Suggestions to Olam in their fight against Muddy Waters

When Muddy Waters (MW) strikes, the immediate aftermath will be a double-digit percentage plunge in high volume in the share price of the stock being shorted. When MW strikes, it always provide lessons and entertainment for investors unless you happen to be vested in the company attacked by MW. MW sends shudders down the spine of CEOs of public-listed companies. Olam CEO Sunny Verghese must be cursing MW now. Why me? When he learnt of MW's first strike, it was fearsome enough to make him cancel his flight while waiting in the departure lounge.

Olam is a component stock of the Straits Times Index. As a Singaporean investor, I do not think this is a healthy development for our local stock market. On the other hand, shortists do play an important role in the stock market by knocking sense into an over-confident Mr Market who overlooks risks. For this, Singaporean investors (except Olam's of course) should thank Muddy Waters for opening our eyes to the risks of investing in Olam and in providing us keen investment lessons. Their Olam report is an interesting exercise in forensic accounting and due diligence.

In this battle between Olam and Muddy Waters, I hope to see Olam emerging as the final victor. Not through the court-room but by business savvy and creation of shareholder value. I would like to give some suggestions to Olam in their fight against Muddy Waters, although I am definitely not qualified to do so.

MW's main thrust of attack is that Olam is a complex business which is not only hard to understand but also easy to manipulate. MW contends that the biological gains and Level 3 derivatives in Olam's accounts allow management the discretion to manipulate profits to mislead investors. To counter this attack, Olam management needs to win investors' trust so that we trust their highly discretionary profit numbers. One way of doing this is substantial insider buying of Olam's stocks. Preferably, the insider buying should consist of multiple insider buying from executive management, starting from the CEO. Each insider should spend a substantial(>20%) portion of his net-worth or 2 years' salary to buy Olam's stocks. A few months' salary worth of buying is not sufficient. Buying too little and appearing too desperate may backfire if investors treat it as a public relations exercise to win confidence. While CEO Sunny Verghese share purchases a few days ago is to be applauded, his impatience to announce it even before the market closed is highly unusual and may be taken by investors as a desperate measure to win back confidence. Once investors are convinced by the insider buying action that top management's interests are aligned with theirs, then they will be less worried that the profits are being deceptively manipulated.

Please, no more company share buybacks. Don't use shareholders' money to prop up the share price, particularly when MW is alleging that senior management has pledged significant numbers of their own shares and could be facing margin calls. Management could be exposing themselves to shareholder lawsuits if they use shareholders' money to support the share price only to see it plunge later due to management's forced selling from margin calls.

Cumulative negative operating cashflow is a major bugbear for Olam investors. Profits are useless if they do not generate cash. In fact, it is worse than useless because it generates suspicion among investors. It was for this reason that I cease becoming an Olam shareholder a few years ago. I first became a shareholder because of the impressive profit growth. Initially, one can accept the argument that for a high-growth company, operating cashflow is negative in the beginning due to enormous upfront capital expenditure. However, investors lose patience if operating cashflow continue to remain negative over a multi-year period and the company keep asking for more money from shareholders and bondholders. This is the case for Olam. Operating cashflow has been cumulatively negative since FY2008. The poor operating cashflow also lends credence to MW's contention that Olam executes terribly in its acquisitions. Although Olam has rebutted MW on this point, no amount of clever persuasion is enough unless you can show me the money (cash, not accounting profits!). Good execution must show up in the numbers eventually. By numbers, I mean hard cash and not profits determined by opinions of accountants or management.

One suggestion to Olam's management is to, at least for the time being, base their staff's bonuses and promotion on cash-flow metrics, not profits. MW compared Olam to Enron for their shared appetite in acquiring companies to create fake profits through complicated accounting. By pegging staff incentives to real cashflow and not opinionated profits, investors need not fear Olam staff are motivated to practise Enron-like behavior of spending real $10 on acquisitions to create fake $5 of accounting profit.

I hope Olam will pause its capital-raising activity for the time being. Show us some cash first before you continue asking for more cash from us. Despite its impressive growth, Olam's Piotroski score is only 1 for FY2011. However, I am not sure if this is accurate as this was computed by a software I wrote early this year when I had plenty of time being unemployed.

MW is a tough opponent. Its latest move to pay for Olam's debt to be rated is cunning. It is an offer that Olam simply cannot accept. Even if the bonds are rated at better-than-expected ratings, it is useless because Olam's bonds are already trading near distressed levels. It is a lose-lose situation if Olam accepts. If Olam rejects, it appears as if Olam has chickened out. This offer by MW was designed to embarrass Olam.

I hope to see Olam emerge as the final victor. Not vested at the moment but enjoying the show. Will consider investing once Olam starts showing us some real money (cold, hard cash).

The right investment vehicle for retail investors - ETF

It is an open secret in the fund management industry that most fund managers under-perform over the long-term (around 5 years). Very few people who are in the business of selling investment-linked products will reveal this embarrassing secret to their clients. A simple search on Google will show the facts. You can always verify next time someone persuades you to buy an investment fund. Don't blame the salesmen if they are not forthcoming because they cannot sell if all the embarrassing secrets are out.

Two years ago, I wrote about relying on fund managers for our investments. What I wrote then still stands today. I still think the average IQ of fund managers and the bottom 5% of hedge fund managers to be much higher than mine. However, it is puzzling why intelligent people under-perform as a group. A recent brief exchange with a fund manager explains the reason. Institutional investors form the bulk of the transactions, so they are the average. Add in their management fees, so they naturally under-perform the average. If we cannot rely on fund managers who are far more intelligent with much more time and resources on their hands than us, then how? What if there is an investment vehicle that outperforms most fund managers but charges a much lower fee? These are index funds and ETFs. The ETFs referred to in this article are country indices which are baskets of blue chips in the respective countries. So, if you want to invest in Singapore stocks, the right ETF is an ETF that tracks the Straits Times Index.

Cheaper and better than active fund managers, ETFs are a no-brainer for retail investors. DIY investors who pick their own stocks should review their trading records and honestly self-assess if they outperform the index ETFs. If not, index ETFs have a rightful place in their portfolio. Even for skilful ones who manage to beat the index, they can still consider ETFs if they decide to spend less time on investments and more time on their family or take on more meaningful enterprises like starting their own business.

I have yet to encounter a better writer than Andrew Hallam on ETFs and index funds in Singapore's context. Since my writings cannot hold a candle to his, please read his articles on ETFs and index funds below.

http://andrewhallam.com/2010/08/local-and-expatriate-investing-in-singapore-part-i/
http://andrewhallam.com/2010/10/singaporeans-investing-cheaply-with-exchange-traded-index-funds/
http://andrewhallam.com/2010/10/singaporeans%E2%80%94beware-of-high-cost-index-funds/
http://andrewhallam.com/2010/10/singapore-index-funds-cost-1500-more/ 


Among ETFs and index funds, there are good and bad ones. It is for this reason that I opened a US brokerage account just to buy ETFs in the US stock exchanges. On the local exchange, the STI ETF will suit most retail investors who want exposure to Singapore stocks. I will discuss more about this in a later article.

Update on my favourite life insurance plan (Aviva SAF Group Term Life) for Singaporeans

Last year, I wrote about my favorite life insurance (Aviva SAF Group Term Life) for Singaporeans. It is still my favorite today and I just got an update that the maximum coverage allowable has been raised to SGD1 million. This will cost SGD1536.00 annually and I signed up for it with little hesitation. Based on my personal experience, I seldom need to pay the full premium each year because Aviva gives partial refund of the premium at their discretion.

For Singaporean NSmen with dependents, this is a no-brainer if the objective is to use minimum sum of money to provide maximum protection for the family. This plan is open only for NS men and I am not aware of other cheaper plans. Fortunately, the policy holder can buy protection for his spouse at even lower cost probably because the wife has no risk of death from military accidents. This is the only plan I know of that protects against military mishaps. Singaporeans who have been through NS will know that this risk is not really that low.

Much of what I wrote in my first article for this insurance plan still applies. So, I shall not repeat here.

By the way, I will bet very few insurance agents or fee-based financial advisers will recommend this product. This product is so value-for-money that there is hardly any room left to pay for commission. I do not get paid a single cent for recommending this product.

For more details, please refer to the Aviva brochure and judge for yourself.
http://www.aviva.com.sg/pdf/SAF_GTL_Brochure.pdf

PS: I do not collect any commission from Aviva. In fact, I have never collected any commission for my product reviews. Just a happy customer who wants to share with fellow Singaporeans on the kind of protection that they should have to protect their own family.

Different ways of spending money leading to different wealth outcomes

How nations spend their money will ultimately determine their wealth. Same goes for companies and individuals. I will talk about the different ways we spend money and why certain organizations fail/succeed because of the way they spend money. Before that, I confess that I am not smart to think of such a powerful, yet simple concept. This credit goes to Milton Friedman, arguably the most influential economist of the 20th century, who introduced the concept in his book "Free to Choose".

Children in western societies love Christmas because they receive gifts from adults. Children in Chinese society love Chinese New Year because they receive red packets (红包) which contain money from adults. Suppose you are free to choose, what would be your choice? For me, I am so glad to be born a Chinese :)

When your Uncle buys gifts for you on Christmas, he is spending his money on someone else (First way of spending money). He may love you very much and has the kindest intention to shower you with the best gifts. The problem is he does not know you well enough to buy what you really like. He could spend a bomb and still end up with a gift that you do not like, do not need, do not want. Worse still, he may even buy you something you already have. He could end up buying you an expensive white elephant that serves no useful purpose except take up space.

When your Uncle gives you red packets (红包), the money is yours and you can spend your own money on yourself (Second way of spending money). Nobody knows your likes and dislikes better than yourself. Since it is your own money, you will do your best to get value for money when you spend it and therefore, not overspend. In other words, you will use the minimum sum of money to extract maximum pleasure. This can best happen when you are spending money on yourself. This way of spending money leads to far superior capital allocation compared to the first one when a person spends his own money on someone else.

When you go on overseas trips with expenses fully paid by your employer, you are spending other people's money on yourself (Third way of spending money). Because it is other people's money, you do not really care how much you spend. What you really care is to extract maximum pleasure from spending the money. This way of spending money will lead to wastage but it will at least serve its purpose of being put to good use on yourself. Wastage but at least good outcome.

Suppose you are a kind, idealistic person and joins the government one day with the intention to help other people. As a government official, you are charged with the responsibility to spend taxpayers' money on taxpayers. Now, what happens? You are spending other people's money on other people (4th way of spending money). This is the worst of both worlds. Because it is other people's money, one tends to spend with less care. Because it is spent on other people who are faceless strangers, the spender does not really know what other people want and need. Therefore, chances are that the people whom the money is to be spent on do not really benefit much from it. This is going to lead to plenty of wastage without achieving good outcome. A good example of the proverb "The road to hell is paved with good intentions".

The 4 ways of spending money is a simple concept and is a useful tool to think about economic systems. The private sector does a better job allocating capital than the public sector because most people there spend their own money on themselves. Even with the best of intentions, the government is unlikely to achieve more than a group of selfish individuals pursuing their own selfish interests using their own money (read the invisible hand of Adam Smith). This is why free, capitalistic countries have succeeded so spectacularly economically compared to the socialist/communist, centrally-planned economies.

It is naive to think that most government officials are public-spirited and have the people's interests at heart most of the time. All forms of government is guilty of the third way of spending money - spending other people's money on themselves. In other words, corruption. Despite Singaporeans' numerous complaints about the government, this is one aspect that our government score very well in being relatively corruption-free. China can do everything that Singapore can from low-end work to high-end technology but it is very hard for them to copy this clean aspect of Singapore. The vested interests are too deep. Closer home, due to human nature, there is a natural tendency for Ministerial salaries to go up if set by Ministers themselves. The fact that the PM has agreed to cut his own salary as well as his colleagues' is a good sign that we have good men in charge and democracy is kicking alive here. I have actually written a letter to the PM on this issue but I doubt he will have the time to read it.

Due to the ease at which government officials can spend other people's money on themselves, it is far more important to focus on the character of the people they are recruiting than on their intelligence (1st-class honors, good academic grades etc) which our government tends to be obsessed about. Intelligent workers are double-edged swords. A smart worker in a position to steal will be able to steal more without getting caught. Who can disagree with that? Problem is it is very hard to judge a man's character because intelligent but bad people can put on a good show to show they are good people.

A more insidious form of "spending other people's money on yourselves" today are financial institutions taking excessive risks with other people's money and paying themselves very high bonuses when things go right but push the losses to taxpayers when things go wrong. When things run well, Wall Street lobbied for deregulation and that government should have the good capitalist sense to keep their hands off. In 2008, when things went wrong, Wall Street screamed for help "Save me, save me or the world will go to an end", hoping that the government will turn socialist to save them. Since taxpayers' money are at risk for too-big-to-fail institutions, there is a good case for more regulation. In fact, any institution that have taxpayers' money on the hook should be heavily regulated.

One vital purpose of Finance is optimal capital allocation which is channeling idle capital to productive uses. Ironically, allowing financial institutions to spend other people's money on themselves without adequate regulation has led to one of the worst capital allocation in living memory which culminated in the global financial crisis of 2008. The global major banks lost so much money that the government has to print money to save them. So much money was lent to people with bad credit because the bankers have repackaged the debt and sold off to other investors who are not in a good position to make credit decisions compared to the bankers themselves.

Thirty years ago, all major Wall Street investment banks were private partnerships. They were handling their own money. By 2000, Goldman Sachs became the last major investment bank to go public. By then, all of them were using other people's money to get rich, some at a leverage of 30 to 1. The risks people take with their own money and with other people's money are very different. 2008 crisis would surely not happen had investment banks remain in private hands.

The free market works best when enterprising people have maximum freedom to use their own money for themselves with minimum interference from government. If they screw up or just suffer hard luck, the free market will discipline them to ensure that poor capital allocation decisions get punished. The government should lay their hands off these enterprising people because the free market will be there to punish (or regulate) them for bad decisions/behavior. However, the free market does not work for certain groups of people (too-big-to-fail financial institutions) who have at their disposal so much of other people's money that when they screw up, society cannot give the free market total freedom to punish them without risking social chaos. Government has to step in for such cases.

As a Singaporean hoping for a more prosperous future for our country, I hope to see more of our people using their own money for themselves and get rich as entrepreneurs. Today, it is not healthy to see too many of our finest minds joining the government sector and getting rich as bureaucrats who spend other people's money on other people, however well-intentioned. It is also not healthy if a disproportionately huge number of bright minds join the financial sector and get rich in a poorly regulated environment where they use other people's money on themselves neglecting their fiduciary duties to people who entrust money to them.

On a final note, this blog is about helping your own money which is really about managing your own money yourself. If possible, always rely on yourself on money matters as very few can be trusted when it comes to handling money. There is no better incentive structure than to have a person manage his own money and invest/spend his own money for himself.

In memory of Dennis Ng Kah Wan 吴加万

Update: My attitude towards financial trading/investing courses is summed up in this blog post I wrote. If you can learn from cheaper alternatives such as books/internet, please do so. 
I know little about Dennis' financial training courses. He was very generous with his time with people who engaged him online. For that, I'm grateful and this is why I wrote this eulogy.

Money gurus who charge thousands for their courses are viewed skeptically by experienced financial practitioners. Going by their hourly rate, their students pay more for the course compared to an MBA from a reputable university but do not get a recognized certificate upon graduation.

Skeptics will ask ... "if you are such a good investor and love the game so much, why don't you invest and make money for yourself? Why are you sharing your secrets to strangers and diluting your future gains? Are you making more money teaching than doing? Have I hit the nail on the head?"

The financial gurus will reply something along the line ... "I have already made enough money from the market. I want to give back to the community. I want to help people by sharing what I know."

Since battle-hardened investors are trained skeptics, almost all of them will find it very hard to believe the financial trainer. But if there is one man who can make me believe, he is Dennis Ng Kah Wan 吴加万 (RIP on 26 Jul 2012 at the age of 43)

I state upfront that I have never met Dennis in person. However, I know him online on WallStraits (under another nick) since 2004 long before he got famous after setting up http://www.masteryourfinance.com. Maybe it is presumptuous to write an article on him without meeting him but Dennis spends so much time online sharing his knowledge that it is easy to know him well by reading his posts.

Before Dennis set up his own financial website, he easily ranks among the most frequent contributor to various investment forums like WallStraits (now defunct), ChannelnewsAsia Market Talk and ShareInvestor.com. Yet, on each one of them, he was extremely unpopular and threads end up with personal attacks on his character. His critics blast him as being arrogant, intolerant of opposing views and is a shameless self-promoter. It is hard to disagree with the critics if you read just a few of Dennis's posts. However, if a person has the patience to read through most of his posts and ignore the self-advertising part, one could sense that Dennis knows his stuff and was extremely willing to share his knowledge. What was particularly impressive was his willingness to sacrifice his own time to write long replies to answer questions from newbies. I was worried that such a fine contributor would be driven out of WallStraits forum. Out of selfish reasons, I wrote a long post in support of Dennis so that he would not leave the forum. Dennis was quite touched and I guess that was how I got into his good books and why he invited me to join his inner circle to share ideas on individual stock picks. (I don't think it was because he thought I was a good investor as I never shared my stock picks). I politely declined because while sharing investment techniques is fine with me, sharing portfolio is not fine. On investment matters, I would rather be a lone operator. Since Dennis believed deeply in sharing, I guessed I got kicked out of his good books after rejecting his offer.

I probably would have gained more from picking Dennis's stock-picking brain than he from mine because Dennis was the better investor. He gained his financial freedom around the age of 39 through investing in stocks. Despite his vast investment experience, Dennis was not at his best as a teacher at investing on investment forums (except www.masteryourfinance.com). He gets impatient when his advice is not taken. It may not be that people do not take his advice because they doubt him. In investing, there are many ways to skin a cat. One man's meat could be another man's poison. What suits him may not suit others. He showed this darker side of himself on one of Musicwhiz's blog post. I thought he was not being fair to Musicwhiz when he commented that Musicwhiz's 36.9% returns over a 5-year period was very poor returns with the effort put in. Given that Dennis lost half his fortune in the Asian Financial crisis, Musicwhiz's first 5-year performance was at least superior to his.

Dennis would get irritated and impatient when people disagree and refuse to learn from him. This aspect of him made him come across as arrogant and was one of the reasons why he was so unwelcomed on investment forums. I believed Dennis was deeply hurt by the experience. In a private correspondence with him, Dennis revealed (in his own words) that "the reason my MasteryOfFinance forum was not open to public comment is becos of silly personal attacks I've been through in public forums, which you should know very well, why I left wallstraits.com" In his defense, I think this seemingly arrogant behavior stems from his deep passion to teach. When a teacher is anxious to see results, he will become impatient with students who doubt his teachings. Unfortunately, fellow forummers never had any intention to be his students. Many of them were good investors in their own right and could make good money with their own methods. If Dennis wanted people to listen to his advice, then the most effective way is to get people to pay to listen to him. This was why Dennis was so well-respected in his own forum www.masteryourfinance.com but disliked in all the other investment forums that he actively participated before. Dennis's fault was trying to impose his methods on others but he never held back on what he knew for those who wanted to listen. In all fairness to Dennis, can any of his detractors accuse him of being selfish in sharing what he knows?

Dennis was at his best as a Personal Finance teacher. People who took his Personal Finance advice saved lots of money by not overpaying for high-commission aggresively sold insurance plans or buying a car unnecessarily. Dennis never bought a a car. Simply put, owning a car in Singapore just does not make financial sense. Despite gaining financial freedom, his mode of transport remains BMW (Bus, MRT, Walk). He literally walked his talk.

Dennis never really upgraded his lifestyle as his wealth grew. This multi-millionaire still lived in a HDB flat and refused to buy a car. This led to netizens who do not know Dennis well to comment that he was stingy, never sat back to enjoy his wealth, was so keen on making money from his training seminars that he worked to his last breath. I am convinced Dennis did not work that hard for money. What makes me so sure was Dennis's simple, low-cost lifestyle. Does it make sense to work for money and continue doing something you do not like when you have no need for more money? Or does it make more sense to do what you like after you have made enough money to be free to do whatever you want? If Dennis had upgraded from a HDB flat to a Sentosa Cove property, bought a Ferrari, then his detractors may be right in saying he is one of those financial trainers who are out to make a quick buck for themselves. Dennis had already reached financial freedom when he started www.masteryourfinance.com. He has already learnt a hard lesson that few would listen to his advice if he did not get them to pay for advice. Ironically, I guessed he felt he would do his students more good if he had charged them a fee than give knowledge away free of charge. Besides, any good cause can only be sustainable if it generates cashflow. Charity alone is not enough.

I have a theory about thrifty people who remain thrifty despite attaining immense wealth. These people do not work for money. They work for their passion. They live for themselves. Warren Buffet still lived in the same house after 30 years. Through Lee Wei Ling's letters, Singaporeans know that our founding father, Lee Kuan Yew, and his family lived frugally. Likewise for Dennis Ng. Dennis was working for his passion when he started www.masteryourfinance.com. Even before Dennis started www.masteryourfinance.com several years ago, he had been talking about his passion to spread financial literacy. This can be verified even by his detractors who quarreled with him in the investment forums.

According to some web postings, Dennis had a defective heart. Yet, he worked so hard that he was probably the most active financial trainer in the public arena in Singapore FREE of charge. He writes fortnightly (alternate Tuesday) for My Paper.sg. He has a weekly Radio program on Capital Radio 95.8 FM every Thursday 10.10 am to 11 am. He blogs for CPF Board's imsavvy.sg. He writes on a monthly basis for share investment magazine http://www.sharesinv.com/author/dennis-ng. With his wealth, he need not have worked to death. On this aspect, he led life like a fool. However, in his pursuit for his passion, his life was full.

PS: Dennis's death shocked me. My regret was that I never met him in person to express my thanks for sharing his knowledge free of charge on investment forums. Thanks to Dennis, I did not overpay for insurance, did not buy a car and always kept an emergency reserve for bad times. This helped me saved a comfortable sum of money and made my recent period of unemployment more bearable. This long post is a posthumous act to express my gratitude to Dennis Ng. 

Other eulogies for our late friend Dennis Ng;
http://www.bigfatpurse.com/2012/07/eulogy-for-dennis-ng-lessons-from-my-teacher/
http://www.donnadaritan.com/2012/07/how-would-you-know-it-will-be-last.html
http://ivanismyname.blogspot.sg/2012/07/rip-to-my-teacher-my-friend-my-mentor.html
http://www.newagedentists.com/uncategorized/dennis-ng-was-right-rip/
http://www.propwise.sg/in-memory-of-dennis-ng-1969-2012/
http://singaporeshortstories.blogspot.sg/2012/07/dennis-ng-founder-of-housing-loan-sg.html
http://sgwebreviews.blogspot.sg/2012/08/personal-finance-expert-dennis-ng.html

A good investment book for Singapore context

The best investment a person can make is investing in himself. The safest and most rewarding asset I possess is my knowledge and ability to earn a living. It is safest because nobody can take my knowledge away. Enemies can rob all my physical possessions but they cannot rob my knowledge away.

A good education does not always have to come with a high cost. Reading good books is a cost-effective way to get a good education. I would suggest to kiasu Singaporean parents that after your kids are old enough to read books on their own, encouraging them to read good books is more value for money than sending them to enrichment courses. It will be interesting if someone can do a study on whether the lucrative tuition industry in Singapore has enriched our kids more than impoverish our parents.

In investing, it is even more important to read the right books. Unlike the hard sciences where nonsense can be invalidated through rigorous experiments via the Scientific Method, nonsense teachings on investment can appeal to readers by playing on their sense of greed and fear. This is why so many people, even smart ones, fall prey to investment scams which look downright stupid on examination.

Investors are money-minded people. It is hard to make money by writing books for the small Singapore market. To make more money, it makes more sense for investment gurus to spend time on investment than writing a book on investment. Some authors use their books as marketing material to promote their much more lucrative trading courses which charge thousands of dollars. I do think some of the financial trainers know their stuff and their students will gain some benefit. However, attending expensive trading/investment courses is not a cost-effective way to get educated compared to reading good books, not to mention these authors will withhold some of their knowledge from the books to keep the best for the more expensive courses. It is only fair to keep the best for the best-paying customers.

When choosing investment books, one thing to look at is the background of the author. He should have the right background to know his stuff. He should have a long and positive track record to prove that he knows his stuff as well as to temper theory with practical advice. Lastly, he should be willing to share his knowledge, preferably without hidden agenda. The last characteristic is almost impossible. How can you expect altruism from investors who are money-minded by nature?

I believe Dr Michael Leong, author of the book "Your First Million - Making it in stocks",  comes closest to fitting the above characteristics. He was a successful entrepreneur as the Founder of ShareInvestor.com. Successful businessmen are better investors because they know what to look out for in assessing a business. It certainly helps in analyzing companies. Being in charge of a financial media company that supports public-listed companies brings him in close contact with numerous CEOs of Singapore's most successful companies. Very few has this privilege. He shares his insights from these experiences in his book.

In the old days, ShareInvestor forum(no longer visit the forum nowadays) attracted very good private investors to share their special insights. Old-timers will remember wonderful contributors like Mossie and Warren. I believe members of the forum, including Dr Leong himself, picked up some of their investing prowess from interaction with these forummers who shared willingly without expecting much in return simply because they like to talk about investing.

Dr Leong made enough money from his investments to enjoy an early retirement. This is a proven track record for fellow investors to at least read what he writes about investing. The fact that he is retired is one of the things that attracted me to the book. A person who has already made enough money from his investments to retire from the rat race is more willing to share his knowledge without hidden agenda because he has already reached his money goal. If an investment book was written by people like me who still has kids to feed and in constant worry of retrenchment, do not expect similar altruistic sharing. Recently, Dr Leong told me this about his book (in his exact words), "I truly wrote it for my kids as they are not interested in these things currently and I am concerned that when they are, I may not be able then to recall as much as I can now." What can be more genuine than advice to one's own kids?

Readers may consider reading the last chapter of the book "Money and Life" first. It is a chapter on Personal Finance and a person's relationship with money. Not many of us can be rich through investing but most of us can stay out of financial trouble by following basic Personal Finance practices like saving money and not getting into heavy debts. Therefore, the order of learning should be Personal Finance first, then investing for capital gain.

One caveat when reading investment books is that the investment strategies outlined in the book is based on what fits the author best. All of us are unique in our own ways with differing talents and personalities. Just because Dr Leong can be successful with a concentrated portfolio does not mean that his readers can. A concentrated portfolio is actually a highly risky method as compared to investing in a diversified passive index fund or ETF. Readers should not blame the author if they follow his strategy without the same outcome.

Most of the good books I have read on investing were written for US investors. It is refreshing to find a good book like "Your First Million - Making it in stocks" which is written in the Singapore context. I cannot say it is the best because this is the only Singapore-centric investment book I have read so far. I highly recommend "Your First Million - Making it in stocks" for fellow investors who want to invest in the Singapore stock market.

PS: I am not paid a commission to write this promotional article. Dr Michael Leong does not know my real identity. Nobody can pay me any commission because nobody, not even my parents, knows my real identity except my wife but she does not like to read my blog.

A solution to protect talented, successful men from sex scandals

I am surprised the latest sex scandals to rock our country actually put me in a good light in the eyes of my wife. The guilty men are top civil servants in Singapore which is known for its squeaky-clean government officials. My wife commented that although I was a boring and unromantic engineer, she is glad that she can put her heart at rest when it comes to such deviant behavior. I do not know whether to laugh or cry. Engineers make faithful husbands not because they are more moral but because they have the least opportunities to stray. Engineers in Singapore are unlikely to be very rich. They face computers and equipments most of the time in the office, have little contact with gorgeous ladies and most do not occupy positions high enough to receive sexual favors. Men who have stayed faithful to their wives are either not rich and powerful enough to be targeted or have little exposure to temptations in their daily lives. I shall not delude myself and take the credit for staying faithful because I am a moral man. What is closer to the truth is that I am a deprived man. In this case, this is a good thing because I am naturally protected from being destroyed by sex scandals and divorces.

It is a pity to have so many talented men throughout history regardless of race and religion be destroyed by sex scandals. These are men who could have gone on to achieve greater things and this represents a serious brain-drain to mankind! In this article, a solution to stem this brain-drain will be presented.

In the previous post, some rules for men to follow to protect their money from beautiful women who are employed as Sales tools were suggested. However, rules are useful only if the rule follower is disciplined. How many married men can stay disciplined when an irresistible seductress wraps her arms and legs around him, then skilfully move towards to the soft trigger spots? Therefore, a solution cannot simply consist of moral rules like the 10 commandments. By the way, who can really follow the 10 commandments? Not even on Sunday!

Rich and successful men at the peak of their career are desirable takeover targets of scheming gold-diggers. Actually, to be fair to women, most of the time it is the men who request to be taken over. A viable solution would be to make the men who are desirable takeover targets become poison pills for the gold-digger women whether the men like it or not. This is to protect men from their own weaknesses. Even powerful men have a soft spot for sexy ladies.

The Woman's Charter entitles a woman to a big chunk of the husband's assets and his future income in a divorce. Yet this is not enough to scare the men into behaving themselves. One proposal is  instead of getting the man to pay for his misdeeds, get the 3rd-party seductress to pay for the damages. Get the mistress to pay the wife if she sues for divorce. The man will pay for the remainder after the seductress has paid until she is bankrupt. By having such a law, no gold-digger woman would dare to seduce our men because it is going to dig a big hole in their own pockets. Thus, our men will be protected from sex scandals. I implore our law-makers to protect our local men by transforming them into poison pills to the gold-diggers.

This law provides an outlet to wives who want to get back at the mistresses who break up their families. There is no better way to do this than to sue the mistress to bankruptcy.

Singapore is known for its high density of high net-worth individuals. Foreign women might be attracted to come here to make money off our local rich men. Rather than suffer an outflow of wealth from our men's adultery, the country will at least enjoy an inflow of wealth by "levying a heavy fine" on foreign women for seducing our men and breaking up their families. Fair justice.

Some men may protest that such a law will take the fun out of their life. If they love their money and family, the only woman that a married man should allow himself to be seduced is his wife. All other women are simply too expensive. Some men may say they need an outlet and their wives simply cannot fulfill them on this aspect. I have a better idea. Go to the toilet and DIY (do-it-yourself). It is free of charge, risk-free (no fear getting sexually transmitted disease), no one will make snide remarks about your sexual performance, no need to synchronize with anyone, own time own target etc. Some men will still insist this is not enough and is a stupid idea. I will still repeat the same message in a blunter way - Go fuck yourself(literally) and get over with it.

Protecting money from our soft spot for beautiful women

Throughout history, there have been many great men felled by their weaknesses for seductive women. In the East, we have the 四大美女 (4 great beauties) of China. These women got their names because they were responsible for the sinking of mighty empires and the deaths of thousands of men who got drawn into wars started by these beautiful faces. The West has its share of such women too. Think of Helen of Troy, the face who launched a thousand ships which led to the destruction of Troy.

Recently, Singapore has its own version of such a woman. She is an under-aged teen prostitute who led to the downfall of 48 men. Women throughout the developed world are protected by divorce laws which force men to give half their assets in a divorce. Here, even under-aged but sophisticated prostitutes are protected. In this particular case, the prostitute was sophisticated enough to cheat 48 successful men with distinguished careers into thinking that she was legally open for business.Why does not the law protect the men who got cheated?

I am amazed that in a world where laws are mostly made by men, why do men treat themselves so unfairly? Why shower so much protection to women (get rich from divorces) and neglect protection for ourselves when history has thrown out so many examples that proves that men are weak and vulnerable to manipulation by seductive and beautiful women?

The lust for gorgeous women is programmed into our DNA. We need not be taught to lust. We just know it, feel it and manage it so that it does not run out of control as we grow up. Being a man, I am acutely aware of my built-in vulnerability. Firstly, I will talk about how I personally manage this weakness to protect my money. Secondly, I would like to suggest laws to protect the wealth of rich men who have poor self-discipline against ravishing and manipulative women with foul intentions.

It is a time-tested and effective business practice to employ attractive women to get men to part with their money. Some restaurants employ scantily-clad waitresses so that men can feast with their eyes while feasting with their mouths. Ever been to Hooters? Car shows employ sexy models because fast cars are associated with sexy female passengers. In the recent tragic Ferrari fatal accident, the rich PRC driver Ma Chi was accompanied by a sexy female companion (Wu Weiwei) who was said to be wearing a white spaghetti-strap tank top and hot pants at the time of the accident.

Most of us have been approached by bank relationship managers to buy financial products. So far, all the female managers whom I have encountered are highly attractive. Knowing that my judgment will be clouded in the presence of an attractive sales person, I never allow her to close the deal on the spot. Instead, I ask for printed materials to bring home so that I can analyze the numbers alone without her presence affecting my judgment. By keeping emotions away, I protect my money. Buy because the numbers look good, not because the face and body look good. If the presence of a gorgeous lady adversely affects your judgment, make sure that the decision-making process is done in her absence. Only the message matters, the messenger should not at all. Preferably, the message should boil down to a set of analyzable and fairly accurate numbers.

One reason I do not go to the casino is that there are too many beautiful faces and colorful lights inside the casino that distorts one's judgment. I think I stand a better chance of making money with my investments alone in front of the computer to analyze financial statements and price/volume movements without sexy distractions.

In my next article, I will make suggestions on protecting rich men's money from manipulative gold-diggers and their own poor self-discipline.

PS: Most married men who get into trouble with other women had it coming to them because of their own poor discipline and bad behavior. This post is not meant to push the blame to women. Rather, it is written by a man who is acutely aware of his own weakness and feels it is a pity to see so many potential great men who could have gone to greater heights in life be destroyed by this weakness.

Will fee-based financial advisory model lead to more financial literacy?

Recently, an insurance agent called me in my office. He was very polite, so I did not want to cut him off too quickly. He started off recommending whole-life insurance products. I was not interested. Then, he went on talking about savings and endowment plans. I still was not interested. Finally, I told him to email me the information so that I could end the conversation. Before hanging up, I told him I am interested only in insurance plans that offer purely protection and have absolutely no interest in savings-related or investment-linked insurance products. After all, insurance is all about protection. Savings and investment should be secondary considerations. This insurance agent never contacted me again.

Several years ago, an insurance agent came over to my home because I wanted to buy H&S (Hospital and Surgery) plans for my whole family. He spent the first half hour talking about critical illnesses and endowment plans which I have never express interest in. I listened patiently and politely since the agent took the effort to travel down to my home. I refused to buy any of the plans that the agent recommended because I prefer term plans which are cheaper. Before he left, I guess he could not hide his irritation and told me that the commission he earns from my H&S plans can at most pay for the transport he took to come to my place. I am not sure if this is an exaggeration. At least I know now that agents are paid a pittance for selling term-plans. So, in future, if I should need to buy products that an agent seems uninterested to sell, I will go to his office myself.

For the past decades, insurance sales is driven by commission. Commission-driven insurance agents plus financially ignorant or lazy consumers has resulted in Singaporeans overpaying for insurance protection and yet, remain under protected. How can Singaporeans have adequate insurance protection if the salesmen's main priority is to recommend savings or investment-linked products or expensive whole-life plans that cover death and 30 critical illnesses rather than hospitalization which is much likelier to happen? There is nothing evil in their actions because I will do the same thing in their shoes. If I were an insurance agent, I too will focus on selling products that pay me the most commission instead of selling the most appropriate product to the client. Client analysis means selling the highest-paying commission product that he can afford and probably likes, not necesarily the best product for his financial future. Hey, my own financial future comes first before my clients, right? Let us not be hypocritical. We are all like that.

Ravi Mellon(Managing Director, Monetary Authority of Singapore) made a dreaded speech on 26 March 2012 to the Life Insurance Association. Ironically, this much dreaded speech addressed to the financial advisory community is entitled "Putting the Customer First". Why should a speech from a regulator that puts customers first be received with such dismay? This really highlights the serious conflicts of interests between customers and financial advisers.

Some interesting nuggets from this speech that reveals why that insurance agent started off recommending whole-life insurance plans first;

• Take for example a whole life insurance policy.  An FA representative could earn a basic commission of 50% of the policy’s annual premium in the first year, and another 40% of the annual premium during the following five years. (Whole-life premiums usually cost around SGD2000 a year)
• His supervisor would in turn earn overriding commissions throughout the first six years.  There is typically a third tier comprising the agency managers who also get overrides. 
• Total overrides during the first six years can amount to 70% of the policy’s annual premium. 
• Together, the total commissions and overrides earned by the representative and his supervisors would be equivalent to about 160% of the policy’s annual premium.

MAS will move more commission-based financial advisory activities to become fee-based. Already, the obvious losers are making noise. Fee-based advice is objective and the adviser undertakes client analysis to recommend products based on what he thinks is best for the client's financial future as opposed to commission-based advice in which client analysis leads the adviser to recommend the highest-paying commission product that he has the best chance of selling.

Unfortunately, fee-based financial advice does not come cheap. These advisers charge by the hour and the average fee comes to around $3000 on average, $2000 at least (correct me if I am wrong). If a person has savings of around $10k-$30k, it does not make sense to go for fee-based advice because the fees are too significant as a percentage of the money being managed. This cuts off the lower-income and youngsters who still have not accumulate a meaningful sum of savings. This is still better than the present commission-driven model because no advice is still better than bad advice. Bad advice is unavoidable when there is a serious conflict of interest between advisers and clients.

I think fee-based financial advisory business will evolve to serve mainly the rich because that is the profitable way to go. What does it leave for the rest? When consumers want something but cannot afford or do not want to pay for advice, they will have to educate themselves. Perhaps the best thing to come out of the move towards fee-based financial advice is that more people will become financially literate in insurance matters.

By the way, do not expect members of the financial services community to educate you. They actually have an interest in keeping their clients ignorant. Ignorant customers are the easiest to do a rip off. There are knowledgeable people around who are generous in sharing their knowledge on financial forums. Below are some links that may be useful;

http://www.valuebuddies.com/thread-389.html

http://forums.hardwarezone.com.sg/money-mind-210/newbie-guide-how-find-good-agent-investment-insurance-2818607.html

Loss of my favourite dividend child - Nera Telecommunications

I like to own companies that pay good dividends. I view them as my children. These children pay me annual allowance for my living expenses.

The best children are those with growing income and pay me a reasonable percentage of their income as dividends. This percentage should not be so high until their own growth is stunted because they are not reinvesting enough of their profits back into the business. This percentage should also not be so low until I have problems paying for my living expenses. No parents like children who are stingy with their allowance despite earning fat salaries. A fast-growing income means that the children can afford to pay me rising, comfortable allowance without holding back their own wealth accumulation or even putting themselves into hardship. These are the best sort of companies to buy for dividends. They are very hard to find but if you can find them, they will not only deliver consistent dividends but good capital gains as well.

I do not like children who pay me generous allowance when times are good and ask for the money back (and more) from Papa when bad times hit. These children share a common name. Not all of them behaved this way but quite a number of them did in the credit crisis of 2008. The name of these children is REIT. I forgave them because the law stipulates that they have to pay at least 90% of their income as dividends which means they may not have enough internal cash to put back into the business. It is not their fault but this defining characteristic means the sustainability of dividends paid by REITs is questionable. I will consider buying REITs on a depressed basis when bad times hit and after they have raised money from other people.

One of my favourite child is Nera Telecommunications. Although this child does not enjoy growing profits, it has been able to pay out very generous dividends because of its strong, consistent cashflow. See the table below to judge how filial this child has been to me for the past 8 years.

Year	Dividends per share (cts)	Dividend yield based on price at beginning of year(%)	Stock price at beginning of year when dividend is paid
2003	2.875	7.65%	$0.376
2004	2.875	9.36%	$0.307
2005	3.245	9.69%	$0.335
2006	18	47.37%	$0.38
2007	4	10.26%	$0.39
2008	3	15.79%	$0.19
2009	3	7.89%	$0.38
2010	4	10.81%	$0.37
2011	6	13.95%	$0.43

For the past 8 years, Nera Telecommunications have been paying dividends with yields ranging from 7.65% to 47.37% (yes it's 47%, no typo error). On a growth basis, NeraTel is not impressive. In fact, the book value has been sliding down since 2003. Its earnings has been quite flat over the years too with earnings per share hovering at around 3cts per share. PE ratio is not impressive at an average of 17 for the past 4 years. So, one way to interpret this is that NeraTel has been sacrificing growth to pay generous dividends to its shareholders. So shareholder-friendly. Such a filial child.

A good question to ask at this point is whether the dividends are sustainable. Since dividends are paid from hard cash and not accounting profits, it is better to look to the cashflow statement rather than the income statement for the answer. NeraTel's operating cashflow grew 15% in 2010, 16% in 2009 and a whooping 80% in 2008. The absolute amount of the operating cashflow is comfortable enough to cover the generous dividends. Based on the cashflow numbers, there is good reason to believe that the generous dividends are sustainable in the years ahead. There must be something about the business being a cash gusher that enables it to have a consistent track record of paying generous dividends for 8 years throughout good and bad times.

On 10 Feb 2012, ST Electronics made an announcement to buy my favorite child away. The price offered is $0.45 cents per share. The actual price paid by the Acquiror is only $0.39 excluding 6cts of dividends that will be paid by NeraTel.

Is the offered price $0.39 too cheap? If the worth of a company is the sum of its future cashflows, then NeraTel is surely worth more than $0.39 based on its strong, consistent, stable dividends in the past decade. In fact, the dividends that NeraTel paid in the past 7 years alone already exceeds $0.39 which is the offered price today. ( I hope any potential acquirer will take note of this point) Now, ST Electronics wants to pay only $0.39 to swallow up all the future dividends for decades to come.

This cheap $0.39 offer comes at a time when the no-growth baby is starting to show some growth after expanding their Telecom business to new markets in Middle East and North Africa. In the latest announcement for FY2011, NeraTel net profits grew 23.9% and increased its already high dividends by 50% to 6cts per share.

Some may ask, if NeraTel is really worth that much, why is its biggest shareholder Eltek selling it so cheap? The answer is found in their balance sheet for FY2010. Eltek has NOK600m debt versus NOK6.8m cash. With the ongoing European sovereign crisis, it is not surprising Eltek is hard up for cash and has to sell its assets cheap to raise cash.

It is very hard for me to find a better child than NeraTel. Nera Telecom has been a good child to many minority shareholders. Don't insult me with a cheap price tag. I will vote no! How about the rest? What say you?

Disclosure: This post has been written with vested interest.

Letter to Prime Minister on Ministerial salaries

Dear PM Lee,

I thank you for having the courage to take the unpopular measure of cutting your colleagues' salaries, including your own. The parliamentary debates have focused on setting the right level of pay to attract good people. My humble opinion is that for our country, it is more important to focus on setting the right incentives than setting the right remuneration amount. It is not only wasteful but even harmful to spend lots of money to attract brilliant people and then drive them with the wrong incentives. The best example to illustrate this point is Wall Street in 2008. Wall Street, with all the money it could throw, attracted the best minds from all over the world. Yet, it failed so spectacularly in 2008. Why? Because the people working on Wall Street were driven with a set of perverse incentives that rewarded them for behaving badly. Many of them took excessive risks because when things turn out well, they scoop up the gains but when things turn out badly, other people pay for their mistakes. In such a system, good people eventually turn bad. The smarter the people, the faster the system is driven into self-destruction because smart people know how to game the system more effectively. The world would have been a safer place in 2008 if Wall Street had hired stupider people.

I had seen how bad incentives made good people turn bad when I was in secondary school. My math teacher was a dedicated teacher. She would give the weaker students remedial lessons during the holidays. I respected her until perverse incentives made her behave badly. It came after the Ministry of  Education introduced school ranking. To get her promotion, she pressured the weaker students to drop Additional Mathematics because weak students will pull down the average and affect the school ranking. Things got so bad that one of the parents went to the Math Head of Department and threatened to report this matter to MOE. The HOD relented. Luckily, he did because the son of this parent later got distinction in 'O' Level A Math to the pride of his father. It is hard to know how many children suffered from such tactics by our educators during that period. I do not blame my teacher. I blame the bad incentives that drove her to behave so badly.

In a one-man-one-vote electoral system, it is to the interest of the ruling party to peg their salaries to the masses instead of to a tiny representation of 1000 top income earners (Only 1000 votes, how to stay in power?). The right incentives should drive government servants to serve the masses and not the minority rich because that will result in the maximum number of votes won. Also, the incentives will make a big difference to the thinking and hidden agenda behind the decisions made by policy makers. If salaries are pegged to the top 1000 income earners, their internal biases will be to favor the rich. This will worsen the income-inequality problem which is already a major threat to social stability today.

I hope you would consider pegging Ministerial salaries to a high multiple of the median income of Singaporeans and bonuses pegged to the real inflation-adjusted median income growth. Real median income growth represents rising purchasing power of the people. I think many Singaporeans would not begrudge Ministers' generous bonuses if GDP growth had delivered rising purchasing power to them. Instead, Singapore's strong GDP growth benefited mainly the rich and punished the rest with rising cost of living. How could the people not be angry? There is even a perception among the people that policy makers took the easy way out to grow GDP to hit their own bonus targets by opening the floodgates to foreigners without spending the necessary infrastructural investment to accommodate the enlarged population. Whether right or wrong, perception does matter.

Rising purchasing power means cost of living got to be kept low. I hope the KPIs(Key performance indicators) of government officers would focus more on reducing cost and less on boosting profit. Profits are best left to the private sector. It is not healthy for the public sector to focus on profits because they can simply take the easy way out to raise fees and charges. Worse still, they may even transfer the cost of their mistakes to the public. Since the public services are usually monopolies, there is nothing the people can do. Let us not waste the brainpower in the government and direct them to serve the people by lowering our cost of living. I hope future KPIs will focus on how fees and charges for the people are being brought down through public-sector efficiency and not just profits which can be made from squeezing the people.

How high should the multiple of the median income be? As long as Singaporeans prosper together with Ministers, I think it is fine if Ministers get paid very well. My humble view is that Ministers should be paid as high as possible to attract able leaders but not so high until the people lose respect and trust for our leaders. I think that level has been breached and I thank you once more for taking action to restore some of the lost respect. 失民心者失天下。欲得天下，先得民心。

It is not out of jealousy (too far out of the league to be jealous) that I support cutting Ministerial salaries but out of concern as a citizen that it will harm our country's long-term future. I hope you will forgive me for being brutally honest on this issue.

As you have mentioned in Davos in Jan 2012, Singaporeans and the government have to work together. It is hard to work together if the people no longer trust and respect the government. If there is no respect, unpopular but sensible messages will be lost on the people when delivered by a messenger who is not respected. If there is no trust, new policies will always be interpreted by the people in a bad light (They are just doing this for selfish reasons. Just want to make money for themselves etc).

When salaries are too high, it actually worsens your problem of attracting the best candidates to join you. When the people start to associate politicians with greedy Wall Street bankers, potential candidates who actually want to serve the people will stay out for fear that their own image will be tarnished. This makes it very hard for our country to attract able people from the private sector to come forward. Able people from the private sector usually have to take a pay-cut when they join the government. They will probably join if they are compensated with non-monetary rewards like having a higher standing and respect in the public eye. I think one of the greatest rewards of holding a political office is when strangers thank you and you could genuinely feel the sincerity of their respect for you. It will be better for our country to use the respect commanded by the office to attract able people rather than throw money at them and risk attracting the wrong kind of people.

When salaries are set too high, it is unfair to Ministers who do not need the extra money but want more respect from the people. When annual salary has already exceeded the million dollar mark, that extra hundreds of thousands do not matter anymore. If a public servant says otherwise, then it is dangerous to have him around because he probably has a very expensive lifestyle to maintain. Such a person has a higher risk of falling victim to corruption and bribery. Singaporeans will prefer senior public servants to lead simple lifestyles because these people tend to be incorruptible (that extra money is immaterial because I already have enough). I am glad to learn from your sister's letters to the Straits Times that your family lead a simple lifestyle. Past high Ministerial salaries have unfairly tarnished the image of Ministers who lead simple lifestyles and do not need that much money. I think they would rather trade for more respect than more money. When Ministers don't feel respected, it will surely affect their job performance to a certain extent.

Lastly and ironically, when salaries are too high for senior public servants, they no longer have a stake in the long-term future of Singapore. With globalization, the rich can simply migrate to greener pastures and take their money along with them. It is middle-class people like me who have a bigger stake in the future of Singapore and this is why I am writing this long letter. When public policies take decades to realize their effect, it is important that policy-makers have a long-term stake in the country's future. Otherwise, they will game the system by taking short-term monetary gain at the expense of the long-term good. Earn as much as you can while you can, place low priority on the long-term good because if the country crumbles later, just migrate! It is very hard to set incentives to get people to focus on the long-term because they come and go. Pensions are effective in that regard. Perhaps a return to the pension system would be desirable but you may consider putting a significantly higher percentage of the remuneration into the pension.

I am not sure if you are still reading at this stage. If you are, I sincerely thank you for sacrificing time to read a letter from an insignificant but sincerely concerned citizen of Singapore.