Sunday, October 29, 2017

Next BIGSCRIBE Talk #2 : The fear of leverage.

I was supposed to be pushing for my next talk but ticket sales picked up over the weekend and we're down to almost single digits worth of tickets left. If you have not bought your tickets, this is your last chance. Click here.

As I'm reading Andrew W Lo's Adaptive Market, I will begin this post by talking about an mental experiment that some of you might be familiar with.

Which pay-off would you choose ?

Would you prefer a $240,000 pay-off with 100% certainty or a 50% chance of making $500,000 ?

Intuitively speaking, most readers will choose the 100% payoff of $240,000 even though the expected payoff of the second option is $10,000 higher. We are much more interested in a guaranteed $240,000 because we cannot stand the idea of risking a 50% chance of winning nothing. Loss aversion is a natural part of human evolution.

For years, I refused to touch leverage because, even though I was aware that my gains can be multiplied, the idea that an event that could wipe me out completely made me afraid of committing my funds into a margin account. During the depths of the Great Recession, I walked into Maybank's branch in Shenton Way and then walked out without doing anything because I just did not have the guts to go ahead with my plans to start playing with a margin account. Even then, I had information that recessions seldom last longer than 1.5 years and we've almost facing a downturn of 2 years. That could have been my millionaire (or multimillionaire) moment.

I finally got into leverage recently only after I convinced myself that my financial independence would not be threatened by an event that would wipe out my entire margin account. From this safe vantage point, I have recently created a small account that is designed just to help me pay-off my mortgage.

For my next talk, I will imagine what it is like to use leverage to speed up the attainment financial independence. I am backed by a brilliant and controversial work by Ian Ayres called Lifecycle Investing who was also behind some legal papers I had to read when I was a law student. I then took the approach in Lifecycle Investing and adapted  it to be used locally in the REITs sector.

Like all my talks, they are focused on how you can attain financial independence with all the mathematical backing I can muster from my Bloomberg backtesting.

Even if you fail to conquer to your fear of loss aversion, you will find my very conservative approach of matching leveraged assets to personal liabilities ( With yields possibly reaching beyond 10+% )  refreshingly novel.

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