Friday, October 20, 2017

The Origin Story of Growing Your Tree of Prosperity

[ I wanted to share this story because I just read Chris Guillebeau's Side Hustle. Guillebeau was never really an author that I respected in the past, his earlier works glorified financial independence a little too much and reminded me of MLM programs and the kind of rotten insurance agents that I troll on a regular basis on this blog. His latest book, however, was extremely useful and highly accessible. The stuff he brought to the table was quite intuitive and often based on common sense, but he had a lot of interesting examples from folks who managed a side hustle.]

I did not get into writing because I wanted side income.

My finances were doing ok and I was just discovering dividends investing. The primary motivation for writing my first book was just to prove that I can get shit done when some folks around me are just shuffling their feet and just talking about their grand ambitions without shipping a single product despite talking about it for yonks. In fact, my parents were somewhat against me writing a book and spilling the beans on how I invest. I mean, why share anything if it work surprisingly well on the family wealth right ?

Truth is, I always had some friends who were always talking about finishing a published work. I never figured out why was authoring was so hard. I finished my undergraduate thesis fairly early and spent most of my final semester refining my algorithm so to me, a published work is simply a thesis that people would actually find use to read.

Just to say that I can finish-off what other people can only talk about, I looked for ways to hasten the process of getting a book into the bookstore. The manuscript was strangely the easy part. Once I finished up my table of contents,  I can sustain a lot of writing for hours once I got off work - a lot of it was actually done in Bangalore when I experienced outsourcing destroying engineering jobs in Singapore.

The original aim was to lose all my allocated money on this project, get the book on the shelf, and possibly act smug because of my quick time to market. I hired a consultant, ponied up about $6000 and passed him my manuscript. Within a few months Growing Your Tree of Prosperity was on the shelves of major bookstores.

The book was initially a shit-storm of a product.

I had listened too carefully to my consultant. He advised me not to hire an editor to keeps costs low so it turned out to be badly written. The feedback was also negative from some folks I  met in the writers guild, some author said that my grammar was unforgiveable. Some friends pooh-poohed this product because it was self-published and lacked the cachet and pedigree of a real published product. The book has also gone through two distributors. I pulled out from the first one because I felt the owner did not have integrity and the second distributor even gave up because of the disruption the book business was facing from e-books at that time.

Then, amidst the horrible feedback and brickbats, something strange happened.

People clicked with the contents of the book.

Maybe the bad grammar made the book more intimate.

I was featured on Me and My Money, got a radio interview and the book hit no. 10 for just one week on the Straits Times non-fiction bestseller lists. The fact some people thought I was an attention seeking troll who claimed to save 70% of my take home pay helped. Turns out bad publicity is awesome publicity.

I also cannot escape this new found attention at work, management began to see me as a possible asset to be deployed in financial institutions. Of course, the biggest benefit was that in writing a book on personal finance, I have to really get rich because I would not be able to live with the cognitive dissonance of not making my first million before I retired.

In conclusion, I'm not sure whether there is ever a moral to this story.

My first book was a pissing competition. It was basically the length of my dick against the length of the dicks of everyone else I knew who had literary ambitions. I wanted to show that my dick was longer. I even had money to make it happen. On hindsight, I did not even win this pissing competition properly, I self-published and neglected to hire an editor.

But this pissing competition took me to quite a few places.

  • I have this blog. It's not a big deal, but you're reading this, right ?
  • I quit the workforce and took a 4 year holiday to argue with Millenials over some finer point of Constitutional Law.
  • I can conduct a segment in a financial seminar and get a 100% full house record in all my talks given so far. ( No one ever paid me to talk when I spent 10 years with the Toastmasters movement. )
  • I have awesome friends who are truly investing experts. This has rubbed off on me to take bigger risks with my portfolio and share with everyone new ways of making money.
  • My awesome friends even offered me shares in their company that will be paying dividends this year !

As a side hustle, Growing Your Tree of Prosperity was a failure on many counts. But failure sometime pays its own dividend.

If you are an artist who is always criticised by other, why not put it up on Etsy and see if you can do something good for your personal cash-flow.

Or like me, you have friends who were dreamers and can't seem to take the final step to ship a product, why not just finish the job for them? It sure beats criticising other people. Show, don't tell!

Anyway, my stock of Growing Your Tree of Prosperity is about to be sold out, I might have only a few copies left.

Tomorrow, I am going to find whatever copies I have left and will sell each copy for $88.88. Whoever buys my final copies will get my two other books for free.

[ Ok, I just salvaged 8 copies and have updated my store-front. I guess at this stage, I don't really mind if they never get sold.]

Thursday, October 19, 2017

Efficiently Inefficient #14 : Arbitrage

The final section of the book discusses arbitrage. The formal definition of arbitrage is the achievement of guaranteed profits by simultaneously buying low and selling high.

In practice, a guarantee is almost impossible.  Traders buy and sell securities that are almost the same to achieve a profit, sometimes incurring massive losses when their trades fail to diverge.

Arbitrage is too mathematical for a retail investor blog.

I will just briefly describe the sub-sections of this book under the Arbitrage trading section :

a) Fixed Income Arbitrage

Fixed income arbitrage covers the buying and selling of bonds of make a profit. One approach is based on trading the slope of the yield curve. If long term yields are expected to drop but short term yields are expected to rise, one form of arbitrage would be to simply buy 10-year bonds and sell 2 year bonds. Mathematical formulas employing bond duration calculations will be used to determine that proportion of long and short term bonds to buy. The best way to get a good handle of such trades is doing the CFA II exams.

b) Convertible Bond Arbitrage

I am not even sure if it is possible to perform this form of arbitrage here.

First you need a convertible bond. This is a bond that can be converted into the stock of a company. If the convertible bond is considered underpriced, the trader will buy the convertible bond and short the stock. Executing this trade requires the use of sophisticated programs that crunch option mathematics as a convertible bond consists of an underlying bond instrument embedded with a call option.

Let me know if you have any experience doing this.

c) Event-Drive Investments

I will jump into this form of investing next week as it is definitely possible to do this here. Suppose a counter is going to be delist and $1.00 will be delivered to investors per share in 3 months. If the current price is $0.95, this is a 5% return over 3 months. Event-drive hedge fund managers will buy up this stock with leverage to magnify their returns.

If the delisting fails, this trade can explode in your face.

Tuesday, October 17, 2017

Cutting through the bullshit when assessing investing stories.

I certainly did not like Narrative and Numbers : The Value of Stories in Business by Aswath Damodaran because it takes a while for his framework to sink in and become monetizable for local investors. In fact, upon closer reading,  the book is actually solid evidence that narratives can be quite dangerous for investors as even experts don't have a clue and have to run with multiple assumptions. Nevertheless, Damodaran is open-minded to criticism and a master of his art and possibly the best guy to ask when assessing companies with no credible cash-flow.

Ok...About narratives... why do we read a financial blogger and decide to jump in and support his story?

I am usually quite trigger happy when a story involves dividends but I, too, exhibit a personal bias when I jump into the markets after reading about a good investment. A lot has to do with whether I see the blogger as a person of substance or a bag of hot air. Sometimes I jump in if I like the blogger and do a double-take if I "see him no up". It's not an objective process at all.

I think we can do better in this regard.

Damodaran has a framework that allows us to assess how good a story is. I have tried to create a very rough outline based on his book.

To have a credible investment story, we may need to consider the following elements :

  • Does the story address the total market size of the investment opportunity ?
  • Does the story talk about the market share of the company in question ?
  • Reality check - Revenue can be derived from an assessment of market size and market share. Is it realistic ?
  • Does the story talk about future trends in operating expenses ?
  • Does the story discuss trends in operating margin capital which can be obtained from operating income by revenue ? ( Operating income = Revenue - Operating expenses )
  • Does the story discuss future trends in taxes ? ( Might be less important for local stocks )
  • What are the reinvestment opportunities - Typically the story should have a credible sales to capital ratio which is how much revenue can be generated from $1 of reinvestment. But, accounting-wise,  this is complicated as it involves dividing (change in revenue) to ( capex + working capital ).
  • The entire story will need to be discounted based on the discount rate and probability of failure.
  • Reality check - Do these financial characteristics fit with a company in a particular phase of its growth cycle ?

I thought perhaps this list may be refined to form a checklist that can be used further to "audit" any investment recommendation and assist the investor to ask further questions of the blogger.

For example, a person who is very bullish about Banyan Tree over tourist arrivals may be focused on the market size over the next year. Series of good questions from an investor would be whether Banyan Tree can capture more tourists or market share over the upcoming year and whether the added arrivals would increase their operating expenses ? Otherwise the thesis that profits would increase may not be as strong as what the person claims.

If any financial blogger wants to volunteer to have an article "audited" in a friendly manner, do let me know !!!

Otherwise, I might just "volunteer" someone to test it out !

Saturday, October 14, 2017

The Electric Toothbrush and the Vibrator

Imagine an electric toothbrush.

It is a stick-like object.
It contains a motor.
You stick into a sensitive part of your body.

What other device can you think of that has the same general features ?

A vibrator.

It is also a stick-like object with a motor like component. You also stick it into a sensitive part of your body.

From an engineering perspective, it is possible to invent a device that is both an electric toothbrush and a vibrator at the same time. Components and form factor are very similar.

But we don't think generally about an electric toothbrush being a vibrator at the same time.

In the finance industry, however, people sometimes do not make such distinctions.

ILPs perform the task of protection and investment at the same time.
It is a toothbrush.
It is also a vibrator.

The one of the group of anonymous insurance agents who tried to declare war on the financial blogosphere told a story where he met an MBA and CFA during reservist who was rendered speechless when confronted as to why he felt so strongly that insurance and investment should be treated separately.

What justification do we have to separate investment and protection so vociferously ?

This is a common defence against "buy term and invest the rest" philosophy that clearly makes a distinction between insurance and investing that we tend to support in the financial blogosphere.

The anonymous insurance is unfortunate because he did not meet me during his reservist training.

I will ask him whether he would like to back my project to kickstart an electric toothbrush that can also serve as a functional vibrator.

And then I will ask him to shove it up his arse.

[ This is my first attempt at financial comedy. Other bloggers have been asking me to consider financial stand-by comedy in future talks. ]

Wednesday, October 11, 2017

Efficient inefficient #13 : Managed Futures

Today’s article is about managed futures but this strategy is really about trend following. The result of this strategy is very credible, with Sharpe ratios going as high as 1.8. Bershire Hathaway’s supposed ratio is about 0.76 and my usual backtests struggle to hit 0.6. According to the textbook, a diversified trend following trading strategy can return 19.4% with only a volatility of 10.8%.

My primary interest in this strategy is figuring how I can apply these learnings to the build-up of my momentum-based portfolio which would proceed sometime next year. As it turns out, looking at long term trends lasting about 1 year is optimal with weekly rebalancing taking place, but equities provide the lower returns than fixed income and commodities.

If you believe in market efficiency, it would be hard to accept that you can make money from trends, but the return drivers come from two main sources : 

A) People react too slowly to information

One theory is that people anchor their views to historical data and adjust their views too insufficiently to new information. Another reason is that people tend to sell winners and ride losers for too long. Central banks also exacerbate the process as they focus on reducing exchange rate and interest rate volatility. Also, market friction, prohibitions against short sales do not allow arbitrage to take place instantaneiously.

B) After a time delay, people overreact to information

Once prices move for a while, the bandwagoners start piling onto a stock. People are afflicted with confirmation bias ( Boh Koh Leng ! ) and focus on what they already believe in discarding evidence to the contrary. Investors also add to the problem chasing investments that tend to do well recently which contributes to fund flows.

My leveraged portfolio is only 50% done and it’s already calculated to return about $20,000 a year. A momentum based strategy that adopts some of the best practices by trand following investors will not only provide me decent returns, it is likely to have little correlation with my leveraged or unleveraged yields portfolios.


Monday, October 09, 2017

Manufacturing Outrage in the Financial Blogosphere.

It takes a troll to know when someone is trying to manufacture outrage using the realm of personal finance. Roy Ngerng had a large impact when he spoke about the CPF system even though a lot of reasonable folks wanted to point out that a lot of his arguments were unsound.

Mediacock attempted to so this recently, basically just creating a scenario where if you do the maths, you will become outraged and then proceed to take it out on the PAP or anyone who is perceived as an obstacle to your Singaporean dream. ( Simplest answer when you savings $960 to cover expenses of about $200,000 requires a minimum of 17 years, longer if you factor in CPF contributions. )

Netizens have pointed a lot of issues with this example :

  • Singaporean workers get increments and they tend to be higher in their younger years. Family income settles down to $8,800 a month. 
  • A wedding banquet is normally offset by ang baos. (A 60% offset is reasonable. My ang baos covered around 90%)
  • Photography and Videography is "nice to have".
  • 15% savings rate is a rookie number and really should not be a constraint. Graduate with a job should live like a student and gun for at least 50% savings. 10-15% in American finance books is not contextualised to Singaporeans who live with parents prior to getting married.
But the simplest way to debunk this attempt at outrage is to note that folks without degrees are settling down and doing fine.

For a savvy university graduate couple who can save up to 50% of their income and gain increments of 8% a year, $200,000 can be accumulated within around 5 years. Maybe even 4 years if they pick up some solid investing skills. Of course, very few folks are savvy.

Imagine a different scenario where we exist in a European Socialist welfare system :
  • Maybe 50% of the income of this graduate couple may be taxed to line the pockets of the unemployed Welfare queens.
  • Sluggish economy means that salary increments are almost non-existent and may not even cover inflation.
  • Folks pay rent because it's so hard to be able to afford homes.
  • Welfare economies do not incentivise the development of financial planning know-how.
  • Upside is that families are breaking down so folks cohabit and no longer get married.
Mediacock can try such a math problem and figure out how long it would take to accumulate $200,000 SGD.

I think that's a bigger reason for outrage.

Saturday, October 07, 2017

A Third Class Honours, by any other name...

In today's new NTU has made a decision to re-label the Third Class Honours designation to something more politically correct. The question is whether this will really make a difference to their students or how the industry would view local graduates.

I was in a bad situation myself sometime last year. I was teetering on the brink of losing a cum laude  and started make plans to graduate without a cum laude designation. This was because I was scored bottom in my Civil Procedure and International Moots class. The options do not look good because the industry is going through a tough patch, I have yet to score a training contract, and a 1-1 mapping between NUS and SMU would map a summa cum laude to a 1st class, a magna cum laude to a 2nd Upper and a no-frills cum laude to a 2nd lower even though a cum laude designation within SMU maps to the upper half of a 2nd Upper from NUS. I was also really worried that the older lawyers, many who would not even countenance a second law school in Singapore, would discriminate against us SMU graduates.

The situation was the opposite 18 years ago when I graduated from Engineering. I was in the 1st Class bracket, but in all my job applications, I mentioned that I expected to get a 2nd Upper. In those days, 2nd Upper was a cool grade. Folks were more relaxed about academic achievement with only the government and Anderson Consulting being really interested in paying more to hire top flight engineering graduates. Those days, lying about expecting a 2nd Upper even turned out to be a good move. After I joined P&G for a year when I found out that some of my colleagues take quite a lot pride about rubbishing 1st Class Honours graduates resumes. But the excuses are always that 1st Class Honours graduates may not have developed as a "whole person" and may have sacrificed their extra curricular activities.

These days grades matter. It's not because universities developed funky titles for their best students.
It's because HR departments need it to justify the expense and there are more students vying for those few professional jobs that guarantee a ticket to the middle class. HR department know where you stand on a percentile basis relative to your peers because it take an intern perhaps an hour to generate a table that maps degree classifications to percentile numbers and subsequently to starting salaries. Kids these days just put CGPA on their LinkedIn to erase all doubt about their quality.

Another words, NTU can't outsmart the industry by simply relabelling their product.

I'm also going to burst a couple of bubbles on this blog :

a) The silly idea that your degree classification only matters for your first job.

This is completely untrue from personal experience. If it only matters for one job, no one would regret getting average grades in university, go ask the middle aged uncles my age. In practice, when you submit your resume, you include your job experience AND YOUR GRADES so your interviewer will look at your candidacy IN TOTALITY.

You might have solid grades but if you did your work in a less inspiring setting, grades can save your career. Like my short 1.5 years stint in Government, you might find yourself in a position with no solid contribution to write about in your resume after you leave (Even my 11 months with NTUC netted me one data centre move). In reality, some work is just BAU (Business As Usual) work. You don't get rewarded when things work, but shit really hits the fan when things fail, so if you have done a perfect job, there's nothing to rave about to your interviewer.

Worse, in many cases, the sexier work is just farmed out to the folks with better grades.

In any case, it is highly dishonest to lie about grades or university being unimportant after your first job.

b) The lie that we are moving towards a skill driven society.

This is so dishonest I think we need to install a new hell to folks who are spreading this lie. The move towards a skill based society is not a motherhood statement that is bandied about to make the weak and mediocre feel good about themselves. Degrees contains two sources of value, one comes from skills development and another component comes from signalling.

The signalling value of a degree qualification is quantified by the salary difference between a person who comes from a better university and a person who comes from a less prestigious institution but is equipped with the same skills.

You can shoot your mouth off and say that we're moving to a skills driven society when this salary gap narrows and when employers have decided to pay for skills instead of branded paper qualifications. Until then, Singapore overwhelmingly pays based on the talent and potential of a graduate that is divorced from actual skill-sets picked up from school because MNCs can train their own employees better to give them the skills they need.

In fact, I would even argue that the gap has widened and is widening further because we no longer belong to a society where 20% have degrees and instead are moving to a society where 40% have degrees. Grades will matter even more in a society full of degrees. HR has KPIs to meet as well and don't like to be kept in the dark about what kind of guys they are putting on payroll.

So if local universities really want to make grades matter less, the solution is not relabelling. It's not even better teaching. The solution is to do the politically incorrect thing and limit the number of graduates in Singapore society by limiting their intake. This move must be coupled by a strong apprenticeship system that allows Polytechnic graduates to gain access to the middle class with good jobs that, in turn, allow them to raise families without running away to Australia to get a degree. These polytechnic graduates can then, based on personal circumstances, learn their way towards better jobs through part-time studies.

I think with university graduates being capped at a smaller number, we can have a society where skills matter more !