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.

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