Tuesday, January 27, 2015

What are the first principles in Investing ?

The awesome thing about the finance blogosphere in Singapore is that bloggers can build on each other's ideas.

BigFatPurse has put up a really good article on first principles and why it can often be better than just employing analogies. 

While it does not apply to every domain I know, analogies are not particularly good in investing. Many investors like to talk about Warren Buffett but forget that he can takeover entire companies and fire managers which destroy value, this has the effect of unlocking value from the stocks that he buys.

Retail investors like us will not be that lucky. A value stock can be undervalued for decades tying our money down for years before they can be put to better use elsewhere.

Of course the other problem of analogizing success is that we often come across successful relatives who brag about their investments becoming multi-baggers. This is a terrible fallacy which is often committed after Chinese New Year - If a cousin or uncle sports a fine piece of luxury watch or drives a Maserati, we automatically think that we can copy what they are trying to do. There is no framework which guides how we look at finances.

While I do not have the answers as to what all the First Principles of Investing are, I can share what can be conveniently written in one blog article.

a) Compounding is greatest thing known to mankind.

The first principle is simply that compounding allows you to create wealth exponentially. The theory is obvious even though the practice is not. If compounding is the 8th Wonder of the world, the savings you make in your 20s are a whole lot more important than the savings you make in your 40s, so why are so many young Singaporeans fabulous and broke ?

Similarly, return of 8% are astronomical compared with returns of 6%.

b) Your profits are your raw returns from your investments minus costs.

Another obvious theory which is seldom seen in practice. If profits are raw returns minus costs, you should be aggressively managing your investment costs by pruning out investment vehicles which pay too large a commission to the salesman or fund manager.

The superiority of ETFs over actively managed funds over the long term should be something to concerned about. You should be trimming your personal expenses as well, if only to channel more money into your savings.

c) Asset allocation can be a free lunch if you re-balance your portfolio.

This is more complicated. Asset classes do not move in tandem and complicated mathematics shows that by mixing up these key asset classes, you can improve your risk-adjusted returns. Another words, diversify your investments to cover different market situations. Buy a mix of equities ( STI ETF), bonds ( CPF-SA ) and commodities ( Commodity ETF from SGX ).

Rebalance your asset mix every year. Your human capital or unearned income is also an asset and should taken into consideration.

d) Performance of an asset class is a question of statistics and probability.

Generally speaking the best asset class over the long term are equities with a return 8% and a standard deviation of about 20%. While proponents can argue about the fallacious assumption about markets being normally distributed. We know with a simple understanding of statistics that promising returns over 7% a risky proposition for anyone selling an investment product. This allows an investor to immediately filter out deals which guarantee 12% a year - the deal is too good to be true.

In summary, there is a broader reason why we need to turn to first principles instead of merely analogizing from the investment success of others. First principles sets the boundaries between common sense and salesman bullshit, allowing you to avoid paying hefty commission and scams. With the right foundation, a person can craft a plan to make his first million without looking for a guru or role-model.

An obstacle towards understanding these first principle is that the study of finance is inherently difficult which costs may years of a person's life. It is difficult to get started in investing using first principles without a strong grounding in statistics, economics and accounting.

Which alludes to an bigger question : Is theory that worthless in a society that is now trying to turn to competence and skill ?

Saturday, January 24, 2015

For hands of gold are always cold...

Sometimes you wish that some classroom would erupt into full-scale political war. This almost happened the other day in class when we were discussing about the removal of juries in our legal system. A faction in class feels that the population is educated enough to being juries back but another feels that it is more efficacious to leave decisions regarding the facts of the case to the judges.

I have very civil classmates and the discussion ended pretty quickly, had this been other students, the discussion could have turned ugly very quickly. In an alternative universe, this would have become an opportunity to bitch about the strongman politics in the 1960s and some progressive will hijack the discussion to talk about human rights.

What is not obvious to most people observing this exchange is that underlying this discussion is that a specific ideology may have infected Singaporeans which go beyond their support for the PAP or the Opposition - The idea of Plato's Republic that there are Men of Gold, Silver, Bronze or even Lead. Our Administrative service is full of Oxford PPEs, living Philosopher Kings who determine national policy for the best of the country - readers do note that these super-scalar public servants cannot be voted out in 2016 no matter who you vote for. 

The abolition of the jury is just a small symptom of the underlying root cause. There is a notion that a judge, person of higher learning, is more capable of cutting through the rhetoric to dispense judgement in Singapore. This arose from the belief that there is someone more eminently qualified, or even better than a different class of persons.

This does end with the courts.

Opposition supporters, while upset with the PAP's elitism, are visibly impressed when Chen Show Mao has joined the cause of WP.

Some very silly Singaporeans abdicate the management of their finances to the so called Financial Advisors.

For now i would like to just like to invite the reader to see where they stand on this idea.

Strong-form of the theory

The strong form of theory is that not only are there men of gold, silver or bronze, children of parents of gold are also people of gold. This is the eugenics argument and part of the reason why many civil activists fought off the graduate women's policy which was implemented in the 80s ( Progressive are unlikely to give that hat tip to Vivian balakrishnan for fighting the good fight right ? ).

While this idea might seem repugnant to most readers, social science has lent support to the argument. In the US, assortative mating is now the root cause of income inequality with a whole lot of social advantages going to the children with graduate parents. Go read this week's Economist for more details.
Semi-strong form of the theory

The semi-strong form of the theory has more adherents. It is the idea that there are men of gold, silver and bronze but it is not an in-born trait. You can rise to your position based on your own talents and life is not an ovarian lottery.

This is an attractive idea for progressive change, but sadly this has less support in social science. You need to retool  and engineer society to make this a reality. This starts with more tax payer money to the poor and socially disadvantaged.

Weak form of the theory

The weak form of the theory would appeal to hipsters and art history majors. Whether a person is a man of gold, silver or bronze is contextual. A person can a man of gold if he chooses the right vocation and is put into the right situation.

This theory can be logical and I can imagine a lot of coherent arguements for it, but I fail to see what kind of consequences can arise from this belief. Since everything is contextual, do we leave things as status quo?

Fuck the theory

Some anarchists or communists will decide to simply fuck the theory. There are no philosopher kings, men of gold, silver or bronze, just human beings.

I can see the attraction of this stand as no one wants to be labelled a man of lead, the best way is to dispense with the labels. Problems might arise during CNY when your relatives start to label every cousin and nephew based on their income or academic performance.

As for my personal belief, I think that science does support Lee Kuan Yew and the strong form of this belief. But humanity should aspire toward a society that is semi-strong. If a clever kid did not choose rich parents, we need to elevate him to a leader, so tax payers must be prepared to pay to ensure that his disadvantage is reduced.

I am less supportive of the weak form of the theory because there are traits like conscientiousness which create all-round good outcomes for folks with such traits throughout his/her life so "better" people do exist ( try working with a flake if you do not believe me ) . 

Tuesday, January 20, 2015

Which periodicals do you read ?

Just a short article today, it's been kind of frustrating that I have to rush my readings tonight for tomorrow's lesson, I was not aware of the readings until this afternoon and I am not the kind of guy to do work last minute.

Just want to share the periodicals I currently read :

a) Business Times and the Edge.

Local investors should do their best to read these two periodicals on the local market scene.

Having no money to invest for about 10 more months makes reading this no longer mandatory. I continue to read the Edge to track my current investments, sometimes a very in depth article appears and it allows me to decide whether to keep a stock holding. Given that most of my stocks are high yield, I generally try to ride out a rough patch rather than sell my holdings.

Currently, I read the Edge every Friday and pick up BT for the Saturday issue because of it's Leisure section which is quite fun to read.

b) The Economist

For years, I was unable to have a breakthrough with the Economist. It was a magazine I admired and the folks who read it on a regular basis always seemed to have a lot of substance.

But I always found the Economist to be very dry and struggle intellectually with the articles. Finance class only helped me cope with the Schumpeter section but I still skip anything on Africa and South America. ( Does a REIT investor in Singapore give a shit about Robert Mugabe ? )

If the Harvard Business Review could be such a compelling read, why is the Economist so boring ?

These days, I look forward to my copy of the Economist as it summarizes the big news of the week and it's analysis is incisive as ever. Compared to my legal case readings, The Economist is as exciting as a fantasy novel involving Driz'zt, Elminster and a neo-Otyugh in BDSM action ( In the case of the Schumpeter articles, with Elminster wearing only diapers).

Of course my rationale for my new found obsession with the Economist is that it is the preferred writing style of the folks who mark my essays.

c) Financial Analyst Journal and CAIA Journal of Alternative Investments

The biggest reason why I kept paying my CFA and CAIA  membership dues is that it comes with the Journals on investing. The papers are fairly hardcore but I was able to dive deep into various new age investment strategies. (  latest being a treatise on covered call strategies. )

This is really an extension of my CFA studies and my independent has kept me updated with techniques like fundamental indexation and synthetic annuities after all these years after leaving finance school.

Just don't ask me why I can handle FAJ but not the Economist.

d) Special Mention : Malaysia Edition of Personal Money

There used to be a reason for me to go to City Square Johor Bahru every month.

Sadly, Personal Money, a periodical from the same team who brought us the Malaysian Edge, has been discontinued. I was a quite a big fan because of the human element of the magazine.

There is a certain quality of a Malaysian financial periodical which treats their readers as ordinary human beings. Personal Money had articles on hipster cafes, cheap gadgets and Chinese Astrology whereas the Edge Singapore views investors as the regular Singapore Tatler types who are only into expensive watches and fountain pens. It is dehumanizing to think that investors only eat at restaurants which charge $300 per pop.

If anything,take this as an appeal from me - At the end of the day, no matter how numerical or analytical  we are, we are ultimately human beings.

Investors do not exist so that you can rub into our faces the Ferraris, Michelin 3-star meals and Mont-Blanc pens. I'm fairly immune to envy but I am aware that this lifestyle proposed probably prevents many of us from building a decent portfolio in the first place.

The state of local finance periodicals is currently just that - hardcore analysis and then pages and pages of horological pieces which costs more than stocks which was just analyzed.

Saturday, January 17, 2015

Power of the dual-lawyer family.

Some law students are like oxygen molecules, they form covalent bonds very quickly.  After one semester, it comes at no surprise that couples have started to form in class.

While I think that teasing is not a necessary part of campus life - I am certainly happy for my classmates who are now happily attached to each other, it would be interesting to examine what i would think is the most potent couple combination in class.

The lawyer-lawyer couple is, financially one of the most potent combinations you can form in Singapore. This may have far reaching consequences for policy makers if they are concerned about social stratification but that is not part of our discussion today.

After both husband and wife gets admitted to the Bar, their combined income far exceeds anything me and my wife have achieved in our entire lives ( once we discount our investment income ). Of course, the mathematics can also apply to doctor-doctor couples or management consultant - investment banking couples, but lawyer couples form very easily in class since there is so many opportunities to work with each other in SMU.

As part of my analysis, I generated a spreadsheet with a very conservative assumptions of the cash flow a legal couple can expect.
  • Salary begins with a post-CPF take home pay of $4,500 and 3 month bonus every year.
  • A projected 10% increment every year for a decade after which the increment slows to 5% a year. I expect lawyers to job hop a lot to maintain this salary trajectory. 
  • A very modest assumption of 6% investment returns from a 25% savings rate.
My results are as follows :

YearAnnual SalaryCouple SalarySavingsAccumulated SavingsInvestment Income

The results are very interesting.

Basically it means that if the couple maintain a steady household expenditure and increase their standard of living at the same rate of salary growth, they can expect to still accumulate their first million at year 13 from graduation ( about 15 if they used a bank loan to pay for the JD program. )

A 28 year old couple will accumulate about $1 million at around age 41, earlier if they can save their entire bonus and increments.

Of course it can be argued that life can be very unpredictable and my table does not account for the burnout rate of legal professionals. It is also entire possible that one member of the couple can take a few years off to raise kids.

Another impediment is that many lawyers can get used to the high spending culture and lifestyle common to keep up with appearances, which would make saving 25% unrealistic.

Lastly, it can also be argued that few lawyers, being very verbal creatures, might be able to eke 6% from their investments. I believe that they can afford the best fee-only financial advisors to meet their investment goals.

Of course, I am not just doing this analysis for couples.

Observe that by halving the numbers, a single lawyer who can save 25% of income can also achieve a passive income of more than $2,000 sometime around year 11. This means that a legal career sort of pays for financial freedom is it can be sustained for about 11-13 years.

This can be helpful in answering some crucial questions my classmates have on managing their lives.

My classmates are now faced with a decision on whether it is advisable to speed up and accelerate their JD studies from 3 years to 2.5 or 2 years.

In the grander scheme of things, with prudent management of resources, my classmates can reasonably be financially free after about 11- 13 years of hard back-breaking work, they just need to survive.

From this perspective, it makes the acceleration of classes unnecessary.

Monday, January 12, 2015

Functionalist perspective on the attainment of Financial Independence.

The primary reason why I avoided the study of Humanities when I was younger was mainly because I do not like the idea of getting lots of B's when the report card gets handed back to us.  The secondary reason, which also explains why I do not have great luck with Arts girls when I was an undergraduate, is that I have a very utilitarian and pragmatic philosophy of life.

Like many engineers, I am not only vulgar in my words, I am vulgar in my outlook of life. Here's hoping Law school can change that.

Imagine that you are in an RPG game and you find a magic sword. A great humanities scholar will be interested in it's history, the player wants to know who forged it, who wielded it into battle and how was it lost. Perhaps it was forged prior to the Doom of Valyria, wielded by Azhor Ahai, a great hero of ancient times who perished it battling an armada of fire breathing dragons.

When I find a magic sword, the only thing I want to do is to hit someone with it. The more damage I do, the more satisfying it is. I don't care if it's the great flaming sword of Azhor Ahai or the +2 Dildo of Sodomizing Justin Bieber.  I like to roll critical hits with my weapon, behead my opponent and kick his head around like a football after I am done with it.

Imagine my loss that it took me 40 years to discover Functionalism !

Functionalism is a methodology used in Comparative Law. To shed insight on legal systems around the world, scholar ask themselves what is the purpose of these laws ? Another words, while the Law of Contract differs from US, Singapore and German jurisdictions, the function of having rules is to govern agreements and promises between two parties. Different societies evolve different approaches to deal with people who breaks oath and promises.

This insight is actually quite brilliant because I think if I swing this concept hard and fast enough, we can learn something about why some people attain independence and why some don't.

I think  the problem with very technical financial authors like myself, there is a lot of focus on technique. If you distill the essence of how I attained financial independence, its basically get a decent job, save aggressively and invest in high yielding instruments until the yields exceed your monthly income.

Even today, it baffles me as to how people can't do something as simple as that. I have actually met lawyers in the past, salivated over their 5-digit monthly incomes and then they ask me how to budget their expenses because there's not enough to go by every month.

The insight on financial independence I just learnt from my legal texts is this : While almost every piece of financial advice is similar, the purpose of the person who seeks financial independence differ. This is the opposite problem in Comparative legal scholarship.

What is your purpose of seeking financial independence ?

If what you seek is income security to cope with job loss really want that quiet confidence  to live out your life without being a slave to any corporation, then the method of dividend and value investing makes a whole of sense and like many other financial bloggers, you should be able to attain FI before the age of 40. This life can be boring.

If what you seek is variety, you aspire to the kind of Facebook creature  living that parachutes off planes and take lots of picture of your high-end cuisine, you are likely to fail, because for FI to take place, it often means having a very austere lifestyle for more than a decade. All that advice on budgeting and seeking yield based instruments will not allow you to meet your purpose. It's like Afghanistan developing securities trading laws. I think that instead you should be attending Dale Carnegie courses and should look for a good sales job to attain that lifestyle.

The final insight from Functionalism is actually common sense : You need to know what you really in life and have a definite purpose before you look for the tools and the techniques to achieve that purpose.


Sunday, January 11, 2015

One year after leaving the workforce !

Wow ! Since Christmas, my life has been a series of milestones.

It has been a year since I left the workforce, and it's been so long I am probably not even classified as someone as someone who is unemployed any-more. instead, I am now someone who is no longer participating in the labour force.

The economy has really changed a lot, I'd just like to speak about two trends which was not anticipated when I quit my job last year at about the same time.

a) SIBOR is up. Real-estate bulls are in for a beating of a lifetime.

I have had a balanced real-estate/equity portfolio for quite a while. What is really irritating and I believe this is being shared by many readers all these years are the kinds of fools who would never believe that a bear market in real estate is possible.

With SIBOR being up so drastically over the past two weeks, many of us with a home mortgage ( myself included ) should be expecting a higher payout over the next few months. This should be something that needs to be anticipated. But if you are a rentier who has to pay out of your mortgage for your bank loan, there is now a distinct possibility that you can have a net cash outflow after servicing your loan. Worse, there is going to be strong downward pressure on real estate prices now that it costs a lot more to service mortgage loans. That should be part and parcel of the risk of real estate investing.

What is delightful to me, however, is that some folks who have a livelihood selling real estate and loans would have to contend with less agreeable clientele as I believe many common folk will be a lot skeptical of the snake oil they are peddling. Sometimes it takes a real bear market to teach folks to be less trustful of salesman types.

( I do welcome critics to analyze the mortgage deal which I secured about 3 years ago, my perpetual rate moving forward is 0.68% + 3 mth SIBOR. So far I am seeing no rush to refinance. )

b) Oil and Gas sector no longer looks good.

I've been waiting for this for the past 15 years with great relish. A confluence of factors are driving down oil prices, mainly the US unlocking their shale reserves and a slowdown in China largely triggered by anti-corruption measures. Personally, I'm even inclined to think that low oil prices are a result of the world coming together to screw Russia over their annexation of Crimea. ( Otherwise, why would OPEC actually not cut their output ? )

Low oil prices can wreak havoc in most economies, but my take is that it is generally good as household end up with more discretionary income.

More importantly, even after the shake-out in the banking sector, oil and gas executives continue to be the cockiest fuckers you meet on the corporate world. For the  first time in 15 years of my working life, they are now quaking in their boots.

If you've been a regular reader of this blog, you might remember my article in the past where I exhorted my friend not to envy his whoring and arrogant friend who works as a hotshot in the oil and gas industry. Apparently, my friend is getting the last laugh now.

What is the moral of the story ?

The economy will eventually humiliate everyone and make fools of us all.

When I had my first job with Procter & Gamble, I felt like an invincible genius who got myself a first class ticket to the millionaire suite because what could possibly go wrong with a consumer goods company which looked immune to economic cycles in the 1990s. Who knew that the entire IT department would be sold to to HP within a span of 5 years ?

These days, even Coke is retrenching workers. 

So far I am doing fine, one record year paying taxes, a mortgage loan and school fees all without touching my investment capital.

Who knows what would happen next year ? Will I lose my financial independence ?

Singaporeans will learn that capping foreign talent will hurt the pockets of the local middle class workers. Getting rid of young workers from China and replacing them with our aged workers can only end in lower productivity and this is now being seen in all our metrics. I fully expect an electorate who will be much less xenophobic as I believe that ultimately all of us still vote with our wallets.

Perhaps I should start getting cosier with the law firm partners who come over to SMU. I've not been talking to them so far as I've yet to even figure out which area of the Law to specialize in.


Monday, January 05, 2015

At 40, I have no doubt that Confucius is wrong !

One of the WTF moments I had turning 40 is that I had the luck to know of Confucius very ancient ideas of personal development earlier to see if it is possible to compare my personal development with the Great Confused One.

I was not surprised that this effort made me more confused.

This was taken from Analects 2.4.

At 15 I set my mind on learning; by 30 I had found my footing; at 40 I was free of perplexities; by 50 I understood the will of Heaven; by 60 I learned to give ear to others; by 70 I could follow my heart’s desires without overstepping the line.

So at the age of 40, Confucius claims that he was free of perplexities - someone who has no doubts.

One contextual interpretation is that during those bad old days, there are many gurus or snake-oil salesmen who can survive selling personal philosophies and as a sage, Confucius needed a lot of confidence to be able to put himself forward as a great teacher. 

We no longer live in the time of Confucius. People in their 40s have more doubts than ever and are plague with more perplexities. Mortgage liabilities and children continue to take a toll on workers in this stage of their lives. Many will wonder what they have done wrong with their careers when some of their peers have started on directorships. So even if we are ethnic Chinese, Singaporeans are full of doubts, some over what is morality, but our doubts stem from whether we made the right choices in our lives. 

I have my own personal biases as an Ang-Moh Pai Potatoe eating Ethnic Chinese, one of these biases is that I've always been very sensitive of the Teng Lang Pai Chinese helicopters who come from all those loyal Chinese schools and favored as loyal and conscientious citizens. 

( Of of these things I was very sensitive about is their chauvinism. In a truly multi-racial society, designating ethnic Chinese students into special conclaves to study their mother tongue is a horrible idea which needs to be struck down in the next elections. We can designate special institutes for some passionate students to cover their mother tongue as a first language on Fridays and Saturdays. In normal days, Singaporeans should have contact with all races and this should include foreign nationals as well. )

Coming back to Confucius, I do marvel at his intellectual arrogance in thinking that he has no doubts. 

This is not a simple matter. this is something which affects our daily lives. 

I am increasing noticing that many folks in their 40s, uncles and aunties like myself are starting to develop psychological defenses to account for their own mediocrity. I urge readers to just observe the folks they meet during Chinese New Year. 

a) Success and wealth are immoral

This psychological defense is erected to show that the folks more successful they are more more immoral. For example, one might argue that someone lives in landed property because he is a successful salesman - he cheats people for a living and unlike honest folk, does not work with their hands. 

b) Success can be proxied.

This second psychological defense is erected when face with someone perceived to be more successful than them. This is fine, as they know someone who is "lagi" more successful. 

Is this not the moral development hinted at by Confucius ? 

Uncles and aunties in their 40s, having no doubts at the corruption and mediocrity of the folks they are compared against ? 

Maybe I am immature, I think this is mainly an Ethnic Chinese problem within my own community. I don't experience much of these amongst other races, so do feel to correct me if I am wrong. 

In summary, the only thing which I have no doubts is that Confucius' teachings do not mirror my own personal development. 

I doubt whether the decisions I made are even right. 

I doubt whether the bets I have placed on the economy would turn out my way. 

I doubt that readers would be pleased by this post.