Next Talk : Investing with Less Stress. ( 18th May 2017 )

Ok, it's time to start promoting our next talk again and this time round, we're happy to say that we're back to talking about investing in the stock markets. You can get more information on how to book your seat by following this link here. This time, you should act quickly because we've consistently sold out for all our talks but we've actually got a smaller venue.

The topic of our next seminar is "Investing with Less Stress".

The slides are still a work in progress so my outline is still a little messy but I will be talking about the following things :

• What are key sources of stress in our lives.
• Computer Science's case against overthinking.
• How risk management as a professional discipline can be applied to your daily lives.
• Insurance as a form of risk transfer - You can't really talk about stress and risk without talking about insurance. Also, I can't talk about insurance without being candid and disagreeable. ( So this should be entertaining if you are sick and tired of commissioned salespeople from the insurance industry. )
• How investing can fit into your risk management framework and complement a minimalist insurance lifestyle.
• Dividends investing as a means to eliminating stress. I will walk you through the steps on how to obtain information to build up a dividends portfolio so that you can attain a stress-free life of financial independence. This is a simple approach designed for novices without a Bloomberg terminal.
• How is investing in dividends backed by academic research.  
• Currently, I'm still working on psychological effects of financial independence so, once again, you may expect new and interesting stuff which I hope would even entertain my fellow speakers. 

This is probably one of the most valuable talks that we'll be giving so far with all three speakers presenting extensively on investing with the stock-market. 

In spite of this, we're still trying to lower the price of our talks.

Let's hope that we can sell out after this notice.

Equity Management #10 : Example on how a market neutral portfolio is constructed.

This is for the benefit of some readers who want more information on market neutral portfolios.

Right now, I still have no idea how a retail investor can get started on this form of investing and would be really grateful if intermediate investors can give me some tips on which brokers can provide this service. My only guess is that if you are high net worth, you might be able to talk to your private banker to start doing this.

The book mentioned that the portfolio manager hires the services of a prime broker who can also act as a custodian of the stock ( No CDP involvement in such a case ).

Procedure

In this example, the investor begins with $10 Million. He sets aside $1 million as a liquidity buffer in case his short positions turn against him, so he gets to trade $9 million of stocks.

1. Investor buys or goes long on  $9 million of stocks. These stocks are held with the prime broker that also acts as a custodian (CDP).

2. Investor shorts or sells $9 million of stocks at the same time. These are stocks which are not owned by the investor so needs to be borrowed by securities lenders.

3. When the stocks are being sold short, the broker needs to put up $9 million in proceeds to securities lenders as collateral for shares borrowed. If the shorted counters increase in value, the manager is expected to top up to allow the broker to maintain the collateral, which explains why he holds a $1 million in reserve.

How to make (or lose) money

If you have this arrangement, there are 4 ways to make (or lose) money :

1. Stocks you buy increase in value and pays out dividends.

2. Stocks you sell decrease in value. But you have to pay out dividends of stocks you short.

3. The $9 million of collateral posted to securities lenders generates interest which goes to the security lenders, broker and the investor. Unfortunately, the book mentions that this is subject to negotiation between the different parties so we get no clear idea as to how much money is earned here.

4. The interest rate from the $1 million spare buffer.

Arrangement your investments in this manner gives you the opportunity to earn or lose money in an a rising or falling market and everything boils down to your stock picking skills. In this example, I have not employed any derivatives or CFDs to create the long-short portfolio.

Hope that a kind Samaritan can share with us what needs to be done to have such an arrangement with a local broker as well as their personal experience combining longs and shorts in their investment strategy.

Random musings about Bangkok.

This is not a lifestyle blog but I spent the last 3 days in Bangkok in a fairly intense but fun trip.

Here are some random thoughts from my trip.

a) Singapore is losing on many fronts to Bangkok in retail and entertainment

The retail situation in Bangkok is really so much larger in terms of scale and variety. The first thing you notice is that there is no "Capital Mall" effect and each mega-mall is able to develop its own character. We shopped at the Siam Paragon which is like a larger version of Takashimaya but had an exhibition which was running a Comics Convention at the same time. Terminal 21 which was located near our hotel had a different national theme on each different floor. One floor is modelled after Shibuya Tokyo and another was modelled after London.

However it is the Night markets that really shine in Bangkok, we went to Rod Fai 2 which feels as if its 20x the size of Bugis Street but had terrific rock bands which played our favourite english songs from the 90s. You can listen to rock music, eat seafood, and have a beer at the same time. At least for me, I would probably not bother with hipster markets in Singapore for quite awhile after this experience.

I don't know what this means for us given that we've been reporting on the impending demise of our retail sector in Singapore for a while. If you've been to Bangkok, I think the death of Orchard Road was well-deserved because retailers and landlord inflicted quite a lot upon ourselves.

b) There are two price-tiers in Bangkok so do spend with proper planning.

[ It was a 3 day 2 night trip and even though there was no "night firing", I managed my finances rather badly spending the equivalent of 70% of my budget buying role-playing games in the first night and then relying on my friend's excess cash for the rest of the trip as they did not want me to use my credit card and rack up miscellaneous fees. I paid them back in SGD when I reached Changi. 

Don't be like me.  ]

Another observation is that there are two clearly distinct pricing tiers in Bangkok. If you stick with what foreigners eat, expect to pay closer to Singapore prices. We've has a fantastic steak meal at El Gaucho Argentinian Steakhouse but it cost us $120SGD each. I also paid around $8 SGD for a simple croissant and coffee breakfast next to the hotel.

On hindsight this is silly because Bangkok street food is so cheap and so good. A teriyaki chicken stick can be bought for 40cts and a bowl of noodles, around $1.80 SGD.

A smart tourist would be wise to mix and match the street food with the high-end restaurant to get a great experience for the trip.

c) Is Bangkok is becoming a cooler place than KL for Singaporeans ?

My last trip to Bangkok was not as good because there was alway folks on the streets harrassing me and asking me to go to some lucky temple or offering "free rides". As such, I always felt that the Bangkok experience has always been inferior  to that of KL.

But after this trip,  I seem to get the impression that the situation has turned around. Public transport over Sky Train and MRT is really cheap and convenient so we can avoid the rude private drivers. Thais are also a lot more orderly and well-behaved when taking their public transport.

The convenience, mega-malls, night markets and cheap eats may push more Singaporeans to choose Bangkok over KL instead. And this includes better security as Bangkok malls now feature security gantries at all their entrances.

Anyway, these are my observations, feel free to comment if your experience differs from mine.

[ Our most hilarious encounter was a taxi driver who refused to switch on his meter, tried pimping some services to us and failing to do so, tried entertaining us with racist jokes about his Indian Passengers and demonstrating how much he knows about Singaporean stereotypes while making an illegal turning.

If you get offended easily, Bangkok is not the right place to be. ] 

My JD aftermath #1 : Was it worth it ?

Ok, I've got sometime to blog before I head to Bangkok over the weekend for some serious shopping and eating.

A couple of days after my last paper, some headhunters have started talking to me and I had a serious chance to ask myself what would be my desired price tag to postpone my legal ambitions. I have since calculated a number and have gotten back to them and they still seem interested.

So drastic changes might be afoot.

It might be a good time to reflect upon the past 3 years.

a) General message for aspiring JDs - Don't do it.

First of all, most professionals looking for legal conversion are probably doing it out of pragmatism so I don't expect most JD aspirants to be financially independent and studying for a degree out of sheer vanity like myself.

Anyway, I caught up with some class-mates last night and we all agreed that our decision to take the SMU JD was not rational in hindsight. None of us would recommend this course to others for now.

I will elaborate further...

b) The headwinds in the legal sector may become persistent.

The largest negative is actually out of SMU's control.

We have no idea how long the legal industry would face this situation of oversupply as families send their kids overseas to get a law degree from an English university. Local graduates have a reason to be angry and disgruntled because these foreign graduates are mostly not from the Oxbridge elite universities and probably never had to do community service to graduate. Also a First Class in a UK University is 70%. In SMU, this nets you a B grade.

Even if the government has tightened the overseas universities that can be accepted into the Bar, the legal industry is also facing a lot of disruption from better search tools and use of AI to reduce the workload of associate lawyers. I think companies are also wizening up and will be looking at cheaper forms of dispute resolution like mediation and arbitration in the future. Collectively, this will hurt law firm revenues over time.

This will be the primary reason why many of classmates regret making this life decision.

If they do not get retained after their training contracts, what would have been the point of the past three years ?

Speaking of which...

c) Three years is a long time.

Three years is simply too long for a postgraduate qualification because the opportunity costs is too high. More importantly,  it is harder to foresee industrial trends beyond a year or two. Had an engineer in my similar situation were to decide to spend 1 1/2 years to become a data scientist, there is sufficient reason to believe that the tide would not turn against data science so soon when he graduates.

Ditto for MBAs because the INSEAD MBA is so short, you can target an industry and move in after graduation with a much lower risk.

Perhaps the JD should be retooled into a 7 year part-time program. This would make more sense to me. Prior to transitioning into legal work, we can remain gainfully employed be roped into working with legal departments to resolve sticky corporate law issues.

d) Some facets of JD life are completely unnecessary.

Overall, the course was, for me, a positive experience. But there are persistent negatives faced by generations of JD students.

I cannot think of another postgraduate qualification which has a pro-bono requirements which has been enforced in such a stringent manner. Me and my classmates have expended a lot of energy to get this aspect of our course done right.

Finally, group projects which should have been designed to get people to work together and build camaraderie has been turned into a process to make people from the same teams really hate each other. As it stands I'm not even sure if we will ever have a full class outing again as we've factionalised so badly over the past three years.

Of course, my personal experience for the past 3 year may be a result of changing trends in adult education in Singapore. This has stopped becoming a joke and anyone who wants to maintain a decent career trajectory would have to keep finding ways to pick up more skills. Skills upgrading, similarly, would need to become more modularised so that students would not enter an industry which has been disrupted too drastically after investing years in a qualification.

In the future, a law degree has to stop being a licence to someone to work in a highly protected industry. Instead, some of us may have to find ways to monetise our legal thinking skills within other industries in Singapore.

Anyway, I am off to Bangkok.

Next week : I will talk about the people I met in SMU and it will be FUN! FUN! FUN!

Equity Management #9 : Long-short equity investing.

For the next few years, I will be stretching myself beyond the usual yield investing which has been instrumental in allowing me to reach this current of financial independence. One of the approach I am toying with is the use of leverage, I hope to start building a small portfolio which has a modest amount of leverage to magnify my dividend yields.

The longer plan is to look at long-short investing. There are three ways to do this :

a) Market-neutral strategy

This strategy balances your long and short positions. The dollar value of your long and short positions are equal to each other. When craft a portfolio like this, there is no net market risk and your returns will be your gains from stocks which appreciate in your long portfolio and depreciate from your short portfolio. This is pure double alpha.

b) Equitized Strategy

This takes a long-short portfolio and you overlay this with a stock indexed futures position. So overall, you can get back the 6-7% from the STI index and you also earn a kicker from your market neutral portfolio.

c)  Hedge Strategy

Hedge fund managers enhance the equitized strategy with by varying the risk to market by changing the number of futures held on the stock index.

At this moment, I am not really sure how shorting would work beyond clicking the Contra checkbox when making a sell order but I do know what readers can attempt if they want to explore this option further.

We have a lot of gurus and great investor education providers but they seem only focused on taking up long positions. Ask these experts what they would do if they were made to craft a short portfolio by reversing their stock picking methodology.

Can we backtest a portfolio of low earnings yield, high price to book value stock with negative free cash flow?

This can be a source of additional returns and be the first step towards starting a mini hedge fund operation on your own.

Personal update - Done with my JD programme ( Hopefully ! )

And just like that, I completed my final exam in SMU and I guess I would have met all the requirements to graduate with a Juris Doctor qualification.

While I would have preferred to end my SMU stint in a high, my last paper was brutal and I found myself lacking the time to craft a coherent response to the exam questions. Nevertheless I should be able to move onto the next stage where I start tackling the bar exams.

Perhaps in another post I would talk about my overall experience with SMU but right now, I have several priorities :

a) Internship 

I will go back to becoming an intern again on 2nd May, this time I hope to be able to attract a training contract with a law firm. This process is already fairly hard for a LLB with average grades, it is much harder for a person going through a mid-career switch. I will be following the latest developments on government grants and will be trying to leverage on this support so that I can at least qualify to the bar sometime next year. After all, I have been unemployed for the past 3 years and the government might have some goodies for any law firm that is willing to throw me a bone.

b) Giving one more talk in mid-May

The next talk conducted by financial bloggers will be about stress-free investing and I have once again been given a slot to speak on this event. Slide preparation will begin as early as tomorrow as I need to give an indication to the other speakers as to what areas I would cover.

I try to make all my talks unique and would independently research new material for paying customers. You should expect content which is different from  any other product offering in Singapore as I blend computer science, social science research and finance to talk about the relationship between stress and personal finance for the local retail investor.

c) Rest and relax from surviving one of the most challenging academic pursuits in my life

My immediate priority right now is to simply enjoy myself.

This Wednesday, I celebrate my daughter's 6th birthday after which I will be off to visit what is possibly the largest tabletop gaming hobby shop in South-East Asia this weekend.

I will also not be reading any non-fiction for the next two weeks, being focused on Liu Cixin's Death's End and the latest Star Wars canonical piece on Thrawn by Timothy Zahn.

Computer game-wise, I will be downloading and installing the enhanced edition of an old cult favourite Torment.

Anyway, I am still zoned out from one of the hardest exam papers I ever attempted.

More updates before the middle of this week.

Mystics Secrets of the Eunuch Sorcerer !

Before I go for my exams and take 10 days off my blogging, I'd just like to address the amazing traction of my Eunuch post by looking at ways for a fresh graduate public servant to rapidly create a portfolio that can facilitate an early exit from stifling bureaucratic environment.

The public service is a lot more forgiving for entry-level personnel and you will find that your early salary trajectories are quite steep to keep you interested in staying on as a public servant. Furthermore. a rookie public servant also experiences much gentler office politics making it easier to keep earning the pay-check.

This makes your earlier years the best time to start creating the early "exit" portfolio. Any delay and your organization will slap the golden handcuffs on you and emasculate you forever.

a) Some generous assumptions

My salary projection assumes a starting salary of $3,500 before CPF for a top flight local graduate with a first class Honours degree ( Salary taken from top end of MOE Education Officers ). He maintains a disciplined lifestyle and spends only $2,000 a month but gets a 2 months bonus every year. Salary increments are projected to be 5% every year.

[ Life is unfair but I have a fairly smart, capable and sophisticated readership who show up on time for almost all my seminars ! ]

b) Target

The target portfolio size is $300,000 which, when invested in high yielding instruments, would generate the $2,000 salary expenses and cover the basic expenses of a male herbivore who lives with parents and wants to play computer games all day.

c) Portfolio is a simple STI ETF

This assumes that the exit portfolio is a diversified local equity portfolio returning a modest 7% a year. This exit portfolio is designed for total returns and only converted to a high yielding portfolio after exit from the service.

d) Results 

If you follow this example, based on my spreadsheet, you are expected to complete your exit portfolio in around 10 years.

( Do try it out yourself on a spreadsheet ! )

e) Eunuch Sorcery : Tapping on the power of leverage through margin financing

I was thinking about whether are there ways to speed up the creation of the exit portfolio and then had this idea of looking at margin financing.

You can check out this link  The Maybank website allows you to enter the name of the stock and it will return the interest rate they will charge you if you borrow from them to buy a stock.

Some of the data points were very interesting for yield investors :

• Aims AMP Reit (yielding around 8%) is considered investment grade and financing can be obtained at merely 2.88%. 
• So is Cache Logistics Trust which yields around 8.4%.
• The STI ETF is considered Grade 2 and financing is expensive at 5%. I can imagine how interesting things can get if this can be upgraded to Grade 1.

So you can leverage a portfolio of yield counters at a low financing cost of 2.88%.

e) What if the public servant leverages 50% of a diversified equity portfolio which returns 7% at a cost of financing of 3% ?

Because the timeline is particularly tight, at least on my spreadsheet, there is insufficient time to compound the additional returns from leverage, this tactic will at best shave off 4-5 months from the time needed to generate $300,000.

Conclusion

A disciplined top-flight local graduate will be able to safely generate a portfolio to leave the public sector and get his modest expenses completely replaced within a period of 10 years. The fastest way to speed this up is by either performing better at work so that increments can exceed 5% or cutting your spending below $2,000 a month ( Spending $1500 can cut the time down to 8 years or 7 years if you are targeting a passive income of $1500 ).

The bureaucrat can attempt Eunuch Sorcery by leveraging his portfolio but the time horizon is too short for compounding to take place and it will at best allow him to exit the public service 4-5 months early. There is also a risk of magnifying losses when introducing leverage into a portfolio .

A  smart, capable and lucky public servant can possibly exit within 8 or 9 years if he attempts to employ all these techniques at once. If he is a male who has done NS and had a 4 year degree, he would be 34 years old - not too late for another career in banking or management consulting, perhaps ?

Equity Management #8 : Front-running and factor crowding.

If you follow this series on my blog, one of things you will realise is that it is increasingly harder and harder to come up with actionable ideas for readers as the equity management textbook becomes even more abstract. I was wading through 3 chapters on smart beta investing before I could compose this article. Nevertheless, this column is probably meant more for my own investment education than for the hapless reader.

Ok, back to equity management.

To assist in comprehending this short write-up, you can refer to Dr Wealth's excellent article on factor investing which I will share here. In summary : Factor investing basically means that you are very likely to outperform markets if you focus on low P/B, small companies, high momentum, high gross profitability and low volatility stocks.

Factor investing is ok for most intermediate investors, but something can go wrong if the finance industry gets into the same game and start pumping millions of dollars to the same stocks as intermediate retail investors. In the near future, we might be seeing the launch of smart beta ETFs which will allow investing novices to do factor investing by just buying a few counters on SGX.

This can result in factor crowding. If everyone dog piles into low P/B stocks, there are less profits for everyone else as prices of these stocks rise.

Another problem is front running which occurs when hedge funds become aware of the specific times when these smart beta ETFs rebalance their portfolios. They can drive up the low P/B stock counters just before these ETFs begin to accumulate those stocks which has the effect of lowering the return to these funds and anyone who is also trading those stocks at the same time.

So while it's great to do factor investing right now when the ETFs traded on the SGX are relatively primitive by US standards, things might start to change rapidly once our local finance companies start playing catch up by introducing newer products.

I also can't help noticing that my income portfolio is doing rather well lately as more Dividends and REITs based ETFs are being launched in SGX.

If you're a eunuch, here's how to grow a pair !

When I left the private sector, I was already financially independent. But I wanted to see if I could get into a career which would stretch longer and give me work life balance. Unfortunately, my tenure out of the private sector was very short and I never managed to get used to the culture of the public sector.

It's actually sad what public servants had to endure in the past few months. One senior civil servant implied that they were paper-pushing eunuchs and then Parliament took turns to take pot-shots at them. Having some experience with bureaucracies, I realise that a lot of civil servants are stuck in their roles and had nothing to do with the red tape they are subject to every day.

When I was a eunuch, financially, I was at my peak. I had great pay, a superb 7-digit portfolio and fairly decent work life balance.

My day job however, meant be treated like an asexual bureaucrat when I engaged the folks in Blk 71. One founder of an up and coming startup I met then was drunk and started going on a tirade about the Singapore government. Another prominent boss, treated me like lesser being and only wanted to engage me through his secretary intermediary when I was 3 metres away from him. Some of those companies which the government eventually tried to support happily made verbal arrangements with my team and then casually broke it off. One guy even wanted to teach us a lesson about making money and capitalism ( when my personal dividends probably exceeded his net profits that year ).

But the work of eunuch meant that we have to grit our teeth and do what's best for the country. I actually take "servant" in public servant seriously. If I am a servant, I serve.

This was what eventually what broke me - SME bosses are polite and deferent when they come begging for the money we collect from the tax payers, but in their eyes we are lesser beings because we eunuchs live in the comfort zones but get the privilege of doling out financial support.

They are the ones begging for tax payer handouts but we are considered a lower caste than they are !

Anyway, eunuchs also want their freedom one day, here's how I think you can break free :

a) Exploit your higher pay by setting it aside

For at least the first 7-8 years of your career, your salary will be higher than your private sector counterparts. The trick is not to be smug  about it and set aside as much as you can to maintain your higher salary glide path. There is nothing stupider than seeing a newly signed on regular SAF officer blow his first lump sum sign-on payment to buy a car just to look cool.

I see a lot of middle management in the government getting overly comfortable and driving big European cars to overcompensate for their lack of mojo and over investing in children's tuition. ( It's kinda funny driving a BMW to attend a 10 hour meeting with a senior director who treats everyone like shit and probably no longer have any employable skills. )

This is a golden handcuff designed to trap you into a the life of a eunuch forever.

b) Equities are the key to an early exit.

The salary of a  civil servant is not only high, it has a bond-like characteristic. This means that unlike the private sector equivalents who face retrenchment all the time, you can go for an equity portfolio with a higher risk.

For officers at a younger age, you may even want to read about leverage and see if you can craft a 130-30 long short portfolio to accelerate your gains further.

c) Go for total returns and downshift to a dividend portfolio later. 

For a person who starts a career with the government, the best portfolio is to optimise for total returns which means targeting various factors like smaller companies, low P/B and P/E values for 7-8 years and going for 2 economic cycles of returns ( a backtest may result in 20% p.a returns on a Bloomberg terminal ).

Once your portfolio hit exit velocity ( $300,000 for a single man yielding 8% and putting $2,000 every month ), you can start plotting your exit into the private sector.

d) You may need to invest in retraining.

Retraining needs to be a priority before you get into the private sector. At this point, good luck, maybe there is a way to use the Civil service college to pick up some useful skills instead of buying an expensive MBA which was the best method of exit in the past.

e) Entrepreneurship is really tempting but...

Some government servants do eventually succeed in business and they come with a better appreciation of the schemes available to build a startup. There is enough literature on the odds of success.

Make sure that you stick with tiny bets and don't touch that $300,000 pair of testicles you worked so hard to develop just to stop being an eunuch again.