Equity Management #7 : Taking on more risk from a benchmark portfolio.

Most investors are normally fixated at their returns from ordinary asset classes. You take on the risk of equity for 8% returns and moderate your equity position with a bond position which is stable but only gives you only 2%.

Professionals don't have that luxury.

If market returns from equity are like an act of God then individual returns which deviate from the market benchmark would be the act of Man.

Professionals use Information Ratio (IR) as a measure of their skill - calculated by how much excess return (called alpha) is generated for each unit of residual risk. Most professionals get about 0.5 but an exceptionally good professional manager can get 1.0. As I still am not an accredited investor yet, I have yet to ask professional money managers what has been their information ratio for the past 5 years.

For the other readers, here how you take on increasing residual risk and subsequently have a bigger chance of outperforming or underperforming the benchmark :

a) Hold the STI ETF ( ES3 )

At the lowest level of residual risk, you hold the STI ETF and track is almost perfectly. The only tracking error you get is probably the amount paid to rebalance the portfolio when a new stock enters the index and a negligible management fee. If you just want to have average market returns, this is the best choice and supported by many financial bloggers.

b) Shift to an equal weightage STI portfolio

If you have more capital, you can hold each STI component stock in equal proportions. At this stage, your portfolio will no longer track the STI but you will no longer be over burdened with banking stocks and won't hold stocks based on how large STI companies are.

In the US, the equal weighted RSP index fund has outperformed the capitalisation-weighted SPY index for over a decade.

c) Smart Beta

If you want to take on more even more risk, you may wish to start looking at Smart Beta ETFs which will eventually show up in Singapore one day. One example of such an index is one which weighs each stock based on dividend yields or earnings yields (to exploit low PE outperformance). At this stage even more risk is taken and you stand a greater chance of deviating from the market benchmark.

Until the Smart Beta ETFs actually show up, you can take the counters in the STI ETF, take the reciprocal of the P/E value and own a proportion of stocks based on this earning yields number.

Eg. You will own twice as much stock with a P/E of 10 than a stock with P/E of 20.

d) Personal Active Management 

If you can stomach even more risk than that, you will get back to square one as there is a low of solid analysis on individual stocks in the financial blogosphere. You can just focus on stock picking and ignore the market benchmark altogether.

If you are a reader and an intermediate reader, you do not need to make the jump from buying and holding the STI ETF to owning a portfolio of individual stocks based on recommendations you read about.

There are intermediate means to contain your risk by varying the proportion of STI stock in your portfolio - Too bad the ETFs here have not evolved to that stage yet.

The Three Faces of Poverty in Modern Life.

In order to become richer, sometimes it is helpful to understand poverty.

When Thomas Piketty published Capital in the 21st Century, it is easy for a rentier like me to dismiss this as a rallying cry of welfare-state socialists. But as it turns out, the book had the effect of deepening my conviction towards my dividend portfolio because it proposes the idea that the growth of capital far exceeds the growth of earned labour income as reflected in the ( r > g ) inequality which made the work antithetical to capitalism. The lesson I learnt is that : Between using your wealth to make more wealth and selling your time to make money, always choose the former.

Today I'm going to propose that there is more than one way of being poor.

Understanding that inequality and poverty goes beyond the lack of financial wealth may be a useful insight in structuring your personal finance as well as planning for your children's future.

I propose three ways to look at poverty.

a) Financial poverty

The most common form of poverty is when you lack money. Without money, there is essentially no way you can buy what you need. Nothing more needs to said here as the combined might of financial bloggers are now at your disposal to obtain advise on wealth management matters so let's move on...

b) Temporal Poverty

More insidious than wealth poverty is time poverty. Some families or communities may not be considered financially poor but they might suffer a form of temporal poverty in that they lack time. A wealthy executive woman can hire a helper to assist with child rearing, but a single mother is not just financially poor, she is time starved as she has to balance a job with child rearing. Even if both women are equally smart and capable, the single mother will always feel more tired than the wealthy executive.

One recent study concerns the lack of sleep which, unfortunately, led to the censure of a popular radio station. This would have been better construed as a discussion on time poverty and its effects on our population. It starts with a constructive discussion on what are trading away our sleep for.

Dealing with time poverty is often very similar to dealing with financial poverty. If you studied harder while you were younger, you might be able to trade off one unit of your time for more money than if you had dropped out. Similarly, time spent planning your budgets in your 20s, can give you more time after financial independence in your early 40s.

c) Social/Cultural Poverty  

It's not what you know but who you know.

Being in the right family, school or church can result in very different life outcomes. My dad and his blue collar co-workers would coordinate trips to buy in bulk that result in substantial savings within the household. At the higher end, being from a particular school along Bukit Timah Road is helpful getting a foot in the door in high finance.

It is much harder to earn social or cultural capital. Sometimes, you can break a social barrier by studying hard and earning a valuable skill. An engineering degree is often the fastest way a working class family can quickly gain a foothold in the middle class.  Some barriers, unfortunately,  simply cannot be breached - for further details you can read Kevin Kwan's Crazy Rich Asians.

In the US, Tyler Cowen talks about the phenomenon of rich, white families gently buying up the homes of adjacent black families so that more of these rich, white can be clustered together. In the US, we have a problem with rich liberals railing about income inequality when they live amongst the most segregated communities in the country. In Singapore, just look at the folks aggressively promoting Singlish - can you figure out which schools they come from ? Personally, I think its the same phenomenon.

Social poverty is possibly better managed with a government mandate. We've done very well when we made sure that our public housing are evenly distributed based on race. We may want to do the same thing with primary and secondary schools.

At a personal level, perhaps along with auditing your financial accounts, you may want to have an honest look at you spend your time and whether your time is really spent on important priorities in your life. Thereafter, you may want to review your family, schools and companies you are associated with to see whether you have a "weak network" in case you need to look for a new career or start a business.

You might be richer / poorer than you think.

Equity Management #6 : A unified approach to engineering portfolios.

Ok, we're moving into a new section of the book which talks about portfolio management. The basic summary is quite simple - a unified approach towards portfolio management trumps the approach where the markets get segmented.

What this means to me is quite simple, wherever possible, try to start with the entire universe of stocks. In my case, I review the 700+ counters available on SGX through my broker when looking for counters with the highest yields.

Stick to table of stocks which typically gives higher yields is self defeating because even Venture does not give 6% yields anymore at its current price. Instead, the table of yield stocks should be updated from the entire universe before I target a set of stocks for analysis.

The chapter also hints that some forms of analysis might be superior depending on the sector you are analysing :

Dividend discount models work better for utilities. ( Which begs the question of whether it would similarly be good enough for REITS. )

For growth industries like  the Tech industry, momentum measures might be a better bet.

The chapter also considers the power of long-short portfolios, something which I was tempted many times to try but have no guts to do so. Basically, you you go long on a set of low P/E stocks and you go short on a set of high P/E stocks. As you may have no market risk, any profits you make is portable and above and beyond index returns and you can then supplement the returns with a position on the STI ETF.

These are all great ideas, but my finance portfolio is not merely a financial strategy, it is also a lifestyle strategy which lets me focus on my legal studies with minimal trades.

So I'll stick to my dividend income portfolio, thank you...

Personal Update

There has been no article on Equity Management last week because I as getting into the deep end of the book which talks about selecting the right data and tracking errors, items which are dry even for a dedicated finance otaku like me.

Instead, I hope to start talking about the Portfolio Management section of the book over this weekend.

So all I have is a personal update :

a) School has been intense but the worse is over.

This has been the week of major deadlines. I have one more presentation to go next week and then it will onto the exams. But beginning next week, I can start to relax as I only have two papers this semester. If everything works, out my final paper in SMU would be sometime mid-April.

Then its about 3 months of holidays and internships before the bar preparations.

b) Finance and Investments

Markets have been red-hot and most income investors would have had a great time with the markets with a series of large payouts at the end of March. Manufacturing stocks are also doing very well due to the turnaround in the Singapore economy.

The question remains as to whether the turnaround in the economy is real and whether the US may put a dampener on world trade when they kick in protectionist policies. The markets don't seem to care that the Donald is in charge.

I probably made my dumbest investment move this decade in February :

Because I needed some liquidity to tide over the Chinese New Year, I started liquidating my non-yield generating assets and sold off most of my cryptocurrency. Thereafter, Ethereum went from around $10 to $40 !!! It was only a token sum of $1,000 but $3,000 can last me quite a while.

Fortunately, I had secured some mining contracts which still gives me a couple of Ethereum coins in my wallet but this failure is really epic in the midst of other parts of my portfolio doing so spectacularly well.  

c) Books and readings

I am currently reading The Complacent Class by Tyler Cowen. It is an interesting take on how America's loss of physical mobility is slowing down innovation and exacerbates inequality. It is full of insights which can be contextualise to Singapore.

One possible tip is when observing Singaporeans is that when you read about those keyboard warriors who rail at income inequality may be the folks who live in the most segregated housing estates and school in the most racially segregated secondary schools.

There are too many good books out there. Anthony Robbins just published another finance guide called Unshakeable - maybe he just wants us to forget about his old self-help guru days. The Cato Institute finally published a book entitled Anti-Piketty which is compulsory reading for rentier/super-managers aspirants.

d) The Hillion has opened.

For the folks who live in Bukit Panjang, congratulations.

The Hillion has opened so we have another soulless mall within a short commute of where we live. For my family, at least we no longer have to go to Choa Chu Kang when a kid needs to see the pediatrician.

Hope to post at a higher frequency from now on.

You don't get to hack the CPF, the CPF gets you hack you !

Ok, it is time to summarise yesterday's proceedings. In case you guys are wondering, when we conduct our talks, we don't really do rehearsals so some of us speakers are also there to listen to what other bloggers have to say. So things get interesting if there is a disagreement between us, nothing we ever do is scripted.

Here are some comments and things which I learnt from yesterday's session :

a) Budget babe's mention of SRS.

At first the company directors were slightly concerned when they realised that SRS which was covered last night was not actually administered by the CPF Board, but I think we've learnt a lot more as a result of her talk. One way of avoiding taxes is to voluntarily set your money aside into the SRS program where you can then invest in the financial markets. The downside is that withdrawal retirement age will incur a 5% penalty. 50% of all withdrawals are still taxable when you take you money at a later age.

The SRS is a great system to have but I am not currently using it. I would be more interested if withdrawals of dividends can be made tax free.

b) CreateWealth8888's market timing approach.

Jacob's session was a real treat because he shed light on the wisdom of baby boomers on how they invest their money. Jacob has a method which involved drawing money from the markets and placing it in his warchest when times are good and doing the opposite when markets are bearish.

The approach may seem simplistic, but Jacob can get 17.2% CAGR out of his approach to investing which is very impressive indeed.

c) Attendees really really like the CPF-SA 4% interest rate.

A bulk of questions involve the CPF-OA to CPF-SA transfer. I can see that folks really like that scheme and want to find all sorts of way to take advantage of this program. Although I have been a beneficiary of this technique having maxed out my CPF-SA prior to reaching 30, there are some things people need to take note of.

If you can invest 35% of your CPF-OA at 8% and keep 65% at 2.5%, you will earn 4.425% which is higher than what the CPF-SA gives. I also believe that, over the long term, as interest rates rise, the government will set the CPF-SA rate to a government bond rate plus may 1-2% so when interest rates drop again, you will stop getting 4% in the future.

Guaranteeing 4% may not be a sustainable practice.

d) Some attendee wants to hack the CPF-SA system

I think a very small proportion of blog readers are actually too smart for their own good.

One particular person wanted to contribute to his son's CPF to "hack" the CPF system. After conferring to other bloggers, I have to say that this is one of the stupidest ideas I have ever heard in quite a while and sadly my body language may have shown that I was just not too impressed by this suggestion. While I could not answer the question last night, apparently you can perform a voluntary contribution (VC) into your child's CPF which distributes the money even between the CPF-OA, CPF-SA and CPF-MA.

While the CPF program is a good one with a lot of government guarantees locked into it, a 4% interest rate on the CPF-SA is not a Constitutional guarantee. It is also cruel to lock in money for your kids when you can just get them to open a CDP account and give them some preference shares. There are currently 5 preference share counters in the SGX, if you buy each counter in equal proportion, you are likely to beat 4% every year.

The lesson for readers is this : You don't hack the CPF. In Singapore, the CPF hacks you.

Michel Foucault is a philosopher who wrote books on how prisons exert control over inmates. He pioneered the idea that the ability to influence a population's sense of what is normal is a legitimate form of power a government can have. The CPF as a scheme tells you that having a house is good, saving adequately for health is good and supporting your parents, and paying yours kid's tuition is the normal thing to do. Government officials are influenced by Richard Thaler's Nudge and practice a form of liberal paternalism on the population. ( Lucky us right ? )

The more you contribute to your CPF, it is almost always true that you get to better secure your future. But you are also letting the CPF define to you what is normal and what is not normal in your life.

While I agree that many things like home ownership and giving my mum money every month is great, I bet that almost all financial bloggers would agree that we'd prefer to have control over our retirement age.

When it comes to financial independence the CPF Board can keep its tendrils to itself.

Equity management #5 : The Small Firm Effect

Some investors like investing in small firms because it is an area where the natural strengths of a retail investor can really shine.

Institutional investors can't invest in some counters like Karin Tech and Global Testing because there is so little liquidity in these counters that it would be a struggle to even pick up more than 2000 shares in a single transaction.

The small firm effect is a well known in academic literature. You can earn higher returns if you focus on smaller stocks.

But there are some caveats :

a) Small firms might also be neglected firms

A large component of small firm returns is also attributed to its neglect. You may also have oversized returns if you invest in stocks which are not covered by analysts. I can't seem to get a lot of information on a counter like Figtree, for example.

b) Small firms are illiquid.

There is a high bid-ask rate and low number of bids so it will take a lot more transactions for a position to hit 1% of your portfolio. My dad took weeks to pick up 1,700 shares of Global Testing. I think that is quite enough because of the amount of cash which needs reinvestment every month.

c) Small firms effect can disappear when macroeconomic conditions change.

Small firms are fragile.

When there is increase in BAA corporate bond interest rates or T-bill rates, returns may disappear. Similarly returns may go up when there is an unexpected increase in industrial rates. When there is expected inflation, small firms are also impacted negatively.

Academic research on small firms is not particularly practical for retail investors but one is clear : It might be useful and fun to research and accumulate a small portfolio of 20 local small stocks when you are younger and have smaller portfolio size below $50k.

When you start managing a larger portfolio, you would have to look for other opportunities.

FInancial Blogger's CPF Talk : Some details.

For this upcoming talk, we employed a very lax marketing schedule so right now we are about one week away and we have only 20% of our tickets left to sell so we should have another sell-out session next week.

Today I’m going to provide more clarity on what I will be talking about.

The problem with the CPF program is that it attempts to do too many things at once. Hence we should emphasize the “personal” in personal finance.

Instead of giving the audience solid answers, I will discuss the feature of CPF in question, followed by how I employ this feature. This is then followed by suggestions how the audience can think about whether this mode of application applies to their personal circumstance.

Don’t expect all the speakers to have any consensus on CPF.

My presentation is organised around 7 arguments or touch points which tends to generate the most debate in the financial blogosphere:

·      Whether to transfer of CPF-OA to CPF-SA ?

·      How much CPF to tap for investment purposes ?

·      How much to allocate to your parents retirement needs ?

·      How much to allocate to your child’s education ?

·      How much CPF should you use to pay for your housing needs ?

·      The controversial question of whether it is better to have an Integrated Health Shield.

·      Which scheme to subscribe to for CPF Life ?

It is quite a lot of material and I will cover much ground in 30 minutes but hopefully once you understand some of the basics of the CPF system, the other bloggers will be able to entertain you with more anecdotes and personal stories on how they manage their CPF money.

Next Talk : CPF Optimization for Retirement

You can now start to get your tickets to the next event that is held by BIGScribe.

This time I will be joined by superstar financial bloggers CreateWealth8888 and Budget Babe who should be familiar to readers of this blog.

Like all talks, I will volunteer for 30 minutes of the seminar.

A third of my slides will focus on the basics behind the CPF program so that the other bloggers are not constrained by the fundamentals and can talk about their personal experiences and stories. More importantly, I will also be sharing my candid views on the CPF system as there is nothing to constrain me from constructively criticising this program.

About a third would cover key decisions that you have to make when it comes to the CPF program such as whether to transfer your CPF-OA to CPF-SA, how to invest in CPF-IS and choice between the different CPF Life Schemes. On my last count, my slides will talk specifically on 6 aspects of CPF use.

The last third of the talk would be personal stories. I will be beefing this component up to keep up the engagement with the readership.

The talk will be held on Thursday 16 March 2017 7.30pm at #10-26 International Plaza.

Please click on the link here to make your reservation, I was told that Budget Babe's fanbase has already purchased a sizeable chunk of tickets before the promotion has even begun and am quite confident that we will sell out a third time.

Equity Management #4 : On Market Anomalies

Market anomalies would not normally creep into a discussion between value investors but their existence demonstrates the possibility of making profits by understanding some market patterns which has been happening on a regular basis for a while.

Even if you are a long-term investor, knowing these anomalies might assist you in deciding on a good time to buy a value stock.

a) January effect 

Stocks tend to have oversized returns in the month of January. This effect tends to work better for higher yielding stocks and worse for stocks of smaller companies.

b) Turn of the month effect

Returns tend to be oversized on the last day of the months to the third day of the following month. Explanation is that companies are eager to provide good news so it tends to happen earlier in the month.

c) The Day of the Week Effect

Mondays tend to be down days and Fridays tend to have the highest returns. Switching a sell-day from Monday to a Friday can result in substantial returns.

d) Holiday Effect

There is a belief that the trading day before the holidays tend to produce better returns but the research was based on US public holidays. I wish we that we had a similar study here.

e) Time of day effect

Markets tend to be bullish the first 45 minutes of the day and the last 15 minutes for the day.

While the effects of these anomalies are statistically significant, one doubt I have about exploiting these anomalies on a regular basis is that the profits gained would be rapidly eroded by brokerage fees.

But after filtering for stocks based on fundamentals, there is no harm choosing a buying window on the last day of the month, on any given Friday, or throughout the month of December to make your stock purchases.

The joys of being temporarily Malaysian.

With the ringgit at an all-time low, I went into Malaysia for a few hours with my mum during my mid-term exams. We did not venture far into Malaysia, we just hung out at City Square very possibly the most expensive part of the entire country because it is the closest mall to Singapore.

Shopping in Malaysia is a liberating experience for me. I am always counting my expenses in Singapore. In Malaysia, I feel liberated and I can spend my money anyway I want in any restaurant that I like. I also become more open to food and luxury articles in investment magazines like the Edge.

( I still hate the local lifestyle articles in our business weeklies because they distract from investing in the markets. )


What I observed is that the low Ringgit must have really warped the economy of the country.

Hakka vegetarian dumplings cost me $7.50 MYR. This is not considered cheap by Malaysian standards but it is for folks from Singapore. A curry bee boon Yong Tao Fu is about $12.50, quite ridiculous for someone on a Johor paycheck but only about $4 SGD after currency conversion. I actually got a Singapore-designed Kalashnikov gaming keyboard for $22 SGD after conversion when I was sure that similar model cost $35+ back home.

This is painful for Malaysians who work in Johor. A monthly salary of a first year lawyer after pupillage in Johor Bahru is $3,000 MYR or less than $1,000 SGD. A fresh Singapore ITE graduate can earn $1,700 a month.

We might even see SGDMYR=$3.33 as early as this year if the Singapore economy surprises on the upside. As the Malaysian ringgit keeps trending lower, many Singaporeans and Malaysians will attempt to do some geo-arbitrage between the two countries.

The trick is to confine all your expenses in Malaysia and then earn and invest in Singapore. I can imagine after the office buildings get built in Woodlands, many folks will try to geo-arbitrage by trying to live in Johor and work in Singapore.

Investing in Malaysia is also really something which deserves another blog writeup. In the Malaysian Smart Investor magazine ( yes, they still have a monthly investment magazine ), a couple of fund managers are advising readers to buy S-REITS citing our high yields. If I can only invest in Malaysian REITs and equity counters, I would still be working today. Their top yielding REITs are only giving out around 5-6% not counting withholding taxes although this makes their high yielding equity counters much more attractive in comparison.

Over time, both countries will try to make it hard for you to cross the causeway and to do this will employ toll charges across their customs checkpoints but the single biggest issue is personal security.

There is a saying that a Johorian that has never been robbed is not a real Johorian. If you really want to live and work in Malaysia, you need to factor into your living expenses adequate security systems. But even if you are a multimillionaire in Malaysia who can afford bodyguards, who can protect your from your bodyguards ?

Just a final tip.

Malaysia's low exchange ensures that any product with a higher rental and labor cost component would be cheap compared to what we pay back home. So the trick is to stick to food, watching cinema and personal services like massage, nail manicure and the same stuff some uncles do near Peace Centre.

Imported branded goods don't make as much sense although Mr. DIY (A Malaysian chain that is a mix between Daiso, Toy R Us and Homefix)  always has something worth buying when I go there.

Equity Management #3 : The Dividend Discount model is overrated

One of the fundamental building blocks taught in the CFA is the dividend discount model or DDM. In Chapter 4 of the Equity Management book, empirical studies would succeed at demolishing the explanatory power of DMM when it comes to stock returns.

For the novices, the dividend discount model is basically the  idea that a stock price should be the net present value of all future dividend payments.

V = D1/(1+r) + D2/(1+R)^2 + D3/(1+r)^3 +....

If dividends grow at a constant rate, the equation collapses to  V = D1 / (r - g)

V = Price of the Stock
Dx = Dividend in year x.
r = risk free interest rate
g = rate of dividend growth

If you read a brokerage report which employs the dividend discount model, you can now objectively take those results with a pinch of salt. There are simply too many variables which require a future prediction for your value calculation have a chance of being accurate at all. First you have predict future dividends. Second, you have to know future interest rates. Even if you are able to plug everything into your spreadsheet, in essence, you are getting an estimate derived from other estimated values. No wonder many analysts cover their tracks and recommend a buy only when the current market price is discounted from this calculated value estimate.

This authors performed a series of regression exercises and concluded that the DDM does not adequately explain what drives investment returns.

An investor is better off relying on a low P/E ratio and a low price/sales ratio to make investment decisions.

The chapter ends with a valuable quote from Paul Samuelson which I am still trying to channel when it comes to my own investment portfolio. The quote goes like this," I prefer paradigms that combine plausible Newtonian theories with observed Baconian facts. But never would I refuse to houseroom to a sturdy fact just because it is a bastard without a name and a parental model. "

The Singaporeans you will meet in the Economy of the Future.

Perhaps it is time for a semi-serious look into the four kinds of Singaporeans you will meet in the future. 

I call this is new 4P model of the Economy of the Future.

a) Prince / Princess

You will find Princes in those schools along Bukit Timah Road that offer the New Age International Baccalaureate syllabus because only rich people can buy a ticket out of taking the A levels. 

The Future Economy is the oyster of the Prince. Someone who was born in a family where their parents has amassed plenty of capital while there were still stable jobs. 

As labour becomes replaced with automation, capital which flows into companies which harness the technology to produce the marvels of innovation allows capital owners to attain a level of wealth and financial independence which would be very much better than whatever model we have today. 

The stewards of such immense wealth in the future are the Princes.

b) Polymath  

The future economy is all about training, attaining breadth, and plumbing the depth in multiple fields of knowledge so that a person can adapt to all forms of technological disruption. First the economy will demand T-shaped professionals, then it will not be enough. We will need those who are "pi" shaped. Soon only a #-shaped professional will be able to get a decent job.  

Unfortunately, only a very tiny and elite group of citizens can attain the title of Polymath. Someone comfortable with the Liberal Arts and hardcore sciences to become a force for disruption rather than a victim. 

Only the Polymath will have stable jobs in the future, and they will be very well paid. In spite of the relative stability of such jobs, a Polymath will have a new jobs scope every few years.

As a Polymath becomes older, he needs to scales vertically and horizontally to survive in the future economy. 

Failing which he joins the masses as...

c) Peasant

The CFE report does not really address what happens to peasants in the future. I would rather think that if I were in charge, I would say that Singapore needs to start conducting feasibility studies on a basic income which pays off $200 - $400 from cradle to grave without any conditions. This is not for actual implementation but for the event that automation and AI destroys jobs faster than we can create them.

How should peasants live ? 

Will unqualified men be permanently tied to the gig economy and find entertainment in virtual games which by then will increase in levels of sophistication so they lead blissful matrix-like lives ? 

Will attractive peasants become tied to just a few Polymaths and Princes via a systems of irrevocable trusts to maintain the semblance of a new clan-like family structure.

Nevertheless, it does not look good for Peasants....

But there is worse...

d) Prostitute

It does not take a stretch to figure out that perhaps some people may not not want to fuck a chunk of metal no matter how much you enjoyed watching Westworld. One survivor of disruption would be the world's oldest profession.

Depending on how cynical you are, you might also realise that suckers are still born every minute so the folks who hustle, work in sales might fall into this category if you bother to broaden this category. 

I will not live long to see the future economy. But I will be making choices to the best of my ability to allow my children to either qualify as Princes or Polymaths when every single task in the Singapore economy gets automated away.

Have you read the CFE report ?

What will you do and where will you be in the future ? 

 

CFE post : How SMU can fit into the future economy.

Yay ! Mid-terms are over.

Today, I wanted to combine several posts into one.

Of recent note, SMU has been on the radar of social media as of late. Exchange student Kerry Dwyer has written very candid comments about her SMU and Singapore experience here. In a mid-term party which was conducted by my JD pals yesterday,  my foreign classmates felt more inclined to agree with Kerry. There are clearly some issues with SMU.

Now I tried to get as much information on the Committee on the Future Economy (CFE) study and, like everybody else, I was unable to find anything unique or special about this report. What I did detect is the overwhelming use of the word "innovation".

Right now, based on my three years spent in SMU as a law student in the JD program, I do not think that SMU is fully aligned with the CFE's innovation drive. We obviously have the physical infrastructure to make it happen, but one of the biggest impediments to make it happen is our lack of software.

SMU students, and this includes myself, simply cannot shake away the Tyranny of the GPA.

The need for high GPAs are real. A cum laude is more valuable by $500 a month than a normal pass degree. Higher GPAs also grant access to objectively better companies and this is natural - HR departments don't want to waste their time interviewing so many students so find ways to keep their selection pool to those with better grades which immensely unfair to students with more average grades but an interesting CCA record.

Instead of whining about the problem, I can think of several really immediate and actionable solutions to make the SMU experience better for folks like Kerry Dwyer and align SMU towards the future economy.

a) Make GPAs invisible

This is not a suggestion to eliminate the GPA. GPAs which are invisible still allow students to be sorted according with their performance. Having visible GPAs have the effect of making our industries apply for shortcuts in their hiring practices. If GPAs are invisible, companies will have to make a decision by visual inspection of grades followed by an evaluation of CCAs. This way students are not reduced to a single number.

Elites may hate this idea but 20 years ago, we never a GPA and the industry did fine.

b) Have only two degree classifications Pass and Merit Scholar.

After making GPAs invisible, it is better to simply identify the top 10% cohort and give them some sort of Merit rating. Students can spend their time pursuing what interests them instead of trying to get a better honors classification.

This is definitely better than just treating us like grades of Kobe beef. The Harvard Business School MBA gives out a pass or a Baker Scholar designation, so once again this is not something new.

c) Give students the option of converting subjects to a pass/fail grade.

This is a pet peeve of mine because I think I just ruined my degree classification picking subjects which add value to my investing skills.

Students, when choosing electives, we are faced with a difficult choice when deciding which electives to pursue. Many students are forced to choose subjects which promise a fair grade or less work to maintain good GPA. This creates a perverse incentive to focus on their strengths. An economics H3 student will feel pressured to take an economics and law module because he gets to stick to his comfort zone. Conversely, if you choose subjects which are taught by great lecturer who have a rigorous approach to their curriculum, you can be penalised even though objectively you would have learnt more during the semester. Lecturers who wish to remain popular may also start to inflate the grades they give out or make the curriculum lighter to maintain their course's relevance.

One good workaround is to always allow students the option to waive away grading requirements for perhaps just two electives in their degree program. This way, students are safe to take up subjects like "Quantum mechanics, general relativity and the Law" without impacting their GPA. The beneficiaries of this approach is very likely the Computer Science courses where there are high-risk classes on writing new apps which could mean an A+ or an F grade.

d) Allow groups of any size in group work.

Group work is a bugbear for many of us because they have a serious impact on grades.

Local students do not discriminate or hate foreign students. They avoid them because foreign students do not come from a perverse culture where GPA determines the fate of your entire life and will not put in what local students perceive as a fair share in group presentations. The other issue is that there are students who are so objectively bad that no one will form a group with them.

It is manifestly unfair to force students to take them in because it penalises their grades as well.

One solution is to simply allow groups of variable sizes with a limit of perhaps 8 students. Students know how to sort themselves out and form groups which optimise their capabilities and that grades should account for the number of people chosen in a team.

This way, the untouchable student can work alone and be graded fairly.

Collectively, my suggestions will not make students innovative overnight, but it certainly removes the impediments which allow students to take a chance and expand their horizons. It would also certainly reduce the odds of the University experience scarring exchange students so badly, they put up a B grade essay in condemnation to our approach which has so far, made us one of the largest GDP per capita nations in the world.

Equity Management #2 : What strategies are the real deal when investing in stocks ?

[ This article is based on Chapter 3 of Equity Management by Jacobs and Levy ]

It is not easy to tell who is the real deal when they about investing in equities and who is merely making up a story on a good investment strategy ?

The really smart quants have a decent answer : Disentanglement.

When we say that a low P/E strategy produces returns which are above average compared to the rest of the markets, this concept of P/E is entangled with many other value measures. If lower P/E stocks also tend to be smaller companies, then it may well be said that the outperformance was attributed to smaller companies rather than the low P/E strategy itself.

Do deal with this problem,  the quants will employ a mathematical process to disentangle P/E from the effect of small companies. One possible approach would be to divide companies into buckets of differing market capitalisation and then choose the low P/E stocks from each bucket to see how they perform rather than just buying the lowest P/E stocks from the market.

The results of disentanglement enables us to answer who is the real deal when they talk about equity investing.

Based on market data, only a few strategies work after disentanglement.

a) Low P/E : Generally speaking investing in low P/E stocks tend to work.
b) Small size : Smaller sized companies tend to do well.
c) Sales/Price : Higher sales to price seems to work as well.
d) Analyst Estimates tend to be useful within one month from publication.
e) Residual Reversal

Residual reversal deserves some additional mention. To employ this strategy, look at stocks over the past month and buy the stock which has declined the most and sell the counters which gained the most. It seems that this strategy is fairly effective as well but I have yet to back test this on Bloomberg. Executing this strategy seems cheap and easy as you only need a copy of Share Investor magazine to get the job done.

The above information gives hints to investors who wish to build  starting screen to pick the best stock to buy in the market.

What does this mean for yield investors like myself who find that our favourite strategy show little promise after the process of disentanglement ? The first thing to note is that such studies are done in the US where dividends taxation is high compared to capital gains tax.

Beyond this, yield strategies may still outperform because they also employ low P/E stock counters. If a company has a payout ratio within 100% and yields 8%, you are effectively capping your P/E to less than 12.5.

At the end of the day, intermediate income investors need to get off their high horse and see dividend payments as part of lifestyle design rather than a direct attempt to outsmart the markets. They are, in effect, making the extra returns from low P/E counters.

Valentine's Day : A Celebration of the Ordinary and of Loneliness.

This Valentine's Day is a good one for internal reflection.

I had morning classes and had front seat rows to observe LLB Law students celebrate the event and was unsurprisingly underwhelmed. A few classmates for cookies and flowers but otherwise VD was a sombre affair in law school. This is not particularly different from engineering school, which is the modern functional equivalent of a monastery on campuses Singapore wide.  This week, law students are too busy preparing for mid-terms this week and many of my classmates have bigger problems on their minds like getting a training contract and coping with the downturn in the sector.

As for myself, my Valentine's day plans got torpedoed by my daughter who insisted that every romantic meal between mum and dad must be eaten at McDonalds. Me and my wife ended up eating burgers with each other on Valentine's Day. We did not even managed to eat the cheese cake my daughter chose from the neighbourhood confectionary because she fell asleep once she got home.

When you look back in your 40s, you will realise that VD is not so much a celebration of love and soppiness as presented but that of ordinariness and sometimes loneliness for most of us. Most couples date for only a couple of years before they get married and have kids. If you give about 5-8 years of formal VD celebrations, that's less than 15% of a person's lifespan.  The bulk of Valentine's Day is actually about living an ordinary life and the rest of it is about loneliness.

For many singles, VD is a day to hide from social media. Without knowing that they are in fact a majority online, it must be quite harrowing to see so much pink on Facebook. If you combine Valentine's Day with the effect of dating advice from gurus, books on relationships, old bulletin board systems like nus.talk.romance where I used to do most of my trolling before I discovered the importance of money, it is all about loneliness and whether it is better to cope with it or fight it aggressively.

Once you are a single who has figured out that Valentine's Day is all about loneliness, then half the battle is won. Mark Manson writes a hugely popular blog and has a great book called The Subtle Art of Not Giving A Fuck. 

Amongst the singles and the love-lorn, there is a distinction between even singles who cope with loneliness on a daily basis.

If you look at my LLB classmates, they don't give a flying fuck about Valentine's Day or loneliness for that matter, they give a huge fuck about the bigger goal of building a long term professional career.

We may have to distinguish my classmates from singles who don't give a fuck about loneliness but have yet to find something greater to give a fuck to. That's still easy to achieve. This blog suggests financial independence.

And then there are those who do give a fuck about VD, refuse to admit it, and then decide to take cover from all that soppiness online, but then tell everyone they don't give a fuck about VD. These guys have to accept that Valentine's Day is recurring (like herpes ) and comes every year. As a general principal, loneliness will not leave you alone if you give it any fucks in your daily life.

The folks who reflect upon themselves and decide that thy do give a fuck about loneliness can take this day as a day to start acting as if they give a fuck.

This is a good state to be in because it opens a person up to examine their flaws and how they can make themselves a better person to deal with that loneliness.

Quick Personal Update : End of CNY

Just like that CNY is over. I am hunkering down for a week of 3 mid-term exams and my blogging will slow over the next few days.

a) Personal Finances

It has been quite good for the past few weeks for income investors. We should be expecting juicy pay-offs at the end of this month and, in spite of every negative thing that has been said about Trump, his approach towards the fiduciary rule and Dodd Frank is creating some sort of rally in the markets. At the rate the rate things are going, I might actually be ahead compared to my last day of paid employment with law school with three years of expenses hardly making a dent to my total capital size.

( This is mainly because I have managed to sock away some small dividends reinvestments over the past three years. )

Some months ago,  some friend asked me why I supported Trump because his election would hurt me financially the most because he is anti-globalization. My reply is that we don't really know what Trump means for the financial markets. It takes quite a lot to be able to predict what an incoming US President can do for a 40 plus stock Singapore portfolio.

At that time, I argued that in spite of my own personal wishes, Trump might not even be elected. Even if elected, checks and balances may stop him from executing his priorities, Even if Trump gets his way, the effect on my financial portfolio is unknown. We don't even know how long he can remain elected and the length of my investment horizon might not make the election consequential at all.

Right now, the financial markets have vindicated all my investment choices so far and we are winning BIG.

Bigger if you consider that I was never very bullish on Telcos in the first place and they are not doing all that hot recently. I don't even have an objective reason to hate Telcos, I just think that every conventional yield investor will turn to them for help which makes them really unattractive as yield instruments.

But I should remind myself that a market can reverse itself rather suddenly.

Somewhat disappointing is that I liquidated my Ethereum holdings at a negligible profit to create some liquidity for the Chinese New Year only to see it go up slightly. Perhaps I can get back in later before April.

b) Law School

I am prepared for the worse this semester because I was teetering around 3.4 GPA and have a decent chance of losing a good cum laude classification. Apparently I took up some really hardcore subjects this semester because I wanted to pick up skills in M&A and Insolvency because the material may improve my investing skills. While grading for these classes are harsh, the material was taught quite well and I was enjoying the practical aspects of it.

My only consolidation is that now I already have a foot in the door for a firm and grades will matter less after some years of practice.

Hopefully.

c) Books I am reading

There are too many good options when it comes to my extra-curricular readings. I was shifting between two really powerful books.

The Subtle Art of Not Giving a F*ck by Mark Manson is something I will definitely blog about because it presents a lot of basic self-help ideas in a harsh tone which I really like !

The other book being Algorithms to Live By by Brian Christian which is a harder read but has really nifty ideas to apply algorithms to live normal productive lives.

Of course, the report by the Committee of the Future Economy is now a big distraction in the news. I feel an obligation to go through the 170+ page report and figure out what this means for readers.

Unfortunately, I only have so much spare time.

Anyway, so far the Year of the Rooster has been a good one.

Equity Management #1 : Ten investment insights which matter

I thought I should look for a more advanced book after reviewing Tim Feriss' Tools for Titans and have settle on Jacobs and Levy's Equity Management which I doubt anyone would read because it is quite an advanced guide and looks like a huge brick. The way I'm going to cover this book is going to be slower, with about one article a week.

This book is, upon inspection, quite difficult to understand but still considered way easier than Benjamin Graham's Security Analysis.

Today I am just going to give everyone a snippet of Chapter 1 which is entitled Ten Investment Insights which matter. 

I will try to summarise each insight into a sentence for a start :

a) The Stock Market is a complex system - The stock market is essentially random but it has a web of return regularities in the form of market anomalies so it cannot be characterised simply as a random or predictable system at all.

b) Market complexity can be exploited with a rich multidimensional model - The more predictors you build to forecast returns, the bigger your informational advantage.

c) Return-predictor relationships should be disentangled - Low P/E needs to be disentangled from the small firm effect because most low P/E firms are small companies.

d) An investment firm should abide by the law of one alpha - Your value strategy may buy a stock which your momentum strategy wants to short. 

e) The investment process should be dynamic and transparent - Tight risk control is bad for returns.

f) Customised, integrated process preserves insights - When you try to optimise your portfolio, don't forget to include costs in your model.

g) Integrated long-short optimization can provide enhanced returns and risk control for market neutral and 130-30 portfolios - Nobody in the financial blogosphere pairs their long positions with a short position to capture alphas. One of us should try this one day.

h) Alpha from security selection can be transported to any class - Basically it means that if your long-short positions generate alpha returns, they can be paired with a long position in the permanent portfolio for a boost to your returns.

i) Portfolio optimization should take into account an investor's aversion to leverage - The CFA program uses the mean-variance optimization to control leverage. This is not cool anymore.

j) Beware of risk-shiifting, free lunches and irrational markets - Mostly about LTCM.

As you can see, this is fairly complicated box and targetted at professionals.

Let's see where this journey over 39 chapters will take us. 

Chinese New Year as Life Audit.

Today is the 7th day of Chinese New Year and I would to talk about family visits between relatives.

Exchanging notes with my younger classmates, the culture of probing relatives who ask about school performance and marital status is currently alive and well in Chinese New Year and it has created a considerable amount of angst amongst Singaporean Chinese, particularly unmarried women. The psychic damage from the pressure to find a boyfriend has created a new market for paid actors to play the role of a boyfriend.

The views about this aspect of Chinese New Year also varies amongst some of my classmates. My classmates, especially those who perform rather well academically, argue persuasively that this culture is the reason why Singapore is world-class, the system elevates the successful and shames the people who do not conform to what a Chinese family would consider a success.  My classmates who came from foreign universities think that people should simply ignore the custom completely and just get on with their lives.

I believe that there is a balanced approach towards Chinese New Year.

Therefore, I am suggesting that people simply treat Chinese New Year as a Life Audit.

It might be useful to simply reframe the nosy relatives who come into your home are basically auditors that you willingly invite to probe for areas of improvement in your lives.

For a start, you might not do that well in an audit when you are younger, prior to entering a top-5 JC, I was just an ordinary student in a government school. Well-meaning uncles will enquire about my schoolwork and even criticise some of my career choices and aspirations.

After I turned my life around in University, questions on academics stopped and was replaced with questions on my dating status. The questions then moved from marriage to children and subsequently, and rather unreasonably, to male children.

Appearing in the Straits Times was a great way of getting the auditors off my back for a year or two. But there was a gap between me quitting my job and living on my investments and getting accepted into law school, then sensing an weakness, the auditors wanted to enquire more on whether I can cope with the fast paced tech industry.  Entering law school at 40 invited more curiosity and I knew that people are not so willing to probe you once you get to this stage.

Overall, this year was a relative good year.

My mum told me that some relatives are making enquiries and showing some concern on the sluggish legal sector. Fortunately, I scored a small internship after close to a three year struggle. I doubt I will "spared" if I had to rejoin the IT sector. And there will be queries on my HbA1c readings which is my only weakness this entire year. Otherwise, it was pretty good when I uploaded a picture of my family with parents, kids and all to a family Whatsapp group and was rewarded with almost complete "radio" silence.

We passed audit !

Of course, as human beings, not everyone will make it in a Life Audit.

Particularly severe outcomes can arise if somebody does not conform to heterosexual norms, gets a divorce, commits adultery, becomes bankrupt, goes to jail or has a child out of wedlock. Less severe audit results can come from a stint in ITE or making less than $3770 a month ( median income in 2014 ).

In anticipation of a nasty audit outcome, a lot of young people just leave the country to avoid probing relatives.

Reframing the entire exercise as a Life Audit creates a balanced outcome.

For me, if an auditor shows up, I talk and engage them pleasantly, I don't hide. I make sure that there is a paper trail ( a healthy baby boy is particular good in this regard ) and evidence of the successes over the past year.

No one escapes an audit without at least some areas of improvement and they might well be areas you may wish to look into. In some cases where the findings have high severity, you have to decide whether corrective action is even possible.

At the end of the day, there is a fundamental difference between a CNY audit and a compliance audit. IN CNY, life audits are bilateral. 

If an auditor goes to far, do have some probing questions of your own.

You are an auditor too !

Channel 8 Rant : Why be a Good man when you can be a Great man !

A Happy New Year to all the readers of this blog.

I've been silent this new year prior to writing this article because I don't really have any mind-blowing content today having initially wanted to talk about elitism, hubris and exclusivity of law schools but that's only useful for a small segment of my readership and not really consistent with the festive mood this week.

And then, a couple of minutes ago, a good friend sent me this link to this awesome rant about being a Good Man in Singapore.

You can follow it here.

I must say that Ch 8 programming will be quite good if it can channel the frustrations of the Singapore heartlander. So let's hope that Mediacorp keeps up the good work !

This link has Ch 8 actor Jeremy Chan talking about what it takes to be a good man in Singapore. Upon reflection, Jeremy Chan comes to the conclusion that life is too short and meaningless to be a good man in Singapore.

I think Jeremy Chan's character is, by design,  too smart for his own good.

I'm going to offer an alternative for readers and propose the path of the "Great Man". Someone who can lead a superior life compared a Good man. If Friedrich Nietzche has his Ubermensch, at least readers of this blog has the idea of a Great Man which is derived from Jeremy Chan's idea of a Good man.

a) A Great Man makes $3,300 as a graduate and that's not counting overtime.

In the video clip, Jeremy claims that a good degree produces a salary of $3,000. The actual number is around $3,300 based on actual statistics of local graduates, this $300 difference can be critical when we look at the savings component later on.

b) A Great man minimises his non-discretionary expenses because they do not define him as a person.

The video does not accurately portray the spending of a great man who actively optimises his expenses. While it is correct that Great man eats at hawker centres or food courts and spends about $6-$7 a meal, transport can be capped at $120 using a transport concession pass for adults so that's at least another $180 of savings every month.

c) A Great Man saves his increments, bonuses and overtime.

Jeremy Chan's character then misses two important components of salary of a man in his 20s and 30s. Firstly, that some graduates do get overtime pay (more if some young worker actually gives tuition on weekends ). Secondly, a graduate gets bonuses. And thirdly, a graduate worth his salt can get 8-12% increments for at least the first 5 years of his working life.

With these three components, a Great man can learn a thing or two from the Budget babe who can achieve $30,000 savings perhaps during the second year of work.

d) A Great Man can invest his savings creating wealth which snow balls.

I keep harping about $300,000 portfolio yielding 8%, but suppose this Great Man invests it in equities, he can expect about 8.5% on average over the long term, this means that the following year, his investments can further defray $2550 of his expenses. If he spends $1,500 per month, this will defray close to 15% of his annual expenses the following year, which let's him save even more money after that.

e) A Great Man constantly upgrades himself.

Between doing overtime and giving tuition, the great man will eventually realise that his skills are really fading fast even as he is gainfully employed sometime in Year 5. There will be opportunities to find jobs which pay a huge premium for someone with the right skills. A Great Man will then making tactical moves to obtain these skills which will be a lot cheaper to achieve these days than during my time. These days, the government gives $500 Skills Future credits and Coursera and Udacity has drastically lowered the bar for anyone wishing to obtain new and marketable tech skills.

For me during the bad old days, there were the CFA and MSCE IT certifications but these days it can be the Data Science Specialisation from John Hopkins or the highly marketable INSEAD MBA.

f) The Great Man pushes family formation and dating all the way to the back of the queue.

Between managing a career, moonlighting, and upgrading skills constantly, something has to give because the Great Man is not a Superman.

What the great man gives up is early family formation and dating.

The optimal approach to dating has always been the solution to the secretary problem developed by computer scientists. If the Great Man gives himself 15 years to settle down starting from age 25, he does not have to commit seriously to a relationship until he is 31 (1/e or 37% of his 15 years duration).

g) What does the Great Man do to entertain himself ?

Does all work and no play makes the Great Man a dull boy ?

Here's the politically incorrect nub of the issue - for fun, the Great Man does exactly the same thing as any other men. When social scientists studied unemployed men without degree qualifications, 18-30 hours of computer gaming a week leads to a life of unusually high personal satisfaction. There is nothing preventing a Great Man from doing what simply works to keep himself entertained.

Just resist the temptation of buying virtual goods.

The only difference is that a Great Man should hang out with other Great men and never game while upgrading priorities have yet been met.

h) So what is not guaranteed when you do become a Great Man ?

Carrie Wong is not a guaranteed reward for a Great Man.

You might need to become a Ridiculously Unreasonable and Successful Man for that.

Explaining how to become one is the job for a different kind of blogger.

Modern trends in self-help and personal improvement

I started reading self-help books sometime during my JC years, quite a while before Robert Kiyosaki incited me to really take possession of my personal financial destiny.

The self-help fare in those days are divided along the lines of the personality ethic books by Dale Carnegie and the character ethic books championed by Stephen Covey. Along the way, Anthony Robbins became a huge motivational superstar and Neuro Linguistics Programming start to take off. I, too, was also swept up by the trend of going really far to read the books written by NLP founder Richard Bandler and John Grinder.

As the effort to wind-down on my summary on Tools for Titans, it might be useful to share some trends I noticed looking at some of the more contemporary trends in self help.

a) Buddha and Confucius - Rise of Eastern Philosophy

Maybe it's because of the economic rise of China, the West has become enamoured with all things Oriental. A module on Confucius has become the third most popular course in Harvard university. There is also this very strange but pervasive trend of successful folks from Silicon Valley who practice some form of meditation reported in Tools for Titans.

I bet you can expect a lot of self-help to channel Buddhism moving forward with one or two works on the fringe which talks about Legalism or Mohism in the future.

b) Return of Stoicism - Resilience becoming a panacea to everyone's problems

You can't emerge from Kinokuniya without seeing quite a few books on Grit or Resilience. Another observation is the rise of Stoic philosophy, which asserts  that you can control how to respond to any stimulus. There is a branch of psychology which grew from this philosophy as well (Cognitive Behavioural Therapy).

While I don't disagree with the studies, I am curious as to how much should a person "tarhan" before throwing in the towel. Do you really want to stick to reporting to a bad manager when there are better opportunities somewhere else ? Where do you draw the line ?

The problem with resilience is that too little is known of gritty people who have failed in their lives. Do overly resilient end up sticking so hard to an impossible mission that they destroy their lives in the process ? This is an important question to ask when facing raving fans of the Resilience movement.

c) Carol Dweck's Growth Mindset versus Fixed Mindset

If you have not become sick of Carol Dweck's idea of growth mindset trumping over the fixed mindset, expect this idea to become even more dominant when AI starts destroying white collar jobs and people find that they need to pick up new skills to remain employable.

The basic idea is that our brains are malleable. If we put in the time and effort to do something well, we can grow to become better at it over time. It explains why ordinary students who believe that they can do better can trump gifted students who believe that their talents are fixed.

I expect life coaches to be channeling a variant of this approach to get clients to break out of their comfort zones.

d) Scott Adams - Systems as a superior alternative to goals

The emergence of systems as something superior to goals is a result of the tedium of seeing people proclaim their SMART goals without doing anything substantial to achieve it.

A goal is an outcome but a system has to be acted upon.

Gamification is a system. Exercising in a Gym is a system. Setting aside money to invest for dividends is also a system.

I can imagine many self-help books in the future proposing many systems to assist in areas like personal finance or dieting.

See if you can identify a major trend

My list is definitely not collectively exhaustive. If you can find another general direction within the field of self-improvement, do share with me on this blog.