Saturday, September 24, 2016

On Oscar Wilde, cynics, price and value.

Today's piece is going to be little philosophical.

Let's start with Oscar Wilde's definition of a cynic which is  "A man who knows the price of everything and the value of nothing."

I thought this is exactly the kind of nasty remark most disgruntled Singaporeans would heap on a value investor so I thought it might be a good time to think deeper about this statement. It is highly probable that a person who thrives on economic analysis would see everything in economic terms.

After all, once you have a hammer in your hands, everything looks like a nail.

I'm going to propose a philosophical framework for us investment types not to fall into the trap of valuing everything via economic means. The inspiration for this idea is from the book The Five Life Decisions by Robert T Michael which is yet another excellent read which details a longitudinal study on Millenials and the consequences of the many life decisions they made. This also ties into my exhortation a few essays ago that we should study Gen X like an anthropologist and decide whether the YOLO philosophy makes sense for you.

My framework is as follows :

We need to understand that some things in life are means to an end as opposed to other things which are ends in itself. There is also a hybrid class of things which are both means and ends.

Here are my proposed examples :

a) An education is largely a means to some end. 

The study confirmed that even in the US, for the batch born in 1980, a higher education results in higher wage differentials, with someone with an advanced degree earning twice as that of a someone with a high school diploma. More damning news for the folks who want to emulate Bill Gates the Harvard dropout, the gap widens dramatically as the Millenials grow older.

An education also determines the people you associate with, who you marry, your lifespan, and the odds of your children also receiving a high education.

It is a key decision you have to make in your life. But education does not really stand on its own, it is merely a means to end. As such, economic analysis is useful in this regard. What courses to take should account for employment opportunities and median salaries.

b) A spouse is both a means and an end.

If you perform economic analysis on whether to marry, there is ample evidence to go ahead and get hitched in ROM. While it is not accurate to say that two can live on the price of one, according to the survey, two can indeed live on the price of 1.62. ( In fact 5 can live on the price of 3, but polygamy is not longer allowed in modern societies ! )

Marriage allows two people to complement each other and specialise in something to keep the household running, but marriage also takes time to work out and generate enough savings for both husband and wife so the overwhelming advice from the survey is to marry only if you have a long term orientation. Another words, if your significant other is a "here and now" kind of crazy personality, the best advice is to dump the person ASAP and find someone more stable.

But we don't generally do economic analysis on our spouses because you cannot really put a price tag on the intimacy and joys of being with someone else. Otherwise, SDU would have been much more successful in that case we Singaporeans are such a kiasu people.

c) Children are better treated as an end in itself.

Unless you are really perverse, children should not be the means to anything. They are really expensive to raise in the US which can cost $1,000 per month from ages 0-2. While it's way cheaper in Singapore thanks to government subsidies, parents suffer from bad job performance and lose a lot of personal freedom once they have kids. So right now, no economic analysis can justify having children in modern society.

But once you shift your focus to children as an end in itself, then very possibly you can enjoy the process of raising kids.

This is the key to avoid becoming a cynic.

Children should be treated as ends rather than means. We become financially independent to raise our kids. But it's not wise nor realistic to raise kids thinking that  they can make us financially independent although some very successful parents may be able to that.

But it does not end at just kids.

Sports, artistic and cultural endeavours are better off evaluated as an end point objective rather than some sort of means to an end.

Which comes back to my previous point on Vladimir Nabokov. Cultural capital should based on its own merit, and not to be benchmarked against other forms of capital. Otherwise, there will be no art and beauty in society at all.

Of course, this framework cannot deal adequately with all issues we face in this modern age.

If a person wishes to study for a qualification in Fine Arts, he is paying good money to eventually join an economy which places little value on their qualification. He needs to be clear that Fine Arts is an end and should not expect to be remunerated ( unless he is very talented ) as perhaps a surgeon should in modern society.

The most pragmatic way of dealing with this problem is to simply be born with rich parents.

Wednesday, September 21, 2016

What do high income people know ?

Self-help in this age of complicated data analytics means that the advice we can get on how to conduct our lives can become very specific and very useful. This is light years ahead of the good old days where we are stuck with Dale Carnegie, Stephen Covey and, worse, Napoleon Hill if we actually try to read to improve ourselves.

William Poundstone's Head in the Clouds, can be a very disturbing read but I now view it as a compulsory read if one aspires to be a thought leader in personal finance. William's experiment is ground breaking because he invented a questionnaire which asks a series of questions on general knowledge and then he maps out the answers to a person's earned income. In many cases, he adjusted his statistical results to remove the effects of age and educational level.

What we have is a guide to what a person knows against his annual income.

I am just going to share three findings which really made me think.

a) Knowing about personal finance increases wealth and income but not dramatically.

Knowing about personal finance such as effects of compounding interest would ideally be the biggest predictor of income and wealth, but it had only a moderate effect. The income gap between a person who knows compound interest and basic personal finance is only $20,000.

b) General knowledge and in particular basic knowledge on sports has the greatest effect on income and wealth.

The biggest income gap is worth over $50,000 of annual income is general knowledge and basic knowledge on sports. The folks who can point to Kazakhstan on the map have a huge income differential against someone who could not do so. That is somehow intuitive.

What is not intuitive is that knowledge on sports also results in a dramatic difference. But the questions on sports were simple ones which well-informed persons would know such as the number of players in a soccer team.

But don't start cancelling your Economist subscription for the New Paper yet ! When Poundstone created a sports quiz for die hard fans, the income difference vanishes. I struggle with understanding result and harbour grave doubts that this will replicate in Singapore.

c) Cultural knowledge does not result in any income difference

The most hilarious result is that cultural knowledge does not result in any income advantage at all. If you know that Vladimir Nabokov is the author of the book Lolita, it does not enrich you financially in any way ! This is a mind-blowing finding which nay have repercussions on how the US would see their cultural education in the future.

The only current explanation is that the folks who have a mastery of cultural trivia tends to be lower paid than other segments of US society.

d) Open mindedness and curiosity are important traits for wealth creation.

If we are to take our findings in totality, open-mindedness and curiosity are valuable traits for wealth creation. The quiz was designed to be done well by someone who reads beyond his syllabus no matter what his educational qualifications are, which explains why general knowledge creates such a robust income difference even after adjusting for educational qualifications.

Certainly this book has changed my views on the personality traits for wealth creation.

I would place Conscientious and Open-mindedness key in my future works on Learning how to Earn.

Sunday, September 18, 2016

Learning as a fundamental skill in personal finance.

If you look at the news on the glut of law students, one lesson becomes clear : there are no clear career paths with guarantees of comfortable middle class lifestyle. Engineers have always lived in this reality because when times are good, foreigners will be deliberately introduced into the economy to keep salaries and business costs on the low side. The only solution is extreme austerity, career gamesmanship and savvy investing.

Moving forward, I no longer think that my classmates are destined for a good life anymore. For even the select few who can get into the big four law firms, their constitution and resilience will be severely tested. Even with the high incomes, the glut will ensure that the legal industry remains an employer's market for the next 5-10 years. An employer's market based on my personal experience means that you have to accept the working conditions no matter how bad things get. Law students who cannot get a training certificate would have to think of creative ways to have a legal career as a non-lawyer, which can be just as lucrative if played right. Advantage will go to the more creative folks.  

This reflects a problem in personal finance, where no one has really bothered to study pre-employment issues in wealth accumulation. Most of us are stuck with the belief that we need high earnings to generate high savings before investment can even take place. 

But what enables you to get the high earnings in the first place ? In China, a vocational skills certificate enables the same pay as a graduate degree because skills are in a much higher demand in Chinese society. In Singapore, an NUS graduate can hand-in-heart expect $500 more per month than an SIM graduate. 

From this point onwards, a thought leader in personal finance must be focused on Learning as a skill.

Learning is pre-requisite to earning. In knowledge-based economies, the best learners can command the highest salaries. In the book Head in the Clouds by William Poundstone, people who can answer questions on the world history and current affairs were found to have higher salaries. But that's not all, Poundstone adjusted the statistical models to account for education and age and still found that folks who knew more still commanded higher incomes than those who did not. The differences were stark, a graduate who is knowledgeable about world affairs can command almost twice the salary of a similarly aged graduate who was not as knowledgeable. This is in spite of knowledge losing its currency in a world of search engines. 

Learning is also a post-requisite to financial independence. Once all your financial goals are met, your curiosity and open-mindedness will probably determine the quality of your life after you dispense with the need to work for someone. Otherwise it's just meaningless existence of sharing food photos and watching cat videos on the Internet.  

I am only halfway though the Poundstone book, after which I will read The Five Life Decisions by Robert Michael on how Millenials make key decision on what to study and who to marry. 

The aim is to find a way to instill curiosity into someone regardless of his/her academic talent. 

I hope to be able to have enough research material to establish Learning as a fundamental personal finance skill. 


Thursday, September 15, 2016

[Vote for me #3] Investing your money starts with containing your costs

[ I have submitted a personal finance essay and right now, I am still canvassing for votes here. Voting will only end on 16th September. I will be writing  a set of three essays to elaborate on the ideas presented in my essay in the hopes that I can get more hopes and hopefully win something for this competition. This is the third and last essay ]

The last component is investing your money, and I will not go into the territory covered by other bloggers on specifically investing which stock counters, instead I will share general tips which would dramatically improve your investment performance.

a) Investing is about cost control, so you need to get rid of parasites out to suck you dry

If you are focused on investment performance and always trying to guess which sector or industry would outperform the markets, you are already wrong. The performance of global equities over time will always be around 7-8% per annum. For bonds, you might be lucky to get 3-4%.

Face with this reality, the fastest way to outperform is by controlling your costs. If you buy a unit trust or ILP from some financial advisor, you can lose thousands when you hit retirement age because the expense ratios and management fees will cause you to lose 2.5% every year. So your equity returns are more likely to be around 5.5% per year.

The same applies if you invest your own money in the stock market but churn your own account often. The money goes to your stock-broker.

b) Investing is about spreading your risks

Too many investors think that they invest like Warren Buffett. Too many end up investing like Jimmy Buffett. The really good guys who can read financial statements might be able to hold 8-12 stocks and achieve returns of 30% every year, but most of us are average investors.

I think that it is better to assume that you are an average guy.

I hold about 30+ stocks because I really don't want to be affected by the underperformance of one counter. Instead, some of bad performance of my stocks are counteracted by those which outperform, giving me a good night's sleep.

c) ETFs are the best tool to lower costs and spread your risks.

If you agree with my earlier points then an ETF which covers all the stocks like Straits times index is a great way to reduce your costs and spread your risks. For beginners, a simple strategy of holding a stock and bond index is a great way to invest your money without going through the lengths of becoming a stock market expert.

d) If you are stock picker, be principled with your stock picking approach. 

If you fancy yourself as a stock picker, then you will need to be principled in your stock picking approach. You can't really wake up one morning and decide that Sheng Siong is a great stock because your wife shops there everyday ( Even though Sheng Siong is actually a great stock to have over the past year ).

I use a Bloomberg terminal which is free for all SMU students. You can use a terminal for free at the central library but fighting the other uncles for a 1 hour slot can be quite annoying.

I employ a selection criteria like "high dividend yields" and "free cash flow > dividends". Every now and then, Bloomberg gives me a list of stocks which meet my criteria, then I try to check out stocks which have yet to own. I will research and then buy the counter if the dividends I accumulate to spread my portfolio further.

Every now and then I try to run a simulation on how my strategy would perform in the markets over the next 10 years.

This is to convince me that the strategy I employ is not a bad joke.

e) I do have money set aside for high-risk investments

As I am a financial blogger, maintaining a degree of thought leadership matters to me, so I dabble in crowdfunding websites and mine cryptocurrencies in a datacenter in Iceland.

These initiatives rarely make me any substantial amount of money but reading up aggressively on these new ideas keeps me updated on technology trends and adds an X factor to my class presentations.

The combined effects of my investment portfolio and high risk initiatives is that I have very little money on me at all times after setting aside family expenses.

How little liquidity I have is often affected by rights issues from my REITs investments.


Wednesday, September 14, 2016

[Vote for me #2] Saving money and resisting the lure of a YOLO lifestyle.

[ I have submitted a personal finance essay and right now, I am still canvassing for votes here. Voting will only end on 16th September. I will be writing  a set of three essays to elaborate on the ideas presented in my essay in the hopes that I can get more hopes and hopefully win something for this competition. This is the second essay ]

The second aspect of personal finance I would like to talk about today is the idea of saving money. Saving money lacks the complexity of finding ways to earn more money because it is largely something which is within a person's control. The financial blogosphere is replete with ideas on how to save your money and I shall not repeat them here in this article.

Some bloggers have become successful by tracking their meticulous expenses either using a new-fangled app or an old fashioned note-book. Others blogs have great advice on cutting personal expenses but it all revolves around the concept of downgrading - finding a cheaper alternative to a goods purchase. And it can all be very effective. Downgrading from Starbucks coffee to Kopitiam Kopi-O kosong can save $5-$10 a day.

There are some hard truths that we bloggers have to personally confront when we talk about saving money :

a) Only conscientious people can save more.

The bulk of folks who benefit from savings advice are the folks who are already conscientious which covers the bulk of the readership of this blog. The question arises as to how to deal with unconscientious readers or folks who are likely to benefit the most from saving more money. Beyond getting a loved one to actually force them into an automated savings programs, most of us do not have a workable solution to this problem.

Sometimes it takes a huge personal setback to get a person to wake up their ideas and change their lifestyle.

For my generation, it may be too late.

b)  People are fascinated with the YOLO philosophy

The lives of a financial blogger is, frankly, only inspiring to other financial bloggers.

We seldom put up exciting pictures of us posing next to a perfect sunset or eating exotic seafood or a mountain of roast beef. Even though I kinda like my current lifestyle, pictures of mountains of legal textbooks can be depressing to a large segment of the population.

I think cracking the savings puzzle is to find a way to defuse the YOLO philosophy. The idea that you only live once and you should enjoy your life while you can is very attractive compared to a philosophy of always delaying gratification.

My only advice is to get the younger folks to stop observing other younger folks and start observing the 40-something year olds like me. Study the folks in my generation like an anthropologist. Take notes and learn from the mistakes made by my generation. Because it is only in your 40s when the corporate world deems you too expensive for your obsolete skills.

When you study Gen-X :

  • Who were the cool dudes and the attractive fly boys who always lead interesting lives that is full of variety ? 
  • Who is always "happening" and can be found in Zouk on Mambo Wednesdays ? 
  • Do these subjects have jobs today ?
  • Are they slaving for their mortgages and become middle-aged uncles who are constantly being pushed around by other life priorities ?
  • Are they struggling to support their kids and their parents ?

Ask them about the time when they were in 20s. 

Get them to regale you with their tales of derring-do from their younger days of "Chionging" their watering holes. 

Ask them about Fire Disco, China Black and Devil's Bar. 
Ask them about BigO magazine, The Mighty Lemon Drops, Lizard's Convention
Ask them about Nirvana and the grunge movement.
Ask them about slacking at Newton hawker centre or the Esplanade.

For some, there are very fond memories.

For other's, they are the glory days which will never be repeated amidst the modern pressures of being the sandwiched generation.

In my generation, there will be winners and there will losers. Sometimes, winners can turn into losers. Other times, losers bloom into winners.

Study them carefully, then make a decision on how precious your YOLO philosophy is.

Tuesday, September 13, 2016

[Vote for Me #1] Earning your money and Career Management

[ I have submitted a personal finance essay and right now, I am still canvassing for votes here. Voting will only end on 16th September. I will be writing  a set of three essays to elaborate on the ideas presented in my essay in the hopes that I can get more hopes and hopefully win something for this competition. ]

Figuring out how to earn your money is most critical component of personal finance and very possibly something which even the best financial advisors would be unqualified to advice on. If you can manage your career and earnings well enough, more than half the battle for Financial Independence can be won. In Singapore, this is compounded even further by our low tax regime which allows most Singapore workers to retain as much money as they can from their labour.

Unfortunately, career management is the hardest and most complex component in personal finance because it taps on your ability to learn, adapt and play company politics. Your financial advisor will also not have a clue on how you should plan for finances for the occasional 1 or 2 years when you will be searching for a new job in your 40s.

Here are some points to note when considering your career :

a) You will always be better off with better educational qualifications

Companies determine your pay scale by looking at your educational qualifications.

A local graduate draws on average $3,300 as starting pay and has a fairly good increment to look forward to. A local private university graduate draws $2,700 but pays more to get that degree. A fresh polytechnic graduate draws $2,100 but gets to start work at a younger age.

A lot of people cannot accept this fundamental truth.

They keep reminding themselves that Bill Gates dropped out from Harvard.

They should sell fishballs.

b) Extroverts always have an edge in their careers

There is a lot of "hope literature" which tells you that academics may not matter in some jobs, but if you look at success stories beyond academic qualifications, it always boils down to a job with an unlimited upside in sales. This gives the extrovert salesman a huge advantage over the introvert herbivore.

If you are great in sales, it is possibly the easiest job in the world but if you suck at it, life can be a living nightmare.

The situation is changing for introverts who can crunch a lot of numbers and write fantastic code, but the transformation of our economy is currently incomplete, if you don't get along with people, a career in sales is not for you.

c) You can get obsolete holding onto a job

I would say that a solid engineering degree has a shelf life of at most 10 years, after which you need to rely on your working experience to remain relevant. Focusing exclusively on the job without thinking about industrial trends is the reason why so many engineers are driving Uber cars today. MNCs are also notorious for keeping their best R&D projects in North America. So Singapore staff will only get to patch and maintain systems.

Because of massive technological disruption, you can suddenly become obsolete overnight and if you work for an SME that cannot afford to retrain you, its time to kiss your earnings goodbye.

d) Heroically working for a startup or SME generally does not pay off

Over 15 years ago, I had a seminar with Ellen Lee who eventually became an MP. I remember arguing in those days that a good graduate will never consider an SME as a place to build his career because MNCs just look better on a person's resume and provide projects on a larger scale to work on. I was openly elitist because I represented my classmates and had to channel that indifference.  My NTU counterpart, who was a really stupid guy who on hindsight should not be allowed to represent a great institution like NTU, argued aggressively for SMEs and said that he wants to "Pao Kao Liao". Then he let slipped that he wants to work hard so that he can join an MNC later (maybe he could end up becoming my subordinate later in life).

Now I am at the age where folks of my generation can sit down and compare notes.

Readers can judge as to how well these SME and startup guys fare on average compared to the MNC or government guys. Just don't tell me about the rare cases where someone lucks out and has a multi-million dollar exit in Blk 71, that's an exception and not the norm.

e) So you have to think like a start-up executive, but work for MNC, government agency or a bank

The only solution is to first hitch onto a stable,well-paying job which allows you to save as much money as reasonable possible at an earlier stage of your life so that you can compound your wealth. This means going after all the well-known names in the industry or the government agencies.

But these jobs also have the effect of lulling you into a sense of complacency. So many of us in MNCs in those days hoped to worked for our companies for life. But over the years we got outsourced, retrenched and restructured anyway because MNCs also like to preserve a youthful culture can be very brutal to mid-career executives.

So you have to think very lean like a start-up executive. Keep learning about industrial trends and remain curious about new technologies and how they can potentially turn your comfy MNC life up side down.

But what does this all mean for earning your money ?

Play a tight game, go where the money is and don't be caught up with any ideology which is anti-elitist or political in nature. If you have spare time and energy to create more streams of income like opening a e-portal or writing a book, do it aggressively if it does not violate your HR policy.

Thursday, September 08, 2016

Please vote for my Personal Finance essay !

Even during those intensive days where I was preparing for International Moots, I was able to spend an hour writing a 600 word essay on Personal Finance which can now be found here.

My primary motivation is, of course, to win the competition and enjoy the prestige of winning. But more importantly, the prize is a 2D1N stay at MBS which means that my poor family gets a short holiday away from home which I would not ordinarily spend on even if my money came from my dividends.

Ok, I just want to share the backdrop and motivation of my essay.

I needed to summarise my personal financial philosophy within 600 words.

And regular readers should know this :

My philosophy of personal finance is not a philosophy of fun and laughter. Financial planning more of an engineering problem. More akin to planning a legal defence.

I think that there is a fundamental problem with the way financial planning services are sold in Singapore.

Financial planning is primarily a sales and commissions driven exercise, as such, it is very easy for the Financial Planning Industrial Complex to emotional link financial planning with happiness, fun, variety and relaxation. For example, one major insurance firm hired actresses to jump around like drugged-up-hamsters-surrounded-by-colourful-confetti to create an impression that retirement is time to indulge in your hedonistic fantasies. Another supposed investment guru showed off pictures of his dividend checks, very possibly to hijack the emotions of their client base who will lose control when they see such ostentatious displays of wealth.

The mainstream news is not helpful either, recent articles in Me and My Money already feature the most credible guys in the financial planning industry but no one pointed to the big elephant in the room in all these personal financial plans which is crucial for all Singaporeans facing globalisation and technological disruption today :

Can your client retain his job and income when he reaches his 40s and 50s ? If not, what are your remedies ?

Retirement is not a day of fun at Uncle Ringo's.

The planning required is meticulous and delaying of gratification can be quite depressing to some people.

So I wrote an essay which is somewhat cold. It surgically details the three basic steps to stop that reliance on a pay-check before age 40.

I hope that you can vote for me.

Because in this essay, I will show you how I dealt with that elephant in the room.