Sunday, October 21, 2018

Making your retirement safer with a "bear trap" account.


Blog reader with the "Unkown" moniker brought up an important point about the weaknesses of using computer models to simulate the withdrawal of funds from a retirement portfolio. I cannot say that I fully understand the maths, but I think I can explain the problem  to a lay person.

Most of the retirement simulations makes sense, but if you are unfortunately enough to face a nasty market crash just around a year or two after giving the middle finger to your corporate bosses, the odds of running out of money increases dramatically.

Initially I thought that there was no simple solution to this "Sequence of Return" problem - The foremost expert recommends a wonky approach called an equity glide path to resolve this issue. But a quick discussion with Kyith of Investment Moats gave me a useful insight to this issue that can be executed by laypeople.

Kyith summarised the challenge as one to survive the first recession after declaring early retirement.

So here's a possible fix to the problem - Create a second retirement portfolios just to deal with the first market crash after FIRE.

Suppose in the earlier scenario, our BBFA friend has accumulated $432,000 in the form of an equity portfolio to withdraw from social life completely and spend the rest of his days playing computer games whilst spending $1,500 a month. He may be wise to postpone retirement until he builds a second retirement portfolio that I call a "bear trap".

A bear trap allows the suspension of spending from the retirement portfolio until the market recovers upon the first market crash. Earlier on, I built a program to measure the duration of market crashes and the worst crash in the STI lasted 700 days from peak to trough. This means that a bear trap must be large enough to sustain our BBFA friend for around two years. Suppose he needs $1,500 a month, he will need a $36,000 portfolio to complete this bear trap.

Because this bear trap needs to account for a near term market crash, it should be placed in a cash deposit account that can give about 1.5% to 2% every year and not participate in any security that contains any market or credit risk.

This means that BBFA should pull the retirement trigger only if he has one $432,000 equity portfolio and $36,000 lying in a DBS Multiplier, OCBC 360, or UOB One account.

Suppose BBFA really encounters a market crash within 5 years of leaving the work force, he can simply take $1,500 from the bear trap account instead of drawing down his equity portfolio. This gives him ample time for his equity portfolio to recover from the nastiest downturn.

Of course very anxious readers will have concerns about the second and subsequent bear attacks. One possible solution is expand the equity portfolio slightly by 20% so that dividends can be directed to regenerate the bear trap after the first market crash. BBFA has around 6-10 years to fully regenerate the bear trap to prepare for the next downturn. This solution is not very attractive to me because it would be tantamount to reducing his withdrawal rate to around 3.5% instead of the usual 4.17% based on the model.






Thursday, October 18, 2018

Early Retirement Scenarios



Thanks to the efforts of BIGS contributor and venture capitalist Lim Der Shing, we now have a decent simulation tool to track what happens when we start drawing out money for retirement. A link to the academic paper and tool can be found here.

I'm going to share two retirement scenarios and discuss the implications of using such a tool to determine the target withdrawal rate and subsequently the portfolio size to support this retirement lifestyle.

Before getting into the scenarios, I just want to highlight a possible controversy to the use of this spreadsheet.

I use the real rate of return of an equity portfolio to be 7.4% which is considered abnormally high for Singapore markets. This is because I derive long term equity real returns as the inverse of the current Shiller PE ratio for Singapore markets (currently 13.5) taken from the link here. Contrary to our collective experience, Singapore markets are cheap and notwithstanding the trade war, we are in a much better shape than Malaysia that has a higher CAPE of 16.6. Therefore, there is no better time than now to have a nice retirement portfolio built on a mixture of Singapore stocks and REITs.

If you are not comfortable with my numbers, simply give yourself a healthy 100% margin of safety from my simulation figures. Retiring based on a bigger margin of safety remains within the reach.

( Note that I also put the real rate of returns for bond is 0.9%. )

Scenario 1 : The BBFA ( Bui Bui Forever Alone ) FIRE retiree

Suppose you are single male, in your 40s and are quite sick of corporate world. You live with your parents and want to spend the rest of your life playing computer games and don't want anything to do with love or marriage.

What considerations would you need to retire ?

  • You can assume that you will live to age 90. So your money must last at least 50 years.
  • You are willing to spend capital such that your net worth when you die at age 90 is about 50% of your net worth today. ( You have no dependents )
Cranking the numbers on the spreadsheet, to be successful 95% of the time, your safe rate of withdrawal peaks at 4.17%. It also advises the use of a 100% equity portfolio. 

Suppose your monthly expenses is set at around $1,500 or $18,000 annually. The amount needed to retire is $18,000 / 4.17% or $432,000. 

Scenario 1 establishes the most austere form of retirement involving a single male in his 40s who lives with parents and plays computer games all day. The simulation suggests that $432,000 is enough to successfully last 50 years with a 95% probability of success. At the end of his life, he still has around 50% of what he started with which would adequately cover the event that he lives longer than projected.


Scenario 2 : The ordinary retiree

A more realistic scenario was co-created with one of my students who invited me for lunch after class. He had a much more realistic approach to retirement.

Suppose you are a married male, in your 60s and want a portfolio to augment your retirement lifestyle. Your children are already independent and working. Your spouse had her own career and she will mirror your financial strategy.

What considerations would you need to retire ?

  • You can also assume that you will live to age 90. So your money must last at least 30 years.
  • You are willing to spend capital such that your net worth when you die at age 90 is about 80% of your net worth today. This is because you want to leave a sum of money to your children after you die.
Cranking the numbers, to be successful 95% of the time, your safe rate of withdrawal peaks at 3.85%. It also advises the use of a 100% equity portfolio. 

At this stage, this retiree has already secured a cash flow of $1,000 a month from CPF life. He expects his expenses to be around $2,000 in total (I project retiree household expenses to be around $2,100 in 2018). Dividing $12,000 / 3.85%, we get a portfolio size of around $312,000. 

Scenario 2 takes into account the benefits of having a lifetime annuity like CPF Life so this drastically reduces the required portfolio size of a retiree. 

Observations

First off, in both cases a 4% withdrawal rate used as a rule of thumb is considered quite acceptable. For extreme FIRE practitioners who want to get out of the rate race in your 30-40s, I recommend using 3% instead since you may be retiring with young children in tow. 

There are quite a few interesting observations here. 

In all cases, having 100% in equities results in the highest withdrawal rates. A reasonable retirement portfolio for a couple in their early 50s is also very much possible at around $1,000,000. Of course, you must accept that you have already fully paid your home mortgage, kids are doing fine, you live a simple HDB heartlander lifestyle and your children have no desire to take over your entire portfolio after you die. 

In both of these examples, I omitted the possibility of higher returns by the intelligent application of factor investing, where a balanced portfolio of equities and REITs can be boosted to around 14% returns. I have also omitted the use of leverage which may be dangerous for the retiree but may accelerate the process of attaining the right retirement portfolio size.  

( I'm still doing some R&D to see if the simulation spreadsheet accepts negative numbers )








  

Tuesday, October 16, 2018

The Art of the Good Life #44 : Cargo Cults


During World War II, natives living  in the islands involved in the War of the Pacific saw soldiers call upon metallic birds which flew past and dropped tin cans which contained delicious food. After the war, a cargo cult was born - natives built planes out of straw to attract these metallic birds which they hoped would drop more food on them.

Some people ask me why I am so obsessed with results rather than process. The reason is that I do not wish to fall into the same category as these cargo cultists. Process is important because it's a shortcut to consistent results, but if I can't get my results, the process has to be improved further. This is even if the process has been adhered perfectly.

The book uses an example of an author who wants to write a book. Instead of writing a book, he goes on to emulate the lifestyle of Ernest Hemingway, living a playboy lifestyle and using only Moleskines notebooks to capture his literary ideas. His book eventually flopped.

To be fair, my investment approach is not immune to the problem of cargo cultism.

When you keep using quantitative backtesting tools to create a high-return low-risk strategy, you can end up using a combination of factors to data-mine historical results. If you follow this strategy correctly, it may not translate to future earnings.

My defence against data mining is to use only factors suggested by quantitative investors who have combed US data for 50+ years. All I do is employ those same factors that work in the US to Singapore Stock Exchange for the past decade with some adaptations of my own.

Here's an example of what I am working on next for my next workshop :

If you are familiar with the characteristics of the STI components, you will be aware that returns have been about 7+% at most for the past decade. Utilising factors in investing does not significantly boost returns because these are stocks that are monitored by major investment houses so markets are fairly efficient. This is frustrating given that STI components attract cheap financing for leveraged portfolios.

The question is whether is it possible to create a different kind of STI the same way US quants call Market Leaders. Market leaders are large, successful businesses that brokers would be keen to provide cheap margin for.

So guided by the existing literature on the US markets, I developed a localised form of Market Leader stocks.

  • Stocks must be found in SGX
  • Filter out China domiciled counters and REITs.
  • Stocks must have a market capitalisation above $200M for adequate liquidity.
  • Stocks must be above the median in free cash flow.
  • Stocks must be above the median in revenues.
This set of filters will generate about 40+ counters which generate 15.77% returns with a low semi-variance of 11.81% (15 year history plus annual rebalancing) making this a superior starting point for investors to begin quantitatively selecting factors to achieve superior performance. 

Of course this on only a teaser, follow up considerations would be adequately considered in the second run of my workshop.












Sunday, October 14, 2018

Races of Wealth Accumulation : The Dwarf, Elf and Orc

Sarah Stanley has continued the good work of her late father Thomas Stanley and updated The Millionaire Next Door into a new book The Next Millionaire Next Door and it is chock full of interesting facts about how to get rich in this current economic environment.

Inspired by both her material and our recent discussion about approached towards early retirement, I thought I'd write about three type of millionaires which I categorise as three fantasy races of dwarf,elf and orc so that we can distinguish three distinct roads to riches.

a) The Dwarf

The largest number of millionaires are dwarves. Hard-working and frugal folks who succeeded by saving as much as they can through penny earned. Dwarves do not have high salaries so they spent most of their lives working very hard and adopting a standard of living well below their peers.

I see myself as a dwarf because my salary throughout my life was not particularly high. The strength of FIRE movement is largely dwarven because it focuses so much on resilience and frugality.

These are the value of a people who spend years underground mining for gold.

b) The Elf

A lesser number of millionaires are elves. Elves are high flying professionals who earn well above the average income. A high flying CEO, investment banker, medical specialist or a legal partner is considered elven.

Elves need to spend a lot of time honing their skills to do well in their careers because they are amply well rewarded for plying their trade. They often become millionaires by the sheer size of their pay check.

Frugality is less important to elves but to reach the ranks of the millionaires, elves do need to spend less than what they earn ( which is a lot anyway ). Frugality is also harder as elves also has to adopt the habitus of the Elven race. For example, law firm partners often mingle with their peers and are expected to adopt the consumption patterns of law firms partners.

As elves do have to spend to keep up elven appearances, the net worth of Elven millionaires is often tied to their properties. The rest is normally spent on keeping up appearances.

c) The Orc

The life of an orc is nasty, brutish and short.

A small business owner faces a 90% rate of failure, but those who do succeed gets to enjoy the life of a powerful Orc Chieftain. Many Orcs die at an early age, but those who make it big usually do it with dash of ingenuity, salesmanship and no small amount of luck.

Those who do make it, make multiples of million of dollars when they do cash out. It seems that Orcs do not need frugality at all, instead Orcs hone their salesman instincts and risk taking ability to kill off any other Orc who end up competing in the same field as them.

I think that it is useful to understand that these three distinct segments are best treated as different races.

It's hard for an Elf to understand why Dwarves work so hard to keep their expenses low. Dwarves may scoff at Elven penchant for high-living. Orcs, having killed 90% of their own kind to become War Chieftains, do not understand why frugality matters to Dwarfs since life is short. Elves think that every other race has little cultural capital. Orcs despise Elven elites and their inability to survive in the harsh realities of small business.

Of course there is always a fourth race. The Undead generally do not expect to reach their financial targets within their lifetime which is why there are four fantasy races in the above picture.






Thursday, October 11, 2018

Personal Update : Financial Bloggers are human beings too !



This might seem counter-intuitive to some readers but financial bloggers are human beings as well. 

Following LP's leadership in sharing his thoughts about buying a car, I will also highlight my various sins that I indulged in this week.

We're looking at a fairly serious market bear right now and if you follow my blog, you should know that my pay-check from my workshop would be sitting on some losses because I committed into a leveraged account just before the massive drop today. 

Shrugging the losses aside, I still had extra money beyond my regular dividend pay-checks so today I'm just going to describe what I did with my money after I gave my wife some shopping money. 

a) Got some toys for my kids.

I bought some toys for my son. But a very sharp observer will actually notice that these are actually toys for myself. Kids these days have very little affinity for Transformers unlike my generation. I also have a very low opinion of Peppa Pig and PJ Masks preferring more violent Saturday cartoons for boys. So I sneakily bought the latest Cyberverse Optimus Prime and Megatron for $120. My son does play with his toys but I think he is not old enough to figure out how to transform them yet.

Not in the picture is the boardgame Little Scythe I bought for my daughter. I can't really sustain a boardgame hobby anymore as I lack the time to play with my friends. These days I buy boardgames to teach Clio strategic thinking and Little Scythe is a kid's adaption of award winning war game Scythe. Hopefully we can pick the up up by watching Youtube videos. I also hope to get the neighbour's kid involved because she seems like a pretty smart kid who is on her way to GEP. I want my daughter to pick up gaming skills from her ( because she definitely does not want to consciously pick up gaming skills from me ! ).

b) Books for myself. 

I have probably gone overboard with my book binge because Amazon has this new system that credits dollars into my account that can be used to buy more Kindle books. What is amazing about this system for Kindle users is that using the credits to buy Kindle books gives even more credits so I I easily bought 10+ books that I would not have bought using my own money.

I just want to say that Thomas Stanley's daughter has updated her dad's Millionaire Next Door and you will be seeing a delude of articles that channel this book over the next few weeks. This is compulsory reading if you are a serious financial blog reader.

c) Games for myself.

You also notice on this picture that I went looking for second hand games and managed to pick up a 1st Edition D&D Manual of the Planes from Bookpoint at Bras Basah. RPG books are a rare drop in a second hand bookstore and it is also helpful that I conduct my talk previews in the same building. 

This afternoon I will be going off to pick up my Legend of the 5 Rings RPG.

d) Travelled to Johor for a one  day trip.



As I am still fairly disciplined when it comes to spending money in Singapore, I try to go to Malaysia to let my hair down, so yesterday I went on a one-day trip to Johor. 

To enjoy a Johor trip, the trick is to bribe the locals to bring you around in a vehicle while offering free meals to them. I was brought to many awesome but inaccessible places to eat by my cousins. One of the meals I had was this Nasi Lemak along Jalan Mahmoodiah what is located next to a cemetery. 

I had five meals with my cousins yesterday and the total damage was less than SGD $100. My cousin had a facial in a hotel that cost more than what I spent the entire day (But she's High SES) !

But I had an epiphany yesterday during my trip. I think I may have figured out what the difference between a being a Johorian and a Singaporean and why is it so therapeutic to just go to Johor and spend time there with the locals.

My cousin introduced his gamer friend to me and we hung out for half a day. I really like his pals because he is an English College alumni so he's connected to the equivalent of an RI-ACS network in Singapore. Another words, they watch the same movies and trade the same cultural capital as I do.

What I am impressed about Johorians is this -  his friend never asked me what I do for a living. 

You guys know that this is a sensitive question for me because of my weird career choices as of late and I have yet to come up with a proper 5 minute elevator pitch about myself. 

This is very rare in Singapore and it takes perhaps a few minutes before I had to awkwardly explain that I am both a lawyer and an engineer but currently conducts financial workshops so I work 3 hours once every 2 weeks. Currently I come off sounding very scammy to someone not in the financial blogosphere, almost as sleazy as an MLM practitioner. Even worse, Malaysians working in Singapore actually seem even more eager to size you up so that they can peg you in this invisible hierarchy that permeates Singapore society. 

What does this say about our society versus our neighbours next door ?

For now, I contend with my duplicitous life. In Singapore, I remained disciplined and I pinch every penny.  Once I get to convert $1 SGD to $3 MYR, that decadent side of me is finally free. 

I can bring my relatives to eat 5 meals a day !






 








Tuesday, October 09, 2018

How long do you need to endure when faced with a market downturn ?



Part of the work of being a trainer is that I am relatively free to pursue some research to improve on my training materials so I got back to some R programming this week.

My statistical programming is rusty again and I have to get back to the basics of understanding data frames and how to put simple packages in my R Studio. And this means dealing with some stuff that professionals find trivial like manipulation of dates and processing the finance data from Yahoo Finance.

Fortunately, I was able to get some useful thing done within the last 2 days. I downloaded historical STI information and was able to measure the duration of market crashes.

I wrote a simple program in R to track crashes on the STI.

This program adopts the following rules :

  • A crash occurs when the market dips 30% from the previous market peak.
  • The timing of the start of the crash will then be set at the timing of the market peak.
  • A recovery occurs when the market goes up 30% from the previous market trough.
  • The timing of the market recovery will then be set to the timing of the market trough.
Unfortunately, I can only fetch market data as far back as 1987.

My program them screen dumps the crash data, which I reproduce here.


------
Crash from  1607.1  To  1079.5 
From date:          
1990-03-27
Recovery at date :          
1990-10-11
------
Crash from  2493.7  To  1073.5 
From date:          
1996-02-06
Recovery at date :          
1998-01-12
------
Crash from  1698.8  To  805.04 
From date:          
1998-03-19
Recovery at date :          
1998-09-04
------
Crash from  2582.94  To  1241.29 
From date:          
2000-01-03
Recovery at date :          
2001-09-21
------
Crash from  1808.41  To  1213.82 
From date:          
2002-03-19
Recovery at date :          
2003-03-10
------
Crash from  3875.77  To  1456.95 
From date:          
2007-10-11
Recovery at date :          
2009-03-09

From this dump, we can safely say that the longest period that we will need to endure from a market peak to market trough is 2 years. The longest period is not our most recent recession on 2007, but during 1996-1998 when we had the Asian Currency Crises.

My R program allows me to vary the conditions of a crash. If I set a crash to be 10% from a market peak and a recovery to be 10% from a market trough, I will, of course, see a lot more crashes in my program output but with a shorter duration.

Moving forward, this program will be added to my list of teaching materials for my workshop.

And in case you are wondering, we are not in a crash situation yet.

Over the next few weeks, I will be trying to determine whether an objective asset allocation between stocks and bonds would exist. Will post my findings here.








Sunday, October 07, 2018

The Art of the Good Life #43 : The Just World Fallacy



This chapter serves to remind us that the world is amoral and that thinking that morality will win out in the end is a fallacy. The author emphasises that the world is actually unjust and that living stoically would actually result in much fewer disappointments.

One recent event that made quite a number of folks angry is NTU organising a job fair that is exclusive to students with the best grades. It's quite easy to vilify NTU and say that doing this is incongruent with the Singapore's recent attempts to reduce the elitism in society.

But just as hard it is for top students to boycott the event (who wouldn't want an intimate session with an investment bank ?), NTU is in a battle against NUS and SMU for the best students from the local JCs and is already hampered by its poor physical location and super uncool ancient Chinese themed architecture. They have a duty to ensure that their students get noticed by the top companies.

It is also unfair to apply more pressure on our universities and not consider other stakeholders who are also at fault. I suspect the career fair is also supported by government agencies and MNCs. If HR can get direct access to the top cohort of a university, it may mean less effort interviewing new hires. This is why over a decade ago, my finance lecturer would brag about HR departments from Citibank wanting special access to the University Scholars who were studying in the Bizad faculty.

I believe that, over the short term, students will activate their Unions and launch into a pitched battle with their University Administration to ban such invite-only events only to see these career fairs being taken over by the private sector. Over time, though, there is nothing stopping our companies from holding an external event to invite local and foreign grads to a career fair, stipulating a minimum grade to qualify for admission to the fair itself. A paymaster can dictate the terms and have the right not to interview anyone with below average grades.

Which leads us to the question of whether grades truly lead to better performance at work.

I always believed that IT and Engineering are the least elitist of professions because they involve actually solving real problems or creating real products that has to be tested in the market.

In most other professions, the performance of a worker is often rather quite subjective. Two legal trainees can submit a research memo with basically the same legal argument but one submission may be subjectively viewed in a more favourable light because one trainee has been known to have better grades in school or comes from a more prestigious university. The Halo effect can be quite strong where the profession deals with subjective matters.

As angry as many NTU students are, I just cannot see how morality can win on this matter. In fact, I can see a lot of ugliness that can result if we clamp down on these events too aggressively.

With the current arrangement, there is a chance that the person with best grades will be matched with the best jobs. You don't want to have a situation like in legal industry where training contracts or associate positions may be given not on the basis of grades, but by how much social capital the candidate has. This creates a huge advantage for a candidate who comes from a High SES background.

All this points to an uneasy conclusion.

When our leaders say that grades are not important and we should not be defined by our academic performance, gently smile and ignore the propaganda.

Continue to go all out to get the best grades, cultivating a strong CCA record whenever possible. Do all the previous year exam papers and try to internalise the material that is taught.

For those who are not academically inclined, go all out to develop your communications skills, doing everything in your power to turn yourself into the best salesman the world has ever seen.











Friday, October 05, 2018

How to start a war in the financial blogosphere.



The major fracas going on in the financial blogosphere right now started this week when Suze Orman told the Internet why she hates the FIRE movement. You can access that interview here.

This got me thinking about how a pitched battle can occur within the local financial blogosphere here.

Here are my thoughts on how to spark a war in out blogosphere :

a) There are industries here that should really hate the FIRE movement

The Singapore FIRE movement irks people for many reasons.

I can imagine that commission sales agents who sell insurance, active fund managers or even MLM folks will have many good reasons to really hate us.

We have collectively sustained a grass-roots campaign to warn readers about investment products that comes with high costs and we have devoted many articles on how to choose an investment product without any industry bias.

This lack of bias is forcing some institutions to become more honest when dealing with folks who buy financial products.

b) Whoever attacks the FIRE community needs to be very rich.

We are quite used to the many skirmishes in the blogosphere which makes the community quite anti-fragile. FIRE advocates are generally dismissive of small time folks who launch minor attacks like question the Buy Term Invest the Rest philosophy which have been a point of conflict for eons. We know that the folks have personal interest arguing for the traditional "high commissions" approach as they are defending their rice bowls.

What we have not seen so far are folks who have a net worth above $5 million dollars who publicly question the FIRE philosophy. Folks at this level of net worth have the confidence to launch a much more credible assault. Part of the problem is that we are conditioned not to disagree with rich people in Singapore.

So I predict that whoever sparks this conflict will be in the fairly affluent high net worth category.

c) Can the "Suze Orman attack" succeed ?

The Suze Orman attack employs a brutally simple strategy.

Simply get a rich person to tell everyone in Singapore that having $2 million or more is not enough to retire on. Then back it up with possible examples of personal disasters that can befall anyone : terminal illness, escalating medical expenses, university fees, etc. The richer the person sharing the message, the higher the bar is conveniently set. In short,  the rich person is telling that he/she has met this target, but you have not, so you better keep working because you don't deserve to retire.

There is an objective way to blunt this attack.

The Household Expenditure Survey of 2013 says that a retiree household's median expenses is $1,700 but experiences a fairly high inflation rate of 5.5% every year. Now suppose you intend to retire in 20 years time, you will expect to spend around $5,000 every month after compounding 5.5% for 20 years. But this is for an entire household so this covers the expenses of a married couple.

Let's say you are single. This means that you need $2,500 per month in 20 years time or $30,000 a year. This would be only about $750,000 of investible assets in about 20 years time applying the safe 4% withdrawal rate.

There are several factors going in your favour. CPF Life can give about $1,000 a month if you have your minimum sum kept with CPF, it can provide some buffer for you provided that you use a new escalating pay-out plan. So this means that you have a nice buffer in 20 years time.

So suppose you have $750,000 right now and you can already live on your dividend pay-outs, would it be safe to shift to a job you like and stop working for a stifling corporate environment ? After all, folks who like the FIRE movement prefer to think about financial independence over retirement planning.

I think that is a reasonable thing to do. After all, the average net-worth of a Singaporean is around $400,000 which is higher than the median at around 60th percentile. So $750,000 is already a significant sum. Can you retire after hitting $1M even if 20 years have not passed ? Very possibly !

So we can conclude that whoever attempts a "Suze Orman Attack" would have to condemn a large swath of Singaporeans into a lifestyle of permanent and never-ending employment, almost tantamount to a lifetime of slavery !

This includes the current households of elderly who are already retired !

d) The question of whether someone deserves Financial Independence

I'm also thinking about ways to attack the FIRE movement beyond attempting to scare folks into working forever by setting an artificial bar to retire in peace.

One possible attack is to simply question whether a person deserves FIRE in the first place.

There might be a series of moral arguments against the FIRE movement.

Does a person really benefit if he gets a cash flow to retire from the workplace and spend the rest of his life playing computer games and binge watching Netflix ? Does society fare well if a significant portion of the population were to just retreat from the workplace once they can subsist on rental income ?

FIRE may have a significant impact on life decisions. In the US, cit was found that couples with children have a net worth 25% lower than couples without children. Will FIRE advocates sacrifice kids for their financial success ?

Not everybody will seek part time employment or make their lives more meaningful. A significant number will just want to fuck off from participating in society completely. In China, the Fei Zhai Kuai Le movement exists to promote this sense of happy mediocrity. What kind of society are we trying to build if FIRE is co-opted to this new age philosophy of striving to be mediocre but happy ?

Even as a fervent FIRE advocate myself, I believe very strongly that a significant part of the population does not deserve financial independence because of how meaningless their lives will become once the golden hand-cuffs disappear.

So, if someone develops this line of argument of attack against the FIRE movement, I would spend a significant amount of time listening to them, sometimes offering some examples of my own experience. It is significantly better than fear mongering.

Maybe at the end of the day, Suze Orman just wants attention by attacking the most successful sub-cultures you can find on the Internet today.














Tuesday, October 02, 2018

The Art of the Good Life #42 : The Illusion of Changing the World



The second installation of "The Illusion of Changing the World" argues that you should not try to take yourself too seriously and put yourself on the pedestal.

While inventions can be made by a specific individual, if the individual had not existed, the invention would have been made anyway because many folks in this world may be looking at the same problem. Reinforcing this idea further is that many large companies can change CEOs but company results are often quite consistent no matter who is in charge.

I try not to invest based on my feelings towards a company's management team.

These are subjective evaluations on how well a company is doing.

However, I have to admit that it is possible to assess the strength of management through the proper metrics.

Case in point, the Piotroski's F Score considers a positive and rising ROA as two considerations to see if the company is worth investing in.

I also like the ending of this chapter. Eventually, after anyone dies, there will be part of the memory of at best, their surviving spouses, children or grandchildren.

Thereafter they will disappear from history.


Sunday, September 30, 2018

Where to go if you quit Singapore ?

One of the exercises in the recent workshop I ran was a simulation exercise to close off Day 1.

Workshop participants are invited to form groups to imagine leaving Singapore for greener pastures. As part of the exercise, each group of students will elect a target country. Students will then try to dig out economic data on the target country, make broad estimates on how much it would cost to live in that country and estimate how large a Singapore portfolio should be to generate passive income required to retire there. They will subjectively assess which part of the market cycle the country is in and then they will do some research on what kind of instruments in SGX will allow some proxy bets on that economy. Finally, they will also have to defend an asset allocation in the target economy should they wish to invest in that local market.

After populating the spreadsheet with figures they collected. I asked the class to vote for which country they would like to emigrate to the most after this discussion.

For this batch of students, Thailand won by a huge margin.

-->
Melbourne Thailand Malaysia Beijing
Median Income $6,666/month $378/month $720/month $1106/month
Median Expense $2,800/month $306/month $679/month $858/month
Portfolio size to retire $850,000 $92,000 $203,700 $257,400
GDP Growth 3.40% 4.60% 4.20% 6.70%
Inflation 2.10% 1.62% 3.17% 2.30%
Unemployment 5.20% 1% 3.42% 3.83%
Business Cycle Peak/Contraction Expansion/Peak Peak Contraction
20 year Bond Earnings Yield 3.00% 3.32% 4.70% N/A
Market Earnings Yield 2.87% 5.76% 6.23% N/A
P/E Approach 17 17.36111111 16.06 13
Asset Allocation Plan (E/B/Cash/ Com) 60/20/10/10 60/20/10/10 30/60/0/10 80/20
Proxy Stocks in SGX Singtel, Thai Beverage, King Wan, Keppel Land Dairy Farm, Silverlake, Top Glove CMT, Mapletree North Asia.
Proxy ETF Philip AP Div ETF Thai Index UCITS Malaysia ETF CSI 300
Votes 6 12 9 1

I guess I will never really understand why the class still went ahead with choosing Thailand.

I warned them that national figures may not truly reflect how much a Singaporean Expat would need to live in a place like Bangkok and there are issues like law and order that need to be factored into when choosing to live in a new country.

Nevertheless this was the choice of the students after a lively discussion on whether the numbers made any sense. China, surprising, was found to be unattractive by my students.

Perhaps they found a Communist regime stifling.

If you were given these four choices, which country would you go to ?


Friday, September 28, 2018

Personal Update - Just Crossed the Rubicon !



After the high of completing my first workshop, I was confronted with another major dilemma in my life.

A company that has been interested in my job application from a year ago was finally able to offer me a job. Unfortunately, this meant taking on a contract role at more than a 30% pay cut from my last pay-check. This was a far cry from a fairly attractive offer last year but stupid old me wanted to be called to the Bar so badly, I was prepared to reject every job offer to meet my personal goal.

If I were any other 40 year old, common sense would say to take the job and then build up my career again in IT security. Most folks my age don't get a second chance. The law degree just makes me more overqualified to do operational IT work. I thought perhaps I can always manoeuvre myself to exploit my legal skills and slowly find my niche again. Furthermore, this is an attractive option because when combined with a light workshop schedule and my passive income payments, I would still rake in more than an MP allowance for at least the next 6 months.

The alternative is also extremely attractive but in a more subtle way.

Once a workshop is complete, maintaining the slides would take a few hours of polishing prior to the workshop. While I have slightly more work to do because I have a lot more skin in my student's portfolio, the biggest challenge is still trying to schedule more classes. Beyond that, all the work can be done from home or the Bloomberg terminal at the Central library. While the pay was not that high at the start, I can scale it at my own discretion. The upside is really up to the imagination of my and my business partners. This is the power of being a free agent.

In the end, I chose to see where this life as a workshop trainer could take me. This path is too intriguing, and I want to stretch it to its logical conclusion.

Maybe it is because I drunk my own Kool-aid, I also have to be consistent with the material I teach. The life-energy exchange of a workshop instructor is generally very high compared to a full time worker. I get almost total autonomy to manage my work as I see fit. Imagine the cognitive dissonance if I had to explain why I opted for a poorer life-energy exchange to students and readers of this blog if I took the job for the financial security that I claimed on this blog that I don't really need.

I mean, what is financial independence, if,  at they end of the day, we still choose a day job in the end ?

Writing the email to tell the company that I have stopped pursuing the job was one of the hardest things I had to do professionally. It reverses the years of indoctrination that a man needs a job to stay relevant to the economy and to have a personal identity. At the back of my head, I felt that I finally took a gun and euthanised my old IT career that was pivotal to my financial independence today. My old school IT governance skills was like a loyal pet to me.  Even if I pick up IT skills in the future, it would be AI skills that can be weaponised in the financial markets and local courts.

It sounds cliche, but after sending out the email, I felt a sense that some burden had been lifted from me.

I no longer have to keep second guessing what kind of options will come my way and analyse how it would interfere with this new career of mine. I do not need to project my future salary and stress myself out on how I can multitask several jobs at the same time.

I can't recall where I read this but over-educated guys like me  need to stop thinking about our qualifications as real options - derivatives that become valuable if a special condition is being met. Some of these real options are always hiding out of the money, waiting for some smart career move to suddenly push it into profitable territory.

If you have a lot of qualifications, you have a complicated portfolio of options that you need to keep a watch-out for.

But we have influence and power over our careers that goes far beyond the power of someone who is long on a call option.

I think it is time to exercise an option and convert it into a stock on workshop creation. 

Beyond this, the markets will determine whether I've made the right move.















Wednesday, September 26, 2018

The Art of the Good Life #41 : The Illusion of Changing the World - The Great Men Theory



Can we really change the world ?

This chapter tells us not to subscribe to the "Great Men" theory. It is very tempting to believe that India needed Gandhi to become independent. Closer to home, it is very much harder to accept that Singapore can become the economic miracle without Lee Kuan Yew. But success is larger a series of interconnected events, and so, cannot be attributed to an individual.

How do we apply this to investing ?

I think the first thing we need to do is to start thinking about how much we hero worship the top investors.

Warren Buffett comes into mind.

It's pretty sickening to keep hearing Warren Buffett being quoted out of context.

Price is what you pay, value is what you get.
Be greedy when other people are fearful, be fearful when other people are greedy.

We make the mistake of taking the intentional stance. That things happen because there is an intention behind it.

But I think we're not even close to peak Great Men yet.

Once Jack Ma announced his retirement, I know that very soon, he will become very free to share his "wisdom" with this world. Make no mistake, Jack Ma is a communications genius and some of his quotable quotes are legendary. I was quite impressed when he talked about why we should be looking at TechFin companies in stead of FinTech ones. ( And yet some idiots tried to argue with me that his stint as an English teacher did not contribute much to his business success today. )

But rhetorical flourishes aside, Jack Ma is very possibly only qualified to talk about his experience as a businessman, specifically building up a B2B business like Alibaba. And yet, we get so excited when he talks about how he parents his kids and tells them that there is no need to top their studies.

Is Jack Ma a fantastic parent ?

Does Jack have anything useful to say to a startup engineer at Ayer Rajah Crescent who can't seem to get a match on Tinder ?

Probably not.

My friends and readers are much smarter. When you read something about love and relationships on this blog, people know that I'm trolling and read it for entertainments sake.

Rarely would my readers actively screen and backtest prospective spouses by choosing the venue they hunt for dates.








Monday, September 24, 2018

I am a workshop trainer now. Hear me roar !



During the past 2 days, I started on my new life as a Financial Workshop Trainer. Under the guidance of Dr Wealth, I was able to craft a compelling preview and managed to have a successful first run of the Early Retirement workshop with 33 students.

At a personal level, starting this journey allows me to earn equivalent to about 60% of my previous take home pay which is significant more than how much a rookie lawyer can earn on a smaller/medium sized outfit putting more than 12 hours a day in a law firm. The effort after creation of the slides(which was actually super tiring) is only about 20% of a normal day job, so I have the capacity to grow my investment skills and pick up some AI capabilities in 2019.

After the course yesterday, I started to think about the problem of alignment of interests between a workshop trainer and participant. I think this is a significant gap that is missing from the current financial education landscape. I can fill this gap because I want to be consistent with what Nicholas Taleb has said about having "some skin in the game."

As a result of this, I wrote the following letter to all my workshop participants.

Here is the letter I sent to my course participants this morning. Unfortunately, to be fair to the participants, the valuable annexes to this letter cannot be shared on this blog.

Dear Students of Batch 1,

It’s been a great honour and privilege to be able to conduct a 2-Day Early Retirement Workshop for you.

This has been a very enriching experience for me and I’ve learnt a lot from you. This is no accident because we did not limit ourselves to just sharing some investment strategies. You were able to come up with something unique on your own throughout these two days.

One of the questions I have been asking myself since yesterday evening was how to align my success with yours and the answer came to me this morning as I had my first cup of coffee in my life after a 5 day break from my usual daily shot of caffeine.

As an instructor who has enough from passive income, it is my duty to ensure that I eat my own cooking with the profits I earn from this course. 

Since many of you were candid enough to share your living expenses data with me, I will also be very candid with you, because new I count you as a friend. On average, an instructor makes about $10,000 to $20,000 from running a course. So I can put $10,000 of my proceeds from this workshop into markets and leverage to the point whereby the amount of investments I have in my margin account will exceed my revenues earned from teaching you in this class.

And I will proceed to do so.

This is best way to ensure that I am able to eat my cooking and keep my workshop standards high. There is no greater honour than to put this money into  the portfolio you guys have painstakingly built  yesterday.

You will find the composition of this inaugural Batch 1 Portfolio in Annex A of this message. It has 8 counters and I will be using an equity multiplier of 2 when I construct this leveraged portfolio. Annex B contains the other pieces of useful information you have constructed over the last two days on Business Trusts.

It has been fun teaching you guys and co-creating new leverage portfolios together as  a class !


Christopher Ng Wai Chung

Let this be a signal that I have now arrived into this industry and openly challenge all financial trainers to put some more skin in the game to benefit their paying customer. Don't just invest in your own portfolio, if your students are meant to succeed after attending your training, you should be putting your money in their investment decisions.

Thursday, September 20, 2018

The Art of the Good Life #40 : Other People's Shoes



Suppose you are doing your Reservist and you hear a story from Uncle Sam. Uncle Sam is one of the most popular specialists in the Brigade and always seems to be surrounded by men wanting to hear about his ridiculous escapades.

Today Uncle Sam describes a story of his last trip to Hong Kong.

In this last trip, Uncle Sam visited Temple Street and hired the services of someone who calls herself Mistress Akina (Based on 80s pop singer Akina Nakamori). After bringing her back to the hotel room, Mistress Akina first orders Uncle Sam to strip, and thereafter, she ties up  while simultaneously humiliating him about the small size of one of his organs.

When Uncle Sam is tied up in bed, Mistress Akina proceeds to climb on top of him and takes a nice long crap on his chest.

Philosophical question for the reader from this scatological anecdote :

Was Uncle Sam suffering throughout this engagement ?

This chapter in the book talks about the important of getting into someone's shoes and trying to empathise with them. I think this is an important point in the "FIREr vs Entrepreneur" debate raging in the FB group after Alvin Chow of Dr Wealth wrote an article on whether financial bloggers are suffering.

Over the years, I have faced my share of critics who reason that my approach to personal finance causes me a lot of suffering. This is as if they are speaking for myself. But the truth is that without really going ahead to cut down the savings and actually grow your wealth, you don't really know whether this journey is one of pain or pleasure (or both, in the case of Uncle Sam).

I would instead argue that high octane entrepreneurs, super-FIRErs and BDSM enthusiasts have one thing in common : They belong to deviant subcultures that are misunderstood by members of the public.

Sub-cultures engage in conflict because of difference in what french sociologist Pierre Bourdieu would call a habitus. 

The habitus of a FIREr is that they dress and eat simply. A lot of their social capital is tied to the books they read and whatever investing strategies they have. Books FIREr's read include Your Money or Your Life by Vicki Robin.

The habitus of a entrepreneur, on the other hand, is that have have to dress well to hustle and sometimes rewards themselves with better food. Such a person might consider knowledge of finer restaurants part of their cultural capital. Entrepreneurs prefer reads like Gary Vaynerchuck or Michael Gerber.

But like two countries having different currencies without a formal exchange rate, the cultural capital of a FIREr may seem worthless to an entrepreneur and vice versa.

People will say all sorts of things about FIRErs. Some will say that they are denying themselves True Happiness. But these guys might not know that  FIREr is secretly laughing all the way to the bank getting thousands into their bank accounts in dividends every quarter.

[ Digression : For this weekend's class, one strategy backtest 31.28% with a semivariance of 15.93%. As there are no more previews left, if you want one of the last few seat for the lesson. Write to me private. I'll get you guys in touch with the organisers. ]

To ordinary people, life as a startup entrepreneur is harsh and they seem to hustle all the time. But these guys also have the great privilege of seeing their product ideas find validation in the market. I'm going through a journey myself, giving talks in previews and seeing if the audience dig my presentation enough to buying one of my programs and tuning the message if it falls flat.

As such, I think it a lot better to see Savers (High end FIRErs) and Strivers (Entrepreneurs) as the same side of the coin.

The opposite side of the coin is everyone else, folks who drift along the Singapore economy and accepts whatever society throws at them.

If they get upset, they can always activate their keyboards and pick on someone they don't like, like Nas Daily.













Tuesday, September 18, 2018

The Great Marriage Firewall of Singapore.


This came about because I had to tackle a conundrum with Government statistics.

Earlier on, I wrote in the last article that the median income was $2,699 in 2017. Kyith Ng of Investment Moats thought that this number was a tad low and another BIGS participant found another number that said $4,232 per month.

As it turns out, all the numbers are correct. $2,699 was median income of a household divided by the number of heads in a household. $4,232 is the median income of someone who contributes to the CPF. In practice what this means is that a family consisting of a couple with kids will typically see the husband and wife making about two times $4,232. Dividing this sum total but the number of folks in the household, including kids, this will results in a figure closer to $2,699.

This brings up an entirely new and interesting dimension to reading national statistics.

If you remained single and worked for a living, half of you will be able to earn $4,232. However, if you gotten married and settled down, after diving the income across all members of the household, you only have $2,699.

The price tag of being married is about $1,500 a month !

This great $1,500 firewall may be the reason preventing singles are getting married. Unfortunately, this is manifesting in ways which confuse citizens like the recent argument that you can make babies in small flats. It does not help that, recently in the UK, the game Fortnite is starting to appear in quite a few divorce papers - Some computer games are so good that a lot of guys are giving up family life to pursue a life of gaming instead.

This also changes the way we should engage our single friends. Yes, even those who are currently looking for someone to settle down with.

If I'm feeling trollish, I would challenge my single friends this way :

Whoever marries you would have to downgrade their lifestyles by $1,500 a month. What makes you so worthy that someone would choose to downgrade their salary by $1,500 in order to start a family with you ?

At an individual level, this is a high bar to cross - especially for men. Most men will simply try to work hard and reach an income above the median by at least $1,500 so that they can worthy.

It's like Thor slogging to become worthy for his hammer (only to have his hammer crushed by his evil sister).

It gets worse. Just remember not too long ago, I wrote about ITE graduates drawing $3,000 after a decade of slogging.

At a policy maker level, this number is a huge national disaster because when we scale up the numbers, people do tend to be quite rational when making lifelong decisions.

On one hand, singles have a lot going for them these days. Why should single men bother with dealing with the choosiness of single women when they can have endless treats on Netflix and Steam.

Similarly, why would single women give up their financial autonomy for a media income guy? 

The Great Marriage Firewall of Singapore is the biggest policy challenge in the future. This will be surely be exacerbated by technological disruption which will see a generation of single men lose their jobs and then retreat into their tiny flats to Fortnite until they expire from old age.