The Model Thinker #15 : Lyapunov functions and equilibria.

I don't really want to get to the mathematical derivation of Lyapunov functions but they are a class of equations that allow us to predict whether a process will reach a state of equilibrium.

One example of how a Lyapunov function be used in a real world situation is to model a Race to the Bottom situation.

Imagine a game where governments get to set the amount of investment taxation. The heuristic to  set these taxes is to set it at 90% of the average of what other countries are setting last year so as to attract a larger share of investments from other countries. Over time, this game becomes a race to the bottom where the only equilibrium state is when every country imposes close to zero taxation.

This was probably what went around policy maker's head when they tried turning our local stock exchange into a REIT hub. To attract other countries to their their real-estate assets in Singapore, we simply make it as tax free as possible.

Even better for local investors, to maintain our position as one of the best places to launch REIT products, our government extended this tax break until 2025, ensuring that one of the conditions of a Perfect Storm for REIT investors would not manifest for another 5 years.

This game of race to the bottom to attract foreign listings is the reason why these tax breaks are likely to stay beyond 2025. The only way this can be taken away is when the Singapore voters gets so upset with inequality here that they make the ruling government lose another GRC. This is not likely the situation right now since the number of foreign workers is now under strict control.

But in the grander scheme of things, REITs democratise ownership of commercial property allowing someone to own a mall with less than $1,000, how can this play such a big role in generating inequality in Singapore ? Passive income from REITs are a lifeline to many retirees here.

I think a better move would be to remove legacy admissions from Primary schools and bring down the Special Apartheid Plan or SAP schools in Singapore.

Nothing disgusts me more than seeing virtue-signalling liberals entrenching a good life for their children by securing the best seats in  the schools along Bukit Timah road.

The Twin Arrogances in Investing.

Initially I wanted to just provide a personal update today, but tragedy has befallen my mother's side of the family and, over the next few days I will be hanging out with my my dad while my mum goes to Johor to pay her last respects to her youngest brother.

The other thing is that Kyith of Investment Moats wrote a really objective article on leverage that you can find here. I strongly recommend that you read it to get under the hood of how most leverage strategies work. I this the article is sufficiently well-written such that a public rebuttal is unnecessary, any specifics on why my method works is something I can only discuss with my students behind a pay wall. Given how polarising leveraged investing is, I do appreciate that it must be damn hard to write a balanced article like what Kyith has done.

Nevertheless, I just want to add to the discussion something about the Twin Arrogances in Investing.

a) The Arrogance of Superior Asset Allocation

The first arrogance of an investor is that belief that he is a superior at allocating assets. If you think that markets are bullish, you tilt a portfolio towards more equities and less bonds. If market are indeed bullish, you will outperform someone who has a larger allocation in bonds. If markets are bearish, you will underperform.

Promoting leverage falls into this category of arrogance and hubris. When you have a normal portfolio, you may be 70:30 in equity:bonds. When you are leveraged we typically go 120:-20 or even as extreme as 200:-100.

Interestingly the "girly men" who stick to a warchest also fall into this category. They may go 50:0 because the right hand side is largely stuck in cash. So if their superior portfolio returns 20%, they only generate 10% over their entire portfolio. A lot of folks only count the returns of their equity portfolio and fail to account for their cash drag which next to zilch while waiting for their next big bet.

Be wary of pornographic numbers displayed on other blogs.

b) The Arrogance of Superior Security Selection.

The second arrogance is superior security selection. It is this idea that by spending more time to assess a stock, you will be able to pick a portfolio that provides superior performance. When we do quantitative backtesting, we also have to be careful of this belief that models will retain its usefulness over time.

If we all have infinite time to investigate every stock, then it may be better to go after superior security selection. The problem is that as we put in more time, we also get diminishing returns. Worse, time spent becomes a sunk cost and many value investors get fixated on specific stock counters. I have witnessed so many investors get trapped into just looking at a few stocks and for years, these counters never go anywhere close to their intrinsic value.

Let me share an "almost embarrassing" example made by me and my own students.

In the last class, my students were sent to investigate Cache Logistic Trust. After a review on analysts reports, they concluded that Cache should be thrown out, citing declining cash flows as the reason. Cache was 75 cts at that time. I was uncomfortable about Cache being 75cts as well so I was too pleased with their findings to argue with them.

Immediately after I built my portfolio with training fees, the CWT default occured and Cache crashed to 71.5cts, then all the online armchair theorists starting screaming about Cache's exposure to CWT which was estimated at 20%-30% at that time. So the 3-6 pairs of eyeballs went to read reports written by paid professionals (often CFAs) did not even clearly flag the CWT default risk even once. One report in January even cited CWT lease expiring as a risk.

It did not stop at my students. The armchair theorists also missed out the real exposure to CWT which was reduced to 16% after a clarification from the REIT that evening.

I think as retail investors we overestimate our ability to do the the deep investigation that even professionals struggle to do.  I'd fully admit that even with 30-50 brains in every class, a collection of analyst reports written by an Army of CFAs, my class makes a lot of mistakes rejecting stocks from the portfolio (which I record them all to teach future classes). We still do it in principle because one batch of students rejected all 3 stocks correctly (possibly by luck) and made 40+% returns in about 4 months.

The question of Asset Allocation and Stock Selection is, of course, an aged old debate that CFA candidates study. At least over a decade ago, the verdict is that asset allocation matters more in portfolio performance than stock selection.

I think on balance, we still need to guard against the hubris of thinking that we are fantastic asset allocators. I have always maintained that leverage is something Millenials and Gen Z HAVE TO DO because they face such short career trajectories before they have enter the cycle of retaining and retrenchment that will cripple their lives in their 30s and 40s. If someone wants to critique my methodology, you should provide a template to give a young 20-something a career that lasts at least 15 years which was about how long I took to retire WITHOUT LEVERAGE.

Actually, I'd rather my students avoid taking the risk of a margin call but I bet even the PAP government does not have a solution.

No government in the world has one right now.

Anyway, my student are sitting on fairly massive gains so far, so they should be reminded that a lot of superior performance comes from leverage and this will soon reverse itself if REIT markets go south.

WINTER IS NOT COMING FOR LEVERAGE INVESTORS.

WINTER IS ALREADY HERE.

YOU  HAVE SIMPLY CHOSEN TO LAUGH AND MAKE SNOWMEN INSTEAD.

Life Narratives

It is only when you start becoming a trainer when you start to realise the importance of narratives. 

A good narrative is where my biggest disadvantage lies. 

I don't have a good Cinderella story - it is public knowledge that I grew up on landed property. Unlike many motivational gurus and some financial advisors who want to rely on sob story to churn sales, I never had to experience my home electricity being cut off and neither was I forced to dumpster dive when I was a kid because my dad gambled away all my bursaries. The lack of a good narrative, unfortunately can,  can create some kind of gap between me and potential customers. 

Worse, I cannot rely on the excuse that I do not come from a rich family to explain why I am not a deca-millionaire yet. Also, all my problems are "first world problems". Describing issues I face will always risk being recast as whining. 

( In fact, I will readily admit that I am not a deca-millionaire because I have some personal flaw that cannot be blamed on other people. Yeap, it's my bad ! )

Anyway, here are two nice narratives you can have :

a) The Conan Narrative

Would make a nice ITE ad

Conan was barely a thief and brigand until he rose through the ranks to become the Destroyer and King. This is a classic rags to riches story. The best narratives in Singapore follow the Conan storyline can sound like this : 

• You are first condemned by the education system and wind up in ITE/Poly/Private university. 
• Then you refused to submit to the labels from everyone around you making you a Byronic superhero entrepreneur. 
• Then you get into MLM/Internet Marketing/ Insurance sales/Value investing/Forex.
• Everyone rejects you, but you strive forwards backed by the power of FAMILY and TEAMWORK.
• You eat what you kill.
• Then you become a millionaire. 
• Then you have drive a nice Lamborghini.
• You are a winner. If the reader wants to be a winner, he buys something from you or pays for your course. Then they can be winners too !

b) The Elric Narrative

Elric of Melnibone is one of the Eternal Champions created by author Michael Moorcock. Elric is an Albino prince and through a series of tragic events, becomes manipulated by his sword Stormbringer to being an end to the current world so that a new world can be born.

Elric is the opposite of Conan. It is a story of how the mighty can fall and in return regain a sense of humanity at the end of the story arc. An Elric story in Singapore can look like this :

• You are identified as being gifted when you are young child being able to read Russian Literature or solve the Byzantine General's problem at age 6.
• As you get older, you start to rebel against the authorities because they won't let you do English Literature and Art History. Your parents say : either study Engineering, Medicine or Law or be forever branded as a disgrace to your family. 
• Being unable to study the subjects you like, you start taking drugs and engaging in premarital sex.
• Your grades begin to suffer.
• You are forced to study for O levels despite being an RI student. Your final O level aggregate is divisible by 32.
• You get kicked out of the Golden Road and end up in a Polytechnic.
• Relatives, waiting decades to pounce on your insufferable parents, have their day laughing at your academic fall on Chinese New Year.
• By this time, now no one cares whether you read English Literature or not. Your folks are too afraid of you committing suicide.
• Now you can finally study English Literature in some overseas 3rd Tier British Metropolitan university.
• Today you give talks on New Age Therapy to help sexual abuse victim debunk common narratives in Singapore.
• Today you are happy and centred, fully in control of your own being.
• Sign up for your program to erase the pain of the past and Rise like a Phoenix !

Two narratives. One about a rise from the ashes. One about fall from great heights. Both immensely profitable from a trainer's perspective. 

What lesson is there for investors ?

One possibility is this :

Either apply for leverage and hope for a big rise or short CFDs hoping for a massive fall.

Go loud, go big or go home.

While I will not question stable investment strategies, I can question the manhood of some folks who get excited over endowments that give north of 2% but take liquidity away for 3 years.

Yes, there are wusses who hold a massive war-chest and missed out on the recent REIT Rally. Yeah, the girlie men who get an orgasm and finger themselves because Singapore Savings Bonds return 2.1+% to investors. 

They lack a narrative because they can neither win nor lose.

Why do I write a blog article to make fun of them ?

Simple.

I have balls. They don't.

Here's to all fans of the Game of Thrones Season 8 !

The Model Thinker #14 : Local Interaction Models

Today's installation is so abstract that I will just describe two local interaction models.

First the Local Majority Model :

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1	2	3
4	C	5
6	7	8

Each cell in a two-dimensional square can be in two states : White or Black. In each period, one cell is chosen. If a cell is chosen it will adopt a new state if five or more of its neighbours are in that state, otherwise it maintains it current state.

If we allow this Local Majority Model to run over a canvas of Black and White Squares, we will eventually have patches of Black and White like a Holstein Cow.



The moral of the story is that where local coordination takes place, the global configuration would be patchy and diverse. This model explains animal hides like that of the zebra.

The Game of Life is more complicated. Suppose we play by these two rules instead and refreshed each cell every period :

Life Rule : A black cell with exactly three white cells turns white.
Dead Rule : A white cell with fewer than two or more than three white neighbours die and turn black.

Depending on the initial arrangement of white and black squares, we will get equilibrium, moving or complex arrangement of black cells. This shows that by just a few simple rules, highly complex functions may result.



This would be fun if I were still a Computing A level student and programming in Pascal.

But right now, I have no idea how to make this relevant for investors.

Maybe a reader can do some Googling and let me know how he would apply this to making money.

What does it take to be Marriage Material in Singapore ?

I think it is about time we update some figures on what it takes to be marriage material in Singapore.

According to evolutionary psychologist David Buss, women across multiple cultures value economic resources, earnings potential and ambition much more than men when selecting their mates. This is why the world is full of examples of rich and powerful old men marrying younger trophy wives but you can hardly find examples of rich, wealthy women marrying athletic and young men.

In fact, evolutionary psychologists are specific enough to say that women desire men to be in the top 70% percentile of earning power compared to male peers.

Getting statistics on this is a little challenging and we will need to get data from different sources and make a series of assumptions before a useful estimate can be derived.

The first source of data is to get household income statistics per member for 2018 which pegged at $3,804. Each household has about 3.3 members in 2018, so we can derive a total household income of $3,804 x 3.3 or $12,553.

Once we reach this stage, we may have to make some assumptions about a typical household to zoom into our data on working folks. One such assumption is that a household has two working members, so a person makes about $12,553 / 2 or $6,276.

Finally, we have to adjust for the gender gap at work. Women draw a salary about 87.5% that of men at work. So we have to adjust the salary again backtracking to $12,533 x (100 / 187.5) or $6,694.

So most guys should gun to order produce a salary of $6,694 including CPF before they can consider themselves marriage material or within 70% of male cohorts.

Of course, just because women desire an earning potential at the top 30% percentile in surveys do not mean that they actually get it in practice, there are only 30% of such men to go by in society today. In practice, women also desire other traits like kindness and generosity in their men.

There are interesting conclusions from this exercise. If you have $1,000,000 but listen to enough bull-crap from commissions sales folks and think that earning 4.75% from an endowment fund is a big bullock cart wheel, that's only $47,500 a year which misses the mark if you think that you can "shake leg" your way to marital bliss. So even a millionaire would need a day job if he listens to the insurance industry and still want to be considered a worthy marriage partner.

The hurdle rate to be taken seriously in the dating game for "shake leg" millionaires is at least 8%, which means that you need to wrack your brains in the investment game to play it well.

Of course, guys are still way luckier than women when it comes to mating game.

Men are a lot more superficial than women. When it comes to selecting women for marriage, they consistently go back to waist to hip ratio of 0.7. Worse, men of all ages prefer dating women aged 27.

Some useful Waist to Hip ratio figures for your consideration.

• Scarlett Johannsson has a WHR of 0.69. 
• Gisele Bundchen has 0.66. 
• Tyra Banks has 0.67

In such a case, you don't need a Bloomberg terminal. 

A measuring tape will do.

If you invest with an aim to "Shake Leg" one day, you will never become a Millionaire.

One of the interesting facet of my work as a trainer is that my work is, at best loosely, coupled with the Dr Wealth Marketing team. This means that I can only at best influence how that team markets my course. Consequently, I do not have the power to dictate what the marketing team does.  if you think about it, this makes a lot of sense given that I know very little about marketing to other people and the Dr Wealth team are pros at what they do.

Naturally, member of the Marketing team read this blog to determine how to pitch their message.

Just the other day, I tried to convince the team that by no means should the words "Shake Leg" appear in the marketing materials promoting my course. Objectively, I suppose "Shake Leg" is a powerful word that is attractive to the team because it is a bastardization of the Hokkien Words "Kio Kar" and it creates this image of not having a care in this world. Using it right can potentially raise the bottom-line.

For me, I actually think that it is quite crass. As my course depends on students who are motivated to get their hands dirty to analyse and read about investments, I can't really count on folks who invest simply for the aim of "shaking leg".

Putting that aside, I do not think that investing in dividends with the aim to shake leg meshes with my brand identity because if I am financially independent enough to "Shake leg", then it does not take a genius to ask why the fuck am I conducting investment courses in the first place ?

There are more rational ways to show that if you invest with the aim to "Shake Leg",  you would not achieve very much more in your lifetime.

If divide the Singaporean household expenses in 2018 by the number of headcount in each household, you will get a number between $1,500 to $1,600 per month. At $1,600 per month, expect to spend $19,200 a year.

For the folks who attended my class last week, we constructed a portfolio what yielded a forward yield of approximately 7.6% per annum unleveraged prior to injecting assets that lowered it's volatility.

So to generate $19,200 a year, you only need $252,631 to cover your basic expenses.

The gap between $252,631 and your first $1,000,000 represents one of the hidden ugly secrets of the FIRE movement that no blogger really likes to talk about. Between $252,631 and $1,000,000, even the best amongst us experience a significant drop in motivation to keep plugging it in the job market, which has become quite toxic of late.

One million dollars is a just a number. You don't really need a million to have your dividends pay for your basic meal and transport expenses, that kind of freedom is already quite sweet and you can FIRE your boss once you get used to living within your passive income.

Another words, you can "shake leg" for amounts way below that of a millionaire.

There are larger societal issues at hand when you design such a powerful financial solution for other people.

• Will a BBFA who can cover all his personal expenses have the motivation to start a family ? 
• Will a successful DINK couple bother having kids given that they can travel four times a year on their passive incomes ?

For me, I just want to use my FI to make a serious dent in the universe and find ways to disrupt this training industry. What truly sparks joy for me is seeing folks confident enough to invest on their own so they can eschew insurance products with a large investment component with subsequent losses in commissions for sales professionals.

Finding ways to motivate people post-FI is, unfortunately, not in my current pay grade.

So if your sole aim of dividends investing is to pay for a monthly VPN subscription  and Porn Hub membership, much power to you. I can only solve the financial component of your life.

Meaning is something you need to figure out for yourself.

The Model Thinker #13 : Path Dependency

Path dependency happens when current events interfere with future events. There are two extreme models of path dependency.

Imagine you have an urn full of white and black balls and you get to draw one at random from the urn.

If, after drawing a ball, you get to add two balls of the same colour drawn back into the urn before you draw again, you end up with the Polya process. The Polya process models the situation where anything can happen. After drawing 1000 balls, the probability that the urn contains 40% white balls is the same as the probability that it contains 5% balls. Interestly, a Polya process should not be confused with a tipping point as the entropy of the process decreases gradually even if the same coloured balls keeps getting drawn.

If the rules are changed such that after drawing a ball from the urn, you introduce two balls of the opposite colour, you get a path dependent process known as the Balancing Process. In the long run the urn converges to 50-50.

I note with much amusement that leveraged REIT investing has been increasingly the subject of discussions in Telegram and Whatsapp discussions and to be fair, my public speeches and masterclass played a humble role in popularising this form of investing.

At this moment, the popularity of leverage REIT investing may be undergoing a Polya process. As more successful investors come on board and talk about making some money from buying leveraged REITs, it will attract more curiosity from the investment community, if this effect is large enough, it may even push REIT markets further north as more and more investors borrow to magnify dividend yields.

Even so, we need to maintain some humility especially in the face of such remarkable gains in the stock market.

There will come a point in time when the Polya process breaks down and the Balancing process takes over. This may happen after a prolonged period of yield compression. At that stage, folks who invest in leveraged REITs investing make less money and start telling other people that it is overrated and maybe they can do something else instead like growth investing in small cap equities instead.

After this, perhaps a whole new era of growth investing in small caps will herald a new age with a new crop of trainers. The adoption of this new strategy then becomes the new Polya process.

When will this reversal happen ? Will my quantitative models be able to detect this inflection point ? Will I be able to pivot my class to deviate from the REIT strategies that made my students a decent amount of money so far ?

I can't answer these questions right now. I am adding a level of flexibility to give my class the chance to vote between an equity or REIT portfolio in June.

Letter to Batch 4 of Early Retirement Masterclass

I just concluded two days of investment training and as part of a custom, I will share my final letter to my students here.

As you can see, there are a fun folks in this particular batch of students :


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Dear Students of Batch 4,

It’s been a great honour and privilege to be able to conduct a 2-Day Early Retirement Workshop for you.

Compared to other batches, this class was highly interactive and very fun to teach. Dr Wealth staff was still traumatised after one of the ways suggested by the class to increase sideline income included “sell backside”.  But for every troll answer in class lies a teachable moment. “Selling backside” may seem funny and irrelevant, but it may also present a commercial activity with an unusually high life-energy exchange.  As such, there are no real bad answers in class, only narrow-minded instructors.

I would like to thanks some students for sharing some valuable insights with me. It was enlightening to know that our HDB values reach a maxima after a 5 year period and subsequently experience a depreciation that is offset by inflation. This is definitely information that benefits everyone.

The current mood for yield investors is at an all time high, so all three portfolios made by previous batches have done remarkably well. As I have conducted three classes over the past  six months or so, I have invested $30,000 into your collective portfolios. Right now, I am well above 10% gains as we speak.

When we start to do well in our investments, we should remain humble be aware that things may go south at any moment and this round of optimism over real estate investment trusts may not be sustainable moving forward. As we arrive into August, traditionally the worst month of the year, we may experience a correction in the markets as folks start to take profits on their REIT investments.

Because of this, I have included two defensive counters into the portfolio to push down the volatility of the portfolio further.  This will bring the overall yield down for the co-created portfolio from 7.6% to 7.08%.

Finally,  I attached the asset allocation suggested by the class in Annex A. I have also attached our co-created portfolio that yields 7.08% in Annex B of this message. Also included are the results of the equity screening in Annex C. These six stocks can be part of any equity portfolio but may not necessarily attract cheap margin financing.

I look forward to investing $10,000 of my own fees into my margin portfolio with an equity multiplier of 2 into the portfolio in Annex B. You will hear details of my execution in about two weeks time.

Christopher Ng Wai Chung

The Model Thinker #12 : Random Walks

The simplest form of the random walk is a function that has an equal probability of being +1 or -1. The expected outcome of this function is zero and the standard deviation is the square root of the number of periods.

A simple random walk in one dimension has two important properties. The first property is that it is recurrent. Over time, it crosses zero infinitely often. The second property is that it is unbounded - it can exceed any positive or negative threshold.

Our stock markets can be considered to be nearly normal (or Gaussian) random walks with a positive drift. This means that the stock market changes by an amount drawn from a normal distribution.

The implication is thus, once you deduct the equity premium and the risk free rate, the stock markets returns are supposed to be random a mean value of 0%. This is the efficient markets hypothesis - it posits that future prices must follow a random walk.

There is too much unnecessary debate on the efficient market hypothesis.

I think the way forward for a good quantitative investor is that, eventually, all factors of outperformance will disappear once it becomes well known enough for people to follow it. The January Anomaly is almost non-existent these days. The Grossman and Stiglitz paradox says that if too many people believe in the EMH, they will stop analyzing, and this make markets more inefficient. If too few people believe in EMH, they will put in more work on analysis, making markets more efficient.

One consistent trope promoted by many other folks in this industry is the idea that dividend growth is something that is worth investing in. This has caused some retail investors to ask me whether it is possible to construct a backtest using dividends growth as a factor. So recently, I had some time to refine my models and I tried to use this factor to see if it truly outperforms as claimed by many gurus.

If we had bought an equally weighted REIT portfolio for the past 10 years, returns would have been 21.25% with a semivariance of 9.64% ( What to do ? Times were good ! ). If you had bought half  of the REIT universe that grew dividends by the most throughout over the past 5 years, your returns would be below the average at 18.25% with a semivariance of 13.41%.

(Test was done on Bloomberg on 26 March 2019.)

Buying REITs for dividends growth for the last 10 years would have resulted in underperformance.

To rub salt in the wound, the investors would also have to stomach more volatility at the same time.

The End of an Era

Today actually marks the end of an era.

Beginning tomorrow 1st April 2019, Tictail, the platform where I sell my books, will shutting down for good. It is also time for me to permanently end the sale of my books from this blog.

Until very recently, I'd always struggled with the selling of my books. My distributor MarketAsia changed hands and I could no longer find a home for my physical copies, so I had to load them in my parent's home and wait for the occasional sale to get them to my tiny fanbase. It was such a sad day years ago when I ordered a significant portion of my books to be shredded because I had no space in my home to contain them. For years, I would sell about $50 worth of books every month.

Things started to perk up only after I figured out that my books can play a major role in building my personal brand after becoming an investment trainer. Some readers might know that I give away my books to folks who show up for my previews.

After initiating this new arrangement, the problem started to reverse itself - my books are now getting depleted so quickly that it is not feasible to sell them to blog readers anymore, at the rate I am going, I'm not even be sure that my stock will last till May 2019.

There are going to be other trainers who have publishing ambitions. I have the following advice for them :

• Being only a writer is not a workable strategy to make money. Singaporeans are not a very literate lot and you need to combine writing with speaking to actually get somewhere. It took me over a decade to learn this simple lesson.
• Be a best seller, not a best writer. My first book was unedited and I still have nightmares that it would ruin my brand because of the bad English. My first book turned out to be a Straits Times Bestseller. Just be authentic, this is not an English Literature exam.
• As a finance author, you'll grow old enough to see your heroes become villains. My first book mentioned the corporate heroics of the Hyflux founder and the virtues of buying SPH as a dividend stock. It might be better positioned in the humour section rather than the finance section today. 

So from this point onwards, the only way to buy my books is to show up for my course preview, but the question is whether I have another book in me to do this again.

I think I still have great content, the only issue is that I hate doing the footnoting and after getting a Law Degree from SMU, I would be a disgrace if I do not footnote every single claim I make in my new piece of work. The other issue is that I am never going to self-publish again. 

Now I go big or go home.

It is time to seek a "real publisher". When I was a rookie finance author, one publisher rudely asked whether I was a millionaire and scoffed at me after I said no. Today I can qualify as an AI under the Singapore Law and I will make sure that I give this local publisher a miss. 

   

What problem is Financial Independence supposed to solve ?

I thought it might be a good time to summarise everything I know about The Problem that becoming financial independence is supposed to solve. If no one works on coming up with a proper definition of the problem, financial independence is just like blockchain technology, a solution looking for a problem.

Here is what I know about the problem so far :

a) Emergence of the gig economy

The emergence of the gig economy is a new thing that folks in my generation did not have to contend with. Graduates from the ITE/Poly/University tracks will face an economy that will not give them a permanent employment role 50%/40%/10% of the time.

The effects of being in the gig economy is not truly understood so far because most 20-somethings are energetic enough to earn a decent wage. Problems occur when they fall sick or start to slow down when they have a family. There are knock-on effects when it comes to home ownership and marriage.

Investors may be beneficiaries of this phenomenon because the gig economy keeps folks cautious and this maybe that's why inflation has been benign.

b) Retrenchments are affecting younger workers compared to the past

The latest round of retrenchments in 2018 hit folks in their 40s and PMETs hard. Anecdotes from my students tell me that even some folks in their 30s are being let go by companies. This is likely due to the half life of a good degree becoming shorter and shorter.

I learnt structured programming in JC, then in University Object Oriented programming required a radical rethink of how to write software. These days we have functional programming and just around the corner, quantum computing may enact a paradigm shift which may render all software developers obsolete.

The combined effects of (a) and (b) may lead one to conclude that Millenials today with a degree have about 10 years of regular employment where they can get a steady increment every year with little fear.

Let's look at what happens at the end of 10 years :

a) Your salary will become lumpy as work becomes projectised

I had a great conversation from an old friend today. The problem faced by Gen-X guys like me is not that we will lose a salary. The problem is that our salaries will become lumpier. Our work becomes more projectised and we will paid when someone has an incentive to pay us.

For me, I have a training gig with Dr Wealth. I get paid only after every class. If I conduct a class, generally I will be paid a week later. If I am ill and cannot conduct a class, I don't get paid. I also don't get paid if my services are no longer required by Dr Wealth. I may have to find a new company to partner with.

I am not alone in this regard because a lot of guys my age look for short working contracts and face the same situation. Alternatively, it is a life of moving from retrenchment to retrenchment.

Sadly our home mortgage payments are not lumpy but remains consistent.

b) You will come under pressure to retrain and it would be a fight for survival

The government is not doing this Skills Future thing for fun, they anticipate that folks will have to reinvent themselves quite a few times in their lifetime. As someone who graduated recently from law school, this process of reinvention is a very unpredictable move. In my case, the legal industry not only became unattractive, I had the added weight of ageism against me. Even if I can find a way to become a community lawyer, my paid would be a mere fraction of my last drawn income. In essence, my pay cut would have been more than 50%.

A lot of Gen-X guys are now facing the pressure to retrain, but they have to realise that it's less about retraining but more about readjusting to a lower income and maybe longer hours at work.

Retraining is about survival. You don't retrain to thrive or do better. That is why skills training adverts show discouraged workers, they don't show 40-something uncles going back to SMU and trolling his Legal philosophy lecturer on why Trump is awesome. 

c) Life gets better for a short while, then it starts to sucks

If regular solid employment is going to last only 10 years, then your life is only going to get better for a short while before it starts to suck over the long term. If the future is lumpy and unpredictable, then every financial obligation you are taking upon yourself is going to hurt you over the long term.

10 years basically means that if you have a car. That's the only car you can afford your whole life. You may only go for a home mortgage significantly below what you can afford because it lasts 25 years. I can't even imagine why folks in their 20s today will want kids in this kind of economic environment.

If we position the problem statement as what I have above, my solution fits the problem statement perfectly.

(i) Dividends investing allows a lump sum asset to be converted into a perpetual stream of small quarterly payments.
(ii) Leverage can deal with short 10-year  horizon span most 20-somethings face in today's workforce.

( Note : Risk of  margin call makes leverage feasible only for folks who know a lot more about finance. )

The STI ETF has gains 6.92% since inception with a semi-variance between 11-12%. Investing in a disciplined manner to the tune of $1,500 every month for 10 years will barely get you a quarter of a million dollars at the end of the period, after which you will barely get $8,000 a year in dividends.

For this game to be played well, you need to be at the level of the most dedicated FIRErs on the blogosphere. Otherwise, when you hit your 40s, you may be going through the equivalent of Design Thinking programme thinking that it would actually make you valuable to an employer in the future.

2-3 years after that, you will still be back attending another course after getting retrenched

The Model Thinker #11 : Entropy : Modelling Uncertainty

Data falls into four categories.

Data could be in equilibrium. A person's height is in equilibrium, as is the stock price for one counter at market close today.

Data can be cyclic. Revenues for the semiconductor firm is generally cyclical because there are ups and downs.

Data can be random like the distribution of stock prices on the SGX.

Finally, data can be complex. If my daughter chooses stocks, it may not be completely random and, my daughter being a 7 year old, possibly may not be based on a fixed pattern as well.

Equilibrium and randomness can be modelled using Entropy (expressed as an equation above).

Where we are indifferent or have no special information on a variable, we can model the behaviour assuming that entropy will be maximised. 

In cases where values falls within a range, the uniform distribution maximises entropy within a given range. Distribution of different species in a geographical zone may be uniform.

Where the number has to be positive and cluster around a mean, the exponential distribution maximises entropy. At larger time scales, stock markets indices tend towards an exponential distribution.

Where numbers are described by a mean and variance, maximising entropy results in a normal distribution curve.

I will not say anymore on this chapter as the book promises more on how this applies to the stock-market in later chapters.

BBFA The RPG - From Keyboard Warrior to Marriage Material !

We all have to begin somewhere in life.

I have spent a large part of my younger life as a BBFA so I know that BBFAs have a strong affinity with the Financial Independence Movement.

Once of the core strengths of the BBFA is that they are not constrained by society's judgement on their approach towards financial planning. This gives them the freedom to work towards building a pile of Fuck You Money without society making them feel bad for doing it.

One very effective way to achieve your financial goals is by gamification, so I decided to imagine what the BBFA RPG would roughly look like.

A BBFA's prime attribute is Intelligence. BBFA's generally have no use for Charisma.

The level advancement table should look like this.

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Level	Title	Portfolio Size	Passive Income / Month
1	Keyboard Warrior	$-	$-
2	MMORPG Maven	$20,000.00	$100.00
3	Data Hog	$40,000.00	$200.00
4	Gian Png Kia	$80,000.00	$400.00
5	Chicken God	$160,000.00	$800.00
6	Soi Cowboy	$320,000.00	$1,600.00
7	FIRE Disco Dancer	$640,000.00	$3,200.00
8	Marriage Material	$1,280,000.00	$6,400.00

This game assumes that 6% yields are possible in an income portfolio.

The Special Abilities of a BBFA is as follows :

At 1st level, the BBFA gains the title of Keyboard Warrior and gains the power of Rebuke/Turn Woman. When activating this special ability, The BBFA goes online and blames everything on women who prefer hanging out with jerks instead of nice guys like them.

At 2nd level, the BBFA gains the title of MMORPG Maven. At this level, the BBFA no longer needs to pay his MMORPG subscriptions with his earned income as his dividends will effectively pay them for free. Once a month, the BBFA can buy a virtual item using dividend income. Just feel good about himself.

At 3rd level, the BBFA gains the title of Data Hog. Home broadband and mobile phone expenses are now paid by their passive income. The BBFA gains immunity to lag. His rate of Porn Download doubles as a result of a better Fibre plan.

At 4th level, the BBFA becomes a Gian Png Kia. He no longer need to work for hawker centre food. Once a week, he can order a piece of fish along with his economic rice. He can, of course, entertain the idea that women might be impressed by this giving the DM a good laugh in the process.

At 5th level, the BBFA becomes a Chicken God. Twice a month, he can visit Geylang and have all his expenses paid by his passive income. He can now use masterwork condoms (ribbed for his pleasure) and gains advantage to all save versus sexually transmitted disease.

At 6th level, the BBFA gains the title of Soi Cowboy. Once a quarter, he can summon 1d6 BBFAs of lower level accompany him to visit Bangkok. This trip is fully paid for by his dividends. Unfortunately, his posse will have to pay their own way. No money no honey.

At 7th level, the BBFA gains the title of FIRE Disco Dancer. He gets a taste of financial freedom. He gains immunity to retrenchment and no longer takes psychic damage from his day job.

At 8th level, the BBFA gains the title of Marriage Material. A single woman of marriageable age that comes within 30 feet of the BBFA must save versus Celibacy or be charmed by him. The single woman can make a saving throw again every month. If she makes her saving throw, she is immune to the BBFA's charms until he gains another level.

Gaming Analogy for the FIRE movement.

There are many interesting parallels between the FIRE community and Board gamers.

As it turns out Tabletop Gaming magazine talks about different attitude towards tabletop gameplay last month which can be applied to the FIRE movement.

In tabletop gameplay, players can be arranged around a 2x2 matrix. On one axis is respect for the rules and, on another axis, respect for goals.

This creates four categories of different "players" that can be found in the board-gaming world our society today.

Let's look at each category one by one.

1) Conventional Player / Believer in the Singapore Dream.

The conventional player is the kind of player you meet most of the time. Those who respect the rules of gameplay and respect the goals of the game. In D&D, the fighter tanks; the cleric heals; the thief opens lock; the wizard Fireballs.

In personal finance, respect for the rules means that the person respects the conventional way money is being made - study hard, get a job/start a business and put aside some of that for a rainy day. Also in Singapore, the ultimate conventional goal of traditional masses is to get married, start a family, buy a home, and have kids.

2) Cheat / Criminal

The kind of player that board-gamers universally hate are cheaters. Cheaters still want to win so they respect the goal of the game. They just do not believe that are constrained by the rules. A common approach to cheating is to miscalculate your victory points or in the case of Magic the Gathering, miscounting the amount of life you have left. One player did it so often that the community named a cheating manoeuvre after him.

(Can't name the person because I am now considered to be the same profession as that guy and some gamers do read my blog.)

In personal finance, a cheater is someone who is looking for a short-cut to gain financial success. One example is someone who commits a criminal offence like embezzlement or corruption. The proceeds from criminal enterprise would then go into buying big cars and homes to show that they have arrived. ( Some do arrive - in Changi prison )

Cheating is also a continuum, some behaviours in society may not be criminal but are unethical. There is a lot of conflict of interest in society today. Would that be considered being disrespectful of the rules even though it is followed?

3) Gamer's Nightmare / Hipster

There are players that are quixotic that they are even bigger nightmares than cheaters. The are the  folks do not follow the rules and don't respect the goal of the game.

There was once a really unpopular DM that was hated by the gaming community in 1990s who ran a Vampire the Masquerade game for a friend of mine. Once the game began my friend kept badgering the DM by repeatedly asking him "Is there a rock on the floor?". The DM got impatient and finally said,"Ok, you find a rock on the floor." My friend then said,"Ok, I hit myself on the head until I die ! Toodeloo muthafucker ! Kakakaka ! "

In personal finance, this may be more akin to someone who takes an unconventional view about life. Maybe someone who refuses to work, and dumpster dives everyday for example to champion some arcane anti-capitalist cause. They are very much like hipsters from Western culture. They may not have families, but everyone else is wrong because they are corporate drones.

4) FIRE / My approach to gameplay

Interestingly the board-game article did not cover the fourth category of gamer which I belong to. Gamers like me respect the rules but we don't really care about the published goal of the game. We won't cheat, but we invent our victory condition throughout game play to amuse ourselves losing many games we play but having immense satisfaction while doing it.

For me, my consistent victory condition is that the sore loser / asshole does not win and I am willing to lose the game to make that happen. I play normally when there are no sore losers in the group.

Beyond my approach to gameplay, there is always this player whose sole goal of playing Dominion is to collect all the Harem card in his deck so that he can be some Harem master at the end of the game. In Settlers of Catan, these are players who try to build the longest road. Finally, in Twilight Imperium, these are the hilarious jokers who role-play the alien race and and expect everyone to negotiate with them as if it is an RPG.

In FIRE, most of us respect the rules on how to make money. So much so that I believe that FIRE aspirants are more hardworking than conventionals because they know that every cent they make can be used to compound towards a better future. Where the FIRE community differs is that they don't really care about the ultimate goals of the Singapore Dream.

I would not blame them for that.

Every mortgage you get last about 25 years. Every child takes 23-25 years to grow up and start being able to earn money on their own. Your degree's half life, on the other hand,  is only 6-8 years. Your career may last 15 years at most.

A true gamer who attempts FIRE knows that, these days, he has about 8-10 solid years to offset his basic expenses before he runs out of luck in his career. Those with degrees need to be be careful, recent surveys show that most retrenched professionals in 2018 are degree holders in their 40s.

By discarding the ultimate goal of the Singapore Dream, a FIRE aspirant can gain the freedom to breakaway from corporate work.

In the short term, however, there is not much functional difference between a the most effective FIRErs and BBFA. This weekend, I will discuss the BBFA's affinity with FIRE in a separate post.

The Model Thinker #10 : Broadcast, Diffusion and Contagion.

What does it mean when it was written in The Economist that a group of whiz kids hired by Barclays Bank modelled the cryptocurrency craze as a disease and concluded that the bull market in 2017 is not ever occur again ?

After reading this chapter, I suspect that the they used models of broadcast, diffusion and contagion to model the behaviour of cryptocurrency investors - specifically this thing called the SIR Model.

If I am right, then cryptocurrency investments reach fever pitch based on the following variables :

P(contact) = Probability that a non-crypto investor gets exposed to a cryptocurrency idea.
P(spread) = Probability that a person exposed to a cryptocurrency idea would actually invest in it.
P(recover) = Probability that a cryptocurrency investor quits crypto-trading.

Whether a disease or an investment idea can spread through a population depends on this number called the basic reproduction number or R0.

R0 = (P(contact) x P(spread)) / P(recovery)

Where R0 is less than 1, the disease will dissipate. Where R0 is more than 1, the disease will spread through the population.

Policy makers have in their databases different R0 for a different diseases. Measles spread very fast and have a R0 of 15. HIV is a much slower 4. The higher the R0 the more thoroughly a population needs to be vaccinated.

Since I have no access to the original paper, I can only make educated guesses on how the analysis took place.

We have no idea what goes into determining P(contact) and P(spread), but I suspect in 2017, the basic reproduction number was much higher than 1 and this led to the cryptocurrency market overheating. In 2018, the whiz kids figured out that R0 had dipped below 1.

What does this mean ?

• It likely means that folks who are exposed to an ICO paper or cryptocurrency trading idea are not longer taking action on making actual trades. This is most likely due to the number of scams out there in the cryptocurrency world.
• Alternatively, folks actively trading cryptocurrencies are leaving the market in droves. Why risk everything on Bitcoins when REITs give a steady 6% every year?

Armed with this model, we might be able to predict whether the FIRE movement would meet the same fate as cryptocurrency trading. 

I would characterise the FIRE movement this way :

• Becoming financially independent is still not mainstream in Singapore with just a few businessmen making a profit out of teaching folks how to do it. So, rightfully, P(contact) is low and limited to the BIGS and Seedly communities.
• Some folks might be turned off by dividends investing if it too slow. Right now the industry is still experimenting on a better message to drive investor action. Even my own solution involves leverage to speed things up to motivate the younger investors to do something about their lives. I would peg P(spread) as being so-so. A trainer's success is in managing his P(spread).
• While my personal bias may get in the way, I believe that FIRE will catch on because P(recovery) is so low, it is close to zero. Seeing money drip into a bank account has been so addictive, it's dominated my life for the past decade or so. 

A small P(recovery) is the reason why "Dividends are the opiate of the capitalist masses. " 

FIRE will survive as a movement and grow stronger simply because once a person starts seeing some results, he's likely to persist until he becomes financially independent. I know because I'm almost a drug peddler myself, getting my own dad to dividends about a decade ago and now seeing it in some of my students. Monitoring his stocks is what keeps my dad alert in his old age.

Pursuing FIRE while in a relationship.

There is one question that I am not good at answering :

How does one pursue FIRE while in a relationship with someone else?

The first problem is that finance experts are generally not relationship experts, you should treat all relationship advice from financial experts with a pinch of salt. ( Of course, I freely dispense relationship advice because I want to keep readers entertained. )

The second problem is that financial experts who solve these problems within their own marriage can only describe their solution based on one data point. This kind of wisdom is not empirical at all.

There are two obstacles towards crafting a satisfying answer :

The first obstacle is that, generally speaking, academic studies suggest that spendthrifts ends up marrying tightwads. This is unusual because we tend to marry folks who have the same political views and personal values. It's just that when it comes to money, opposites attract.

The second obstacle is that men and women have different spending patterns. For example, men like to put their discretionary spending on sports goods and woman spend more on maintaining their personal appearances. Having different priorities often leads to conflicts. You can't just tell your wife to cut down on cosmetics unless you want to spend a week at the doghouse.

I also do not like the solutions offered on social media that prioritises "better communication" and that "since everyone is different, the answer depends on the individual". These are not answers. It suggests that the person dispensing the advice might not be knowledgeable at all.

FIRE is hard, but it has a particular bias for technology professionals. You can read about the saltiness of American women who say that the FIRE movement seems to only work for white males in Silicon Valley ( Even though FIRE was invented by a hippie woman called Vicki Robins who inherited wealth ). In fact, if you have MBTI profile of INTJ, I suspect that FIRE is somehow twice as easy for you than someone else like me who is ESTJ/ENTJ. Even right now, I suspect that my method I teach to help folks achieve financial independence is particularly useful for BBFAs because it's not hard saving and investing if all you do is lock yourself in a room and play the console and watch anime all day.

For my own personal situation, like many folks, I watched my parents fight over money all of time while I was growing up. I know how hard it is when my mother's siblings always seem to be trying to borrow from my dad all the time.

So I grew up knowing that whatever plans I have to become wealthy, they needed to be executed while I was still single. Financial independence is a solo achievement, not a team sport.

As for the ladies I meet in my workplace in the 90s and 00s, let me get flamed for saying this - Gen X Singaporean women I encountered when they were single in the corporate world WERE LARGELY, IN MY OPINION THEN, FULL OF SHIT ! 

I want to be Ally Mcbeal !

My life is Sex in the City !

[ I must remind female readers that I may have been immature when I was a single engineer in my late 20s ]

They scare me.

They were just too overconfident, too busy indulging in their spa-obsessed scuba-diving lifestyles, and getting point to point on taxis, leading a happening life of salsa dance and salsa culinary delight. I calculated that if I fell in love in one girl from this environment, I'd be a corporate slave for the rest of my life which would fun in my 20-30s but hell in my 40s.

This is why I did so many weird things as a single eccentric guy :

a) I transferred my CPF-OA to CPF-SA because I don't want my future girlfriend to see a single cent in my CPF-OA and push me to buy a private condominium. Today, I get over $10k from the CPF board on my interest alone for my SA and MA accounts.

b) I was able to cut down my expenses within $1,200 and spend within my dividends when I was barely 32 years old. There was no way I could have been able to do that if I had a mortgage to pay.

c) I refused to travel, figuring out that volunteering for outsourcing projects would cover my holidays when I was not running projects on a weekend.

So if I use my life as a data-point, it may be better for a guy to just FIRE as a single male then look for someone who can tolerate his strange approach towards personal finance. Even then, I have no qualms when I was building my wealth that there is a large chance that I would be a BBFA today.

But I didn't.

Is it something I would do again if I can live my life as a Millenial?

Hell yes.

Should I recommend my extreme approach to relationships to guys reading this article?

Probably not.

Goodhart's Law and the folly of using Investment Benchmarks

Charles Goodhart is an Economics Professor from the London School of Economics. He said that "Any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes" One interpretation is that when a measurement becomes a target, it ceases to be a good measure. 

I was expecting to lose money when I ploughed my trainer's fees into the portfolio created by my third batch of students. After all, the Capricorn effect is long over and REITs have already completed a fairly good run in the markets.

Furthermore, the worse decision we made as a class was to keep First Reit in our portfolio. It subsequently lost me about 7+% over the span of less than a month, likely due to the perceived problems from its sponsors. Interestingly, the class kept it in the portfolio even when their senior batch happily excluded it from the final list of stocks to buy into.

So I was quite surprised that my portfolio is still on positive territory today.

Frasers Logistics and Industrial Trust did very well  not because it was especially well run but because it was expected to be joining the FTSE EPRA/NAREIT Global Developed Index. The news of its inclusion in the index came out on 4 March 2019, about slightly more than a week after I built the portfolio. It's full inclusion will occur on 19 March 2019.

Interestingly the positive movement in the counter began as early as 27 February 2019.

This phenomenon explains the relevance of Goodhart's Law. As investors rush into REIT ETFs and begin benchmarking their performance against popular indexes. It becomes possible for smart investors to follow news on the inclusion of a REIT in a major index and then perform trades based on that fact by front-running the index investors. Passive investing based on a benchmark, thus, makes someone a patsy.

This is possibly one of the more convincing arguments active fund managers will level against ETF passive investing and you can bet your bottom dollar that they have a personal interest to spread this story around, even inducing their salesmen lapdogs to do the same. Sadly, from my perspective, the alternative to active investing is not passive investing, but DIY investing. Even if benchmarking becomes an investing trend that can be exploited by some front-running, the cheapest way to do it is to trade in the counter directly.

Over the next few days, we shall see whether Goodhart's Law to hold true over Frasers Logistics & Industrial Trust. If Goodhart's law is correct, we should see Frasers Logistics revert to lower value after 19th March 2019.

The Model Thinker #9 : Network Models

A fully blown discussion on Network Analysis goes beyond what is possible for a simple blog article.

I'm only going to focus on qualitative analysis of networks and just one trait that is important for layman readers. 

The betweenness of a network is defined as the number of paths of minimum length connecting two nodes of a network that passes through a node. This is mathematically expressed as a percentage. The higher the betweenness of a node the more powerful or influential a node is.

People or communities that have a high betweenness score wield extraordinary levels of power and  influence within society. This trust is not earned by just being at the right place and the right time, but a genuine effort to build trust is required to succeed. 

Later this evening, I will be attending a dinner hosted by Seedly. And in complete honesty, I will be looking for opportunities to see if I can collaborate with them over the medium or long term. 

Seedly is an an example of a node in the financial blogosphere that wields an influence far above any individual institution or blogger on its own. Even the folks who work in Seedly seemed surprised that their last event sold 1000+ tickets within 48 hours, effectively establishing themselves as the de facto hub for Millenials seeking information on personal finance. It was also very exciting for a speaker/trainer to address a much younger and energetic crowd because we're all too used to talking to jaded senior investors who keep wanting to know how to market time their investment purchases.

In my opinion, the power that drives the network effects that pushed Seedly to its prominent position is its unflinching commitment to being unbiased, which has become a bugbear to the commissioned financial advisors on Facebook. I would imagine that most banks or insurance companies, even with their large amounts of capital, would find it a struggle to attract young investors these days because  people are aware of that conflict of interest that comes from building a relationship that they know would result in sales commissions going to whoever is talking to them. 

In this case, the game plays well to Seedly's strengths : They do not need to be totally unbiased, just more unbiased than the Financial industrial complex present in Singapore today. 

Very far behind Seedly in terms of influence is The BigScribe Community that I personally love very much ( I own shares in BigS ) . BIgScribe is actually more unbiased in that we do not have commissioned advisors in our team of admins. BIgScribe's network effects are weaker because we have deeper and stronger financial discussions and denizens are expected to keep the quality of the discussion at a high level. This means that Bigscribe has a much lower appeal to the mainstream audience. 

The lesson for bloggers is that, one way or another, you can drive traffic and influence by playing on both Seedly and BigScribe's strength. 

When it comes to networks, it is not a zero sum game. If you can game this and become something that forms a link between these two networks, you should be able to find a way to in win in whatever you are trying to do.