Thursday, May 29, 2014

The root cause of social stratification is ** drum-roll ** Singapore women !

Like every parent, I want my daughter to be happy. Unlike some folks in Singapore, I think my daughter will grow up with a judgement criteria which would be very different than if I were to have a son. A woman is ultimately less lauded for her financial success, but more on a holistic set of criteria which includes the formation of a happy family.

The agreement with my wife is that we'll let Clio decide what she's good at and pursue it without putting too much pressure on her. I see myself as a parent who will invest a lot less in tuition and enrichment activities. My daughter will have to tell me what she wants to do before I will invest in that activity. No attempt will be made to extrinsically motivate her, she has to demonstrate interest and passion on her own....

...but within limits.

As traditionalists, me and my wife want my only daughter to marry well. This makes the situation challenging because she first has to marry, but she also has to marry a great guy. Another words,  I can't choose my daughter, but me and my missus will damn well choose our son-in-law. We'd rather she remain single than to marry a flaky jerk. ( The worse combination possible is a disagreeable guy who is not conscientious - and the world is full of such assholes. They need to be spayed)

Now, my daughter is likely to get into a viciously brutal mating market in about 25 years time. I predict that a lot of guys will then be wired to some virtual sex-fantasy world and only a few would emerge from this virtual reality to settle down with someone. The one place where there's going to be some guys who have been filtered based on conscientiousness and economic power are places of higher learning - local universities or top foreign universities.

Let's face it. Top universities will remain temples of conscientiousness and openness to new experiences. Application for a seat will require years of study and passing will require nights doing tutorials and tuning out distractions like console games, etc....

So our current education system has a secondary role of elevating conscientious guys to be picked up by eligible bachelorettes.

Now, here's the deal.

Statistics also show that the way people mate are changing.

In the past, we expect the best looking women to be paired with the highest earning men. Now, the new numbers point to men and women pairing with each other based on similar educational backgrounds. This is called assortative mating.

So the whole world has decided to become more like a Heather Chua fantasy. University graduates marry graduates. A-Grader marry A-Grader, B-Grader marry B-Grader, etc... Marrying outside your education qualifications will become increasing rarer.

So every parent concerned about their daughter's marriage prospects can no longer ignore her educational prospects. The best bet for me to get an awesome son in law, is to put my daughter in an institution of higher learning, a top university gives her the best chances of success.

So we're back to square one.

Parents will wage against each other to put their kids in the best schools. Yes, even those who do not care for academic performance will have to take it seriously if they want to maximize their children's happiness.

Now what is the combined effect of mating within the same educational background ?

Kids will have a pair of parents of similar qualifications.

In Steven Levitt's Think like a Freak, it was proposed that educational outcomes are determined largely by the home environment rather than the school environment. Kid's academic performance is largely determined by the environment created by the parents. Making matters worse, in my previous post, I proposed that conscientious is genetic. Kids inherit their parent's conscientiousness which determines their grit, determination and ability to delay gratification - traits required for scholastic achievement.

Therefore, it is better parents, and not better schools, that create better academic outcomes for children. 

If you accept this conclusion, then social strata will form as better parents generate more genetic and financial advantages for their children. A-grade, B-grade and C-grade families will start to form in Singapore society. We will become a caste system.

This ultimately leads to the title of the article.

If mating trends lead to social stratification, then rightfully it is the choosier gender which is the root cause of this phenomenon. In evolutionary psychology,we know that mammalian women have to be choosier than men as they invest more parental effort in their children. Ergo, Singapore women are the root cause of social stratification !

But my reason for writing this article is not to troll Singapore women ( my daughter will grow up to be one. )

The current political trend in Singapore is to talk about social stratification is being caused by the educational system.

I humbly disagree.

I propose that it's better to look at the root cause and examine the structure of the Singapore family, what happens when undergrads ask each other out on a date, and how couples are being formed in various campuses. Kids spend only 1/3 of their time in school but 2/3 of their time at home. Parents play a a big role in academic outcomes.

This leads to shift I propose in the political discussion. Stop looking at class sizes and teacher qualifications which can hurt the tax payer. Stop talking about dismantling the RI brand ( I got good buddies from RI, they are erudite, not elitist ! ). It's a grave mistake to take out RI, parents will invent a new RI in it's place and if the private sector takes over elite education, we'll have worse inequality !

I propose two ideas which we can refine together :

a) Conduct social events between students of different institutions to meet each other.

Heather Chua would be flabbergasted if the next Mobile Apps Development contest pairs RGS students with ITE guys in pair-programming teams ! Universities and polytechnics and have joint Jam and Hops - bright lights, techno music and alcohol... best way to have more couplings.

b) Inheritance tax for rich families which have less than 3 kids.

I call this the Phantom Child taxation. Beyond $2 million Singapore dollars, inheritance taxation will be 66% if the dead family member has one child, 33% if he has 2 kids, and tax-free if he has at least 3 kids. Rich families can adopt kids from poor families to avoid the Phantom Child Tax. This either forces wealth to be spread across generations and places the burden on breeding to the Elites, which I think is cool because they'll be too busy breast-feeding their babies than to plan their next en-bloc sale.


Wednesday, May 28, 2014

The Obligatory CPF post.

I'm really upset with Roy Ngerng.

We could spend time have a constructive discussion about creating a career path for Poly and ITE students in the public sector, but instead, the entire discussion bandwidth was hijacked by everyone trying to say something about the CPF program.

So to just go with the flow, here are some of my thoughts on the system.

Before I raise my points on CPF, I need to qualify myself - If my CPF is  returned to me, my financial position would become much stronger. I have the willingness and capability to take bigger financial risks so I can achieve better returns. On my last calculation, a return of my funds would allow me to reach 5 digits a month in dividend income - more than enough to achieve my legal and start-up ambitions.

I would like to argue in this post that Singapore is better off having a CPF program.

a) Arguments need to account for the matching from tax payers.

There is a ridiculous argument that simply because the government can invest our CPF and achieve double digit returns, they can afford to do better  than the 2.5% in CPF-OA and 4% in CPF-SA. Assuming this were even true, these folks forget that the government matches your contribution when you make your monthly income deduction, this goes beyond the 2.5% and 4% returns and is a substantial transfer of taxpayer funds to Singapore workers.

[ All : A friend just told me that this argument is invalid. CPF matching is solely done by employers. I'm keeping this around for you guys to appreciating that blogging in anger does not lead to great argument ! ]

This matching is substantial, how many Singaporeans can claim to more financial assets than their CPF account ?

b) Public goods cost money too.

At the end of the day, what is even wrong with the government making an investment profit on your CPF?

I acknowledge that this argument is unique as it holds only in very few countries. Our government is relatively good at investing taxpayer money relative to the average citizen.

Some things just can't be handled well by the private sector, military and civil defense, maintenance of the courts to protect your property rights, construction of roads and schools. Excess in investment may not flow into your CPF account, but to stay in power, governments will have to maintain your infrastructure and invest these funds well. This means giving soldiers and firemen a decent livelihood.

Our government has enough for a surplus almost every year, so this means that we're not leaving a pile of debts for our kids.

c) You sacrifice your freedom to use CPF to gain the freedom of not being burdened by the  stupidity of others.

Another argument is that the CPF is your money, you want the right to use it anyway you want. For me, that would be awesome, I will buy more income generating assets. For some uncle, it would be even more awesome - more money to buy cigarettes, call chicken and drink more beer. Problem arises when uncle call chicken too many times, get HIV and can't pay his medical bills, then you, the tax-payer, will bear the burden.

So we don't live in an ideal world. People will call chicken and buy Toto with their spare cash, they will not plan for the future and they will inflict a cost on all taxpayers. Your taxes and GST will rise proportionately to the number of folks who will make the decision to let themselves go and have too much fun.

The burden to the taxpayer is non-trivial. Social workers need to be hired to provide help to those who drop out of the system. These social workers need to be managed - more scholars ! Call centers need to be set up. You have to pay for an entire agency to make things happen. Someone has to foot the bill. The result of this is government gets bigger, require more funds to maintain, our children become burdened by our excesses !

So for lack of a better term, CPF is protection money. Tax payers participate and give up some freedom. In return, they are protected from the flakes and losers that, unfortunately, exist in all societies. The damage these flakes inflict upon themselves is taken from their CPF first before you even get taxed ! ( How cool a system is that ? The assholes end up screwing themselves first before they get to screw you ! )

Now that being said, I do have some pet peeves with CPF - it's a system that can be fine-tuned :

a) Why separate contribution from monthly income and bonus ?

This rule baffles me, why not just allow CPF contributions to take place for $90,000 a year and not separate the bonus and monthly income pools ? An Accenture consultant who has a 12 month salary scheme contributes less than a public servant who has a 15 month scheme even though they may have the same income.

b) Do we really need a savings plan for home ownership ?

We can definitely rethink this sacred cow that Singaporeans must own their homes. In effect, we are forcing Singaporeans to save for home ownership except that with a 99-year lease, we don't really own our HDBs homes anyway. The CPF can potentially shrink if we decide to slay this sacred cow. I can definitely imagine myself buying a portfolio of stocks and REITs and using my dividends to pay my rent. I will enjoy the greater mobility and shift my family nearer to my daughter's school if I can afford to do so. I can also rent out a home in AMK to a more dynamic yuppie couple when I get older and rent a Semi-D in a rural area.

People who reach different stages in their lives may be better off living in different areas. Decoupling ownership with domicile may be good for Singaporeans.

c) Exposing Singaporeans to more market forces can make them tougher.

Singaporeans tend to be a little naive compared to Hong Kongers when it comes to investing. Yes, allowing folks to invest more of their CPF will result in more losses for many, but investing is a game where tuition fees would sometimes need to be paid. I thinking raising the CPF-IS to 50% will allow us to have more skin in the game. Having more citizens exercise their rights as capitalists will also make them more sympathetic to the efforts of the Government to manage their funds well.

It will also arrest the falling liquidity in the local stock market.

In conclusion, I think that many issues merit a more urgent debate than the CPF program. The CPF program can be improved, but it is generally sound and has served us for many years. It's purpose is not just to give us retirement income, a home or a means to send our kids to the University, it also protects us from the behavior of stupid and in incompetent people by limiting the economic burden they place on all tax payers.

Of course the intent of  this article is not to let the Government off the hook.

A good citizen should always challenge the investment choices made by the custodians of tax payer money. eg. Perhaps more money can be channeled to better Poly and ITE apprenticeship programs instead of building a new University. These are all worthy points of discussion which and can be done without committing libel against anyone.

Anotherwords, many political issues are actually investment problems in disguise.

Thursday, May 22, 2014

Choose Yourself !

It started with my conclusion that conscientiousness is largely determined genetically so the following conversation started with the maxim that a man would need to choose a wife properly. If anything, a flaky wife, if Minister Mentor might be correct, will give you flaky kids.

I took the conversation one step further and proposed that instead of finding a better wife, why not choose a better self !

This idea seems absurd at first - my friends protest that they can't choose which family to be born to. In my opinion, I do not think that it is much more absurd than following the maxim to choose a wife properly. At the end of the day, women are choosier creatures than men. Before you can choose someone to become your wife, she probably already has an idea of why you would not make husband material.

So to all the man-children out there, good luck with a second date !

I think there is merit in the idea of "Choosing a better self" rather than "Choosing a better wife."

Let me try to construct a working action plan to accompany this philosophical idea with two other big ideas from economics and psychology :

a) Capital in the 21st Century say that (r >g)

In this reality/dimension, the return on investment will always exceed GDP growth. Folks who accumulate wealth will always grow richer than folks who rely solely on their earned income. This is a fundamental reason for wealth inequality.

b) Our willpower is a finite resource and can be depleted

Psychological tests show that people who strain themselves mentally will have trouble resisting later. Very much like Diablo III, your Willpower is like your Mana, Fury or Wrath - it is a resource that can be depleted every-time you are made to exercise it. Make a diabetic do two programming assignments, and he will succumb to a Magnum moments later.

If you can accept the previous two points, you should be able to accept some of my conclusions :

a) You need to allocate your Willpower or attention properly as it is a scarce resource

To choose yourself, you will need to decide what you want to focus on. People who like money can focus on tasks which make money. People who want happiness will have to choose concerns which make them happy. Conscientiousness may determine the amount of Willpower you have, but allocating it well to activities and hobbies which promote your personal agenda belongs to the province of personal wisdom and common sense. Have too many sports and hobbies and you will find that you will do badly in many of them. Have one or two interests and you will be able to cultivate depth even if you might not be endowed with a lot of conscientiousness or Willpower.

b) If you want money than you overwhelmingly need to grow financial capital

How do you allocate your Willpower if you want to maximize your wealth ? If (r>g), an ordinary employee will find that their salaries will approximate GDP growth or g over the long term, but if he can start to own financial assets in his early twenties, his wealth will grow at a rate of r which is larger than g.

The action is plan is thus, as simple as Ohm's Law.

If you work in an MNC and see your colleagues get 10-15% increments every year, then spending time at work and putting effort to be a good employee makes sense ( Your personal g > r ). In such a case, the MBAs which focus on management and administration are logical areas to focus your effort. You can also go karaoke with your bosses and colleagues as there is a positive long term impact in your wealth generation.

However if you work in a place where a 5% increment is an event which should be celebrated or are sufficiently senior in your job role where your increments match GDP growth, then an MBA to improve your productivity is not as good an investment as the CFA which will teach you about managing wealth. Similarly for your hobbies, you can now stop brown-nosing your bosses and instead spend your evenings reading financial blogs. Your money is coming from your financial wealth instead of paid labor.

If you work in an industry which is facing decline and see your pay getting lower for each contract renewal, then transcend money and and focus on your personal happiness. Spend as little time at work and think about what makes you happy and fulfilled. Be gen-Y, go for work-life balance.  This is not a trivial exercise because if you have done well, you would have no regrets on your deathbed unlike other people. There's even a qualification you can get for that called an MFA. For some, this option is best choice.

So to end, let me talk about my experiences playing Diablo III.

I play a Lvl 70 Crusader with 45 paragon points, I joined a friend who has a  Lvl 70 Witchdoctor with 150+ paragon points and decked from head to toe in legendary items. I barely struggle at Torment 1 and my friend is slowly getting comfortable at Torment 4. I undertook took one quest and got slaughtered by a pygmy in a Nephilim Quest.

It was an eminently humbling experience to party with people with better loot and better stats.

I think it's a teachable moment for real life. In that sense the Witchdoctor chose himself, he went on quests with other supremely Uber Diablo characters, accumulated paragon points, looted more gold and had more legendary drops.

Similarly in real life, some folks struggle like my Crusader in Torment 1, always working too hard for too little. Others are cruising Torment 4 like my friend's Witchdoctor, taking up more difficult assignments for bigger and better rewards.

So this is the moral of the story.

Choose yourself better.

Choose the right things to focus on.

This way the better wife will choose you !


Monday, May 19, 2014

How can we intrinsically motivate our kids ?

Some of my friends think I might have some magical powers to answer some of life's most perplexing problems.

Today they asked me a question about how to intrinsically motivate their kids.

While I have neither the qualifications nor the knowledge to answer such a question, I think that it may be interesting to blog about this anyway since many readers may be parents and some of you guys may have gifted kids and can share some of your insights with us.

While I am not a magical shaman who can teach you how to raise your kids or increase your penis size, I have a magical tool called Google and given my amateur interest in psychology, I might be able to get some reasonable answers for kiasu parents.

And my answer, which I will qualify later, is a BIG FAT NO !

I'm going to start with simple reason why you can't intrinsically motivate your kids - The main reason why you can't do it is because if you succeed, then your kid is not motivating himself intrinsically, your kid is being extrinsically motivated. But of course, you don't ask your friendly, neighborhood,  financial blogger to just play word games with you, so here's an answer which is more interesting :

Conscientiousness is largely genetic.

Psychological studies on twins show that conscientiousness, that magical quality that makes kids delay gratification and focus on their studies, is largely based on the genes that are passed onto them from their parents. A sad conclusion from this study is that if you have been a conscientious person yourself, there is a possibility that this can rub off on your kids, but if you are a flake, always late for appointments and sabo-ing your project team, I think a vasectomy might not be a bad idea.

In previous articles, I have alluded to other studies that practicing your willpower will increase your conscientiousness. Science has not determined what kind of exercises these should be to be most effective. You might have to think of designing a life around your kids where they can practice their willpower but I am not too sure how to do that effectively. I do know that conscientious people who do sign up for muscle training and end up being more conscientious with their finances. A lot of enterprising folks have programs for children but I would challenge any provider to document their results scientifically for verification.

Psychological research is not all bad news for parents - One trait which can be affected by environmental factors is Agreeableness. Which means that  raising kids to be competitive, Zerg-rush for early retirement only to get into the gladiatorial arena of law school might not be a terribly workable objective for many parents ( Besides, I would really hate the competition ! ).

It is better to create a loving environment for your kids so that they can become positive people who can make your lives better and happier when you get older.

That is almost the only thing which parents can take credit for.

So have happy kids... Their own ambitions will take care of everything else.

Tuesday, May 13, 2014

Chaos is a Ladder !

The blogger for SG Wealth Builder, Gerald,  has been very kind to mention me again in a book review :

To help supplement his review, I just want to say that I have not read the book The New Retirementality, it's also not very fair for me to claim credit for practicing the 4 pillars mentioned in Gerald's review. I do not know contextually what Vision, Work, Balance or Successful Aging meant from the author's POV, but judging from the dictionary definition, I actually think I practice none of the above !

This is especially so for successful aging, my biggest weakness. As a person who has serious trouble controlling my blood sugar due to my genes, part of the motivation to quit my day job is to see if I can reduce my need for diabetic medication, otherwise I expect most Type II Diabetics to age faster and have a lifespan 15 years shorter than most of you healthy readers. Maybe the right term for me is Accelerated aging - this is something I'm working on aggressively, reducing my food intake and exercising every other day so that I can live to see my daughter get married. ( Penang White Curry mee does not help ! )

But more importantly, I want to share my approach and philosophy towards Balance and Vision.

I don't subscribe to a balanced lifestyle. Never did, never would. I just think that to have audacious goals, you will need to make the right sacrifices. My financial independence could not have been achieved if not for the 4 years where I did the CFA, FRM and CAIA exams while holding a day job and maintaining all my older IT certifications. The key component is while studying I had to put some theories into practice and my dividends investing strategy originated from a Clifford Asness paper on dividend counters having superior growth rates to non-dividends yielding counters in the Financial Analysts Journal ( which you can get as a CFA associate member ). Prior to the article, I was losing from my investments in value stocks and making only a small profit from unit trusts.

Sacrifice is more important than balance. While my peers are travelling or getting distracted by computer games, I was trying to just increase my knowledge in the hopes that I can find a chink in reality's armor that can be exploited - that takes time, effort and, in these days, proficiency in statistics. I doubt very much has changed in my current life as a JD program pre-matriculant. ( I just hope that my ambition does to push me off the edge and I try to to score a CPA and JD simultaneously. ;) )

The last component I want to talk about is Vision. Some people claim I have vision, which I disagree. Instead, I do read  a lot more than other people. My ideas and take on the future is hardly original but it may come from multiple books on history, economics and technology. This is not a deliberate process, all my knowledge just stews in my brain and ideas then start to pop in my mind.

People who like Vision may see Strategy as  deliberate goal setting and then relentlessly attacking the goal by taking aggressive action. This means having a clear idea of what the end-point of their life means and finding ways to make it work - I admire that. I used to take that approach, but it gets tiring as you get older.

Life does not turn out your way all the time : Some people you meet at work will get that promotion that you desire because they deserve it more. The economic situation can change and make that shoe-box unit buy a bad idea.

Change is the only constant in life.

My life strategy these days is more inspired by Petyr Baelish or Tywin Lannister in Game of Thrones.

Petyr Baelish, first made Master of Coin, invested in his network of spies, then created a series of events to bloodlessly capture the Vale of Arryn. Fans who read the book are only guessing what he has planned for Sansa Stark. Tywin Lannister exploited the unravelling of the Stark-Frey alliance to enact the Red Wedding, this is in spite of losing every battle to Robb Stark prior to hatching a plot with the Freys and a the Boltons.

For the folks who read, accumulate capital and network aggressively, you can play by a different set of rules.

Capital creates capital. Perhaps a shift in political situation in Thailand can create a bargain stock in the SGX. Ask yourself how can we exploit a Modi victory in India by making adjustments to your portfolio.

Time is as good as capital. Too much time freed up after leaving the workforce, what if I can invest in gaining legal knowledge to open up new forms of arbitrage involving the prediction of stock price movements on law suit outcomes. Other readers can attempt an MBA. The possibilities are endless.

Life strategy for me today is to sit tight and exploit any situation which arises. Prepare yourself with assets, time and knowledge and some interesting options will unfold itself in time.

After all, chao is a ladder !



Sunday, May 11, 2014

Who should be at the bottom of the barrel ?

Recently there has been a spate of articles criticizing Singapore's brand of meritocracy which has been gaining traction on the Internet. These articles almost always employ the same argument - they either draw an example or create a fictional character who faces many obstacles in life, and then they conclude that there is no way this character can get ahead without some sort of a push from the government or the Singaporean tax payer.

These authors are very conniving, because very often, the argument normally just stops there. The  logic is that basically, that some folks can never make it in Singapore  because not everyone has the same starting point, therefore tax payers are morally obligated to help them throughout their whole journey sometimes to the extent of sacrificing their own personal interest so that "we're all in it together".

Now my position on a meritocratic society is that it is not perfect, society is better served by always seeking to fine-tune the definition on what the meaning of talent is for a system to sustain itself. This is a never-ending process and winners in one generation may be losers in another. So bottom line is that no matter where we are, there will be winners and losers, but unless we take pains to paint a picture on how we want an alternative to look like, it seems to me that the anti-meritocracy camp is just as elitist as the status quo. Do these writers silently wish to create a new order in society where they become one of the privileged in Singapore society today.

What is their real agenda ? I do not know what is the secret agenda of these politically charged articles.

Instead, my post today is to confront the ugly truth by clearly stating who should be at the bottom of the barrel. This is in the hopes that by my admission, I will attempt to provide and answer that is avoided by many of these articles.

We cannot determine a fair pecking in society without coming to a consensus of who should right at the bottom of the pyramid. This is a head-headed process that all of us needs to go through. Someone has to be scrapping at the bottom of the barrel, no matter what happens. We just need to determine philosophically, who are the most appropriate folks to take on these roles.

So in my humble opinion, the stereotypical bottom-scrapper is the Flake.

A flake is a person who is at the bottom of the barrel in terms of the psychological measure of conscientiousness. He lives by the moment, never has a plan for the future. He may not show up on time in most meetings and is a dangerous asset to have in any project team.

Everybody knows who the Flake is, he comes in many names "LJ man", "Jackass". If you think Seth Rogen, the Wayan brothers, Ken Jeong or Johnny Knoxville can convincing play your buddy in a movie, he is a flake.

Flakes cannot be allowed to handle money, they have horrible marriages and drain the medical system as they can't be trusted to look after their own health. They cannot delay gratification and are very prone to addiction. Flakes probably inflict the most damage on their children, who may become subjects of anti-meritocratic articles in the future.

Now suppose, you are with me on this and actually agree that Flakes should be related to the bottom of the league.

Does the Singapore Meritocracy sufficiently address and agree to this division which I have proposed ?

I would say, to large extent, yes. We have a rigorous education which sifts out lazy and unmotivated students. A system of bursaries and scholarships are given to students who have the grit and tenacity to overcome their financial situation. Our baby bonus is a 1-1 matching system after $4,000 and not a pure handout so parents who save will be able to offload more expenses to raise their children.

But even from this point of view, our meritocracy is not perfect. Rich kids can be sent overseas for degrees even if they are useless wastrels. They also inherit 100% of their parent's hard work as there are no inheritance taxes in this country.

So in conclusion, you might be a flake and be offended by this article and disagree with me on who should be a bottom feeder. Come up with a social division of your own and defend it on the Internet. At the very least, by performing this exercise, you have a clearer perspective on what we want our meritocracy to be.

Sunday, May 04, 2014

Law school preparation, Thomas Pinketty and Capital in the 21st Century.

To a few friends who know what I've been plotting scheming for the past year, Law School was known as Plan A. Plan A was the best in a series of post-retirement outcomes after I stop work. It was designed to be high-risk, high-reward ( reward being more social status, not necessarily finance-driven )  and will give me something really intellectually challenging  to do until I am very very old. I was'nt relying on Plan A to succeed and actually took a lot of pains to create three other credible alternatives, all less cool, but certainly would allow me to way richer than if Plan A would take place.

So with Plan A, a problem will be created for my financial portfolio.

Law school costs about $3,000 a month for the first two years. My dividends, which will be needed to pay for my family expenses, will now need to cover my expenses upon moving into my new EC and tuition fees. My condominium payments will be covered for the next 3 years by my CPF account, so that leaves barely $1,500 for my personal expenses and conservancy fees.

Making matters are the financial market movements. Mid-2015 interest rates will start rising, which will negatively impact my condominium loans as well the loans of the REITs I invest in. Making matters worse, industrial REITs will start facing oversupply in my first year of school. Needless to say, I've been tilting my portfolio to dividend yielding stocks slowly for the past year to maintain my current yields.  

This means more than 50% probability of eating into my capital which I have been building for decades, which many push me to take a bet on the legal employment scene in 4 years time ( Which admittedly is still a good bet for legal professionals ) 

Of course, upon graduation, things will get better. With a renewed career, I will have options beyond tech and finance and even an entry-level role will provide adequate diversification for my future portfolio.

I'm sharing this to lead into a simple discussion on Capital in the 21st Century. French economist Thomas Pinketty wrote a fine work which rattled economists so badly that it's hard not to get something on your feed which reviews or criticizes his work. 

It's not easy for a amateur to mount a credible offense on Thomas Pinketty's work, which is a difficult read. I leave the heavy lifting to the academics. I will only talk about a small part of his work.

Thomas Pinketty's basic idea is that in most economies, the rate of return of capital is higher than then GDP growth of a country. ( Expressed in equation r > g ) What this means when expressed on the ground is that the return of REITs and dividend yielding stocks (5-7 %) generally exceeds that of your annual increment or the GDP growth of the Singapore economy which is about 2-3%. This has the effect of making income inequality worse as investors make more money from investments while workers can only have a small increment on an annual basis. 

I am only capable of making a small dent in Thomas Pinketty's argument based on my personal experience. And if I made a mistake in my reasoning, do feel free to correct me here for the benefit of all readers.

Everyday, someone like me applies and gets into Law School. In SIM, a polytechnic graduate may get into a private degree program. Some A-grader parent pumps $2,000 to put their kids into Montessori school thinking that it'll provide an edge in the PSLE exams. If Pinketty is right, then we're all better off cornering plots of industrial property. So why do so many Singaporeans invest their life savings into education ?

The answer is that the value of human capital often trumps financial assets :

Very often -> R_capital > r > g

Sure, GDP grows at 2-3%, but getting into the legal or medical profession gets yourself into a career which has regulatory restrictions, building a moat which makes it hard for other people to join the profession. - As is finding a job where you can dominate a small niche regardless of which profession you belong to (i.e. can you program in JCL for the AS/400 ? ). This can be way better than finding a stock with that mythical investment moat around it.

I think a better way to look at modern society from reading Pinketty is as follows :

Sometimes R_capital > r : In such a case, you go back to school, invest in a qualification like the CFA, build domain knowledge to get a better increment, get your ass back to work. Become a Super-manager. This is often the case when you are younger or in your 20s or 30s. 

Sometimes r > R_capital : In such a case, you start building a portfolio of assets or create a business for yourself. Retool your life to that of a Rentier/Rent-seeker. Generally this happens in your 40s. 

In summary, appealing to the authorities to seek redistribution of wealth is futile as you need to wait for consensus for that to happen. 

You are better off putting in effort to benchmark the value of your human capital versus your financial capital and putting in a scheme to manage these two all-important assets. 

Thursday, May 01, 2014

April Fool Portfolio : May update.

It was not a particularly good month for the April Fool's portfolio. The portfolio was down slightly while the rest of the market went up.

I think for above-average gains to be made, the portfolio would have to be expanded to be as diverse as the portfolio which I back-tested on my Bloomberg machine. That would require that I pony up enough money to buy about 50+ stocks and take on the liquidity risk associated with such counters.

For now, I would keep the portfolio as it is. If the situation does not improve in three months, I will kill this portfolio and move my money to a better investment.

ISIN CODENAMEPRICESHARESTotal ValuePrice PaidOriginal Value
E18ECS Holdings0.64200012800.651300
KI3Hu An Cable0.11000010000.1021020