Tuesday, June 18, 2019

More insights from attending real estate seminar previews

I'm not a saint.

To become a good trainer I do attend previews from other trainers. When I do attend these previews, I have to with hold judgment on the content being taught and focus on the user experience of previews to figure out how I can raise my game.

This creates a moral dilemma : There is a strong moral push to reveal my inner thoughts on what these seminars teach - I'm human too, I don't like having my time wasted on seminar previews. On the other hand, I don't want my training career to be built on the failure of other trainers.

My latest visit this time is a real "no money down seminar" and, unlike me, the trainer is very attractive and highly charismatic.

Here are some thoughts I have on last session :

a) Purchase of Industrial property should account for 7% GST and depreciation

A major idea in this preview is that industrial property does not attract ABSD unlike residential property. Also, some positive cash flow can result after accounting for mortgage payments and taxes.

I was trying to figure out whether there is a catch to all this and realise that somehow GST was omitted from the calculations. While you avoid the 12% ABSD for residential property, I think you have to pay 7% GST, which can quite punishing.

Also another element not discussed is that industrial leases can be much shorter than residential leases so depreciation is something that needs to be factored into the cost as well.

b) Mechanism for "no money down"

Obviously this was not revealed in a preview, so I want to take a stab at guessing the mechanism behind it.

My first guess is that the 20% funding for industrial property comes from getting a separate term loan from a bank by using the residential home equity as collateral. This is hardly a no money down scheme - that term loan can be invested in dividend stocks if you wanted to.

My wilder guess comes from seeing a trust deed in one of the slides. A trust basically allows multiple investors to pool resources to buy a property and allows some of them to be designated legal owners of the property and others as beneficial owners of the property. This is a highly dangerous as the trust deed will define the legal relationship between the parties moving forward and beneficial owners do not have a lot of power over the property.

( How is this arrangement safer or better than just buying a REIT baffles me. )

c) Some narrative tropes in real estate seminars are a turn off

Apparently, female real estate trainers seem to position pregnancy as some kind of apocalyptic event to gain sympathy points. I have two kids of my own and I just don't buy it. If you get pregnant while your husband is not fully functional as a  breadwinner, this might gain partial sympathy points but from my own experience, having kids is a happy event for me.

Another storyline element which made my blood boil is that some people see financial independence as a way to tell their kids that there is no need to study so hard. This alone would be a reason not to sign up for me. Even if there is no need to study so hard for a job, academic credentials can lead to more social or cultural capital. I don't really want to attract folks who think otherwise to my course. If anything, a good investment course should make you wish you'd study harder for your statistics class.

So some folks who do not want to attend a course may want to experiment with this idea, which, to me, seems to work in theory :

a) Find out whether you can get a term loan from your own residential property, many of us are sitting on quite a fair amount of home equity. If you have an EC like me, it is not uncommon to have $500k in home equity after MOP.
b) Find a real estate agent who specialises in industrial property. Start visiting a few and look out for bargains.
c) Some arbitrage opportunities will arise from property that is particularly run down, you can consult your agent to see how much you need to get a contractor to spruce it up with a new paint job. You can also erect walls to rent out to multiple parties to get more rentals.
d) If you are lucky enough to get away with being cash flow positive, you can see if you can sell the property a few years later and rinse and repeat the process.
e) Just don't ask me why this is better than investing in REITs beyond the high leverage.

If you some insights to share about no money down seminars, do comment on this blog.

I am not surprised that days after attending the preview, my friends alerted me that the company that organised the preview I attended was put under the MAS watchlist.

Well this should be my last article before I fly to Australia tomorrow.

Catch you guys next week !

Monday, June 17, 2019

Letter to Batch 5 of the Early Retirement Masterclass.

It's been a hectic week and I have not been updating this blog.

For the past two days I have been running Batch 5 of the Early Retirement Masterclass while my dad is still recovering in Yishun Community Hospital. At the end of class yesterday, I went to see my dad along with my own kids. We did not really much of a Father's Day celebration but I am really glad that my dad saw my kids the first time after being hospitalised for so long. ( We have been videoconferencing in the past. )

This coming Wednesday, my family will be taking a short trip to Australia. This was planned prior to my dad's hospitalisation. Beyond immediate places like Thailand and Malaysia, my family has not had a trip since I signed up for law school and they are in need of a holiday.

So anyway, here's the latest letter I sent to my students.

<< Letter to Batch 5 >>


Dear Students of Batch 5,

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

We may be seeing an inflection point in the markets as it is conducted just before the June 20 meeting between President Trump and Premier Xi Jin Ping.

As the markets may go either way, I will invest my proceeds from class training into two different portfolios. The first portfolio consisting of blue chip stocks and the second portfolio consisting of REITs and business trusts. This is also the class where major changes have been made to the key strategy used previous classes so much so that many of the usual REITs we would have bought in previous batches have been changed almost completely.

Also of note is that this class has, very happily, trimmed off half of the REITs selected by the back-tested model. I particularly liked it when one group selected SPHREITs to be included in the portfolio but a dissenting opinion was shared from someone who is not from the group. As we worked to iron out the disagreement, I am glad that the group was willing to change their minds. In investing, we should never cling onto our investment ideas stubbornly. This discussion resulted in a portfolio with even higher yields.

At the end of the day, only history and the markets can tell whether the choices we made are the right ones. Collectively, the overall effect of investing in this batch of securities would be to diversify from what was invested in before so I look forward to putting my money into the markets in about two week’s time.

Our co-created equity portfolio that yields 4.31% can be found in Annex A of this message. Our co-created REITs and business trust portfolio that yields 6.455% can be found in Annex B.

I look forward to investing $10,000 of my own fees into my margin portfolio with an equity multiplier of 2 into each of the portfolios in Annex A and Annex B. You will hear details of my execution in about two weeks time.

Christopher Ng Wai Chung 


Tuesday, June 11, 2019

The Model Thinker #23 - Collective Action Models

Image result for traffic jam

Where situations involve a misalignment between self-interest and collective interest, we can use collective action models.

In a collective model, individuals can choose to free rise or contribute. If every individual contributes, the sum of payoffs is maximised. An individual who free rides, get to keep a higher pay-off for themselves but the collective suffers.

There are three models in this chapter :

a) Public Goods.

When it comes to public goods like paying for the environment or defence, contributions to the public good attain diminishing returns as more contributions are made but contribution to privates have a pay-off that varies linearly with contribution. This creates a gap as the socially optimal allocation to public goods becomes very large compared to the equilibrium allocation.

Society becomes worse off when folks act on their best interests and do not sustain public services.

To resolve the public goods issue, societies levy a tax and make it compulsory to sustain public good services to maximise the utility for everyone.

b) Congestion

The congestion model applies to use of parks and expressways. The pay-off of the use of the resource was found to decrease by the people who utilise it.

To deal with congestion, we can ration these resources, rotate access, run a ballot, levy a fee or enlarge capacity. Singapore is particularly good at dealing with congestion limiting access to folks with a COE and levying a fee to use roads in the CBD area every day. Fees than get channelled into public transport.

c) Renewable Resource Extraction

The third problem concerns systems like fishing. If you fish below a rate, fishes can survive to create the next generation of fishes. If you exceed a critical level when fishing, the population collapses and soon there will be no more fishes left to fish.

To deal with this problem, a monitoring body need to be setup to enforce fishing limits, monitor deviations and impose sanctions. Fishing limits should also be adjusted based on the amount of fishes left in the body of water.


Saturday, June 08, 2019

Early Retirement as a Religious Experience

Image result for mark manson

Mark Manson's latest masterpiece Everything is F**cked is a work of a genius. It stylishly blends the latest insights in psychology with postmodern philosophy and written in a compellingly unique voice.

This is a must read for fan of this blog.

One of the cooler ideas in this book is on how to start a religion and it is this section of the book that resonated with me the most.

Attaining Early Retirement and becoming Financially independent has always been to me a personal affair which I documented through my books at various stages of my journey. My earlier ideas recast financial independence as being akin to attain Nirvana by adopting a Calvinist work ethic.

One of the impediments of effective training has always been convincing students to take action.

As such, reframing Early Retirement as a Religion is a novel idea that might work. To start acting on one's own intelligence and investment ideas is not so much a logical exercise, but one based on faith and emotions.

Faith that, when a person invests on their own, things will not go south.

I will now imagine how Early Retirement can be re-engineered into a religious movement :

a) Sell Hope to the Hopeless

Early Retirement does indeed seem hopeless to a beginner.

We probably have about 10-15 years worth of work before we get interrupted with a string of retrenchments and retraining initiatives. Most investment products low ball their returns so an exit within 10 years is a difficult enterprise. As a consequence of this, this seems impossible to most laymen.

As I already have a product offering to make Early Retirement possible that combines a quantitative approach with using a bit of leverage, this is already something that is expected in a training course.

b) Choose your Faith

For such a high quantitative investing methodology, folks may argue that faith is unnecessary to invest employing my approach since I am a man of science.

I actually now believe that faith is fundamental to successful Early Retirement.

You must believe that there is a chance that markets may adopt historical risk and returns. Non-stationarity makes it a crap shoot but some evidence is better than making bold proclamations about "good sponsors" and "superior managers" or reading candlesticks.

Furthermore, you must also believe that doing it on your own is better than hiring an active investing professional because you will not be encumbered with expensive management fees.

There are a lot of horrible people showing evidence on the Web that shows that people are bad at choosing stocks on their own. When you ask them what they think about people's odds of choosing a "good" commissioned financial advisor instead, they become silent on this matter.

c) Pre-emptively Invalidate all Criticism or Outside Questioning

This is the stage where training is no longer helpful since I do enjoy addressing criticisms as constructively as possible.

There are, however, some forms of criticism are particularly bad where I would no longer advocate being reasonable to the person levelling it. One is that because most evidence points to most laymen failing at investing, you will also fail at investing.

To deal with this, a good religion needs an enemy. If Early Retirement were to made into a religion, its enemies might well be some commissioned Financial Advisors or MLM practitioners.

" You are an FA, of course you will argue that I cannot attain Early Retirement on my own. I am not paying you commissions to adopt your slave mentality! Go Away ! "

d) Ritual Sacrifice

Early Retirement already calls upon more ritual sacrifice than most real world religions.

  • Tracking your budget with an App. 
  • Forgoing restaurant visits. 
  • Frequent library visits to read investment books. 
  • Pre-funding your trading account to lower commissions.
  • I even started intermittent fasting today. 

Sometimes my job as a trainer is to document all these rituals into one single set of Holy Training Manuals.

e) Promise Heaven and Deliver Hell

The capitalist economy has already installed a Heaven and Hell for adherents to Early Retirement.

Heaven for Early Retirees is a life unconstrained by unreasonable job supervisors, where your taxi fares come from REIT dividends and DBS pays you to visit Japanese restaurants.

Hell is a life of constantly getting Retrenched, Retraining for a new job then going into a new job just to be retrenched again. Hell for civil servants is doing procurement.

f) Prophet for Profit

In case you don't know, we trainers already profit from conducting training.

In my view, the challenge is to sustain a reasonable profit. This means coming up with training that always improves with the times. This may mean adopting some religious practices to improve student outcome. And no, I don't share my insights for free.

As you can see, there is nothing much stopping me from turning Early Retirement into a secular religion.

This is possibly not that new, the FIRE movement is already attracting believers in droves.







Tuesday, June 04, 2019

The Model Thinker #22 - Models of Cooperation

Image result for cooperations

Models of Cooperation can be used to allow us to think about the shenanigans in the insurance industry, but first let's talk about how to shoehorn this model, originally based on the Prisoner's Dilemma model, to describe the industry as se know it in Singapore.

When a Financial Advisor cooperates, he basically decides to put personal ethics above his bottomline. He will engage with his clients fairly and sell what the client needs. To me, a FA who cooperates operates by the spirit of the engagement. He does not adhere to rules simply to meet compliance requirements.

When a Financial Advisor defects, he basically decides to focus solely on the bottomline without getting caught. He sells primarily for his commissions first and his client's needs second. While he may not engage in illegal acts and will still maintain standards of compliance.

The difference between cooperation and defection is outwardly subtle, but there should be a higher payoff for defection than cooperation. As the gap between defection and cooperation widens, more FAs defect and consumers suffer.

Our models of cooperation can then provide ideas as to how to create a better industry that provides Financial Advice.

The first mechanism to promote cooperation is repetition. If FAs think that they are in it for the long haul, they would be less willing to screw their clients. One possibility is to stagger pay-outs to FAs across a longer period of time so that they will suffer the consequences when clients find out that the product was not suitable later. Another mechanism would be to clawback commissions if they quit the industry after making an immediate sale.

The second mechanism is reputation. If the history of defections can be made more transparent, then the public can choose not to engage with someone with a bad reputation. Some insurance companies track the churn rate of their agencies but this is only made transparent when litigation occurs, imagine what benefit this can bring if these rates can be made public. In my opinion, FIDREC should also allow proceedings to be accessible by members of the public. If a policy sold by an agent is disputed often, even if the outcome is in her favour, the existence of disputes should be made public domain as a warning to potential customers.

The third mechanism is clustering. If we want to engender more cooperation, a group of successful companies must emerge that would be able to profit from cooperative behaviour so that it may spread. The burden cannot be placed on companies like Providend forever. One way I try to contribute to this situation is to direct some of my students to MoneyOwl to see whether they can remedy their insurance woes (and my students have a litany of insurance woes that I can't advice on). I see cooperative synergies between financial education and unbiased financial advice and like to contribute to this moving forward as I get more traction within my own industry.

The final mechanism is group selection. One of the fundamental tensions in group dynamics is this truism : Individual selection favours defection but group selection favours cooperation. We are increasingly seeing commissioned FAs as a coalition. When an FA defects, he makes more money than a cooperative FA. But when a group of FAs all defect at the same time, FA collectively get seen in a more negative light compared to a group of FAs who cooperate. MAS is now starting to drop hints that this current arrangement is not sustainable over the long run.

I believe that changes are coming and maybe defection can be legislated out of existence one day.

Friday, May 31, 2019

What do they really teach you in Real Estate Seminars ?

Image result for real estate seminars

For a trainer, I am actually pretty noob when it comes to attending other training seminars previews.

But to improve on my own presentation style, I have started attending the previews from other course providers because there's always room for improvement. Because of the embarrassment of getting noticed, I try to avoid investment seminars and focus on training seminars in other fields, so this week, I attended a real estate seminar and can't help but feel that training courses in this domain may be based on a lot of dubious fundamentals.

Without revealing the specific seminar I attended, I will just share with everyone what I learnt. 

Note that I am not an expert in residential properties, so feel free to correct me if my analysis is wrong.

General Strategy - The general strategy proposed in this seminar is that a working couple who is currently sitting on a private property for the past 5 years should sell it and trade up to two pieces of property - one property under the husband and one property under the wife. The couple will live in one property and rent out the other for passive income. Rinsing and repeating this every 5 years will make you a millionaire. 

I see a lot of flaws with this suggestion :

a) These strategies depending on drawing down CPF for passive cash flow.

If you look at the math, for the property that is rented out, rental income these days can seldom cover your monthly mortgage payments, but because monthly payments is covered by $1,200 from CPF, the rental income can become net cash flow positive. 

This is not real passive income but tantamount to drawing money from CPF instead which is already your money. Furthermore, it deprives you from the nice guaranteed 2.5% from the Singapore Government.

b) You will not get a tenant renting the second property all the time.

Even REIT investors get worried about tenants. SoildBuild's primary issue has become that of rent coming from NK ingredients. 

When you have one property, you either have one tenant paying rent or it lies empty and you get zero rent for a particular month. In those months when you have no rent, you are likely to be cash flow negative.

c) Things can go south very quickly when interest rates go up

SIBOR is rising as we speak and I've been paying a lot more every month since the Fed have started raising interest rates. When SIBOR ratchets upwards, you are unlikely to be able to raise rents at the same time and this will have a negative effect on your cash flows.

d) Property taxes are conveniently ignored in calculations.

Owning real property is different from owning a REIT due to taxes that have to be paid for property ownership. Rental income also flows into assessable income every year. 

No attempt was made to quantify this. 

e) The thesis that real estate will appreciate just like in the past is questionable

I have to be careful when saying this because I do quantitative backtesting so I may actually be committing the same sin. 

But when it comes to residential real estate, we know that price appreciation are probably more dependant on whether we will welcome foreign labour in the future and whether cool measures will continue. This thesis has to confront the fact that younger workers are increasingly finding it hard to own real estate because of the nature of their work. It does not help that fresh graduates are finding it harder to get permanent jobs 6 months after graduation.

Commercial property managed by REITs is simply not as big a political time bomb as real estate property. 

f) The trainer actually gets many bites of the cherry 

A lot of these seminars are taught by real estate agents. 

I suspect that trainer fees are not the only payments that the trainer will receive. Subsequent real estate transactions will also be serviced by these trainers. Does this introduce a conflict of interest when trainees are nudged to buy/sell properties through these trainers ?

Anyway, feel free to share what you do know about these seminars and correct my misconceptions if there are any. 

It was quite fun to learn what other trainers are teaching. 






Tuesday, May 28, 2019

The Model Thinker #21 : Game Theory Models Times Three

Image result for tycho nestoris


This chapter is about game theory where models describe a situation of zero sum games. I don't want to get into a discussion on zero sum games because they are more useful in a situation where you trade in derivatives or currency. Someone's win has to come off from someone's losses. This is the kind of game that I really hate getting into.

Instead the addendum of the chapter talks about something more interesting which is the problem of identification.

What causes people to take up a particular investment approach like value investing or quantitative investing ?

The peer effect model reasons that people adopt an approach when influenced by their peers. If that were true, a person who joins Seedly would become more open minded to buy whole life insurance, where a network of FAs are brazenly picking fights against the BTIR crowd. If this person joins BIGScribe, I am guessing he is more likely to adopt a more hostile stance towards whole life insurance, preferring to invest their way out of any personal situation. At least so far, the design of BIGScribe is that there are no commissioned salesman holding admin roles within the group.

The sorting model suggests that people sort themselves out and they congregate in the same groups that have the same philosophy towards insurance and investment. If you consider the sorting model as the dominant one, you will simply argue that Seedly attracts more FA types and folks who are more open-minded to what is sold by the insurance industry. Similarly, BIGScribe is, somehow, a magnet for very sceptical critics.

The problem of identification is that if we only have a snapshot of data, we can't really tell apart which effect is a stronger play. We have to observe participants in each Facebook group over time. Right now, I believe both effects are always in play between the FB groups. Some folks will be influenced by the regular posters in each respective group but eventually those with the same outlook (or agenda) will congregate within the same cluster.

In designing a good training to enact change in a client, both effects will have to be exploited at the same time to benefit the customer.

I like to to get beginners invested as soon as possible, treating dividends as some kind of "gateway drug" to get a rookie investor hooked ( like Walter White ). Of course, because of the amount of skin I have in the game, I have to pre-select students who will most likely adopt my approach towards investing. Right now, I am aware that engineers, accountants and teachers somehow have a strong affinity to what I teach in class.

Should I soften my style to make it more touchy-feely and emotionally charged so as to appeal to the artistic and designer types that I generally do not have an affinity with ?

Let me give you a hint with a quote from Game of Thrones :

"I am neither kind, nor a lord, Your Grace. I am merely an instrument of the institution I represent, it's wellbeing is a matter of arithmetic, not sentiment." - Tycho Nestoris of the Iron Bank of Braavos.