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.

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.

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

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.

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

The dumbest reason to become an entrepreneur is to become rich. Look at the numbers. Most start-ups fail. Not just that. Most of the promising start-ups who got venture capital funding fail. Why would our best and brightest Singaporeans who have the option to work in the civil service and big MNCs want to become an entrepreneur? The risk-reward ratio simply does not make sense. Does it make sense for someone to exchange a low-risk-high-gain job, say in the civil service, to become an entrepreneur with no work-life balance, negligible or negative pay and despite all these sacrifice, the odds of having nothing to show at the end of the day is very high? I have met entrepreneurs in the course of my engineering work. I know they have no work-life balance because some have unwittingly made appointments on weekends and public holidays. They worked so hard until they forgot which days are weekends and public holidays. Unlike salary workers, they fail to appreciate that today is Friday although they have no Monday blues as well because they HAVE TO love what they do. Given the low odds of reward and guaranteed sacrifice, how to sustain without passion?

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

Many Singaporeans have financial obligations to support the family. For a Singaporean breadwinner, it would actually be irresponsible of him to become an entrepreneur if he does not have adequate savings to cover the initial years of building up the business. During this dry period, there is probably no income to feed the family. Even if he is able to get funding from investors, it is unlikely the salary will be high. If I were a venture capitalist, I want the entrepreneur to have skin in the game and not pay him as if he is back to working as a salary worker in a low-risk environment. The entrepreneur should not expect his investor to take risk that he would not take himself. The entrepreneur's workers, if any, will probably earn more than him in the initial years.

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

This is a problem common everywhere and not just Singapore. For an economy to function normally, most people should work as salary workers. If not, where are the entrepreneurs going to find the workers? Besides, most people do not have the temperament to be entrepreneurs. The moment you broach the idea of becoming an entrepreneur, everyone around you, particularly your family, starts to make discouraging remarks. This happened to me and my beloved, normally supportive wife was the strongest opposition voice. It is not easy to go ahead with a risky project when well-meaning friends and family says negative things and they all sound right. Like investing, there is merit in being contrarian as an entrepreneur. A contrarian entrepreneur is likely to move into or even create a niche business where the profit margins are higher and the competition is lesser. In this kind of business environment, it is easier to earn more money while working less hard compared to businesses with cut-throat competition. It is easy to be a contrarian investor but much harder to be a contrarian entrepreneur. I am a lone operator in my investing/trading activites. I think being a lonewolf helps in the investment process because I do not have to deal with distracting and negative views. No entrepreneur can be a loner because there is so much to do and so little time and no one person can possibly have both the strengths and time to do everything himself. An entrepreneur has to persevere against all odds despite the negativity from well-meaning people around him.

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*)

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)

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.

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)

Choosing your Valentine from a Value investing standpoint

The most important decision a man can make is arguably his choice of wife. A wrong choice can ruin his happiness for the rest of his life. If he tries to regain his happiness by getting rid of the wrong wife, he risks financial ruin because of the huge cost of divorce. At least women gain financially when they divorce. Therefore, it is very important for men to put very careful thought into the screening criteria for potential wives. 

ALL men, including me, start off on a wrong foot when we look for wives. We are immediately turned on by a gorgeous hot babe. Naturally, we get instantly turned off by this other babe (click here).

Like value investors with a contrarian streak, we should not dismiss too quickly what makes us feel uncomfortable. Often, it is the unpopular and neglected that yields value.

Physical beauty is the most over-rated attribute among the qualities that men seek in women. It is so desired by men that we bid up prices of beautiful women in the marriage market to stratospheric heights and yet, is beauty really that important? Have you ever heard of parents advising their sons to get a hot babe who performs well on the bed so that he can receive good sex? To parents who know better, it is always about good character and someone who is respectful to them. Physical looks appeal to our basic animal spirits but in the ultimate scheme of things, they do not matter that much. Besides, all women, however beautiful, must become ugly some day. Aging is inevitable. Postponing the inevitable costs lots of money. Is that good value? Instead of paying up for a depreciating asset, should we men not focus on the more enduring assets like good character, mutual love, great communication, matching interests, good financial habits? It will be ideal if a gorgeous hot babe also possess these enduring assets. However, if such a woman comes along, she most likely will be very expensive to acquire. She will probably be spoilt by rich suitors who treat her with expensive dinners and gifts. The poor and middle-class simply cannot compete. For the richer ones, it will still cost a bomb. Why get yourself embroiled in a bidding war? On the other hand, if we were to place our bet on a value babe who possesses the enduring good assets but looks like a pig, she will not only be cheaper to acquire but the probability of success is also higher. Money spent on wooing girls who reject you yields zero returns. So, place your bets on higher-probability ones where there are no competing bidders.

Alright, I know I know. It is madness to expect men to settle down with a pig-like value babe. Just as investors should choose a style that suits their temperament, men should choose a wife that does not look too abhorrent to their taste. A plain-looking Jane with 2 eyes, 1 nose and 1 mouth should do fine.

If you are a cheapskate on the prowl for value, ugliness presents the opportunity for mis-pricing in the wife market. An ugly woman does not make a bad wife. In fact, it may be a blessing in disguise for her. I have a theory that men who marry beautiful women have a higher chance of straying. They marry for beauty. Unfortunately, the aging wife's beauty fades with time and when that happens (with 100% certainty), they look for a younger and prettier mistress. The ugly wife, on the other hand, is on safer grounds because the husband will hardly notice that the aging wife has gotten uglier because it cannot get any worse. Besides, if the husband really cared about beauty, he would not have married her in the first place. It may not be a bad idea for a man to get used to an ugly wife right from the start since she is going to become ugly one day anyway. This reduces the risk of him womanizing which is financially disastrous even for the rich because of the cost of divorce. Unfortunately, boys will be boys.

Since men are expected to foot the bill on dates, we should think of ways to minimize this cost. The most cost-effective way is to find a wife during your school days. As students, it is fair to expect both parties to go on Dutch since both are not earning an income.

Dating women near or slightly above the marriageable age yields a higher chance of landing a wife. When a woman gets older, she will start to worry about being left on the shelf. Older women are more serious about getting married. Therefore, money spent dating older women is more likely to yield returns than on younger women. The older age is a catalyst that will shorten the time for one's investment to bear fruit. Younger women who are not so keen on marriage will keep the poor man waiting and spending. To minimize your cost, keep your expenses on dates to women who are serious about marriage. The ideal case is to marry the first girl you date and kiss. This is not only cheap but the relationship is also healthy as it is free from past emotional baggage. This advice is not applicable to swinging bachelors who derive pleasure from switching girlfriends and having fun with lots of partners. This is just another freedom of choice for one's lifestyle, although it is a very expensive one.

For men who are thrifty and aim for financial freedom at an early age, it is very important to find a thrifty wife. It is hard to save if one party earns and the other spends. It is hard to fill a leaky bucket. Opposing financial habits in a couple can kill a relationship. The European crisis is an example of such a union at risk of breaking up because of the mismatch between thrifty Germany and spendthrift Greece.

From my personal experience, a good way to evaluate whether a girl is of wife material is to observe how she treats her own family. How she treats her family today is an indication of how she treats you when you become family tomorrow. If she is not a filial daughter, drop her. If she cannot get along with her siblings, find out why. If she loves her family very much and showers them with great care and generosity, she will probably be a good wife to you, a good mother to your children and a good daughter-in-law to your parents. Such a wife, even if she looks like a value babe, should bring happiness to the man who marries her.

Suggestions to Olam in their fight against Muddy Waters

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

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

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

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

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

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

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

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

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

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

The right investment vehicle for retail investors - ETF

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

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

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

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

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


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