I have never attended any trading/investment courses before. Not even
free ones which are usually sales preview. I declare upfront that I am personally biased against training courses
that charge 4-digit figures and last only a few days, since I used
cheaper alternatives such as books and internet to pick up financial
knowledge. I cannot make fair comments about the quality of these courses since I
have never personally attended any myself but one thing I can say objectively is that they are certainly much more expensive compared to books and internet resources. My financial education was mostly gained from free books borrowed from the library, free educational materials from the internet and online interaction with other investors/traders. I have benefited from many kind people on online forums who have generously given their time free of charge to share their knowledge without personal hidden agenda. So far so good using this cheaper approach.
In the past, I have written a positive review free of charge on a 1-day investment course based only on its course content as I did not attend the course in person and it was priced at SGD98. Short courses that are priced above $1000 are more expensive than even expensive MBAs on an hourly basis. Maybe some people learn better in a class setting instead of reading but do be mindful of the price you are paying versus the value you are getting.
If a person is prepared to pay thousands to go for a short course to learn how to invest in the financial markets, it means he is serious to become a DIY(do-it-yourself) investor. He has to answer this question first "Does it make sense to DIY? Are you financially better off buying cheap passive equity index funds/ETFs such as Straits Times Index instead of managing money yourself?" Most professional fund managers perform worse than cheaper passive equity indices. What makes you think you can outperform the equity index when professional fund managers with more time, more resources and more knowledge are unable to do so? A DIY investor has to spend a lot of time if he is serious about it. He will surely fail if he is not willing to put in the time. He will still face high odds of failure even if he is willing to put in the time since most full-time professional money managers underperform the indices. Time is a limited resource. When you spend lots of time on DIY investing, you have less time for your career and family. You may miss that promotion and bonus because you got distracted by DIY investing. You may end up making less money despite putting on a lot of hard work. Your family relationships may suffer as well. I believe most people should not be DIY investors in the financial markets. Having said that, I am a DIY investor myself. This is because I saw bleak prospects in the industry that I worked in when I started out (turned out to be correct) and I love the process of managing my own money. If I do poorly as a DIY investor, I will view it as expenses for indulging in a hobby I like. If it turns out well, the skills acquired can serve as a backup protection for my family finances in case I get retrenched as a middle-aged engineer. This was my reasoning when I started out as retail market player.
Among the people who attended the expensive short courses, one commonly cited reason is that short courses speed up their learning process. They say reading books take too much time. If that is the attitude, then they will most likely fail. A person cannot expect success if he is unwilling to sacrifice the time to master a craft. No short-cuts to success. If they are willing to put in the time, then they should ask themselves the question if it makes more financial sense to use cheaper alternatives such as books and internet resources instead of expensive courses.
If Renaissance Technologies is willing to open up their money-making formula in the Medallion Fund in a 3-day training workshop, I am more than willing to pay a fortune for the short course. These are proven strategies that cannot be found in books and internet. But would any money manager with secrets to produce consistently high returns yearly like Renaissance be willing to teach their secrets to outsiders? I am personally skeptical of trainers who claim to have wonderful track records and want to reveal their secrets because it is their passion to help people reach financial freedom and they want to give back to society. If a trainer boasts about high, consistent returns that matches top hedge fund managers, please ask for his brokerage statements that show his past transactions. Make sure the statements are not from a demo account! The past transactions must include all the losers and preferably long enough to cover 2 boom-bust cycles. If he wants to teach for a fee, it is reasonable to ask for evidence to verify his claims. Know your rights as a customer.
The financial training (and money management) business has a wonderful business model in the sense that the salesman can make empty promises about future returns without being held accountable. The financial salesman can hide behind the standard disclaimer "All investments carry risk. We cannot be held responsible for losses incurred." Human psychological weaknesses like greed and fear are magnified when it comes to money issues. A skillful salesman, without the shackles of being held accountable for his sales talk and mastery of human psychological weaknesses, can do wonderful manipulation work on his victim. The force is strong in them to manipulate your minds. So, be careful. One way to guard against manipulation is to ask for facts, numbers that cannot be manipulated which shows his past track record for what he is truly worth.
A close friend shared his experience about a financial trainer who tried to portray himself as someone sincere about helping people reach financial freedom through his courses. He felt his intelligence was insulted and I absolutely agree. If someone is really sincere about helping people reach financial freedom through education, there are cheaper ways like sharing their insights on forums, websites, youtube videos, self-published ebooks which can be accessed free of charge. Why charge a four-digit sum for a short course and claim it is your sincere passion to help other people reach financial freedom? It is absolutely fine for a businessman to charge whatever price he wants for his product/service. He is running a business and it is fair to expect him to charge the optimum price to maximise his profits. I will do the same if I were in his shoes. However, please do not use noble-sounding reasons like I am doing this to help you reach financial freedom so that you can quit the job you hate. Customers should be on their guard when someone claims he wants to help people reach financial freedom but charges a exorbitant price for doing so, given that there are cheaper alternatives. As for the chances of reaching financial freedom through the markets, most people are better off not touching the financial markets themselves anyway. I wish potential customers of these financial courses are peppered with realistic warnings and not sold to unrealistic hope before they seek their riches in the financial markets. This is particularly so for financial courses where students are taught to use leverage. Failure could mean financial destruction and following that, family falling apart.
Not every action taken is driven by money. I have been touched by the kindness of experienced traders/investors on online forums who sincerely shared and helped without expecting any payment. The late Dr Michael Leong, founder of shareinvestor.com was one of them and there are others too. In Dr Leong's words,
For those of us who make money directly from the markets, we know how
difficult it is for the novice investor to start investing. The least
we can do is to show you the ropes free of charge. We will never want
to take any part of your savings just to show you the ropes. This money
is needed by you to start off your investment journey. Hence, my
conscience will certainly not allow me to take such money. I rather
share freely, or not at all.
http://pertama.freeforums.net/thread/77/real-investors#ixzz406iJZvsr
It is not hard to spot these rich and kind people. They are usually people who have made enough from the markets and have gone full-time because it is their passion. They spend most of their time trading/investing and not training. Indeed, when a financial player spends most of his time training instead of trading, where do you think he makes most of his money? Businessmen will gravitate towards the activity that generates the most money. When someone spends most of his hours training instead of trading/investing, he probably makes most of his money from training.
Ray Dalio said he has reached a stage in life where he feels the responsibility for passing on his knowledge. He does not sell expensive courses. You can download his latest book "Big debt crises" free of charge. I truly believe his sincerity. On the other hand, if average nobodies like me say the same thing, you had better be skeptical.
PS: I understand there are people in the financial training community who will be unhappy with this post. If I make unfair comments in this post, please convince me I am wrong and I will edit accordingly. This post was motivated by bad experiences suffered by people close to me.
Tuesday, November 27, 2018
Sunday, December 10, 2017
My favourite charities as a selfish person
I am a selfish person at heart. My saving grace is that I am not hypocritical about it.
My number one favorite charity as a selfish person is buying term insurance. The lucky subsidizes the unlucky. The lucky ones are those who do not need to make claims because nothing unfortunate happened. The unlucky ones are those who met with some unfortunate events that cost a huge sum but were saved by the insurance claims. Without "charity" from the lucky ones, the unlucky ones will have to absorb the full financial cost of their bad luck. Nobody starting out in life will know how their luck will turn out later in life. So, I try to be selfishly charitable by donating to "charity" to help the unlucky ones in case I turn out to be among the unlucky ones later.
My number two favorite charity as a selfish person is investing in the shares of great companies which make plenty of money and create lots of social good along the way. If the "charity" turns out poorly and I lose all my money, fine. It is charity anyway. If the "charity" turns out wonderfully well, it is "charity" at its best. The "charity" makes money. The customers are happy to pay money because the value provided by the product/service is worth more than the money paid. Suppliers make money. The employees make money. (Isn't this better than simply giving money to the jobless poor who still remain jobless with shame and no dignity?) Most important of all, I make money :) Being charitable is good, particularly when it yields benefits to selfish people like me :)
Hopefully, my selfishness will wear off later in life. As a person grows wealthier, he actually becomes less selfish. No wonder the world's greatest philanthropist, Bill Gates, is also the world's richest man. The world's greatest capital allocator, at one time the world's second richest man, has decided to selflessly allocate the bulk of his wealth to the world's richest man's philanthropic foundation. These two selfless charitable donors really put selfish "charitable donors" like me to shame. I feel like a selfish bastard and rightly so. However, I assure everyone not to be wary of selfish people like me. If one day, I suddenly say things like "Money is not important. I just want to help people and make this world a better place. Helping people is my passion blah blah ...", then you really have to be wary of me. Be very careful of people who talk like selfless do-gooders and have yet to earn their big pot of gold.
One of the big social risks today in the world is the huge inequity in the wealth distribution of the population. Too much wealth in too few hands for those who don't need that much money while the many who need more are starved. We all start off as being selfish looking out for ourselves and family only. That is perfectly normal human nature. After some make it, it is also human nature that some of them will follow the shining examples of Mr Gates and Mr Buffett to give back to society. I hope I have the goodness in me to behave as well as these 2 gentlemen after I achieve 0.00X% of their wealth. If I am indeed that blessed but still stay like a selfish bastard, here is a gentle reminder to myself to read the history of the French Revolution and study what happened to the rich when the many who were poor revolted. I promise to let the poor eat more cake at my expense if I am blessed enough so that my head does not end up in the pike. Hmm ... being selfish again?
My number one favorite charity as a selfish person is buying term insurance. The lucky subsidizes the unlucky. The lucky ones are those who do not need to make claims because nothing unfortunate happened. The unlucky ones are those who met with some unfortunate events that cost a huge sum but were saved by the insurance claims. Without "charity" from the lucky ones, the unlucky ones will have to absorb the full financial cost of their bad luck. Nobody starting out in life will know how their luck will turn out later in life. So, I try to be selfishly charitable by donating to "charity" to help the unlucky ones in case I turn out to be among the unlucky ones later.
My number two favorite charity as a selfish person is investing in the shares of great companies which make plenty of money and create lots of social good along the way. If the "charity" turns out poorly and I lose all my money, fine. It is charity anyway. If the "charity" turns out wonderfully well, it is "charity" at its best. The "charity" makes money. The customers are happy to pay money because the value provided by the product/service is worth more than the money paid. Suppliers make money. The employees make money. (Isn't this better than simply giving money to the jobless poor who still remain jobless with shame and no dignity?) Most important of all, I make money :) Being charitable is good, particularly when it yields benefits to selfish people like me :)
Hopefully, my selfishness will wear off later in life. As a person grows wealthier, he actually becomes less selfish. No wonder the world's greatest philanthropist, Bill Gates, is also the world's richest man. The world's greatest capital allocator, at one time the world's second richest man, has decided to selflessly allocate the bulk of his wealth to the world's richest man's philanthropic foundation. These two selfless charitable donors really put selfish "charitable donors" like me to shame. I feel like a selfish bastard and rightly so. However, I assure everyone not to be wary of selfish people like me. If one day, I suddenly say things like "Money is not important. I just want to help people and make this world a better place. Helping people is my passion blah blah ...", then you really have to be wary of me. Be very careful of people who talk like selfless do-gooders and have yet to earn their big pot of gold.
One of the big social risks today in the world is the huge inequity in the wealth distribution of the population. Too much wealth in too few hands for those who don't need that much money while the many who need more are starved. We all start off as being selfish looking out for ourselves and family only. That is perfectly normal human nature. After some make it, it is also human nature that some of them will follow the shining examples of Mr Gates and Mr Buffett to give back to society. I hope I have the goodness in me to behave as well as these 2 gentlemen after I achieve 0.00X% of their wealth. If I am indeed that blessed but still stay like a selfish bastard, here is a gentle reminder to myself to read the history of the French Revolution and study what happened to the rich when the many who were poor revolted. I promise to let the poor eat more cake at my expense if I am blessed enough so that my head does not end up in the pike. Hmm ... being selfish again?
Sunday, November 12, 2017
In memory of Dr Michael Leong, founder of ShareInvestor
This is a very belated post. Dr Michael Leong died on 12Feb2016 after battling colon cancer for more than a year. I still remember him for his helpfulness to his online readers.
I have never met him in person but he was kind to an online stranger like me. When I was jobless in 2012, he sent me an email to extend help.
Hyom, I read about your retrenchment in your blog. I understand that you
are from the electronics industry and from the way you write, I assume that
***. Sometime back I was told that *** maybe
on the lookout for ***. If you are keen, do let me know and I
will try to put you in touch with them.
I was touched because he was a man of reputation in the business world. He puts his own reputation at risk when he makes a referral for someone whom he has not even met face-to-face. He could have looked like a complete idiot. I did not take up his offer because I already found a job. To this day almost 2 years after his death, I still remember him for his kind act. The least I did was to send him a wreath on his funeral wake, together with a group of grateful ShareInvestor customers who benefited from the community that his company ShareInvestor created.
It was in Dr Leong's DNA to share his investment insights freely and generously. He had no financial agenda in sharing. He had already achieved financial freedom through investing in the financial markets before he sold his successful company (Shareinvestor) to SPH. There was no need for him to make money in conducting investment courses. What better person to learn from as a novice? He was highly qualified with a long and successful track record, willing to teach, happy to teach and yet not asking for teaching fees.
God bless all the generous, rich investors who have been willing to share their insights to newbies like Dr Leong.
In Dr Leong's own words,
For those of us who make money directly from the markets, we know how difficult it is for the novice investor to start investing. The least we can do is to show you the ropes free of charge. We will never want to take any part of your savings just to show you the ropes. This money is needed by you to start off your investment journey. Hence, my conscience will certainly not allow me to take such money. I rather share freely, or not at all.
http://pertama.freeforums.net/thread/77/real-investors#ixzz406iJZvsr
This is not to say he was against trainers who charge for conducting trading/investment courses.
I still feel that one needs a different moral compass from mine if one charges thousands of dollars for a get rich quick scheme. Of course I am not against those who charge generally accepted rates for teaching. Put another way, an honest day's pay for an honest day's work.
I have blogged positively about investment courses that charge less than $100 for a day's work.
However, for courses that charge 4-digit figures, the student should consider free alternatives such as library books and online forums. I speak from personal experience that books and forums work just as well. I have never paid for any investment course or even attended a single free investment seminar. A budding novice should read all he can about all kinds of investment styles/methods while keeping an open mind, pay the necessary school fees to Mr Market and tweak his investment style to something that suits him personally as he progresses in the school of hard knocks. After experiencing at least 1 boom-bust cycle (5-8 years), there should be a long enough track record to assess if he is suited for this game. If he is not willing to put in the hard work which may not pay off anyway, passive index ETFs/funds are his best bets based on historical performance data. Even hiring expensive under-performing professional fund managers is better than investing on his own if he is someone who only loves the money but not the game.
While Dr Leong was generous and successful, I think some of his investment methods are not suitable for the majority. Dr Leong made a fortune from a concentrated portfolio and he once said "Put all your eggs in one basket and watch that basket carefully". It worked for him but this is dangerous for most. He had a unique background. He was a successful entrepreneur and his CEO position in Shareinvestor gave him access to the wisdom of other successful entrepreneurs. He was also highly intelligent given his medical background. His entrepreneur background gave him an edge in picking the right businesses to invest in. Concentration which worked for him will probably be harmful for most. I humbly admit I am not as good as him, so I did not follow him on this. I believe that most of us are better off with diversification and if you have no reason to think you should be better than most, stick with diversification.
Dr Leong's intial investment strategy which made him a fortune was similar to Benjamin Graham's net-net strategy. It is akin to buying companies selling at well below their liquidation value which is supported by solid, tangible assets such as properties, marketable securities and cash.
He later tweaked his strategy to invest in top entrepreneurs. He had bad experience investing in net-net companies run by entrepreneurs who did not treat minority shareholders fairly. He later changed his style to invest in top entrepreneurs like Elon Musk, not intelligent but conservative "care-taker" management executives. The Elon Musk type of entrepreneurs are less concerned with adding a few more zeros to their bank account and more interested in changing the world for the better with their products/services. "Care-taker" management, in my view, are more like "wealth managers" who invests in safe businesses, avoid rocking the boat, averse to taking big risks and not keen to see bad things happen under their watch. These people are usually very smart (surely smarter than me) but as a Singaporean, I hope to see more of our leading local companies led by trail-blazing "entrepreneurs" and not "care-taker" clever managers.
Again, I find Dr Leong's new strategy unsuitable for the majority of investors. This strategy suits his entrepreneurial background but it is very difficult to execute for the rest of us. His earlier net-net strategy was not only easier to execute but much less risky as well. What an investor need to execute the net-net strategy is the ability to read a balance sheet. This can be easily picked up by almost anyone willing to spare the time to learn basic accounting.
Even if a person has the good fortune to meet a helpful "mentor" like Dr Leong, he needs to have the humility to admit that what works for others may not work for him. Conversely, he also needs the "arrogance" to try and succeed at what most people failed if he thinks he has got what it takes. If a person thinks he can succeed with a concentrated portfolio and/or possess the sharp eye like Masayoshi Son to spot great entrepreneurs such as Jack Ma who had no business plan and revenue at that time, why shouldn't he give it a try?
Dr Leong was a devoted family man. I recalled that he remarked that the most stressful period of his life was when his son was hospitalized. Given that he was the founder of a successful start-up, I am sure he had very stressful periods in his life but his son's hospitalization topped it all. When I asked him how did he manage to find time for his family and yet have a successful career, he replied that he was lucky to have found a job with IBM that allowed him to work from home. He admitted there is no easy solution. I guess Dr Leong must have found a good wife who was a wonderful mother to his kids and also gave him the free time to focus on his business.
Although Dr Leong has passed away, the Shareinvestor business that he left behind is still making a difference to customers' lives. I have been a subscriber of Shareinvestor for > 10 years. His legacy has taken on a life of its own. I think the emotional satisfaction from being a successful entrepreneur is higher than a successful investor. Besides money rolling into the bank account, the entrepreneur gets additional satisfaction that his product/service is making a difference in his customers' lives, on top of the jobs created for his employees and sales for his suppliers.
Dr Michael Leong led a meaningful life. I am sure his family is very proud of him.
I have never met him in person but he was kind to an online stranger like me. When I was jobless in 2012, he sent me an email to extend help.
Hyom, I read about your retrenchment in your blog. I understand that you
are from the electronics industry and from the way you write, I assume that
***. Sometime back I was told that *** maybe
on the lookout for ***. If you are keen, do let me know and I
will try to put you in touch with them.
I was touched because he was a man of reputation in the business world. He puts his own reputation at risk when he makes a referral for someone whom he has not even met face-to-face. He could have looked like a complete idiot. I did not take up his offer because I already found a job. To this day almost 2 years after his death, I still remember him for his kind act. The least I did was to send him a wreath on his funeral wake, together with a group of grateful ShareInvestor customers who benefited from the community that his company ShareInvestor created.
It was in Dr Leong's DNA to share his investment insights freely and generously. He had no financial agenda in sharing. He had already achieved financial freedom through investing in the financial markets before he sold his successful company (Shareinvestor) to SPH. There was no need for him to make money in conducting investment courses. What better person to learn from as a novice? He was highly qualified with a long and successful track record, willing to teach, happy to teach and yet not asking for teaching fees.
God bless all the generous, rich investors who have been willing to share their insights to newbies like Dr Leong.
In Dr Leong's own words,
For those of us who make money directly from the markets, we know how difficult it is for the novice investor to start investing. The least we can do is to show you the ropes free of charge. We will never want to take any part of your savings just to show you the ropes. This money is needed by you to start off your investment journey. Hence, my conscience will certainly not allow me to take such money. I rather share freely, or not at all.
http://pertama.freeforums.net/thread/77/real-investors#ixzz406iJZvsr
This is not to say he was against trainers who charge for conducting trading/investment courses.
I still feel that one needs a different moral compass from mine if one charges thousands of dollars for a get rich quick scheme. Of course I am not against those who charge generally accepted rates for teaching. Put another way, an honest day's pay for an honest day's work.
I have blogged positively about investment courses that charge less than $100 for a day's work.
However, for courses that charge 4-digit figures, the student should consider free alternatives such as library books and online forums. I speak from personal experience that books and forums work just as well. I have never paid for any investment course or even attended a single free investment seminar. A budding novice should read all he can about all kinds of investment styles/methods while keeping an open mind, pay the necessary school fees to Mr Market and tweak his investment style to something that suits him personally as he progresses in the school of hard knocks. After experiencing at least 1 boom-bust cycle (5-8 years), there should be a long enough track record to assess if he is suited for this game. If he is not willing to put in the hard work which may not pay off anyway, passive index ETFs/funds are his best bets based on historical performance data. Even hiring expensive under-performing professional fund managers is better than investing on his own if he is someone who only loves the money but not the game.
While Dr Leong was generous and successful, I think some of his investment methods are not suitable for the majority. Dr Leong made a fortune from a concentrated portfolio and he once said "Put all your eggs in one basket and watch that basket carefully". It worked for him but this is dangerous for most. He had a unique background. He was a successful entrepreneur and his CEO position in Shareinvestor gave him access to the wisdom of other successful entrepreneurs. He was also highly intelligent given his medical background. His entrepreneur background gave him an edge in picking the right businesses to invest in. Concentration which worked for him will probably be harmful for most. I humbly admit I am not as good as him, so I did not follow him on this. I believe that most of us are better off with diversification and if you have no reason to think you should be better than most, stick with diversification.
Dr Leong's intial investment strategy which made him a fortune was similar to Benjamin Graham's net-net strategy. It is akin to buying companies selling at well below their liquidation value which is supported by solid, tangible assets such as properties, marketable securities and cash.
He later tweaked his strategy to invest in top entrepreneurs. He had bad experience investing in net-net companies run by entrepreneurs who did not treat minority shareholders fairly. He later changed his style to invest in top entrepreneurs like Elon Musk, not intelligent but conservative "care-taker" management executives. The Elon Musk type of entrepreneurs are less concerned with adding a few more zeros to their bank account and more interested in changing the world for the better with their products/services. "Care-taker" management, in my view, are more like "wealth managers" who invests in safe businesses, avoid rocking the boat, averse to taking big risks and not keen to see bad things happen under their watch. These people are usually very smart (surely smarter than me) but as a Singaporean, I hope to see more of our leading local companies led by trail-blazing "entrepreneurs" and not "care-taker" clever managers.
Again, I find Dr Leong's new strategy unsuitable for the majority of investors. This strategy suits his entrepreneurial background but it is very difficult to execute for the rest of us. His earlier net-net strategy was not only easier to execute but much less risky as well. What an investor need to execute the net-net strategy is the ability to read a balance sheet. This can be easily picked up by almost anyone willing to spare the time to learn basic accounting.
Even if a person has the good fortune to meet a helpful "mentor" like Dr Leong, he needs to have the humility to admit that what works for others may not work for him. Conversely, he also needs the "arrogance" to try and succeed at what most people failed if he thinks he has got what it takes. If a person thinks he can succeed with a concentrated portfolio and/or possess the sharp eye like Masayoshi Son to spot great entrepreneurs such as Jack Ma who had no business plan and revenue at that time, why shouldn't he give it a try?
Dr Leong was a devoted family man. I recalled that he remarked that the most stressful period of his life was when his son was hospitalized. Given that he was the founder of a successful start-up, I am sure he had very stressful periods in his life but his son's hospitalization topped it all. When I asked him how did he manage to find time for his family and yet have a successful career, he replied that he was lucky to have found a job with IBM that allowed him to work from home. He admitted there is no easy solution. I guess Dr Leong must have found a good wife who was a wonderful mother to his kids and also gave him the free time to focus on his business.
Although Dr Leong has passed away, the Shareinvestor business that he left behind is still making a difference to customers' lives. I have been a subscriber of Shareinvestor for > 10 years. His legacy has taken on a life of its own. I think the emotional satisfaction from being a successful entrepreneur is higher than a successful investor. Besides money rolling into the bank account, the entrepreneur gets additional satisfaction that his product/service is making a difference in his customers' lives, on top of the jobs created for his employees and sales for his suppliers.
Dr Michael Leong led a meaningful life. I am sure his family is very proud of him.
Monday, August 10, 2015
More Singaporeans need to be entrepreneurs but ...
I have always respected entrepreneurs. Even more if they are fellow Singaporeans. They dare to execute on their dreams despite the high odds of failure. How to not respect? I am glad to be of assistance to give free product reviews of fellow worthy entrepreneurs on my blog in the past.
I recently stumbled on an article which lamented that Singaporeans are not risk-taking enough and that this is bad for the country because the country needs more entrepreneurs and more workers to join risky entrepreneurial start-ups to create value. The writer, Mr Devadas Krishnadas, is an entrepreneur with a shining career history in the civil service. He earns my admiration to have the courage to quit a high-paying and stable job to become an entrepreneur. He walks the talk. However, there are some points which I do not agree with the article from the perspective of a salary worker and investor.
Job seekers should not be expected to take risks. Otherwise, they would have become entrepreneurs. What is troubling on a national scale is that we do not have enough talented Singaporeans who have a higher chance of success as entrepreneurs but choose to remain as salary workers. Singapore needs more people like Mr Devadas Krishnadas who resigned from a good job to create risk-driven value as an entrepreneur. However, can we blame most Singaporeans, including myself, for not being like him?
Some reasons I can think of why there is a serious shortage of entrepreneurs in Singapore. I am not qualified to comment as an entrepreneur. I write from the angle of a salary worker.
A worrisome trend has been developing in the Singapore economy in recent years. Some big MNCs are moving out. This explains the government's generous moves to support local SMEs in the form of grants and innovation support. Singapore has got to build our own indigenous big companies to replace these MNCs. Fortunately or unfortunately, I believe there will be more entrepreneurs as a result of the MNCs moving away. Mid-career professionals who got retrenched by the MNCs may start thinking of becoming entrepreneurs because they have lesser to lose now. Besides, their chances of success is higher due to the long experience and network built working in industry. Unfortunately, I believe most of the concentrated local talent in the civil service will remain locked in the public sector because the risk-reward ratio is simply too compelling to stay.
If a person just wants to be rich, please don't become an entrepreneur. He will surely give up later. He has a better chance at becoming rich by slogging as a high-level big company executive or government scholar earning a high-paying, stable salary. If he holds a middle-class job that pays around the national median-income, he still has a fair chance of becoming comfortably well-off by keeping to a simple lifestyle, patiently saving and investing for at least a decade.
Just don't be an entrepreneur if your sole objective is to be rich.
Most young, energetic Singaporeans have taken up huge loans to buy property. This cannot be helped. In the Singapore context, they probably have to in order to get married. The girlfriend and future parents-in-law may disapprove if the man cannot afford a HDB. Unfortunately, some middle-aged Singaporeans who have otherwise accumulated enough savings to take on the financial risks to become an entrepreneur have taken up even larger loans to invest in a second property. A person in huge debt cannot afford to take on the financial risks of an entrepreneur. His interest expense comes due every month. Without a salary job that generates a stable cash-flow, the risk of financial ruin is not low. This issue indirectly affects me not because I invested in a second property (I prefer stocks and avoid huge debt to keep my options open for entrepreneurship), but because I am not able to find peers as potential entrepreneurial partners. I have personal weaknesses and I hope to find partners who can complement and make up for my weaknesses before taking on this risky path. However, if I want to become an entrepreneur, I do not want a heavily indebted partner who is forced to be in a hurry to make money. From my investing experience, those who are in a hurry to make money end up making less or lose money. I believe it will be even worse for entrepreneurs who are in a hurry to make money. They may end up not only losing money but their reputation as well by short-changing customers and their investors. I can afford to lose money but not my reputation. Emotionally, I find the latter extremely depressing whereas I am numb to losing money. As an investor, you have got to get used to losing some $$$ now in order to make more $$$ later.
Fellow financial blogger Christopher Ng has suggested that a fertile soil to cultivate potential entrepreneurs are kids from rich families. I will add one more group - middle-aged workers who have accumulated enough savings and investments to weather the storm. I agree with Christopher and will not repeat the details on the how. I will talk more about the why. Given that most start-ups fail, would-be entrepreneurs better be able to afford failure. Rich people can afford to fail. In fact, this may even help narrow the wealth-inequality social problem if losses from failed start-ups are concentrated to the rich. On the other hand, out of the few who will succeed spectacularly, no one will begrudge them for getting even richer if they create value to their customers, employees and suppliers as entrepreneurs. The poor will not begrudge the rich if the wealth-inequality is caused by value-driven entrepreneurial activity. If those who cannot afford to fail rashly choose to become entrepreneurs, there will be social problems when enough of them fail and most of them will.
Singaporeans have been complaining about job discrimination in our own country. The foreign PMET (Professionals, Managers, Executives and Technicians) workforce has gained critical mass in Singapore labor market, giving rise to the foreigner-hire-foreigner complaints. It is only human nature that people tend to feel comfortable working with people similar to themselves and hire according to these in-built prejudices. To be fair to the foreigners, they could complain the same about Singaporean employers preferring to hire Singaporeans. I am confident our government is able to solve the infrastructure-overload problem given the talents employed in the civil service and the money they can throw at the problem. However, I am doubtful the rising PMET unemployment problem attributed to unfair discrimination can be eased. It is a problem that money and intelligence cannot solve. It is a social problem that involves changing people's behavior and this will take lots of time. Furthermore, even if this problem does not exist in Singapore, foreigners can still take away our jobs without coming here. Foreign MNCs are already moving out of Singapore to cheaper locations. Instead of complaining and waiting for solutions from the government, unemployed PMETs who can afford to take risk should partner each other to start their own companies. Create jobs for yourselves. You have lesser to lose financially when you are jobless. Having said that, I admit I lack the moral authority to encourage entrepreneurship. I am hiding behind a full-time salary job on weekdays and a part-time investment job on weekends/public holidays. As an investor, I do not feel as socially useful compared to entrepreneurs. I mean no offense to fellow investors but entrepreneurs do create much higher social value. (*I take a deep bow to all the entrepreneurs in Singapore*)
I recently stumbled on an article which lamented that Singaporeans are not risk-taking enough and that this is bad for the country because the country needs more entrepreneurs and more workers to join risky entrepreneurial start-ups to create value. The writer, Mr Devadas Krishnadas, is an entrepreneur with a shining career history in the civil service. He earns my admiration to have the courage to quit a high-paying and stable job to become an entrepreneur. He walks the talk. However, there are some points which I do not agree with the article from the perspective of a salary worker and investor.
The young woman sitting across me was being interviewed to join my firm as a consultant. Well-travelled, highly qualified and poised, she spoke eloquently on why she wanted to join the firm - indigenous, small but growing.The attitude of the job applicant makes perfect sense and not at all troubling even if we expand it to the national scale. When a SME asks for a loan from a bank, the bank charges higher interest rate compared to a big company because of the higher risk. Similarly, for someone applying for a job at a SME, it is absolutely reasonable to ask for higher compensation because of the higher risk. It will be very troubling if a bank does not expand this risk-management practice on a national scale. The country's financial system may face systemic risks due to too much bad debt later. Likewise, given the very low odds of success for start-ups, several families will be in financial trouble if there are many Singaporeans who are not compensated enough when they lose their jobs working in start-ups.
Having gone through several stages of recruitment, we were finalising her appointment. She suddenly said she wanted a much higher compensation than the range discussed.
When prompted as to why, she replied that it was a great risk to work for a small local firm. I asked her to expand on her logic. She said her best option was to work for the civil service or a multinational company and that she was, in effect, doing the firm a favour by joining, and thus merited a market premium.
This attitude towards risk is disappointing individually, but troubling when we expand it to the national scale. It suggests that the young generation value the payoff for their education in terms of occupational safety. While at one level rational, such an attitude may help explain why small and medium-sized enterprises (SMEs) have great difficulty engaging the best talent.
- See more at: http://news.asiaone.com/news/asian-opinions/why-safe-job-risky-business-spore#sthash.ZqdDOsYw.dpuf
Job seekers should not be expected to take risks. Otherwise, they would have become entrepreneurs. What is troubling on a national scale is that we do not have enough talented Singaporeans who have a higher chance of success as entrepreneurs but choose to remain as salary workers. Singapore needs more people like Mr Devadas Krishnadas who resigned from a good job to create risk-driven value as an entrepreneur. However, can we blame most Singaporeans, including myself, for not being like him?
Some reasons I can think of why there is a serious shortage of entrepreneurs in Singapore. I am not qualified to comment as an entrepreneur. I write from the angle of a salary worker.
- It does not make financial sense for Singapore's best minds to become entrepreneurs
A worrisome trend has been developing in the Singapore economy in recent years. Some big MNCs are moving out. This explains the government's generous moves to support local SMEs in the form of grants and innovation support. Singapore has got to build our own indigenous big companies to replace these MNCs. Fortunately or unfortunately, I believe there will be more entrepreneurs as a result of the MNCs moving away. Mid-career professionals who got retrenched by the MNCs may start thinking of becoming entrepreneurs because they have lesser to lose now. Besides, their chances of success is higher due to the long experience and network built working in industry. Unfortunately, I believe most of the concentrated local talent in the civil service will remain locked in the public sector because the risk-reward ratio is simply too compelling to stay.
If a person just wants to be rich, please don't become an entrepreneur. He will surely give up later. He has a better chance at becoming rich by slogging as a high-level big company executive or government scholar earning a high-paying, stable salary. If he holds a middle-class job that pays around the national median-income, he still has a fair chance of becoming comfortably well-off by keeping to a simple lifestyle, patiently saving and investing for at least a decade.
Just don't be an entrepreneur if your sole objective is to be rich.
- Cannot afford to take the financial risks of an entrepreneur
Most young, energetic Singaporeans have taken up huge loans to buy property. This cannot be helped. In the Singapore context, they probably have to in order to get married. The girlfriend and future parents-in-law may disapprove if the man cannot afford a HDB. Unfortunately, some middle-aged Singaporeans who have otherwise accumulated enough savings to take on the financial risks to become an entrepreneur have taken up even larger loans to invest in a second property. A person in huge debt cannot afford to take on the financial risks of an entrepreneur. His interest expense comes due every month. Without a salary job that generates a stable cash-flow, the risk of financial ruin is not low. This issue indirectly affects me not because I invested in a second property (I prefer stocks and avoid huge debt to keep my options open for entrepreneurship), but because I am not able to find peers as potential entrepreneurial partners. I have personal weaknesses and I hope to find partners who can complement and make up for my weaknesses before taking on this risky path. However, if I want to become an entrepreneur, I do not want a heavily indebted partner who is forced to be in a hurry to make money. From my investing experience, those who are in a hurry to make money end up making less or lose money. I believe it will be even worse for entrepreneurs who are in a hurry to make money. They may end up not only losing money but their reputation as well by short-changing customers and their investors. I can afford to lose money but not my reputation. Emotionally, I find the latter extremely depressing whereas I am numb to losing money. As an investor, you have got to get used to losing some $$$ now in order to make more $$$ later.
- Majority of people do not have the temperament to be entrepreneurs
Fellow financial blogger Christopher Ng has suggested that a fertile soil to cultivate potential entrepreneurs are kids from rich families. I will add one more group - middle-aged workers who have accumulated enough savings and investments to weather the storm. I agree with Christopher and will not repeat the details on the how. I will talk more about the why. Given that most start-ups fail, would-be entrepreneurs better be able to afford failure. Rich people can afford to fail. In fact, this may even help narrow the wealth-inequality social problem if losses from failed start-ups are concentrated to the rich. On the other hand, out of the few who will succeed spectacularly, no one will begrudge them for getting even richer if they create value to their customers, employees and suppliers as entrepreneurs. The poor will not begrudge the rich if the wealth-inequality is caused by value-driven entrepreneurial activity. If those who cannot afford to fail rashly choose to become entrepreneurs, there will be social problems when enough of them fail and most of them will.
Singaporeans have been complaining about job discrimination in our own country. The foreign PMET (Professionals, Managers, Executives and Technicians) workforce has gained critical mass in Singapore labor market, giving rise to the foreigner-hire-foreigner complaints. It is only human nature that people tend to feel comfortable working with people similar to themselves and hire according to these in-built prejudices. To be fair to the foreigners, they could complain the same about Singaporean employers preferring to hire Singaporeans. I am confident our government is able to solve the infrastructure-overload problem given the talents employed in the civil service and the money they can throw at the problem. However, I am doubtful the rising PMET unemployment problem attributed to unfair discrimination can be eased. It is a problem that money and intelligence cannot solve. It is a social problem that involves changing people's behavior and this will take lots of time. Furthermore, even if this problem does not exist in Singapore, foreigners can still take away our jobs without coming here. Foreign MNCs are already moving out of Singapore to cheaper locations. Instead of complaining and waiting for solutions from the government, unemployed PMETs who can afford to take risk should partner each other to start their own companies. Create jobs for yourselves. You have lesser to lose financially when you are jobless. Having said that, I admit I lack the moral authority to encourage entrepreneurship. I am hiding behind a full-time salary job on weekdays and a part-time investment job on weekends/public holidays. As an investor, I do not feel as socially useful compared to entrepreneurs. I mean no offense to fellow investors but entrepreneurs do create much higher social value. (*I take a deep bow to all the entrepreneurs in Singapore*)
Tuesday, June 24, 2014
A value investment course that is simple to understand and simple to execute
Update: I gave a positive review on this course mainly because it costs SGD98 at that time. Recently, it came to my knowledge that the price of this 1-day course has balloned to 4-digit figures, with the course duration extended to 2.5 days with new materials added. At this price, I will recommend to readers to get their education by reading good books and participating in online investment forums which are freely available. Although Alvin is one of the more decent financial trainers who is unlike the other trainers with aggressive sales tactics, I can no longer in good conscience put a positive review on the course as the price is too high in my opinion, given that I learnt the investment craft through free books, online resources, interaction with other experienced people who shared freely. However, what works for me may not work as well for you. So, if you think an expensive course is more effective for you than self-learning through cheap books and interaction on online forums, please go ahead and try out the course.
Alvin first communicated with me after I wrote a eulogy on his late teacher (Dennis Ng). He wrote books on trading and published interviews with Singapore Trading Gurus. Today, he conducts a value investment course. It is good to be open-minded and flexible. There are many ways to make money from financial markets. Without being exposed to the different ways, it is difficult for a person to pick the best one that is suited to his temperament.
Alvin asked me if I would like to attend his course. I had always been a lone operator in investing and never attended any course except read books and paying school fees to Mr Market (I lost lots of money as a newbie and it is more beneficial to share such experiences than boast about winnings). As I preferred to remain anonymous, I refused his request but offered to review his course based on his training materials. Since I am not paid, I am free to write negative stuff, if any.
I do not know how Alvin is like as a trainer. I have never met him in person but I like his intellectual honesty.
It is inevitable to pay school fees to Mr Market along the way. A prerequisite to benefiting from the school fees is to admit your mistakes and take the blame on yourself. Don't blame unfair practices like market manipulation, insider trading, bad advice from brokers etc. Blame yourself because ultimately, the buy and sell decisions are yours to make. I was very impressed with Alvin's honesty when he revealed that he blew up SGD100k in his trading account. Potential students of his value investment course may ask ... why would I want to learn from a loser? Most of us will lose big at some point (me included) no matter how prepared. The loser has a better chance of becoming a winner in future if he is honest about it to himself and family who are affected by the loss. I have reservations in a guru of an investment course who spends more time harping on his winnings than sharing the lessons from his losses. You cannot learn much from someone who boasts about his achievements but you can learn much from someone who reflects on his past mistakes.
I doubt Alvin's training style would be to impress, boast about past achievements to appeal to the greed of newbies who want to get rich quick. If he is which I doubt so, I apologize for writing this positive article on his course.
The CNAV strategy that will be taught in the course involves buying stocks at prices way below their conservatively estimated net asset value. Suppose you buy a company with net assets worth $100 on its balance sheet at $50. Your downside is well-protected. If the company is liquidated today, it is quite unlikely to sell below $50 because of the asset backing. In addition, given that the asset base has adequately compensated the investor for the price paid, he is getting the earning power of the company for free. The company need not be a growth stock or highly profitable as long as its operations are not burning cash. In fact, any profits will be a bonus to the investor.
A few things to note is the quality of the assets. For this kind of asset play which is probably low growth, high quality assets are those that are easy to value and hard to defraud. Cash, marketable securities, real estate fall into this category. Assets whose values are hard to estimate should be discounted heavily to be conservative. Almost 4 years ago, I wrote an article which describes a case study using a method similar to the one employed in Alvin's course.
One problem with this method is the risk of stumbling onto value traps. After all, when something is too cheap to be true, it probably is. To reduce the risk of stumbling onto minefields, Piotroski score is added as an additional screening criteria as taught in the course. A Piotroski score of at least 7 would be good enough.
Every investment strategy has its pros and cons. The problem with the CNAV method is that the stocks uncovered tend to be illiquid and few. A bad scenario will sound like this. Someone runs the CNAV screens and uncovers only 4 stocks. He puts his entire capital into these 4 stocks. Something goes wrong with 2 of them. He tries to cut his losses but the stocks are too illiquid for him to run. There are a few things to note to counter the weaknesses of this strategy. Using the CNAV strategy, does today's market generate enough stocks to provide adequate diversification? If no, the investor needs to watch his position size in each individual stock. It should not be so large that he cannot cut his losses fast enough if something goes wrong later. Fortunately, these problems are less of a concern to the small retail investor as his capital is small.
The CNAV strategy is not suitable for investors with large amounts to invest. This is bad for the big institutional investors but good for small retail investors. Because CNAV stocks are illiquid, they are not worth the attention of the big players. It is because of this neglect that they become so cheap for retail investors who do not mind the illiquidity to pick. Since CNAV is not a scalable strategy, retail investors will need to look for other strategies after they have become successful. That is a good problem to have.
What I like about this course is that it is highly focused on a single concept that is simple to understand and simple to execute. Value investing is simple to understand. What is so hard to understand about the concept of buying something worth $1 and paying $0.50 for it? What is really difficult is its execution. How do you really know it is worth $1.00? The problem gets even more complicated when the investor tries to project future earnings and cashflow. The CNAV strategy has nothing to do with the future. No projection. The investor only needs to know how to read the balance sheet to extract net asset value and apply a discount. A one day course is quite sufficient.
The course costs only SGD98. It is too cheap for the trainers to make meaningful profits. Therefore, it is quite fair that other products/services will be promoted during the course. I cannot review on this aspect because I did not attend the course.
PS: This is not a paid advertising post. Nobody knows my real identity except my wife. I like to share good financial products/services, particularly from fellow Singaporeans. Other similar posts are (Link) and (Link) and (Link)
Alvin first communicated with me after I wrote a eulogy on his late teacher (Dennis Ng). He wrote books on trading and published interviews with Singapore Trading Gurus. Today, he conducts a value investment course. It is good to be open-minded and flexible. There are many ways to make money from financial markets. Without being exposed to the different ways, it is difficult for a person to pick the best one that is suited to his temperament.
Alvin asked me if I would like to attend his course. I had always been a lone operator in investing and never attended any course except read books and paying school fees to Mr Market (I lost lots of money as a newbie and it is more beneficial to share such experiences than boast about winnings). As I preferred to remain anonymous, I refused his request but offered to review his course based on his training materials. Since I am not paid, I am free to write negative stuff, if any.
I do not know how Alvin is like as a trainer. I have never met him in person but I like his intellectual honesty.
It is inevitable to pay school fees to Mr Market along the way. A prerequisite to benefiting from the school fees is to admit your mistakes and take the blame on yourself. Don't blame unfair practices like market manipulation, insider trading, bad advice from brokers etc. Blame yourself because ultimately, the buy and sell decisions are yours to make. I was very impressed with Alvin's honesty when he revealed that he blew up SGD100k in his trading account. Potential students of his value investment course may ask ... why would I want to learn from a loser? Most of us will lose big at some point (me included) no matter how prepared. The loser has a better chance of becoming a winner in future if he is honest about it to himself and family who are affected by the loss. I have reservations in a guru of an investment course who spends more time harping on his winnings than sharing the lessons from his losses. You cannot learn much from someone who boasts about his achievements but you can learn much from someone who reflects on his past mistakes.
I doubt Alvin's training style would be to impress, boast about past achievements to appeal to the greed of newbies who want to get rich quick. If he is which I doubt so, I apologize for writing this positive article on his course.
The CNAV strategy that will be taught in the course involves buying stocks at prices way below their conservatively estimated net asset value. Suppose you buy a company with net assets worth $100 on its balance sheet at $50. Your downside is well-protected. If the company is liquidated today, it is quite unlikely to sell below $50 because of the asset backing. In addition, given that the asset base has adequately compensated the investor for the price paid, he is getting the earning power of the company for free. The company need not be a growth stock or highly profitable as long as its operations are not burning cash. In fact, any profits will be a bonus to the investor.
A few things to note is the quality of the assets. For this kind of asset play which is probably low growth, high quality assets are those that are easy to value and hard to defraud. Cash, marketable securities, real estate fall into this category. Assets whose values are hard to estimate should be discounted heavily to be conservative. Almost 4 years ago, I wrote an article which describes a case study using a method similar to the one employed in Alvin's course.
One problem with this method is the risk of stumbling onto value traps. After all, when something is too cheap to be true, it probably is. To reduce the risk of stumbling onto minefields, Piotroski score is added as an additional screening criteria as taught in the course. A Piotroski score of at least 7 would be good enough.
Every investment strategy has its pros and cons. The problem with the CNAV method is that the stocks uncovered tend to be illiquid and few. A bad scenario will sound like this. Someone runs the CNAV screens and uncovers only 4 stocks. He puts his entire capital into these 4 stocks. Something goes wrong with 2 of them. He tries to cut his losses but the stocks are too illiquid for him to run. There are a few things to note to counter the weaknesses of this strategy. Using the CNAV strategy, does today's market generate enough stocks to provide adequate diversification? If no, the investor needs to watch his position size in each individual stock. It should not be so large that he cannot cut his losses fast enough if something goes wrong later. Fortunately, these problems are less of a concern to the small retail investor as his capital is small.
The CNAV strategy is not suitable for investors with large amounts to invest. This is bad for the big institutional investors but good for small retail investors. Because CNAV stocks are illiquid, they are not worth the attention of the big players. It is because of this neglect that they become so cheap for retail investors who do not mind the illiquidity to pick. Since CNAV is not a scalable strategy, retail investors will need to look for other strategies after they have become successful. That is a good problem to have.
What I like about this course is that it is highly focused on a single concept that is simple to understand and simple to execute. Value investing is simple to understand. What is so hard to understand about the concept of buying something worth $1 and paying $0.50 for it? What is really difficult is its execution. How do you really know it is worth $1.00? The problem gets even more complicated when the investor tries to project future earnings and cashflow. The CNAV strategy has nothing to do with the future. No projection. The investor only needs to know how to read the balance sheet to extract net asset value and apply a discount. A one day course is quite sufficient.
The course costs only SGD98. It is too cheap for the trainers to make meaningful profits. Therefore, it is quite fair that other products/services will be promoted during the course. I cannot review on this aspect because I did not attend the course.
PS: This is not a paid advertising post. Nobody knows my real identity except my wife. I like to share good financial products/services, particularly from fellow Singaporeans. Other similar posts are (Link) and (Link) and (Link)
Sunday, June 2, 2013
Stocks versus property. Why I prefer stocks over property.
Singaporeans love the property market. The fact that it took our government seven anti-speculative measures to dampen Singaporeans' love affair with property since 2007 is evidence that it is very hard to break this strong love. In the meantime, the lack of success is not exactly bad news to the government. They have made 1 billion in tax revenues from the property curbs.
There is substantial anecdotal evidence that more Singaporeans made more money from property than stocks. Just ask and look around. Our parents' generation who dared to invest in property have secured their retirement. It is small wonder the next generation will do the same thing since property investments have worked for decades for so many people.
I have peers who took the plunge and invested a second property 5 years ago. I am sure they are doing quite well. Some have urged me to stop hoarding my money and take a plunge into the property market. Another told me I will never become rich because of my steadfast refusal to take the risk to buy a second property. I probably look stupid to these people. However, I think it is fine to look stupid for good reasons which will be explained here.
In one sentence why I refused to buy an investment property - I cannot control risk with property investments with the same ease as stocks.
Given the very high property prices in Singapore and my own financial resources, I only have enough money to buy 1 property for investment. Only 1. What can be more concentrated than that? The lack of diversification makes it hard to manage risk. With stocks, I can construct a portfolio of 30 stocks with not a single one taking up more than 5% of my net-worth. I can afford to make several mistakes without facing financial ruin. Can the same be said with a concentrated property portfolio consisting of only 1 property? To make matters worse, this single property has to be bought with leverage. How many Singaporeans can buy a property with cash? When an investor uses leverage, his margin of error is greatly reduced. The mortgage debt is usually quite substantial because it can take 20-30 years to repay with today's high property prices. It is quite common to pay 25% cash with the rest using borrowed money to purchase a property. The investor loses 20% when the property drops 5%. Leverage introduces the risk of margin call. Although banks seldom ask borrowers to top up their mortgage loan when property price drops, they are legally allowed to do so. If the borrower misses the interest payment because he loses his job, the bank may foreclose and force-sell his property in a battered-down market at a lousy price. With stocks, there is no need to use leverage. One can build a diversified portfolio with as little as SGD30000 with cash.
Value investors tend to steer clear of bubbles. I do not shun participation in a bubble if the underlying asset is liquid. The end period of a stock bubble is historically characterized by a parabolic rise of stocks in a short time. Being out of the market at this stage means missing out the opportunity to make lots of money in a short time. Thus, I will join in the crowd despite knowing that it is a stock bubble, although only a manageable portion of the net-worth will be inside the market. (Don't try this if you are a newbie in the stock market, particularly if you have yet to suffer gut-wrenching losses) The reason why I dare to join the bubble is that stocks are liquid. The moment danger is sensed, one can get the hell out in a single trading day. This is one of the advantages of being a retail investor with a small fund to manage. It makes risk management much easier. Properties are illiquid with high transaction costs. Unlike an equity investor, there is no way for a property investor to get the hell out even if he desperately wants to because of property's illiquid nature.
If a hired fund manager shows me a portfolio with a highly leveraged, super-concentrated and illiquid portfolio, I will sack him straightaway so that I can sleep better. How to manage risk with a portfolio like that? Middle-class Singaporeans who took on a 20-year mortgage to buy an investment property are doing just that.
Besides the inability to manage risk, there is another good reason to avoid property investments. I hate debt intensely. The only time I overcame this hate was to buy my first residential HDB Singapore flat so that I can marry the love of my life. While this article frowns on property investment, a HDB flat is highly desirable. One motivation foreigners convert to become a Singapore citizen is to have the privilege to buy our HDB flats. Particularly for Singaporeans who have sacrificed for National Service, don't ever miss your privilege to buy a HDB flat. It is almost a sure-win as it is subsidized by the government. Besides, everyone needs a roof over our heads that provides the stability for us to marry and start a family.
Buying an investment property today usually involves taking on a huge debt that requires at least 20 years to repay. This makes a person a financial slave. If the goal of investment is to be financially free, then does it make sense to take on so much debt for an investment that it risk making one a slave for the next 20 years? It is not just money anymore. It is freedom. With a heavy debt, a person has to tolerate bullies at work. It is easy to slip into mental depression if a person has to drag his feet every day to work in an environment that drives him crazy. Although my present workplace is wonderful and I am working with and for pleasant and smarter people at the moment, there is no guarantee that this can continue. The advantage of investing and saving hard is to accumulate enough "fuck-you" money to have the freedom to show the middle finger and quit when faced with unreasonable behavior at work. Buying a second property at this point will take away all the "fuck-you" money that I have painstakingly accumulated over the years.
For high net-worth individuals with enough money to buy up multiple properties with cash, property is an appropriate component in this investment portfolio. It is easier for the rich to manage risk in their property portfolio. For the majority of middle-class Singaporeans like me, I think they should think twice before committing to a highly leveraged, concentrated and illiquid investment that can potentially make a slave out of them for the next 20 years.
There is substantial anecdotal evidence that more Singaporeans made more money from property than stocks. Just ask and look around. Our parents' generation who dared to invest in property have secured their retirement. It is small wonder the next generation will do the same thing since property investments have worked for decades for so many people.
I have peers who took the plunge and invested a second property 5 years ago. I am sure they are doing quite well. Some have urged me to stop hoarding my money and take a plunge into the property market. Another told me I will never become rich because of my steadfast refusal to take the risk to buy a second property. I probably look stupid to these people. However, I think it is fine to look stupid for good reasons which will be explained here.
In one sentence why I refused to buy an investment property - I cannot control risk with property investments with the same ease as stocks.
Given the very high property prices in Singapore and my own financial resources, I only have enough money to buy 1 property for investment. Only 1. What can be more concentrated than that? The lack of diversification makes it hard to manage risk. With stocks, I can construct a portfolio of 30 stocks with not a single one taking up more than 5% of my net-worth. I can afford to make several mistakes without facing financial ruin. Can the same be said with a concentrated property portfolio consisting of only 1 property? To make matters worse, this single property has to be bought with leverage. How many Singaporeans can buy a property with cash? When an investor uses leverage, his margin of error is greatly reduced. The mortgage debt is usually quite substantial because it can take 20-30 years to repay with today's high property prices. It is quite common to pay 25% cash with the rest using borrowed money to purchase a property. The investor loses 20% when the property drops 5%. Leverage introduces the risk of margin call. Although banks seldom ask borrowers to top up their mortgage loan when property price drops, they are legally allowed to do so. If the borrower misses the interest payment because he loses his job, the bank may foreclose and force-sell his property in a battered-down market at a lousy price. With stocks, there is no need to use leverage. One can build a diversified portfolio with as little as SGD30000 with cash.
Value investors tend to steer clear of bubbles. I do not shun participation in a bubble if the underlying asset is liquid. The end period of a stock bubble is historically characterized by a parabolic rise of stocks in a short time. Being out of the market at this stage means missing out the opportunity to make lots of money in a short time. Thus, I will join in the crowd despite knowing that it is a stock bubble, although only a manageable portion of the net-worth will be inside the market. (Don't try this if you are a newbie in the stock market, particularly if you have yet to suffer gut-wrenching losses) The reason why I dare to join the bubble is that stocks are liquid. The moment danger is sensed, one can get the hell out in a single trading day. This is one of the advantages of being a retail investor with a small fund to manage. It makes risk management much easier. Properties are illiquid with high transaction costs. Unlike an equity investor, there is no way for a property investor to get the hell out even if he desperately wants to because of property's illiquid nature.
If a hired fund manager shows me a portfolio with a highly leveraged, super-concentrated and illiquid portfolio, I will sack him straightaway so that I can sleep better. How to manage risk with a portfolio like that? Middle-class Singaporeans who took on a 20-year mortgage to buy an investment property are doing just that.
Besides the inability to manage risk, there is another good reason to avoid property investments. I hate debt intensely. The only time I overcame this hate was to buy my first residential HDB Singapore flat so that I can marry the love of my life. While this article frowns on property investment, a HDB flat is highly desirable. One motivation foreigners convert to become a Singapore citizen is to have the privilege to buy our HDB flats. Particularly for Singaporeans who have sacrificed for National Service, don't ever miss your privilege to buy a HDB flat. It is almost a sure-win as it is subsidized by the government. Besides, everyone needs a roof over our heads that provides the stability for us to marry and start a family.
Buying an investment property today usually involves taking on a huge debt that requires at least 20 years to repay. This makes a person a financial slave. If the goal of investment is to be financially free, then does it make sense to take on so much debt for an investment that it risk making one a slave for the next 20 years? It is not just money anymore. It is freedom. With a heavy debt, a person has to tolerate bullies at work. It is easy to slip into mental depression if a person has to drag his feet every day to work in an environment that drives him crazy. Although my present workplace is wonderful and I am working with and for pleasant and smarter people at the moment, there is no guarantee that this can continue. The advantage of investing and saving hard is to accumulate enough "fuck-you" money to have the freedom to show the middle finger and quit when faced with unreasonable behavior at work. Buying a second property at this point will take away all the "fuck-you" money that I have painstakingly accumulated over the years.
For high net-worth individuals with enough money to buy up multiple properties with cash, property is an appropriate component in this investment portfolio. It is easier for the rich to manage risk in their property portfolio. For the majority of middle-class Singaporeans like me, I think they should think twice before committing to a highly leveraged, concentrated and illiquid investment that can potentially make a slave out of them for the next 20 years.
Saturday, April 13, 2013
Characteristics of a good fund manager
I have a theory about hiring smart people to work for you. Once you hire people with the right talent, you can just sit back, relax and wait for good results as long as you drive him with the right incentives. On the other hand, if you drive him with the wrong incentives, he will destroy you despite paying him top dollars. We have seen this phenomenon happened in Wall Street and this almost destroyed the world financial system in 2008. Closer to home, would it serve Singapore better if our smart civil servants were incentivized to raise the inflation-adjusted median income of all Singaporeans instead of raise the GDP? By focusing on absolute growth, the government took the easy way out to grow GDP by importing foreigners without considering the quality of growth. Quality of growth should raise the purchasing power of the masses. Today's unequal world delivered great wealth mainly to the top richest 1% who already have more than they ever need even if they live up to 150 years old at the expense of the rest who have to suffer rising cost of living.
The lesson from Wall Street is that smart people with wrong incentives will destroy. Therefore, when choosing the right fund manager to manage my money, I will first focus on the incentives that drive him, then on his ability.
First and foremost, fund managers should not charge you fees if he loses your money. This means rejecting the standard fee on asset under management(AUM) . This is exactly the kind of incentive that drives intelligent fund managers to harm their clients. Bigger fund size kills investment performance. It is easier to make investment gains of 15% with $200k than $200m. With $200b, it is virtually impossible. How to find investment opportunities that yield 15% if the fund size is a substantial percentage of the economy when the economy itself is mature and slowing down? If the host is not growing, how can the "parasite"? When fund managers are focused on growing their asset size, they are not acting in their clients' interest. Unfortunately, such bad behavior is the norm in the fund management industry. This is not the person's fault but the system's fault (bad incentives). Instead of spending money on core investment activities, they spend money on marketing to grow their asset under management (which leads to poorer performance). For fund start-ups, they may even take excessive risk to have a great year so that they can market the hell out of it next year. Then, once the marketing succeeds and the asset size grows large enough to throw up comfortable cashflow to the fund managers, they start to become risk-averse, be contented with mediocre results as long as they do not underperform the benchmark.
The safest and perhaps most rewarding strategy on a risk-adjusted basis (career risk, not investment risk) for an established fund manager to pursue is to follow the crowd. If they follow the crowd and get it wrong, clients are more forgiving. If they go against the crowd and get it wrong, clients flee and the managers will earn lesser management fees or even get fired. If you want to hire a fund manager, would you want him to focus him to focus on his own career risk or on the actual investment risk which will determine how much money he makes or loses for you? The standard fee on AUM is the culprit for this sort of undesirable anti-client behavior.
Secondly, fund managers should eat their own cooking. In other words, they should invest in their own fund substantially. Preferably, they should invest so much of their net-worth into the fund that if they cause pain to their client by losing money, they should feel the same pain multiplied by 10. This will discourage the kind of short-term risk-taking behavior in Wall Street that led to 2008 financial crisis. Of course, the same euphoria from making money will be felt by them multiplied by 10 and clients will be more than happy to congratulate them. Let's make money together. This way, fund managers will concentrate on the risk and opportunities that really matter in the investment process.
Thirdly, the performance target should be set reasonably high but not unreasonably too high. In other words, fund managers should have a high watermark. The watermark is a performance target that has to be exceeded before the fund manager gets paid a bonus. This ensures clients do not pay for under-performance. The watermark should not be set too high as this could lead to two undesirable outcomes (1) Close down the fund and open a new one to reset the watermark after a series of bad losing years (2) Take excessive risk to hit the watermark. This is not likely to happen if fund managers eat their own cooking.
One Singaporean fund which meets my criteria of a good fund manager is Aggregate Asset Management. They first caught my attention on Business Times as a fund that does not charge any management fee. Zero AUM fees. When I had a brief exchange with Mr Eric Kong on fund managers not being well-regarded because most of them under-perform their benchmark and still charge their customers management fees, he honestly admitted so. This is also one reason why he has decided not to charge any management fees for his hedge fund. I think this is not only ethical but it also makes business sense. Clients of hedge funds are unlikely to be fools, otherwise they could not become rich. They will not remain as suckers for long and will opt for a better and fairer deal for themselves, if there is such an option. Aggregate Asset Management has started the ball rolling.
The founders do not get paid unless they deliver results to their clients. Meanwhile, the administrative cost of running a fund are borne entirely by the founders. They make a strong impression when you compare them to the robbers who committed the biggest bank robbery in banking history on Wall Street in 2008 (robbers being the banksters themselves).
Aggregate Asset Management has a high water mark mechanism (read the FAQ) which demands that the fund managers earn an absolute profit for their clients before they start to earn the first dollar from their clients. This is far superior to the current (and dominant) payment scheme in which fund managers charge their clients management fees on top of the losses they heap on the clients during bad years.
The Founders and their close circle of friends/family have put $3 million into the fund. Although I am not sure what percentage of their net-worth is invested in the fund (the more the better), the fact that their loved ones have entrusted their money with them is reassuring. Once a person is comfortably rich, family relationships become more precious than mere dollars and cents. There is little risk that the fund managers will take unreasonable risks with their clients' money. It is not just money now.
Right incentives alone are not enough. The next ingredient is ability. Mr Kong's personal portfolio return was 17.8% a year between May 2005 and June 2012. This is certainly impressive performance in an 8-year period which covered a business cycle that included the worst global financial crisis for the past 50 years. However, it is not likely that the same performance can be repeated in a much larger-sized portfolio. To the founders' credit, they have humbly and honestly lowered their target to 12% annual return which is still highly desirable. I wish I could match their lowered targets.
(Source: Business Times Nov14 2012 article. Also available from fund website)
Apart from a good performance record, the amount of risks taken to attain the good performance is even more important. High gains achieved as a result of high risks is luck. High gains achieved despite taking on low risks is skill. Would you prefer someone who employs a concentrated portfolio to achieve 17% annual gain or someone who uses a diversified portfolio to achieve the same result? I would prefer the diversified approach because it is lower risk. Aggregate Asset Management employs a diversified strategy.
There is no right or wrong as to which approach(diversified or concentrated) is better. Advocates of the concentrated strategy will say that it is better to focus your funds on your ten best investment ideas than to spread it across 100 ideas. Since it is your best ideas, the probability of getting it wrong is lower. However, as Mr Eric Kong mentions, when a stock occupies a substantial percentage of the portfolio, an investor may get emotionally attached which distorts his judgment. When facts point that he may be wrong, the investor may be too proud to admit it or find it too painful to make the cut. This is a lesser issue in a diversified portfolio which enables the investor to be more objective. I would like to add further that there is such a thing as bad luck. You can be right in your analysis, in your judgment of character, in everything but still lose money when bad luck hits. Good risk management means good damage control when bad luck strikes. An investor who puts all his eggs in one basket and diligently watch the basket very carefully is still not protected from bad luck. Without further elaboration, I have had more than my fair share of bad luck. Hence, I am allergic to a concentrated (and leveraged) portfolio.
I wish Aggregate Asset Management a good start to their investing year in 2013. Unfortunately, I will not be able to share in the prosperity because I am not qualified to be their client.
PS: This is not a paid advertising post. Nobody knows my real identity except my wife. I like to share good financial products/services, particularly from fellow Singaporeans. Other similar posts are (Link) and (Link)
The lesson from Wall Street is that smart people with wrong incentives will destroy. Therefore, when choosing the right fund manager to manage my money, I will first focus on the incentives that drive him, then on his ability.
First and foremost, fund managers should not charge you fees if he loses your money. This means rejecting the standard fee on asset under management(AUM) . This is exactly the kind of incentive that drives intelligent fund managers to harm their clients. Bigger fund size kills investment performance. It is easier to make investment gains of 15% with $200k than $200m. With $200b, it is virtually impossible. How to find investment opportunities that yield 15% if the fund size is a substantial percentage of the economy when the economy itself is mature and slowing down? If the host is not growing, how can the "parasite"? When fund managers are focused on growing their asset size, they are not acting in their clients' interest. Unfortunately, such bad behavior is the norm in the fund management industry. This is not the person's fault but the system's fault (bad incentives). Instead of spending money on core investment activities, they spend money on marketing to grow their asset under management (which leads to poorer performance). For fund start-ups, they may even take excessive risk to have a great year so that they can market the hell out of it next year. Then, once the marketing succeeds and the asset size grows large enough to throw up comfortable cashflow to the fund managers, they start to become risk-averse, be contented with mediocre results as long as they do not underperform the benchmark.
The safest and perhaps most rewarding strategy on a risk-adjusted basis (career risk, not investment risk) for an established fund manager to pursue is to follow the crowd. If they follow the crowd and get it wrong, clients are more forgiving. If they go against the crowd and get it wrong, clients flee and the managers will earn lesser management fees or even get fired. If you want to hire a fund manager, would you want him to focus him to focus on his own career risk or on the actual investment risk which will determine how much money he makes or loses for you? The standard fee on AUM is the culprit for this sort of undesirable anti-client behavior.
Secondly, fund managers should eat their own cooking. In other words, they should invest in their own fund substantially. Preferably, they should invest so much of their net-worth into the fund that if they cause pain to their client by losing money, they should feel the same pain multiplied by 10. This will discourage the kind of short-term risk-taking behavior in Wall Street that led to 2008 financial crisis. Of course, the same euphoria from making money will be felt by them multiplied by 10 and clients will be more than happy to congratulate them. Let's make money together. This way, fund managers will concentrate on the risk and opportunities that really matter in the investment process.
Thirdly, the performance target should be set reasonably high but not unreasonably too high. In other words, fund managers should have a high watermark. The watermark is a performance target that has to be exceeded before the fund manager gets paid a bonus. This ensures clients do not pay for under-performance. The watermark should not be set too high as this could lead to two undesirable outcomes (1) Close down the fund and open a new one to reset the watermark after a series of bad losing years (2) Take excessive risk to hit the watermark. This is not likely to happen if fund managers eat their own cooking.
One Singaporean fund which meets my criteria of a good fund manager is Aggregate Asset Management. They first caught my attention on Business Times as a fund that does not charge any management fee. Zero AUM fees. When I had a brief exchange with Mr Eric Kong on fund managers not being well-regarded because most of them under-perform their benchmark and still charge their customers management fees, he honestly admitted so. This is also one reason why he has decided not to charge any management fees for his hedge fund. I think this is not only ethical but it also makes business sense. Clients of hedge funds are unlikely to be fools, otherwise they could not become rich. They will not remain as suckers for long and will opt for a better and fairer deal for themselves, if there is such an option. Aggregate Asset Management has started the ball rolling.
The founders do not get paid unless they deliver results to their clients. Meanwhile, the administrative cost of running a fund are borne entirely by the founders. They make a strong impression when you compare them to the robbers who committed the biggest bank robbery in banking history on Wall Street in 2008 (robbers being the banksters themselves).
Aggregate Asset Management has a high water mark mechanism (read the FAQ) which demands that the fund managers earn an absolute profit for their clients before they start to earn the first dollar from their clients. This is far superior to the current (and dominant) payment scheme in which fund managers charge their clients management fees on top of the losses they heap on the clients during bad years.
The Founders and their close circle of friends/family have put $3 million into the fund. Although I am not sure what percentage of their net-worth is invested in the fund (the more the better), the fact that their loved ones have entrusted their money with them is reassuring. Once a person is comfortably rich, family relationships become more precious than mere dollars and cents. There is little risk that the fund managers will take unreasonable risks with their clients' money. It is not just money now.
Right incentives alone are not enough. The next ingredient is ability. Mr Kong's personal portfolio return was 17.8% a year between May 2005 and June 2012. This is certainly impressive performance in an 8-year period which covered a business cycle that included the worst global financial crisis for the past 50 years. However, it is not likely that the same performance can be repeated in a much larger-sized portfolio. To the founders' credit, they have humbly and honestly lowered their target to 12% annual return which is still highly desirable. I wish I could match their lowered targets.
(Source: Business Times Nov14 2012 article. Also available from fund website)
Apart from a good performance record, the amount of risks taken to attain the good performance is even more important. High gains achieved as a result of high risks is luck. High gains achieved despite taking on low risks is skill. Would you prefer someone who employs a concentrated portfolio to achieve 17% annual gain or someone who uses a diversified portfolio to achieve the same result? I would prefer the diversified approach because it is lower risk. Aggregate Asset Management employs a diversified strategy.
There is no right or wrong as to which approach(diversified or concentrated) is better. Advocates of the concentrated strategy will say that it is better to focus your funds on your ten best investment ideas than to spread it across 100 ideas. Since it is your best ideas, the probability of getting it wrong is lower. However, as Mr Eric Kong mentions, when a stock occupies a substantial percentage of the portfolio, an investor may get emotionally attached which distorts his judgment. When facts point that he may be wrong, the investor may be too proud to admit it or find it too painful to make the cut. This is a lesser issue in a diversified portfolio which enables the investor to be more objective. I would like to add further that there is such a thing as bad luck. You can be right in your analysis, in your judgment of character, in everything but still lose money when bad luck hits. Good risk management means good damage control when bad luck strikes. An investor who puts all his eggs in one basket and diligently watch the basket very carefully is still not protected from bad luck. Without further elaboration, I have had more than my fair share of bad luck. Hence, I am allergic to a concentrated (and leveraged) portfolio.
I wish Aggregate Asset Management a good start to their investing year in 2013. Unfortunately, I will not be able to share in the prosperity because I am not qualified to be their client.
PS: This is not a paid advertising post. Nobody knows my real identity except my wife. I like to share good financial products/services, particularly from fellow Singaporeans. Other similar posts are (Link) and (Link)
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