ETF has been around 4.4% for the past 10 years. 

If you employ a filter that chooses Singapore stocks with lowest EV/EBITDA  and then find within this universe, those with the highest ROIC, you can get a 10.63% return with a Sharpe ratio of 0.39. 

Not too bad. 

At this stage, a lot of investors will be satisfied with this filter because it can achieve decent gains. But when you combine a value measure with momentum indicator like the Relative Strength Indicator (RSI), I was able to achieve 24.89% returns with a Sharpe Ratio of 0.9. 

As all my backtests experiments span 10 years, we clearly cannot ignore some of the ideas of Fundamental analysis as well as Technical Analysis.

This makes the EMH one of those theories that is so dumb, only intellectuals will believe in them. 

Thursday, May 31, 2018

BIGScribe Investors Exchange 2018 is about F.U. Money !

I'd like to see BIGScribe Investors Exchange as the Wrestlemania of Singapore Investing.

You can book your tickets for this event here.

Our last event sold out and I was told by the event organisers that we are selling the tickets at twice the rate last year. It's no surprise, because as of this time, we have four heavyweight speakers who will be talking about serious investing topics for that day.As you all know, I am a retail investor and a fan boy, so I look forward to the presentations just like members of the audience.

Which puts me in a fix, because I am the fifth speaker.

Traditionally the last speaker in a presentation team in SMU Law School presentations has to find a way to wrap up the proceedings and create a positive spin for the whole event. Even in Wrestlemania, the final event is when the Heavyweight title often changes hands. The wrestlers in the final event is seldom the best fighter in the WWE ( Leg Drop of Doom, anyone ? ), but the fight has to contain the best trash-talking and drama.

Last year, the topic of my speech was "50 Shades of Dividends Investing" and I was quite sure some folks were offended by my subject matter.

This year may be no different.

I will be talking about F.U. Money.

But for now, I'd like what F.U. stands for to be a mystery.

I will discuss what F.U money is, how to get it, how to make it grow. I will explain why we are so hot and bothered by F.U money. Why we want that F.U. moment in our lives and why we need to get that moment soon and not delay gratification indefinitely.

As in all my talks, I will discuss some empirical observations on blue chip stocks, dividends and REITs.

If you're lucky :

a) You might even become disillusioned and even a little angry with ETFs.
b) You may also never see some degree programmes the same way again after my talk.
c) You suddenly feel that contrary to modern concepts of self-help, delaying gratification has limits.

You see, my job should not be just to motivate you, my job is to show that you reality bites and how you can fight back.

Folks who follow me will expect that I try to back up every assertion with research and empirical findings to support my thesis. A lot of material was crunched to create the slides which are undergoing trimming right now.

We will take the data science of investing and try to marry it with the latest psychological research and I will show you how all this can be tied up to your personal goals of happiness and bliss. 

It's time for Investors Exchange 2018.

Buy the tickets while stocks last.

And most of all - F.U. !!!