Tuesday, May 22, 2018

The Art of the Good Life #24 : The Spiral of Self-pity

Another short one,

There are three unproductive ways that we can deal with negative events.

a) Do nothing.
b) Complain
c) Engage in Self-Pity

The book misses out the fourth point :

d) Engage is self destruction

The trick is not to engage in any of these activites. The suggestion not to engage in self-pity comes about because there is no end to the injustice that your ancestors faced that led to your fate today.

I just want to say a few words about Millenials and personal finance.

In 2008 and 2009, our generation faced possibly one of the worst recessions ever. One effect of this is the rise of the Hipster. No, not the kind of hipster that sells rainbow-themed foods at the Geylang Bazaar ( Now that's really hopeless shit !) but the kind of ironic, frugal child of the Great Recession that is forced to work in the gig economy and avoid seriously engaging in the financial markets.

So this Millenial Generation was burned so badly by the markets, they eschewed Wall Street and missed out on the greatest bull market post-recession. But it gets worse - they invented a whole new asset class called the crypto-currency and dived into it without proper asset allocation and diversification.

Some became very rich but the majority are stuck with paper losses as they hold for dear life into financial oblivion.

For the folks suffering huge losses this quarter, try to avoid self-pity, just pick yourself up and start studying finance seriously.

At least, unlike me, you still have your youth.

Sunday, May 20, 2018

Feasibility of Bond Margin Financing

[ Feedback for this article is fast and furious !

Some concerns raised is whether investment grade bonds with a short duration can even be found in the markets ]

This has been a great week. The folks of Kim Eng held an open house and invited me to attend. The catered food was relatively good given that my exposure to free buffet is limited to what is available in SMU law school. They also gave me a pair of free movie tickets because I was such a special margin financing customer.

I'm just saying all this because I know they read this blog quite religiously.

Anyway, let's have a closer look at their bond margin financing facility.

Maybank Kim Eng has a fairly competitive rate to facilitate bond margin financing. I invite all readers to share with me what private bankers give them, but 2.28% is sweeter than my rates for REITs financing, but we have to live with the lower returns from bonds.

The framework I am using is the traditional use of the Kelly Criterion that blackjack players use to size their bets. The better the odds of winning, blackjack players will place bigger bets. I also employ a modification called the half-Kelly because gamblers generally half the output of the Kelly Criterion so as to err on the safe side when placing bets in a casino, this way they can survive longer.

Ok, so let's look at a typical deal the Maybank guys have suggested to me that night.

Suppose we have a bond with one year left to go. Let's assume that this is a bond issued by a local bank that returns 4% and is rated AA - it's a safe,conservative bet. As bonds are sold OTC, each bond position is a hefty $200,000. I also did some searching on Google and I found that in the worst case, a AA bond defaults with a percentage chance of 0.38% in a super bad year like 2008. This gives us a worst case scenario for a default. To simplify matters further, if a bond defaults, I assume  that you will lose everything even though the insolvency process might give you higher priority than shareholders.

So assuming that we have war-chest how much of it can we put into investing in this bond without leverage?

We apply the Kelly Criterion, or [b(p) - q] / b, where b is the odds on a success or 0.04, p is probability of success or 0.9962 and q=1-p or 0.0038. If this bond were a blackjack game, the Kelly Criterion will recommend that 90.12% of your war-chest can be placed on this bond. Sane gamblers use the half-Kelly and can invest 45.06% of their portfolio into a bet. At $200,000 for one position, you need to be almost half a millionaire to take this bet.

Now let's look at the Kim Eng deal that allows us to employ some leverage to buy these same bonds but at a cost of 2.28%. By leveraging 300%, you only need $66,667 to place a bet on one bond. There is, of course,  a 0.38% chance of utter ruin. Suppose we apply leverage, there is a 99.62% of winning (4%*3 - 2.28%*2) or 7.44%. This translate to odds of 0.0744. There is a corresponding chance of a disaster occurring with a probability of 0.0038 where we will lose 304.56% of our bet.

(Expect to lose everything when a bond defaults. Also you will owe the broker the money you borrowed from them as well. )

Put all the numbers into the Kelly Criterion,  the equation will allow us to bet [0.9962 x 0.0744 - 0.0038 x 3.0456] / 0.0744  or 84% of your war-chest. Using a half Kelly, this is a bet sized at about 42% of your war-chest.

What can we conclude from this exercise ?

a) A margin account for bonds allows a smaller retail investor to bet on bonds, something that is the province of the UHNW investor. The first case where there is no leverage, you will need about $400,000 to justify placing one bet on a bond. In the second case where you employ leverage, you only need ($66,667/0.42 ) or $160,000 to justify one position.

b) The equation covers credit defaults but most of the fear in our current market comes from interest rate risk. The smart money is betting that the Fed raise interest rates three times in 2018 and twice in 2019. If this prediction is wrong, there will be bigger shocks to bond prices. This is why leveraged bond bets should focus on bonds that will mature soon, like within 1 or 2 years of placing your bet.

c) Having bets with a size of $200,000 or $66,667 is still fairly large for a retail investor, so expect only quasi-affluent folks to be making use of this margin facility.

d) Unless you are a multi-millionaire, most of your positions will not allow you adequate diversification.

For now, I will be sticking with my REITs margin financing account which is doing ok. After it hits my ideal size and leverage ratio, I will not be ready for bond financing yet because I want to start working on a market neutral portfolio using CFDs which is something I hope to start doing in 2018.

Friday, May 18, 2018

People fail because they major in minor things.

The last article where I spoke about the complexity of Singapore life attracted some amount of constructive criticism from bloggers like La Papillon and Richard Ng, so I went back to the drawing board to see whether that idea can be reviewed or salvaged. 

In many cases, they are right, complex societies do not exist, only complicated people. And I think I tend to be more complicated than an ordinary Singaporean. In many matters, Singaporeans do have it easy compared to their international counterparts. Our tax code is simple and we do not spend too much effort trying to optimize our taxes unlike our friends in the US. 

One salvageable idea in that article is the advice that I give to readers not to major in minor things. I think this idea was invented by Jim Rohn and made famous by Anthony Robbins. 

According to Tony Robbins : People fail because they major in minor things.

Here's an example of what I did recently.

At this stage of my life, I don't want to be beholden to any employer. If I work for someone, I want the work to be interesting, rewarding or both. To do that, my finances must be able to sustain joblessness better than my 4 years of law school. Even better, I must be able to save more than most working folks even when I am jobless.

So I really wanted to optimize my expenses so I went through my broadband and mobile phone commitments. I went to a Starhub outlet and started to work with a salesperson to re-contract my phone and cable TV. The salesperson was actually quite nice and was willing to offer to me cheaper SIM only and no-frills cable TV plans. The total result of my effort was to shave off $50 from my telco expenses every month. Let's just say that in 2 years, this would have saved me $1,200.

Another hack I did was to buy a battery changing kit from a China vendor for my Oneplus 2 phone for about $20. With an extended battery life, I can now avoid buying a Google Pixel 2 and maybe even wait for the Google Pixel 3 to be launched. This can potentially save me another $1,300 over the next two years.

Net-net my micro-managing efforts yielded about $2,500 of savings over the next two years.

Now, suppose I move $200,000 of my portfolio from Tech stocks to my REITs margin account. I can push my dividend yields from 5% to 10%. This subtle change can net me an extra $10,000 in dividends every year. Of course, more effort would be required to do some research, but even if I miscalculate, an additional $5,000 with an improvement in the Sortino/Sharpe Ratio of my portfolio is quite a reasonable result.

As such, fooling around with Telco plans and optimizing some credit card benefits may be considered a minor thing compared to simple portfolio shift from Tech to Leveraged REITs.

But some decisions are even bigger than those involving your investment portfolios. Your decision to study for a degree will have a major impact on your total income you will make within your lifetime.

Choice of a degree affects your human capital. 

You can easily find a website and dig out statistics on starting salaries and employment rates of a degree program.

To stay politically correct, I have listed the worst NUS degrees you can apply for after your A level exams, omitting the truly abysmal numbers coming out from SIT. The third column from the right contains the median monthly income figures and the percentages are employment figures after 6 months of graduation.

In many cases, people do really major in minor things.

Enjoy !

Tuesday, May 15, 2018

The Art of the Good Life #23 : The "Good Death" Fallacy

Short post because I'm not feeling good ( sprained my back ) and it's been a long night.

The "Good Death" Fallacy is a mistake we make because we not give any weight to a duration of an event.

Consider Anna who was single, unmarried and had no children. She had good friends and enjoyed going on long holidays. At age 30, she suddenly died in a car accident.

Now consider Beth who was also single, unmarried and had no children. She had good friends and enjoyed going on long holidays. The last five years of her life was not as good as her first 30 years. At age 35, she suddenly died in a car accident.

When asked to determine who lived a better life, most surveyed participants said that Anna had a better life even though Beth lived 5 years longer.

Our mind is prone to over emphasize the peak in each event and how each event ended.

The duration does not matter so much.

Sunday, May 13, 2018

How hypergamy and rise of involuntary celibates affect our personal finances.

The recently Toronto attacks by a single man on women illustrates the danger of involuntary celibates to our modern society. If you have been following this blog, I write about about the rise of the useless caste - Video gamer males who do not participate in the labour and marriage markets. Involuntary celibates are a different archetype. Incels are angry men who are upset that they are being ignored by women or "Staceys" who prefer dating what incels label as jerks.

One of the root causes of involuntary celibacy among males is demographic policy. China is now ticking time-bomb because their rural areas are full of men who cannot find a spouse  thanks to the ago old practice of aborting female fetuses. A nation of millions of Incels is definitely not a safe place for our daughters.

But there is another reason for the rise of Incels.

Hypergamy is the act of marrying someone of a superior caste. The fact that women are generally hypergamous has been researched and generally supported by social science. The following paper rationalises this phenomenon - because women tend to invest much more heavily in offspring, women will tend towards marrying men with higher human capital and men want women with lower human capital because of men's desire to have legitimate children.

( My personal experiences being exposed to family law also seems to give me the impression that men with lower human capital marrying women with higher human capital will result in marriages of poorer quality. )

The effect of hypergamy on personal finances is largely ignored by investment gurus but it is far reaching and can impact your investments.

Face with a dearth of eligible women, men in China work punishing hours to own an apartment to attract a spouse pushing up real estate prices. Interestingly, many people still remains single. Chinese women who are highly-educated  and successful get dissed by society as sheng nu. At the other end of the spectrum, lowly educated rural men sometimes have to resort to kidnapping or sharing spouses.

Imagine our 4G leadership making a decision to re-introduce immigration to deal with our low fertility rate. The Chinese, being so used to high real estate prices, will definitely push up real estate prices in Singapore. This will occur without a corresponding increase in rentals creating price compression in local real estate markets. Wait... i think it's already happening today.

At a personal level, this means that I now see myself as a "corrupting influence" when I hang out with LLB interns.

To me, when a fresh male Law graduate starts a new career, the high starting salaries and career potential allows them some leeway to play a waiting game in the game of marriage. Their human capital is an appreciating asset and hypergamy guarantees that the harder they work on their cases, the more attractive they are as husband material. It's like playing blackjack and only committing the heavy bets when there are more 10s and Aces left in the shoe.

For the female Law graduate, the marriage game is much harder. The university is the last place where they will be surrounded by eligible men who are intellectually compatible with them. One bad move and they will miss out on the marriage markets.

I think this also answers my previous posts as to why we can't make RGS girls marry ITE guys.

Thursday, May 10, 2018

Why invoking Warren Buffett may be bad for the retail investor.

While Warren Buffett is over-represented in investment literature, the willingness of many gurus and trainers to channel him goes beyond belief. Invoking Warren Buffett in an investment lecture has almost become something akin to religious ritual. It creates instant credibility for the investment trainer even though in Singapore, he is not likely to be Warren Buffett.

( It's ridiculous right, it's like me quoting Xiaxue to get her readership figures.)

There are two instances in investment literature that show that such locally approximated "Warren Buffett" approaches might end up leading retail investors astray.

a) Quants have started figuring out the secret sauce of the Buffett technique

John Alberg and Michael Seckler in an article entitled Misunderstanding Buffett talks about how Berkshire Hathaway's returns can be replicated using factor models. A combination of value, quality, low beta and.... the liberal of leverage of up to 1.6x can allow a quantitative model to cover most of Buffett's returns.

Most of the time investment trainers tend to focus on the qualitative aspects of investment management like whether there is an investment moat or a sustainable competitive advantage or whether management is trustworthy. These are fluffy approaches towards investing which may cause the retail investors to lie to themselves and fall in love with a particular stock simply because too much time has already been spent analyzing it.

At this point I'd like to say that only Dr Wealth's Factor based approach seems to get the technique right with as little emotion as possible. ( While Alvin Chow is a friend, but he did not pay me to say this )

b) Berkshire actually runs three portfolios of which only two can be replicated by a retail investor.

 This second insight on Warren Buffett actually came from an autobiography by Ed Thorpe entitled A Man for all Markets whom I had a much closer affinity with because I'm primary a numbers guy, he is a mathematician and has beaten casinos in black jack and roulette before conquering the financial markets.

According to this book, the simplest way to look at Berkshire Hathaway is to see it as a collection  three portfolios. Only the first portfolio can be replicated well by a retail investor because it consists of publicly owned stocks. The second portfolio consists of GEICO/General Re - his various insurance businesses that allow him to create some kind of faux leverage through "insurance float", investing the premiums he earns that hasn't been paid out.  His third portfolio consists of stocks that simply are not publicly traded.like Wesco Financial and Clayton Homes.

Anyway, the next time you encounter a someone channeling Warren Buffett, you might want to read these two books and engage them in a spirited debate to see how their ideas hold up.

Tuesday, May 08, 2018

The Art of the Good Life #22 : Life Stories are Lies !

The world of RPGs is split between two broad player types. I belong to "Murderhobo" category. I create powerful PCs whose sole purpose is to kill monsters and spread mayhem in the gaming world. If the gamemaster gives me  a wish, I will often ask for a magic sword so that I can kill more monsters and spread more chaos in the campaign world. I like my RPGs to be chunky, mathematical and full of interesting loopholes. Characters possibly played by Murderhobo gamers include Saitama One Punch Man, Thanos, and Batman (Injustice).

The opposite of a "Murderhobo" is the "Storyteller". These assholes get into a game because they want to develop a narrative around their character. They wish to explore their inner world and how it interacts with the campaign.  These players value coherence of the campaign world and they hate murderhobos and the chaos we bring into the campaign. They like an RPG that is rich, descriptive and rule-lite Characters possibly played by Storyteller gamers include the Genos, Spider Man, and Batman (Dark Knight Returns).

As a dedicated "Murderhobo", of course I know that the "Storytellers" are wrong !

The narrative bias is my favorite cognitive bias because we are wired to love a great story. The ability to turn a set of disjointed facts is one of the key skills of a data scientist, litigator or a financial journalist.

Take for instance the recent rise of DBS stock which is currently the talk of the town. It's easy to spin a great story out of it. Perhaps bank stocks are rising because of rising interest rates and banks tend to become more profitable when interest rates are higher. But can this explain the recent fall in OCBC prices? You then go on to talk about DBS's fintech strategy which makes it part of the Fintech economy. As we discover more, we end up contradicting our story about DBS, you then go on to modify your story further to maintain its coherence. 

A good story has three elements that come in in the form of 3 Cs. It is "compact" or easily understood. It is "consistent" in that it does not contain an element that contradicts with itself. It is "causal" or formed by events that lead from one to another. Our human brain simply cannot accept facts as is and has evolved to turn any series of events into a story. This is the reason why we have superstition and religion - a story must be manufactured to explain a natural phenomenon.

Our inclination towards stories brings most of us to have some sort of life story for ourselves. It is some kind of lie we tell ourselves to make us seem more heroic than we appear to be.

This ultimately prevents ourselves from seeing ourselves realistically - multi-layered, paradoxical and incoherent.

Sunday, May 06, 2018

How would Thanos manage his personal finances ?

I'm quite sure most readers have watched Infinity War by now. In my opinion, the Mad Titan Thanos can be a great role model for folks trying to achieve financial independence. After all, who wouldn't want all the assholes in the workplace (along with some friends ) to disappear at the snap of your fingers ?

As it turns out, a person's journey to financial independence mirrors Thanos' attempt to collect all the Infinity Gems :

a) Mind Gem

The Mind Gem represents the skills you would need to understand how money works. For the rookie, I recommend reading the Richest Man in Babylon by George Clason. Then concepts of FIRE can be found in the works of Vicki Robin. After that you can try the more technical investing guides in the bookstore.

b) Power Gem

The power gem represents the ability to manage your energy. In personal finance it represents the ability to max out your life-energy exchange. A strong career and earnings signifies the ability to convert your life energy to money.

The power over life energy maxes out your earnings.

c) Space Gem

In the story, the space gem allows users to manipulate space and be at any location at the same time.

In personal finance, this represents the space between your earnings and your spending. The wider the space, the more savings you have. It is pointless having great life energy exchange when your excess cash is spent buying gadgets and useless stuff. This also explains why Thor is the God of Lighting, not the God of Hammers.

d) Time Gem

The time gem allows the manipulation of time and the ability to see into the past and the future. Now that you have adequate savings, power of time allows you to employ compounding to multiply your wealth. Compound interest is, after all, the eighth wonder of the world.

For astute fans, Dr Strange used the time gem to employ some of kind of Monte Carlo analysis to look into 1.4 million futures before deciding to conceded the time gem to Thanos.

e) Reality Gem

The reality gem allows everything in reality to be altered. To me, it means choosing the right reality of your investments. Picking a combination of stocks to you the best investment rewards.

Another aspect of financial independence that is not revealed in many books is that it is much better to test out your new lifestyle before adopting it. Otherwise how would you know that this new reality is the right one for you ?

f) Soul Gem

The Soul Gem is probably the gem that allows Thanos to snuff out 50% of the entire Marvel Cinematic Universe.

While it does not have a direct analogue in personal finance, we need to mindful of Nicholas Taleb's advice to always have Soul in the Game. To continue to engage meaningfully in the world around us, we need to retain some amount of soul or vulnerability in order for life to be meaningful.

I suspect that half of the universe is stuck in the Soul Gem with Gamora what's in the gem will be kep to undoing what the Mad Titan has done in the Infinity Wars.

So for readers who fantasise about making all the jerks and horrible people in the office disappear, it might be useful to ask yourself this question :

What would Thanos do ?

Thursday, May 03, 2018

In Law School, sociopaths are a feature and not a bug.

The JD alumni gathering in SMU was quite a blast. I had the privilege of meeting some juniors, some who actually read this blog.

So kudos to the current administration for a job well done !

When members of different cohorts meet together to have conversations, one element that consistently bonded all of us who graduated from the JD programwas the sheer amount of shit we had to put up with our fellow classmates in group projects. During this gathering, we had an animated (and extremely therapeutic) conversation about our horrible experiences with classmates who are so notorious, a layer of Hell should be reserved for these monsters.

Without naming names, let me show you a few examples of some of the sociopath antics I heard about from different batches of JD students (AS far as I am concerns, this is officially all hearsay and rumour and sorry, I will not confirm the identities of these folks over email)  :
  • A JD alumni once withheld paying her school fees and would pay so long as she was able to obtain satisfactory grades. 
  • According to rumor, another alumni threatened to sue the school administration if he did not get his school fees back. 
  • Someone gained notoriety for arguing with lecturers when they were questions during their school presentation. Eventually no one wanted to work with her because it meant getting really bad group grades. 
  • Someone once wrote to the administration to demand that her entire class retake an exam because she was dissatisfied with her grades. 
  • Someone hid books in the law reference library so that others would not have access to it. ( I even heard that a junior LLB has started doing this more recently )
  • You heard the Russian hacker story on this blog. Nothing further to add here except that it was my exam script that was deleted.
What was unanimous as I mingled with seniors and junior batches was how consistent sociopaths have appeared in all batches.

It was only when I did my practice training when I figured out why we kept encountering these monsters in school. You see, in my current workplace, my supervisor actually has a copy of this book by Martha Stout in our library of legal resources. She encouraged all her employees to read it because sometimes your client might be facing a sociopath in the courts. Worse, you might be representing one to make a living and might be pressured to do something that you would regret later. So the experienced litigator studies sociopaths the same way project managers study the PMP.

So later this gathering, I was asked by the Dean how I feel about the JD program since I have started my practice training. I said that I would like to take back of some the feedback I gave on the program on this blog in the past. Upon further reflection, I realize that being exposed to slackers and sociopaths in Law School is not so much a flaw in the admissions program, but a feature that all law schools need to eventually follow.

That is the fundamental essence of Dispute Resolution. Without that Dispute, there will not be a need for resolution.

Who creates the Dispute in the first place ? Sociopaths, of course.

Tuesday, May 01, 2018

The Art of the Good Life #21 : The Memory Bank

This chapter gets you to consider the value of an experience as compared to the value of a memory.

Suppose you have a fantastic experience, like a conversation with God or your deity, but then after the experience you would forget about the experience completely - How much would you pay for that memory ? Now suppose you can remember the event for one day, one week or your entire lifetime. Would you value this experience with a higher premium ?

The author hypothesizes that most folks would not ascribe any value to an experience that cannot be remembered, and that more value will be attached to memories that can be recalled. According to the author, this is irrational as we are wired to only remember the peak experience and how most experiences end anyway. Furthermore,  memories become worthless once we are dead.

Next the author links this concept to idea of "being in the now" or mindfulness.

The part which I find of value is the idea that being focused on the now should not be misinterpreted as being not bothered about the future. Having plans for the future is compatible with the idea of being in the now. We can plan ahead, but once planning for the future is over, we can then refocus on the present moment.

I think this idea has merit.

On social media, there's viral story about a business man who meets a fisherman. The businessmen tries to convince the fishermen to up his game, scale his business, and be more ambitious in life but soon realizes that, in the end, the fisherman will end up being in the same position he is currently in.

This story is insidious and can mislead the reader into ignoring the bad things that may happen in the future.

If the fishermen tries to live his life in the moment and maintain status quo, unpredictable events can take him out of his comfort zone, and there may be no chance of recovery from catastrophic events. For example, a child falling ill may burden him with medical bills.  If the fishermen works hard to scale his business, he may accumulate more resources which can then be used by him or his family. While he might come back full circle much later in the future, he would have more resources to deal with calamities and may even leave a legacy for his children.

The moral of the story is that sometimes stories exist to pander to the weak and to defend lifestyle choices that lead to mediocre outcomes. 

Sunday, April 29, 2018

What is your Samuelson Number ?

Since we are in the topic of the Kelly Criterion and leveraged portfolios can be justified, let's about Samuelson numbers.

In the book Lifecycle Investing by Barry Nalebuff and Ian Ayres, one controversial concept they spoke about is called the Samuelson Number named after Paul Samuelson, the first American to win the Nobel Prize for Economics.

In this book, the book asks the following question to its readers :

If you would already be retired or financially independent today, how much worth of equities would you have. For some people, it might be, say,  $1,200,000 worth of equities.

Nalebuff and Ayres would then go on to suggest that a young graduate should employ 200% leverage to first accumulate $1,200,000 in equities and then pay off the amounts owed subsequently with investment returns and salary contributions. So a fresh graduate would start with a leverage of 200%, after reaching $1,200,000  the leverage would slowly start to drop until it becomes an unleveraged equity portfolio. Thereafter, investments beyond $1,200,000 will flow into the bond component of the portfolio.

I read Lifecycle Investing quite a while ago but I did not have the courage to put its ideas into practice. Over time, even Paul Samuelson began to question this approach because employing leverage meant skirting with the possibility of ruin.

I see modifying this approach using our low tax REITs regime as something feasible for a young Millenial investor today for several serious reasons :

a) We can now backtest a relatively powerful portfolio of REITs to return 10% which has a low standard deviation of around 13-15% and yield about 6.5%. This means that every $1 contributed into this leveraged pool can generate 10 cents in dividends every year. ( Currently achieved in my margin portfolio )

b) With 10% yields, a $2,000 passive monlthly income can be achieved with only $240,000. This allows the Millenial worker to cover his own expenses in a relatively short period of time in his early 30s.

c) Given how short STEM careers are because of technological disruption, this may be safer than trying to be loyal to an industry/company upon graduation because the need to keep  relearning your skills to stay ahead in the workforce or be relegated to the gig economy.

d) Once $240,000 is achieved, the worker will have two sources of income. His work is not over because he has to deleverage his portfolio to retire, but he will be in a way safer position than someone ho has to rely on his corporate job.

My challenge for the upcoming year is to use of my alchemical skills to combine the ideas of Vicki Robin, Barry Nalebuff, various Quantitative hedge fund investing approaches and a few other authors to create a new workshop that is mathematically tested to allow a new age knowledge worker to reach financial independence at the earliest time.

For now I have yet to complete this project because I have yet to begin crafting a backtest pure equity portfolio.

But in the meantime, it will be great to start thinking about your own Samuelson number.

Thursday, April 26, 2018

Applying the Kelly Criterion as a middle ground between a War-Chest and a Leveraged Portfolio.

This week has been really rough for tech manufacturing and income stocks. But what really saved my portfolio was my margin account which held up while the rest of my portfolio got battered. I really look forward to creating another back-tested equity portfolio in time before my talk.

Anyway, one possible middle ground between the war-chest and the leveraged portfolio is the Kelly Criterion. If you have heard about the casino antics of Ed Thorpe, you will know that he was one of the first to come up with a practical approach towards making bets using the Kelly Formula.

You can find the derivation of the formula for the Kelly Criterion for stocks on this link.

For most of us, we just need to know that the proportion of our war-chest to devote to an investment is equal to ( stock return - risk free rate ) / ( standard deviation of the stock ^ 2 ).

So if perform a back test and find that the STI ETF has provided returns of 3.5% with the risk free rate with a standard deviation of 19%.  We can also derive the risk free rate by using the 10 year local bond current yield of 1.8%.

The Kelly Formula yields (0.035 - 0.018) / (0.19)^2 or 47%.

So you should put 47% of your war-chest into the STI ETF.

Suppose you conduct a back-test and figure out a way to create a REIT portfolio that returns 10% with a standard deviation of 13%, let's see what happens instead when we use the Kelly Formula.

The Kelly Formula in this case yields (0.1 - 0.018) / (0.13)^2 or 485%.

A lot of gamblers suggest using this thing called a Half-Kelly so that your position sizing becomes even more conservative. So even if we take half of 485%, 200% leverage is not as insane as some bloggers make out to be.

As a person who only uses 200% for less than a quarter of my total net worth, I really do not suggest that you use an equation to position size a margin account.

What I am saying is that mathematics may be able to reconcile the differences between a war chest investor and a margin account investor.

Sometimes both can be right.

Tuesday, April 24, 2018

The Art of the Good Life #20 : Your Two Selves

[ My pal 15 Hour Work Week has also started a regular series on this Rolf Dobelli book as well ! I read his blog here because he has a different take on this book and I read it to revise its concepts. ]

You have two selves.

The first self is the experiencing self. This is part of the consciousness that is in the present, taking in all sensory perceptions real-time. This part of the self has to sift through millions of data points just to retain a few of it for storage in long term memory.

Which leads us to the concept of the second self also known as the remembering self. The remembering self  gathers, arranges and evaluates all the data captured by the experiencing self.

These two selves evaluate events differently. In fact the remembering self tends to over-emphasize peak events and the also the things which occur right at the end of the event itself. This is the reason why some people who suffer during BMT tend to see it more positively in retrospect.

This idea may explain the behavior of the folks who reach Financial Independence.

It does not matter how long it takes for  someone to reach financial independence. In retrospect, the triumphs in a person's career will determine how he assesses his journey to reach cross-over point, where passive income exceeds expense.

This further means that, without an extremely unpleasant event that actually ends a person's career, folks will generally not voluntarily end a career journey after reaching financial independence. We often get out because we get retrenched or meet very toxic people in the workplace.

We can extrapolate some useful insights from this realization beyond the Rolf Dobelli book.

Those who first reach Financial Independence and then pull the trigger to Retire Early will always tend towards Introversion. This is because the workplace will always be a place of over-stimulation. Endless meetings, presentations and chats next to the water cooler.

Which leads to a deeper realization.

When you read the articles of a financial blogger, invariably you will encounter someone who is heavily biased towards advising readers on what best to do with their money and life and that this advice would actually work against extroverts.

This is where we see the extrovert minority struggle to understand why people are so eager to retire even within this community.

I don't see a problem for extroverts trying to reach financial independence. The trick is to get there first, and then ask yourself how can this financial independence be used to make a bigger dent in the Universe.

Failing that, more money may just mean bigger parties and louder music speakers.

Sunday, April 22, 2018

Cryptocurrencies are DOOMED !

Given that cryptocurrencies are going through a minor recovery of sorts, it is time to have an update on cryptocurrency investing.

April 2018 is a very fortunate month for folks who are interested in this asset class. This is because Barclays Bank has devoted most of their Equity Gilt Study 2018 report to technological disruption and cryptocurrencies. While I do not have the actual report, the Economist has summarised what it had to say about the state of cryptocurrency investment world.

The basic gist of the study is that cryptocurrencies have peaked. There will no longer be another upside like what the luckier millennial investors have just enjoyed. The reality that this investment class does not produce a dividend is now sinking in.

Cryptocurrencies also face four challenges :

a) There is a lack of trust in cryptocurrencies. 

Generally speaking, people trust currencies backed by government.

b) Cryptocurrencies lack sovereignty. 

Governments and businesses hate it because there is potential for tax avoidance.

c) Third is privacy. 

Once you lose your private key, every transaction made on the wallet will be revealed.

d) Irreversibility. 

Finally blockchain transactions are hard to reverse.

Where cryptocurrencies remain relevant are in societies where trust is minimal or already lost. It is not difficult to imagine that cryptocurrencies will be quite useful in  a failed state like Venezuela.

How Barclay's bank concluded that the peak is over for cryptocurrencies is super interesting because they got their whiz kids to model the euphoria like an infectious disease. There is a ridiculous ramp up of prices at first but eventually the disease fizzles out as a large part of the population is immune to it. Once prices falls, investors lose hope and sell. Soon prices fizzles out, just like the way a fever breaks.

I really want to get a copy of the report because the approach to model cryptocurrency as a disease outbreak is really cool and amazing and can be reapplied for other asset bubbles.

For now I have concentrated my cryptocurrencies in my Coinbase account and will be liquidating it soon since Coinbase will no longer work with XFERS on 15 May 2018.

If I just retrieve my cash into my margin account, I would have enough to sustain my mortgage payments, effectively attaining my biggest resolution I have set for myself this year.

( If a reader is a a private wealth client of Barclay's bank and access to the document, I'd be most grateful if somehow you can send me a link to a PDF copy)

Thursday, April 19, 2018

You can choose your reality.

When I was single, I thought of wanting to join SDU, so I consulted an engineering classmate who frequently attended these SDU events, hoping that he can give me some  dating advice. I was a desperado and wanted to know what were my chances of finding a significant other when I joined these events.

My friend understood my 20-something self very well so he wanted me to be less of a jerk than already was then. I remember we were riding on the north-south line and he told me that in order to succeed in SDU, I must get used to having dates with average-looking women. So he pointed to me three women of my age sitting opposite us in the MRT.

The first woman was really plain and I would not have noticed her even if she was standing in front of me. The second woman was actually quite a turn off because she had a lot of acne on her face. I can't remember what turned me off the third woman, it might have been her weight. What I do remember was jokingly telling my friend that if I am left with these girls, my family line would be essentially over and I would choose eternal loneliness over a domesticated life.

What is the moral of this ridiculous anecdote ?

Organizations and salespeople exists to create a new reality for you.

SDU's approach towards getting more graduates to date is to bombard them continuously with average looking women and men with average charm so that expectations can be lowered and an eventual match takes place.

They are the in the business of lowering your expectations.

As investors in the 1990s, unit trusts were the rage. In my first book, I wrote about expense ratios and management fees. In those days, I invested in unit trusts like the Templeton Global Equity Fund which could charge over 2.75% in annual fees. Even if equities gave 9%, I would make barely 6%. Dollar cost averaging was the hot new thing 20 years ago.

That was the reality then.

The insurance industry is worse. Agents routinely sell their products as being better than bank deposit rates.

While the situation is much better, we need to careful about the products sold in the markets today, ETFs are highly advantageous compared to actively managed funds but we are seeing very unexciting returns from the STI ETF at around 3.5% last year when simply buying an equal-weighted basket of STI components can give a 1.5% boost to your returns.

So in essence, in the world of investments, you can create your reality.

When I started back-testing a portfolio on Bloomberg, the world of double digit returns with a lower semi-variance suddenly opened up to me. When I started employing leverage, having an expanding portfolio without the need for a day job became a new reality to me. So much so that there are projects that I am eagerly looking forward to doing by the end of this year involving the shorting of stocks.

New realities can also backfire. Cryptocurrency prices can double in a short span of a week. Now we could be seeing a nasty backlash in 2018.

The trick is to stick to the fundamentals like diversification and risk-position-sizing to ensure that there is a way out when the reality changes.

Monday, April 16, 2018

The Art of the Good Life #19 : The Smaller Meaning of Life

The larger meaning of life are questions relating to what you re are and how you fit in into the Grand Scheme of the Universe. These are questions that are hard to answer and require a lot of introspection.

The smaller meaning of life is a lot easier to attain because all you need is to understand your goals and ambitions.

The book talks about research done on children. Those kids who consider money as something indispensable had a higher income later in life and are generally happier than those who did not value money as much. Of course, those who valued money but did not achieve material success later in life are the most miserable of them all.

The surface advice from the book is that goals matter. Popular self-help supports the idea of SMART goals.

Scott Adams takes goals one step further and asks the questions of what kinds of personal systems can be built towards attaining personal success as opposed to following simply goals. Habits and rituals are more effective than goals.

So I guess a more complete picture is to first know what your ambition is followed by your goals, and then to find out how to build a system or series of habits to achieve your ambitions.

My goal right now is to offset my mortgage with my margin account. To do that, I have to save about $4,000 a month on an allowance of $800. This means really skimping on on the use of my dividends every quarter.

To do that, I developed two systems :

a) Fish soup once a day. As Maxwell road hawker center soup serves fish soup that is well above average, I get a healthy meal that keeps my blood sugar low at a mere $6 a day. Somehow good healthy diets can drive overall savings since I spend less time at restaurants.

b) Book moratorium on the poor dividend months. Every January, April, July and October, I stop buying e-books and RPGs so that I can use the library more and select only those that I can read in that quarter.

As we speak, my margin account is getting close to $480,000 in size which generates about $24,000 a year. This is not a small achievement as I had no earned income building up this margin account and I was able to  keep my core portfolio generating income that  I can feed my entire family with.  As my margin account is full of higher quality REITs, yield accretive moves should be able to tip me over to be able to offset mortgage payments hopefully by October 2018.

Saturday, April 14, 2018

Managing your Attentional Capital or Focus

Today I went over to Starhub to re-contract my mobile phone into a SIM only contract. By doing that I resolve a painful problem I have been facing since I started work in a law firm - I have two devices that employ mobile data that I bring to work, a mobile phone and a tablet. For months, I have been exceeding my data usage by 4Gb and have been spending $200+ on telco expenses every month. So today was the expiration of my contract so I rushed over to switch to a SIM only plan with 16Gb of data allowance.

The conversation was amusing. The sales executive tried to bait me by telling me that I am losing a $100 phone voucher when I refused to get a new phone. I told him that because I used so many extra Gigs of data, I am a good customer of Starhub and I need to stop being a good customer starting today. He then said that I will lose my double data allowance once a year is up. I then told him that by then, I may choose a new Telco by then as there would be four players in Singapore.

I wanted to tell him to stop up-selling so I told him that I'm a Starhub shareholder and I appreciate his up-selling efforts but I'm minimising what I pay to his company to him moving forward.

The conversation then veered into investing and we started to talk about Starhub dividends. I told him that he was stupid for not investing in Starhub because of the 6% yields he's likely to get and that if there is a drop in dividends he would be the first to know because he would be facing more customers like me who are either bailing out or cancelling a plan. The rest of conversation is about how to open a brokerage account and get started to make more money from his company.

That look on his face when I told him that his company pays me better than a bank deposit was priceless.

Even more amusing was that I ended up selling to him.

Ok... This is a pointless story.... I am rambling... All I wanted to say on this blog post is that we need to conserve our attentional capital or focus.

Singaporeans are lucky compared to Europeans and Americans in that very little attention needs to be paid on taxes because out taxes are quite low. Beyond that, life is pretty complicated on this island.

Here are some examples :

a) We spend too much of our time thinking about CPF which is a confusing monster of a scheme because it covers retirement, education and housing.

b) Property ownership takes up too much of our time as well because the asset enhancement depends on our attitude to foreigners and how we prioritise the needs of home owners versus home buyers. I keep getting into Whatsapp chats where people just speculate about property movements and talk about stupid condo launches. But no one ever talks about tolerance of foreign labor which will drive prices moving forward.

c) We have to consider our educational needs - you can't buy a private degree anymore in Singapore because HR departments will hardly consider the degree worth the paper it is printed on. Replacing this is the possibility of developing skills using Skills Future Credits.

d) There are also other endless distractions that we need to think about : telco expenses, insurance expenses and credit card rewards.

If your personal finances rely on so many moving parts, it simply means that smarter and more conscientious citizens will have an edge in society. They simply can take advantage of more schemes to generate more revenues and savings. Just now, I was teaching my single friends about the Entertainer App, something I picked up from Budget babe's talk last year.

For the folks who are not that smart, you would have to prioritise what area to focus on and stop majoring in minor things. This is why I wanted to stop paying for a mobile phone plan and separate my data plan from the gadgets peddled by telcos. For that same reason, I absorbed the risk of floating rates for my mortgage so that I don't have to keep monitoring which fixed rate plans are the most advantageous ones out there. I have been using the same DBS VISA Classic card since I started work and have never asked for a fee waiver in my life. All my card rewards go into paying the annual fee and Popular vouchers.

As life becomes more complicated, the one rule to follow is to simply follow the money.

If the STI ETF provides a return of 3.5% and you backtested an equal weighted portfolio of STI components give out 5%, a $100,000 shift in your portfolio nets you an extra $1,500 a year. If you can backtest a REIT Strategy that gives 10%, then you can earn an extra $6,500.

That's $6,500 every year after you tilt $100,000 away from the STI ETF.

For those starting out, a well executed job switch may net a 20% increment.

No amount of optimisation of your telco bill or credit card rewards can generate extra revenues like that.

Thursday, April 12, 2018

Hacking your own Millionaire Mindset.

I think that we may have gone too far telling everyone what a Millionaire Mindset is not. The Millionaire Mindset is not about affirmations. Generating wealth is also not about sharing the quotable quotes of billionaires - although running a business selling motivational posters might actually work.

Now it's time for me to propose a generalized procedure for someone to develop a genuine Millionaire Mindset that puts him within a reasonable striking distance of landing a million bucks. Now in order for this to work, you need to read a lot. If you cannot accept this rule, then my approach will not work for you.

I propose that the Millionaire Mindset is hidden behind three books.

1. The Millionaire Next Door by Thomas Stanley

Nothing cuts through all that motivational crap like hardcore academic research. The Millionaire Next Door is a little dated by now but it shows some of the common traits and habit of everyday millionaires from the perspective of a sociologist. This is where most of the fundamental ideas of frugal living and avoiding flashy consumption come from.

I consider this the first book to read to develop this Mindset.

2. Your Money or Your Life by Vicki Robin

I read the earlier version of this book which was co-authored with Joe Dominguez. It's not an easy read but it's a textbook on FIRE and may contain humanity's first attempt to characterize financial independence as a cross-over point between basic expenses and investment income.

This is a crucial second book because financial independence is the bridge between survival and attaining millionaire status. It's like castling in a chess game to build up a defensive position early so that you can checkmate your opponent later.

Achieving financial independence allows you to farm your entire income into your portfolio allowing millionaire status to be achieved a short while later.

3. Seeking Wisdom : From Darwin to Munger by Peter Bevelin

The final book in this series is really about mindsets. I think that there is a certain way to think that makes you a better investor, worker or entrepreneur.

I'm in the middle of this book and most bloggers have not featured this book yet because it is quite unique as it unifies some key ideas in  Evolutionary Psychology, Behavioral Finance and some of Munger's ideas on Mental Models into a very interesting read. I think this book should supplant Thinking Fast, Thinking slow by Daniel Kahneman and Amos Tversky in a financial blogger's bookshelf because it much more accessible to lay persons.

Of course, developing a Millionaire Mindset may not make you a millionaire immediately.

But this is certainly a better alternative than the wishful thinking recommended by the folks who wrote The Secret.

Tuesday, April 10, 2018

The Art of the Good Life #18 : The "End of History" Illusion

I said recently on social media that an intelligent woman is like a magical sword. If you are not capable enough as a guy to wield this weapon, you can get yourself hurt really really badly.

A very intelligent and capable lady once bragged to me that her husband/boyfriend is a lucky guy because she is smart enough to say the right things to motivate him so that he can become very successful in life. She will push him to become an alpha male, a leader of men that commands respect.

Someone suitable enough for a daughter of a better age.

But as smart as she is, here's something that she does not know about us men.

It's hard to change us.

Changes happen as we interact with the environment. We change only when we are internally motivated to do so. A lot of tragedies in families arises from the desire of the wife to change the husband. A typical tragedy always involve marrying a man-child and expecting him to become a responsible dad overnight. I think you have better luck hoping for a rebound in crypto-currency prices.

While it is hard to change someone, we are always changing - just not in ways that some ambitious or highly intelligent women would find desirable. The rate of change is constant throughout our lives. A hard charging executive might become a lazy has-been after reaching his 40s. Even I changed from a gainfully employed  technology professional to a woefully underemployed legal professional.

Thus the HR adage that companies "hire for attitude but train for skill" is a wise move.

[ Kudos to this intelligent lady I spoke of. She become a highly successful executive and married a truck driver. ]

Sunday, April 08, 2018

Personal Update

This might be a great time to just give a personal update.

a) Training Contract

At this stage, I've reached half-time for my training contract. I've learnt quite a bit of from the past 3 months although for the sake of confidentiality, it is best that I do not provide too many details about my work. Most of the learnings I have derived from my work is how to manage our lives so as to avoid legal problems much later on. Sometime the most innocent moves like treating some of your children better than the others can have huge implications decades later.

Right now, I am slowly ramping up my job search in all the sectors what I can competently work in, targeting the jobs that are out of my league at the moment to see if I can get an interview. This includes the IT sector. I have not much luck so far and even managed to get a rejection letter from a headhunter.

I doubt things would look this easy looking forward in my 40s but I need to ramp up my job hunting efforts next week.

b) Personal Finances

There is a certain magic about working in a job that pays a 3-figure allowance every month. Because I try to eat healthily, I tend limit myself to Fish Bee Hoon meals at Maxwell hawker centre everyday.  l also avoid anything that may put me in a carb coma at 4pm during a workday.

The results from a savings perspective is quite astounding.

I managed to save $4000 every month for Q12018 because I have fewer avenues for spending my money. Reducing this by my home mortgage payments, $1800 is still pretty good and more than many median income families.

c) Financial markets

The maths in the past paragraph does not really check out if you are a new reader and do not really understand my personal situation, but most of this can be made possible because of my new margin account where I leverage high quality REIT that yield 6.5% to yield 10%. This new source of yields complements my old portfolio that yields closer to $5000 - $6,000 a month these days because it has more Tech counters these days.

I think 2018 would have been much better if not for the trade war started by Donald Trump. Over the short term, my portfolio has been experiencing a lot of fluctuation for the past 2 weeks. Medium term, I am cautiously optimistic as Singapore exports may even benefit from the situation.

Like most market watchers, I'm closely watching MAS's next currency moves which may lead to the tightening of the SGD. This can possibly lower SIBOR and make it cheaper to finance our mortgages and make our property more valuable this year. The downside is that our exports can become less competitive.

d) Cryptocurrency markets might be killed in May for many Singaporean investors

Last year, I was cursing myself for not putting enough into cryptocurrency. This year, I'm glad it's only small part of my gambling money.

News of Coinbase stopping Xfers transfers is really bad news and it might be an end game for many crypto investors in Singapore. I'm waiting for alternatives to be proposed by the blogosphere.

For the millenials who keep bragging about their crypto efforts, I wonder how they are doing right now.

e) Book moratorium

On January 2018, I decided to hold a 1 month moratorium where I was disallowed to buy any books so as to generate more savings to ramp up my margin account. It has been rather successful and I have decided to do this for all my low dividend months of April, July and October.

I still have plenty of books to read including a biography of Ed Thorpe and Jacob Fugger. I will feature these reads on this blog at a later time.

f) Leisure

Managing a blog, working on a finance workshop and family means that I have no means of leisure. Maybe I can start gaming a bit in July 2018 when I will give myself a break after my training contract.

Saturday, April 07, 2018

Is finance gendered ?

Let's imagine a finance seminar for men ( and men only ) that is relevant to you regardless of whether you are an alpha male or a BBFA.

a) It will focus on lifelong learning and address the issue why boys are not doing too well in school compared to women.
b) It will talk about earnings of blue-collar men who are not getting increments based on inflation rates.
c) It will discuss strategies of saving money by bingeing on Netflix, cutting cable and playing computer games all day. Even discuss the most optimal car to own.
d) It will focus on saving more money by eliminating male-dominated vices like smoking or drinking.
e) It will talk about investing on passive income to offset computing gaming expenses and Geylang escapades.
f) It will address men's shorter life-spans and adjust a mix of annuities and term life accordingly.
g) It will consider the prevalence of divorce and update the men on how our courts will rule on matrimonial asset division, custody of children and maintenance of spouse.
h) The tone will be humorous and filled with hours of filthy jokes along with good advice on money management.
i) Goody bags will be filled with condoms, Viagra, Astons vouchers and Tiger beer.

The question is why does such a seminar not exist ?

I think it is because people might find it absurd.

But once we flip that idea for women, this is common business practice and quite a few start-ups are doing quite alright providing financial education for women.

I think investing is not like writing novels. You can write a novel like 50 Shades of Grey that appeal to mainly to women. The financial markets are fairly consistent to male or female investors. While it can be argued that women tend to trade less and are more conservative in outlook, I know of many men who invest like women ( and do quite well for that matter ). Of course, there are also women who buy shit-coins like the most foolish of millenial males.

In my opinion, finance is different beast. SPH does not pay a different dividend to a man as opposed to a woman. One of my most admired financial journalists is Teh Hooi Ling and I try my level best to adapt to her quantitative investment style towards portfolio building.

The decision to segment the population to cater specifically to women is a business decision and not really based on a superior investing model that someone only works when executed by a woman.

It would be good to hear from women why they need a "safe space" to discuss money matters.

It seems like a gender neutral issue to me.

Tuesday, April 03, 2018

The Art of the Good Life #17 : The prison of a good reputation.

This chapter begins by asking the question of who would you rather be :

a) You are the best lover in the world but everyone thinks that you're the worst lover in the world.
b) You are the worst lover in the world but everyone thinks that you're the best lover in the world.

Most folks would choose (b).

The chapter however goes on to show that being obsessed with how people see you can be bad for your mental health. After all, all thanks to social media, we have all become managers of our personal brand. I am always performing a Google search on my own name and measuring the number of eye-balls that this blog attracts. Articles on back-testing and correlations would attract me about 300-400 eyeballs a day but brutal truths about private degree holders will net me thousands of eyeballs over the next 24 hours.

Would switching to internal measurements make you better off ?

It will certainly make you more comfortable, but I know of too many people who set such a low bar for themselves, so much so that they don't achieve very much when they hit their middle age. Furthermore, the book admits that our ancestors needed to maintain good reputation before they could survive as part of a tribe.

I guess this is why financial independence is so attractive to many readers with introverts taking a particular idea to leaving the rat race.

The only measurement that matters is your passive income. After it exceeds your basic living expenses, you can start living the introvert's dream of leaving the workplace and isolating yourself in your little cubbyhole without a care of what the whole world thinks about you.

But for me, there is a slight problem...

I am an extrovert.

My financial independence gives me more ways to engage with readers and fans through talks and seminars.

Perhaps a simpler question would be to choose between :

a) You are the worst investor in the world but everyone thinks that you are the best investor in the world.
b) You are the best investor in the world but everyone thinks that you are the worst investor in the world.

(b) makes you a Warren Buffett.
(a) Makes you a hedge fund manager for an LTCM.

Saturday, March 31, 2018

A Millionaire mindset is a Low SES mindset !

The genesis of this post came from an anecdote from a friend who attended a financial talk over a decade ago. This financial talk was conducted by a famous options trading guru ( who has since had a very disappointing day in court and is no longer giving talks on options trading today ). Halfway during the talk, my friend was either so bored or so offended by the presentation that he abruptly stood up along with his friends to leave the lecture hall and the speaker then pointed out to my friend's group and proclaimed that " These are the people who do not have the mindset to become millionaires."

There is something which I think has to be said about the mindset of the millionaire as possibly espoused by these trainer gurus, MLM or insurance salesmen types. These ideas are largely derivatives of the writings of Rhonda Bynes in  The Secret or some other mindset changing work of authors like Harv T Eker which in turn are derived from authors in the 1980s who talk about programming your mind like a computer or Psycho-Cybernetics.

If you have enough friends over the years who subscribe in wishful thinking and how a person's mindset can be tweaked towards earning more money, you will realise that somehow a lot of more of these people also tend to fail rather than to become actual millionaires. Perhaps they blew their savings on a nice car because frugality is for "middle class" folks. Or perhaps they had to "fake it until they made it".

Which is why I came to this realisation :

The Mindset of Millionaire is the Mindset of the Bankrupt !

Because the Millionaire takes greater risks than most people,  so they tend to end up with greater wealth. But those who take bigger risks also have a larger probability financial ruin. So the same mindset creates more bankrupts.

This is something we need to be cognisant of.

Compare this with mindset that the Financial Independence community espouses.

In our community, we rarely use words like "Millionaire" because it triggers a lot of lay people and hijacks their amygdala. People stop being rational when millions of dollars are involved in a conversation.

Instead we talk about earning, saving and investing your way towards financial independence where wealth targets are largely a function of your daily expenses. A single man who invests well can comfortably slow down when he has $400,000 invested in high yielding stocks and REITs. A family may need $1.2M.

Here's the deeply counter-intuitive idea : Even a millionaire who supports our approach towards Financial Independence should be well aware of how low a millionaire's real social economic status is.

Suppose your family has $1 milllion dollars invested in a popular SREIT ETF, this translates to perhaps $55,000 a year at 5.5% yield or $40,000 if you agree to a safe 4% withdrawal rate. This is well below the median income of a Singapore household ( which is around $100,000 these days ). A millionaire (who lacks an earned income) has to live below the means of the median income family.

This means that a millionaire household has to adopt the lifestyle well below that of a HBD dwelling family to sustain their well-being over time.

This is why the FI community supports the notion of frugality above all other concepts in personal finance.

Wednesday, March 28, 2018

The Art of the Good Life #16 : Tyranny of a calling

"Few people are as unhappy as those with a talent no one cares about." - John Gray.

The lesson in this chapter is that chasing after a calling is a recipe for a miserable life. Having an over-inflated expectation that we need a particular vocation that stems from something deep inside is a loser's game.

The chapter provides the example of writer John Kennedy Toole, who had his conviction about being a successful writer shaken to the core after numerous rejections from major publishers,  committed suicide by carbon monoxide poisoning. After his death, A Confederacy of Dunces sold millions of copies and was awarded the Pulitzer Prize.

Amazingly, the chapter neglects to offer an alternative to the tyranny of a calling which is provided amply by the works of Vicki Robin in her masterpiece Your Money or Your Life.

It is eminently more practical to view your vocation as a means of exchanging life energy for money.

No matter what we do, we are in essence, trading time for money.

Consider the efficiency of your use of your life energy by figuring out a number with the numerator being your salary minus all expenses associated with your job (such as transport or the cost of looking the part). The denominator consists of the time spent in the office every month plus expenditures of time outside office hours networking to get more business or commuting to the workplace.

If my fellow trainees perform the calculation, some, like myself,  may find that they have a lower efficiency than most domestic workers in Singapore.

Others, such as the financially independent crowd who have a value investing or dividends based focus, will find that they are more efficient with their life energy than members of the Cabinet.

Friday, March 23, 2018

On the hypocrisy surrounding War-chests and Leverage investing

Not everyone is a big fan of leverage investing using a margin the account. It is probably not coincidental that some of these detractors of margin financing also tend to employ a war-chest when describing their investing strategy.

In my opinion, margin investing and the employment of a war-chest are two extremes in investing.

Much like Law and Chaos in Michael Moorcock fantasy novels.

When you invest using leverage, you are trying to magnify your returns by borrowing money. If the cost of borrowing runs below the rate of return of the unleveraged portfolio, you are likely to succeed in getting better returns provided if the underlying investments generate positive returns. The problem of a leveraged portfolio is that there is a chance of complete and utter ruin, which to me is the odds of a margin call. In essence, you are trying to get higher expected return by flirting with the odds of ruin.

A war-chest is the opposite of a margin account. You hold a portion of your portfolio in cash so you are not subject to market risk at all. The downside is that if you calculate your rate of return, your cash component of the portfolio returns 0%, worse than buying government bonds.  You are trying to securing your portfolio from losses by lowering your expected returns.

Both camps harbor fantasies on investing outcomes.

Leverage investors harbor fantasies that they would be able to avoid ruin but the odds of ruin can be estimated if you use the right statistical model. I consider 1 in 40 odds to be generally acceptable in my margin account if I can extract 10% yields for my trouble.

War-chest investors also harbor fantasies. There is this belief that the investor can time the markets to produce returns that can overcome the deficiencies of cash drag that have been adopted by the investor. Right up till today, I have yet to see a modelling attempt to justify market timing using a war chest. All I see is a lot of chest thumping and vanity displays of personal results, very often in un-diversified portfolio which does not help readers who want to replicated the strategy.

As of now, I'm still waiting to back-test a model that incorporates market timing with a war-chest. I simply do not see leverage investing and having war-chest as something that mutually exclusive to each other.

If a good marketing timing strategy exists, a savvy investor can hold his portfolio in cash and make tactical leveraged bets in a margin account. 



Wednesday, March 21, 2018

The Art of the Good Life #15 : The Secret of Persistence

Old age and treachery will always overcome youth and speed.

This chapter is about persistence.

The secret to success is about taking steps to sustain your smaller successes and have them compound over time. This is why Warren Buffett is always used as some paragon of compound interest in many personal development books even though we ignored his earlier tactic of buying up cheap companies and forcing management to unlock value by board control. There is some quantitative backing to Warren's slow and steady form of wealth accumulation, the Sharpe ratio of Berkshire Hathaway was known to be between 0.7-0.8 when hedge fund strategists are using strategists that go north of 1.

The other example which I enjoy is the concept of a long-seller. Books like 50 Shades of Grey are bestsellers, but they may not persist over time. Lord of the Rings, however, and Jin Yong's works will be sold in bookstores so long as there are still bookstores left in this world.

How to come up with something that persists?

The general guideline is to pace your work and not work too hard to the point whereby you burn out. Personally, I think you should aim for small successes and then scale them into bigger ones without tiring yourselves.

This is why looking for dividend yields work in investing. No doubt high-yield strategies tend to under-perform quantitative strategies involving FCF/Price and EV/EBITDA, but seeing dividends trickle into your bank account is relaxing and therapeutic, and very often you become motivated to save more for the future. Eventually you may be able to sustain this form of investment whereas someone with a more formidable formula would have sold out in the next market recovery. 

Nicholas Taleb elegantly expresses the power of persistence by his concept of the Lindy effect. If a literary work is popular for one century, the rule of thumb is that it should be popular for another hundred years.


Sunday, March 18, 2018

Thoughts on yesterday's Computation Law and Blockchain Event

There is nothing that a seasoned IT professional despises more than a lawyer who obstructs his projects in the corporate world. I should know, because I hated these corporate lawyers so much, I became one of them just to figure out how to prevent them from cock-blocking me at work.

After a week of training, the last thing most trainees want to do was to attend a full-day seminar with other legal professionals but this event is not just any ordinary event. This is a small tribe that I feel I really can relate to over the longer term, and I can build a lot of strategic friendships moving forward.

Here are my random thoughts on the event.

A more coherent view on how Technology will disrupt the Legal sector is quite a few years away.

a) Lawyers and Programmers can work together but it may not be practical to do so

The most impressive segment in the event is by Kommerce headed by my old friend Karen Teoh who is COO of this initiative. In her company's segment, a full fledged lawyer was talking about his experience working with a programmer on building a Smart contract. My IP law professor David Llewellyn has taught me that this has been done before, but I have always found the idea impractical because the uncertainty of the Agile methodology and ridiculous lawyer billing fees would make the software ridiculously expensive.

So naturally I acted all snarky and asked about whether this was practical moving forward given that lawyers are so expensive. I also asked if the price of programmers and lawyers would converge over the long term. It was such a troll question, the audience was laughing at me after I was done.

b) LegalTech will fail in Singapore without Government intervention

Another harsh truth I realised about LegalTech is how fragile it is in a place like Singapore.

There is absolutely no way law firms will welcome disruption in their space because they really want to preserve their hourly billings. Even SAP consulting has moved into fixed project billing eons ago. Furthermore, lawyers are also protected by the Legal Professions Act. If you wish to provide legal advice you need to make sure you're qualified to do so. So LegalTech only has a very small area to play in if they do not wish to flout local laws.

The other issue is that Computer Scientists tend to be extremely hubristic and think that the world can change if we can build a distributed ledger around anything that they would like to disrupt or launch an ICO.

Two groups of highly intelligent, hubristic and arrogant professionals are going to have a really bad time relating to each other. It's like a couple destined for divorce unless the Government injects a lot of tax payers money to fund startups that have a 95% chance of failure. The government also needs to create a safe sandbox where IT guys can disrupt the legal industry with fewer consequences. Unlike FinTech, there is also less money to go around because of the localised nature of our laws. Law firms do not scale globally as well as banks.

Also, as I've spent time as an IDA officer and used to be one of those Barcamp groupies, I prefer to discount everything shared by accelerators since all ROI gains figures are unrealised as of now.

If local accelerators have a big exit story to tell, they'd be in your face by now, but all we're seeing is a lot of "pivoting".

c) There is negligible attention on the real problems faced by small law firms.

I am a lowly trainee in a boutique law firm, I have a lot of skin in this game. If access to justice is a problem in our society, then more junior lawyers need to be able to do independent research and give more strategic advice to clients. But instead, junior lawyers are too busy supervising paralegals who have to do the real heavy lifting in disputes. Photocopying, scanning, e-Lit submissions and typing.

There is too much paper involved in legal work and OCR scanning tools are not perfect. Documentation management involves windows folders and Word.

A trainee can spend an entire evening creating table of contents, making references and preparing documents for submission into the courts. As I'm on the frontline right now, I also witnessed how dangerous outsourcing this work can be and why smaller law firms prefer to avoid negligence liability so they do the work themselves.

In IT you can outsource because programming code can be corrected by a an IDE or a compiler. In legal work, the compiler is a human being with decades of experience.

d) Anyone getting into LegalTech need to ensure that they have other avenues to escape to when they fail

Some law student friends asked me whether they should heed the call of the accelerators.

Startups are sexy, startup exits and IPOs are sexier still. If you make it, you will be in the same category as the  Razer CEO. Always remember that there is one Razer CEO but many startup founders who failed. Many have spent their youths working on small, agile corporate firms that are informal and have a different social capital from the corporate MNC suit. This has negative implications on their net worth and prospects of finding a spouse.

If anyone wishes to go LegalTech, the most important priority is to work out a plan B. If you are a lawyer, ensure that you complete Part B and can run into a smaller law firm with your buddy's help after your startup tanks. If you are programmer, you have to keep picking new technologies or find a way to teach part-time in a Poly so that you can have multiple sources of income.

Oh yes, you also should read financial blogs so that you can develop passive income to make yourself more anti-fragile. The last thing you want to do is to have all your stock equity invested in one start up that may not be around 5 years later when you are closer to starting a family or having children.

Anyway, I think this is a new beginning for me. I will somehow get into LegalTech one way or another over the long term, but for now, I will observe and learn.

This sector has a long way to go before it can be taken seriously.

Friday, March 16, 2018

On Nicholas Taleb, leverage and ruin

Skin in the Game by Nicholas Taleb is not finance book per se but some of its ideas are interesting enough to challenge some of my ideas of leverage. I think Taleb's ideas are worth grappling with because they can potentially change your approach towards personal finance.

One particular idea is that ensemble probability is very different from time probability. If the model reflects the ruin of a few participants out of many, it is conceptually very different from the reality where there's only one participant who has to stop permanently the moment he is ruined by the markets.

One of the better things I did last year was to open a margin account. I wanted to continue to obtain high yields from REITS but I also wanted to buy higher quality REITs with a good story and stable management. The only way to resolve this paradox is to borrow $1 for each $1 I have and invest it in the better REITs on SGX.

When I talk about my approach towards leverage, I usually begin with a back-test. The models I ultimately employ for leverage always have a yield which exceeds on average 6.5%. After accounting for the borrowing fees, I tend to get 10% yields on my invested capital.

The more interesting feature of the models I employ is that I use semivariance which I combine with the expected return to figure out what happens in a 1 in a 40 year freak market. In a typical model involving REITs, I can backtest a modest 10% return with around 13% semivariance. So there is a 2.5% chance that I will drop 2 standard deviations down on a freak year or (10 - 2 x 13)=16% lose about 1/6 of my portfolio. ( But of course, market returns are non-normal so this will happen more frequently than what my models predict. )

As a 16% drop is only about half of the margin call of 30% ( Since I  limit my leverage to 200% ), I should not have to worry so much about hitting a margin call anytime soon as the probability is less than 2.5%.

Which brings us to the problem : So long as I maintain this leverage, there will be a chance that I will bust one day. Over time, this probability is 100%. Taleb says that "in a strategy that entails ruin, benefits never offsets risks of ruin."

This is where Taleb's insight comes in useful. If I am ruined, or gets a margin call, I can't play anymore. This is what Taleb calls the uncle point. Millenials will just say GG.

The moral of the story is this. If you leverage, you will definitely be ruined over time. In your universe, there is only you ! Your ruin may even drag down members of your family if you are not careful.

But I only leverage less than 20% of net worth and can comfortably live on the dividends of my un-leveraged portfolio. Furthermore, a margin call will only wipe out 60% of my original cash outlay into my margin account.

So the moral of the story is this : Leverage only your excess portfolio. Otherwise have a plan to eventually wean yourself out of a margin account.

Monday, March 12, 2018

The Art of the Good Life #14 : Circle of Competence

The last chapter was easy to read because Fuck You money agrees with me so much.

This week's chapter is the opposite because it really exposes just how dumb my latest career moves are.

The harsh truth is this  - Most of us have a really small circle of competence and this chapter reminds us that we should really just stick to it. If we know what we're good at, we should just focus on it and build a career around our personal strengths.

I think in the absence of passive income, this is something which I would have done. I would slowly retool myself into an IT Compliance professional and possibly try to stay that way for as long as possible. There are endless IT certifications to attain, in fact just before Law School, I got TOGAF certified so I am able to talk convincingly about Enterprise Architecture ( Most epic bullshit in the IT world which I'm glad did not catch on ).

But Fuck You money sometimes make you do really dumb things, often because you can and most folks, well, can't.

Legal work is so disjoint from my circle of competence as an engineer and a personal finance hobbyist, that I think I've been striving to promote my incompetence and being a sucker for punishment.

So, this chapter has a good point. I've been too focused on my deficiencies. But a lot depends on how you see what your circle of competence is.

If I see my circle of competence as IT, then I'm probably a real idiot for running to SMU to do my JD program. If I see my strength as learning new things and find synergies in different disciplines regardless of what kind of career I will eventually have, then I might have something to console myself with.

But still, thank god for Fuck You money. Nothing make idiocy viable as much as passive income.

A training contract is tough and pays less than what a domestic help gets, but I can survive this !

And I think there's a seminar on Legal Tech this weekend.

Maybe I'll find my niche there...

Saturday, March 10, 2018

Why Singaporeans tolerate inequality.

You see that parade of academics and rhetoricians rail about inequality in Singapore. Social commentators, however, are less willing to discuss the actual solutions to reduce the effects of inequality.

My personal belief is that Singaporeans on the whole are fine with inequality.

Yes, some Singaporeans will become scholars and yet some turn out to be merely statistics.

Nicholas Taleb's latest book Skin in the Game shed some light about the kind of inequality that we tolerate against the kind of inequality that should not be tolerated.  As it turns out the gap between the rich and the poor is a distraction that liberations employ to justify massive wealth transfers between the rich and the poor.

The is a more insidious kind of inequality at work. The concept Taleb employs is ergodicity.

Singaporeans can tolerate inequality so long as access to the upper classes is not blocked. Another words, the son of a taxi driver or a single parent family can rise up in society to become a Minister today.

This not only means allowing smart and capable guys like Chan Chun Sing to rise, it also must allow the so-called rich to fall.

Four years ago I retired because I was effectively financially independent. As a deliberate tactic, I ensured that my monthly dividend flows were about the same as the Singaporean household income statistic when my whole family got off the salary bandwagon. Four years later,  after law school, my dividend flows have gone up and so has my portfolio size ( thanks to some of my dabbling with leverage ).

At this juncture, I can imagine a liberal reading this and declare that a passive income investors will need to be redistributed to the poor.

But as it turns out, my dividend flow has been dropping relative to the household income for the past 4 years. There is a steady $1000 gap between what I collect and what most households earn every month now. This is one of the reasons I want to return to the workforce in spite of spending well within my investment income, Singapore society is the kind of society that does not let it's people rest. Even financial independence mean a gradual dropping of one's ranking relative to others.

So I have to pick up a McJob to remain average and respectable in this society !

So while our system introduces a substantial gap between the haves and have nots. Membership of the haves is open to everyone.

Which brings us to solutions which can make us uncomfortable and require the sacrifice of political capital.

The government cannot just create a system where the poor can rise to the ranks of the rich.

The rich must be able to fall.

Like many of you investors, wealth redistribution is something I would never support. I earned my wealth and my family has been becoming "poorer" over the past 4 years while I retooled myself to become a lawyer. Getting rid of assortative mating and mandating RGS girls take on ITE husbands is also impossible given that assortative mating contributes to 40% of inequality.

For a start, I can think of two subtle changes :

One possibility is that legacy admissions must be banned in Singapore. It does not make sense for the ACS boys who bullied me in the 1980s get a free pass to admit their kids to the ACS franchise and continue to benefit from being part of such an illustrious and well-connected alumni. This has to be earned and should not be a right based on a person's bloodline.

Another possibility is that Government Gebiz system limit some bids to companies of a specific range of sizes rather than favour larger companies. If some tenders are so big that a company needs to meet a paid up capital threshold to bid for the project, we have to accept that some projects can be so small that only a company that is small is allowed to bid for it. Readers in government can confirm with me as to whether this practice already takes place.

You see, you don't see Kuik Shiao Yin fighting to discuss these reforms in Singapore society.

It's always about the problem, never about solutions beyonds raping our reserves.