Tuesday, October 17, 2017

Cutting through the bullshit when assessing investing stories.

I certainly did not like Narrative and Numbers : The Value of Stories in Business by Aswath Damodaran because it takes a while for his framework to sink in and become monetizable for local investors. In fact, upon closer reading,  the book is actually solid evidence that narratives can be quite dangerous for investors as even experts don't have a clue and have to run with multiple assumptions. Nevertheless, Damodaran is open-minded to criticism and a master of his art and possibly the best guy to ask when assessing companies with no credible cash-flow.

Ok...About narratives... why do we read a financial blogger and decide to jump in and support his story?

I am usually quite trigger happy when a story involves dividends but I, too, exhibit a personal bias when I jump into the markets after reading about a good investment. A lot has to do with whether I see the blogger as a person of substance or a bag of hot air. Sometimes I jump in if I like the blogger and do a double-take if I "see him no up". It's not an objective process at all.

I think we can do better in this regard.

Damodaran has a framework that allows us to assess how good a story is. I have tried to create a very rough outline based on his book.

To have a credible investment story, we may need to consider the following elements :

  • Does the story address the total market size of the investment opportunity ?
  • Does the story talk about the market share of the company in question ?
  • Reality check - Revenue can be derived from an assessment of market size and market share. Is it realistic ?
  • Does the story talk about future trends in operating expenses ?
  • Does the story discuss trends in operating margin capital which can be obtained from operating income by revenue ? ( Operating income = Revenue - Operating expenses )
  • Does the story discuss future trends in taxes ? ( Might be less important for local stocks )
  • What are the reinvestment opportunities - Typically the story should have a credible sales to capital ratio which is how much revenue can be generated from $1 of reinvestment. But, accounting-wise,  this is complicated as it involves dividing (change in revenue) to ( capex + working capital ).
  • The entire story will need to be discounted based on the discount rate and probability of failure.
  • Reality check - Do these financial characteristics fit with a company in a particular phase of its growth cycle ?

I thought perhaps this list may be refined to form a checklist that can be used further to "audit" any investment recommendation and assist the investor to ask further questions of the blogger.

For example, a person who is very bullish about Banyan Tree over tourist arrivals may be focused on the market size over the next year. Series of good questions from an investor would be whether Banyan Tree can capture more tourists or market share over the upcoming year and whether the added arrivals would increase their operating expenses ? Otherwise the thesis that profits would increase may not be as strong as what the person claims.

If any financial blogger wants to volunteer to have an article "audited" in a friendly manner, do let me know !!!

Otherwise, I might just "volunteer" someone to test it out !

Saturday, October 14, 2017

The Electric Toothbrush and the Vibrator

Imagine an electric toothbrush.

It is a stick-like object.
It contains a motor.
You stick into a sensitive part of your body.

What other device can you think of that has the same general features ?

A vibrator.

It is also a stick-like object with a motor like component. You also stick it into a sensitive part of your body.

From an engineering perspective, it is possible to invent a device that is both an electric toothbrush and a vibrator at the same time. Components and form factor are very similar.

But we don't think generally about an electric toothbrush being a vibrator at the same time.

In the finance industry, however, people sometimes do not make such distinctions.

ILPs perform the task of protection and investment at the same time.
It is a toothbrush.
It is also a vibrator.

The one of the group of anonymous insurance agents who tried to declare war on the financial blogosphere told a story where he met an MBA and CFA during reservist who was rendered speechless when confronted as to why he felt so strongly that insurance and investment should be treated separately.

What justification do we have to separate investment and protection so vociferously ?

This is a common defence against "buy term and invest the rest" philosophy that clearly makes a distinction between insurance and investing that we tend to support in the financial blogosphere.

The anonymous insurance is unfortunate because he did not meet me during his reservist training.

I will ask him whether he would like to back my project to kickstart an electric toothbrush that can also serve as a functional vibrator.

And then I will ask him to shove it up his arse.

[ This is my first attempt at financial comedy. Other bloggers have been asking me to consider financial stand-by comedy in future talks. ]

Wednesday, October 11, 2017

Efficient inefficient #13 : Managed Futures

Today’s article is about managed futures but this strategy is really about trend following. The result of this strategy is very credible, with Sharpe ratios going as high as 1.8. Bershire Hathaway’s supposed ratio is about 0.76 and my usual backtests struggle to hit 0.6. According to the textbook, a diversified trend following trading strategy can return 19.4% with only a volatility of 10.8%.

My primary interest in this strategy is figuring how I can apply these learnings to the build-up of my momentum-based portfolio which would proceed sometime next year. As it turns out, looking at long term trends lasting about 1 year is optimal with weekly rebalancing taking place, but equities provide the lower returns than fixed income and commodities.

If you believe in market efficiency, it would be hard to accept that you can make money from trends, but the return drivers come from two main sources : 

A) People react too slowly to information

One theory is that people anchor their views to historical data and adjust their views too insufficiently to new information. Another reason is that people tend to sell winners and ride losers for too long. Central banks also exacerbate the process as they focus on reducing exchange rate and interest rate volatility. Also, market friction, prohibitions against short sales do not allow arbitrage to take place instantaneiously.

B) After a time delay, people overreact to information

Once prices move for a while, the bandwagoners start piling onto a stock. People are afflicted with confirmation bias ( Boh Koh Leng ! ) and focus on what they already believe in discarding evidence to the contrary. Investors also add to the problem chasing investments that tend to do well recently which contributes to fund flows.

My leveraged portfolio is only 50% done and it’s already calculated to return about $20,000 a year. A momentum based strategy that adopts some of the best practices by trand following investors will not only provide me decent returns, it is likely to have little correlation with my leveraged or unleveraged yields portfolios.


Monday, October 09, 2017

Manufacturing Outrage in the Financial Blogosphere.

It takes a troll to know when someone is trying to manufacture outrage using the realm of personal finance. Roy Ngerng had a large impact when he spoke about the CPF system even though a lot of reasonable folks wanted to point out that a lot of his arguments were unsound.

Mediacock attempted to so this recently, basically just creating a scenario where if you do the maths, you will become outraged and then proceed to take it out on the PAP or anyone who is perceived as an obstacle to your Singaporean dream. ( Simplest answer when you savings $960 to cover expenses of about $200,000 requires a minimum of 17 years, longer if you factor in CPF contributions. )

Netizens have pointed a lot of issues with this example :

  • Singaporean workers get increments and they tend to be higher in their younger years. Family income settles down to $8,800 a month. 
  • A wedding banquet is normally offset by ang baos. (A 60% offset is reasonable. My ang baos covered around 90%)
  • Photography and Videography is "nice to have".
  • 15% savings rate is a rookie number and really should not be a constraint. Graduate with a job should live like a student and gun for at least 50% savings. 10-15% in American finance books is not contextualised to Singaporeans who live with parents prior to getting married.
But the simplest way to debunk this attempt at outrage is to note that folks without degrees are settling down and doing fine.

For a savvy university graduate couple who can save up to 50% of their income and gain increments of 8% a year, $200,000 can be accumulated within around 5 years. Maybe even 4 years if they pick up some solid investing skills. Of course, very few folks are savvy.

Imagine a different scenario where we exist in a European Socialist welfare system :
  • Maybe 50% of the income of this graduate couple may be taxed to line the pockets of the unemployed Welfare queens.
  • Sluggish economy means that salary increments are almost non-existent and may not even cover inflation.
  • Folks pay rent because it's so hard to be able to afford homes.
  • Welfare economies do not incentivise the development of financial planning know-how.
  • Upside is that families are breaking down so folks cohabit and no longer get married.
Mediacock can try such a math problem and figure out how long it would take to accumulate $200,000 SGD.

I think that's a bigger reason for outrage.

Saturday, October 07, 2017

A Third Class Honours, by any other name...

In today's new NTU has made a decision to re-label the Third Class Honours designation to something more politically correct. The question is whether this will really make a difference to their students or how the industry would view local graduates.

I was in a bad situation myself sometime last year. I was teetering on the brink of losing a cum laude  and started make plans to graduate without a cum laude designation. This was because I was scored bottom in my Civil Procedure and International Moots class. The options do not look good because the industry is going through a tough patch, I have yet to score a training contract, and a 1-1 mapping between NUS and SMU would map a summa cum laude to a 1st class, a magna cum laude to a 2nd Upper and a no-frills cum laude to a 2nd lower even though a cum laude designation within SMU maps to the upper half of a 2nd Upper from NUS. I was also really worried that the older lawyers, many who would not even countenance a second law school in Singapore, would discriminate against us SMU graduates.

The situation was the opposite 18 years ago when I graduated from Engineering. I was in the 1st Class bracket, but in all my job applications, I mentioned that I expected to get a 2nd Upper. In those days, 2nd Upper was a cool grade. Folks were more relaxed about academic achievement with only the government and Anderson Consulting being really interested in paying more to hire top flight engineering graduates. Those days, lying about expecting a 2nd Upper even turned out to be a good move. After I joined P&G for a year when I found out that some of my colleagues take quite a lot pride about rubbishing 1st Class Honours graduates resumes. But the excuses are always that 1st Class Honours graduates may not have developed as a "whole person" and may have sacrificed their extra curricular activities.

These days grades matter. It's not because universities developed funky titles for their best students.
It's because HR departments need it to justify the expense and there are more students vying for those few professional jobs that guarantee a ticket to the middle class. HR department know where you stand on a percentile basis relative to your peers because it take an intern perhaps an hour to generate a table that maps degree classifications to percentile numbers and subsequently to starting salaries. Kids these days just put CGPA on their LinkedIn to erase all doubt about their quality.

Another words, NTU can't outsmart the industry by simply relabelling their product.

I'm also going to burst a couple of bubbles on this blog :

a) The silly idea that your degree classification only matters for your first job.

This is completely untrue from personal experience. If it only matters for one job, no one would regret getting average grades in university, go ask the middle aged uncles my age. In practice, when you submit your resume, you include your job experience AND YOUR GRADES so your interviewer will look at your candidacy IN TOTALITY.

You might have solid grades but if you did your work in a less inspiring setting, grades can save your career. Like my short 1.5 years stint in Government, you might find yourself in a position with no solid contribution to write about in your resume after you leave (Even my 11 months with NTUC netted me one data centre move). In reality, some work is just BAU (Business As Usual) work. You don't get rewarded when things work, but shit really hits the fan when things fail, so if you have done a perfect job, there's nothing to rave about to your interviewer.

Worse, in many cases, the sexier work is just farmed out to the folks with better grades.

In any case, it is highly dishonest to lie about grades or university being unimportant after your first job.

b) The lie that we are moving towards a skill driven society.

This is so dishonest I think we need to install a new hell to folks who are spreading this lie. The move towards a skill based society is not a motherhood statement that is bandied about to make the weak and mediocre feel good about themselves. Degrees contains two sources of value, one comes from skills development and another component comes from signalling.

The signalling value of a degree qualification is quantified by the salary difference between a person who comes from a better university and a person who comes from a less prestigious institution but is equipped with the same skills.

You can shoot your mouth off and say that we're moving to a skills driven society when this salary gap narrows and when employers have decided to pay for skills instead of branded paper qualifications. Until then, Singapore overwhelmingly pays based on the talent and potential of a graduate that is divorced from actual skill-sets picked up from school because MNCs can train their own employees better to give them the skills they need.

In fact, I would even argue that the gap has widened and is widening further because we no longer belong to a society where 20% have degrees and instead are moving to a society where 40% have degrees. Grades will matter even more in a society full of degrees. HR has KPIs to meet as well and don't like to be kept in the dark about what kind of guys they are putting on payroll.

So if local universities really want to make grades matter less, the solution is not relabelling. It's not even better teaching. The solution is to do the politically incorrect thing and limit the number of graduates in Singapore society by limiting their intake. This move must be coupled by a strong apprenticeship system that allows Polytechnic graduates to gain access to the middle class with good jobs that, in turn, allow them to raise families without running away to Australia to get a degree. These polytechnic graduates can then, based on personal circumstances, learn their way towards better jobs through part-time studies.

I think with university graduates being capped at a smaller number, we can have a society where skills matter more !

Thursday, October 05, 2017

Openness to new experiences and regaining cultural capital.

I wanted to write something less hardcore for the blog today.

One of the side effects about reading about entrepreneurship is that you begin to start understanding that some personality traits make much better entrepreneurs. Successful entrepreneurs tend to be more conscientious, open to new experiences, non-neurotic, and extroverted with research actually taking into account actual business results.

Perhaps being open minded to new experiences may have monetary consequences.

For folks like myself who is knee deep into our 40s, we're mostly stuck in the past. Married folks and parents have musical tastes which are stuck in the 1990s and like bands like Radiohead, with Boomers pushed back even further to the era of probably the Beatles or Elvis. For the past two weeks I've been hanging at Wild Market food court and watched as a highly talented but hapless Millenial performer struggle with coming up with a tune for the folks who want "old people music". She eventually settled with Tracy Chapman's Fast Car which in my opinion, failed to make the request.

I don't think there's anyone should be proud of being stuck in the past. Even amongst geeks, there is somehow a generation gap between the folks who follow the latest anime storyline compared to those whose cultural capital is stuck to the 1980s. Cultural capital can be like money sometimes. If you use an old Banana note from the time of the Japanese Occupation, it's the same as being conversational about Evangelion and Macross when the world has moved on to anime One Piece or Attack on Titan. People won't conduct a cultural exchange with you if you just know the cultural artifacts of the 1980s.

Openness to new experiences can also be about brands.  

I discovered the Quechua brand when I started shopping at Decathlon. It definitely does not have the cachet as Nike or Adidas but it does have the virtue of costing me only about $15 for a pair of sandals. The price point was so cheap, I actually decided to ditch my brand loyalty to BATA.

There is a quick way to regain the cultural capital lost when you started a family or started having kids. It will not be easy and requires some effort.

One particular magazine I like that oozes with cultural capital is 1843, a lifestyle publication from the same folks who publish The Economist. What I do is that I take some time to engage with their cultural articles in spite of not having any affinity with it.

I choose music as my primary means of engagement because music relaxes me and I don't really have to turn all the songs I like into an intellectual exercise. You can choose to read some serious fiction or watch some movies.

This week I learnt of a talented new artist called St. Vincent. I even picked up information on an old chinese song called Da Hai by Zhang Yu Sheng which is recently seeing a resurgence due to the death of political dissident Liu Xiao Bo in China. Coincidentally a local artiste Chen Wei Lian has a fantasy cover on this song.

Tuesday, October 03, 2017

Efficiently Inefficient #12 : Global Macro Investing, the Rojak of Investing.

I find Global Macro Investing super confusing because you can't really distinguish the good investors from the bad ones.

The Warren Buffett-level guru for Global Macro is none other than George Soros himself. I attempted to understand his theory reflexivity a third time and have no idea how it can be used for trading my portfolio. It still appears to me that George Soros trades on his own gut-feel but had the time and luxury to create a philosophical framework around it so it seems more intellectual. Global Macro investors strike me as being very intuitive in their approach to money management which is fine so long as it make s money.

Some Global Macro investors make money by carry trades.

This is when you go long on any asset with high interest rates and short any asset with low interest rates. In the 1990s, a lot of boomers used the Australian fixed deposit as a means of getting 6% yields every year. Imagine borrowing Singapore dollars at 3% to invest in Australian dollars at 6% - that's a basic carry trade for you. Global macro investors are not limited to currency carry trades and they can find the equivalent carry trades in equities, bonds or even commodities.

Other Global Macro investors can spend their careers just monitoring and predicting the behaviour of Central Banks so that they can make directional bets on the markets.

What is possibly more useful for readers of this blog are Global Macro investors who trade on economic developments who have a simpler framework to assess what works best when investing in a particular country.

You need to know whether the GDP growth and inflation of a country is strong or weak relative to its historical record before you can apply this framework :

a) Strong Growth + High Inflation = Overheated Economy

In an overheated economy, the central bank may be compelled to raise interest rates so Global Macro investors will sell bonds. Stocks tend to do well at this stage. The US economy right now seems to be overheating.

b) Strong Growth + Low Inflation = Goldilocks economy.

In a goldilocks economy, both stocks and bonds do well but volatility drops which would lower the price of options. I think Singapore is currently in a Goldilocks situation.

c) Slow growth + High Inflation = Stagflation economy

This is a nightmare scenario because stocks do badly because of slow growth and bonds flounder because the central bank may need to raise interest rates to fight inflation. In this kind of economy, Gold and commodities do well. I would venture to guess that Bitcoins would also thrive in situations like this as well.

d) Slow growth + Low Inflation = Lost Decade economy

Japan might still be trying to get out of this rut and if Singapore does not leave a door open for some foreign labour, we will enter this phase and stay there for many years. Only bonds do well in this economy.

If you can chart which stage a country is in you can theoretically invest in a basket of ETFs containing stocks of overheated and Goldilocks, for example.

Sunday, October 01, 2017

Should you rubbish your business diploma from a private institution ?

My last post on private education has received many eyeballs. Unfortunately, it had zero engagement or comments. One possibility is that it's relatively well argued and so hard-hitting that readers probably spent more time contemplating their personal life choices rather than pick a fight with me to disagree on details.

For today's bombshell, you can relax.... As of now, I have YET to be able to conclude that a business diploma from a private institution deserves a better place in the rubbish bin.

But I think I'm objectively closer to that goal this week.Remember in my article on private qualifications that a business qualification is possibly the stupidest decision you can make :

  • 48% of private degrees are in business administration, making those with a private business qualifications a dime a dozen in Singapore.
  • In the US, there is already conclusive evidence that such a qualification can be a "negative signal of value".
Last week, the Economist delivered another bombshell that is so juicy, I have to share it with blog readers. A group of academics (one with ties to NUS so I'm super proud) performed an experiment in Togo Africa, it divided a large number of entrepreneurs into 3 groups. 
  • One was a control group. 
  • One group was given traditional business training such as those found in marketing, economics and accounting training programs.
  • A final group was given psychological training. 
It was found that for the entrepreneurs that received business training did not experience any significant gains in the running of their small businesses. However, those that received psychological training had such massive gains that the cost of training can be covered by increased profits within 2 years. Note that small business in Togo only generate revenues in the hundreds of USD a year.

A clear conclusion can be made about the value of psychological training over business training for  entrepreneurs. But the results do raise interesting questions :
  • Is business training and skills really useful for entrepreneurs ? 
  • At which point of business growth do these formal business skills become useful ?
  • Are MBAs being hired purely based on their talent and innate intelligence and not for their skills in business administration ? ( Remember that companies that hire MBAs can put them on management associate programs that train them in actual work tasks. )
  • If those with business diplomas are going to be hired by an SME, would their skills make a difference in their jobs ?
Of course, the big elephant in the room now is what constitutes these psychological skills that made such a huge difference in an entrepreneur's business results. I actually dug out all the original research papers with the training outline and I then mapped training objectives to some books I have read before so you can read up on your own to develop these skills in your spare time, so do enjoy  :

  • How to be a Self-starter - Stephen Covey's Seven habits of Highly Effective people. Anthony Robbin's Awaken the Giant Within.
  • Innovation and Opportunity Identification - Blue Ocean Strategy by Chan Kim. Another book on creativity but avoid Edward De Bono unless you want to cure your insomnia.
  • Goal Setting -  Try something by Brian Tracy. This comes so naturally to me, I don't have a book to suggest.
  • Action Planning - Getting Things Done by David Allen
  • Feedback - Thanks for the Feedback by Douglas Stone
  • Overcoming Barriers - Adversity Quotient by Paul Stolz or Grit by Angela Duckworth
  • Bootstrap Financing - $100 Startup by Chris Guillebeau. I personally do not like Chris Guillebeau even though I read most of his books. I don't think this book is good enough so appreciate any other suggestions. This topic is super important so I made it a section on its own.
The original training is, of course, way better than just merely reading books because you get hands-on practice, networking and even a capstone project on how you can enhance your current business.

If you read until this point and you are absolutely fascinated by ideas here, I actually think that entrepreneur training that is based on credible research data will be a killer app in Singapore and I might even want to either receive this training myself or even make money training others. 

If you are also interested and may even want to back this idea up with money of your own, drop me a line privately because I think we're onto something that is not just big here, it can have a massive impact to our small business ecosystem in Singapore.

Thursday, September 28, 2017

Efficiently Inefficient #11 : Quantitative Equity Investing.

This is the chapter that I have to read really carefully because I am in the process of semi-professionalizing my own portfolio.

As it stands, everything is going fine with my 200% leveraged portfolio, I basically collected every single REIT that yields between 6%-8% that is not in my main portfolio and built a leveraged portfolio out of it. I have about 13 counter as of now (it would have been 14 has the Cromwell IPO not been cancelled). The portfolio size is expected to reach over $200k next week and it yields around $11,000 a year. That's not bad considering that I only pumped about $110k into this portfolio so far.  The portfolio was also remarkably stable during the 7th month when all the other portfolios I have took a small dive.

The book confirmed that this is, in a limited extent, what some professional hedge fund managers do in practice - they apply leverage on lower beta stocks to magnify returns and, if they wish to stay market neutral, employ a much lower gearing on their riskier short positions.

Anyway, let's just review the 3 types of Quantitative Equity investing :

a) Fundamental Quantitative Investing

This is what I am trying to do with the exception of shorting overpriced stocks.

I backtest a series of different strategies that result in diversified portfolios which tend to outperform markets over time. Two strategies that tend to work over time are mentioned in the textbook is (a) Buying stocks with a high book value relative to price and shorting stocks with a low book value relative to price. (b) Buying the stocks which performed well over the last 12 months and holding them for a month. Selling the worst performing stocks over the last 12 months and holding those positions for a month.

I am doing just the long-only variant of (a) but (a) and (b) tend to result in different portfolios which have a low correlation with each other.

My next project is to see if something can be said about (b) for SGX stocks.

b) Statistical Arbitrage

This sound really fun but I am limited by my inability to short stocks on SGX. In statistical arbitrage, you hunt for Siamese twin counters and bet on them converging in price. An example of a  Siamese twin might be Unilever NV which is traded in the Netherlands and Unilever PLC that is traded in the UK. In this form of investing, you monitor a set of Siamese twin stocks and you bet on them converging in price when they start to deviate in value. You execute your strategy by buying the lower priced twin and selling the higher priced twin.

Just thinking loudly to myself, one local Siamese Twin counter might be the two HPH counters which are denominated in USD and SGD.

I'm going to sit this one because this strategy might generate a lot of trading costs.

c) High Frequency Trading

Sometimes I wish that I could get into this industry.

Imagine you have a big order of 1,000,000 shares. You split the order into 1,000 orders of 1,000 shares and use a computer algorithm to perform these trades for you. You earn a profit by being some kind of market maker, providing liquidity to buyers and sellers who arrive at the market at different times.

The theory is that if your orders arrive fast enough ( and this is done by co-locating your servers nearer to that of the exchange at a fee ), you can profit from the small mispricings that occur in every given day.

Wednesday, September 27, 2017

Agency, Structure and Financial Independence.

This post was inspired when I read a Masters thesis from a fellow D&D player called Shao Han.

The central idea of his thesis is as follows : Some of us might feel constrained and alienated in some way in a modern meritocratic technocracy and table-top role-playing games can inculcate a sense of Agency in gamers. Given that a large part of my life ended up this way probably because I started playing D&D since I was 10 years old, I think I should a blog about how theories of Structure and Agency might be able to explain the genesis of my ideas and approach towards Financial Independence.

In sociology, Structure and Agency can be considered to be something akin to Yin and Yang. Structures provide a pattern by which we live. For example, a Chinese wedding custom is a Structure. Agency is the power that we have to act against the Structure that is constraining us. In this same example, Chinese wedding customs result in expensive weddings, that in turn pushes Chinese males to become more concerned about money making and subtly shifts his ambitions towards accumulating more assets ( because ultimately Chinese males wants sexual access too and this means expensive weddings ! ). A Chinese male who is voluntarily lazy and unambitious may develop a philosophical loathing for the Chinese ideal of family. We should at least, applaud his Agency to see beyond the Structure of a Chinese wedding.

[ This probably answers that question that financial bloggers have asked ourselves for ages when we gather for drinks and food. The question of why there is so little diversity amongst our numbers. But I digress... ]

How does one gain Agency ? I decided to reminisce about my own D&D experience to answer that question.

For me, my moment of awakening came when I joined a truly dysfunctional D&D group. I played with two Hong Kong RPGers who took a different approach to playing D&D. For most of us who still play D&D today, basically we create a character and then reacted to the whatever the Dungeon Master threw at us.

These Hong Kong guys played D&D differently. I suspected that it's probably due to their poorer grasp of English but it resulted in fascinating play situations.

These guys were not "rules lawyers" but were better classified as "rules rapists". They interpreted every rule in their own unique way. They took me under their wing and they taught me never to accept what the rules say what "can be done", but to do things that the rules did not explicitly say what "cannot be done".

For example, a Fire Trap spell in old school D&D can be cast on any closeable item by a 3rd level Druid. The design intent was to trap a chest or a box and create a fiery explosion when any thief were to attempt to open the box without uttering a password. My Hong Kong friend declared that his mouth is also closeable item so he cast a Fire Trap on his mouth and went around the dungeon biting Orcs. Needless to say,  our DM spent most of the session rolling on the floor and laughing his head off rather than running a proper game for us. From casting Stone to Flesh and then eating to through dungeon walls to suprise an opponent to using an Item spell to turn a pebble into a boulder, my games were worse than watching a bad episode of Rick and Morty while being on crack.

After years of gaming with Hong Kongers, I eventually became a "rules rapist" myself. These days, I still love tinkering with the D&D rules but I try to tone it down because I don't want to be a pariah in the gaming circles.

Back to financial independence.

One sure way of speeding towards your goal of Financial Independence is to understand the Structure that permeates our society. We're bound with golden handcuffs with an obligation to form families and put ourselves under expensive mortgages so as to look like some folks who are living the Singaporean Dream.

As what I have learned from Shao Han's Master's thesis. That is merely a Structure which can be overcome by our own Agency.

Why not ask ourselves this question :

Can we do something about our lives that is not strictly prohibited by the law or the Singaporean Dream ? You will find that living in Singapore is really not that restrictive.

For me :

  • My first breakthrough was that engineers can be rich in spite of  a humble income because unlike many other professions we're good with numbers and we're not afraid to use it. We just need to take these equations we have and use it in Finance.
  • The second breakthrough is that a person can save more than 100% of our paid income. Dividends hold the key to earning vastly beyond an engineer's salary.
  • The third breakthrough is that we do not need to be paid a salary to support a family. That's the job of the tenant who need our real estate holdings. Capital can even grow after 4 years of successive unemployment. ( Thomas Piketty's r > g inequality )
  • The fourth breakthrough I am currently working on is that there is nothing stopping an engineer from becoming a lawyer once he is fully decoupled from the paid wages economy. It's like a demilich becoming an archlich. Who said that you must retire ? I choose to pivot.

So in summary :

I started as a 10 year old struggling D&D player hanging out with DMs who were out to torment kids and teenagers.

I learnt the art of "rules raping" from a group of expatriate gamers.

I was changed by the experience and tried to broaden this act of gaining Agency to the broader world of personal finance.

Maybe there's a teachable lesson here.

Sunday, September 24, 2017

Hard Truths about Private Degrees and Second Chances in Singapore

Sam Choon-Yin's book entitled Private Education Singapore : Contemporary Issues and Challenges is a very enlightening read not just for stakeholders in the Private Education Industry but also parents who have serious concerns about their child's education.

This book is not completely unbiased, the author is after all a Dean of PSB Academy. But it is generally speaking the most objective piece of work so far on this industry.

One small bugbear of mine is that the author painstakingly alleges discrimination from the industry as well as poor management practices of the Private Education Institutions (PEIs) for the pay and employment gap faced by private degree holders. But let's be candid lah - An economy cannot run solely on discrimination alone, a $600 pay gap in Singapore between local degree holders and private degree holders cannot be magically hand-waved away by allegations of discrimination because hiring private degree holders would thus mean 20% cost savings in manpower. A degree of responsibility has to be taken by the student himself.

( If we follow the same logic above, then local degree holders like myself should not feel good because when we are also benchmarked against an Ivy League or Oxbridge degree holder. Some amount of credit should be given to graduates from top international universities too. )

A particularly damning study which should be understood by private degree holders who read my blog should be a study by Deming in 2016 in the US, a person with a BA in Business from a private institution was 22% less likely to have its resume answered to, rendering the qualification effectively " a negative signal of applicant quality". This is on all fours in my last talk on funding an education at the Lifelong Learner's Library.

A couple of useful tips stand out for those unfortunately enough to have to look for a second chance with a PEI in Singapore.

a) Don't take the easy way out because local authorities do not regulate academic rigour.

The various bodies that regulate private universities in Singapore are focused on prevent the loss of Singapore's reputation through fraud so they put in place measures to regulate the administrative processes of these institutions. Local regulators, however,  do not have in place a framework to track the academic rigour of these programs.

Making matters worse, a lot of private degree candidates look for a short duration program to get their degree earlier without understanding that a degree's value comes from its academic rigour. If it's just a piece of paper to you, your degree's value would devolve into the same value of the paper its printed on.

Look for a good institution that does not cut corners and report a HIGH FAILURE RATE. Your degree value increases when other people are seen not be able to get it easily.

b) Business administration qualifications have the lowest market value and should be avoided.

Some statistics from the book is heartbreaking and shows why laissez faire cannot really be applied to education in Singapore. Because every Tom, Dick or Harry wants to study business and be the next Jack Welch or Olivia Lum ( But they both have engineering degrees ). In 2015, 48% of private education graduates are graduates in business administration. According my previous article arguing that a degree is a positional good, the private business degree is too common out there in the market to make a big difference to your pay-check.

One of the reasons why Business Administration in a local university has good prospects is that the government knows how to keep their numbers in check. Keeping the faculty small and maintaining standards means that a business program in Singapore is highly competitive. Result is that our banks love local business graduates because they have been "pre-qualified".

Private universities will expand seats in the business faculty upon greater demand. Business courses do not have labs and quite cheap to run. More importantly, compared to Engineering or the Social Sciences course, a business course can be pitched at a relatively easy level.

c) The best private degree courses are Engineering and IT related.

I speak from personal experience that the IT industry is already the least elitist sectors in Singapore. Most of the folks in Block 71 will not care about the quality of your degree if you can get some coding done for them. Some famous software engineers I know don't even have formal degrees.

So logically speaking, our private undergraduates should be learning how to code and build machines. But in 2015, only 5% of private degree holders do engineering and 7% do IT. This makes Engineering and IT the safest bet for private degree undergrads.

Yes, I accept that STEM subjects are relatively hard compared to Business subjects. But that allows software engineers to maintain employment and have a workable salary in this country.

d) You need to supplement your private degree with a challenging industrial qualification or a portfolio of interesting projects to be taken seriously

Once the facts demonstrate that you will not be treated as well as others by the industry, the last thing you should do is to just sit there and let the forces of society roll all over you. If you are not looking at starting your business, there are amazingly difficult industrial qualifications that only require a degree to qualify for the program.

The CFA will accept your private degree to qualify to be a Level 1 candidate. The pass rate has now dipped below 40% and I've seen postgraduate Finance folks fail the program. There is no better second chance qualification than the CFA. The same goes for a difficult CPA qualification as well as some of the harder IT security qualifications like SANS GIAC. Some of the easier qualifications which are highly respected are the PMP qualifications but do combine it with an ISACA or MCSE paper if you wish to be taken seriously.

If you do not want to study, then by all means build up a portfolio of projects. When I did the R program in Coursera, I use Shiny to create a permanent portfolio optimiser which I showed to legal-tech startups to look for coding work. I still have access to my Github account.

What is the underlying theme behind my suggestions on how to do well in spite of a private qualification ?

Do the hard, difficult things that is beyond the reach of your peers. Find a market niche or blue ocean where you can compete with fewer people. Over the short term, you need a a job that pays your bills. Over the long term, you need something to over-compensate for your degree credentials.

In this article I do not support or deny the current of affairs.

I have indeed thrived tremendously under this system but my children may well be the system's next victims if they fail to get into local tertiary institutions. I have to prepare them to live in a positional world where out education system functions as a sorting machine rather than a nurturing one.

If you wish to be inspired by a role-model of a graduate from a private university, I strongly recommend following the ironically named Unintelligent Nerd blog that I read for my personal inspiration. This guy does awesome shit !

Saturday, September 23, 2017

Fun with other financial bloggers : Debtzilla play-through.

Hanging out with other financial bloggers has always been fun. Some events we had in the past, like a cosy karaoke session we had a week ago, allowed me the privilege to catch a glimpse of financial bloggers having fun. Seeing these folks in action is always rewarding because sometimes you get to see how highly optimized individuals design their lives and their approach towards leisure and problem solving.

So, the word has gone out that the Debtzilla Kickstarter has gone live :

a) Dr Wealth has a detailed description of the game here.
b) If you wish to support the Kickstarter campaign as I have done, here is the link.

We played one session of the upcoming Debtzilla game.

While I had been playing versions of the game at various stages of development, getting to actually play the game with actual game pieces and art-work has been quite a satisfying treat and the game was facilitated very well.

The game is challenging. I'm proud to say that today a group of us financial bloggers took on the game we triumphed over Debtzilla. It's not exactly easy to reach the stage where we can even go toe-to-toe with the monster and the facilitator was quite surprised we actually got this far. Certain aspects of the game was designed to be quite difficult and required a decent amount of interaction and strategic planning between the players to complete the game successfully.

More interesting than the game itself is that the mastermind behind the game Xeo Lye already has a successful Kickstarter campaign called Wongamania under his belt and I expect this second project to do even better than the first.

One aspect of developing financial games is that, historically, it was always believed that a financial game had to trade-off between educational value and fun gameplay. With Wongamania, I was pleasantly surprised that it was able to be both educational and fun. Debtzilla was an attempt to create a more fun and socially interactive experience so it focused only on the aspect of finance concerning debt management. It was also really awesome that financial bloggers can interact with each other and jointly solve a problem together in a fun environment.

I think it's high time for a financial games and education company to make it's mark in the Singapore gaming scene. The maker Capital Gains Studio really has the potential to become the next CMON and perhaps one day I would not just be backing their games on Kickstarter but getting some shares in their IPO in the near future.

Thursday, September 21, 2017

Efficiently Inefficient #10 : Dedicated Short Bias

Reading the section on dedicated short bias made me want to join a hedge fund that does only short-only positions.

The personality of a typical short-seller is also rather interesting : It is usually someone who is antisocial, with a chip on his shoulder, and twisted sense of humour. Short sellers also don't agree with each other. Short sellers are also notorious frugal and successful traders do not adopt the trappings of a successful financial professional.

I have written other articles on short selling, so I will only illustrate in a novel way why short-sellers are often right about markets overestimating a stock price if short sellers face more frictions than investors who go long in stocks.

Short sale frictions means that companies are overvalued.

The example below illustrates how shutting off short-sellers can generate speculative bubbles.

Imagine that there are two types of investors :

  • Type A believe that a stock is worth 80 in a recession and 120 in a boom. Or 100 on average.
  • Type B believes that a stock is worth 60 in a recession and 140 in a boom.  Or 100 on average.

Note that in both cases, both investors believe that a stock is worth 100 on average.

If not shorting is allowed in this market :

  • In a recession, type A investors will be actively trading and will push the stock price to 80 because that's what the stock is worth in a recession. Type B investors can only suck thumb because they can't short the market even though they believe that the stock is worth on 60.
  • In a boom, type B investors will be actively trading and will push the stock price to 140 because that's what the stock is worth in a boom. Type A investors suck thumb because they can't short the market even though they believe that the stock is worth 120.

So in practice, the average price where there in equal probability of a boom and recession will cause the stock to be worth 110 or (80 + 140)/2. The result being that all investors are willing to pay up to 110 in spite of the stock being believed to only be worth 100.

At least from what little I know, speculative bubbles in Asia tend to come from real estate where no degree of shorting is even possible. Consequently, I expect statements of a bubble over cryptocurrencies may be overblown as exchanges do allow a high degree of shorting cryptocurrencies. Comparisons with Tulipmania is, therefore, unfair.

Tuesday, September 19, 2017

The most important thing in Capitalism is Capital !

I wanted to do this article because of a spirited discussion with a highly respected VC in Singapore. In this discussion, I argued that capital is the most important thing in Capitalism. He reasoned that value creation is more important. It's not easy to carry out this debate because value and capital are not fully distinct from each other. There are ways to support and refute the statement depending on our definitions as to what value and capital is.

So instead, I propose an auxiliary argument which may have a more satisfying resolution : Which is better, engineering to create wealth or reallocation of capital to create wealth ? Another words, engineering or finance ?

If the argument were to simply ask the chicken or the egg question, then engineering wins hands down, product creation comes first or there will be no capital to allocate. If the argument focuses on who ultimately makes more money, then the fund managers and capitalists who allocate capital would generally win based on salary surveys.

I'm going to present a novel argument to make my case for finance and capital - a possible answer can be found via cryptocurrencies.

There's always been two ways to get more Bitcoins and Ethereum.

One way is through mining. You set up a rig involving graphics cards and you run some kind of daemon to mine for more coins. As the odds of solving the puzzle to get a coin reward is hard to come by, miners typically join a mining pool to guarantee an amount of coins mined per unit time. This is really similar to a development based engineering career. When you join a startup, you join a company to solve an important problem hoping for a reward that can be shared with fellow engineers.

The other way is through buying coins in an exchange. Various exchanges like Kraken exist for you to simply buy coins with money. When you do this, you are taking calculated bets on value of cryptocurrency. Analogically, you have chosen a career in finance and have chosen the role of a capital reallocator.

I've done a mixture of both strategies and noticed  that for some strange, inexplicable reason that it is, generally speaking, more profitable to buy cryptocurrency than to mine them due to electricity fees and dealing with obsolete hardware. So much so, that you can save on hardware and electricity and just buy the coin direct from the exchange. Successful miners might have been able to sustain themselves by selling mining contracts to other people who are trying to punt on contracts, or monetising their tremendous geographical advantage like having a data center in Iceland.

Does this analogy of the relative merits between mining and buying of cryptocurrency reflect an aspect of humanity that permanently plays down the value of engineering new solutions versus simply taking a bet once a new solution is created ?

I think it is.

With the exception of a few solid engineers who solve major problems and got a "coin reward" from society. The bulk of high income earners in Society are almost always capitalists who invest in companies and buy real estate. Even if you argue that Bill Gates did create some software when he was just starting out, I would think that Microsoft's success was largely due to the support Bill got from his dad who was a lawyer and was able to shape copyright law to give Microsoft the bulk of its profits.

What is the moral of the story ?

I spent 14 years in IT and there is certainly fun being in a fast changing industry. A lot of engineers are passionate about coding because they are introverts and like playing with toys as part of their working lives.

But these engineers need to remember one thing.

While work is rewarding, fun and puts you in the state of flow, you are not really being rewarded based on what you deserve per unit of intelligence and effort. You are just not getting the "coin rewards" you deserve based on the rigs and electricity you are installing in your home.

Why not accumulate some capital and play with that to even the odds against your peers ?

Saturday, September 16, 2017

Dealing with the hypocrisy surrounding academic achievement in Singapore.

The inspiration for the post came about because I am currently reading Private Education Singapore : Contemporary Issues and Challenges by Sam Choon-Yin, the Dean of PSB Academy. I picked this book up out of personal curiosity and, given my career plans, I really have no business sticking my nose into Private Education industry in Singapore but the information contained within the tome is too interesting for me to miss out on it.

More details will follow once I finish the book but I just want to share some ideas surrounding Singapore's inherent hypocrisy around academic achievements and how we can employ some economic concepts to understand why people sometimes act like hypocrites when it comes to academic performance in our neurotic society today.

I think the starting point is to understand what a positional good in economics is all about.

A positional good has this property whereby the benefits that you derive from this good is much greater when fewer people have such a good. Folks with this good essentially play a zero-sum-game against folks who do not have this good. In Singapore, a higher education like a degree is a positional good. The fewer people with access to a higher education, the more benefits accrue to folks with a degree.

Let us use this economic idea to deal with some situations we face in our daily lives.

a) People who want to de-emphasise the professions in daily conversation in favour of vocational training.

I observe that this is getting more common in a competitive society. There is always someone who speak of hawkers, plumbers and electricians as if they are noble savages and decry others who are academically competitive because in some Western societies, we are observing that salaries of folks who perform technical or personal services are climbing but the professions are currently being disrupted.

Normally, I would respect these folks if they are consistent with their proclamations with kids who take up a vocational career. But if you look at what they do for their own children, you will find that they often enrolled their own kids in the better local or foreign university programs.

The idea that education is a positional good completely explains such behaviour : If you can convince other people to play down their academic ambitions, it's ultimately better for yourself or your children.

My dad's friends have always teased me for academic performance for decades. You can hear a pin drop when I tell them that if they have a problem with my stellar performance, they need to get their own kids to drop out of school for their own good and let me mind my own business and personal ambitions.

Of course, not everything these folks say is untrue.

The Singapore government is raising the percentage of the cohort who can get into local universities to 40%. This will effectively reduce the benefit that any person can derive from having a degrees versus those who are not having a degree because the situation in the future is that more people have degrees.

The effect of this policy is predictable :  The arms race fought between parents will simply shift towards getting their kids into prestigious postgraduate qualifications.

The erosion of the benefits of having a degree is not about seeking vocational or lower qualifications but seeking more complicated and prestigious academic credentials.  Net result : People are going to spend a greater part of their lives in school reading more complicated academic texts.

Therefore, hypocrites really just want you to play the game the wrong way.

b) Legal industry's problems derives from legal training being a positional good.

This cuts deep into the bone for my classmates currently doing Part B.

A licensed advocate and solicitor 20 years ago makes a decent premium compared to an engineer even though we never had that situation where the law faculty attracted all the folks with straight As unlike our current situation today. The problem then was that the earnings of a legal professional is tied to the value of a law degree as a positional good. Fewer people with the degree that leads to a practise license would spark a war of talent among law firms. As an engineer who had my salary depressed by decades of additional engineering manpower supply from India and China, I found it hard to accept that I had to live on a lower standard of living because of the choice of my degree.

The music for legal professionals has stopped recently when parents started sending their kids to approved law schools by the dozens. These returnees from foreign countries created a lot of supply and  law firms can basically offer any salary package to a rookie associate because there are so many folks willing to do the work for less pay.

Of late, a lot of VIPs have spoken about the need to treat junior lawyers better and it was particularly entertaining that they are using a moral appeal in the hopes that things will get better.

I would suggest to my cohort that moral appeals seldom work where economic incentives are absent to improve someone's lot in life. Just look at how badly some of us engineers are doing in our 40s today.

Your legal qualification is a positional good, things can only get better when the industry has the ability to squeeze out more people and prevent others from joining the profession.

But this introduces a problem for us Part B students because wishing for that might mean that we, too, would be squeezed out in the process of tightening standards.

c) The solution ?

At the micro-level, there's hardly very much we can do when everyone is sacrificing other non-positional goods like building a family or getting more time for leisure. In Singapore, it's just nothing but the endless struggle for positional goods - better degrees, better grades and hopefully, better pay. The authorities love this because this makes us such hard-working and conscientious workers.

Perhaps the financial blogosphere has part of the answer - Struggle now and build up a portfolio of savings that can replace part of your income.

The trump card in Capitalism is more Capital.

No company will deny you your dividends over your educational qualifications.

But to earn enough to put some aside in an investment portfolio requires decent pay - which is a function of educational qualifications in the first place.

Thursday, September 14, 2017

Efficiently Inefficient #9 : The notion of Quality in Discretionary Equity Investing

As a follow to our previous article, we will delve deeper into discretionary equity investing. Remember that discretionary equity investing can be challenging task as the field is highly competitive and there are a lot of brains chasing the same few investments in the market.

It largely boils down to what investors perceive as the quality of a company:

a) Growth

It's easy to just reduce growth to one metric like compound annual growth rate of revenue, but I can hardly see it work when I back-test portfolios which use this criteria. Good sustainable growth can result in bigger free cash flows, imagine a store that found a way to increase sales without increasing their operational expenses. Growth can also be bad if it comes from manipulating accounting figures. imagine a company growing by acquiring rivals at high prices.

Somehow a growth investor needs to take all these considerations into account.

b) Profitability and Earnings Quality

The other factor to take into account is the profitability of the business. A profitable company of hihg quality has a great profit margin and has a history of high free cash flows.

But lower quality companies can game this by moving expenses into the future to inflate current figures.

c) Safety

A third element of quality if safety. Safe companies are predictable and this can come in the form of a lower beta. Some investors need to delve into the past variation of profitability by examining how the stock has performed in the Great Financial Crisis.

d) Payout and Management Quality

The final element, which is the element which I simply cannot handle is how friendly the company is to shareholders. The best discretionary investors have access to upper management and can tell whether they are managing the company for themselves or shareholders. As I do not have access to management, I have to use a proxy measurement- companies that return money to shareholders generally care about shareholders. With less cash in their hoard, the managers also would need to be more disciplined when they run the company.

At this stage, I'm trying link up the concept of quality to a discretionary investor to this other book I am reading written by Aswath Damodaran called Narrative and Numbers : The Value of Stories in Business. Perhaps in crafting a narrative for yourself if you are a growth investor, you would need to convince yourself that your investment is of high quality based on these four dimensions. After which you can proceed to assess the plausibility of your story by linking it up to accounting figures.

Whatever it is, this would be quite a difficult intellectual exercise if you are a retail investor. More likely, you will fall in love with a stock before can craft a compelling narrative based on it.

Wednesday, September 13, 2017

Slapping your face to look prosperous.

I am blogging from SMU where I am looking for textbooks to buy and read.

( By now, reading textbooks and academic papers have become more interesting than management books which are becoming just an endless stream of narratives with no unifying theme or point. Another point to select an ace engineer : Find out whether he reads IEEE papers. )

Two issues ago The Economist published a short article about folks belonging to the lower income group who have a propensity to overspend on branded goods. It was discovered that as we move towards the lowest quintile of income, extroverts tend to buy more branded goods but introverts do not exhibit this behavior.

What does this mean :

A) That ancient Cantonese saying makes some amount of sense.

The link to the saying is as follows. Our ancestors did not have the analytical tools to figure out that this only applied to extroverts.

B) If you want to marry someone who will suffer with you, choose an introvert.

This idea really takes on some traction if you claim that you want to marry someone who is willing to suffer with you. When you are poor, it is the introverted person who will stick around and cut their spending. Extroverts will double up and exhaust whatever resources you have.

Don't say I didn't warn you !

C) The folks queuing up for branded stuff might be rich or simply poor extroverts.

With this insight, we're no longer so sure that the folks queuing outside ION or the Apple Store are rich or simply extroverts who earn at the bottom quintile of the population. With the right kind of credit card, any acquisition is possible.

D) This might explain Sapeur culture

If you are frugal and follow financial blogs, you will find sapeurs or folks who adhere to La Sape culture fascinating. Sapeurs are African dandies who pawn their land to dress in French Designer wear.

This discovery has also caused me to have a double take of my personal life. I'm fairly extroverted if you benchmark me against the other guys who write financial blogs.

My life would have been very different if I were born under poorer circumstances.

Monday, September 11, 2017

Personal update : Mid-term break is upon us !

It's time for another personal update. I've been suffering from diarrhoea for the past two days but was only put on medication this morning.

a) Part B preparations

We've reached the mid-point for my Bar Preparation Course. I was still reviewing my course materials this morning and preparing for future tutorials until I found out that my mid-term break would last two weeks instead of one. This puts off a fair bit of pressure off me until next week. I just need to consolidate the tutorials I've been having so far.

b) Bleak future for the fresh legal graduates

Almost everyone I knew referred me to the article on the rough treatment of junior lawyers upon graduation. I did not read the article because there is no need to remind me about how bad the legal industry is. Compound that with a highly strung cohort that can somehow reduce their lives to a single GPA figure, it doesn't take a genius to figure out that the industry will face some kind of reckoning soon. Make no mistake - People have killed themselves in the legal industry. This is the price to pay for prestige, I guess.

But once again, we JDs are different. We can go back to our old industries with some of us being offered a decent income for our legal skills.  Even though I'm getting pretty eager to rejoin the workforce, there is no pressure for me to join any industry in the medium term.

You should save your tears for those parents who pay exorbitant fees to send their kids for a UK or Australian Law Degree.

c) Already took a break in KL

Me and my mum had to attend a funeral of a close relative recently, so I took an early break and brought my mum to KL for some shopping. This means that I have already travelled for this mid-term break. This was quite a bitter moment for my family, but at least my mum could just stop playing caregiver to my dad for a few days to go eating and shopping in Bukit Bintang and Mid-Valley.

d) Books I read recently

Of course if I visit KL, I will try to read some books about Malaysia. I read Economic Reform in Malaysia : The Contribution of Najibnomics by Bruce Gale and I was impressed with his analysis on Najib' Prime Ministership. As much as Singaporeans like to laugh at our neighbours over 1MDB, Najib's role was generally positive one for the Malaysian economy Najib being the first to seriously introduce KPIs to the civil service, reduce sugar and gas subsidies and diversify the Malaysian economy.

I will definitely use this book to debate more vigorously against my relatives on the folly of voting a party other than BN for the next Malaysian elections.

e) Our own Presidential elections.

I'm too stunned by the plot twist to blog about this event. This is a senseless sacrifice of political capital on the PAP's part.

f) Financial Markets

While the markets are going down during the 7th Month season, I've not been making any changes to my portfolio. The only I had been doing was using some back-testing. Things should look up after the Hungry Ghosts return back to where they came from.

g) Leisure and Gaming

I attended STGCC last weekend and bought myself the Tank War game by Gale Force Nine. Otherwise, it was quite disappointing for me as there was no second hand hobby shop where I can hunt for vintage game books unlike last year.

This week I look forward to playing more D&D on weekday evenings and at the close of the week, some members of the financial blogging community will be coming together for a karaoke session.

(The clean family karaoke where the mic is made of metal and not flesh !)

Saturday, September 09, 2017

Efficiently Inefficient #8 : The promised backtesting results.

As promised, I tried accessing a Bloomberg terminal to backtest some of the ideas from TUB investing. Here are my findings :

a) Dividends per unit P/B ratio was a strong screen.

Dividends generally do well in backtests. Putting up a screen incorporating the cheapness of a stock makes it even better. There is some research done this year in the Financial Analysts Journals which back-up my findings.

In fact, using Dividends divided by P/B ratio and setting it above a threshold value to target around 20 stocks yielded a return about 13.6% with a semi-variance of 13.51%. Returns were enhanced even further when I used 5 year average free cash flow yields.

TUB credited Teh Hooi Ling for this idea. This is definitely a workable investing idea.

b) ROA per unit P/B outperformed the STI ETF but the performance was unremarkable.

I did not fully adapt TUB's idea of using ROE divided by the PB ratio because ROE can be magnified by a company's gearing  and TUB used another screen to keep gearing low.  Using this screen to capture "management skill at a reasonable price" did not meet my personal expectations. Returns were at 8.86% with a semivariance of 14.19%.

c) Equity screening does not help growth investors.

This last section is something that readers should pay close attention to.

Perhaps I am still not good at equity screening, but a combination of growth screens did not yield anything concrete or useful for me. For this exercise, I searched for stocks with a combination of  high 5-year CAGR for Revenue, Zero debt, PEG ratio below 1. I gradually relaxed each criteria until I had a decent number of stocks and it returned only 3% annually over 10 years.

Because I probably fumbled with Bloomberg due to the lack of time, we should not conclude that growth investing does not work. I can only conclude that using equity screens to buy growth stocks is not a good idea.

More likely, the growth metrics were used as some sort of scorecard to funnel stocks into a bottom-up investing process that requires a more intimate investing process and an understanding of a business narrative that John happens to be quite an ace at.

Also please don't forget that Peter Lynch was a growth investor.

As of now, TUB Investing has been kind to grant me access to their database but I have not used this privilege yet because I wanted to do my own homework before using their bespoke database materials.

My simple screens, of course, do not do full justice as to the amount of work that they have done to create their database.

Thursday, September 07, 2017

Anonymous insurance agents declare war on financial blogosphere !!!

The financial blogosphere was a friendly place.

I'd like to point out that I did not start with a good general impression of some of my fellows financial bloggers such as Tim Ho from Dollars & Sense because, at that time,  I harboured some doubts about whether Dollars and Sense can be unbiased in light of their commercial interests. Over time, my respect for them grew and they seem earnest about giving the best possible advice to the readers. I should also mention that they often organise free events for bloggers to come together to give an unbiased look at some developments in the industry. It should also be noted that Dinesh's investment writings on investing in Singapore are amongst the sharpest you can find on the Internet.

Yesterday, it dawned upon me that a three anonymous insurance agents started a Facebook group that effectively declared war on us financial bloggers. In some of their articles, they attempted in their own clumsy way to challenge some of the ideas shared on blogs like Dollars & Sense and Budget Babe, subsequently going as far to declare that keyboard warriors should not be dishing out financial advice.

Like most financial bloggers, the victims in this saga felt that the Facebook group should be ignored. However, I think that we're are in a precarious position. Commissioned agents have a strong incentive to cause harm to business interests of financial education provides or information portals because the insurance industry simply attracts too much controversy from their sales tactics. For the most part, financial bloggers are unbiased and the Internet allows us to pool our wisdom together. For example, Budget Babe has an excellent expose on agent commissions here.

So this is what I did :

I challenged three of them to a public debate.

I suggested that the topic was about general ethical standards of the insurance industry.  I think folks would want to see a no-holds-barred debate between a team of unbiased financial bloggers and a team of commissioned sales agents and we might even be able to charge a decent amount for it.

As it stands, the majority of financial bloggers just want to ignore these agents. But we know that given the attractive incentives to sell ILPs and Whole Life policies, they will not stop discrediting bloggers who propose alternatives like Buy term invest the rest and the cheaper ETF strategies.

So I'm going to take the opposite tack:

They call themselves "The truth and nothing but the truth".

Subscribe to their group on Facebook.

You can lurk and just enjoy the popcorn.

But chances are that, they being merely commissioned agents, they will make mistakes when they talk about finance.

It is a good opportunity to point out their mistakes and show them up for the clowns that they are !!!

I for one, am itching for a spirited debate !

Tuesday, September 05, 2017

Ancient wisdom from Kuala Lumpur made relevant for Investors !

I was in KL to support my mum for some family matters over the weekend and I was unable to put up articles on this blog, but now I am back an between my lectures and tutorials.

KL is the land of great wisdom and my relatives have shared with me the ancient proverbs of Hakka/Cantonese origin. Unfortunately, while I am able to adapt these proverbs for investing, I am unable to transcribe their pronunciation on this blog.

As of now, I can't even tell whether they are Hakka or even Cantonese in origin.

a) Flying a kite with your public hair

Whoever came up with this proverb was clearly a genius !

When Singapore civil servants are discussion a task that is very tedious and yields very little benefits for the tax-payer, they use the metaphor of "boiling the ocean" to discourage the officer from going ahead with it.

Now we have a better proverb - Imagine using your public hair to fly a kite. The amount of effort required to tie pieces of your public hair to form a string that is solid enough to out a kite in the sky must be enormous. Many civil servants would rather volunteer to work on procurement than to do that (But I won't at my current pay grade).

There are a lot of bloggers who do bottom up investing - identifying the profitability of individual departments and then reconstituting their analysis to create a sum of parts valuation. These investors usually own about 6-8 counters that they analyse very carefully. As good as bottom up investing is, it is difficult for quants to do the same for 40-60 counters.

Because quants, too, would not want to fly a kite with their pubic hair.

b) Sharpening your blade with your penis.

"Your penis is not a whetstone." -  This would have come from the lips of Tyrion Lannister but you get to hear it from me first.

When you use your penis to sharpen a blade you put yourself in a precarious position. If you go AWOL and do not check into camp because you are engaging in underaged sex with your CO's daughter, you are trying to sharpen a blade with you penis.

Some investing ideas are simply bad. In the 90s, some companies sold put options on their own company stock. These days we have ICOs. Imagine mortgaging your home to buy a diversified portfolio of Dogecoin mining contracts.

In summary, KL is a wonderful place. Because of that, this is a wonderful blog.

If you can find more uses for these proverbs, I strongly urge you to share them here.

Wednesday, August 30, 2017

Efficiently Inefficient #7 : What kind of equity investor are you ?

Today's article is short as we're moving into equity investing territory and I don't want to burden readers with too man equations on discounted cash or the residual method in equity valuation.

Instead, when you read anther investment blogger, try to see whether you can lump him or her into one of the two categories :

a) Discretionary equity investor

Most financial bloggers fall into this category. These investors use their own personal judgment to decide which stocks to invest in. Typically such investors will use some equity valuation models but will often supplement it with discussions about firm's managers, competitors, intuition and experience.

For such bloggers, a lot of emphasis is placed on the story and discretionary investors need a compelling narrative to make an investment decision.

The strength of this approach is that the investor has a large edge over everyone else in that they have access to managers of the company and may be privy to information that is normally unavailable to ordinary investors. The weakness is that only a few companies can be covered.

b) Quantitative equity investor

A quant employs small edges in multiple diversified trades to do well in the markets. Tools and insights are drawn from economics, statistics, maths, engineering and computer science. A quant requires a lot of data.

The strength of this approach is its objectivity and discipline. The weakness is that your model can fail when you are hit with a black swan event that cannot be predicted by your equations.

Right now, I am probably not professional enough to be categorised into either of these categories so I see myself as trying use both approaches in making money.

As it stands, I make investment decisions from analyst reports on individual firms but find myself gravitating towards testing out broad investment ideas by backtesting.

It is probably best that retail investors try to adopt both approaches due to the lack of time and resources to navigate the equity markets today.

Monday, August 28, 2017

The things that a Model Singapore Citizen has to do ?

Just some personal sharing today...

So last Sunday my wife finally managed to earn her Singaporean citizenship. It was a rough journey that began with me getting scolded by by ICA staff but it all ended well and I am happy that the government has shown a willingness to consider a sponsor like me who did not hold a steady job for the past 4 years to get his wife citizenship.

Ok, back to the story.

My son Durendal is overly attached to mommy but the seat was too small to accommodate my family so I took my son out of the theatre. My son started to cry for over an hour. It got so bad that the pre-school in Ulu Pandan CC asked me to bring my son in to play with their toys so he would stop crying. But even that did not work.

Soon enough, Minister Vivian Balakrishnan came to the CC as GOH for the citizenship ceremony, on his way in I was pretty sure he saw me struggling with my kid who would not stop crying.

Eventually, I couldn't hack it anymore so I went back to the theatre and I handed my son over back to his mom. So after some back and forth, my son calmed down and we managed to take a picture with Minister Balakrishnan after my wife got her NRIC from him during the ceremony.

After the picture was taken, Minister Balakrishnan whispered into my ear, and he said the dreaded words...

"Please have another kid soon."

This got me thinking...It's hard to be a model citizen.

a) We have to be courteous.
b) We have to have high productivity.
c) We must engage in our mother tongue.
d) We must get straight As in school.
e) We have to marry and have 2.1 kids. ( Especially so for graduate women )
f) Guys must serve NS and pass IPPT every year.
g) Everyone must engage in lifelong learning.
h) Everyone must avoid smoking and gambling.
i) Now everyone needs to lower sugar intake.
j) For bonus points, we must now become more innovative and take bigger risks.

The list goes on...

I'm fully aware the Minister Vivian is possibly very close to being a model citizen. Being a grandfather at his age makes him a model even for his fellow cabinet members.  I'm actually a bigger fan of his dad G D Balakrishnan who was principal of my primary school Bukit Panjang English School and a mid-career lawyer switching into a legal career at age 55.

But back to moral of the story... The Singapore Government wants you to be many things and there's nothing stopping you from trying to become a model citizen.

But, in contrast,the Singapore Financial Blogosphere only wishes that you succeed with one goal in mind :

Have passive income that afford you a modest living.

After you succeed, you wouldn't be a model. Outwardly, people might not even notice that you have already achieved this.

But you certainly will not regret it.

Saturday, August 26, 2017

Ten Year Series Mentality Amongst Investors

I just experienced how tough it is to be in the investment education business.

Like Brian Halim, I was invited to TUB's value investing seminar. You can check out Brian's account of today's event here.

A big problem which plagues the business is that investors have this Ten Year Series mentality. They want to skip the entire process of figuring out how to invest and go directly into buying the stocks that is  owned by the information vendor. Just like a secondary school student, they just want the model answers and do not really care for the process.

This is highly dangerous for both the vendor and the customer.

Some blog articles ago, I spoke about the danger of getting paid in a public seminar and then mentioning stock names too overtly and then running the risk of contravening the Securities and Futures Act. I'm glad that neither Terence nor John bowed to client pressure in today's talk.

The customer suffers as well as he or she would also not have a plan of exit buying the stock because there is no clear idea of the conditions which arose to make the purchase in the first place.

At this stage, on balance, I think we need to be fair to the vendor. Filtering the stocks and going through the bottom up process to select stocks for one's portfolio is tough work involving quite a lot of man-hours. To expect the model answers after paying $20 is not being reasonable at all.

Besides, I actually felt that Terence and John probably revealed too much in today's session because I was definitely confident that I can reverse engineer their processes to produce returns which will be similar to what they can replicate in their portfolios.

But I will NOT do this because I really want these plucky entrepreneurs to succeed in Singapore.

Instead, over the next few days I will verify their investment thesis by back-testing a few of their investment ideas to give everyone a hint of whether what they claim is true at least for the local markets :

a) For John, I will verify the effectiveness of growth metrics combining CAGR (net profit), low D/E and a PEG below 1 to see if claims of outperformance are true along with semivariance information to see if it comes with a greater downside. It is time for me to gain some useful insight into growth investing.

b) For Terence, I am already relatively confident about his claims because I have tested some of his ideas independently on my own but I would focus on two of his novel suggestions : his dividend yield to price/book ratio idea and his management capability ratio represented by price/book value divided by return on equity.

Hopefully, I would be able to share return characteristics and the expected volatility of these portfolios.

And no, I will not share the actual stock picks from my stock screens.

Either you do your own due diligence or pay these guys because they've done fairly solid work to show you how to outperform the markets.

Thursday, August 24, 2017

Efficiently Inefficient #6 : On the costs of trading.

Some folks wrote to me concerning whether my back-testing models incorporate transaction costs. As of today, I kept the settings on transactions mostly default so I expect my models to over-estimate returns. To keep things safe, I always create a benchmark portfolio of equal-weighted STI stocks to compare investment return so that I do not get too carried away when I observe good back-test results.

In today's article, we will look at transaction costs. And as it turns out, it is hard to perfectly simulate transaction costs into a back-testing exercise.

One of the most objective definitions of transaction costs is the difference between the cost of one share upon execution and the average between the bid price and ask price of a stock, so generally speaking, any of the following can increase your transaction costs.

a) Brokerage costs

Not all brokers are the same. For investors who really want to pinch pennies, they should consider opening an account with FSMOne. Casual observation is that trading costs can be as low as $10 and there are no platform fees for stock trades.

b) Bid-ask spreads

The next element of transaction fees are bid-ask rates. Take for instance a counter like CEI, you can buy it from SGX at $1.055 but a seller will only accept $1.015 per share making this a really illiquid counter. Bid-ask rates are also insidious as the transaction fees tends to become larger the more units you buy.

This cost is what torpedoes back-tested dividends portfolios which tend to flag out thinly traded counters that generate a lot of free cash flow. Which brings us to the next point.

c)  Illiquid counters

Illiquid counters also increase transaction costs. Suppose you want to buy 100,000 of Global Testing. There are only 40 lots on sale at $1.10. If you insist on 100,000 in one trade, you might put in a Limit order of $1.15 and pray that you will get 100,000 shares with an average price of maybe $1.135.

This happens to me quite a lot because I trade during lunch breaks and just want to get my trades over and done with. As I seldom sell and look forward to years of dividend flows, I do not have patience to stretch my purchases over a couple of days.

d) There is an opportunity cost to optimizing transaction costs.

The is a limit to optimizing your transaction costs because you would need to change the way you trade to keep it at a minimum. The trade-off is against your opportunity cost. Perhaps your strategy exploited a trading opportunity that would disappear too quickly.

Where your transaction costs are too high, perhaps you need to put more focus on implementation measures. Trade more slowly and go after more liquid counters and find cheaper brokers. If this results in high opportunity costs, you might want to execute with faster speed.

I guess my only cold comfort is that all my back-tests so far tend to rebalance a portfolio only once a year.


Wednesday, August 23, 2017

Why finance bloggers are not the prophesied heroes that you are looking for.

Image result for night king

This post started out with Whatsapp discussion between friends who examined the difference between paper generals and entrepreneurs.

The impression I got from a large part of the discussion is that entrepreneurs are heroes in Singapore society because they dare to take on business risks and very often take a personal stake in their enterprises. On the other hand, paper generals can broadly be used to reflect Singaporeans who were overladen paper qualifications and attain a degree of comfort without risking too much of their skin.

This discussion reflects the dreams and desires of the common Singaporean. Everybody wants to be the hero of their own story - specifically in GOT, an Azor Ahai who was named in prophecy to overcome personal and environmental challenges to save the world from disaster with nothing but a flaming sword in his hand.

There is also a moral element to this story - You need to overcome difficult odds and, in spite of such odds, you still succeed. Otherwise you are not a hero.

This is when I came upon this insight - Most, but probably not all, financial bloggers are not the heroes that most ordinary Singaporeans are looking for. This is because most prominent bloggers come from the comfortable middle class. Even the few financial bloggers who run companies have fairly decent degrees.

( But there area few minor exceptions ! )

Here are the reasons why we are closer to paper generals then entrepreneurs :

a) Investors are better off when they have better paper qualifications

This is politically incorrect but bear with me for the moment.

When you need more money to invest and have a job in the Smart Nation economy, odds are you will need a degree. Local degree holders start out $600 ahead of private degree holders and $1400 ahead of diploma holders and can get access to more permanent jobs. Statistics also show a steeper salary curve for degree holders who have more experience. This additional money is important because it becomes savings which is then invested in the markets.

I am not asserting that we should be satisfied with society as it stands. My kids might not do that well in school so my struggle as a parent has just begun.

b) A stable career facilitates risk-taking your investments

One of the side effects of Gary Becker's theory of Human Capital is that our career and investment portfolio should be taken as a whole and a good stable job can be reframed as the bond component of a person's total wealth. This facilitates more risk taking in his investment portfolio and as a result he can take on more equity risk.

The result being that a SAF general can take on much more market and credit risk than a salesman or an Uber driver.

So paper generals can extract more market premiums than their risk taking counterparts.

c) Investors wants the odds in their favor. 

Even the most successful business men will admit that the odds are against them when they first started out. You pay the landlord rent, pay salary to your employees and even a merchant terminal extracts 3% from your revenues. If your company becomes insolvent, secured creditors and employees take precedence over shareholders.

We investors prefer to take on the other side of the bet. Preferably the rental payments go into their pockets. For quite a while Neratel was a good investment when they supplied payment terminals.

d) We are closer to monsters than heroes

If you follow the Game of Thrones, a credible financial bloggers cannot afford to be Jon Snow who somehow blunders from victory to victory while knowing absolutely nothing.

The closest thing I can think of when I see financial bloggers as community is that we are the Night Walkers. The best financial bloggers are cold AF. They have an army of zombies to do their dirty work for them. Even a (market) bear can be zombified and turned to their advantage.

Investors also try to be objective as possible and are generally hard to faze by the markets.Notice how calmly the Night King took out his Ice Spear when Daenaery's dragons attacks. It is as if he was preparing for this encounter for quite a while.

Which is the last insight I leave with you GOT fans, we really would not know when the Dragon will attack in the financial markets.

Winter is Coming.

But with the right spear in reserve, we can bounce back from the assault riding on an Ice Dragon the next time the bull run returns.