Wednesday, August 16, 2017

New insights from Ramesh s/o Krishnan v AXA Life Insurance Singapore Pte Ltd

Sometimes, a lawsuit sheds such interesting insights on the world of financial planning, it becomes impossible to resist making a small mention of it on this blog.

I will not write about the legal issues raised by this case as I expect a lot of more qualified folks to discuss this negligence case in the next few months.

Just two points before my classes start :

A) Persistency ratios.

The insurance industry tracks this very interesting ratio which tracks the percentage of policies sold by an advisor that are still in force after a certain period of time. So if an agency has a 13 month persistency ratio of 10%, it means that after 13 months, 9 out of 10 policies are no longer in force, consumers have have cancelled those policies within that year. 

Sadly, the industry does not have a standardized mechanism to define what a persistency ratio is and how it should be reported to authorities. If MAS can standardize that all insurance companies should standardise their persistency ratios for Term life, whole life and ILPs for a fixed period like 36 months and make this metric transparent, we would actually have a means of measuring how much regret a consumer is experiencing when buying insurance products.

B) Twisting of policies.

The second insight is the concept of twisting which was also mentioned in the case. Twisting occurs when a financial planner advises a customer to drop an existing policy only to pick up another very similar policy. Twisting occurs to the detriment to the consumer because he or she incurs a sales charge all over again for a new policy.

Naturally, when an agency cultivates an aggressive sales culture, advisors may end up twisting their customer's policies. When done industry wide, persistency ratios will go down.

This case is a fascinating read even though it is tad long at 50+ pages.

Technology can come to the rescue of the hapless consumer of financial products. I imagine a future where MAS or a consortium of companies sets up a blockchain registry that tracks the take-up and put-down of all insurance policies so that citizens can go to a central website to track the persistency rate of the agencies they deal with and the specific products sold by an insurer. 

This would keep agencies and insurers honest. 

In the meantime, readers can try to pep their financial advisors on the persistency ratios of their agencies although I think you are more likely to draw a blank stare in return. 

( If you actually do that, do share your results with me. )

Saturday, August 12, 2017

Efficiently Inefficient #4 : Backtest Noob musings.

There are some murmurings that I am emerging as some sort of back-test guru but that cannot be further from the truth. I am still very much of a noob and have a whole lot more to learn.

Today I will take about some aspects of backtesting that I will need to straighten out to improve some of my own investing strategies.

a) Understanding superior returns

The book explains that there are just two sources of superior returns. First, acceptance of liquidity risk. And second, superior information. Back-testing may refers to obtaining of superior information that compares strategies against each other although some of the counters flagged by a stock screener can lack liquidity. ( Like my frustration of being unable to buy more Global Testing stocks )

b) The problem of trading costs

Bloomberg's backtesting tool should allow us to factor in trading costs. In such a case, monthly rebalancing is costlier than annual rebalancing.

c) Data-mining as a serious form of bias when backtesting the markets

Kyith Ng of Investment Moats asked me privately what would backtesting results be if I changed the order of stock selection in my screens. So instead of choosing the highest dividend yielding stocks and then looking for those with the lowest gearing, I would look for REITs with the lowest gearing and then find the highest yielding stocks in the set. Both backtests will yield different results so one will clearly be superior to the other.

We will always be seduced into backtesting more sophisticated screens to get a higher return or lower risk but we are still operating on one historical dataset and may overfit the data.

d) Need alternative sets of data.

One day to preventing ourselves from data mining would be to test a different set of data with the screens which I have unfortunately not done in any of my talks so far.

We first find a strategy that works in Singapore, for example dividend stocks with sustainable free cash flows. We use a completely different set of data like the US or Japan and we observe to see if we can obtain outperformance in a different market.

This gives us better assurance that our investment ideas are not completely off the wall.


Friday, August 11, 2017

National Day Middle Finger Meditations

It is amazing that a day before National Day, I made an obscure reference to Henry Park and the Law of Attraction responded by giving all of us this courageous kid from Henry Park who took the chance and gave the middle finger to all Singaporeans during National Day. I am sure the poor kid must have been given a hard time by his parents or teachers for what he did.

Before I share with everyone my version of the moral of the story, let me share with everyone a small snippet of my life.

SMU Law Faculty is under new management and it's fair to say that things are certainly getting better for SMU Law Students. For the first time in my life, I sense that SMU is trying to engage with alumni and working really hard to consult with us on making key changes to the syllabus and pedagogical techniques. The alumni responded enthusiastically and I could certainly feel the passion in the seminar room with the new Dean talking directly to us.

But one small observation bothers me.

As I am quite clueless about the legal industry, some JD classmates pointed out to me that the eager folks who came back to help out were the older generations of former Justice Legal Clerks and basically the best of the best that SMU ever produced. If Law School were DC comics - these guys are the New Gods; if Law School were Marvel - they are the Inhumans. They gave well argued points on how legal education can be improved and enhanced and backed it up with industry experience.

[ Side note : Do Law undergrads pay some version of Magic the Gathering that feature prominent lawyers and member of the bench ? Can I tap my Associate and Trainee card to play a Writ of Summons ? Can you tap a tap a Senior Counsel to play a Strike out my Proceedings card ? ]

Then it suddenly hit me.

This is just like a JC reunion. Successful folks will come back to see how everyone else is doing. More ordinary folks will not want to show their face unless they are also into MLM or insurance.

The views represented in alumni feedback sessions, through no fault of anyone, would be overly represented by the folks who had the most positive experience of SMU law school. Why else would you come back?

Law School is awesome when you're kicking ass, but it's worse than eating SAF coconut bun in the 90s when your ass is being kicked.

There may be fewer folks who represented the views of those who might be able to give valuable feedback which makes Law School better for the rest of the 80% of the graduates, such as those :

a) Who tried hard by missed out from getting with a Latin distinction grade by 0.01.
b) Got dumped by bf/gf just before the exams.
c) Who fell sick and had to drop out from the entire semester.
d) Just can't get their writing up to par to meet university standards.
e) Almost had a nervous breakdown from the workload because they have no muggers.
f) Became class pariah and was never willingly invited to form a group with someone else.
g) Who are enraged by some professors who can get tenure in spite of being tardier than a Henry Park primary school student.

Social science research has that same problem. Some research samples are drawn from US universities and run into the bias of being white, industrialised, democratic, highly-educated and rich.

But let's come back to National Day.

If you want a primary school that represents highly successful Singaporeans whether they are parents or students in the future, you will choose to feature a bulge-bracket white-shoe primary school like Henry Park. And then you hope that a successful upper middle-class kids will never give you the middle finger... That hope was dashed last night.

I would like to celebrate the NDP middle finger.

It reminds us that no system is perfect.

It's not even close when everyone is trying their best.

The Changkat Monyet Primary School kids stayed largely at home to watch NDP or may be helping out at their parent's hawker stall. They can't give you the middle finger, but when they get shunted to the Normal(Technical) stream and look forward to a life of constantly being undervalued by society, they might just decide to give a big "fuck you" to the society they live in. The 30% who keep blaming everything on the 70% has a constant middle finger thrown at the rest of Singapore.

But things are looking great.

At least in yesterday's NDP - These folks were represented.

[ Note : I think a bunch of us ordinary mortals were quite committed to future Alumni activities and we've made a pact to attend as many as we can in the future. ]

Tuesday, August 08, 2017

How Singaporeans can be their worse enemy !

Every National Day, I will try to write something to get readers thinking about some important issue they are likely to experience in the future.

Of late, I have been trying to get my daughter into the primary school that is the located closest to our HDB EC. Westspring Primary School has recently been in the news in a good way lately so it is highly sought after by residents in my area. To keep the long story short, we got extremely worried when we had to ballot under Phase 2C but in the end we managed to get a seat in the Primary school of our choice.

While you may want to congratulate me for my good luck, I recently discovered that my own primary school,  Bukit Panjang Primary School, an extremely silly and mediocre place in the 80s (where some of us had to engage in melee with Primary 8E and 8M students) has climbed up the ranks and now positioned at 36th place nationwide. My alma mater is now one of the upper tier primary schools in Singapore.

Not putting my kids into my own primary school was not a straight forward choice. We are confident of the high standard of education in all primary schools in Singapore but have no illusions about the social economic status of classmates my daughter will meet and the lifelong friends she can hope to have when we vary our primary school choices.

In the end, a short commute would save costs and give my daughter more time to sleep. So neighborhood school it is.

The ability of Singaporeans to secure their children in top primary schools through legacy admissions is one of the biggest weaknesses of our meritocracy and belongs to a class of behaviors known as opportunity hoarding.

While it is very convenient to blame the top 1% in wealth and income, a lot of opportunity hoarding is conducted by folks largely by myself  and readers of this blog who belong to the top 20% of the Singapore population.

Yes, we, Singaporeans of the top 20% are the worse enemy of Singaporeans.

The upper 20% has evolved from just buying better toys and game consoles for their children to doing something with time and money that can entrench their kids in the upper crust for life.

Consider this, a neighborhood primary school is often lacking in volunteers. In contrast, in our best primary schools, a presentation on the human body can be made by a medical specialist who wants to volunteer to give a head start to his own child via Phase 2B. A fairy tale can be narrated by someone who is a legal counsel for the same reason. The upper crust volunteers in the best places to get their kids into the same slots that gave them the social networks that played a role in their success. The situation in universities can be worse when rich folks can pay to put their kids in foreign universities and can insure them from bad A level results.

Opportunity hoarding can also be subtle. Some medical guidelines state that babies should be optimally breastfed for 6 months. In Singapore, however,  maternity leave lasts only 4 months. The most powerful couples can afford this luxury for their children because the father is capable enough to hold the fort while the mum finds some way to spend more quality time for their kids. Assortative mating, where the best graduates marry each other, account for 40% of income inequality in many Western societies.

For interested readers who want to know more, how the upper middle class is leaving everyone else in the dust in the US can be found in Richard Reeve's Dream Hoarders, which in my opinion, is a lot worse than what is faced in Singapore.

At the end of the day, I can't change the way I play the game because the future of my own kids are at stake. In fact, I intend to play it to the fullest and bring the financial markets into the picture to boost their chances of succeeding in the future.

So expect no quarter from the top 20% of Singaporeans.

Amazingly, PM Lee, is already on the case putting enhancements to pre-school education as a top priority which is heartwarming.

Our government needs to be a government for all Singaporeans, not just Henry Park Singaporeans.

But we can do more.

I can imagine Singapore mining a new kind of crypto-currency that can be used when wealthier parents volunteer in the neighborhood schools. Mining of the coins is inversely proportional to school popularity and awarded proportionally to volunteers and these coins can then be traded to get their kids into the best primary schools in Singapore. This currency can scale to provide some sort of remuneration to volunteers and do-gooders in our society. I would definitely spend more time giving library talks to get these SamaritanCoins in my wallet.  

That is the least we can do - eliminate the ability of old boys from sending their kids into their own primary schools and create a system to grant incentives to folks who help in schools that need help the most.

This way we can build a better age for our children where our generation's best is yet to be.

Saturday, August 05, 2017

Deep REIT investing insights from Investors Exchange 2017

Sometimes, the good stuff needs to wait until after a seminar is over.

As speakers in BIGSCribe events are also investors, we are also part of the audience when someone else is speaking.

Kenny Loh or Marubozu gave a fantastic presentation on REITs investing and runs a course here. Here are the results of my back-testing to refine my own REIT investing strategy using the insights I learned from Kenny Loh's Three Musketters approach to REIT investing. Paying customers would already have some sort of quick tutorial on what semivariance is from my presentation.

a) Baseline - buying all REITs at one go

If you buy all 41 REITs in equal proportions, your returns would have been 8.5% with a semivariance of 13.67% for the past 10 years. This is our baseline and I recommend that every investor who might not want to go too deep into screening should just buy all the REITS in SGX in equal proportions.

b) Choosing REITs with the highest Yield 

As I have spoken in my own presentation, buying half of the higher yielding universe of REITs can outperform the strategy of buying all the REITs in the SGX universe. Last time I backtested 9.64% with a higher semivariance of 14.25%.

c) Choosing REITs with the lowest Gearing

Kenny spoke about looking for REITs with a lower gearing. I backtest a strategy that buys half of the REITs in SGX with a lowest debt to equity ratio. Once again, I was able to outperform at 9.56% with semivariance of 13.98%.

d) Choosing REITS with the lowest Price to Net Asset Value

Kenny spoke about being careful when looking for REITs with a high net asset value. I backtest a strategy that buys half of the REITs in SGX with a lowest pice to book ratio. This time I underperformed at 7.28% with semivariance of 15.08%.

Attempting to buy a dollar worth of real estate with 99 cents actually backfires on the investor with lower returns and higher risk.

e) Super-duper REIT screening strategy

So thanks to Kenny, there are at least two working strategies. Find REITs with a high yield and low gearing. I combined both screens, searching for the top 50% highest yielding REITs and then within that set, short-listing 50% of those with the lowest gearing.

This time I had a winning strategy in my hands. A final return of 13.16% with a semivariance of 14.49%. It has a fairly high Sharpe ratio of 0.54.  1 in 40 years, you may lose about 16% of your portfolio value, making this something which may be amenable to 200% leverage.

What is the moral of the story ?

When investors get together and mutually present seminars, our insights are silo-ed and we might not be able to extract the maximum benefit if we stick to our own investing approach. Even my 6-8% strategy returned only 10%.

Because I always make sure that I follow up on my learnings from other speakers, the blogosphere can benefit from a much sharper insight that combines the investment ideas of several speakers.

[ Note : The Singapore REITs universe is small, applying a screen to choose a quarter of sticks in the universe will only yield about 8-11 stocks. A diversified investor will need a few different strategies to build a portfolio that can withstand the test of the time. ]

Wednesday, August 02, 2017

Efficiently Inefficient #3 : Alpha shenanigans from Investor Exchange 2017

In today's segment, I'm going to talk about how to incorporate some concepts from hedge fund investing into the talk we just had last week, but first you need to remember what I reported on REIT returns last Saturday.

If you buy all the REITS in the stock market and rebalance your purchases annually for the past 10 years, you would expect to earn about 8.3%. Generous returns by any standard as the STI could barely stretch 5% during that same period of time.

Suppose you then buy 50% of the REIT universe which gives higher yields, you would do 1.15% better or earn a return of 9.45%. It does not take much mathematics to figure out that the lower yielding REITS would return 1.15% less than the average at 7.15%.

A hedge fund manager with a prime broker might be able to structure a bet that allows buying of the top 50% yielding REITs and shorting 50% of the lowest yielding REITs.

This method of investing would yield a really nice 2.3% that does not correlate with the general REIT index. So you can have a market neutral fund that returns 2.3%. This is realistic because Singapore Savers Bonds return about 2.3% risk free.

The industry calls this alpha, which in this example, would be 2.3%.

But the book also mentions this ratio called the Alpha-to-margin ratio.

Some hedge fund managers are given a lot of flexibility from their prime brokers. Suppose the prime broker allows a margin of 20% which allows the hedge fund manager to obtain a leverage ratio of 500%.

The alpha to margin ratio in this case is 2.3% / 20% or 11.5%. This is a 5x magnification of returns.

I bet this is how accredited investors can be told about market neutral returns at such ridiculous.

While it would be fun to create small portfolios like this for individuals, investing in such hedge funds was probably what led to market nightmares like what happened to LTCM. You are using a vacuum cleaner to suck up pennies on the railway while there is an incoming train.

It starts with a simple backtest suggested by an engineering geek which is then followed up generous offers of market leverage from brokers. Sometimes, a market anomaly occurs and low yielding REITs might outperform high yielding REITs for a period of time and KABOOM !

You got a disaster in your hands.

Sunday, July 30, 2017

Aftermath : Investor Exchange 2017

Yesterday, BIGScribe had our biggest event for the year and we sold out all 250 tickets for the event. Although I did speak for 20min yesterday, I attend these events as a fan boy myself and would generally try to follow-up on them on this blog. Here are the comments I have on the event.

a) Optimal search for Real Estate properties

This is just my personal opinion on Vina Ip's talk. While I know very little about the actual purchase of real estate, I am quite sure that only a small minority of real estate investors can review 100 pieces of real estate before making a solid buy decision. I'm not even sure if the sales person would get fed-up and stop working with the buyer after the 60th viewing. But that being said, I buy homes to stay in and do not make money from buying and selling properties.

But I do have the aid of Computer Science via this concept known as the Secretary's Problem.

If you have 1 year to find a piece of real estate, spend 37% of the time building a database of searches just to know your own preference. After around 4 months of viewing property, you have a pretty good idea of price and the value of the property you are searching for. The scientific advice to minimise regret is to find the next piece of real estate that is better than the 37% database you have built earlier. In this case, if you have a few years to buy real estate, you might really end up going through 100 pieces of real estate but you certainly do not need do this if you have to buy a house in 6 months.

( This is the same mathematical model computer scientists used for Tinder matches and blind dates )

b) Marubozu's three considerations when buying REITS.

I really enjoyed Kenny's talk about cautioning REIT buyers on gearing and Price/NAV. Over the next few weeks, I am going to empirically verify his talk and see if there is a way to come up with better performance when screen REITs with a gearing lower than 40% and NAV/Price above 1.

If it returns over 10% backtested over 10 years with a low semivariance, I would adjust my margin strategy to accommodate this framework.

c) Teh Hooi Ling's super-duper awesome talk.

I am a gushing fan-boy when Hooi Ling started talking about her investment ideas. She is my senpai in the MSc Finance programme in NUS. We have very similar training in finance but it was obvious that I am just an amateur and she the astute investing professional.

The gem of Hooi Ling's talk is the idea that you can construct some kind of indicator to figure out when the game is up and we may be staring at an economic downturn. This involves the process of creating a value screen that returns the number of stocks that meet criteria. When the number of deep value bargains drops to a low number, it may be time to leave the market.

The question is how should such a screen look like?

I have constructed deep value screens before using P/B and P/E, I need a third criteria to create this screening prototype and may have the exact research journal paper from the Financial Analysts Journal to get this task complete.

If I do successfully construct a cheap and dirty screen for retail investors, I would possibly do a talk on it next year.

BIGSCribe is currently collating the feedback on the event and I might talk about it again over the next few days.

Some fans told me that they did not like my 50 Shades of Grey theme but judging at the body language and interaction of the audience, I know that you secretly enjoy talks like this.

Just remember to have a safe word !

Friday, July 28, 2017

The disruptive potential of Amazon Prime.

I was really lucky because on Thursday morning, I was able to slip an order for some groceries from Amazon and was able to experience the Prime service on my own. As it was Amazon Prime's first day in operation, the order obviously came late and the delivery person was very confused. Thereafter, the service actually went down and even at this time, the delivery service is still currently marked as being sold out.

Regardless of how badly they performed this week, Amazon will get its act right within the next few months if not weeks. The price point of their products were really attractive and I can imagine a lot of Singaporeans opting to order from them instead of going to the nearest supermarket to queue for their groceries.

Here are some preliminary thoughts :

a) Retail is very likely doomed but it has been doomed for a while

Retail has been doomed for quite a while and you notice that malls are switching their focus on providing services and experiences rather than goods. I don't think they will get it right so soon so I expect landlords to seek lower rents over the next few years. 

You can definitely expect to see more cafes, tuition centres and maid agencies in our malls over the next few years. 

b) There might be a boom for delivery personnel in Singapore.

I expect this to be positive for drivers who don't mind working in the gig economy. Not everyone likes to work for Uber and some just want to deliver goods for a living. Over the short term, expect some really attractive jobs which would be a relief for males with lower educational qualifications. 

Demand for driver might even ramp up the pay for Uber and taxi drivers. This boom should last until driverless cars start showing up on Singaporean roads.

c) Warehouses are the next malls.

I am fairly bullish on warehouses now and expect e-commerce companies to start new leases on large warehouses to house all these goods Singaporeans will eventually buy. A new equilibrium will be reached between the space used in malls and space used in warehouses. 

I have a particular concern for our Friend Local Game Shops. I have scanned the board games section on Amazon Prime and find that the discounts are so deep that buying them from vendors on Carousell. Singapore may no longer be able to sustain so many game shops and those that do survive will need to find some means of organizing events to make it more compelling for gamers to show up. 

This is going to be bad for me because, without bookshops and game-shops, I no longer have a reason to even go to Orchard Road.

Tuesday, July 25, 2017

Efficiently Inefficient #2 : How to be your own Hedge Fund manager.

At this stage of my personal finances, I am edging ever closer to to becoming an accredited investor. But as of now, I am not there yet. Accreditation can allow a person to qualify for hedge funds but evidence of hedge funds outperforming the market are hard to find because many hedge fund managers simply do not wish to report their results to a central database.

It is probably easier to expect that investors of hedge funds would generally underperform the market because the fees are so high. Hedge funds can charge a management fee of 2% and 20% of their outperformance compared to a benchmark. Furthermore, the book mentions that hedge funds tend to have returns which have a large kurtosis and are negatively skewed. This is geek-speak for returns which can be very large and negative when the time is not right.

Thus, it may be safer for us retail investors to just see hedge funds as a sophisticated compensation plan for hedge fund managers.

For intermediate DIY investors, it may be better to get your hands dirty yourself and avoid paying ridiculous management fees by considering some of the key features of hedge funds and adopting it on a much smaller scale towards your own portfolio.

Here are some ideas for your consideration :

a) Leverage

I am fairly familiar with leverage as my margin account has will be invested in over $100,000 of SGX counters this week. Leverage allows investment gains to be magnified. A portfolio yielding 6.5% leveraged at 200% at a borrowing cost of 3% can yield 10% for an investor.

The problem is that leverage also magnifies losses so this feature need to be handled with care. I backtest my portfolio strategy and note the semi-variance of my strategy before committing my funds into my margin account. ( More will be shared in my talk this weekend. )

b) Shorting

Hedge funds also regularly short their positions so as to create portfolios that are market neutral. I am less familiar with this as I have yet to implement a portfolio of short positions. Previous blog commentators have explained how to implement some short investing ideas. The latest being Daily leveraged certificates which allow an investor the ability to take short leverage bets on the STI index making perhaps 3% or 5% gains when the index dips 1%.

c) Derivatives

I can do some mathematics behind derivatives but have very exposure to them. The only derivatives I have are long-dated company warrants on Second Chance stock. I bought them when they seemed underpriced a while ago.

d) Cryptocurrency

While not mentioned in the book, I think it is unavoidable that a new class of hedge funds would take up positions in cryptocurrencies in order to generate returns uncorrelated with the stock and bond markets. It is interesting area of development and something I am looking into closely.

In general, I think that for a retail investor, a basket of ETFs is enough to create some means of preserving the purchasing power of your wealth. I certainly would not risk my core portfolio on any of the strategies I mentioned.

The rest of the introductory chapter of the book would be dry for most investor readers but fascinating for lawyers who get some exposure in figuring out how hedge funds are structured.

Sunday, July 23, 2017

A Prostitute's Ikigai

One of the points raised by the cruel commenters of Reddit when my article on why Singaporeans do not matter became a top read on this blog was that I have a a very narrow circle of friends who are gamers. I wanted to use this opportunity to show that my choice of social circle can lead to better insights compared to just hanging out with Singaporeans who want to take Instagrams of food or talk about their children's PSLE preparations.

Consider this scenario :

Someone wants to hire a Singaporean prostitute for a night of fun. When the time came to meet up with her, she did not show up, saying that she does not know whether she can get off her day job as a PA on time. The second time round, the person tried to make another appointment with her, but she was fussy and refused to service her client in a hotel room, instead she insisted that the client should do her outside (as in the open wilderness).

I felt that this is a teachable moment for my blog readers - maybe the prostitute really was in this line of work to attain self-actualisation.

Prostitution is a good threshold example when we look at different frameworks on career and life satisfaction.

The Western model of career planning we learn about in TED talks and self-help books is that we look for three things when deciding on a career :

  • Choose a career you are passionate about.
  • Choose a career that pays well.
  • Choose a career you are good at.

If we adopt the Western model, we can say that it is definitely possible for a prostitute to find that her job is a calling. In this case, the freelancer already has a day job and takes on clients because she enjoys the work, the work pays well and she is quite good at her job role ( Maybe she gives good GFE vibes and is always fully booked, who knows ?).

What's interesting is when you adopt the Eastern model and decide whether prostitution work will allow someone to find his / her "reason for being" or what the Japanese say Ikigai.

The Eastern model introduces a fourth element.

Prostitution must be the kind of work that the world needs.

At this stage, it is arguable as to whether Prostitution work can be someone's Ikigai.

A judgmental prude can argue that the world does not need Prostitution because it destroys families and introduces more negatives than positives to society. A more liberal interpretation can be that Prostitution can curb other sexual crimes by creating an outlet for men without conventional forms of sexual access.

Something that is acceptable by a society that emphasises individualism can be frowned upon when we assess it through the lens of a more communitarian society.

One thing is clear - Readers can benefit when they ask themselves whether their current vocation is their Ikigai.

Wednesday, July 19, 2017

Efficiently Inefficient #1 : How to think about market efficiency.

I am writing this article in Raffles City Food Court after a second day of lectures for the Part B Bar preparation exams. Two uncles sitting next to me are talking to each other about MLM and bragging about their recent trading successes via cryptocurrency trades. The conversation is quite fascinating but I have a blog article to write.

The book Efficiently Inefficient by Lasse Heje Pedersen was written as a textbook for folks who want an introduction into various hedge fund strategies. I thought the concepts may be be useful for retail investors who want to craft a more sophisticated investment strategy. After all, you guys are aware that I have since the last book, built a margin account which I intend to expand over the next two weeks. By August this year, about 4% of my total portfolio value would be leveraged by 200%.

We will start with a relatively simple concept of market efficiency.

The idea that markets are efficient is the idea that our stockmarket reflects all market information. Market prices always reflect fundamental value and readjust when breaking news occur. If markets are efficient, then active investing is pointless and your should just minimise your costs and just buy ETFs for your portfolio.

The converse of market efficiency is that the market prices do not reflect fundamental value and it is possible for active investors to succeed. Human beings make mistakes and it is possible for the investing crowd to become overexuberant or overly pessimistic.

The idea of markets being efficiently inefficient is a new one which tries to be a halfway house between market efficiency and market inefficiently. Markets are inefficient enough just to compensate money managers for their costs and fees but efficient enough to make it hard for a new market manager to enter the market.

If you adopt this belief, then market managers will typically perform well enough to be rewarded for the liquidity they provide to the markets but will find it challenging to perform beyond what they charge an investor in terms of trading costs and management expenses.

Some active managers will be able to exploit market anomalies over the short term but they will need to keep searching for new ideas to remain relevant to their clients.

I would this hypothesis to be correct. The only way to keep ahead of the markets is to keep reading and finding new ways to invest your money.

It does not make sense for anyone to be permanently financially independent without performing a porfolio review every now and then readjusting their investments to adapting to changing circumstances.

Saturday, July 15, 2017

Equity Management ( Last Episode ) : Time to move on and how to think about GLP.

I'm closing this segment in favour of something more reader-friendly next week based on more interesting hedge fund strategies.

I thought perhaps I'd like to show how the stuff I wrote on this column would be applied to the latest news on GLP.

Based on what can figure out on the news, GLP is being bought out at $3.38 and dividends declared in May will not reduce it's value which means that potentially whoever owns GLP will get to exit at $3.44 by latest April 2018. Looking at the current price, GLP is also trading at $3.29 which provides a nice 15 cent profit even for investors who decide to buy after the news has been declared.

Here are a few points :
  • Basic maths says that buying and holding GLP until next April will return around 4.55% or around 6.825% annualised. A lot of friends and bloggers have been sounding the alarm on such an arbitrage opportunity.
  • At this stage it is very easy to fall into a trap of equating this deal as a short term bond issue which gives 4.55% in 8 months. A 4.55% corporate bond is relatively stable but a buyout largely depends on whether the buyout will succeed. Serious losses can result in the buyout does not take place. 
  • At this stage, we can give benefit of the doubt to the folks who see this as a bond-like investment because the underlying mechanism is what we folks in law school know as a s210 Scheme of Arrangement which is welcomed by initiated by internal management. ( But a s210 can be shot down by the courts in a myriad of ways which will not be the subject of this article. )
  • So will you invest your money to earn an annualised 6.825% ? Depending on your level of risk aversion, some folks might. For me, I have much more attractive counters yielding 8-10% on my radar.
What is more interesting is when you apply leverage and try to mirror what some professional hedge fund managers do.

If you look at Maybank's lending rates for GLP, they consider this a Tier 1 stock so they only charge 2.88% for margin. Suppose you leverage at 300%, You can expect to earn over 6.825 * 3 - 2.88 * 2 or 14.715% annualised over 8 months.

14.715% is a decent return, but take note that if the buyout fails, you may be looking at perhaps 20% drop which would cost you 60% of your capital. There is no such thing as a free lunch.

This is something that I don't have the guts to do, but thinking about risk and return in this manner may provide more interesting insights that you can't find elsewhere.

( I am not vested in GLP )

Anyway, beginning next week, we will trying to go through the following book :

Tuesday, July 11, 2017

JD Aftermath #7 : Future of the legal industry

Image result for smu school of law

Today marks the end of my journey with SMU where I travelled back to campus for Commencement 2017. I wanted to save one last salvo before I begin preparations for the bar exams next week.

Today's highlight was Minister Shanmugam's speech. I would like to share some personal thoughts on what was presented to us today.

I felt that Minister Shanmugam's tone was generally positive. However, I can't help but feel that lawyers are going to be in for some really tough times unless they belong to the category that do bespoke work for big clients.

a) Elephant in the Room : No one knows how the legal landscape is going to be disrupted.

I interviewed with SMU as someone who has just left the team in IDA. At that time, I just completed my Coursera specialization on Data Analytics with R. I spent my time during the interview talking about legal analytics and ultimately how judgments can be predicted with the right deep learning algorithms. During my final year, some judgments from the European Court of Human Rights can already be predicted with 80% accuracy by just scanning the submissions.

In today's Commencement, what was not said was more important than what was said. Ho Kwon Ping's opening address briefly mentioned Fintech but nothing more was said about legal-tech.

IMHO, the Big Elephant in the room is that SMU does not have a module that teaches lawyers how to address the latest developments in computer science and give law students a sample of the skill-set required to master them. We are still not creating lawyers with the ability to speak to engineers and other technology professionals.

NUS, in contrast, offers this module to its students.

( If SMU wants to start, it should make Richard Susskind a compulsory read. Just sayin.... )

b) Inevitably, many of us will leave for greener pastures.

Minister Shanmugam puts up a series of very interesting slides which talk about how easy it is for other countries to take our lunch. In particular, Singapore is always under the threat of losing its position as an air hub. We also do not have a particularly efficient people-to-lawyer ratio compared to countries like South Korea (I felt that the Minister should not have withheld that ratios for the US but that's just me). If we want to succeed, we have to do more with less and a subtle message I received is that companies would not be satisfied with paying so much for non-bespoke legal advice. This is convincing to me because I spent over a decade in IT outsourcing.

I might be better off using the ITSM discipline to control a cadre of Indian lawyers to generate the low level research for more experienced partners before the passing the work to the client. I can even implement follow-the-sun where a document can be handed over to an Indian Call center and work complete before breakfast the following day.

If the legal landscape is going IT's way, then lawyers may be wiser to try to leverage on this outsourcing trend or at least find a bluer ocean to swim in.

c) Two great places to get into are Arbitration and Insolvency.

I felt a certain pang of regret when the Minister showed his info-graphic for Arbitration which was showing rampant growth.

Over a decade ago, fresh after my CFA I almost wanted to pick up a graduate diploma in Arbitration but was stunned when I was turned down for the inaugural batch of the course. Even in SMU, I pursued modules which taught me more about business so that I can be a better investor so I no longer had enough credit to study the arbitration module.

I was luckier because I spent a lot of time on Insolvency which was a tough subject. Initially I wanted to get into an area of the law where I get a leading indicator of whether the economy is coming to an inflection point. So I hope to get some real work on Insolvency in a later phase of my career.

Perhaps the most positive aspect of the talk is when the Minister sharing about growing areas of practice that rookies can get into.

What's next ?

Well what is next for me is that I will begin Part B next week.

I will withhold judgment until I meet the hordes of overseas graduates who are coming back to compete for a pie that growing smaller and smaller over time.

On the whole, I believe that SMU has prepared me well.

Heck, NUS Engineering and Finance school has prepared me well for this.

Bring it on !

Sunday, July 09, 2017

Why Singaporeans will not matter in the future.

I thought I'd spend Sunday writing about some of the key conclusions from the book Homo Deus by Yuval Harari within our local context. This is a very interesting read which I strongly recommend to all readers. In fact, you might be better off skipping Sapiens and going into Homo Deus straight because it talks about the future instead of the past.

a) Politically Singaporeans do not matter

If you look at the Oxley Road matter, one takeaway is that ordinary Singaporeans do not really matter in this unfolding drama, the support for our constituencies will not collapse overnight whether we preserve or demolish 38 Oxley Road. Ditto for the Elected Presidency.

The more interesting insight I gained from reading Homo Deus is the philosophical question of whether PAP is a political party or an algorithm. I find the algorithm argument convincing because the PAP is one of the most successful and consistent political parties in the world. Imagine the PAP as some sort of computer process or daemon with the Constitution and associated Statutes as some kind of database.

The PAP algorithm under the hood may work like this : Keep unemployment low within 5%, keep economic growth reasonable at 2-3%, manage constituencies to cover all basic and security needs. If all these conditions are being met, no opposition party can gain enough foothold to block a Constitutional amendment which further allows PAP to tweak the Constitution to continue to meeting these hard economic guidelines further entrenching their power.

Unlike the ministers that direct the PAP, the PAP is a highly intelligent algorithm without the requisite consciousness that knows Singaporeans better than Singaporeans themselves. Where Singaporeans can make a difference is only during rare cases like in 2011, when they gave an entire GRC to the Worker's party which triggers a flag for the PAP to make bigger changes to its social policies. But any intelligent programmer will know that code can be written to adjust to external sensor. This external sensor being an election poll.

b) Militarily Singaporeans do not matter

This is a much easier argument to extend because the nature of war itself is changing. A fat, overweight soldier can be a butcher in the battlefield because he can command a squad of attack robots. The consciousness of a solder is no longer an asset in a world where command and control can be simplified suing highly-refined AIs.

This will be a province of a few select Elite Singapore battle scholars.

c) Economically Singaporeans do not matter.

The ordinary Singaporean will have about 20-30 years head-start but will will become irrelevant much faster than his counterpart from another country because we are embracing a Smart Nation with a much bigger sense of urgency.

Look no further than the emergence of a robo-advisor, a low cost financial planner that would not push products down your throat or create a conflict of interest. The technology will not just render an army of financial professionals unemployed, it will create a better environment for millenials to invest their money. In the future, a robo-advisor might even be able to replicate active fund manager capabilities. I see this happening within 10 years.

As more technologies begin to disrupt the services, the population will split into a caste of "useless" citizens and a "super-elite" core that will control and direct an army of artificial intelligences to keep the economy humming.

I actually believe that the creation of the "useless' caste has already started.

I had a conversation with a bunch of friends the other day where 80% of the subject matter is about events in the virtual world  such as : What games to play. How to power level your Necromancer and what we bought in the latest Steam Sale.

A world in which Singaporeans do not matter may be welcomed by many Singaporeans

What I painted on this blog is very dystopian but I also believe that it would be welcomed by many Singaporeans who finally get the rest they desire. There will be no Marxist nightmare because the proletarian are too busy killing Diablo to overpower the bourgeois elite.

The ordinary "useless" class will withdraw from the marriage and breeding market ending years of heartache and frustration (Already happening based on the latest survey). They can plug into a virtual world where you can have a sense of achievement and even lead meaningful lives. (Unless you power-level and depend on someone else to give you free xp, which is akin to living on your inheritance). A world where non-degree males have problems finding employment, a government algorithm only needs to provide enough basic universal income to sustain a lifetime of plugging in playing games for an entire lifetime or watching Netflix videos.

The population will likely drop and the Singapore will be ruled by an enhanced and very small caste of High Programmers/Policy makers.

Your future Ikigai will be to reach 1000 paragon points.  

What can you do?

This is not a question that I will need to answer as I have already retired once. But this is a serious  challenge for my children.

The first answer for everyone is to simple embrace the future. For this to take place, some form of Universal basic income for internet bandwidth and food needs to be provided for the population. Efficiencies may make this a very small burden even for 5% of the population that pays taxes.

The next best answer is to attempt to join the super-elite. This is not going to be easy as the skills in the future would be advanced degrees in both biology and computer science. But perhaps 5-10% of the population will make the cut.

My answer is for folks within our generation to amass enough wealth to support just one or two generation ahead of ours. Investing in companies that will bring in this new age will maintain prosperity for our children who may or may not qualify to be super-elite.

If they fail, the family line will end with them but they will have comfortable lives. If they succeed, they will work very hard to keep the nation advancing into the future and may be able to continue going one perhaps a few generation more.

Saturday, July 08, 2017

Equity Management #19 : Dividends strategy versus Deep Value Investing.

During my preparations for the talks at the end of the month ( which is rapidly selling out ! ), I would go to Lee Kong Chian Library and take down some interesting observations on the market from the Bloomberg terminals.

Today's observation goes beyond the scope of my presentation in July so it's better to share this on my blog for intermediate investors. It will also give attendees and idea of what my presentation would be like at the end of the month.

An important question investors are curious to know is whether deep value strategies outperform a well-crafted dividends strategy. I have always maintained in my talks that a dividend strategy is, in many cases, inferior to the deep value strategy.

( Information on my dividends strategy will be shared on my talk itself but let's look at simple deep value strategy I back-tested on Bloomberg.)

Suppose we take the bottom 20% P/E ratios from a set of local SGX stocks. And then within this set, we find the bottom 20% P/B ratio. We will end up with a list of deep value stocks that belongs to the province of deep value investors.

Backtested 10 years and annually rebalanced, the performance is abysmal :Returns are 3.07% and the portfolio is highly volatile with a semivariance of 23.40%.

Investing in the STI ETF would have gotten better results.

As I could not believe my eyes, I then tried to observe the stocks selected by this approach. The market returned mostly Chinese companies.

So the next step would be to limit the scope of this strategy to locally domiciled companies.

The improvement is very dramatic - Once you filter out the Chinese companies, the returns become 52.46% annually ! The semivariance becomes higher at 34.69%.

This is superior to any dividends strategy I will be presenting end of this month and possibly superior to any performance of active managers covering the Singapore market !

Some preliminary suggestions for investors :

a) If you go for deep value, filter out the China stocks in SGX.
b) While your returns will improve, your risks will also be magnified.
c) The backtest does not account for the lack of liquidity of good deep value stock counters. So you might even be able to buy the stocks suggested by the screen becuase no one is selling them.
d) While it's tempting to leverage such counters, brokers are unlikely to give you decent lending rates for deep value stocks.
e) Unlike dividend stocks, deep value counters may not occasionally give you a reward you for holding counters over time.
f) No release of dopamine in your brain when you get rewarded with dividends. ( Which is what got me hooked more than a decade ago ! Dividends are the opiate for the investing masses ! )

Wednesday, July 05, 2017

Personal Update : The Road to Commencement and Part B.

Just another personal update as I have just returned from my short holiday which has been spent mostly queuing for Universal Studio rides. 

The next few weeks is going to be rough :

a) Signing up for a 2-day shorthand course

Fans of my blog know that when it comes to lifelong learning, I tend to go all-out and take a skills mismatch quite personally. One of the problems I faced during my internship is the taking of Court Attendance notes during Pre-Trial Conferences. My fingers were too slow when taking the notes down and the quality of my work was generally quite poor. ( These are verbatim notes, not the summaries which I can comfortably handle in the past. ) 

So yesterday, I shortlisted a shorthand approach called the Pitman approach which is efficient but has a high learning curve and will begin lessons this Friday. I am rushing this through so that I can unleash this new Talent Tree/Feat when I begin my lectures for Part B. 

I will let everyone know whether I can claim my Skillsfuture credit for this class.

b) Cryptocurrency classes on Coursera
Just one day before Commencement, a Coursera class on Blockchains would be opening up next Monday. I am now considering whether I should attend this course. The question is whether I should pay for the course to do the capstone project. 

This is somewhat risky since Part B has a distinction grade and a senior lawyer half-jokingly told me that I should not try to merely try to just pass my bar exams. ( Gimme a break I SMU is brutal enough ! )

If you do wanna sign up for the course and want a study buddy, do let me know. 

c) My next talk  "50 Shades of Dividends Investing"  

This talk is shaping up well and all my content has been incorporated into my slides so I can share my overview here. Generally speaking, expect a highly quantitatively driven talk. I don't make bald assertions without backing it up with a back-test from a Bloomberg terminal. You can sign up for this mega-event here.

Some of my findings should be counter-intuitive and controversial enough even for intermediate investors but there is definitely two useful investment strategies which I will share in my talk.

The Overview look like this :

The Corporate workplace as a Brutal Master
Fifty Shades Darker
Investing your way to freedom
Investing specifics :
The flaws of the STI ETF strategy.
How dividends can assist you.
Importance of REITs in a dividends strategy.
Two cool approaches to dividends investing.
Question of leverage
Fifty Shades Freed
Attaining Financial Independence

Monday, July 03, 2017

Oxley Road Saga : Lee Kuan Yew as an intersubjective phenomenon.

I did not follow closely what was said in Parliament today. The reason is because Singaporean should not be distracted by what is essentially an internal family dispute. However, the dispute is interesting because it raises a very interesting philosophical problem which goes beyond the agendas of Team Preserve and Team Demolish. After some consideration, I think that I now belong to the Team Preserve faction but it is a lot more interesting to look to at the issue from Team Demolish's point of view.

If this issue is merely a family dispute, then 30% of Singaporeans belonging to the anti-PAP would possibly spend a lot more time eating popcorn than throwing their lot for Team Demolish. Why would the folks who hate the PAP want to fulfill the wishes of LKY so much?

Personally, the answer lies in the concept of an intersubjective phenomenon narrated in the books by Yuval Harari. To get under the hood and understand why the factions are split, we have to see the difference between Lee Kuan Yew as a man and Lee Kuan Yew as an intersubjective phenomenon.

As a man, Lee Kuan Yew is mortal. He has his failings as a human being.

As I am a dad myself, I know that my kids will run away from me when I release a nice wet fart when I was out on staycation with them for the past two days. I can imagine what PM Lee's personal relationship with his dad is like. Lee Kuan Yew is a demigod to most of us but, very likely, he farts just like me.  To all of us, LKY was Singapore's first PM. But to PM Lee and his brother, his dad farts like most other dads. Hence the idea that there is nothing "magical" about Oxley Road.

In this case, PM Lee cannot be more wrong about how magical Oxley Road is. I agree with PM Lee that Singaporeans do not currently need 38 Oxley Road and will not make political decisions based on the preservation of one historical monument.

But belief is powerful. And people need a symbol in times of crisis and instability.

A belief in an intersubjective phenomenon like Christianity can launch a crusade to take back Jerusalem in the middle ages and result in the destruction of millions of lives. Bitcoin and Ethereum are also intersubjective phenomenons which made quite a few people rich over the past few months.

Thus, I think that Lee Kuan Yew as an ideal is millions of times more powerful than Lee Kuan Yew as a mortal, and 38 Oxley Road is the physical manifestation of Lee Kuan Yew as an ideal. While it can be argued that Singapore itself is such a symbol, 38 Oxley Road can at least be identified while you are within the country.

Why do we need ideals ? The reason we need ideals is that science and economics is not enough to galvanise millions of people into one nation. To do really big, astronomical things, we need an ideology.

Not everything can be explained or proven by science or social science.

Take for instance the statement by Lee Kuan Yew that "Poetry is a luxury that we cannot afford". Economists cannot prove that, if we emphasise English Literature and Poetry as a nation, it would definitely bring ruin to our island economy. The statement is, thus, an ideological one which positions the study of poems as being "unethical" and antithetical to a practical Confucianist society like ours. The truth is that a lot of things in life which make societies work require a conflation of morality and facts. The political process determines which facts/morality wins.

Keeping 38 Oxley Road preserves a part of Lee Kuan Yew as an ideology. Depending on where you fall on the political spectrum, you might want to preserve it if in the future you see a faction which may try to resurrect Republican and right wings values based on some of the things Lee Kuan Yew did. A rising political left in the far future might wish to emphasise the other side of Lee Kuan Yew who fought hard for labour unions. This may happen hundreds of years down the road and independent of the wishes of the Lee family or the PAP.

(Would Chairman Mao be happy to have his face printed on every dollar note in China ?)

The faction that wants to see 38 Oxley Road destroyed probably believe whole-heartedly that any ideology brought forth by Lee Kuan Yew as a concept is repugnant to their sensitivities. As such, my personal bet is that the literati forms the vanguard of the Team Demolish faction.

Like it or not, Lee Kuan Yew is now an intersubjective phenomenon, which is why our government will need to perform some sort of calculus before deciding to preserve or demolish 38 Oxley Road.

IMHO, it's already out of the Lee family's hands.

This is not an easy task, because there are many ways to wield and weaponise an ideology.

Friday, June 30, 2017

Personal Update : Career transitioning continues.

Ok, as I have just completed another round of internship, it is time to take a break and go for a staycation in Sentosa over the weekend, so there will be no updates until this weekend is over.

a) Career transition into a lawyer is proceeding smoothly so far.

I won a a training contract after two months of gritty, realistic training, my boss admitted that I was thrown somewhat over the deep end and I was treated more like a trainee than an intern.I did my usual share of legal research, assisted in pre-trial conferences, wrote parts of some affidavits, and even used my multidisciplinary skills to produce some spreadsheets and charts to reinforce some of the legal arguments we wanted to use.  It was rewarding seeing some of my multi-disciplinary ideas get implemented in a dispute. I'm not too sure if my crazier ideas would have been taken this seriously in a bigger firm.

The only sad thing was that it took 4 months of work before I was able to be offered a contract. The economy for lawyers really sucks right now but I think that things will get better over the next few years.

I believe the 2:1 requirement for foreign grads would have to brought back to ease the glut somehow, let's see if I am right.

b) Was finally conferred my degree by SMU

At the same time, my time in SMU is almost coming to an end and I was conferred my JD this week. I spent the morning getting my gown and certificates and will be attending my third convocation within the next 2 weeks.

My 3 year journey as a Law Student is finally coming to an end !

I will be spending the next 6 months preparing for my Bar Exams. I hope it would be less stressful than Law School.

c) Croesus ! Croesus ! Croesus !

A bona fide dividends yield investor would never miss out on having Croesus in his/her portfolio and I was no exception to this rule. While almost all Croesus investors would be disappointed at losing a wonderful yield counter thanks to the impending offer from Blockrock, most would accept the attractive offer.

I always had an unusually sizeable portion of my portfolio in Croesus and made about 50% returns since the time I started investing around 2013. I guess it's time to move on and I know exactly which part of my portfolio to reinforce with my winnings so that my annual yields would increase after conclusion of the acquisition.

d) Next talk - 50 Shades of Dividends Investing

Once I get back from my short holiday, I will be all hands on deck for the next talk. My slides are quite skeletal at the moment and I need some time with a Bloomberg terminal before I can nail my material down pat.

Getting the numbers is one thing, making the theme consistent with 50 Shades of Grey is of course the biggest challenge for me so far.

e) Readings

A recent survey on what CEOs intend to read this summer show that the book lists are dominated by one name : Yuval Noah Harari. Both his books Sapiens and Homo Deus are similar to each other but I am currently reading the latter after have a great time with the former. ( It was recommended to me by a reader of this blog ! )

The insights are so brilliant, I would possibly need a few articles to ground these ideas into ordinary living in Singapore.

Otherwise, there has been a spate of books which show that the trend is shifting away from blaming inequality on the 1% and more towards the new meritocratic. I expect to comb them all in due time.

Also, we should be getting ready for the return of Game of Thrones.

Catch you guys next week !


Thursday, June 29, 2017

Equity Management #18 : Mysteries of short selling stocks.

Ok, now that I have established a system for margin trading, it is time to move on and consider this other system which I have always been curious about which is short selling.

In the US, short selling is quite interesting as a sale should ideally result in some cash in your hands. You can then deploy this cash into various other long positions.

I've always been curious as to how short selling works but I have no idea how to start. I am somewhat familiar with Contra trading where you sell a stock and then try to buy it back within the next three days but this is more akin to speculation and I can't take up a long-term short position against a stock that is being mis-managed or over-hyped. ( I don't wish to engage in CFDs for now because it's more like getting into a derivatives position. )

The Equity Management textbook mentioned that short positions are very different compared to long positions and are subject to many interesting constraints, some of these constraints are regulatory and others are self-inflicted :

a) You are obviously constrained by a budget which you have set for yourself.

b) Another constraint that is interesting is called Regulation T which applies to equity, convertible bonds and equity mutual funds. Suppose you have $10,000 in your cash account. The sum of long positions and absolute value of short positions cannot exceed $20,000. So if you short $5,000, you can at most create a $15,000 long position. Seems logical but this only applies in the US.

c) Some investor specify a fixed gap between the value of the long positions and the short positions. A 120-20 position has a gap of 100%. A market neutral portfolio has a gap of 0.

d) Some securities are simply hard to borrow and the broker will not even allow you to short those counters.

I would really appreciate it if a reader would point me towards some kind of short selling facility for local stocks.

As of now, the closest thing is my margin account which is basically shorting a 2.88% bond to buy REITs and Business trusts.

Monday, June 26, 2017

The importance of Cultural Capital when changing careers

Image result for doji hotaru

This blog has in the past discussed two forms of capital. Financial Capital represents whatever wealth you have in your personal balance sheet and represents what most of us are comfortable with. Human capital is the net present value of our unearned income. We are less familiar with this concept because it corresponds to what professions we have chosen  and it can also increase in value with more investment into lifelong learning.

While financial and human capital are two sides of the same coin. Cultural capital comes from a different coin entirely. The idea of cultural capital came from a sociologist called as Pierre Bourdieu. Bourdieu defines cultural capital as one that is derived from skills, tastes, posture, clothing, mannerisms, material belongings and credentials. For example, fans of high-end audio can use their financial capital to get the latest and greatest audio devices from Adelphi plaza, but it take cultural capital to develop an interest and speak convincingly about Classical music and know the difference between Debussy and Bach.

As I'm in the middle of a massive career shift myself, I have on recently started to understand how powerful cultural capital can be and this is often ignored by the readers of this blog who probable spends a lot more time working on their other forms of capital, it may be wise to occasionally try to understand the "feel for the game" as you net worth goes higher. Beyond a particular point, your wealth will not be able to grant you access to certain pockets of power but beyond a certain point, you may find it easier to proceed with Cultural capital.

In modern society, there are many situations where either you get it or you don't. Bourdieu coins this term habitus or "feel for the game". Transitioning from IT to the Law, you notice pretty dramatic changes in the "feel for the game".

Previously in IT, there was a hollowing out of engineering talent to the field of banking and whoever is left normally came from polytechnics and private universities, to have a "feel for the game", you need to practical and problem oriented to earn the respect of operational staff, hence the best IT managers start at the bottom, or at the data centers. At the entry level, you need to be resilient, a little rough on the edge and speak Singlish as it facilitates quick problem solving  and intimate working relationships which are built on trust.

This worked at the bottom tier of IT support where problems are solved on a daily basis but can fail at the upper tiers where problems normally involve contract law and some financial mathematics. The "feel of the game" and mannerisms change as you go up the IT ladder.

As you climb up the ladder, you have to start developing some proper IT project management skills which means talking to business people. At the mid-level IT investments must be aligned with business objectives and skill-sets typically become more finance-like with an emphasis on budgetary controls and internal rate of return calculations.

At this stage the "feel of the game" changes. Your mannerism become more formal. Language patterns become based on simple plain English. At the stage some IT Project managers also change their appearance because they start to wear more expensive watches to try to match their business counterparts. At this stage, if you are stuck at the NCC Diploma level, taking project management training only gives you the skills to do the work but not the mannerisms required to get a "feel of the game", which is why project management remains predominantly a game for University degree holders.

( But do not be dismayed, as cultural capital can be earned over time )

As I transition into a legal career, the "feel of the game" changes even further. While SMU has equipped me with the skills of being lawyer, I have to develop new forms of cultural capital to navigate this Brave New World which Law School has not prepared me for.

Hanging around in family court, perhaps I am a little over sensitive when I noticed a subtle war going on between different counsel. The women are trying to outdo each other with their handbags. For the men, perhaps the weapons of war are their watches, which is the only politically correct jewellery that men are allowed to wear.

Even more fascinating is the use of language. I doubt you can taken seriously even if you employ the simple English taught in schools. I observe some occasional Shakespeare thrown in to written documents (But always in a subtle manner). The manner of speech in legal work is elegant and rich with metaphors. It's no accident as lawyers typically from the Arts stream in Junior College and many have Drama and Debating experience.

While most engineers would not even have the time to build up the cultural capital to enter a new industry sector, I was fortunate in that I spent 3 decades of my life playing  Dungeons & Dragons which never allowed us to create artificial barriers between the Arts and the Sciences. You need to understand the the statistical properties of a fireball spell but you also need to have a firm grasp of how matriarchal society like the Drow would function in Menzoberranzan to have a great gaming session.

A few weeks ago, a very senior old lawyer used the word "Amanuensis" in an email, it was hilariously intimidating. This would drive most of us, including lawyers, to look it up in a dictionary. I was exposed to the word because Amanuensis in D&D was a Wizard spell to summon a disembodied scribe to copy a scroll or spellbook into another document. So I was able to guess that the word meant some kind of scribe.

Sadly, cultural capital cannot be earned overnight. There is no cryptocurrency which can speculate to up your stash for Bourdieu-coins.

But if you wanna mine for Cultural Capital, playing D&D might help.

Friday, June 23, 2017

Equity Management #17 : More random thoughts on margin investing.

Here's an update.

This week on Wednesday the kind folks of Maybank Kim Eng bought me and two other finance bloggers to lunch to apologise for the margin call made on my account.

( As I was the only guy who got margin called, I accused the other bloggers of getting a free meal out of my misery ! )

The lunch was somewhat hipsterish -  we ate octopus at this place called Venue by Sebastian. The highlight of the session if not so much the free food but just how surprisingly insightful the folks of Maybank are.

I always thought that most of the finance folks you meet in the industry are the run of the mill guys who can spout finance after passing a few CMFAS exams.  It takes personal effort to read finance literature and even very "smart" guys who claim to be in the know will just talk about about becoming the next Warren Buffett. It was a really enlightening meal.

This article shares some random thoughts about margin investing :

a) Brokerage firms can't promote margin investing as much as they'd like.

I learnt that actually our local regulators are quite wise and proactive in preventing the promoting of margin trading because it induces folks buy stocks that they can't afford. We agreed that this point that this is a good idea because the traditional idea behind margin investing is to buy penny stocks and magnify capital gains.

Only a small minority will use margin trading to magnify yields and minimise trades. It's almost up to us financial bloggers to talk about responsible leverage investing without any inducement from corporate firms.

b) Lifecycle Investing by Ian Ayres and Barry Nalebuff

This was the clincher that convinced me that there are seriously smart folks in Maybank Kim Eng.

Their staff mentioned this book which I read quite a while ago about why, for younger folks, it may be wiser to use some amount of leverage to magnify stock market returns. The book is mathematically rigourous in their approach but it was unable to induce me into action then because I still felt that it was safer to reach financial independence first before even thinking about looking at margins.

I strongly suggest that readers consider reading this book before even getting into margin trading to understand that a more deliberate approach to magnifying gains can be designed to speed up your journey into financial freedom. I'm going to see if there is a way to squeeze this book into my next talk in July.

c) Some preliminary numbers on the risk of default.

I was digging up some of my previous backtest results from the talks I gave last year and found that for most of my dividend screens, whether they are for dividend stocks or REITs, I am looking at a standard deviation of around 12% after a decade long backtest (I use the square root of semivariance). So if you project a return of 9%, a 2-standard deviation event will set you back around -15% and this has a probability of around 2.5% of happening. My backtest for dividend stocks in 2016 had annual returns of 17%.

So this is a strong case for my margin ratio of 200% as I will need a massive drop of 30% to trigger a margin call, this is mathematically expected to occur in less than 1 out of 40 years.

Of course, I just need to beware of the fat tails that I've not been able to mathematically model. Unless you are Nicholas Taleb and have your own prime broker, you are not likely to survive a Black Swan event anyway.

d) Mental accounting and margin trading account.

Investment Moats asked me why don't I just have a unified trading account with a margin facility. I replied that its because I have a mental accounting bias.

In this case, it is justified because Maybank can offer 2.88% interest on 200% leverage so I have to go through the process of opening a new account. I just met an old friend today who claimed that if I go with him on DBS Treasures, I might be able to get financing at merely 1.6% but I can only leverage up to an additional 50%-70%. I guess different providers will come up with a different scheme to attract investors.

At the end of the day, a margin trading account is aspirational and you should not be trying to pay off your basic expenses using leverage. A portfolio that pays the bills should not employ leverage.

For now, I doubt I would recommend that anyone start margin trading without a portfolio backing them up that is ten times the size of the margin account.

Tuesday, June 20, 2017

Investors Exchange 2017 : 50 Shades of Dividends Investing !

Investor-ExchangeImage result for 50 shades handcuffs

I'm really excited to talk about our next event which will feature 7 speakers and last one entire Saturday afternoon on 29 July 2017. This event will be the first time BigScribe would be selling tickets for 250+ seats.  You can place your order through this link.

This time round, I'm really excited to be on the same panel as Teh Hooi Ling, who is currently the President of Aware and my super-senior in the NUS Masters of Applied Finance programme. I have to admit that I am the fan boy this time and I have all of Teh Hooi Ling's books.

For this upcoming talk, I probably am the most light-weight among the speakers because I do not come from the finance industry and do not manage money professionally.I will try to balance my talk between two extremes : One one hand, I will talk about financial independence and my personal investing journey but I expect the folks want to show up for the hardcore investing bits so on that aspect I hope not to disappoint the audience.

As of today, I have only started building the outline of my talk and you should expect the same intellectual rigor that I apply to all my presentations.

For the hardcore aspects of my talk. We should be covering the fundamentals of dividends investing, key asset classes that deserve consideration if you are interested in investing for dividends. I will also cover in detail of the more interesting statistical properties of dividend stocks and, depending on what my findings are from my next appointment with a Bloomberg terminal, how you can super-charge a dividends investing portfolio with leverage.  ( Because now I know ! )

For the softcore aspect of my talk, I will try to weave a story about how consumption is evolving and how you may be able to achieve your savings goals with much more class than perhaps during my time when I was trying to save for my financial future.

The unifying theme for my entire presentation is, of course, based on 50 Shades of Grey and how to break free from a brutally savage corporate master.

The most light-weight speaker must overcompensate with the most alluring and seductive theme for this upcoming event. 

Sunday, June 18, 2017

Spending that counts - What we know from the latest surveys on the rich.

I am currently reading The Sum of Small Things : A Theory of the Aspirational Class by Elizabeth Currid-Halkett and it looks like I would have to update some of my thoughts on saving and spending to the latest findings of social science research.

Apparently, it is no longer cool to get into conspicuous consumption. Rich people no longer show off their expensive fashion and toys. Because the middle-class can consistently use credit to purchase the trappings of material wealth, the rich in the US are moving onto other things to maintain their social and cultural distance from the hoi-polloi. This trend has gotten the progressives particularly worried because the rich are no longer spending in a stupid and flashy manner and almost every dollar now is being put to increase income inequality in Western societies.

I will just share three things the aspiration class are spending on these days to maintain their social economic status. If you are observant enough, you will be able to find that financial bloggers also tend to spend very tactically within these three categories :

a) Labor-Intensive expenditure

The first category care utility driven rather than status driven. The new rich prefers to spend on things to give them more time.

The rich has maids to assist them in house-work and childrearing. Some even pay to have people do the gardening for them or to walk their dogs. The aggregate effect of buying time with money means that they have more time to spend either making more money or quality time with their kids. Social scientists are now detecting ( to their dismay ! ) more quality time wealthy individuals are spending with their children.

Even in Singapore, sociologists are detecting that richer families tend to believe in more filial piety.

b) Experience-driven expenditure

The second category are non-utility driven but also non-status driven expenses. Travel comes into this category but I can imagine many kinds of expenditure of this category which does not result in much travel. Some blogger friends have been very public about the staycations they pay for. Even I would be going on a staycation after my internship in early July.

I do not really agree with the author that travel and experiential goods are non-utility driven. Doing charity work in Lhasa may be something nice to put in a resume to distinguish yourself from other candidates. In the age of Instagram, being able to relax next to the beach is no longer something you get to keep to yourself.

But you can't deny that money being spent on experiences is going up over the next few years.

c) Consumption that counts

The third form of consumption which scares the living crap out of liberals is that the rich is starting to buy things that really count. From time spend attending seminars to subscriptions of the New Yorker and The Economist. Wealthy women, already very well read compared to their less-educated peers, are spending more effort breastfeeding their children ensuring that their children gets a huge jump over their peers.

This blog supports category (C) the most because, individually, investments that really count cost very little money but may require years of education and study to exploit fully and will pay dividends over hundreds of years as your children gain a permanent heads up over their peers.

What does this mean for the big picture ?

Rich people will stop acting rich. They will retain ways to signal to each other their social economic status but they will stop inflicting psychic damage to attract the envy of the middle class.

But income inequality and social mobility will suffer even more once the rich learn to invest their time and money properly.

Friday, June 16, 2017

One thing modern workers need to do to stop digging their graves.

This is going to be a short article as I look forward to paying off some sleep debt.

Once of our upcoming talks in August was supposed to be lifelong learning but for very valid reasons, it did not pan out, so we will probably be going ahead with something else later this year.

I've done some preliminary readings on lifelong learning for my own benefit and discovered this insight about lifelong learning which is not shared public about - you need some degree of career mobility to benefit from lifelong learning.

For lifelong learning to really benefit a worker, he needs to be able to effect a change in his/her work environment to exploit his new  skills. At the personal level, I was somewhat a negative example of this insight. After getting a Masters in Applied Finance and passing all my CFA exams, my IT career was doing rather well and I never really did make the switch into a finance role. I do not have much regrets because I was able to derive an alternative income by building my own portfolio.

A lot of other workers are not so lucky. If you are over your 40s and struggling to pick up some new qualifications note that the research shows that the odds of you being able to exploit your newfound learning is limited. To test out your new skills, you might have to jump ship but the career mobility of a 40-something worker is somewhat limited so the odds of increasing your income from lifelong learning is also limited. The research paper has recommended that the government make it their role to provide career mobility for middle-aged lifelong learners.

So the modern worker must begin lifelong learning at a younger age and not wait for too long to begin developing cutting edge skills which are suited for tomorrow's corporate environment.

Which leads to another problem - You need to make time to pick up new skills !

Workers of the future may need to look for corporate cultures which release them from work on time so that they can invest in their own human capital by picking up new skills and keeping up with the industry. Otherwise, workers will become sitting ducks while being employed and may even  waste too much of their own time developing non-transferable skills that can only be used in one corporate setting.  It only takes the next technological change to render them obsolete.

In this aspect, multinationals continue to be attractive relative to SMEs.

Multinationals are also more exclusive and can afford to be selective based on paper qualifications.

At the end of the day, you can't really blame local graduates for only wanting to work for the biggest and most elite international firms.

Its a valid survival strategy.


Wednesday, June 14, 2017

Equity Management #16 : Troll Portfolio.

It is interesting that some folks who I did not expect to follow my blog are observing this margin trading experiment so here's another update :

Apparently the good folks of Maybank Kim Eng do read my blog and called me up to apologize for the "mistaken" margin call. They also told me that they were not sharing email accounts and my broker did make a mistake and triggered the margin call on Saturday.

I took their word for it because my problem is solved and the system is reflecting my margin numbers correctly. I'm also very forgiving because I am borrowing at only 2.88%, smart readers might wanna hop in after I help these guys even out their operational kinks but the choice is yours.

So let's  recap what a margin ratio is :

Margin Ratio = ( Value of shares pledged + Value of shares bought using margin financing ) / ( Amount of financing - Cash collatateral pledged )

In my case, I bought about $20,000 of shares and put in $10,000 of collateral.

Starting Margin ratio = ( $20,000 )  / ( $20,000 - $10,000 ) x 100% = 200%

Suppose I lose 30% of my REIT portfolio a few weeks later  and the value of my stocks dip to $14,000.

Margin ratio = ( 14,000 ) / ( $20,000 - $10,000 ) x 100% = 140%

This is the exact amount that triggers a margin call from Maybank and they will write to me to ask for a cash top-up or they will sell off my portfolio.

As such, your margin ratio is somewhat like the number of hit points like in an RPG game. If it dips below 140%, you suffer a margin call which is the equivalent to making a death save in D&D.

Because every quarter my portfolio will generate some dividends into my account, I hope that this would gradually increase my margin ratio over time.

For RPG players, this portfolio behaves like a D&D troll without a maximum hit point cap. Ignore it for a while and it will recover lost hit-points over time. But I guess we'll find out about that aspect of margin trading soon enough as I might face even more operational issues by then.