Friday, March 17, 2017

You don't get to hack the CPF, the CPF gets you hack you !

Ok, it is time to summarise yesterday's proceedings. In case you guys are wondering, when we conduct our talks, we don't really do rehearsals so some of us speakers are also there to listen to what other bloggers have to say. So things get interesting if there is a disagreement between us, nothing we ever do is scripted.

Here are some comments and things which I learnt from yesterday's session :

a) Budget babe's mention of SRS.

At first the company directors were slightly concerned when they realised that SRS which was covered last night was not actually administered by the CPF Board, but I think we've learnt a lot more as a result of her talk. One way of avoiding taxes is to voluntarily set your money aside into the SRS program where you can then invest in the financial markets. The downside is that withdrawal retirement age will incur a 5% penalty. 50% of all withdrawals are still taxable when you take you money at a later age.

The SRS is a great system to have but I am not currently using it. I would be more interested if withdrawals of dividends can be made tax free.

b) CreateWealth8888's market timing approach.

Jacob's session was a real treat because he shed light on the wisdom of baby boomers on how they invest their money. Jacob has a method which involved drawing money from the markets and placing it in his warchest when times are good and doing the opposite when markets are bearish.

The approach may seem simplistic, but Jacob can get 17.2% CAGR out of his approach to investing which is very impressive indeed.

c) Attendees really really like the CPF-SA 4% interest rate.

A bulk of questions involve the CPF-OA to CPF-SA transfer. I can see that folks really like that scheme and want to find all sorts of way to take advantage of this program. Although I have been a beneficiary of this technique having maxed out my CPF-SA prior to reaching 30, there are some things people need to take note of.

If you can invest 35% of your CPF-OA at 8% and keep 65% at 2.5%, you will earn 4.425% which is higher than what the CPF-SA gives. I also believe that, over the long term, as interest rates rise, the government will set the CPF-SA rate to a government bond rate plus may 1-2% so when interest rates drop again, you will stop getting 4% in the future.

Guaranteeing 4% may not be a sustainable practice.

d) Some attendee wants to hack the CPF-SA system

I think a very small proportion of blog readers are actually too smart for their own good.

One particular person wanted to contribute to his son's CPF to "hack" the CPF system. After conferring to other bloggers, I have to say that this is one of the stupidest ideas I have ever heard in quite a while and sadly my body language may have shown that I was just not too impressed by this suggestion. While I could not answer the question last night, apparently you can perform a voluntary contribution (VC) into your child's CPF which distributes the money even between the CPF-OA, CPF-SA and CPF-MA.

While the CPF program is a good one with a lot of government guarantees locked into it, a 4% interest rate on the CPF-SA is not a Constitutional guarantee. It is also cruel to lock in money for your kids when you can just get them to open a CDP account and give them some preference shares. There are currently 5 preference share counters in the SGX, if you buy each counter in equal proportion, you are likely to beat 4% every year.

The lesson for readers is this : You don't hack the CPF. In Singapore, the CPF hacks you.

Michel Foucault is a philosopher who wrote books on how prisons exert control over inmates. He pioneered the idea that the ability to influence a population's sense of what is normal is a legitimate form of power a government can have. The CPF as a scheme tells you that having a house is good, saving adequately for health is good and supporting your parents, and paying yours kid's tuition is the normal thing to do. Government officials are influenced by Richard Thaler's Nudge and practice a form of liberal paternalism on the population. ( Lucky us right ? )

The more you contribute to your CPF, it is almost always true that you get to better secure your future. But you are also letting the CPF define to you what is normal and what is not normal in your life.

While I agree that many things like home ownership and giving my mum money every month is great, I bet that almost all financial bloggers would agree that we'd prefer to have control over our retirement age.

When it comes to financial independence the CPF Board can keep its tendrils to itself.






Saturday, March 11, 2017

Equity management #5 : The Small Firm Effect

Some investors like investing in small firms because it is an area where the natural strengths of a retail investor can really shine.

Institutional investors can't invest in some counters like Karin Tech and Global Testing because there is so little liquidity in these counters that it would be a struggle to even pick up more than 2000 shares in a single transaction.

The small firm effect is a well known in academic literature. You can earn higher returns if you focus on smaller stocks.

But there are some caveats :

a) Small firms might also be neglected firms

A large component of small firm returns is also attributed to its neglect. You may also have oversized returns if you invest in stocks which are not covered by analysts. I can't seem to get a lot of information on a counter like Figtree, for example.

b) Small firms are illiquid.

There is a high bid-ask rate and low number of bids so it will take a lot more transactions for a position to hit 1% of your portfolio. My dad took weeks to pick up 1,700 shares of Global Testing. I think that is quite enough because of the amount of cash which needs reinvestment every month.

c) Small firms effect can disappear when macroeconomic conditions change.

Small firms are fragile.

When there is increase in BAA corporate bond interest rates or T-bill rates, returns may disappear. Similarly returns may go up when there is an unexpected increase in industrial rates. When there is expected inflation, small firms are also impacted negatively.

Academic research on small firms is not particularly practical for retail investors but one is clear : It might be useful and fun to research and accumulate a small portfolio of 20 local small stocks when you are younger and have smaller portfolio size below $50k.

When you start managing a larger portfolio, you would have to look for other opportunities.


Thursday, March 09, 2017

FInancial Blogger's CPF Talk : Some details.

For this upcoming talk, we employed a very lax marketing schedule so right now we are about one week away and we have only 20% of our tickets left to sell so we should have another sell-out session next week.

Today I’m going to provide more clarity on what I will be talking about.

The problem with the CPF program is that it attempts to do too many things at once. Hence we should emphasize the “personal” in personal finance.

Instead of giving the audience solid answers, I will discuss the feature of CPF in question, followed by how I employ this feature. This is then followed by suggestions how the audience can think about whether this mode of application applies to their personal circumstance.

Don’t expect all the speakers to have any consensus on CPF.

My presentation is organised around 7 arguments or touch points which tends to generate the most debate in the financial blogosphere:

·      Whether to transfer of CPF-OA to CPF-SA ?
·      How much CPF to tap for investment purposes ?
·      How much to allocate to your parents retirement needs ?
·      How much to allocate to your child’s education ?
·      How much CPF should you use to pay for your housing needs ?
·      The controversial question of whether it is better to have an Integrated Health Shield.
·      Which scheme to subscribe to for CPF Life ?


It is quite a lot of material and I will cover much ground in 30 minutes but hopefully once you understand some of the basics of the CPF system, the other bloggers will be able to entertain you with more anecdotes and personal stories on how they manage their CPF money.

Saturday, March 04, 2017

Next Talk : CPF Optimization for Retirement




You can now start to get your tickets to the next event that is held by BIGScribe.

This time I will be joined by superstar financial bloggers CreateWealth8888 and Budget Babe who should be familiar to readers of this blog.

Like all talks, I will volunteer for 30 minutes of the seminar.

A third of my slides will focus on the basics behind the CPF program so that the other bloggers are not constrained by the fundamentals and can talk about their personal experiences and stories. More importantly, I will also be sharing my candid views on the CPF system as there is nothing to constrain me from constructively criticising this program.

About a third would cover key decisions that you have to make when it comes to the CPF program such as whether to transfer your CPF-OA to CPF-SA, how to invest in CPF-IS and choice between the different CPF Life Schemes. On my last count, my slides will talk specifically on 6 aspects of CPF use.

The last third of the talk would be personal stories. I will be beefing this component up to keep up the engagement with the readership.

The talk will be held on Thursday 16 March 2017 7.30pm at #10-26 International Plaza.

Please click on the link here to make your reservation, I was told that Budget Babe's fanbase has already purchased a sizeable chunk of tickets before the promotion has even begun and am quite confident that we will sell out a third time.


Wednesday, March 01, 2017

Equity Management #4 : On Market Anomalies

Market anomalies would not normally creep into a discussion between value investors but their existence demonstrates the possibility of making profits by understanding some market patterns which has been happening on a regular basis for a while.

Even if you are a long-term investor, knowing these anomalies might assist you in deciding on a good time to buy a value stock.

a) January effect 

Stocks tend to have oversized returns in the month of January. This effect tends to work better for higher yielding stocks and worse for stocks of smaller companies.

b) Turn of the month effect

Returns tend to be oversized on the last day of the months to the third day of the following month. Explanation is that companies are eager to provide good news so it tends to happen earlier in the month.

c) The Day of the Week Effect

Mondays tend to be down days and Fridays tend to have the highest returns. Switching a sell-day from Monday to a Friday can result in substantial returns.

d) Holiday Effect

There is a belief that the trading day before the holidays tend to produce better returns but the research was based on US public holidays. I wish we that we had a similar study here.

e) Time of day effect

Markets tend to be bullish the first 45 minutes of the day and the last 15 minutes for the day.

While the effects of these anomalies are statistically significant, one doubt I have about exploiting these anomalies on a regular basis is that the profits gained would be rapidly eroded by brokerage fees.

But after filtering for stocks based on fundamentals, there is no harm choosing a buying window on the last day of the month, on any given Friday, or throughout the month of December to make your stock purchases.




Saturday, February 25, 2017

The joys of being temporarily Malaysian.

With the ringgit at an all-time low, I went into Malaysia for a few hours with my mum during my mid-term exams. We did not venture far into Malaysia, we just hung out at City Square very possibly the most expensive part of the entire country because it is the closest mall to Singapore.

Shopping in Malaysia is a liberating experience for me. I am always counting my expenses in Singapore. In Malaysia, I feel liberated and I can spend my money anyway I want in any restaurant that I like. I also become more open to food and luxury articles in investment magazines like the Edge.

( I still hate the local lifestyle articles in our business weeklies because they distract from investing in the markets. )


What I observed is that the low Ringgit must have really warped the economy of the country.

Hakka vegetarian dumplings cost me $7.50 MYR. This is not considered cheap by Malaysian standards but it is for folks from Singapore. A curry bee boon Yong Tao Fu is about $12.50, quite ridiculous for someone on a Johor paycheck but only about $4 SGD after currency conversion. I actually got a Singapore-designed Kalashnikov gaming keyboard for $22 SGD after conversion when I was sure that similar model cost $35+ back home.

This is painful for Malaysians who work in Johor. A monthly salary of a first year lawyer after pupillage in Johor Bahru is $3,000 MYR or less than $1,000 SGD. A fresh Singapore ITE graduate can earn $1,700 a month.

We might even see SGDMYR=$3.33 as early as this year if the Singapore economy surprises on the upside. As the Malaysian ringgit keeps trending lower, many Singaporeans and Malaysians will attempt to do some geo-arbitrage between the two countries.

The trick is to confine all your expenses in Malaysia and then earn and invest in Singapore. I can imagine after the office buildings get built in Woodlands, many folks will try to geo-arbitrage by trying to live in Johor and work in Singapore.

Investing in Malaysia is also really something which deserves another blog writeup. In the Malaysian Smart Investor magazine ( yes, they still have a monthly investment magazine ), a couple of fund managers are advising readers to buy S-REITS citing our high yields. If I can only invest in Malaysian REITs and equity counters, I would still be working today. Their top yielding REITs are only giving out around 5-6% not counting withholding taxes although this makes their high yielding equity counters much more attractive in comparison.

Over time, both countries will try to make it hard for you to cross the causeway and to do this will employ toll charges across their customs checkpoints but the single biggest issue is personal security.

There is a saying that a Johorian that has never been robbed is not a real Johorian. If you really want to live and work in Malaysia, you need to factor into your living expenses adequate security systems. But even if you are a multimillionaire in Malaysia who can afford bodyguards, who can protect your from your bodyguards ?

Just a final tip.

Malaysia's low exchange ensures that any product with a higher rental and labor cost component would be cheap compared to what we pay back home. So the trick is to stick to food, watching cinema and personal services like massage, nail manicure and the same stuff some uncles do near Peace Centre.

Imported branded goods don't make as much sense although Mr. DIY (A Malaysian chain that is a mix between Daiso, Toy R Us and Homefix)  always has something worth buying when I go there.






Wednesday, February 22, 2017

Equity Management #3 : The Dividend Discount model is overrated

One of the fundamental building blocks taught in the CFA is the dividend discount model or DDM. In Chapter 4 of the Equity Management book, empirical studies would succeed at demolishing the explanatory power of DMM when it comes to stock returns.

For the novices, the dividend discount model is basically the  idea that a stock price should be the net present value of all future dividend payments.

V = D1/(1+r) + D2/(1+R)^2 + D3/(1+r)^3 +....

If dividends grow at a constant rate, the equation collapses to  V = D1 / (r - g)

V = Price of the Stock
Dx = Dividend in year x.
r = risk free interest rate
g = rate of dividend growth

If you read a brokerage report which employs the dividend discount model, you can now objectively take those results with a pinch of salt. There are simply too many variables which require a future prediction for your value calculation have a chance of being accurate at all. First you have predict future dividends. Second, you have to know future interest rates. Even if you are able to plug everything into your spreadsheet, in essence, you are getting an estimate derived from other estimated values. No wonder many analysts cover their tracks and recommend a buy only when the current market price is discounted from this calculated value estimate.

This authors performed a series of regression exercises and concluded that the DDM does not adequately explain what drives investment returns.

An investor is better off relying on a low P/E ratio and a low price/sales ratio to make investment decisions.

The chapter ends with a valuable quote from Paul Samuelson which I am still trying to channel when it comes to my own investment portfolio. The quote goes like this," I prefer paradigms that combine plausible Newtonian theories with observed Baconian facts. But never would I refuse to houseroom to a sturdy fact just because it is a bastard without a name and a parental model. "