Monday, 5 May 2014

What lies ahead of the curve?

My ex-boss often spurred us underlings to ‘stay ahead of the curve’.

Sometimes this got misquoted as ‘stay ahead of the curb’, which has a marginally different meaning: the curb is the edge of a street, while a curve was the crest of a statistical distribution. One leads to traffic accidents, while the other led to alleged powers of prophecy, and a period of see-I-told-you-so opportunities. 

For a time, I took the saying at face value because, hey, even if I was wrong, at least I was first. But initial naivety aside, I think the deeper question is, ‘when does on run with the herd, and when does on stand against the herd?’


From another perspective, the question becomes whether the herd right or wrong about what lies ahead.  Media headlines tend to revolve around negative news, like riots and protests. Rioters clash with police, destroy property, or break out. Generally, bad things tend to get reported when herds are involved.
However, research suggests, what gets reported in the media is only a small fraction that misrepresents what doesn’t get reported. In other words, what gets reported isn’t a fair representation of what happens when crowds congregate. This isn’t a question of journalistic quality, but rather a disconnect from reality that is likely to happen when you try to condense 24 hours into ten 3-minute segments on a daily basis.

That’s approximately 2% of a day that gets broad media attention, of which the decision of what gets into that 2% is sometimes driven more by ratings than content, according to The Newsroom. Or according to the Press Freedom Index, that 2% is driven more by restrictions rather than releases of information.

But returning to the question of whether the herd is right or wrong raises two questions in my mind: 1) who is in the herd?  and 2) what is the herd saying?

I’m generally not a fan of herds of ideologically driven zealots, which includes well-educated and intelligent zealots. However, intelligence and experience and track record do play a part in whose opinion I’d give more weight. George Soros has a longer and more notable track record than Peter Schiff for instance. And if I had to choose a herd, I’d probably face in the same direction as Soros, all else remaining equal.  Listening to the herd is a matter of understanding the argument and the implications of what that argument entails.

Both questions has problems – the first borders on ad hominem fallacies and the second has the problem of overgeneralization, because herds are not Borg-like hive minds (at least not for long anyway) and teasing out what the herd is really saying is like trying to read the comments column on Youtube.

But they seem pretty fair questions to ask of any large group of people heading in a single direction.

Tuesday, 29 April 2014

Portfolio action: Buying Russia

Over the past week, I made a switch in my portfolio. Once again, this is my attempt to document the rationale for the following decision.

I’m selling out of China, making the decision to buy into Russia.

Reason 1: Russia looks cheap
So says JP Morgan in their 2Q 2014 Guide to the Markets publication.
 Source: MSCI, FactSet, J.P. Morgan Asset Management. Data as of 3/31/14.

From the same source, Russia’s current PB ratio is 0.6x versus the 10 year average of 1.4x. As a general rule of thumb, if it’s selling at less than 1x PB, it’s cheap.

But we know what is cheap, can get cheaper, especially if it finds itself under pressure from financial shocks. 

But it’s not like Russia is in danger of a shadow banking-fuelled debt crisis.

Reason 2: Russia’s survivability looks okay
I’m not going to try to argue that Russia’s going to have a fantastic time in the next few years. People with crystal balls bigger are welcome to project as far as they want. But what I see is Russia looks sufficiently buffered to handle a fair amount of economic whoopassery before they really crumble.
Source: World Databank, World Development Indicators , last updated 9 April 2014.
Having said that, that’s pretty much all the reason I’d have for putting my money in the hands of a  Russian fund. The question now is really, which one?

Three funds, three track records
To bring the question into focus, I need to know what exactly I’m looking for, and that is the fund that is most likely to deliver outperformance over a market cycle. I haven’t much idea where in the market cycle the Russian market is (although valuations suggest it’s closer to the bottom than it is to the top) but I do have some idea that the market will still be intact once it turns up.

So I’m looking for is a fund that has the greatest likelihood of delivering outperformance over a market cycle. The way I’ve chosen to approach this question is to look at historical 3-year returns of the underlying market, and compare each fund’s corresponding return in each period.

Here’s the 3-year rolling return of the Russian market, represented by the FTSE Russia TR USD. All total return data in SGD terms unless otherwise specified.

It’s a pretty ugly picture if you bought Russia around October 2010, as 3-year returns of the market since then have been increasingly negative. If you had entered in March 2011, 3 years later in March 2014, chances are you’re looking at a negative 40% return or so.

But let’s rearrange history a little bit by sorting returns from high to low, giving us a smooth curve.

The chart above shows the historical 3-year returns every day for the past 5 years (end-March 2009 to end-March 2014). Returns have been as poor as -40% or so, to as high as 60% or more.
Here’s the fun part, taking the corresponding fund excess returns (arithmetic difference between fund returns and market returns) for each period, and throwing them against the market return to see when the fund delivers what sort of excess return. 

Three funds: H, J and P are plotted against the sorted historical returns of the FTSE Russia TR USD.

H: Could be worse. Fund tends to underperform most of the time, but keeps underperformance to around 10% to 15%. Noted outperformance in the region 15% to 30% when the market rallies strongly.

J: Looks pretty high beta. Like H, tends to underperform most of the time, but unlike H, underperformance seems worse when markets are not doing much, returning as much as -20% excess return at some points. Upside is noticeably higher when market rallies – in the range of more than 40% excess return in a strong market rally. I guess that’s what keeps investors coming back for more.

Lastly, P: Of the three, arguably the steadiest downside management. By some market voodoo hoodoo, fund has kept performance positive most of the time, across positive and negative conditions. The most the fund has underperformed over a three year period is less than -10%. Meanwhile, upside is as high as 40% in some cases.

On this basis, I’m going with fund P.

I’ll review this decision three years down the road, in March 2017.

Sunday, 28 July 2013

Building a newbie portfolio

So someone asked me for help to build a portfolio. Our hypothetical investor wants to start with an initial investment of $3000, and a regular monthly contribution of $300, and not a whole lot besides that. Because the investor doesn’t have a whole lot of investment knowledge, they aren’t afraid to ask important questions that aren’t easily answered, such as:

‘So how much can I lose?’
‘Who am I investing with?’
‘What am I investing in?’
‘How much can I get out of this?’
‘How long will it take?’
‘Can I trust you?’

I do like big butts.
In other words, all very good questions that many salespeople will finesse their way through without giving you a straight answer. The reason for this pervasive evasive is somewhat nefarious, and not entirely relevant to for the purpose of this post, but suffice to note, these are all important questions that should be asked for all investments.

While the answers are important, so are the logic and assumptions behind the answers. After all, Bernie Madoff could easily answer any of the above six questions without breaking a sweat or, apparently, making an investment (link leads to an interview with Madoff, it’s pretty illuminating).

And regardless of what the recent crop of Sunday Times stories about young investor profiles will tell you, not everyone has the upper income parents/ financial advisor background/(very) high risk appetite/ $50k from parents/multi-industry business owner parents/multiple bank accounts and credit cards/ modeling career/frugal thrift to start off with a $20k portfolios. Personally, I question the message the Sunday Times investor profiles is sending. Advertisers should really find a better place for their ads. I’ve always admired the sports correspondents at TNP.

Back to the matter at hand; a starting amount of $3000 and a monthly contribution of $300, and about 40 years to play with till 65. Let’s also be really conservative and assume a nominal return of 3% p.a.
Say the investor retires at 65, and lives to a ripe age of 80.

Assuming all the above, we’re looking at a monthly income of around $4000 until 80 rolls along and our hypothetical investor dies gracefully. A couple of things I don’t know how to account for are inflation and the time value of money, but I’ll just leave that for now.

Peaking at around $743k, the question is then how can we achieve that 3% p.a. over a long period of 40 years. With only $3000, we’re looking at around one or two funds at best.

With that cap on options, I’m thinking of a half and half equity-bond mix. Given that bonds have had a terrific run over 2007 to 2012, I’m willing to take a little more risk on equity exposure right now. But for the sake of my sanity, I’ll go with the textbook 60/40 mix between equity and bonds.

To represent equity, I’m using the MSCI AC World TR, and for bonds, I’m looking at the Barclays Multiverse TR USD Unhedged, both in SGD terms. Drawing on 9.5 years of data (no real reason for that number, its entirely arbitrary), you see a good range of 12-month returns.

Based on the chart, one has a rough idea of how much one can win, lose and expect over a 12-mth period. This settles a good number of the above questions, with exception of ‘Who am I investing with?’

Saturday, 13 July 2013

Suicide by statistics

A recent report titled ‘suicides hit all-time highs in Singapore’ first broke on the AFP, and subsequently got picked up by Bangkok Post, Yahoo! News Singapore, and even Fox news.

With all this attention, I wouldn’t fault someone for thinking that life in the land of eternal sunshine is a weary façade for depressed souls trying to claw their way out of Singapore Inc. 
Foolish Singaporeans, there is no escape!

It’s a catchy headline, I can’t fault them for that, but out of curiosity, I went looking for the dataset from the Samaritans of Singapore, and the claims are entirely true:

Suicides in Singapore hit an all-time high of 487 in 2012 as more young people bogged down by stress and relationship woes took their own lives, a charity group dealing with the problem said Friday.

The tally, a 29 percent increase from the 2011 total, was boosted by an 80 percent rise in the 20-29 age bracket, the Samaritans of Singapore (SOS) said in a statement. (Link)

But what feels a little lacking is some perspective. 

After all, a one year 29% increase in suicides does not a trend make. Drawing up the data showed the absolute number of suicides was indeed at all-time highs, but given a larger population to begin with, it doesn't seem entirely alarming.

I should probably point out that suicide through the lens of data and statistics is not the same as drilling down to the experience of each individual. The question I’m asking is not about the individual, it’s about the population as a whole, and every individual’s case is uniquely tragic.

But overall, society seems to be doing fairly all right.
Total suicides, Source: Registry of Births and Deaths, Immigration and Checkpoints Authority, Singapore. Last accessed:
Population: Extracted from
From a different angle, if total number of suicides is expressed as a percentage of total population, it still looks fairly stable.
Total suicides, Source: Registry of Births and Deaths, Immigration and Checkpoints Authority, Singapore. Last accessed:
Population: Extracted from
Now, if we were to compare suicides with total death rate, the picture shifts slightly.
Death rate: CIA World Factbook
Total suicides: Source: Registry of Births and Deaths, Immigration and Checkpoints Authority, Singapore. Last accessed:
Population: Extracted from
Things might look quite alarming, if not for the fact that while suicides are at all-time highs, death rates are at all-time lows: 3.41 deaths per 1000 population, according to the CIA World Factbook.

So the question becomes: why don't the all-time low death rates make headlines?

Sunday, 7 July 2013

Numbers on a page

I’m generally wary of writing about data.

Numbers are a different language from words, the former developed primarily for quantifying, measuring and, in my case, stultifying.

Words on the other hand, being the general-purpose tool evolved over lifetimes of use and abuse, have the unenviable task of deal with the amorphous category of the immeasurable.

So while I can throw data on to a blank page, it generally looks much prettier when vomited onto a chart.

That's quite a lot of money.
The chart shows the growth of 60k, with an annual 12k investment, compounded at 8% per annum, will grow to roughly 2.2m in 30 years. The key question in this case is to find an investment that can reasonably be expected to compound reliably at 8% yearly for 30 years.

I’ve been told early-stage Ponzi schemes make excellent investments, but they seem to be in short supply.

Saturday, 6 July 2013

Eat thine own cooking

I would have written this a long time ago, if my motivation wasn’t so readily eroded by distractions and general inertia.

Say you have about S$100,000 to invest, and in 10 years, you want to grow it to S$1,000,000. The actual numbers are unimportant, but the point is the compounded growth rate needed to achieve that goal. To get there in 10 years, you would need to grow that S$100,000 by around 26% every year, for 10 years.

When I was 20, I thought I’d be a millionaire by 30, and retire by 40 to live by the beach and surf and dive all day; and I thought 26% compounded over 10 years was a realistic rate of return. Ah, youth.

Merlyn Ee of the MAS was recently quoted saying, ‘We need to do more to help Singaporeans better prepare for life's unexpected events and to set aside adequate savings for their golden years.’ And citing a HSBC survey done,

Over half of Singapore respondents feel their financial preparations for a comfortable retirement are inadequate: 44% feel their preparations are not enough, whilst 12% are not preparing at all.

She does have rather lofty aspirations for financial advisors in Singapore:

Financial advisory firms can help Singaporeans realise these goals. My vision for the financial advisory industry in Singapore is for financial advisers to be viewed as professionals, just like lawyers, engineers and accountants, with their own code of conduct and high standards of practice.  We are not there yet.

With the exception of the last sentence, real reform lies in a more informed group of consumers, who won’t end up buying structured products, neglecting their investments, and falling for sales tactics practiced by some in the industry. The tricky bit is finance isn’t something people think about a lot. Sure those of us in the industry spend quite some time on it, but I would wager a good number of us, myself included, have quite a few blind spots when it comes to the financial 
phantasmagoria of products.

I can think of two reasons why. Firstly, many don’t have a foundation in finance. I certainly didn’t study finance. What I know has been gleaned over years of experience and a hodge-podge of financial literature often written for larger markets. I’d like to think I know the basic tents of investing but that leads to my second point; knowing versus doing.

This doesn’t get talked about enough. Doing finance is a bit like doing a budget. It sounds and feels good talking about it, but actually sitting down and itemizing income and expenditure ranks somewhere below watching grass grow. Picking investments is the fun part, like shopping for nerds. Portfolio maintenance, rebalancing, and creating excel models is the boring stuff.

If finance is going to be a bigger part of Singapore’s economy, it’s peculiar that not much emphasis is placed on the financial skills needed to make sense of the discipline, especially in schools. 

Some might say it’s a responsibility.

Sunday, 23 June 2013

People on streets

After just under two weeks of haze craze, PSI numbers fall, visibility clears, and the air tastes refreshingly free of burnt rubber. Since no one knows if this recent development is mere respite or remission, I figured I’d grab the chance for a walk in the park.

PSI fell off a cliff, and hopefully never bounces back.
I don’t think much of PSI numbers. I’ll concede it can be a very useful measure of a very specific set of pollutants, but for an individual, there’s an easier way, called sticking your head out and taking a whiff. After all, I live in the East, and work in the South (as per NEA’s geographical definitions). As much as I miss the smell of burnt cocoa at Boon Lay MRT, (thanks Cadbury and ADM cocoa) my lungs can’t inhale that far.

Back in East Coast Park, feet slapping pavement, two items catch my attention.

One; there are a lot of people in East Coast on a Saturday night. Two; more than two aforementioned people are lying/sleeping/passed out on the floor.

By passed out on the floor, I don’t mean curled up with a makeshift pillow and a blanket under the numerous shelters along the park. I mean like this dude below, who looks like he sleep-rolled off the bench and onto the floor.
Sleeping like a baby.
Or like the young indian girl who was sprawled by the overhead bridge. I’m going to risk belaboring the obvious, but if you’re a slim female, with large breasts and a very short skirt, it might be a good idea to be very careful with what you consume. 

For reasons of modesty, I didn’t snap a picture. Her crotch was visible enough that would likely get my blog noticed for the wrong reasons. It was particularly troubling, because she didn’t reek of alcohol, and was fairly young and attractive. My first guess is date rape drug. But I’m no expert in these matters.

Thankfully, I wasn’t the only one who stopped to help. A few good Samaritans, including a rather hot milf in red shorts, a burly Indian man, a homely pinoy woman, and a trio of young NS men came along and started helping in ways that could only be described as random. While I’m trying to rouse indian girl, Burly tells pinoy to fetch some water. She returns, and Burly instructs me to stand back.

Stand back? Dude, how much water are you going to planning to – he pours a handful of water into his palm, and flings it against her face with somewhat more force than I was anticipating. No response.

Somewhere in the background, one of the NS trio goes, ‘fwahlaueh’.

Somewhat startled by Burly’s enthusiasm, I start shaking her with more urgency, lest he decides to douse the entire 1.5L bottle on her. Meanwhile, pinoy and milfy are tending to the delicate task of hiding too much crotch with too little skirt. They settle for placing her handbag strategically between her legs.

Meanwhile, burly has slapped at least three palms of water to the girl’s face, and I’m half-worried she’ll drown before she wakes up. Finally, she stirs, muttering and sputtering weakly. Of course, Burly then proceeds to grab her by the hair and tug her into a sitting position.

I’m convinced Burly is a time-travelling caveman; give him a stone axe and a shopping list that includes mastodon meat and sabre-toothed tiger pelts.

Somehow, we manage to raise indian girl to her feet with no hair loss, although the same can’t be said for her memory; she has no clue how she got here. Troubling to say the least, but at least she’s sober enough to protest against being sent to a police station to sleep off her condition. Round of discussion. 

Burly, clearly a man of action, starts speaking loudly in Tamil. I have no clue what he’s saying, but my sympathies lie with indian girl, who after recently revived, nearly drowned, and barely able to stand, now has to contend with a mustachioed caveman gibbering loudly to her face.

Eventually we decide to get her into a cab. Next issue, she says she has no money - nothing like budgetary constraints to stop a discussion in its tracks. Finally, milfy steps in, opens the handbag, and rummages through indian girl’s belongings.

‘I have no money,’ indian girl murmurs…then somewhat brightly, ‘but I have cigarettes!’

Thanks to milfy, turns out Indian girl does have money ('Oh, I do?' she says), and enough to get her home by taxi. But not before one of the NS trio suddenly swoops into interrogator mode, firing off questions, ‘What do you last remember? Who were you with? What were you doing?’ More than a few of us frowned, including Burly, although it’s hard to tell from his Neanderthal uni-brow whether he was perplexed or thinking of his next meal.

Finally, we get her into a cab, and the entire episode is punctuated by Burly slamming the taxi door.

I hope indian girl is home safe.