Thursday, May 16, 2019

What is your Return on Luck (ROL) ?

Image result for critical hit

If you've been financially independent for a while, you will notice that the blogosphere and social media will be very eager to discount your financial success. You might be marked down on the Internet for the following :

  • Coming from a rich family.
  • Earning a salary above $120,000 a year.
  • Being a scholarship recipient.
  • Being single - with no wife and kids to affect your spending.
  • Being born with a combination of intelligence and conscientiousness. (Blame Jordan Peterson)
The laundry list expands with the millions in your bank account because folks want more reasons to explain why they cannot be as rich as you.

Here's what these critics are missing. There are actually lot of folks who come from rich families and may not have accumulated as much as you. The same goes for those who make a lot of money, or are single, intelligent or conscientious. Of course, the opposite applies. There will always be someone who is born under worse circumstances than you who will eventually do better than you ! 

While a lot of folks are lucky, what is missing is a metric to compare two equally lucky individuals and measure how one will edge out over another. 

Let's call this Return on Luck or ROL.

To measure ROL, we need to ask ourselves this : 

What are the systems and habits we put in place to exploit lucky events in our lives and minimise the misfortunes that happen to us.

When I was going through my first year of work with Procter & Gamble, the company suddenly fired its CEO Durk Jager and the stock price collapsed to $60. I thought this was a perfect opportunity to exploit the market rout and asked my boss how to buy the stock. This being an IT department and us being investing noobs, no one could guide me to a broker to open a trading account. Procter & Gamble stock eventually doubled its price over the next 2 years. Even when I had some investing insight, the investing infrastructure was not there for me to exploit it. So, as a rookie, I had a low ROL.

A margin trading account can increase your ROL even if you do not employ leverage systematically over the long term. When the US REITs simultaneously declared a rights issue, I had no liquidity in my bank account. But because I had a leveraged account, I could participate in the rights issue and then pay it back slowly over time. I just had to stomach a lower margin account ratio in the mean time. The subsequent rise in Manulife REIT and Kep-KBS REIT became a lot more beneficial for me since I participated in the rights issue for my margin account. 

Other systems that can raise your ROL can be as follows :
  • A Crowdfunding account. 
  • Cryptocurrency coin wallet.
  • Fully funded Child Development Account for all your kids.
  • A Private Limited company to bill lawful company expenses and provide legal protection.
  • A network of alumni that creates business opportunities for each other.
  • An educational credential earned from a prestigious institution that companies respect and eagerly hires from.
  • A Bloomberg terminal.
  • A decent term life policy that is cheap, rebates premiums every year, and covers a substantial part of your human capital.
  • A sustainable diet that is scientifically proven to extend your life and won't make you an insufferable asshole to you non-dieting friends.
I can also think of systems that IMHO, may lower your ROL :
  • A mistress
  • A Netflix account that costs you money and time ( Which I have and enjoy, unfortunately )
  • A ready cash facility that can tempt you to overstretch your expenses.
  • A bunch of alcoholic friends who hang out and watch soccer together. 
  • A bottle of champagne in some night club with your name on it even when you do not entertain business contacts for a living.
  • A financial advisor who has a keen idea of the size of your pay-check and the timing of all your subsequent cash flows AND who is financially incentivised to lock your money down in low interest bearing instruments like endowments or expensive instruments like ILPs. (I'd rather keep a mistress )
How can we judge whether a system can increase your ROL ?

One test is whether this plays a role in the virtuous cycle of wealth formation.
A facility that supports dividends investing is such an example. A virtuous cycle is formed when dividends from a portfolio of dividends stocks can be fed back to buy more dividends stocks, pay for better information systems to filter out better dividend stocks, and even qualify you for higher end financial services ( lower financing fees ).

This idea is of course, not mine. I tried to adapt this from Jim Collins, author of the book called Good to Great who pioneered this idea known as the Flywheel Effect.

Just don't be a smart ass and ask me whether I have backtested this....


  1. If you're talking about hitting FI within 15 years...

    A salary in the top 30th percentile plus a high savings rate will help. This means being able to stand spending less than your similarly-paid peers.

    Then combining with the ability & willingness to invest most of the savings, and sticking to it thru -50% bear markets & not doing stupid things.

    Chances of the above is not high, hence the next best scenario of people only achieving retirement FI after 30-40 years of working & raising kids --- and that's provided they are conscientious & don't do stupid things along the way.

  2. Hi,

    Is still possible to your books?
    I recently found your blog and found it to be really informative.

  3. Between investing in an ILP and having a mistress, you rather choose a Mistress!

    I like your hedonistic lifestyle. Joie De Vivre, you think it is cheaper? I doubt it.

    No, I’m not a financial advisor( read Insurance Agent). Once an ILP is purchased, I don’t need to spend time and effort looking after it.

    But a Mistress will insist, which is too burdensome.


  4. Melvin,

    Sorry my books are out of stock right now. I am likely to work on a new books starting this year.

    You might want to look for my books in the library.


  5. Fred,

    Maybe you have the wrong kind of mistress.


  6. Hi,

    A mistress can be considered as a burden if not handled appropriately.