Fears of a Black Swan in Singapore General Election 2011

Singapore general election will be held on 7 May 2011. Investors' expectations are over-optimistic.

Source:

"So I think a lot of investors have plugged in very lofty expectations because over the last three GEs the PAP has only lost two seats so far, and given these are lofty expectations, should the opposition win more than that I think the markets will get slightly hit, but that will only be for a short while."

Given such high expectations, the market may suffer a backlash if the PAP loses 1 or 2 GRCs. I am not so worried about PAP losing one or two GRCs and losing plenty of money when the market opens. I think this may even be a good thing as it may make PAP listen harder to the people. My primary worry is the PAP losing power. That is the black swan event (unexpected with extremely damaging consequences) which will immediately devastate investors' portfolio and risk the long-term prospects of Singapore.

I strive to be pro-Singapore, neither pro-PAP nor pro-Opposition. The reason why I think it will be a disaster for Singapore if PAP loses power is that the opposition is still not ready to form a viable government at this point in time. Using a business analogy, if a customer (Singaporean citizens) is trying to switch supplier because there is great dissatisfaction with the incumbent supplier(PAP), it does not switch immediately to the alternate supplier (Opposition). It has to give time to cultivate the alternative supplier to achieve a reasonable quality before making the switch. In the mean time, if the incumbent supplier regains its edge because of competition from the alternate supplier, the business prospers. The customer may even stick with the incumbent supplier if he makes good improvements.

No business(citizens) with proper supply chain management will depend on only on one supply source (PAP). It is too risky. What if the sole supplier fails? Besides, without competition, the sole supplier will grow complacent and decline. The worst part of it is that the cost of the decline will be solely borne by the customer. The sole supplier(PAP) will simply squeeze the customer(Singaporean citizens) by raising prices (raise GST, ERP, government fees etc). The customer can cry foul and bang his fists on the table but can you really sympathize with the customer? We should blame the customer (citizens) for not cultivating an alternative supplier (opposition) to compete against the sole supplier (PAP). Meanwhile, we cannot blame the sole supplier (PAP) to make an all-out effort to destroy his competition (opposition). Do you want to be a shareholder of a company that does nothing about competition and destroy the competition?

In the coming election, the opposition has been able to attract high-calibre candidates like Chen Show Mao. A credible "alternative supplier" has emerged. Do cultivate them as a check on the incumbent one. However, this is not a time to switch supplier completely because the the "alternative supplier" is simply not ready to take over. In my humble opinion, give the "alternative supplier" (opposition) some time to prove itself and another chance for the "incumbent supplier" to recover its footing, for the sake of the country.

An investment operation functions best when the investor thinks like a business owner. Similarly, a democracy functions best when each voter thinks like a stakeholder. Rational voters who think like stakeholders do not treat political elections like a beauty contest (PAP Tin Pei Ling against NSP Nicole Seah).

On one extreme, I have read vitriol comments on the internet like "I will vote out PAP even if a cockroach contests as an opposition candidate". On another extreme, there is a climate of fear "I will vote PAP because there will be consequences if PAP finds out." Both are irrational. A more desirable approach is to simply think like a stakeholder. Assume that you and your children are going to live in this country for a long time to come to face the consequences of the polling results.

If you think the PAP candidate will bring a better future to you and your children, give him your vote.
Likewise, if you think the opposition candidate can do a better job, vote for him.

Different people will reach different conclusions despite having the same objectives. This is fine as long as the decision process is taken rationally like a stakeholder.

It is in fact more important for the middle to lower income groups to think like stakeholders than the upper-income. The rich will be able to migrate to greener pastures when the country crumbles while the middle-income and below will be stuck here to face the consequences. In a globalized economy, it is ironic that the asset-rich actually has less stake in the country than the asset-poor.

I am a middle-class person with 1 HDB property, middle-class salary and always worried about job security. I will be stuck here to face the consequences. I will certainly think very carefully on this issue from today onwards till 7 May 2011.

What Singapore can learn from the US financial crisis of 2008

Wall Street has always been able to attract the best minds from all over the world because Wall Street pays the highest salaries in the world. Wall Street drives its people very hard. They work very long hours. Wall Street people are by nature highly ambitious, driven and self-motivated. With unparalleled intelligence, diligence and energy, you would expect such an organization to be unparalleled in performance. Yet in 2008, instead of scoring an unparalleled success, Wall Street screwed up big-time and its failure was unparalleled in history. Wall Street failed so spectacularly that it almost brought down the whole world.

Many people have attributed the cause to evil Wall Street bankers full of greed who do not hesitate to cheat the financially illiterate public of their hard-earned savings in pursuit of big bonuses. I do not think that Wall Street people are evil by nature and this is not because I am one of them. If you were rewarded to be evil, would you become evil over time? To cut a long story short, Wall Street folks were rewarded to take excessive risks because when things turn out well, they scoop up the gains but when things turn out badly, other people pay for their mistakes. If you work in Wall Street, wouldn't you behave the same? This system of perverse incentives reward bad behavior. Over time, even good people become bad, not to mention the people who are already rotten. How do you expect highly driven, ambitious individuals who are used to winning in school since childhood to behave otherwise? Do you think they are willing to perform poorly?

At the risk of oversimplification, Wall Street collapse was caused by a combination of high intelligence/energy and perverse incentives that drove the system to self-destruction at the hands of its own people. All other problems stem from this fundamental flaw. The world would have been a safer place if Wall Street had hired stupider people. At least, they would not have been so intelligent bringing about destruction to their employer, transferring the cost to taxpayers and becoming fabulously rich in the process.

The Singapore civil service is able to attract the best minds in the country because it pays very well with very good job security. There is nothing wrong in paying well to attract smart people in the government. Indeed, one of the causes for the 2008 US financial crisis was that the US government was not able to attract regulators who were smart enough to deal with much higher-paid, smarter Wall Street folks who ran circles round the lower-paid, mediocre regulators. Paying high salaries to government workers is a good policy to be continued. However, one has to acknowledge that there is a limit beyond which people start losing respect for the government. Effective but painful policies that are hard for the people to swallow become much harder to implement because the message will get lost if delivered by a messenger who is not trusted by the people.

Having smart people(civil servants) working for you (me and my fellow citizens) can be a double-edged sword. If you drive them with the wrong incentives, they will drive you faster down the road to destruction. This is where my worry comes in. In terms of brainpower and paypower, our Civil Service holds similarities with Wall Street. If you mix that with perverse incentives, the combination will be lethal to our country. I hope our government pays particular attention to this risk when they set KPIs (Key Performance Indicators) that determine the bonuses and promotion of their civil servants .

What concerns me is when government puts in place incentives for their people that are at conflict with the interests of the Singaporean people at large. For example, the Government collects more tax revenue when more people go to the casinos. By pegging their own salaries to GDP growth, there is a tendency for policies to overheat the economy leading to a rising cost of living for ordinary folks. To carry this point to the extreme, an unscrupulous government can simply print money to grow GDP while the ordinary people suffers under inflationary conditions. Of course, this is not happening in Singapore based on the strength of the Singapore dollar. (I am losing big money in my US investments just by sitting on cash alone. ) However, there is a risk that policy-makers are taking the easy way out to hit their KPI to grow GDP by opening the floodgates to foreign labour. While foreign immigration is necessary given the low birth-rate in Singapore, it should not be done in a manner which creates another problem - raising the emigration rate and killing the loyalty of local Singaporeans. In a crisis, Singapore requires a core group of rooted Singaporeans to stay behind to fight for its survival.

The risk of self-destruction caused by perverse incentives is very real. Let us learn something from the US debacle and prevent it from happening to us.

Choosing a broker for trading US stocks

Update: I have switched to Interactive Brokers away from E-trade. The choice of E-trade as recommended in this post is no longer valid. What can I say about Interactive Brokers as a customer in comparison? Customer support is on par. Everything else is better.

I have encountered several inquiries on internet forums on choosing a suitable broker for trading US stocks. I would like to share what I know and have done based on my own research gathered sometime ago when I hunted for a broker for US stocks. If you are a Singaporean looking for a suitable broker for US stocks, please read on.

If you are a Singaporean wanting to trade US stocks, then using a US broker will compare favourably with our local brokers. The trading fees charged by our local brokers are much more expensive compared to US brokers. US brokers commission fees range from USD9.99 to USD19.99 per trade. Unlike our Singaporean brokers who charge a percentage of the trading principal, the US brokers charge a fixed commission per transaction regardless of size. This can result in huge savings if your trading principal is large enough.

Interactive Brokers is amazingly cheap. I do not use Interactive Brokers and shall refrain from further comment.
http://www.interactivebrokers.com/en/p.php?f=commission

Local brokers charge extra fees like custodian fees and handling fees (dividends, rights, splits etc). When your broker act as a custodian for your shares (holds your shares on your behalf), you incur the counterparty risk of losing your money in your brokerage account should your broker go bankrupt. The USD in your local broker account does not earn interest. USD held in your US brokerage accounts (E*Trade, Interactive brokers) pay interest. The SIPC( Securities Investor Protection Corporation) insures up to USD500k of equity, including up to USD250k in cash if your US broker goes bankrupt.

Singapore brokers will charge you GST (currently at 7%) taxes on the commission paid. You do not have to pay GST when using US brokers. This is no small sum if your trading frequency is high.

The hassle of using a US-based broker lies in transferring funds to the foreign brokerage account. In this aspect, E*Trade has done a good job. You can write a USD cheque to the E*Trade Singapore office and the funds will be transferred within a few days. No extra charges in the form of telegraphic/cable charges from the bank. One downside is that you have to open a USD current account so that you can get a USD chequebook. The minimum deposit sum is USD1000 for OCBC and DBS. This is a sum of money that you have to leave idling. Take note of the bank fees when transferring money from your US brokerage account back to your Singapore USD bank account (known as inward remittance). Choose the bank that charges the least inward remittance fees or does it for free. As of today, DBS does not charge inward remittance for its USD current account. OCBC used to do it for free in the past but recently started charging for this service. In fact, OCBC even started charging for chequebooks in SGD current accounts when it was free in the past. I shall be closing my OCBC USD current account and open a DBS account soon.

I do not want to sound like a salesman for US brokers. Using local brokers have their advantages. You do not have to deal with the hassles of opening a USD current account and leaving idle money there to meet the minimum deposit requirement. The greatest advantage lies in the favourable currency exchange rate compared to those charged by the banks. When you buy US stocks using a local broker, the currency exchange rate is quite good. If you compare it to that charged by the local banks, the banks are ripping you off. I do not have a solution to this rip-off. I shall be most grateful to anyone who can suggest a cheaper avenue where I can get a favourable exchange rate.

There are important things to note on the tax aspects of investing in US stocks. Taxes on US stocks held by foreigners are subjected to 30% withholding tax. As a foreigner, if your dividends on a particular stock is large enough, it may make sense to sell your holdings the day before it goes Ex-dividend. Then, on the day it goes XD, buy back your stock after it falls at the price to reflect the dividends paid. Due to the hassle and my small US portfolio, I have not tried this. But, I think it makes good sense to go through this hassle if your dividends are large enough to make a difference.

Foreigners are subjected to estate taxes on the amounts in the portfolio exceeding USD60k. It is advisable to create a joint account with your spouse so that she does not take a hit should you leave this world unexpectedly. It is not so much of a concern if your portfolio falls below USD60k. Even then, it will be easier for your spouse to withdraw your money upon your death if the account is a joint account.

I use E*Trade as my US broker. While E*Trade is cheaper compared to local brokers, it is more expensive relative to other US brokers. However, the advantage is that it has a Singapore office and is registered with MAS. If there are problems with the broker, you can just drop by the Singapore office. If you use a US broker with no office here and not registered with MAS, it is harder to get disputes resolved. Emails can be ignored conveniently. I also like the convenient fund transfer facility E*Trade has for its Singaporean customers.

Disclaimer: Due to bad experience on sharing advice regarding money, I wish to state upfront that I shall not be responsible for factual mistakes because I am not paid for sharing these information in the first place. However, correction to factual errors or better suggestions done in a polite manner are most welcome.

Simple case study of an asset play

An asset play is a stock which is a good investment because of solid asset backing. If the company were liquidated today, the money recovered from its assets will reap shareholders a satisfying profit after paying down all its liabilities. In other words, the liquidation value is way above the market capitalization traded on the exchange.

Stocks with assets composed of intangibles and inventories are not suitable as asset plays. In fact, when the situation is dire enough to warrant liquidation, the value of such assets can collapse to near zero.

The most suitable candidates for asset play are those with assets that are easy to value and hard to defraud - cash, marketable securities (traded on public exchanges where prices are transparent) and real estate properties.

Tuan Sing is a straightforward case study of an asset play which is composed of these sort of easy-to-value and hard-to-defraud assets. As of 29 Oct 2010, it has a market capitalization of SGD281m. After divesting one of its investment property (Kallang Mall), it has a massive cash hoard of SGD207m which is >70% of the market capitalization. This cash cushion allows one to sleep well even if the 2008 credit crisis returns.

On top of this cushion, its crown jewels are the investment properties like Robinson Towers, International Factors Building which are worth SGD261.65m. These properties are in located Singapore. You can physically see and touch these assets. There is no room for fraud.

Its subsidiaries consist of companies like Gultech and SP Corp which are publicly listed on the Singapore exchange. You can obtain the asset values of these listed companies on a real-time basis.

Below is a breakdown of the assets backing this company worth SGD281m. Assets like inventories, intangibles, plant and equipment whose value will be deeply marked down in the event of liquidation are ignored (assigned a value of zero). To provide for a comfortable margin of error, we shall halve the value of assets whose values cannot be ascertained with comfortable certainty like cash and marketable securities. This is the reason why certain asset values will look significantly lesser than what is stated on the latest balance sheet (2010Q3)

Cash holdings: SGD207m
Subsidiaries: SGD157m
Investment properties: SGD262m
Trade and other receivables: SGD26m
Development properties: SGD55m
Total assets: SGD707m

Total liabilities: SGD281m

Liquidation value = Total assets (conservatively estimated) - Total liabilties = SGD426m

The market cap of SGD281m is only 48.6% of the conservatively estimated liquidation value. This is adequate margin of safety for a risk-averse investor like me.

For a good asset play, the assets alone should already provide adequate backing for the price you are paying. Therefore, as long as there are no future losses, it is okay for the asset play to have no future profits. Zero profit growth will not endanger the margin of safety. Any profit growth is viewed as a desirable bonus.

Tuan Sing's profit growth in 2009 and 1st 9 months of 2010 is a big bonus. Profit in 2009 is more than 16 times higher than 2008 (actually an indication of how bad 2008 was, not how good 2009 was). 2009 earnings were good enough to reduce the PE ratio down to a only 6.1

For the first 9 months of 2010, profit grew 53% compared to same period in the previous year. Last quarter earnings were disappointing. Again, earnings growth is not a major consideration for asset plays. Of course, profits are always good to have.

Dissenting views are most welcome.

Disclaimer: I am not a qualified financial adviser. I have no formal training in any finance-related course. It is highly possible for me to make analytical errors, even factual errors which I will be grateful if readers help to correct. I am just an ordinary engineer dipping into the world of investment. The writer has vested interests in the analyzed stock, therefore readers should be wary of non-objective analysis.

Womanizing - things to avoid to preserve your wealth

This post is about women and money. It is written from the perspective of a man and is not relevant to women readers.

I do not want to approach this topic of womanizing as a moralist because I am not qualified to do so. I cannot guarantee to behave like a gentleman should a stunning temptress throws herself freely onto my lap. Rather, I would like to approach this topic from the financial angle.

Womanizing is extremely costly to a married man. Depending on the laws of the country, the woman who sues for divorce can grab half the man's assets plus a chunk of his future income as alimony. The richer the man, the more expensive it is. This is the price you pay to your wife for womanizing.

Even if the wife does not discover your philandering, you still have to pay for the most expensive pets a man can ever keep - mistresses. Mistresses cost much more than a car in Singapore. It is easy to give in to them. It is sad fact of life that men spend more on their mistresses than on their wives. They are more willing to buy expensive jeweleries to please their mistresses than their wives. This is unfair to the wife who made sacrifices to the family for bringing up the children and taking care of the old folks. This is irrational to the pocketbook because if the jewelry had been spent on the wife, it could at least be pawned when the family falls into hardship.

The expensive pets can quickly turn into even more expensive pests when the man tries to disown them. Men, especially men of status, are subjected to blackmail from their mistresses when they fall out. This can be a bottomless pit for your pocket.

The cost of womanizing drops exponentially for bachelors. For men who suffers from sex addiction, it is much cheaper to indulge themselves as swinging bachelors than as cheating husbands. Tigerwoods who reportedly has a sex addiction problem has to pay USD750 million to settle his divorce. For that price, he can hire a high-class prostitute every night to indulge his wildest sexual fantasies till the day his machinery wears off.

When a bachelor womanizes, he might even be respected among his circle of men friends for his conquests. When a married man womanizes, he will be condemned universally. It is a pity so many prominent public figures who could have gone on to do more social good have been destroyed by such scandals.

While the cost of womanizing for bachelors is lower, it is nevertheless an expensive lifestyle to maintain and should be discouraged. The optimal financial scenario for your romance life is to marry the first woman you kiss. Money spent on girlfriends who do not become your wife offers zero returns. If you change girlfriends several times, you have to write off a substantial sum of money spent on useless relationships. It can be worse than useless as former lovers can become sworn enemies if the fall-out is not handled properly. Having too many girlfriends before marriage can be an emotional baggage for the marriage. I would not advise my sister to marry a man with a history of womanizing. Few fathers would want such a man for their daughters unless they are betting on a lucrative divorce settlements.

The most money-saving outcome is to have your first girlfriend become your wife. However, it is better not to marry at all than to marry the wrong one because of the huge cost of getting it wrong.

When my son grows up and seeks advice on such matters, this is what I would tell him;

Take your relationships seriously. Enter into one only if the woman is of marriage material. After marriage, keep your eyes to your wife exclusively. Roving eyes for a married man are simply not affordable, even for the rich.

As a father, I hope to set a living example for my son to follow. One should not womanize out of love for the wife and money. Should one womanize, one runs the risk of losing both wife and money. What happiness is there left?

Relying on fund managers

I started out in the world of investing about 7 years ago. Thinking that it was wiser to get a professional to manage my money rather an amateur like myself, I started off using unit trust fund managers. Being an engineer with no formal financial training, I thought I had better steer clear of the financial markets because I have relatives who got seriously burned. Later, the more I knew about the investing business, the more I steered clear of them. I have nothing against fund managers. I sincerely believe the average IQ of mutual fund managers to be higher than mine and the bottom 5% of hedge fund managers to be much higher than mine. I also do not think they are a untrustworthy group of people. I think they are just normal people who will not place their clients' interests high on the list if the system does not reward them for doing so.

What makes me uncomfortable is that the nature of the money management business has conflicts of interests that put their clients at a disadvantage.

The annual fund management fees provide an incentive to grow the size of their asset under management. It is easier to make an investment returns of 20% on SGD200k than SGD200million. The universe of applicable investment ideas diminishes as the portfolio size grows. Liquidity becomes a greater problem. It is harder to find an investment large enough to absorb your funds to make a difference big enough to move the performance needle when you get it right. On the other hand, if you get it wrong, it is much more expensive to get out due to the slippage and commission fees caused from liquidating a large position. A growing portfolio size is sure to dampen investment returns. An incentive to grow the asset size under management works against the clients.

Career risk distorts fund managers' investing decisions. It makes sense for fund managers to follow the crowd to reduce career risk. If they follow the crowd and get it wrong, clients are more forgivable. If they go against the crowd and get it wrong, they may lose their jobs. During the crazy dot-com bubble, several fund managers of the Graham-and-Dodd school of value investing lost their jobs. If I were a fund manager, I will not invest the same way as I will with my own money. Even hedge fund managers whose stated goal is absolute returns may unconsciously strive for relative returns because of the career risk of disagreeing with the crowd. This could explain why clients of hedge funds who were promised alpha (outperformance over benchmark) ended up with beta (correlation with benchmark). One might as well buy ETFs which I think is the best investing instrument for non-DIY investors. Why pay so much for hedge fund managers if they end up trying to match the benchmark index? One might as well buy cheap ETFs correlated with indices which outperformed most fund managers anyway. The high IQs of fund managers cannot be put to maximum use because they do not solely buy and sell on investment merit but on career risk considerations as well.

I think the best money managers out there are still the hedge fund managers. However, they are out of reach for most middle-class income people like me. If I were eligible someday for their service, I will go for fund managers with zero annual management fees with most of their net worth in their own fund. Their profits will come from outperforming a high watermark. With such a structure, there will be no conflict of interests. There will be no incentive to grow asset size. Career risk takes a backseat to investment risk because if they lose 1% of my net worth, they will lose 10% of their own.

I shall now stop dreaming of that day when I do become eligible. 

Cash becoming a risky asset class because of beast contest

Investing is like a beauty contest. You pick the most beautiful contestant and if the other judges share your opinion, you will make big money. In the stock market, you pick the best stocks with the best potential for capital appreciation and dividend income.

On the other hand, today's currency market is like a beast contest. All the contestants are ugly. Central bankers have disfigured the contestants with their quantitative easing knives and used printed money to bandage their faces. A currency investor tries to pick the least ugly contestant.

My knowledge in currency markets is limited. I do not invest in forex markets because I do not see how an engineer like me with no formal financial training and holding a full-time job can gain an edge over the big financial institutions who can afford to pay smarter minds and provide them with greater resources and time for the job. However, no one can totally ignore the currency markets because it will affect us whether we like it or not. All of us must have cash savings in the form of paper currency. The excessive money printing has render our cash savings increasingly risky as an asset class.

In the short-term, it is uncertain whether deflation or inflation will win out. The financial markets are giving out confusing signals. The gold market suggests that inflation is on the way. The bond market suggests that deflation is coming. In the short term, your guess is as good as mine. However, in the long-term, I will place my bet on inflation.

If deflation rears its ugly head, deflationary forces can be defeated by central bankers through money-printing which is politically acceptable. Alan Greenspan became a celebrated maestro by slashing interest rates to save financial markets whenever Wall Street cries out for help. Paul Volcker was universally hated when he raised interest rates to defeat high inflation in the late 1970s. There is an abundance of regulators who prefer to take the easy, populist route like cutting interest rates and becoming a Wall Street hero (highly rewarding when you join Wall Street later). On the other hand, there is a scarcity of regulators who have the integrity and courage to do what is right, especially if the career risk is not worth it personally.

If inflation rears its ugly head, inflationary forces may not be as easily defeated by central bankers because the country has got to be quite lucky to have another Paul Volcker. Even if the country does have a Paul Volcker reincarnated, he might not have the support of his political master. Debt level today is way much more as compared to the late 1970s. Massive debts have been built up by governments through quantitative easing. By raising interest rates on a huge debt, it is like committing financial suicide when tax revenues eventually cannot service the interest payments. In such a situation, it is politically impossible for the central banker to raise interest rates to kill inflation. What is politically acceptable then and more likely to happen is to allow inflation to kill the burden of debt instead. Besides, much of US debt is held by foreigners. I cannot imagine Obama making a speech to his fellow Americans to tighten their belts so that they can honor their debt to the Chinese. This is political suicide. In a democracy, no politician will antagonize their people who carry votes to appease foreigners with no votes. The easy way out for a politician is to allow inflation and currency debasement to ease the burden of debt to the locals by destroying the value of debt to foreigners. In this event, cash savings in USD will be devastated.

This pessimistic analysis applies for the US situation. However, all countries outside the United States cannot  ignore what happens there. The US dollar is the world's reserve currency. Much of global trade is done in USD. The world's raw materials are priced in USD. Whether they like the USD or not, corporations have to keep a USD bank account because their products or their raw materials are traded in USD. Impact from bad policies by the Federal Reserve will be exported out to the rest of the world.

Inflation is a politically convenient tool to solve sovereign debt problems. This is likelier to happen in highly democratic countries which tends to surrender to the popular vote than in dictatorial countries where politicians simply force unpopular policies down the voters' throats. This is one of the reasons that I think the Singapore dollar looks less ugly than the other beasts at the moment.