Wednesday, August 31, 2022

Why we need to resist the idea of SAP Polytechnics and SAP Universities.


Of late, I've been catching up with secondary school pals to organize dinners with our secondary school teachers. With nostalgic reminisces of the past, there was also the digging up of more unpleasant memories in our secondary school days. My friend complained of a clique of classmates who were very insular and who sought to exclude him from recent social events only to have me remind him that there are real social outcasts like me who would never be in contact in the first place. 

Over time I realized that there is common thread of such cliques when we were growing up, so much so that a sociologist pal of mine calls them the "basketball team". I was even unfortunate enough to manage such a IT Team before but that's a story for another article. 

There are some traits of these cliques. The are mainly introverts, exceptionally traditional and conservative in outlook, lack openness to new experiences, quite agreeable, and prefer strength in numbers. They eat at the same places and almost always engage in the same activities like karaoke. 

Most importantly, they are always monoracially Chinese and speak mandarin. These cliques are part and parcel of our society and as the majority, we often forget that they exist.

For folks who grew up in the 80s and 90s, some of you who are unfortunate may be like me who joined a uniformed group and the basketball team always create trouble for minorities, sometimes just by being themselves. I remember Malay girls felt excluded in St Johns Ambulance Brigade in my secondary school and they lodged a complaint. The response was always ham-fisted, prohibiting the use of Mandarin, and enforcing the use of English always had the effect of making minorities even more unpopular with the basketball team. But this was the 80s and 90s, complaining often gets you nowhere and you get marked for your troubles.  

What is not known is that in a neighborhood school, as a potato eating Chinese who prefers Rick Astley over Wang Jie, we don't have it very much better than Malays, Indians or Eurasians, it's just that we are overwhelmingly minor in such environments. 

As such my social life only picked up after joining NJC.  

George Yeo had his book launch today and several friends were there for the launch. One has actually been sending snippet of his book to me and I thought I share my thoughts on his more controversial ideas. 

Apparently George Yeo likes the idea of converting Ngee Ann Polytechnic into an SAP Polytechnic and NTU into a SAP University. 

I'm not sure what the execution details will ever be, but the idea is that Singapore needs to produce a Chinese elite. This is not simply giving a chance to students to gain a deeper insight into Chinese Language and Culture, but a system to channel better students into these institutions, which are then practically segregated from other school systems. These systems then gain preferential access to scholarships (probably to China) and then go on to form business alumni groups to perpetuate the systemic advantages those ethnic Chinese already have.

In my humble opinion, if you have a system of elites where minorities account for less than 5% of the population, it should not be called the Special Assistance Plan, it should be called Singapore's Apartheid Policy. 

For the system I was familiar with, I was not even in a SAP school, and I already witnessed some alienation of minorities when basketball teams get formed in an ordinary neighborhood school. The system is even worse when you cordon off an segment of the elite and shut them off from regular contact with all others in the country. 

Now imagine what George Yeo is trying to establish in Singapore, a system of apartheid that extends a 4 year secondary school program into a program that can last up to 10 years as students go from a SAP Secondary School to SAP Poly to SAP University. I can even concede that some SAP students have access to some minorities in school, but these are the really progressive ones who are learning Chinese and who might have higher social economic status ( they are probably trilingual). 

Finally, as much a George Yeo has so much effusive praise for China, I'd like to remind the investment community that we are not really talking about ethnic Chinese, but Chinese Communists when we talk about China. In Chinese Communist ideology, capitalism is just a temporary state where they pretend to respect your freedom to make a better life for yourself. The final state of a Communist society is a society that no longer has the concept of private property. Ideally, you can't even have a private key to your crypto wallet.

SAP Polytechnics and SAP universities will just open new means for the Communist propaganda machine to entrench itself in Singapore, graduates will grow up to be like the pro-China boomers today.  Mind your own business, why you so kaypoh when Russia invades Ukraine. 

And one fine day, we will be forced to call another Operation Coldstore or Operation Spectrum to deal with these two institutions.

SAP Polytechnics and SAP Universities cannot be allowed to take root in Singapore.

Fight it like you fight the insipid basketball teams ! 

Hope you guys enjoyed the book launch !



Saturday, August 27, 2022

On Wild Problems


As I run a programme that is highly dependent on number crunching by computers, I'm fully aware that there are a class of problems that simply cannot be analysed by data and statistical models. 

In Russ Robert's Wild Problems the vivid example is the question of whether we should get married or have children. Especially when it comes to having children, if everyone were to boil the decision-making down to cost-benefit analysis, no one will have kids in Singapore. And yet, even a child-hating misanthrope like me would love my kids so much, that I'd gladly disadvantage myself financially so that they can have a good life. 

This means that there are definitely mental models beyond quantitive ones that are required to resolve that class of hard problems that lives throw at you.

One solution to the children's problem is to understand that looking at the kind of cost-benefit analysis is based on the fallacy of narrow utilitarianism. If you find some money in a wallet and there was no one there to witness you finding the wallet, you may really hate to surrender the wallet to the police because it's full of cash that can be used to pay for your children's expenses. But you return it anyway because keeping the money changes the notion of your identity. You can't live with yourself if you keep the money. Folks who return the wallet ultimately prefer to make decisions on personal principles and not that of narrow utilitarianism. 

I think something has to be said about choosing to remain single. There are almost zero disadvantages to not having children, you will end up having more money and time. If you feel bad, you can even volunteer your time to charity. But to remain childless is essentially not propagating your genes, and you won't be able to find out what your kids will ever be like while growing up. I don't think this ultimately bothers some of my single friends, but I think it does bother me a little. 

For me, I'm dealing with a tough question in my own life.

As my training business is struggling with sales and I've just obtained my CFA charter, I've started talking with pals in law firms to see whether I can get part-time hourly paid consultant gigs with them since an entry-level lawyer is kinda expensive and I should really address the issue of going through law school without even trying out legal work beyond my training contract. 

So yesterday, I had the privilege to meet very possibly the richest and most successful customer I will ever get as a trainer, and he totally shot the idea down. He does not think that starting out as a rookie lawyer will do me any good as a middle-aged guy and there are better ways to scale a business. And he was very kind enough to suggest a few ideas which I liked a lot and may pursue with some folks.

As he's been around, I have to accept that this is valid feedback. Me going back to the law firm has always sounded ridiculous, but so was entering law school at age 39, and saving 100% of my take-home pay since I was 32 years old. 

But once again, this is a cost-benefit analysis. If we take it too far, as a financially independent guy with a five-digit dividend monthly income, nothing I do can compensate me for the time I waste on the job, so I cannot just apply one quantitative mental model to this problem of what I want to do with my life next. Also, I'm not quitting my job as a trainer, my condition is that the law firm needs to let me carry on teaching my Early Retirement Masterclass.

So what kind of personal principle can justify starting as a part-time associate in a law firm while balancing my time with a training business?

After a day of deep thinking, I think my central principle is "When you set out to do something, you must complete the task. "
  • My stint as a trainer finally got me my CFA - nineteen years after I passed the Level 3 exams. It required 3 years of full-time work as a training professional. 
  • In law school, I always found some of my classmates ridiculous, I had classmates who dropped out in the final year after paying all the school fees. 
  • I used to get exasperated at friends who can only talk about publishing a book but never complete a proper manuscript, it was the main reason why I set out to write three books on personal finance as an IT engineer. 
  • Even if the last 2 seasons of Game of Thrones sucked balls, I watched it anyway.
Now, I admit that I did not enjoy my practice training, I was mildly depressed when I asked Dr Wealth for help. Thanks to my partners, I created a business line called ERM that exceeded a million dollars in revenue. But this time, I get to choose my level of engagement in a firm and who my colleagues are going to be - I'm starting without a base income. If I fail, I have multiple fallback positions and no one in my family will starve as a consequence of my decisions. 

The fundamental principle is that I should try three years of actual legal practice because I am a completist and not doing would have serious consequences on my self-esteem.




Tuesday, August 23, 2022

FIRE is a good servant but bad master.

I had the good fortune to received a message on Linkedin from Keith Yap. 

He wrote this, and I'm posting it here because somehow he could not comment on my blog :

His comment was very intriguing, I initially thought that there was possibility that he was tasked to write about FIRE from his bosses based on this message, so I offered to defend FIRE publicly against his supervisor which seemed to be someone from Enterprise SG. Many FIRE aspirants are conservative PAP voters and continue to pay taxes post financial independence, so there is no need to fear that FIRE metastasize into some kind of Tang Ping movement.  

Thankfully, after a short exchange, Keith clarified that he wrote the article based on his own personal capacity.

I think his reply was even-handed and fairly neutral so it's safe to be shared on this blog :

I really like the admission that "FIRE is a good servant but a bad master" was cut out during editing. I don't necessarily agree with this, but IMHO,  it would have been a better title for his article. 

Anyway if FIRE does become a bad master, then quit the FIRE movement and do something else with your life. 

Wednesday, August 17, 2022

Does FIRE subvert conventional ideas of work and finances ? WTF !


I don't know whether to laugh or to cry, his guy called Keith Yap, who seems to work in the Government, referenced my CNA article, and then proceeded to make some inaccurate statements about the FIRE movement and millennials ( and I'm not even a millennial ! ). 

You can read the article yourself by following this link

I'm generally quite sympathetic to folks who try to FIRE, because inevitably they will accumulate $100,000 before their 30s then get slammed in social media for sharing it. There is no evidence that Keith Yap is on the road to FIRE, but his main thesis is that FIRE will subvert conventional ideas of work and finances and I fail to see how its possible to agree with this. Furthermore, I think a much higher standard of proof is required to link millennial's dissatisfaction with the workplace status quo with the rise of FIRE.

My first point is that anyone who is attempting FIRE will know how much more engaged you will need to be at work to stand a chance of accumulating (25 x annual expenses) before age 40. This is generally not a game for the average millennial who hates his boss, but someone who enjoys his current work, figured out it may not be sustainable, so wants to volunteer for as much overtime as possible. 

My second point is Keith Yap seems a tad defensive when he finds some FIRE zealots seems to baulk when it comes to discretionary expenses, so he constructs these false dichotomies in his article. You either can save money on pumpkin spiced lattes, or catch up with old friends, Keith conveniently forgets that I can catch up with old friends over a cup of kopi-o kosong. Keith asserts that if you save and skip out on an extravagant wedding, you will lose a chance to gather everyone together, forgetting that I can get everyone together with a buffet instead of a banquet. 

Worse, after setting up a series of false dichotomies, Keith had the temerity to invoke Aristotle's golden mean - which leads me to question whether he is trolling the discerning reader ?

My third point is that folks with an affinity to FIRE are my INTJ pals who probably just belong to 1-3% of the human population but over-represented in FIRE forums and my ERM class. If you actually bother to have friends who are INTJ, you will find that their lives are actually quite interesting. INTJs have very diverse hobbies and often no relation to their jobs. INTJs do not really march to conventional lives and work, so cannot be actively trying to subvert work but to seek a wholly independent approach on lifestyle design. If anything I find INTJs quite fun and hedonistic - they don't eat expensive food, but they are really obsessed with the best hawker fare and can be counted on to find out the best eats. 

Finally, as it is pointed by a lot of successful entrepreneurs and CEO-types, mostly ENTJs who attain FATFire, the skills and talent which made FIRE possible often leads to financial independence but not early retirement or retreat from the workforce. Folks like me still want to find ways to contribute to society and will continue to seek employment, but on our own terms. This is why a paradox will occur if Early Retirement Masterclass is taught by a sometime who is fully retired.

Finally, I think Keith Yap really needs to look at himself and his biases before talking about FIRE folks. 

I visited his profile and find that his work may be government related, in some blog articles, he talks about his scholarship application process. I had a short, miserable stint in a statutory board and I know this - If your income has very bond-like characteristics like government work, and you're on the right side of the scholar-farmer divide, there will ultimately be a disconnect of your salary scale from actual market forces. This is the magic of high current estimated potential and having KPIs widely disconnected from commercial reality.

This inoculation from market forces accords you a more carefree expenses profile which most Singaporeans cannot afford. So maybe you can have that pumpkin spiced latte, that extravagant wedding, that monthly trip to backpack in Europe. You willingness to spend matches your ability to earn. Regardless of market cycles. 

Your equivalent in the private sector or private enterprise may not have that privilege even if he gets the same pay because he knows that in the business world - it's feast or famine. As such, my willingness to spend is only a fraction of my ability to earn. In such a case, having a high investment income is just a desire to have the same privileges of a government scholar.

So some commentators might be scholars and can get high falutin about FIRE. 

I am a statistic, even if I FIRE.

We are not the same.


Monday, August 15, 2022

On Singapore's elusive third gear lifestyle


Every National Day, I want to talk about emigration. But this year it seems that many influencers and bloggers have started to beat me to the punch. Kelvin Learns Investing probably made many Singaporeans proud when he talked about why he will not retire in Malaysia (link). A week ago, there was this wonderful article about a Singaporean who settled down in Chile (link).

I'm trying to put something together to talk about quitting until I saw this article about a Japanese restaurant called Tenya that has raised salaries by 10% and instituted a four day week to solve their manpower crunch. ( link )

I think Tenya is onto something.

I called this the Singapore "Third Gear" problem. For folks who remember cars with a manual transmission, drivers would start at 1st gear and, as the vehicle moved faster, gradually shifted until 5th gear, when the car is reaching its fastest speed. When I was very close to becoming Financially independent, I realized that there was a problem in Singapore - Singapore workers can only be unemployed (first gear) or work crazy hours (fifth gear). 

There is no middle-ground or third gear in Singapore. 

No lifestyle design where you can work a little and live a little pushing many Singaporeans to emigrate somewhere else. 

The first gear would be folks who do not have real jobs. These can be stay at home mums, folks living on government welfare by attending courses organized by the government during the pandemic, husbands who have successful wives calling themselves "business consultants", folks who inherit money, or anyone claiming to be a life-coach.   

Fifth gear would be a majority of Singapore workers. Folks who are committed 9-5 on weekdays on jobs which provide a career path, decent pay, but very little leeway for work-life balance. If you belong to the professional or executive path, bosses expect you to be available 24-7. To be fair fifth gear in Singapore is probably a decent place to be because of low taxes and you really get to keep what you kill, but it is soul draining and some countries like Dubai pay even better for fifth gear work.  

When I was teetering at the brink of financial independence, I was concerned about shifting down to first gear, this is even though I was not just financially independent on my own but I'm also a bit of an inheritor. 

First gear may be irreversible, after a while, no sane HR professional would want to have a look at your resume. Worse, I can't seem to take first-gear folks seriously, they seem so out of touch with reality. For an ENTJ, it's better to lose my financial independence than to stop mattering in society. 

And there's no respect. We're a nation of snobs.

So I stuck to fifth gear for 7 years after living on my investment income. But eventually you end up working for toxic environments as you rise through the ranks of management, where your skills matter less than your political maneuvering. Fortunately, I was able to let fifth gear go at age 39, long after investment payouts exceeded work take home pay.

But I can't find the third gear. 

I delayed for 4 years to go back to school to contemplate my life and maintain an air of respectability.

Eventually, I found some semblance to the third gear after rejecting the legal industry.

In this life, I can free most of the time unless I am conducting a class, then all the work and attendance is non-negotiable given how much preparation my colleagues need to get a class for me. This third gear is very volatile and my sales can be very unpredictable and only those with a fairly high investment cash flow can sustain it for this long. 

I suspect most third gear folks, if you can find them, are not conventionally employed in Singapore. Like me, they either report taxes as a sole proprietor or under the  LLP structure. 

( The guys who own a Pte Ltd actually work kinda hard and may even work on 6th gear until their business becomes profitable. ) 

The good news is that things are changing. 

I think with the pandemic and tighter curbs to foreign labor, SMEs may finally be pushed to really start thinking about what the modern Singapore worker wants. Building a fifth gear job with no chances of advancement would mean that very few locals would want to work for SMEs. But upping the pay a little and then downgrading to a 4-day workweek is a good start and these jobs may meet the aspiration of the Singapore worker. 

Not everyone is a an ENTJ. Many are INFPs who can't count, are lazy, and have an affinity for making bad life decisions..

At the very least, you can live the New Zealand and Aussie lifestyle in a low tax regime. Also you don't have to resort to career in sales to do this. How many balloons need to be forcibly taken away from children for angry parents to seek a statutory amendment to outlaw FAs here?

From a FIRE perspective, thanks to Tenya, Barista FIRE becomes a lot easier to attain in Singapore, where a fifth gear job can get you about $1,000 a month in investment income after 5-8 years, then you downshift to third gear lifestyle on a four day week in the F&B or retail industry.

At the end of the day, liberals like Tommy Koh can talk about Singaporeans being snobbish and the government can talk about a new social compact. 

Just pressure SMEs to unlock a four day work week and make a third-gear lifestyle achievable, fewer folks would emigrate to Australia and New Zealand design a lifestyle there. 

Friday, August 12, 2022

The best is yet to be - My adventures at ACS Independent


It is good that investment trainers to do some pro-bono by visiting secondary schools and presenting to students. If you're lucky, some students will get the message and you'll get to shape some lives, but it is also good for the trainer because you get practice to see whether you ideas can find traction in young minds. It is always challenging when the audience did not pay for your time or may not have the inclination to listen to lecture.

So I was delighted when the Entrepreneurship society of ACS Independent invite me to speak to their students for an hour and spent the afternoon in their campus premises. This is actually he first time I'm presenting in school premises as my slides have only been deployed in RI over Zoom for the past 3 years.

The talk was fine, but I felt that the material, honed over two years at RI, could not fully resonate with ACSI audience but I was mostly able to maintain the attention of these teenagers when I spoke of my personal story - about how outsourcing work can lead to suicides in the workplace and the scholar-farmer divide in the government sector is alienating to those labelled farmers. But I think I won the crowd eventually when I spoke about how the effects of compounding wealth over the years is literally the reason why "the best is yet to be". 

Why do I know it works? Because I love triggering RI students about how compounding of wealth is embedded in their rival's school motto, and relying just on brains and not capital is a loser's game. 

[ In such situations, I see myself as a cross between Magneto and Professor Snape. ]

Anyway, I was actually disappointed that kids have moved on their personal interests. I tried sharing my own personal interests on one slide but no one perked up. I think that's fair, you can't really tell young people about Pink Floyd or David Bowie ( but my son loves Rick Astley ). I also suspect my slides, being keyed to League of Legends, may not actually be played by teens today.

Naturally, I broke the news of speaking in ACSI after the fact, then my FB was flooded by extremely negative people who claim that ACSI does not need any help in financial management and some already come from billionaire families. One joker even said that ACS is so wealthy that my audience were probably all paid body doubles. 

Maybe it's cool to demonize the wealth of ACS twenty years ago, but I find the kids in my class very ordinary. 

The most intelligent question I was asked yesterday was whether I felt it was fair for policy makers to give 2.5%/4% for CPF when invested returns far exceed that amount. I was not very inclined to catalyse the birth of the next Chee Soon Juan, so I told him that while returns are low, the risk or standard deviation is zero, so CPF is actually a very attractive savings instrument.  Furthermore, Singaporeans actually rushed to contribute to CPF during the pandemic so I am not inclined to disagree with current returns are puny.

Anyway, for the blog reader, what is the moral of the story ?

Harsh truth - ACSI has a very dedicated team of teachers who supported their CCA by inviting an investment trainer into campus.  RI even has a dedicated segment for students who aspire to be future investment bankers. In every case, when I worked with our elite schools, no one burdened me with humiliating checks over my course materials and attempts at censorship. 

Fact is people pay thousands of dollars to hear me speak.   

The saddest story is that I took so much pains to volunteer to teach personal finance in my own secondary school and so far I've not managed to gain any ground over this as communications get dropped and people just wander off to take on other projects.

So in the future if ACSI and RI groomed more billionaires or generates the greatest number of jobs for Singaporeans, don't be salty, ask yourselves how much red tape the neighbourhood schools are saddled with before demonize others for their prosperity.

Wednesday, August 10, 2022

Keep discretionary expenses to things that suit your personality


Nick Maggiulli's Just Keep Buying was highly recommended by friends and some readers of this blog and I enjoyed the book immensely. While the book does not change my approach towards personal finance, it had a great financial perspective. Imagine a mathematics textbook that had the same answers to every standard problem but had such a novel working that it's worth a read.

I'm going to share only point which is gold on selecting the right kind of expenses. Nick Maggiulli really got me when he said that he's not really satisfied with the idea that we should simply buy experiences instead of physical goods. Advice like this cannot possibly apply to the entire population and it is more likely to be biased towards extroverts and ignore the 30% of the population that are introverts who may prefer sleeping in bed than travelling to another country. So he proposes that we splurge on things that is consistent with our own personality makeup.

That's basically all there is from the book. 

But the quest for thought leadership cannot stop at just a raw reading of a non-fictional work. The book has a wonderful reference to a paper by Matz, Gladstone and Stillwell from the University of Cambridge entitled Money buys happiness when spending fits our personality.  

This paper is the true treasure from the book.

Researchers actually paid Amazon Mechanical Turk to imagine what kind of person would buy something, allowing a Big5 personality profile to be mapped to a consumer good. Then researchers found out that folks who buy goods mapped to their personality type had higher levels of personal satisfaction. 

I shall reproduce the mapping here : 

So basically, if you know your personality, you can use this table to guide you on what consumer products would give you the highest personal satisfaction. Buy enough to make yourself happy, then you can invest the rest. So extraverts should be happy attending a music concert with friends. Introverts are happy getting a bonsai plant. So unless the book you are giving is 50 Shades of Grey, expect your extroverted pal to keep it in his KIV list for decades, you might be better off signing him up with a club for swingers.

For me, my toys and hobbies come from my openness to new experiences and now I know that given that I'm not a very agreeable person, doing charity does not really hit the right spot for me, but I can contribute to society by making more videos and speaking to secondary schools since I am an extrovert. 

But try not to read too much into this table - it seems that neurotics should engage in gambling to be happy, and disagreeble assholes have an affinity with traffic fines. 

Maybe if you have two purchases of equal price and you want to make a comparison, buy something that is more consistent with your personality.


Monday, August 08, 2022

Thinking and lifestyle design using real options and annuities

This post came about because of MissFITFI's podcast with the owner of Saturday Kids. You can listen to the podcast here.

I want to focus on one important idea mentioned in the podcast which is the idea of placing little bets in life that have a small probability of success but can pay off in a large way. This idea can be broadened quite significantly on this blog.

Consider the term life insurance. This is basically a put option on your human capital. If you die, the insurance pays off a fraction of the loss of your human capital to your family. If you outlive the insurance, it expires worthless. 

There is a class of life strategies that exploit a myriad of real options that behave like term life insurance. Advanced education qualification is a call option on your human capital. If there is a strong market demand for people with such advanced degrees, you can enjoy a higher salary or a boost in your human capital. If your advanced degree is in something that society does not value, it can remain dormant or "out of the money" until there is a shift in industry trends. Options gain value when the underlying security goes up in value or even when the situation is very unpredictable or volatility is very high. 

If you are a fan of Nicholas Taleb's Antifragility, living an anti-fragile life is all about embedding real options in your life. 

Now we consider the opposite of term life insurance, the annuity. An annuity hedges against longevity risk. If you live too long, the annuity pays a monthly stipend every month until you die. 

If we consider term life insurance and annuity as a spectrum, then our lifestyle design based on real options is incomplete. While we need to make many tiny bets to get ahead in life, we need systems that pay out a predictable amount every regular time interval, at least to survive. The importance of having a steady job, some royalty payments, and dividends which are uncorrelated to market cycles are vital to survival in modern society. 

Lifestyle design is all about having both real options and regular cash flows to suit your personal needs. 

One way of approaching lifestyle design with this insight can be as follows:

a) You need to know your absolute base essential lifestyle and find ways to match this using earned and passive income. When doing this, you need to think like a landlord. Ideally, if you need to work harder to do this using passive income, do it as the payoff of getting time freedom is extremely high if you can meet this threshold.

b) Once basic needs are covered by earned or passive income, you can start to think about tiny bets that pay off in a big way. This way you can think like a VC. You can earn a qualification that will be valuable in the future, or put in some capital into a startup. In this example, it is better to do position sizing and make uncorrelated bets so that one big win would cover all your losses elsewhere.

c) Income-generating assets and real options should be interchangeable. Maybe some dividends are used to signup with a new Skillsfuture course or advanced degree. Once the advanced degree gets you a higher salary, you can farm extra proceeds into a bigger dividends portfolio. Balancing the two is an art and you can decide how to allocate your capital based on your own capabilities and personal situation.

Some readers will note that in a discussion that straddles between real options and cash flows, where do capital gains that are analogous to growth stocks stand in this spectrum? Stocks belong at the centre of this continuum. Some stocks pay a dividend and it has an option to grow if their valuation goes up. 

( For the absolutely pedantic, stocks are also a written put option, it can drop in value when the underlying business loses money )

Saturday, August 06, 2022

Why you will fail at Value Investing - part 3


Having established that the company has a high business and management quality. The final step is to determine whether the price is cheap enough to justify a market entry. 

It is this process that I find the hardest to execute.

The author does initially seem to employ a simple metric to determine whether the entry is worthwhile. He starts with the earnings yield numbers which is 1 divided by the PE ratio of the company.

But it is the next step that resembles sorcery more than science. 

As tech companies invest in a lot of R&D, it is entirely possible that earnings after deduction for R&D will be low, so the analyst would have to moderate the earning yields. So the company may have an earnings yield of just 2%, but a smaller company in the same space may have less R&D and were able to conduct their business comfortably at an earnings yield of 10%, the earning yield, now relabelled as earnings power may be adjusted closer to 10% to reflect the market reality. 

The details do go a little deeper when you read the book, but I think it would be very hard for actual retail investors to be able to do this confidently without, once again, tricking themselves into falling in love with the company.  

The idea is that if you can find an earnings power of 5%, you can comfortably add the stock to your portfolio.

Ok, so I'm done with my review, how can we treat the book as a whole?

I'm actually not militantly against this latest version of value investing. While there is a subjective component in each step of the analysis, an investor who applies this consistently as a whole against one specific industry may be able to find some success using this framework. But the question for folks like me is whether superior returns when it does occur, come with higher volatility. Furthermore, can these superior strategies beat momentum-based trends following stock picks in an economic expansion which is where tech-stock picking is at its strongest?

Finally, I'd like to say that I won't review a book if I don't really see some value in it. But perhaps a better value investing toolbox can be a wider literature review of books in this space, which is exactly what you will find on my blog over the next few weeks.   



Wednesday, August 03, 2022

Why you will fail at Value Investing - part 2


If you think that Part 1 of this series makes Value Investing look impossible for retail investors, part 2 would be even worse, we will be looking at Management Quality in this installation.

Management Quality in this book is divided into two parts :

a) Does Management think and act like owners?

In this section, an investor needs to read management's minds. Somehow, you need to find out whether management acts for themselves or their shareholders. There are of course some hints at how to do so, one possibility is to see whether management owns the company shares and will benefit when the share price goes up. Another is to see whether there are any incentives to skew their behavior, like stock options. 

Notwithstanding, you need to be able to tell whether the manager is working for the shareholder or for himself, even though this may not be mutually exclusive. 

b) Do executives understand what drives business value?

This is even harder, as some retail investors may not understand what drives business value, but it is at this point where the book really starts paying for itself. The author likes company bosses this really sharp question, which is more important? (a)  growth in sales/profits or (b) return on capital ?

The correct answer is (b), because, with enough capital, you can generate any amounts of growth to your sales or profit. But high return on capital may evince a sustainable competitive advantage.

The best managers are, therefore, those which are most adept at managing capital. This means that speculative R&D projects with little pay-off need to be traded off for projects which can potentially bring value to the company.

Bringing this central idea to the local markets, I'm afraid that I am only aware of one local boss that meets the bill - Andy Luong of UMS, but this is after the fact. I have earned so much from his stock splits and generous dividend payouts, of course I have a great impression of him. I don't have clout to now enough bosses to know who else hits the bill. UMS is hardly a perfect value stock as it is bogged down by having just one major customer.

I also like Mohd Salleh of Second Chance but that's because of his candour and his public admission that, like me, he loves dividends, I would not say that I've made much from my Second Chance holdings.

[ All this being said, I noticed that Lim Chung Chun CEO of iFast seems to have the same psychological make-up as my business partners who I count as allies closer than friends. I also derive income from iFast these days. The question is whether is he an efficient capital allocator? Or I'm just biased because I make money from them? ] 

While it certainly sounds that management quality is a powerful determinant of investment success and may actually justify paying for active management skills, management itself can be subject to change. Some bosses grow old, fall sick, and make mistakes in secession planning, other's become obsolete and allocate capital as if things are 20 years ago. 

Worse, I've seen so many proponents of management quality generate such bad returns because it takes so much effort to understand management well, these analysts may become fixated with a stock due to the sheer effort put into analysis. If you see some "F" in their MBTI, I notice that emotions can hijack their portfolio decisions quite readily for folks who claim that they are great analysts. 

Companies are companies, you should be ready to move your capital out if your investment thesis is no longer valid. 

Companies are not your girlfriend, but MBTI folks with a "TJ" (folks who read this blog) would be happy to dump a girlfriend if a better person comes around. 

Is value investing a construct to create the illusion for "feelings" people to have credibility in the investing world?

God knows.