Sunday, February 19, 2017

CFE post : How SMU can fit into the future economy.

Yay ! Mid-terms are over.

Today, I wanted to combine several posts into one.

Of recent note, SMU has been on the radar of social media as of late. Exchange student Kerry Dwyer has written very candid comments about her SMU and Singapore experience here. In a mid-term party which was conducted by my JD pals yesterday,  my foreign classmates felt more inclined to agree with Kerry. There are clearly some issues with SMU.

Now I tried to get as much information on the Committee on the Future Economy (CFE) study and, like everybody else, I was unable to find anything unique or special about this report. What I did detect is the overwhelming use of the word "innovation".

Right now, based on my three years spent in SMU as a law student in the JD program, I do not think that SMU is fully aligned with the CFE's innovation drive. We obviously have the physical infrastructure to make it happen, but one of the biggest impediments to make it happen is our lack of software.

SMU students, and this includes myself, simply cannot shake away the Tyranny of the GPA.

The need for high GPAs are real. A cum laude is more valuable by $500 a month than a normal pass degree. Higher GPAs also grant access to objectively better companies and this is natural - HR departments don't want to waste their time interviewing so many students so find ways to keep their selection pool to those with better grades which immensely unfair to students with more average grades but an interesting CCA record.

Instead of whining about the problem, I can think of several really immediate and actionable solutions to make the SMU experience better for folks like Kerry Dwyer and align SMU towards the future economy.

a) Make GPAs invisible

This is not a suggestion to eliminate the GPA. GPAs which are invisible still allow students to be sorted according with their performance. Having visible GPAs have the effect of making our industries apply for shortcuts in their hiring practices. If GPAs are invisible, companies will have to make a decision by visual inspection of grades followed by an evaluation of CCAs. This way students are not reduced to a single number.

Elites may hate this idea but 20 years ago, we never a GPA and the industry did fine.

b) Have only two degree classifications Pass and Merit Scholar.

After making GPAs invisible, it is better to simply identify the top 10% cohort and give them some sort of Merit rating. Students can spend their time pursuing what interests them instead of trying to get a better honors classification.

This is definitely better than just treating us like grades of Kobe beef. The Harvard Business School MBA gives out a pass or a Baker Scholar designation, so once again this is not something new.

c) Give students the option of converting subjects to a pass/fail grade.

This is a pet peeve of mine because I think I just ruined my degree classification picking subjects which add value to my investing skills.

Students, when choosing electives, we are faced with a difficult choice when deciding which electives to pursue. Many students are forced to choose subjects which promise a fair grade or less work to maintain good GPA. This creates a perverse incentive to focus on their strengths. An economics H3 student will feel pressured to take an economics and law module because he gets to stick to his comfort zone. Conversely, if you choose subjects which are taught by great lecturer who have a rigorous approach to their curriculum, you can be penalised even though objectively you would have learnt more during the semester. Lecturers who wish to remain popular may also start to inflate the grades they give out or make the curriculum lighter to maintain their course's relevance.

One good workaround is to always allow students the option to waive away grading requirements for perhaps just two electives in their degree program. This way, students are safe to take up subjects like "Quantum mechanics, general relativity and the Law" without impacting their GPA. The beneficiaries of this approach is very likely the Computer Science courses where there are high-risk classes on writing new apps which could mean an A+ or an F grade.

d) Allow groups of any size in group work.

Group work is a bugbear for many of us because they have a serious impact on grades.

Local students do not discriminate or hate foreign students. They avoid them because foreign students do not come from a perverse culture where GPA determines the fate of your entire life and will not put in what local students perceive as a fair share in group presentations. The other issue is that there are students who are so objectively bad that no one will form a group with them.

It is manifestly unfair to force students to take them in because it penalises their grades as well.

One solution is to simply allow groups of variable sizes with a limit of perhaps 8 students. Students know how to sort themselves out and form groups which optimise their capabilities and that grades should account for the number of people chosen in a team.

This way, the untouchable student can work alone and be graded fairly.

Collectively, my suggestions will not make students innovative overnight, but it certainly removes the impediments which allow students to take a chance and expand their horizons. It would also certainly reduce the odds of the University experience scarring exchange students so badly, they put up a B grade essay in condemnation to our approach which has so far, made us one of the largest GDP per capita nations in the world.

Thursday, February 16, 2017

Equity Management #2 : What strategies are the real deal when investing in stocks ?

[ This article is based on Chapter 3 of Equity Management by Jacobs and Levy ]

It is not easy to tell who is the real deal when they about investing in equities and who is merely making up a story on a good investment strategy ?

The really smart quants have a decent answer : Disentanglement.

When we say that a low P/E strategy produces returns which are above average compared to the rest of the markets, this concept of P/E is entangled with many other value measures. If lower P/E stocks also tend to be smaller companies, then it may well be said that the outperformance was attributed to smaller companies rather than the low P/E strategy itself.

Do deal with this problem,  the quants will employ a mathematical process to disentangle P/E from the effect of small companies. One possible approach would be to divide companies into buckets of differing market capitalisation and then choose the low P/E stocks from each bucket to see how they perform rather than just buying the lowest P/E stocks from the market.

The results of disentanglement enables us to answer who is the real deal when they talk about equity investing.

Based on market data, only a few strategies work after disentanglement.

a) Low P/E : Generally speaking investing in low P/E stocks tend to work.
b) Small size : Smaller sized companies tend to do well.
c) Sales/Price : Higher sales to price seems to work as well.
d) Analyst Estimates tend to be useful within one month from publication.
e) Residual Reversal

Residual reversal deserves some additional mention. To employ this strategy, look at stocks over the past month and buy the stock which has declined the most and sell the counters which gained the most. It seems that this strategy is fairly effective as well but I have yet to back test this on Bloomberg. Executing this strategy seems cheap and easy as you only need a copy of Share Investor magazine to get the job done.

The above information gives hints to investors who wish to build  starting screen to pick the best stock to buy in the market.

What does this mean for yield investors like myself who find that our favourite strategy show little promise after the process of disentanglement ? The first thing to note is that such studies are done in the US where dividends taxation is high compared to capital gains tax.

Beyond this, yield strategies may still outperform because they also employ low P/E stock counters. If a company has a payout ratio within 100% and yields 8%, you are effectively capping your P/E to less than 12.5.

At the end of the day, intermediate income investors need to get off their high horse and see dividend payments as part of lifestyle design rather than a direct attempt to outsmart the markets. They are, in effect, making the extra returns from low P/E counters.

Tuesday, February 14, 2017

Valentine's Day : A Celebration of the Ordinary and of Loneliness.

This Valentine's Day is a good one for internal reflection.

I had morning classes and had front seat rows to observe LLB Law students celebrate the event and was unsurprisingly underwhelmed. A few classmates for cookies and flowers but otherwise VD was a sombre affair in law school. This is not particularly different from engineering school, which is the modern functional equivalent of a monastery on campuses Singapore wide.  This week, law students are too busy preparing for mid-terms this week and many of my classmates have bigger problems on their minds like getting a training contract and coping with the downturn in the sector.

As for myself, my Valentine's day plans got torpedoed by my daughter who insisted that every romantic meal between mum and dad must be eaten at McDonalds. Me and my wife ended up eating burgers with each other on Valentine's Day. We did not even managed to eat the cheese cake my daughter chose from the neighbourhood confectionary because she fell asleep once she got home.

When you look back in your 40s, you will realise that VD is not so much a celebration of love and soppiness as presented but that of ordinariness and sometimes loneliness for most of us. Most couples date for only a couple of years before they get married and have kids. If you give about 5-8 years of formal VD celebrations, that's less than 15% of a person's lifespan.  The bulk of Valentine's Day is actually about living an ordinary life and the rest of it is about loneliness.

For many singles, VD is a day to hide from social media. Without knowing that they are in fact a majority online, it must be quite harrowing to see so much pink on Facebook. If you combine Valentine's Day with the effect of dating advice from gurus, books on relationships, old bulletin board systems like where I used to do most of my trolling before I discovered the importance of money, it is all about loneliness and whether it is better to cope with it or fight it aggressively.

Once you are a single who has figured out that Valentine's Day is all about loneliness, then half the battle is won. Mark Manson writes a hugely popular blog and has a great book called The Subtle Art of Not Giving A Fuck. 

Amongst the singles and the love-lorn, there is a distinction between even singles who cope with loneliness on a daily basis.

If you look at my LLB classmates, they don't give a flying fuck about Valentine's Day or loneliness for that matter, they give a huge fuck about the bigger goal of building a long term professional career.

We may have to distinguish my classmates from singles who don't give a fuck about loneliness but have yet to find something greater to give a fuck to. That's still easy to achieve. This blog suggests financial independence.

And then there are those who do give a fuck about VD, refuse to admit it, and then decide to take cover from all that soppiness online, but then tell everyone they don't give a fuck about VD. These guys have to accept that Valentine's Day is recurring (like herpes ) and comes every year. As a general principal, loneliness will not leave you alone if you give it any fucks in your daily life.

The folks who reflect upon themselves and decide that thy do give a fuck about loneliness can take this day as a day to start acting as if they give a fuck.

This is a good state to be in because it opens a person up to examine their flaws and how they can make themselves a better person to deal with that loneliness.

Sunday, February 12, 2017

Quick Personal Update : End of CNY

Just like that CNY is over. I am hunkering down for a week of 3 mid-term exams and my blogging will slow over the next few days.

a) Personal Finances

It has been quite good for the past few weeks for income investors. We should be expecting juicy pay-offs at the end of this month and, in spite of every negative thing that has been said about Trump, his approach towards the fiduciary rule and Dodd Frank is creating some sort of rally in the markets. At the rate the rate things are going, I might actually be ahead compared to my last day of paid employment with law school with three years of expenses hardly making a dent to my total capital size.

( This is mainly because I have managed to sock away some small dividends reinvestments over the past three years. )

Some months ago,  some friend asked me why I supported Trump because his election would hurt me financially the most because he is anti-globalization. My reply is that we don't really know what Trump means for the financial markets. It takes quite a lot to be able to predict what an incoming US President can do for a 40 plus stock Singapore portfolio.

At that time, I argued that in spite of my own personal wishes, Trump might not even be elected. Even if elected, checks and balances may stop him from executing his priorities, Even if Trump gets his way, the effect on my financial portfolio is unknown. We don't even know how long he can remain elected and the length of my investment horizon might not make the election consequential at all.

Right now, the financial markets have vindicated all my investment choices so far and we are winning BIG.

Bigger if you consider that I was never very bullish on Telcos in the first place and they are not doing all that hot recently. I don't even have an objective reason to hate Telcos, I just think that every conventional yield investor will turn to them for help which makes them really unattractive as yield instruments.

But I should remind myself that a market can reverse itself rather suddenly.

Somewhat disappointing is that I liquidated my Ethereum holdings at a negligible profit to create some liquidity for the Chinese New Year only to see it go up slightly. Perhaps I can get back in later before April.

b) Law School

I am prepared for the worse this semester because I was teetering around 3.4 GPA and have a decent chance of losing a good cum laude classification. Apparently I took up some really hardcore subjects this semester because I wanted to pick up skills in M&A and Insolvency because the material may improve my investing skills. While grading for these classes are harsh, the material was taught quite well and I was enjoying the practical aspects of it.

My only consolidation is that now I already have a foot in the door for a firm and grades will matter less after some years of practice.


c) Books I am reading

There are too many good options when it comes to my extra-curricular readings. I was shifting between two really powerful books.

The Subtle Art of Not Giving a F*ck by Mark Manson is something I will definitely blog about because it presents a lot of basic self-help ideas in a harsh tone which I really like !

The other book being Algorithms to Live By by Brian Christian which is a harder read but has really nifty ideas to apply algorithms to live normal productive lives.

Of course, the report by the Committee of the Future Economy is now a big distraction in the news. I feel an obligation to go through the 170+ page report and figure out what this means for readers.

Unfortunately, I only have so much spare time.

Anyway, so far the Year of the Rooster has been a good one.

Tuesday, February 07, 2017

Equity Management #1 : Ten investment insights which matter

I thought I should look for a more advanced book after reviewing Tim Feriss' Tools for Titans and have settle on Jacobs and Levy's Equity Management which I doubt anyone would read because it is quite an advanced guide and looks like a huge brick. The way I'm going to cover this book is going to be slower, with about one article a week.

This book is, upon inspection, quite difficult to understand but still considered way easier than Benjamin Graham's Security Analysis.

Today I am just going to give everyone a snippet of Chapter 1 which is entitled Ten Investment Insights which matter. 

I will try to summarise each insight into a sentence for a start :

a) The Stock Market is a complex system - The stock market is essentially random but it has a web of return regularities in the form of market anomalies so it cannot be characterised simply as a random or predictable system at all.

b) Market complexity can be exploited with a rich multidimensional model - The more predictors you build to forecast returns, the bigger your informational advantage.

c) Return-predictor relationships should be disentangled - Low P/E needs to be disentangled from the small firm effect because most low P/E firms are small companies.

d) An investment firm should abide by the law of one alpha - Your value strategy may buy a stock which your momentum strategy wants to short. 

e) The investment process should be dynamic and transparent - Tight risk control is bad for returns.

f) Customised, integrated process preserves insights - When you try to optimise your portfolio, don't forget to include costs in your model.

g) Integrated long-short optimization can provide enhanced returns and risk control for market neutral and 130-30 portfolios - Nobody in the financial blogosphere pairs their long positions with a short position to capture alphas. One of us should try this one day.

h) Alpha from security selection can be transported to any class - Basically it means that if your long-short positions generate alpha returns, they can be paired with a long position in the permanent portfolio for a boost to your returns.

i) Portfolio optimization should take into account an investor's aversion to leverage - The CFA program uses the mean-variance optimization to control leverage. This is not cool anymore.

j) Beware of risk-shiifting, free lunches and irrational markets - Mostly about LTCM.

As you can see, this is fairly complicated box and targetted at professionals.

Let's see where this journey over 39 chapters will take us. 

Saturday, February 04, 2017

Chinese New Year as Life Audit.

Today is the 7th day of Chinese New Year and I would to talk about family visits between relatives.

Exchanging notes with my younger classmates, the culture of probing relatives who ask about school performance and marital status is currently alive and well in Chinese New Year and it has created a considerable amount of angst amongst Singaporean Chinese, particularly unmarried women. The psychic damage from the pressure to find a boyfriend has created a new market for paid actors to play the role of a boyfriend.

The views about this aspect of Chinese New Year also varies amongst some of my classmates. My classmates, especially those who perform rather well academically, argue persuasively that this culture is the reason why Singapore is world-class, the system elevates the successful and shames the people who do not conform to what a Chinese family would consider a success.  My classmates who came from foreign universities think that people should simply ignore the custom completely and just get on with their lives.

I believe that there is a balanced approach towards Chinese New Year.

Therefore, I am suggesting that people simply treat Chinese New Year as a Life Audit.

It might be useful to simply reframe the nosy relatives who come into your home are basically auditors that you willingly invite to probe for areas of improvement in your lives.

For a start, you might not do that well in an audit when you are younger, prior to entering a top-5 JC, I was just an ordinary student in a government school. Well-meaning uncles will enquire about my schoolwork and even criticise some of my career choices and aspirations.

After I turned my life around in University, questions on academics stopped and was replaced with questions on my dating status. The questions then moved from marriage to children and subsequently, and rather unreasonably, to male children.

Appearing in the Straits Times was a great way of getting the auditors off my back for a year or two. But there was a gap between me quitting my job and living on my investments and getting accepted into law school, then sensing an weakness, the auditors wanted to enquire more on whether I can cope with the fast paced tech industry.  Entering law school at 40 invited more curiosity and I knew that people are not so willing to probe you once you get to this stage.

Overall, this year was a relative good year.

My mum told me that some relatives are making enquiries and showing some concern on the sluggish legal sector. Fortunately, I scored a small internship after close to a three year struggle. I doubt I will "spared" if I had to rejoin the IT sector. And there will be queries on my HbA1c readings which is my only weakness this entire year. Otherwise, it was pretty good when I uploaded a picture of my family with parents, kids and all to a family Whatsapp group and was rewarded with almost complete "radio" silence.

We passed audit !

Of course, as human beings, not everyone will make it in a Life Audit.

Particularly severe outcomes can arise if somebody does not conform to heterosexual norms, gets a divorce, commits adultery, becomes bankrupt, goes to jail or has a child out of wedlock. Less severe audit results can come from a stint in ITE or making less than $3770 a month ( median income in 2014 ).

In anticipation of a nasty audit outcome, a lot of young people just leave the country to avoid probing relatives.

Reframing the entire exercise as a Life Audit creates a balanced outcome.

For me, if an auditor shows up, I talk and engage them pleasantly, I don't hide. I make sure that there is a paper trail ( a healthy baby boy is particular good in this regard ) and evidence of the successes over the past year.

No one escapes an audit without at least some areas of improvement and they might well be areas you may wish to look into. In some cases where the findings have high severity, you have to decide whether corrective action is even possible.

At the end of the day, there is a fundamental difference between a CNY audit and a compliance audit. IN CNY, life audits are bilateral. 

If an auditor goes to far, do have some probing questions of your own.

You are an auditor too !

Tuesday, January 31, 2017

Channel 8 Rant : Why be a Good man when you can be a Great man !

A Happy New Year to all the readers of this blog.

I've been silent this new year prior to writing this article because I don't really have any mind-blowing content today having initially wanted to talk about elitism, hubris and exclusivity of law schools but that's only useful for a small segment of my readership and not really consistent with the festive mood this week.

And then, a couple of minutes ago, a good friend sent me this link to this awesome rant about being a Good Man in Singapore.

You can follow it here.

I must say that Ch 8 programming will be quite good if it can channel the frustrations of the Singapore heartlander. So let's hope that Mediacorp keeps up the good work !

This link has Ch 8 actor Jeremy Chan talking about what it takes to be a good man in Singapore. Upon reflection, Jeremy Chan comes to the conclusion that life is too short and meaningless to be a good man in Singapore.

I think Jeremy Chan's character is, by design,  too smart for his own good.

I'm going to offer an alternative for readers and propose the path of the "Great Man". Someone who can lead a superior life compared a Good man. If Friedrich Nietzche has his Ubermensch, at least readers of this blog has the idea of a Great Man which is derived from Jeremy Chan's idea of a Good man.

a) A Great Man makes $3,300 as a graduate and that's not counting overtime.

In the video clip, Jeremy claims that a good degree produces a salary of $3,000. The actual number is around $3,300 based on actual statistics of local graduates, this $300 difference can be critical when we look at the savings component later on.

b) A Great man minimises his non-discretionary expenses because they do not define him as a person.

The video does not accurately portray the spending of a great man who actively optimises his expenses. While it is correct that Great man eats at hawker centres or food courts and spends about $6-$7 a meal, transport can be capped at $120 using a transport concession pass for adults so that's at least another $180 of savings every month.

c) A Great Man saves his increments, bonuses and overtime.

Jeremy Chan's character then misses two important components of salary of a man in his 20s and 30s. Firstly, that some graduates do get overtime pay (more if some young worker actually gives tuition on weekends ). Secondly, a graduate gets bonuses. And thirdly, a graduate worth his salt can get 8-12% increments for at least the first 5 years of his working life.

With these three components, a Great man can learn a thing or two from the Budget babe who can achieve $30,000 savings perhaps during the second year of work.

d) A Great Man can invest his savings creating wealth which snow balls.

I keep harping about $300,000 portfolio yielding 8%, but suppose this Great Man invests it in equities, he can expect about 8.5% on average over the long term, this means that the following year, his investments can further defray $2550 of his expenses. If he spends $1,500 per month, this will defray close to 15% of his annual expenses the following year, which let's him save even more money after that.

e) A Great Man constantly upgrades himself.

Between doing overtime and giving tuition, the great man will eventually realise that his skills are really fading fast even as he is gainfully employed sometime in Year 5. There will be opportunities to find jobs which pay a huge premium for someone with the right skills. A Great Man will then making tactical moves to obtain these skills which will be a lot cheaper to achieve these days than during my time. These days, the government gives $500 Skills Future credits and Coursera and Udacity has drastically lowered the bar for anyone wishing to obtain new and marketable tech skills.

For me during the bad old days, there were the CFA and MSCE IT certifications but these days it can be the Data Science Specialisation from John Hopkins or the highly marketable INSEAD MBA.

f) The Great Man pushes family formation and dating all the way to the back of the queue.

Between managing a career, moonlighting, and upgrading skills constantly, something has to give because the Great Man is not a Superman.

What the great man gives up is early family formation and dating.

The optimal approach to dating has always been the solution to the secretary problem developed by computer scientists. If the Great Man gives himself 15 years to settle down starting from age 25, he does not have to commit seriously to a relationship until he is 31 (1/e or 37% of his 15 years duration).

g) What does the Great Man do to entertain himself ?

Does all work and no play makes the Great Man a dull boy ?

Here's the politically incorrect nub of the issue - for fun, the Great Man does exactly the same thing as any other men. When social scientists studied unemployed men without degree qualifications, 18-30 hours of computer gaming a week leads to a life of unusually high personal satisfaction. There is nothing preventing a Great Man from doing what simply works to keep himself entertained.

Just resist the temptation of buying virtual goods.

The only difference is that a Great Man should hang out with other Great men and never game while upgrading priorities have yet been met.

h) So what is not guaranteed when you do become a Great Man ?

Carrie Wong is not a guaranteed reward for a Great Man.

You might need to become a Ridiculously Unreasonable and Successful Man for that.

Explaining how to become one is the job for a different kind of blogger.