Wednesday, October 19, 2016

Beyond Sex in Confined Spaces.

I am late to the game to write about the comments made by Josephine Teo that you do not need a lot of space to have sex. While I think she has probably been quoted out of context, it's refreshing to have politicians being so direct on this topic. Josephine Teo herself is a mother of three making her eminently qualified to discuss this topic.

It's not like our TFR can get any worse so it is an area which we can be more candid about.

Beyond sex in confined spaces, it might be useful to look at social science research on the spending patterns of US families to determine whether Singaporeans are indeed stressed out by the economics of starting families.

Let's look at information on "The Magnitude of Scale Economy in Households Size" table found in the book The Five Life Decisions by R T Michael.

Suppose you are single and live alone, we will normalise your expenditure per unit time as 1x.

A married couple will typically spend 1.62x.

A family of three will spend 2.16x

A family of four will spend 2.64x

A family of five will spend 3.09x

In Western societies, the case for marriage is relatively strong. You can expect a married couple to economise and save about 20% more by division of labor, splitting of rental payments and specialisation. Even better is the possibility of having incomes uncorrelated with each other to survive an economic downturn. As such, the case to start a family is strong as it create a unit which becomes more optimal and efficient as time goes by.

The problem arises when we look at Singapore families.

Most singles already live with their parents in a family of four, so instead of a discount when starting a family, a single person can expect spending about 33% more when he splits off from his parents and starts a new household.

Marriages are, thus, very long term investments where it takes decades to create an efficient economic unit.

Here are some possible conclusions from this data :

a) You really need to learn how to practice sex in confined spaces.

I lived with my parents only when my daughter was three years old. It just made more sense to have more members in a household. Life was much better when I did not have a mortgage and our joint families only paid for one broadband account. If there is a possibility of harmonious existence ( which is rare and this makes my wife even more awesome ), then the first few years of building up a war chest towards your first mortgage makes sense.

But as Chan Chun Sing is not sex police, I am not a sex blogger.

More advice will have to come from some other website ( like Xhamster ).

b) Only conscientious people should ever get married.

Once sociological data confirms that marriage requires such long term planning, it rules out all the flakes and "in the moment" people. People who have problems sticking to plan, showing up on time and seeing themselves as spontaneous unique snowflakes needs to get out of the marriage game or end up at Family Court.

Now the good news is that some folks become more reliable as they get older.

But there's a bigger problem...

c) There is a shelf life for both men and women. 

It's no use knowing that men do not have a real biological clock.

From a purely cold and calculated economic point of view, you need children for a family unit to achieve economic efficiency so the best time to settle down is earlier rather than later.  While there is a biological clock for women and I will not belabor the point here, but as it turns out men have a socio-economic clock as well as they need to be economically vigorous to have the resources to afford and raise children and create productive family units.

I think this reality is truly what gives Josephine Teo nightmares - once men find starting families no longer economic in spite of being biologically viable and that they can't go through the increase or hump in family expenses at the first stage of marriage, they will just stay in Tinder and be fuck-boys forever.

Of course, reader might take offence at such a cold calculated way of looking at formation of families.

If you want a romantic blog that justifies your touchy-feeliess, go read Tree of Sexuality.

Tree of Prosperity is for cold, calculating people.

Friday, October 14, 2016

Personal thoughts on Phillip SGX APAC Dividend Leaders REIT ETF

The folks at Phillip Capital Management invited financial bloggers to a session where they introduced us to this ETF which just ended its offering period yesterday to quite a red-hot reception from investors. Many other bloggers are talking about this ETF, so I will just say a few words about this new product.

Let's start with the negatives :

a) Dividend yield of 4.5-5% does not make my heart sing.

The fund is not really attractive for high yield investors in a market where a REIT like Fraser Hospitality Trust can give more than 8%  when bought directly from SGX. However, management has asserted that it is reasonable to expect about 5% growth in dividends over time, which makes this REIT more attractive to investors who are not so much looking at dividend yields but dividends growth.

b) Expense ratio of 0.65%is on the high side for an ETF.

The fund expects an expense ratio of 0.65% which is more than double that of the STI ETF. But the management is not completely passive because the manager needs to react to the occasional rights issues which come about by every now and they promised that they will subscribe to issues which would be advantageous for the investor.

Management has assured us that expense ratios of ETFs can drop as the size gets larger and operations become more efficient. My skeptical nature believes that expense ratios will drop when there is more competition in the markets from other REIT ETFs.

c) 60% allocation to the Australian market introduces some country risk.

As the fund is fundamentally indexed via net dividends declared, the REITs with the largest dividend payouts tend to be clustered in Australia. This makes the fund less diverse and introduces more AUD forex risk. Personally, it's not so much of a big deal because most of my REITs are local so I would benefit from more diversification if I introduce this into my portfolio.

d) At least for the Singapore REITS component in the ETF, you lose the tax benefits from investing directly in them.

This revelation actually makes me angry, but my anger is not directed at the ETF manager. Basically when you buy a local REIT, you are not taxed at a personal level. If the REIT declares 90% income as dividends, it is not taxed at the corporate level as well. When you buy a basket of local REITs through an ETF, it attracts corporate taxation of 17% at the fund level which really sucks for the folks who need more diversification.

However, the asset allocation to Singapore is not particularly high, so it may not be such a big concern.

Now we've gone through the negatives. At least from my point of view, the ETF launch is a net positive for Singapore. Fund managers cannot sustain themselves through active investing funds because the costs is too damn high. This REIT ETF is one of the first ETFs that bring fundamental indexation and Smart beta to Singapore markets which is great because it allows a new kind of tactical asset allocator to emerge amongst retail investors.

I can definitely see who would be best suited to this product :

a) You are into the Permanent Portfolio investment strategy.

You can now build an Equity, Bond, REIT and Commodities portfolio using a combination of the STI ETF, Asian Bond ETF, this REIT ETF and Lyxor Commodities ETF to create a portfolio to weather any possible economic situation.

I think this REIT plays best to investors who like this strategy.

b) You already have a fairly decent local REIT portfolio and want to reach overseas.

If a person already has a fairly sizeable local REIT portfolio, this product gives you some amount of diversification towards international REITS. And you only need to hold one counter to start diversifying your holdings to Australia and Hong Kong.

c) You want to arbitrage the ETF against its constituent counters.

Right now I am not sure whether this would work. A REIT ETF might be valued at an amount lower than the underlying net assets value. Phillip says that the NAV would be published on their website soon enough so there is a distinct possibility of buying $1 worth of REITS with 99 cents, but I'm not sure whether Phillips will also play the role of a market maker in the markets to prevent arbitrage from taking place.

d) You keep pestering financial bloggers which is the best REIT to buy

This ETF certainly provides a better answer from me in the past which is "Buy as many small positions for all the REIT counters in SGX. This will eliminate the need to micromanage your investments."

If you are too lazy to read up on the prospects of individual REIT counters, paying an expense ratio of 0.6% for a nice 5% yield is reasonable price to pay because you can spend your time on more profitable pursuits.

Anyway, I will be putting my money where my mouth is and will buy at least one small lot at least to keep this ETF in my radar.

[ This REIT is the first of a new kind of Smart Beta ETF which I wrote about months age here ]

Tuesday, October 11, 2016

A perfect storm for REIT investors.

Another point which was keyed off the meeting we had with some fans is the idea of the perfect storm for REITs.

Just to summarise REITs are the perfect instrument for the investor who is gunning for financial independence.

REITs are Collective Investment Schemes so come under moderate scrutiny by the Singapore Government. Issuing REITs require a high level of compliance to prospectus requirements. Investors then get rewarded with be able to diversify their holdings among multiple pieces of property. REITs are also held by back with a gearing limit of 45% and a 25% on development property. The most important feature is that REITs must pay out 90% of their income to retain their benefits.

A combination of these investor friendly restrictions and tax benefits has resulted in a huge growth in the REITs market and many investors who are financially independent today count REITs as a mainstay in their dividend portfolio.

But what can go wrong ?

A perfect storm for REITs investors looks like this :

a) Rising interest rates

One fear is Janet Yellen after achieving a level of comfort in jobs growth in the US, decides to raise interest rates. This will create ripples on SIBOR which would affect interest payments for the highly geared REITs investments.

In this scenario, investors should expect getting less dividends on their investments.

b) Lower rents due to oversupply.

The second fear is oversupply. This is likely to be felt in industrials before the end of the year. I imagine retail property to be hit badly over the next two years because of changes in consumption patterns. Singaporeans have always been buying online for their goods and now I always make it a point to search Carousell if I really want something badly.

In this scenario, tenants are willing to pay less for shop or factory space, hurting investors further.

c) Removal/reduction of tax benefits.

Currently, if REITS pay out at least 90% of the income they receive, they will not be taxed at the corporate level. This was done to promote the asset class and promote the Singapore markets. Since its inception, the government has been slowly scaling back some benefits for REITs. In 2015, REITs no longer have stamp duty concession.

The next time the government will review this tax concession will be in 2020. It's too early to guess whether this will taken away but investors should be aware that these concessions can be taken away once the rationale for them ceases to exist.

Not only will investors be entitled to less dividends, REITs no longer need to provide a 90% payout to obtain tax breaks.

If (a),(b) and (c) occur at the same time, we will have a perfect storm for REITs investors and I expect the damage to be quite significant for most of our portfolios.

The only defence against this is to promote diversification and limit REITs to smaller part of your portfolio.

The problem is that high-yielding equities are quite rare in Singapore markets and you will need to lower your expected yield to around 5% to have a decent non-REIT equity portfolio.

Saturday, October 08, 2016

My Cinderella Story.

One interesting notion I learnt from the AAR of our talk is idea of a Cinderella Story.

Here is an example of a Cinderella story of fictional finance guru Ah Huat :

" Born to a single mum, Ah Huat grew up in a one room flat. Partially blind from a birth defect, Ah Huat joined successive gangs, first extorting money from cardboard aunties, and then dealing with lifestyle drugs after dropping out of primary school. Ah Huat's life changed when he was thrown in jail. Upon his release, he dabbled in multiple businesses but was cheated by someone and became a bankrupt at age 22.

At this time, Ah Huat decided to turn his life around. Ah Huat discovered (Forex / No money down property techniques / Internet Marketing / Insurance sales ) and has been making $10M every year from age 24.

Today Professor Ah Huat, age 32, now holds 3 Phds from different countries, has a great and loving family, and lives in a GCB.

Now, you too can become like Ah Huat if you have pay $6,000 for a money making seminar !"

People like Cinderella stories when they are told by investment gurus.

I always thought that one of our biggest weaknesses (and strength) as a coalition of financial bloggers is our lack of a Cinderella story.

For our sessions, we wanted to persuade the audience that value and dividends investing is a strategic move that is best undertaken from a position of strength. You must have a steady job and has to take on a lower standard of living. There are no short cuts in life.

We don't have any of the following stories to share which would be familiar to you if you attended a lot of finance sales-driven talks :

a) We don't brag about dropping out of school. 

I suspect that we are all quite academically inclined and we were well above average in Maths. After having had deeper conversations with 15WW, I realised that he may be a superior investor because he somehow managed to internalise the Kelly Criterion, which is an intuitive tendency to up the bets when the odds gives him the largest edge.

b) We don't have very heroic tales about being abused or retrenched at work. 

I made some career mistakes in the past which explains why I went into Law School immediately after being able to replace my income with my dividends, but they were never catastrophic.

None of us were ever retrenched. As a consequence, we never felt any need to stick it to Man.

The Man was actually quite nice to us with REIT tax holidays, hawker centres, etc....

c) We were never bankrupt. 

Personally, I don't understand why folks dig the bankruptcy story. When someone becomes insolvent it is often at the expense of their creditors who are the folks who made a sacrifice to lend them money in the first place.

My starting position will always be that bankrupts are untrustworthy folks. Unless it is medically or circumstantially driven, it hints a lack conscientiousness in money management skills and an inability to plan for the future.

While I think we need to be more forgiving of bankrupts so that we can achieve a risk-taking culture, it's an entirely different thing to celebrate it altogether.

d) Our personal family circumstances are fairly average when we were growing up.

We never joined a gang as youths. Never really took drugs. Our parents never beat us. We did not come from single-parent families. Or parents were never compulsive gamblers.

Our circumstances are quite average and the same as our audience.

e) Generally we never under-performed in most of the stuff we did.

I did repeatedly fail my CL2 exams and IPPT but it was never fatal to my academic and working life. I also missed out on some scholarships in my youth which still upset me today. If you googled my name, I was in Singapore's first International Informatics Olympiad training squad in NUS  but I was too young and foolish to cherish this opportunity and was dropped out of my Olympiad squad. This is one of the biggest regrets in my entire life. I think my life would be completely different had I qualified.

Hardly a heroic story because I was never in ITE. I also never got less than 180 for my PSLE T-score. No teacher ever told me that I would amount to nothing (except my Chinese teacher who spent more time vomiting blood from reading my essay submissions) .

So no Cinderella story there too....

But plot twist !

Kyith shocked me when he told me that I actually told the audience a Cinderella story during the session...

I was replying to a question how to deal with an economic downturn.

I related a story about my time in Singapore Mercantile Exchange where we were insulated from the Great Recession of 2009. My portfolio was down and I had easily had an entry-level BMW worth of paper losses. Most investors were going through a tough period in their life.

From 2008 to 2010, I invested every single cent of my earned income into the financial markets and lived only my dividends scraps. I had the confidence to do that because I read a research paper on how long recessions typically last, which is around 18 months on average and I was already a year into the recession when I read the paper. In those days, Cambridge REITs  was yielding 12% and a portfolio of REITs can deliver 10%+ yields.

You can guess the rest of the story. Without the Great Recession of 2009, I doubt I would be where I am today.

Ok, it's still hardly a Cinderella story.

But it's the closest one I know of so far.

Friday, October 07, 2016

Session with Financial Bloggers : After Action Review

Today's session was a blast. For a maiden effort, it was a good attempt. After all, we did sell out within 24 hours. Our event's unique selling proposition was that it had ample substance, and we do not use this session as an attempt to get more sales from the audience.

With this event, what you see is what you get.

Content-wise, I was especially surprised at what Brian bought to the table in today's session - it really changed the way I looked at REITs. This idea alone makes the session worth the price tag we charge for. As we only saw each other's slides and did not rehearse our presentation together, some of the content was also very refreshing to me.

I am pretty sure each of us had a different take on what happened just now, but I want to be candid about our performance today because we are definitely trying to sustain our momentum with these blogger meet-up sessions in the near future.

Here are some areas of improvement we discussed on after the session ended. This should give fans an assurance that our event would be even better.

a) I thought the readers of financial blogs were a very punctual bunch, we should have catered for some snacks and allocated the first 30 minutes to fellowship so that we can break the ice with the audience before we start.

b) On hindsight, our panel was a little too long and too formal. We prepared too many questions and one thing we will change is that we will be more spontaneous in future events and not prepare too much and just answer the questions to the best of our ability. We do have the capabilities and knowledge to handle the Q&A but we should not have scared each other by designing hypothetical questions for each other. Perhaps the session should be half an hour shorter.

c)  In the future, if we can anticipate a common question in the audience, we should address this in our presentation slides with written notes and diagrams. Answering a complicated finance question without powerpoint to supplement our answers will cause the audience to lose their train of thought.

d) Finally, as you can tell from the picture, the lawyer look does not go well with a fun and engaging finance talk so expect me to ditch my 'armor' in future sessions as well. I was also told that I handled one Q&A with insufficient pathos, details which I may turn into a longer blog posting in the future as it concerns the lost of human capital in a recessionary economy.

So whether you are a paid customer, a reader of this blog or someone who missed our event, do share with us what kind of event that you'd like to attend in the future and actually be willing to pay money for.

Sunday, October 02, 2016

Life Lessons from understanding why bestsellers sell.

When I first read the premise of The Bestseller Code by Jodie Archer and Matthew Jockers, I placed a pre-order immediately. It is something too interesting to miss given my grander ambitions.

Apparently computer scientists, through the use of Natural Language Processing (NLP) techniques which have made so much headway to programmatically de-construct a fictional bestseller, it is possible to use AI to score a piece of fiction for earning potential. Already publishers may be front-running manuscripts by passing it through an algorithm and giving only the writers with the most potential advances to reach best-seller status.

More importantly, what computer scientists can now figure out whether culture runs on principles more similar to the laws of physics.

The conclusion from this book is stunning and creates a whole new world of possibilities.

Right now, I can imagine what algorithms can already do when processing investment news. It is definitely possible to read a piece of journalistic writing and determine whether it is bullish or bearish for a piece of stock and then trigger a buy or sell call. This may be the only credible strategy when we trade crypto-currencies. At the more exotic end, I can even imagine that an AI might even be able to read a judgement from a lower court and determine whether an appeal will succeed.

I am just going to talk about two aspects of bestselling fiction which I found particularly interesting from this book which may be useful to readers like myself who are investors rather than readers of fiction :

a) Best-sellers are emotional roller coaster rides

The premise is actually very simple for a computer scientist. Simply scan the text and find sections which consists of more positive words like "love" and separate them from more negative words like "hate". Create a graph which goes up when a section is positive and goes down when a section is negative. You will create a graph which charts the emotional terrain of a piece of fictional work.

It is found that bestsellers are almost always emotional roller coaster rides with multiple highs and lows.

b) Protagonists in a bestseller must always have a high degree of agency in their lives

The second aspect of a best-seller work is that the protagonists must always have agency - lead characters must always be in control of their destiny and must do things to interact with the events and people around them. Books where the person is just a casual observer or someone who is helpless against the events around them tend to score poorer with the AI.

One way an algorithm can do this is to consider the use of verbs in bestsellers compared to those that do not sell well. For some strange reason, associating with verbs "need" and "want" always leads to bigger sales and the verb "wish".

To me this is a very teachable moment about personal development and self-help. People in general are just not excited by folks who seem to want to "wish" their personal situations to change. People who think and observe don't seem to score well with readers who want to read about folks who need or want something and so proceed to take steps to achieve their destiny.

Deep learning and AI techniques are fast invading the field of humanities which is good news for computer scientists who can find new domains to solve really tough problems which in the past would require personal judgement. Imagine the amount of work-load savings a literary agent can achieve if he can trim his pile of manuscripts by 70% but running it thorough an algorithm first. ( I think even the folks who built the algorithm admits that human judgement cannot be outsourced away at the last mile )

Imagine a piece of software that can run through an appellate brief and give an opinion as to whether there is a chance of winning a case.

This is the potential of NLP !

Friday, September 30, 2016

Legal issues which are of concern to financial bloggers.

Some financial bloggers know that one of my personal aims is to become the financial blogger that other financial bloggers read. As such, I am always trying to establish myself as a thought leader in personal finance but it also forces me to sacrifice some relevance to ordinary readers.

I have an exam in Financial Regulations after my mid-term break and have made it a point to write this article for other financial bloggers as we always have some legal concerns when it comes to the articles which we write.

As I am but a humble law student, please do not take this as legal advice. Just appreciate this as an essay on how I intend to manage my own personal risks when putting up articles on this blog.

A problem when it comes to financial blogging is that if someone makes a complaint to MAS that we are providing financial advise without a license, we face the risk of  being fined or given a jail term. 

a) What constitutes financial advise ?

Schedule Two of the Financial Advisor's Act (FAA) has the following definition on what financial advise is. As you can observe later below, some blog articles can constitute research analysis concerning an investment product like a stock. Even promoting an ETF investment strategy can run the risk of being accused of attempting to market a collective investment scheme.

If you are considered by MAS to be providing a financial advisory service, you will need to obtain a license from MAS and be subject to even more stringent regulations ( which would not be the subject to this article today).

You can find the relevant snippet from Schedule Two of the FAA here :

1.  Advising others, either directly or through publications or writings, and whether in electronic, print or other form, concerning any investment product, other than —
in the manner set out in paragraph 2; or
advising on corporate finance within the meaning of the Securities and Futures Act (Cap. 289).
2.  Advising others by issuing or promulgating research analyses or research reports, whether in electronic, print or other form, concerning any investment product.
3.  Marketing of any collective investment scheme.
4.  Arranging of any contract of insurance in respect of life policies, other than a contract of reinsurance.

b) So how do bloggers get their exemption from the requirement of getting  a license ?
MAS obviously does not really want to spend their time going after bloggers, so an exemption occurs under the first schedule of the SFA. Section 4 under Schedule 1 of the FAA relieves financial bloggers from the need to obtain a license :

4.  Any person who owns, operates or provides an information service through an electronic, or a broadcasting or telecommunications medium, where —
the service is generally available to the public in Singapore;
any advice given, or analysis or report issued or promulgated, is given, issued or promulgated only through that service;
that person receives no commission or other consideration, apart from any fee received from subscription to the service, for giving the advice, or for issuing or promulgating the analysis or report; and
 the advice is given, or the analysis or report is issued or promulgated, solely as incidental to that person’s ownership, operation or provision of that service.

Blogging is generally available to the public in Singapore. Our articles are issued only on our blogs and various aggregators, and we get no commissions from our readers and the advice given by blogs is incidental to the operation of our blog.

So in essence, if you are a financial blogger, you are safe.

c) Some risks are heightened when we get into the public and speak to people.

One issue which was repeatedly bugging me is next week's talk when participants do pay good money to engage with us. 

Due to the lack of common law precedents, I can only offer a very amateurish take on cases where bloggers get paid for a public appearance to mingle with fans.

One possibility is that the exemption remains valid because the blogger does not get commissions from any sales of securities from the talk. But I am not comfortable with this notion because being paid a speaking fee may be considered "other consideration" as stated in s4(c) FAA. 

The safest course of action is to treat all public appearance as voiding the exemption for financial bloggers. 

This means that we need to be extra careful once we start speaking for a fee.

d) Financial bloggers need to be careful when interacting with the public for a fee.

Some things we have done :
  • In this case, it may be safer to make sure that every power point slide does not mention specific securities so that it cannot be interpreted as an inducement to get the public to buy something. I have censored some screenshots from Bloomberg to avoid creating the impression that the stocks in the screen-shot are buy recommendations.
  • Another possibility is to couch our answers in a way which cannot be misunderstood as any form of financial advice but instead as what we would do for our own portfolios given our own personal situations.
  • The safest way to share with readers is to share broad strategic ideas that add value to the participant without making a buy/sell recommendation for any specific stock counter. 
Anyway, that's all I have for now given how much I studied our local laws. 

The only way for me to know more and become more useful to other bloggers is that I somehow get into real legal practice and take on actual cases. 

Please so not mistake this as legal advise. 

Always consult a real lawyer.