Tuesday, October 31, 2023

#13 The Missing BIllionaires - Risk and Uncertainty


We've come to the last article on this streak. For this book, we are at Chapter 18 and the rest of the book delves into various esoteric chapters under the Puzzles section. It is probably more productive that I conclude this series for what the book means to me and blog readers and encourage interested parties to either buy or read the book. 

( Judging from some discussions on the telegram groups, the book is getting traction for the local audience )

In this article, we will be discussing risk and uncertainty. I was laughing at some FAs who do not seem to appreciate the importance of the standard deviation of an investment portfolio, but the rabbit hole goes deeper. Most financial assets do not follow the normal distribution. Investors have to confront issues like fat tails, skew and actual events like war and recessions when they run actual portfolios. So anything that cannot be captured or measured as part of a parameter like standard deviation, skew or kurtosis gets lumped in a category called uncertainty. 

The book discusses the differences between risk and uncertainty then concludes that mathematically, then concludes that ideas like expected utility and the Merton share remain useful as adjustments required to account for uncertainty are de minimus. Adjustments downwards are only necessary for investors who are really risk averse.

So this is a fairly depressing conclusion for local investors who buy ILPs. 

Not only are ILP investors paying a ridiculously high cost that may be compensated by assuming more risk by the fund manager, but the ILP locks down your money longer forcing you to confront more uncertainty in the markets. 

Maybe the conclusion in this book can be used by disgruntled ILP customers one way in a FIDREC dispute. The way an ILP locks down your money, imposes ridiculous penalties for early redemption and makes you pay ridiculous management fees may one day be mathematically proven to be inappropriate for any retail investor under any circumstances.

But today will not be the day it happens yet.

That first step begins with refinements made to financial education at the street level. Pushing education on returns, risk, Kelly Criterion, Merton Share and concepts of utility to the masses may require huge educational reform.

For me killing off English Literature in favour of Economics at Secondary 1 will be a great way to start. If you are too sentimental about English Literature then maybe force Pride and Prejudice into the syllabus because Mr Darcy is sexy because of his passive income.

Our history texts should also consider key moments in financial history like Pan-Electric and CLOB because as a financial centre, we need to know what folks like Mahathr can do to mess us up really badly. I'm still traumatised from learning about useless shit like what Gambier is and the Anglo-Dutch Treaty.

But I think as a reader if you do love the humanities, you'd probably not enjoy reading this blog so much. Secondary school really refined my hatred for studying the humanities. I thought three years of law school could reverse it, but I think it polarised me further.

Monday, October 30, 2023

#12 The Missing Billionaires - About Options

When markets run out of assets to be bullish on, my industry will resort to talking up options trading. This is natural as you can be profitable strategies regardless of whether markets are bullish or bearish. I am not into options because they are zero-sum games. For every option you buy, someone has to write it to you. 

The options writer and options buyer can both be profitable at different times.

But the author wants to give options a chance. He wants to examine whether options can improve the expected utility of a portfolio. Even after analysis, the author believes very little about how options can provide a significantly higher Expected Utility for the investor. According to the author, investors can vary the proportion of their equity allocation in place of buying options.

It gets even worse when we consider the costs of playing options, which often comes with a wide bid-ask rate. Odds are most retail investors will be losing out to the brokerage houses and financial institutions who usually take the other side of the trade and have sophisticated tools to assist them.

Interestingly, the book does consider one specific scenario where the use of options would make sense. For young investors, according to Ian Ayres and Life Cycle Investing, it makes sense to leverage their equity portfolio using options to get more than 100% exposure to the asset class. 

But of course, some investors can treat long-shot options bets like lottery tickets. 

Just keep your positions small and utilise only fun money to do this. 

[ The next chapter of the book is on taxation; we will skip to the last chapter I will review tomorrow and end this series of articles. ]

Sunday, October 29, 2023

#11 The Missing Billionaires - Your personal inflation rate is not the inflation rate


We are onto Chapter 15 of the book. Almost 75% through!

This is a compelling and insightful chapter that really blew my mind. 

If an American adult in 1900 were to maintain their average expenses and increase it by the CPI every year, in 2022, they would only be spending $5,000 every year, while the average expenditure in the US would be 11x that number at $55,000!

This turns many retirement ideas on its head because the 4% withdrawal rate used in retirement planning is just adjusted by the CPI annually.

There are several ways to interpret this. One interpretation from the book is that most of us desire an increase of some amount over CPI. The book suggests that CPI+1.5% is a good start. Another interpretation is that our spending is higher than CPI because humanity keeps innovating and creating goods that impact our lives far more than the inflation rate. There's always the next Apple device around the corner. We should be prepared to work to continuously increase our standard of living. 

If we have to find a way to match CPI+1.5% every year, then we've got quite a big problem on our hands when we design a portfolio. Bonds provide too low a return once you factor in their non-trivial volatilities ( T-bills was 12%, not counting forex translation for Singapore Investors ).

According to the book, the best way to match CPI+1.5% is a portfolio of treasury inflation-protected bonds, which Singapore does not issue.

But there is good news.

A portfolio of equities can generate an earnings yield of 1 divided by a cyclically adjusted PE ratio after accounting for inflation. For Singapore, this earning yield is 7.4%. Is high. Furthermore, company earnings are generally less volatile than stock prices. The volatility of company earnings is only about a third of the swing in stock prices.

If you diversify your stocks across low CAPE markets and have the patience to hold them over the long term, your odds of beating CPI+1.5% are high.

So, what's the Holy Grail in building an investment?

The Holy Grail is known as a Constant Standard of Living Annuity. Something that can create a cash flow that lets you maintain your standard of living over time at CPI+1.5%.

But like the Holy Grail, this is hard to achieve as a Singapore Investor. Singapore does not issue inflation-protected bonds, and the only recourse is to look at a diversified pool of equities.

This may explain our national obsession with REITs' limited inflation protection and rental collections as dividend yields. 

It also shows us that lobbying MAS to issue inflation-protected bonds may be something that the middle class really needs. 

Saturday, October 28, 2023

#10 The Missing Billionaires - How theory meets practice for actual asset classes


We’re into chapter 14 of the book and this is its most practical chapter that everyone should just buy the book and read it and I really don’t want to spoil what is otherwise an excellent chapter that debunks a lot of the bullshit spread by the industry.

The most important point for readers are three points that the authors believe in:

A) Markets are fairly efficient 
B) Costs matter
C) The market portfolio is the only investment that everybody can own at the same time. 

I think this is what ultimately divides the run of the mill commissions based FAs and the proper fee based businesses like Providend. 

Yesterday i was buying a war game from a Carousell trader and he was complaining that these days FAs would not even use the term ILPs when hawking financial products to the public. It takes a while to understand that you’re dealing with an ILP when terms like surrender value and bonus units comes into the discussion. The smart salespeople know that people are starting to understand the truth behind ILPs.

The fundamental problem with the alliance of commissions FAs and active unit trust managers is that once you account for management fees, the only way to generate more returns is to take a higher risk with your money. Another words, you need to be compensated more than 1% returns when you pay 1% in fees because you’re taking a higher standard deviation with your fund. To realise this, you need to not just understand what a standard deviation is, but also what the Kelly Criterion or Merton Share is. It comes as no surprise that commissioned salespeople will be willfully blind to these fundamental concepts and laypersons will not know any better. 

I’ve also grown to respect Providend’s decision to just promote market returns in their investment solutions, as in most cases, this is as good as it gets and paying a fee to minimise underlying costs do give a retail investor the best chance to grow their wealth over time. Removing conflict of interest is expensive, but over time, would be worthwhile. 

At the back of my head, I am aware that if we no longer have a monopoly in fee-based financial advice as in the current case in Singapore, it may not be possible to just talk up plain market returns without losing significant market share against a more enterprising ( but as yet non-existent ) business that provides fee based advice. 

In this case, my prediction in the event if the government outlaws commissioned sales, a new breed of financial advisor will appear in the market that will be forced to look into factor investing to gain market share. 

Another valuable insight from the book is that the value, momentum and beta factors seem to survive the test of time and there is a high confidence that such funds do outperform over time. 

[ At the personal level, I hope that I, one day, I can duel against Dimensional Fund Advisors regarding their unwillingness to apply the momentum factor in their products. I got some useful numbers to show from my own home-made Python based trading advisors. 

The reality though, is that I’m a small fly. 

A ronin with a rusty sword.]

Friday, October 27, 2023

#9 The Missing Billionaires - Understanding your own risk tolerance and time preference as an investor


Suppose a demon comes up to you and forces you to play a game where you will toss a fair coin. If the coin comes up heads you gain 20% of your total net worth. If the coin comes up tails, you lose 20% of your total net worth.

What percentage of your total net worth would you pay to banish the demon so that you do not have to play the game?

There is no right answer, although, in practice, savvy investors are happy to pay 4% to make the demon go away. 

These are concrete examples of how a decent financial advisor can learn a bit about the risk tolerance of their clients. I don't think this is the practice here in the industry, but readers can use the book to confront FAs in Singapore just to look at their confused faces. 

The end result of the series of questions is to get the answer to the following question :
  • What the the overall risk aversion or lambda of an investor ? 1 = SBF, 2= ssavvy investor, 3=layman.
  • To what extent is the time preference of the investor? What is the discount rate to make a $10,000 expenditure in one year equally satisfying as a $12,000 in two years? 
The book acknowledges that even in these questionnaires, context will drive risk aversion and time preference. Wealthier people can delay gratification longer so can apply a lower rate of time preference. Poorer folks will prefer taking $19 today rather than $20 tomorrow.  Risk aversion was found by researchers to be low at minimal levels of wealth, higher at median levels of wealth and then low again for upper echelons of wealth.

But this is certainly more interesting and useful than the fact-finding exercise conducted by FAs here who really want to know your salary to find out how much commissions they really can squeeze from you.

In the following chapter, a discussion was made about human capital which I have blogged about and taught a lot. All financial considerations should take into account the human capital of the investor. A civil servant with bond-like salaries can afford to take a lot more risk than a real estate agent with a strong market risk component in remuneration.

This is also one point that actual FAs in Singapore mostly fail to address.

A large part of the religious wars between the crypto, techno and dividends investors are largely due to differences in risk aversion and time preference. If we accept that it varies from person to person, we would have a more adult way to discuss the pros and cons of each investing style. 

It should be normal that a guru to one can often be a goondu to another. 


Thursday, October 26, 2023

#8 The Missing Billionaires - What mortal retirees really need


In the last article, we concluded that if you live forever and invest in a balanced portfolio, the prudent and long-term thing to do is to spend about 2.5% of the value of your portfolio and adjust your expectations to the rising and ebbing size of your wealth hoard.

But what happens if you do not live forever? 

In most cases, people die at age 85 in Singapore and if you spend 2.5% of that wealth annually, it is highly likely that you will leave too much to your beneficiaries after you die and underspending in your life. Which is fine for married folks with kids but not singles. 

The solution is to buy annuities, which allow you to buy a monthly cash flow that will pay you so long as you live. This will boost the amount of money you can spend safely while you are still alive at the cost of losing a fraction of your wealth. 

But there is a problem. US firms put so many conditions and fees on their annuities that in practice it is not worth owning them, that's even when authors painstakingly claim that decent annuities without complex financial engineering can earn companies a hefty profit for companies. The situation is even worse in Singapore, where annuity products off the shelf aren't even designed to pay for life!

But thanks to CPF, we have CPF life, where up to $300,000 can be bought under the Enhanced Retirement Scheme that will indeed generate a monthly payout for life. CPF Life is not designed to provide a comfortable retirement as amounts are way below what a basic standard of living is for a 65-year-old in Singapore, but it remains the most attractive option against all other commercial alternatives.

So as far as any Singaporeans including myself are concerned, I will take every opportunity to hit my ERS. I'm not far away from ERS, in spite of not working in a conventional job for close to a decade, but I have to channel as much as legally possible to hit ERS earlier. 

If there is anything I want from CPF, it is to extend CPF-OS to SA transfer to ERS levels and to allow the $8,000 annual tax-deductible top-up until that level. If the book is right, getting about $1,500 of today's money for life will definitely improve outcomes for many investors from the point of view of a person's expected utility of spending income, this is even if they have multi-million dividend portfolios. 

( Note that if your dividend portfolios do well at age 65, you can even defer your CPF-Life payouts to get a bigger monthly payout. This is a very powerful form of optionality for Singaporeans. )

Wednesday, October 25, 2023

#7 The Missing Billionaires - How to spend like you can live forever.

[This series is a slow chapter-by-chapter review of the book The Missing Billionaires by James White and Victor Haghani. It's getting special treatment on this blog because it is novel and can potentially result in a new Dr Wealth course. To understand it all, the best option is to read the book. Otherwise, you may need to read from the first instalment of this series here. We are currently at Chapter 10 of the book] 

Who doesn't want to live forever? A few months ago, I attended a seminar by Mito Health with a few other finance forum regulars. This seminar was organized by Kenneth Lou who was the founder of Seedly. I really liked the logical no-nonsense approach of that seminar and was hearted that I probably already have more longevity drugs in my system than that entire panel of speakers. ( Namely Metformin, Jardiance, Acarbose and Vit D)

The after-seminar discussions were more valuable and we concluded that longevity can only be a great asset if life is worth living, and we can't conclude that is the case for all Singaporeans. For the wealthy, there's definitely a desire to be immortal. For the middle class who have to deal with rising costs and workplace stress, maybe it's time to die when your time is up.

If you aspire to live forever, then you need to run your investment portfolio like an endowment. Assuming a return of 5.4%, the standard deviation of risk assets of 18%. There are three conventional ways to spend your assets.

a) Spending $5.40 a year and then adjusting it by inflation.

This is closest to the conventional 4% withdrawal rule by Bengen that withdraws a fixed amount and adjusts it by inflation every year. At 5.4%, this is unsustainable because sequence of risk returns. This clearly plagues the FIRE community and a lot of ink and computer code has been spilled to solve this issue.

b) Spending a variable 5.4% of total portfolio assets every year.

This is slightly better because you spend less after your portfolio takes a beating, but this approach is also unsustainable after a while even though it is slightly better than the earlier option. It also means that you are flexible enough to adjust your expenses as you get older and face a bad year in the markets. So only wealthy folks can do this.

c) Spending a variable 4.1% of total portfolio assets every year.

To account for volatility drag, we have to adjust the 5.4% downwards to match geometric mean returns. This approach was found to be sustainable over a long period and also has stricter assumptions as the 5.4% rule. Only the wealthy can have this flexibility.

d) Account for maximum utility. personal risk tolerance and time preference

Naturally, as financial consultants, authors want to improve on conventional approaches to spending. The trick is that if you withdraw too much at the start, you may lose out on higher spending in the future, which you may enjoy.

Just a hint on how the maths works

The authors used a typical risk aversion lambda of 2 and came to the conclusion that you will be very much closer to spending about 2.4-2.5% of your total wealth every year.

While the authors mentioned that this approach does not see rapid adoption in the industry, do they look familiar to you as a Singaporean?

I believe that Singapore is run in this manner. We get to enjoy 50% of the NIRC from our international investments. If conservative returns are pegged around 5%, then this is exactly about 2.5% of our portfolio. 

This also explains why Singaporeans may not like the way Singapore funds are government. 

Our government invests as if Singapore will be around forever.

Individual Singaporeans somehow die on average at 84. 

They prefer to spend more each year. 


Tuesday, October 24, 2023

#6 The Missing Billionaires - A better approach to retirement spending

[This series is a slow chapter-by-chapter review of the book The Missing Billionaires by James White and Victor Haghani. It's getting special treatment on this blog because it is novel and can potentially result in a new Dr Wealth course. To understand it all, the best option is to read the book. Otherwise, you may need to read from the first instalment of this series here. We are currently at Chapter 9 of the book] 

In this chapter, we will be exploring a better approach to spending and investing in retirement. A lot of ink has been spilt over this matter, so it's high time someone comes up with some fundamentals on spending ratios in retirement that are more in line with economic theory.

First, we need to understand what a good solution to retirement spending looks like :
  • Spending more is better than spending less.
  • There is a decreasing marginal utility to spending more.
  • Spending should be smooth over time.
  • Spending should react to investment performance, and changes in the tax regime.
  • Spending adjusts based on our longevity.
The chapter goes on to mathematically describe an approach to retirement spending that takes on investment performance parameters, information on risk tolerance and time discounting to create a retirement plan. I suspect that there is insufficient information to construct the plan on a spreadsheet as the authors run a financial planning consultancy. But the essence of the plan is a spending plan that is couched as a percentage of total wealth each year - very different from a 4% withdrawal rule that is inflexible and goes up with inflation every year. 

The effect of such a plan is as follows :
  • Higher equity returns lead to more spending.
  • Higher volatility leads leads to less spending.
  • Longer life expectancy leads to lower spending.
  • Lower subsistence requirement leads to higher total expected future spending.
If someone challenges me to hammer out a spreadsheet that can advise on retirement spending like this, it may take me a day or two, but my money is on this capability not existing in Singapore right now, partly because the industry is not convinced that maximization utility is not the way to go for wealthy clients.

But it's definitely good to be able to imagine a superior option to the 4% withdrawal rule and its variants. If anything, the 4% rule does not account for dynamic returns from the stock market every year and a person's evolving longevity as mortality tables get amended thanks to better medical science. 

If someone takes an AUM fee from me, this is what I would expect and demand. 

Hope readers of the book can agree with me on this. 

Monday, October 23, 2023

#5 The Missing Billionaires - People are not robots

[This series is a slow chapter-by-chapter review of the book The Mission Billionaires by James White and Victor Haghani. It's getting special treatment on this blog because it is novel and can potentially result in a new Dr Wealth course. To understand it all, the best option is to read the book. Otherwise, you may need to read from the first instalment of this series here.]

The subsequent two chapters of the book are less technical in nature.

The authors begin to address the weaknesses and critiques of investing based on expected utility maximization.

  • One critique is to look at the field of behavioural finance, where people find that folks are risk-seeking when they are in a loss position and risk-averse when they have gains. 
  • Another is the idea that there are non-financial benefits that may inflate the utility of some losing bets, like buying 4D and gambling in casinos. 
It is not too difficult to realise that we are not robots and attempts to explain our behaviour with a few elegant equations is bound to result in inaccuracies. 

The last chapter is the most fun because one of the authors was a founding partner of LTCM which failed really spectacularly before the 2000s. The chapter considered whether the founder would have been much wiser to apply the Merton Share and perhaps allocate his capital more responsibly to maximise his utility rather than his expected earnings. If he would have done so, he would have lost a significantly less than what he actually lost.

But this is hindsight 20-20.

I met so many crypto bros who were flying high with 7-digit net worth in 2021. I always told them that they should lock their gains into a piece of physical property because, when things go south, at least they can see the house that they've won by crypto speculation. 

During that heyday of crypto, no one ever took my advice. The 21% Anchor protocol yields were partly to blame because it looked like riskless profit. 

In the end, I lost money on crypto too, but this was less than 1% of my total net worth today.  

Right now, I continue to hold onto my millions of LUNC and my algorithmic bets on GBTC are already ahead by 25% after two months of initiation. 

Sunday, October 22, 2023

#4 The Missing Billionaires - The St Petersberg Paradox.

[This series is a slow chapter-by-chapter review of the book The Mission Billionaires by James White and Victor Haghani. It's getting special treatment on this blog because it is novel and can potentially result in a new Dr Wealth course. To understand it all, the best option is to read the book. Otherwise, you may need to read from the first installment of this series here.]

The St Petersberg paradox illustrates the differences between mathematical theory and street-level practice.

Suppose you are offered a bet where you toss a coin. The first time you get heads, you get $2. The second time you get heads, you get $4. This keeps doubling until you get a tail. Then the game ends, and you keep your winnings. So the payoff is 2 to the power of (consecutive heads+1).

The question is, how much will you pay for this game?

If you use mathematics, the expected winning amount is infinity, as there is a 50% chance of getting $2, a 25% chance of getting $4, and so on.... sums to infinity. 

Theoretically, a rational mathematician should bet his entire net worth to play this game. But in practice, few would pay more than $15 to play this game.

So what gives?

The answer is that we get diminishing marginal utility from our wealth. Halving our wealth can be as painful as the joy we get from doubling it. In such a  case, we should not consider the expected returns but the expected logarithm of the wealth from a bet. Some mathematical gymnastics later, this bet's street price is closer to $18. 

A class of equations model this kind of risk aversion called constant relative risk aversion or CRRA that covers a spread of different risk tolerances or lambda. 1 is for an alien SBF kind of trader. 2 is for a savvy investor. and 3 is for a layman.  

The book has two practical applications of a theory like this.

  • If you work for a startup and anticipate an IPO because you are optimising the utility of your wealth and not its expected value, in any case, you may want to liquidate your shares and cash out for more certainty than entertain the possibility of loss after the lockup period. 
  • The second application is the idea that Goals-based investing can be dangerous. Economists run computer simulations and found that insisting on meeting a financial goal, like earning 50% of your capital ( get rich or die trying ), can result in wealth loss compared to strategically sizing your investment bets to maximise utility. This is because bets get more desperate and aggressive the further you are away from your goal. 
I wonder if the second application will be helpful in Singapore as our financial advisors are probably too busy getting MDRTs to understand Goal-based investing. 

They know their goal is to earn a commission.  


Saturday, October 21, 2023

#3 The Missing Billionaires - What is the expected performance of an investment trainer?


Encountering this batch of trolls from the Dividends Investing discussion has raised an interesting philosophical question. If someone teaches investing for a fee, should this person have an above-average investing performance?

This is a challenging question to answer. Some investors may have a higher return because of higher risk, but sometimes, they may have a lower performance after a market regime change. My ERM portfolios built over 31 batches of students are currently on negative gains because of two hot wars and rising interest rates but still yield a comfortable 6.5% today. My algorithmic All-Weather portfolio easily outperforms the 60/40 portfolio benchmark, but it's only been launched in August this year.

But performance is not the point.

Should CFA instructors and finance lecturers in public institutions be held to this standard? Many of them lack investment portfolios, and most CFA training programs charge more than my workshops.

Furthermore, like Roronoa Zoro's three swords, my net worth comes from residential property, a dividends investment portfolio, and CPF. I only need some assets to rise in value to win. 

Nevertheless, trolls always retreat when asked to clarify their benchmarks because I also have my own benchmark when it comes to clarifying thoughts. Especially when they find out the other reasons why I like Roronoa Zoro. 

Finance instructors are obligated to maintain and teach a body of knowledge. As I have a job translating theory into practice, knowledge needs to be actionable. It cannot be fluff that I spent half a day listening to today. 

Here is an example from The Missing Billionaires: one very reasonable estimate for future stock market returns is inverting a broad market index's cyclically adjusted PE ratio. Some empirical data suggests this is true for the US for returns over the following decade. 

At the end of September 2023, Singapore's was 13.34 or 7.4%. This is actually quite high, considering that when we look at the risk-free rate from Singapore Savings Bonds, it is around 3% and lower than our current inflation rate ( Yes, SSBs give a negative real rate of return! )

It is possible to create a kind of trading formula that will put 100% into Singapore equities when earnings yield is high relative to the real returns of savings bonds. This allocation should drop when the underlying volatility of Singapore equities goes up. When backtested in the US, folks found a significant 30% improvement over fixed asset allocation strategy in risk-adjusted returns.  

This is where the investment trainer can add value: The trainer can get students to execute one version of an investment strategy and walk them through the expected risks and returns. To do this, the trainer needs to internalise the knowledge and build the portfolio. To get their money's worth, students should take action to go through the same steps as the trainer after the course.  

At this stage, students know what a strategy looks like and can execute it to varying levels of success. 

Note that they or the trainer can definitely lose money from doing this.

However, the students/trainers can refine and improve the strategy to outperform the markets.

It could be a slight change of parameters. Use PE instead of CAPE.

Maybe they use a more sophisticated way of capturing future volatility ( GARCH comes to mind )

The bar for the trainer does not need to guarantee an alpha. No hedge fund manager can do this. The student just needs to have the potential to do well with the knowledge gained. But they need independent thought and action.

This is because the nature of investing is different from weather forecasting.

In weather forecasting, if everyone successfully predicts the weather, the weather occurs regardless. 

In investing, if everyone predicts the same weather, the weather changes. 

Friday, October 20, 2023

#2 The Missing Billionaires - How grown-ups discuss tech vs dividend stocks

I've grown accustomed to trolls from many of my public appearances, so I always plan to engage them in public. This appearance on Money Mind was slightly different because the attacks were not as personal as the ones I faced twenty years ago when I first appeared on the Sunday Times.

Apparently, some so-called wannabe influencer has a beef against dividends investing and thinks investors like AK71 are dinosaurs. I will not dignify their attempts by identifying who they are because this is childhood playground antics - like playing with GI Joe action figures. My Storm Shadow is better than the Snake Eyes discussion. I even went into the dividends forums to ask whether any of them bullied this influencer, to which they said that his issues have a much longer history than the forums.

Why do folks want to pick on AK71 anyway? He's a business rival as we back different training schools, but he has always been generous with his sharing. 

We can use the earlier Merton's shared discussion to discuss the merits of dividends investing versus tech investing. They are not mutually exclusive, and there's room in many portfolios to contain both.

If you are confronted with numerical statistics of a tech ETF compared to a dividends-focused ETF, what proportion of your net worth is ideal. 

So, from Portfolio Visualizer, I compared two ETFs. The famous Cathie Woods ARKK ETF and the Vanguard International Dividends Appreciation ETF. Numbers are shown here based on 5 years of data.

Clearly, ARKK has better returns, but it comes with a much higher risk. Since the Kelly Criterion will reduce the allotment to an ETF by four times for every doubling of standard deviation, taking :

 (returns - 3%) / (standard deviation) ^ 2

3%, being close to the yield of treasuries and even our SSBs.

Allocation of net worth to ARKK is 63.9%
Allocation to VIGI is 168%

In other words, the trader who plays the Kelly Criterion is encouraged to apply leverage on a dividend portfolio!

But we are not crazy Kelly Criterion traders like SBF. We are ordinary people, so the rational thing is to put up to 31% into ARKK or 84% into VIGI.

This is the problem technology investors face if they ever wish to walk into any Dividends chat group to talk down dividends investing and talk up tech stocks. 

Suppose we apply the mathematical models from the trading floor to both strategies. In that case, it is more rational to put more into dividend stocks than tech stocks simply because they are less volatile than tech counters. ( For technical details, look up the concept of volatility drag )

This even accounts for higher returns of Tech stocks.

Of course, readers are free to play with different ETFs to come to a different conclusion, but this is a much better discussion than name-calling.

Finally, I've spent a day fooling around in the Dividends Telegram groups, and they are generally good, rational people. 



Thursday, October 19, 2023

#1 The Missing Billionaires - The Merton Share


I’m going to start a new series on The Missing Billionaires by Haghani and White. This is a brilliant piece of work that fills a very important gap in financial decision making that bridges the theoretical maths and actual investment decisions. I though perhaps reading the book a second time at a much slower pace of a chapter a day would be beneficial as I reform some of my training materials to be more consistent with this piece of work. 

I’m going to introduce the concept of a Merton Share, which is an elaboration of the Kelly Criterion I teach in my ERM classes. 

Imagine you have a coin that flips heads 60% of the time and you are given a chance to bet on heads coming up 25 times. What percentage of your capital should you pick to take these bets?

If you are gunning for the highest expected payout, you should bet all of your wealth into each flip 25 times. But that’s intuitively dumb because a single tail will make you lose all your wealth, so it does not make sense to maximise the expected value of the bets.

So, instead, there is a more rational approach. If you bet 20% of your wealth, you will maximise the median profit, which divides the more favourable and less favourable outcomes into two equal parts. But this is still quite stressful for humans as there is still about a 15% chance of losing more than half of your starting wealth.

So, most human beings are advised to bet 10% of their existing wealth before each coin flip.

In this simple illustration, we captured what it means to be a human being. We do not optimise for the highest expected or median outcomes. We take bets based on what allows us to sleep at night.

Translated to the field of investments, we can calculate our allocation into equities and risky assets using the Merton share, which looks like this :

It means that we increase our proportion linearly into a risky asset when the excess returns go up but reduce our proportion of the same assets based on the square of the standard deviation.

Interestingly, the Greek alphabet lambda measures our personal risk tolerance, which looks like λ. When lambda is 1, the term collapses to the Kelly Criterion, which is how much we will bet optimally. The problem arises when banks and wealth houses measure the lambda of their clients. Even the most savvy investors have a lambda of 2, which neatly falls into the half-Kelly bets that professional poker players bet. Lay people are often three times more risk averse at 3. 

This has quite interesting applications to making personal finance decisions. In my program, we do estimate the returns and standard deviations by our backtesting exercises, but I do not have a scheme to show students how to allocate between this portfolio and the risk-less asset because I imagine a lot of their wealth is already stuck in CPF and physical property. 

More interestingly, the role of a financial advisor is to shift a client's lambda from a starting position of 3 into something closer to 2. 

From a practical perspective, if you meet a frugal housewife who is always hunting for the best fixed-deposit rates by switching different banks, it may be justified to get her to allocate her assets to some local stocks or REITs, too.

The sad thing is many of our financial advisors may not even understand what a standard deviation is, much less a Merton share, and this equation should become a foundation knowledge if we launch a personal finance course nationwide. 


Wednesday, October 18, 2023

Ok, just came back from Osaka


I just touched down from Osaka and looking forward to continuing the regular programming on this blog. We should be going back to some technical finance articles soon. 

As this trip was done with my family, I only have a few insights on my trip other than the realization that I did not buy very much from my trip. Most of the trip consisted of sightseeing.

I only have very shallow insights from my experiences as a Singaporean tourist from Japan. I cannot believe that they will come when Singaporeans will find Japan a cheap tourist destination, but this day has come. Meals that locals eat in cafes and restaurants will cost about $6.50 for us, and do take note that the Japanese serve cold water without extra charge. If you splurge and eat at a higher-end restaurant, I sometimes need help to stretch the food above SGD 30 per head. The meal below is a tofu-based high-end meal we had at about SGD 160 for my whole family. 

If there is anyone to thank, the central bankers in Japan kept interest rates low to keep their Yen weak. Combined with our MAS's decision to keep the current rate bands constant this October. I enjoyed my visits to Istanbul and Osaka because of the different actions of central bankers. 

This may be a template for travel in the future: go to a place where the SGD has the most purchasing power, then eat slightly better than the locals, splurging in a good restaurant maybe once a day. 

I envision a gamer's trip to London in a year or two - I need to focus on my intermediate (earned) cash flow needs and training business.

Sunday, October 08, 2023

Catch me on this week's Money Mind !


After touching down from Istanbul, I have been working with the Channel News Asia team on a dividends investing segment on Money Mind for the past week. The episode aired last night and will be shown twice daily until Tuesday. It is likely that in a few days, the episode will be posted to MeWatch at:

I've worked with mainstream media quite a few times, but this has been limited to newspaper articles and commentaries, so appearing on Money Mind is my first significant appearance on TV. 

In the past, whenever the idea of living on dividends was to appear in mainstream media, a lot of negativity would follow, so this article could capture some of the more controversial points about this appearance. I'm no stranger to controversy and brickbats from fellow investors, as my impression on Me and My Money generated over 100 pages of threads, some particularly mad at me for no valid reason. 

a) The recording was over an hour long. 

For a start, my precious few minutes of appearance on Money Mind was very different from previous collaborations with Dr Wealth and iFast. To create that few precious minutes of air time, I was interviewed for over an hour. The questions could also get repetitive, maybe like a coffee session with CPIB. I don't blame the producer, as the idea of living on dividends is still entirely foreign to mainstream media and tough due diligence questions must be asked. 

b) How I built my wealth to become financially independent.

This was not shown on TV, but a lot of discussion was made over the question of how I built my wealth. I said that I achieved a higher dividend payout than my take-home pay in my last job on a statutory board with a portfolio size of close to $1M at age 39. It created an impression that my salary was about $5k per month throughout my career. 

My IT career actually spanned 14 years, and I was drawing a healthy five-figure sum monthly, even during the Great Recession. My take-home pay went down when I left the private sector, but only because it was moved to the bonus component. Still, there was no need to feel sorry for me when I left the private sector - my pay dropped towards the point whereby I could qualify for my EC, making the move, in hindsight, one of the best moves of my life. 

I'm sharing this because I want to dispel any notion that we can beat the markets with some magic formula - yes, I have superior backtested results and equity returns are way better than a coin flip, but making money requires persistent investment over 2-3 market cycles. So, I was out of the rat race due to a high savings rate and decent pay - I basically did not touch my salary since I was 32 years old. The rest of my net worth has gone up since financial independence because I inherited money in 2018 - I was transparent with CNA on this point.

c) On that strange sedan chair comment

I was glad CNA preserved my comment on the Sedan Chair, but most of the comment was truncated, and viewers might need clarification about what I wanted to say.

In that statement, I mentioned that I admired President Tharman and liked his metaphor about Western welfare systems as a Safety Net. Still, Singapore takes another step by creating a Trampoline, which is about returning from hardships like reskilling and Skillsfuture.

I said that, in this case, dividends investing is like a Sedan Chair. Each stock is like someone carrying their chair for you. Do this long enough, and you will have a stable platform that can carry you anywhere you want to go.

Maybe in a podcast or a future appearance, I will talk in greater detail about the evolution from a Safety Net and trampoline to a Sedan Chair. 

Yes, I am very aware that the metaphor of a Sedan Chair does connote a certain degree of decadence.

d) About that gold dragon I was painting

I try my best in everything I do to pay homage to my gamer roots. I spent much of my life playing Dungeons and Dragons and just completed 100+ hours of gameplay solving Baldur's Gate 3. The crew wanted me to act out a "normal scene" in my family, so I had to suggest something that showed my inner geek. 

I have an Adult Gold Dragon from Wizkids that has yet to be dry-brushed, so I opened up a Citadel paint can and got my son to join me in painting the Gold Dragon. But he's not familiar with dry brushing techniques yet. 

I paid close to $200 for that Gold Dragon, one of the most expensive items I have in my house. 

e) Naturally, a lot of stuff was missed

CNA could not put everything on TV because the interview lasted over an hour. I did criticise dividends investing as slow, and investors will be constantly mocked by tech investors and folks looking for a faster buck. Another important point I raised is that dividend investing does not work in a vacuum; most of us have a balanced portfolio of human capital, residential property and CPF Life annuities, and a dividend-paying portfolio. These asset classes complement each other in different parts of the market cycle.

Coincidentally, even the mighty AK71 has been labelled a dinosaur on social media.

Anyway, this blog will take a break for 10 days as I will fly off to Osaka tonight to escape the haze with my family. 

After returning, I have exciting career developments to share with everyone!

For folks who are curious about my life, I run free investment workshops. You can sign up here : 

Sunday, October 01, 2023

Does nobody want to provide financial services to the mass market anymore?

Now that the furore has died down, I'm sharing some thoughts about today's sad state of the finance industry. 

Here is a little background on where I stand: quite early in my ERM course, my students are often stuck with ILPs and endowments they bought some time ago and getting suboptimal returns from them. But I need the license to tell them what to do with these investments. My solution was introducing them to a salaried advisor from Money Owl, the only source of salaried advisors with the license to get them to drop the plans. Otherwise, my students are on their own and need to develop their confidence with dividends investing before they can pull the plug.

I did this introduction for no fee initially, but subsequently, MoneyOwl would send me $20 food vouchers for each introduction I made. This would have been a derisory sum if not for the positive feedback I got from my students about their excellent service. In one case, we even got a student to go through the FIDREC process and won a better deal from financial institutions that missold these products to my student.

( Today, FAs meet my student and actually run away from her. She won a case with FIDREC! Who says my job is all about the money? )

I suspect this is the essence of what went wrong with MoneyOwl. 

Someone always pays in this business. In the case of commissioned salespeople, it is the client. In the case of MoneyOwl, I suspect the advisor has to contend with a fixed monthly salary and the allies who have scant incentives to introduce customers to them. All this while commissioned advisors are getting wined and dined for the ILPs they shove into the masses' throats by hooking up with them on Tinder or using LED balloons to traumatise their kids. No amount of virtue signalling that you are the good guy will beat the almighty dollar paid to introducers and marketers. Case in point, I have had a very profitable arrangement with iFast Global Markets over the past few years.

So, we have the industry in this sad state today. Everybody wants to serve the rich. People need help finding a way to profitably serve the masses. 

  • Even the might of the NTUC Social Enterprise has decided to sound the retreat for Money Owl. I can attest that Money Owl gave excellent service to the masses. Sadly, it was simply not sustainable.
  • Major robo-advisors here are running on VC funding and are yet to be profitable, no matter how cocky they are or the beautiful people they put on ads. It's no fun placing money on them to find them consolidated with a stronger player a few years later.
  • You need about $350,000 to qualify for the fee-based advisor here. They are virtually a monopoly in this space and prefer investors who are "stewards of their wealth" and not those searching for investment alpha. 
  • TD Ameritrade wants to do something other than serve retail customers in favour of Accredited investors. 
  • Even in my line of work, raising the fees of my courses to a four-figure sum has given me more attentive students and a better class of people to serve. 
The sad state of affairs is that for the bulk of the masses, the only people who can serve them now are commissioned salespersons who are legally allowed to call themselves financial advisors, with all the conflicts of interest inherent in this current arrangement.

Do I have a profitable solution for financial advisory for the masses? I don't. But there are smarter people looking at the problem, and I have a reasonable expectation as a member of the public that this an issue that needs to be addressed. 

The government agencies need to reflect on their strategy that believes that some kind of technological innovation will eventually solve the problem of financial inclusion while subjecting the middle class to being cattle for commissioned salespeople to feed on. I have said in an earlier article that with tax loss harvesting, robo-advisors will see the kind of adoption in places like the US.

My ideal outcome should be a total ban on the commissions' regime, favouring a system similar to the UK. But the first step is to apply pressure to restart a review of the commissioned regime in 2013 by MAS. Voters and citizens need to support MAS to give them the backbone to fight back the industry lobby, I believe they will threaten to leave this market and generate a lot of unemployment. But in reality, societies without commissioned advisors do exist! Skills Future will allow unemployed commissioned salespeople to join the healthcare industry.

At a personal level, if we are limited to a fee-based regime in Singapore, I will jump into the fray and get licensed to do the work myself. If I can compete on investment performance and knowledge sharing, I should find a way to survive, maybe even thrive in this new regime.

If I have to go on Tinder to catfish single women or traumatise kids by taking back LED balloons for new clients, I won't stand a chance in this profession.

Anyway, I will miss Money Owl. Fortunately, I already have a great relationship with iFast Global Markets and will find a way to continue working with the excellent MoneyOwl Alumni there. 

I know that commissioned FAs are exulting over their recent victory. 

But they've yet to win the war, and I hope to see their regime crushed one day.