Saturday, November 01, 2014

Genting Singapore

The author owns Genting and dollars in this post refers to SGD.

Genting Singapore has recently dropped to multi-year lows and the stock at this level looks increasingly interesting. The stock has fallen from its high of $2.30 in 2011 to a dismal $1.04 as investors lamented about the lack of growth and the looming accounts receivables on its balance sheet. 

Genting, needs no introduction. It started the first casino in Malaysia some 40 years ago and was awarded the licence to run the Resorts World casino in Sentosa, Singapore in 2006. Its transformation from a local casino operator in Malaysia to an entertainment conglomerate today is nothing less than spectacular. Today, the Singapore business alone makes close to 3 billion in revenue and it has a market cap of more than 12 billion dollars. 

In this and the next few posts, we would do some analysis on this name to determine its intrinsic value and try to understand its business moats. As with the past analyses, we would be asking the few questions on the Stocks page.



1. What is the Investment Thesis?

Genting is one of the only two casino operators in Singapore earning over 3 billion dollars in gross gaming revenue or 45% market share on the island. While Singapore's gaming market has not grown much in recent years, growth should track the regional GDP over the medium term at 5% YoY. It has also sought to differentiate itself by providing family entertainment and a different experience for tourists. It owns Universal Studio Singapore as well as other strong entertainment franchises that would continue to grow alongside its casino business.

Genting has also eyed opportunities overseas and it announced an investment in Korea and would likely be a key player in Japan when its gaming market opens up. These overseas business remain free options of $0.20 to $0.40 per share today as most investors and analysts do not factor any value into its share price given the time horizon is still a good 5 to 7 years away.

2. Is it Cheap?

With the 60% decline in stock price, Genting is becoming quite palatable. Genting trades at 17x forward PE and 9x EV/EBITDA which are at the lower ends of its historical ranges. Its PE is still pretty high if we just think about PE as we discussed before ie 17x means it would take 17 years to recoup our capital. But we have to understand that this is fundamentally a great business and the 17x PE is based on next year's earnings which would not necessarily do justice. Looking over the past few years, it managed to achieve a record of over 1 billion dollars in net profits and if we use that number, then PE goes down to 15x.

Based on free cashflow (FCF), the preferred way to look at valuation, Genting could generate around 600 million dollars to 1 billion dollars of FCF annually. If we use a conservative 600 million, we are talking about a 5% FCF yield which is quite high by any standards. This would also reflect that the stock has really corrected to such a level which makes it attractive enough for value investors.

Unfortunately, Genting does not pay a lot of dividend, so despite having a 5% FCF yield, its dividend is only 1%. But as the stock price correct further, its management might think about strategies to boost it, including raising dividends or perhaps a symbolic share buyback to signal that the stock is too cheap.

Genting's stock chart since IPO, at $1.04, it's back to 2009 levels

3. Is it a Good Business?

Well, gambling is great business. Not just good, but great, especially for the casino operator though not necessarily for the gamblers and their families. It is said that all vices make great businesses: smoking, drinking, gambling which is why they are also heavily regulated. Such businesses are driven by the idiosyncrasies of the human behaviour namely habit and addiction which makes consumption very sticky and allows the operators to have pricing power. Hence gambling is a good business, sorry great business.

Gambling habits have been well studied globally and statistic showed that around 1% of the population would suffer from gambling issues. The 1% of compulsive gamblers would also contribute to a significant 30-40% of the casino's revenue. In Singapore's case however, with the various restrictions and the focus on attracting VIP gamblers, the revenue contribution from Singaporeans and residents had declined from a high of 60% to 30% today. For Genting, it also has a significantly high VIP revenue of over 50% driven by Chinese and South East Asian tourists.

When looking at the global VIP gambling dynamics, one would then have to consider where Genting stands in the regional high class luxury entertainment and how this would evolve in the next 5 to 10 years. With half a dozen countries talking about integrated resorts, competition would undoubtedly intensify in the next few years. Genting's focus on entertainment and gambling could be its value proposition against the other competitors in Macau and some of the other ASEAN countries coming up with their own integrated resorts. It is also developing its brand name alongside megabrands like Universal Studios and Hard Rock Cafe.

In the last few years, the VIP gambling market suffered quite a bit as the Chinese economy slowed and the government clamped down on corruption/extravagance of its officials and this had a huge snowball effect on the whole global luxury market. However while this trend would continue, the rise of the global middle class and high income earners would in time offset this weakness.

Genting is well positioned to attract these high rollers both from the ASEAN region and from China and we would further examine its economic moats and financials in the next few posts.

Friday, October 10, 2014

What is Your Legacy?

"Seize the day. Gather ye rosebuds while ye may, because... we are food for worms."  - Robin Williams  as John Keating from Dead Poets Society.


We are all food for worms. From the moment we were born, the clock started ticking. We will spend no longer than a dozen decades in this universe. For most of us, it's about 7-8 decades. The first 2 decades we spent learning just to get by. The next two we enjoyed a bit, but then we needed to raise the next generation. Then we realized almost half the time is gone. At some point, our time ends, and we become food for worms, or organic fuel for the cremation ceremony. That is the destiny that awaits all men.

There are so many questions! Why are we born so as to die? What is our purpose in life? What legacy do we want to leave behind? Big questions. Since the human race evolved to possess thinking minds, we have not stop asking. But there are also no good answers. Some believe science cannot provide the answers. But perhaps religion can. Not everyone can accept that because religion introduces the concept of an Almighty, which could be a case of Occam's Razor - it calls for the ultimate additional assumption, ie the Almighty. For some of us with our stubborn engineering trained minds, this just doesn't gel. 

I recently attended a seminar called Life Academy. It was started by some Taiwanese which had gotten quite popular over the years with more than 100,000 attendees globally. It was a seminar that would provoke some thinking about the answers to life's biggest questions. I must say it's pretty profound. Of course, not all the answers would be satisfactory but I believe everyone who attended would have at least one or two takeaways.

For me, it gave a glimpse of how to view our existence in this world, this reality and this one time that we will live and experience all there is. Here's how I would frame it. Imagine that we are going to attend a party. It's an 8 hour party. Every hour for a decade roughly. Well for some lucky folks, it could stretch to 12 hours but for most of us, probably 8 hours. So how should we spend our time?

First, we must make sure we last 8 hours right? Don't get knock out at the fourth or fifth hour. That's health. Eat right, drink right and walk around or dance! (ie exercise). Just keep our bodies and minds strong. Then we must decide, what we really want. Most people realized this party won't last forever only at the fourth or fifth hour or even later. Well, it's never too late, but wouldn't it better to know what to focus earlier on? For readers in their first or second hour, good luck! Do focus and keep walking!

So what is it that we should want out of this party? I would say I would want the following:

1. Experience
2. Love
3. Legacy

Well first, I guess it's about experiencing the party. Try to experience all there is. Well don't do the bad stuff that affects health or the other two on the list: love and legacy, like smoking, or betraying trust, or spread hatred. But for the rest of the experience, by all means, try all the fun!

In a party it would mean talking to a lot more people, do stuff like taking a dip in the pool, playing all the games, exploring the venue in and out. On Earth, I guess it means expanding along the same thought horizon, meet people (of all races and places), do stuff (rafting, backpacking, skiing) and see our world (a lot to see: Machu Pichu, Niagara Falls, Great Wall, Aurora, Great Barrier Reef, Angkor Wat, African Safari, Easter Island etc). Well this in itself would probably take a lifetime. But we must not forget the other stuff. The next on the list being love, which could be the most important.

Humans are social animals. We don't live alone and we yearn to be accepted. Sometimes in bizarre ways. Like buying a flashy car, a mechanical watch or a Berkin bag, just to show people we are "somebody". It's a bit like a young pugilist in those swordfighting novels who had not mastered any skills but needed to hold a jade sword just to impress others. Yeah, like Zhang Ziyi in Crouching Tiger. Ironically, there will be those that we hold dearly in our hearts, with no need for any of the gimmicks above. Our significant other, our kids, our family, our friends. We love them just the way they are. And they, vice versa.

The simple thing about love is to simply just to give it out, and it comes back multiple folds. So give love to our family, friends, colleagues, mates and if we are ready, to strangers too. All too often, we simply give almost everything to our work, to make more money, thinking it's more important. But the clock is ticking, our kids will turn to teenagers then adults in a flash. Our parents will leave this party earlier. Some of our friends too. Is it really about work and money? Do you go to the party to do work and make money in the prime 3rd, 4th and 5th hour? Tick tock tick tock, remember this party only lasts 8 hours.


Cheers by Mayday, echoing the views in this post

Make time for those who meant the most to us, who had helped us, and those who had walked this unique journey with us. Share the love, the friendship. Cherish those moments together.   

And finally, what is your legacy?

Most people never got this far. The toils really got to them. They were working and making money all the way to to 6th, 7th and 8th hour. They would ask how do you spell legacy? To them, life was about making ends meet. It wasn't a party. It was about food, shelter, security. For those of us in a better position, sometimes we think like that too, we need to buy that condo, that lifestyle when there is no need to. We should be helping others instead. Bill Gates and Warren Buffett, the world's richest two men pledged to distribute their wealth for this purpose. Noble souls.

For most of the readers here, we are the fortunate ones who have the luxury to think about our legacy. What do we want to leave behind? Maslov had pretty much summed this up. This is self-actualization. Our calling. Well, it's not easy to figure out. But do think hard. The clock is ticking, the party will end.

For Steve Jobs, it was putting a dink in the universe with an aluminium case that is now in the hands of hundreds of millions of people. For Jack Ma, it was creating an internet firm to help millions of small business owners sell their wares. For most parents, it's about raising our kids. For most others, it's art forms: poetry, photos, music, paintings, movies or creating something, like building a company, a charity foundation or simply becoming an entrepreneur. It is not about whether it was the first of its kind, or whether people liked it. How many units sold or whether it was a success. It is about whether we actually took the step to do it. To execute. Please, do it. Just do it. You don't want to leave the party knowing you did not try.

For me, one of the legacies to leave behind would be a stock portfolio. Amongst other legacies that I thought about: taking beautiful photos, creating a music platform, having a real farm growing my own food, start my own fund and needless to say, raise my kids well. I hope to achieve all of them, although the odds are definitely against me. Well since this is an investment website, let's just focus on the portfolio. 

The goal is to create one portfolio that can hopefully generate good returns for a few decades. It would consist of 50 or so stocks. The best of the best globally. Strong global businesses with huge economic moats. Companies that would continue to pay dividend for years to come and the dividend cheque will get bigger and bigger over time. Companies like Diageo, Disney, Singtel, Jardine Cycle and Carriage, Swatch, Adidas. Companies that produced products that I adored. Johnnie Walker, Omega, Star Wars merchandise. Companies that had made Singapore proud. You get the idea. This portfolio would also provide for my family. The goal is to make the dividends bigger than my annual expenses. It would fund my kids education and my retirement in time. 

It would also represent the fruits of my lifetime of picking stocks. I hope to discuss the stocks with my kids when they grow up. Let them understand why each stock is there and how collectively they contributed to our well beings. Part of this website and investment eco-system contributes to this as well. I hope it would be an interesting legacy. One with meaning, love, abundance and admiration for the people who made great products and businesses.

At the crux of it all, it's always about people. We want to be touched and we want to touch other people's lives. Be it through a product, an art form or simply, acts of love. Experience, love and legacy also revolve around people. Experience is about the people we met, love is about giving it to our friends and family and legacy is about providing for our future generations. By putting others before self is one of the ways to live a meaningful life, perhaps the way. Because, at the end, we are not going to take anything away. Not the flashy car, nor the mechanical watch, and definitely not the Berkin bag. We are here to make a difference to others. It's time to seize the day before we become food for worms. 

Start doing what is really important. Start your legacy, today

Wednesday, October 01, 2014

The Efficient Market Hypothesis

Investing, as with life, is a paradox. We have to learn to live with it and hopefully, sometimes, we find the way out. It is not rocket science. It's just about understanding the world and human behaviour. The world is ever changing yet human behaviour rarely changes. That is why it is so difficult for smokers to quit smoking even when we know that smoking is no longer as cool as when they shot Breakfast at Tiffany's. Yes, paradox. And it is equally difficult for diets to succeed and for value investors to dominate the investing world and for any investor to beat the market. Although that doesn't mean we shouldn't try :)

While this whole website and eco-system is built around value investing and trying to educate investors to understand value philosophy and to beat the market, we must be cognizant that the market is efficient. It is very hard to actually beat the market over the long run. Just as it is very hard for smokers to quit smoking or to successfully lose weight. Statistics showed that less than 10% of smokers can actually quit smoking without the help of medication and 95% of all fat people gained back their weight after some diet regime. In investing, about 10-20% of all investors will actually beat market return ie earn more than 8-10%pa over time.

In an era when smoking was still cool, Audrey would be asking, 
"Are you the 10% or are you just like Cat, a no name slob?"

The Efficient Market Hypothesis or EMH came about in the 1950s and 1960s when a bunch of professors in the University of Chicago and MIT did detailed research on the markets and came to the conclusion that most investors had never beaten the market ie the returns they generated were less than the average market returns of 8-10%. Over the years, the EMH has been debated to the death. Behavioural  finance "sort of" proved that humans are not rational when it comes to investing and hence EMH couldn't hold since one of EMH's core assumptions was that investors are always rational.

Also if the markets were truly efficient, how do we explain bubbles and how Warren Buffett and his group of Superinvestors beat the market for years and years? So is the EMH a fluke or is the market really efficient? Again, paradox.

I believe, as with all things in life, things are never binary. Everything must be explained in percentages (ie analogue basis, not digital). Type A people will never understand this. Let's hope more readers here are Type B.

The market is largely efficient. Maybe 95% of the time efficient. Bubbles and Warren Buffetts exist, but they do not refute the EMH. As investors, we must learn to respect that markets are, by and large, very efficient. To be better than the market, we must think better and see further and that ain't easy.

Why is the market necessarily efficient? 

As a simple analogy to illustrate this point, imagine that we stuff the National Library with $100 bills and get 10,000 people to go look for them. How long would it take before 95% the bills are taken? Not too long perhaps? A day or two? Yes, after that, there could be a few that are stuffed in between books like Security Analysis or War and Peace that might take some time for people to find them - that's where value investors look at.

The stock market is, by and large, like that. It is not easy to make money because everyone is looking for those dollar bills. Here's another paradox, the market did not start being efficient from Day 1. It became efficient as each and every investor took pain to extract the inefficiencies one by one.

The National Library analogy has its limits, so we need another one to better explain the structure of the stock market. The way that most investors (or shall we say speculators) play the stock market is hope to buy something and flip it fast, ie sell it to another buyer at a higher price. Now playing the market this way might make you money. But it is very tiring and you are far more unlikely to make it big. If the success rate for an average investor to beat the market is just 10-20%. Then playing this buy-and-sell-it-to-another-greater-fool game would likely have a lower success rate. Friend, don't make the game harder, already very pai(2) tan(3) liao(3), ho(2) sei(3) boh(2) ie already not easy to make money, pls wake up your idea.

So how?

Let's imagine now that there is a comic book store selling all sorts of comics from Marvel and DC Comics to Japanese manga to Hong Kong's Wind & Cloud or Lao(3) Fu(1) Zi(3). For a moment, also imagine that there is only one store in town and one copy for each comic. Some others might still be playing the previous game here, buy some comic in hope to sell to a Greater Fool. But a better way to play this is to: 

1) Buy a comic that is not expensive to start with
2) But also a comic that is interesting which you can rent out to others
3) Finally it is also evergreen such that the comic's rent price will actually rise over time

There are a few prices here. One is the price of the comic (ie the stock price) and there is the rent price (ie the dividend). The intrinsic value of the comic is determined by how much rent price it can fetch over its lifetime. The future price is determined by whoever willing to pay the highest. If you buy the issue #1 for Superman for $5 and you can rent it out for 5c every month, essentially you earn back the $5 in 100 months or 9 years (a bargain!) and you can sell that #1 of Superman for a higher price, provided the rent has then also increased to 10c per month. (Also imagine that both pirated paper and internet copies do not exist :)


#1 Issue of Superman in 1938

So you see, if you get the right comic, it will provide you an income and one that would rise over time. However you also want to buy them at the right price, because if you overpay, then it takes too long for you the reap the benefits. Say if you buy that same copy of Superman for $20, then it will take you 400 months or 35 years to earn back your cost, and you may not get to sell it at a higher price. That's poor investing.

The market is efficient here because there will be all these other comic buyers snooping for the good comics. Similarly there will be all these investors scouring the stock market for all the good stocks. Usually the buying price is at 12-18 earnings multiple ie it would take 12 to 18 years to earn back your cost. As you can imagine, it would not be easy to spot the great comics selling at a discount. You would have to be at the store every day, reading through all these comics and finding the real good ones which are undiscovered (think: reading a lot of annual reports and analysing a lot of stocks). And/or to wait patiently for some bargain sale some day and amazingly nobody is around.

Once in a while, the buyers disappear as they somehow collectively decided that nobody will read comics no more and you get the bargains. At other times, one or two comic become so superhot as to fetch prices that will take 100 years to earn back the cost (think Facebook, Alibaba). It's better to avoid the temptation to buy these hoping that you can flip and sell to a Greater Fool. Often, people find that they themselves are the Greatest Fools.

Most of the time though, the market is bloody efficient and very few outsized returns could be made. The Efficient Market Hypothesis works. While that is true, it doesn't mean that aspiring investors should just sit back and do nothing. For some, well, scouring for stocks year in year out really isn't their calling, then perhaps it would be better to buy the market (ie buy ETFs). And do other worthwhile things with our lives before we become food for worms.

For the rest of us, yes, we are here to figure out the paradox. Why are we born so that we become food for worms some day? Why try to beat the unbeatable efficient market? 

Because, we are here to seize the day and find as many gems while we can!

Monday, September 08, 2014

Look for Free Options

Those who have knowledge, don't predict. Those who predict, don't have knowledge - Lao Tzu

Investing is not about predicting the future. Predictions are usually not accurate. We heard the famous ones: Bill Gates predicting nobody needed no more than 640KB of memory, Dow Jones 36,000, who needs cars when we have horses blah blah.

Yeah, how right. So what do we do if we do not want to predict?

We want to be prepared. This post serves to illustrate how.

First we must accept that the future is unknown. It is a set of probabilities. We want to make sure that whichever future pans out, we will be okay. In mathematical terms, it means that the expected return is positive. In investing, we want to look for free options, or near-free options. In layman terms, it just means be prepared, don't anyhow bet.

It's easier to use an example, so we go back to Singapore's property market, my favourite topic. As of now (mid 2014), we can probably trace 3 paths that our beloved property market would follow in the next few years:

1. It will crash and burn, ie prices collapse, falling 30-40%, most speculators fall into deep shit and every Tom, Dick, Harry and his wife and his dog totally shun this market. That's when value investors come in.

2. It will continue to cruise along, doing nothing much at 2% rental yield or an average of $1,500 psf ie 90% of Singaporeans would not be able to afford anything any time soon and foreigners continue to nibble on some of our high-end stuff.

3. It will rise and rise as Singapore becomes the Monaco of Asia. Prices rise to $2,500 to $3,000 psf or higher and stay there forever. 99% of all Singaporeans and their children and their children's children will never be able to afford anything and have to resort to living in Iskandar.

Iskandar. Not too bad. Who wants to retire there?

I have posted in the past about why I think Singapore's property market should not continue to rally. But it's not supposed to be a prediction. It's merely a view I hold which I would attribute say a 70% probability that this future is likely to come true.

As for the other possible futures: 2 and 3 above, I would attribute say a 20% probability that our property market would do nothing and a 10% probability that we would become the Monaco of Asia and we will all have to move to Iskandar some day.

So the way to invest here is to make sure that no matter which future pans out, you would be ok. And if one of them happens to be right, you make a lot of money.

Now obviously if you have bought 5 properties on leverage and is paying interest instalments out of your salary, you are betting on Future 3. But if you believe my probabilities, then if Future 1 pans out. Good luck! See you in Iskandar, sorry I mean your makeshift cardboard at the void deck this weekend while I bring my kids to Legoland! That's way too much prediction and too little preparation.

On the other extreme, if you have sold your home and your mum's and in-laws ones as well and on top of that you go short $500k of Singapore property stocks, then you are heavily betting Future 1. But if Future 3 pans out, then jialat liao (ie in deep shit!). Not only you have no place to live, your short would probably be losing close to a million dollars. Makeshift cardboard at the void deck all over again. Again, that's not rational investing.

In investing, most of the time, it's very difficult to make free money or in investing lingo - to find arbitrage opportunities. You have to take some risk to make some good return. But that's just not very efficient. So the lesson here is really to just keep finding those arbitrage opportunities or what I would call "free options".

A free option or a near free option is a bet that would give a good payout if a stipulated event happens in the future but the cost is either free or almost zero. It could be said that one of the goals of investing would be building a portfolio of free options or near free options.

I must stressed that this is not going to be anything easy. The market is efficient and arbitrages are easily profited away by the professionals. Arbitrages are like dollar notes that fell out of people's pocket accidentally on Orchard Road. It would be picked up in a blink. So it's really not like money would fall from the sky. In investing, some of these free options are hard to come by.

But there are times when "free options" come about. We just have to be savvy enough to spot them. In the Singapore market, ironically, one example would be the property play Ho Bee. In early 2012, Ho Bee's share price fell to $1 as it was becoming clear that Sentosa's luxury properties might struggle to find buyers and Ho Bee was the Sentosa developer. It was clear that Ho Bee could have some serious issues as lower sales meant its cashflow would get tight but it had to finance its huge capex for its residential projects and its crown jewel commercial building: the Metropolis.

The Metropolis is a mega-deal for Ho Bee, at 1 million square feet of rental space right outside Bueno Vista MRT, this property alone is worth more than $2 when converted to Ho Bee's share price and even after netting all its debt, there is still $1.5 left. So when Ho Bee traded at $1, the market was saying Ho Bee's entire Sentosa plus other projects are worth nothing and its prime Metropolis could either be marked down drastically because Ho Bee might have to do a fire sale of this prized asset to survive.

Now I am doing this analysis with the full benefit of hindsight. I didn't invest in Ho Bee then and I am drawing conclusions now just for the purpose of illlustrating what's a free option.

The market is not stupid. Remember markets are usually efficient and I believed that there was a likelihood that Ho Bee needed to sell a part of Metropolis cheap to keep itself going in 2012, hence the market priced it below Metropolis valuation. But at $1, the market priced in the worst possible scenario. If it had gotten any lower, someone would have taken Ho Bee private. In fact, the management could just bite the bullet, partner with some private equity and took itself private at say 80c since the company and its management owns 70% of itself already.

So there was a free option on the table when Ho Bee was at $1. I would attribute say 20% probability that it could still fall another 20% which if it did the prudent decision would be to buy even more Ho Bee. But in another scenario, there is an 80% probability that it could rise 50% back to Metropolis minus debt at $1.5.

As things turned out, the upside was 100% and more. Today Ho Bee trades at $2.20. 

So ironically, despite my negative view on the Singapore property market, a prominent property play called Ho Bee was a free option regardless how the whole Singapore property market performed.

Tuesday, August 12, 2014

What's Wrong with CPF? (Part 3)

This is Part 3 of the CPF discussion, interested readers can start from Part 1.

We have come to the most controversial issue, should CPF give us 6-16% return that our sovereign wealth funds generate? It is well documented that GIC generated 6% and Temasek a whopping 16% over a long time frame like 20 years or more. So part of the argument was that why is CPF only paying us 2.5%? Isn't that unfair?

Again, this issue has been debated in depth. So just reiterating a few things.

First Temasek does not handle CPF monies. While GIC does to some extent, it is hard to segregate what's CPF and what's from other Govt sources of revenue. Remember, our Govt has a lot of revenue sources: outside of income and corporate taxes, they have casino levies, COEs, ERPs, summons, stamp duties, Singapore Pools (ok, lost a bit to Andy's Dad but still a mega money making machine), Changi Airport, PSA, Zoo, Bird Park, Night Safari etc etc. So how to segregate? Even if it's possible, it's not optimal.


Singapore Pools, Govt's mega money making machine

But what's more controversial is this: can we stomach the risk that comes with higher long term return? 

CPF rate is risk-free. The 2.5% return is guaranteed. The principal is protected. To ask for a higher return, the risk comes with it: the principal can and will fall below par. During the global financial crisis in 2009, stock markets were down 20%, in a week. At the lowest point, it was 40% decline from its peak. GIC and Temasek suffered huge losses. Can we afford to see our hard-earned CPF money lose 20-40%?

Sometimes, we don't know what we are asking for.

So if the answer is that CPF monies cannot go below par, then the next relevant question should be: is 2.5% appropriate? This is the interesting part. If the money is locked away for 30 years, then looking at insurance policies, long term government bond yield, maybe 2.5% is not right. It should be higher. This point could be valid.

However the Govt is also very wary of raising the interest rate too much, bcos the system will then be subjected to abuse. Imagine this, the Govt raise the interest rate to say 8% (yeah, yours truly's target). Now this is 8% risk free. If this ever happens, this site should be shutdown bcos its purpose in existence just vanished. Why read how to make 8% when CPF gives you 8% risk free?

Of course, this runs the risk that the 8% return cannot be met. In fact, GIC only generated 6%. Then maybe we should ask Singapore Pools to chip in a bit. Or ask Andy's Dad to return his winnings perhaps.

Just kidding, Andy.

It's always good to under-promise, so I guess that's why we are at 2.5%. Okay... just maybe a tad too conservative perhaps. Never mind that for a second, let's imagine another scenario.

CPF gives 8%, say a rich retired guy, say Marlboro Tan. At 65, Mr Tan can just put his $10,000,000 into CPF (a small amt of his huge personal wealth) and the Govt has to pay him $800,000 every year. CPF just became his personal money tree to buy a Ferrari, or 2 HDBs, every year. Yup that's why he's happy waving little Singapore flag during NDP, despite making our lives so miserable. Yes, there's a cap how much you can put in CPF to stop this shit. But there are enough rich retirees in Singapore to abuse this. Right?

So maybe the Govt can only raise it by a little, say to 3-4%. Albeit it is already 3.5% for the first $60,000 and 4% on the Medisave and Special Account, subjected to some cap. So again, maybe it calls for putting aside the differences and petty arguments, say just simplify everything to a 3.5% return.

So these would be my proposals for changes:

1) The equal contribution from employers and employees should be re-instated, say at 15% each.
2) The minimum sum should be scrapped.
3) The CPF return should be raised to 3.5% across all accounts.
4) The interest on CPF withdrawal should be stopped. Or alternatively, CPF can no longer be used to buy houses, fund education or withdrawn for any other purposes.

However, I must stressed that without mutual trust: the Govt trusting its people and vice versa, it is pointless to change anything. Since the intentions would be mis-read and there would be just more arguments.

It is worth noting that my four proposals require give and take for both employers and employees, for both Government and citizens. Like #3 requires a reduction in the Medisave and Special Account returns. #4 can be quite thorny and the alternative of not using CPF to buy houses might not work since people want their cake and eat it with the cherry and gold flakes on top as well. All this cannot be done without mutual trust.

Singapore has come a long way since being booted out of Malaysia in 1965. Our forefathers built this nation from scratch. Our parents trusted their leaders and they built Singapore. They believed that nobody owed them a living. The world does not owe Singapore a living. It is up to us to make our own living. But now, there is no us. There's the Government, which its people do not trust. There's a bunch of folks who think the Government owes them a living.

At the start of this series, I alluded to the fact that, while having some issues, the CPF is a robust system. I believe the few tweaks will make it work well again. This is not like our MRT, or our education system where major, major overhaul would be needed to make things work again. CPF had worked well and is now being politicized bcos of the few issues we discussed. 

But in the end, it's about trust. Put the differences aside and focus on what really matters: listening, understanding, un-antagonistic, unimposing. Rebuild trust and find the solutions together. 

Majulah Singapura!

Saturday, July 26, 2014

What's Wrong with CPF? (Part 2)

This is a continuation of the previous post.

Let's recap, our CPF (central provident fund aka Singapore's pension system) has four issues:

1. The equal contribution rate (employer vs employee) was violated.
2. The minimum sum was a total disaster.
3. Interest was imposed on fund withdrawal.
4. The interest rates are compared to returns of our sovereign wealth funds.

We discussed issue #1. The solution is to bring back the equal contribution policy. Since employers will cry foul if they are asked to raise their contribution to 20%. Perhaps it is much easier to drop employee contribution to match the current 15% or so. ie we see more take home pay! This also helps in a way since less of our salaries will now be locked away.

Issue #2 is the most hated policy. The dreadful minimum sum. When the amount is some crazy number like $160,000 and climbing, most people get put off immediately. But actually, as we wrote in the first post ever on this blog, retirement is expensive. $160,000 is barely enough. So on this count, our beloved Govt might actually be right. Although what's right doesn't mean what's popular.

Just to prove this point. It is also right to exercise five times a week, abstain from alcohol, eat vegetarian, sleep right and stop waking up at 4 am to watch World Cup and stop driving to curb CO2 emission. Who the hell would do all that? So the minimum sum, while a correct idea, is a bad idea.

There was also another damn good reason how it helped. In the early days when all these retirees could withdraw everything without any minimum sum restriction, they withdrew their hard earned savings of say $50,000 and bought Germany vs Brazil, betting Brazil would win (only to see Brazil fail dramatically). Or they would spend $50,000 on a Chinese prostitute. Or they would spend $50,000 buying Lehman note from DBS. Whatever. People were losing their shirts, their last shirt - the one that was supposed to last them till they go meet their ancestors. So isn't it good to have a minimum sum to stop this shit?

Which is worse? Betting World Cup vs CPF

Of course, people don't think that way. They want their money back, squander it and that's that! Anyhow, in today's situation, where there is a lack of trust, I believe the only way is to do away with the minimum sum. Sometimes people have to learn the hard way. Let them get into the same shit again. Maybe get their family members to decide whether they can withdraw or not. Like the casino blacklist.

So, while the minimum sum was a necessary idea, it would not fly in the current climate. To make things worse, we have issue #3 which forces people to put more money into their locked away CPF account if they used the monies before to buy properties, or fund their kids education or whatever. And everyone used their CPF monies to buy properties, or fund their kids education or whatever.

This following important point came from Roy. Thanks Roy!

It was a seemingly logical thing. If you took money out of CPF, you should put it back with interest. That seemed logical. After all. CPF was meant as saving for retirement. So put it back with interest.

But if the money was left there, the government paid the interest. Not us. Over a long time span like 30 to 40 years, this interest would snowball due to the effect of compounding. It is not a small sum.  Just a simple illustration, say interest in CPF now is 2.5% and we withdrew $100,000 to buy our HDB which now cost $400,000. Over 30 years, this would be like 80% of $100,000 or $80,000 that we have to put back into CPF!

$80,000! No joke! By taking monies out to buy HDB, we "lost" this amount...

I urge everyone to pay back what you owe CPF today!

Issue #3 when linked back to the minimum sum is part of Roy's argument. Most will never be able to hit the minimum sum. Imagine having to put back $80,000 just to get back to zero, and on top of this, you need to achieve the minimum sum of $160,000! And the amounts will keep snowballing. Never mind that actually we can still withdraw some money without hitting the minimum sum, as most people do. But this point is definitely worth pondering. By having money in CPF, we earn "good" interest with Govt paying us that 2.5% or 3.5%. By taking it out, we lose that interest and we set ourselves up for future problems due to the rules of the CPF game.

Of course, I do not think the Government had ill intentions designing it as such to suck our money with such a unscrupulous scheme. The HDB and education use came much earlier than the minimum sum. (and equal contribution was even earlier). It was an unintended consequence. So what's the solution?

Well, maybe we cannot use CPF for housing, education or whatever. Maybe we can have an option for people to withdraw CPF but they need not put back with interest, which they do if they hit a certain age. However, the crux of the issue, in my opinion, goes back to trust. Our Govt do not trust that Singaporeans can handle their retirement well. It has been proven with all these retirees squandering away their CPF monies. Similarly, we don't trust our Govt too! We want our money back!

This is a delicate issue. Trust takes time to build. And it would take both our leaders and the people to be humble, willing to put the differences aside and focus on what really matters: listening, understanding, un-antagonistic, unimposing, working together finding the middle ground, finding the solutions together.

Next stop: CPF returns and our sovereign wealth funds' returns.

Tuesday, July 15, 2014

What's Wrong with CPF? (Part 1)

CPF refers to Central Provident Fund, Singapore's pension system.

I must first profess that I am neither pro-PAP nor anti-PAP. In this post and the posts in the future (hopefully I get the time to write them), I will try to provide independent analyses on our pension system, touted as one of the best in the world, and hopefully readers will find them useful.

I also hope that readers would also have read Roy Ngerng's wonderful analysis. I must say it's quite thought-provoking. Though bearing in mind that he had an axe to grind. A lot of the discussion here would also be easier to understand after browsing through Roy's arguments. 

By and large, I would say that CPF is a pretty damn good pension system, for both Singaporeans and the government. Well, after all, it was the brainchild of our forefathers: a bunch of really cool guys, although they are quite misunderstood nowadays. Mr Lee Kuan Yew is really quite awesome, seriously. But the late Dr Goh Keng Swee was the coolest of them all. This site has a post dedicated to him. Sadly, very few people today actually know how great Dr Goh was, and how much we owe it to him.

The CPF Logo

In 1965, when we got kicked out of Malaysia, Singapore, as a nation, had no friends and definitely no place in the world. Needless to say, as a nation, we also had no income, no savings, no nothing! Mr Lee, Dr Goh and their team saw it as their mission to make sure that Singapore can stand on its own. He did a bunch of really cool things, and CPF was just another piece of the puzzle.

Dr Goh first saw the CPF as a great scheme to help citizens save some money, build up the nation's wealth to fund the nation's growth. It was an ingenious scheme! Actually it still is, just that now that it is now pretty much over-politicized. This is going to be one huge election pain point which could bring down the Government!

Anyways, to understand CPF, we have to go back to its beginning.

When CPF first started, the system was simple enough. Part of our salary would be with-held from us and the employer/government will contribute a proportional amount. These monies will be kept away in our own segregated accounts and when the time comes, we can withdraw them and use it for our retirement. This is far superior vs the old pension system where new workers support pensioners which would ultimately fail bcos the payout was too generous and it depended on an ever increasing young workforce to support an ever increasing no. of pensioners.

A lot of developed countries are still on this destined-to-fail system. But our own CPF got complicated as well and culminated to today's nuclear issues. It's gonna blow or meltdown if we don't do anything quick.

So what went wrong with the CPF? I believe the following would be the key issues.

1. The equal contribution rate (employer vs employee) was violated.
2. The minimum sum was a total disaster.
3. Interest was imposed on fund withdrawal.
4. The interest rates are compared to returns of our sovereign wealth funds.

Equal contribution: as most people who followed the discussions would know. One sacred rule about CPF in the very early days was the notion of equal contribution. In fact, when it first started, since both our salaries and the government coffers were so small, we could only start at an equal contribution of 5% ie someone drawing a $100 salary would put $5 in the CPF and the government would also put $5. And everyone's happy!

This notion was maintained until 1985, for reasons unclear to me now, the contribution became 25%! This means that there is 25% contribution from our salary and 25% from the government/employer. Then the economic crisis hit and the government abandoned the equal contribution to save the economy. The government dropped the employer contribution to 10% but kept the employee contribution at 25%. That was the first major breach of trust.

Well this happened some 30 years ago but it was significant. To this day, employer contribution is still lower. Trust once broken is very hard to reclaim. We all know this. Between spouses, siblings, friends. All the more so between the employer and the employee. Between the government and its people.

In fact, trust in our government is pretty low today, according to Catherine Lim. Trust forms the most basic tenet of relationships. When there is no trust, all other discussion are futile. Just imagine this, tomorrow, the government gives in to all the demands of netizen and naysayers of CPF. The equal contribution will be re-stablished. The minimum sum will be scrapped. Interest rate will be pegged to 10%, average of what our Temasek and GIC can earn.

Even if this happens, because there is no trust, people will second-guess the intention. People will demand even more. Why 10% and not 18% - the higher return that Temasek is earning. There is no end to this.

The solution is to rebuild trust. It is not easy. For couples, apologizing is always good way to start. Maybe netizens and officials can try that too.

Part 2 is out.

Sunday, June 29, 2014

Attack on Titans: Decisions

I just can't help writing down these analogies from Attack on Titans. Here's another post. Let me describe one scene relevant to today's topic.

The lead character Eren was in a situation where he had to make a choice: should he trust his teammates or trust himself to defeat the enemy. He chose to trust his teammates which led to all their deaths and he regretted his decision painfully. Eren was advised by the seasoned team leader earlier, one can never predict the results, so one should at least have a freedom to choose rather than being forced to make a bad decision.

Eren after he made the wrong decision

I highlight this story to try to illustrate two points:

1. The future is unpredictable, we will always make the wrong decisions. This is because we always work under pressure, with limited information and with lots of constraints. In investing, 40% of all investing decisions are wrong. But still, good investors can make good money.

2. The more important task is then focusing on the process of decision making, rather than the outcome. Amateur people focus on outcome and not the process. This second point is very important in life.

Let's just expand on the two points above that hopefully can help us make good decisions.

On Pt 1, we must always remember that we cannot predict the future. We may think we are smart, have done our homework, have a relevant understanding of what can happen and hence should be betting well. The answer should be more profound than that.

An important angle in understanding Pt 1 is to know what is the worst case scenario. Once we understand that, we make decisions that try to avoid a scenario that is unacceptable. Another way of putting this is to measure the risk reward of a decision or a bet. If we are only losing 20% in a worst case scenario and we make 100% on a base case scenario and 200% in the best case scenario, then it's an easy, brainless decision.

I would also like to bring up the relevant property example here. In the height of Singapore's recent property bubble, I was getting ridiculed by property bulls as a dumb permabear. If I was so sure that the property bubble will burst and prices would crash, why didn't I sell my property and rent? Well, I didn't know for sure, and I didn't sell my only home for reasons to be explained below. But there are people who did. They sold their only home and rented. Waited for the property bubble to crash. They waited a good five, six years now and are still waiting

Although property prices are falling, it's hasn't fallen enough for value investors to buy. The lesson learnt here is not about betting on the outcome that you think will happen. It is about betting with the best expected return, factoring other factors such as quality of life, peripheral costs and impact to kids and/or parents. And bet such that if you are wrong, you will not get killed. To sell your only property is not betting it correctly. 

What if Singapore becomes Monaco? Yield goes to 1%? Prices stay at $1,500 psf for normal properties and $3,000 psf for prime prime prime properties forever? Someone, with no inheritable parent's place, who sold their only home would have to live in Iskandar. The kids would have commute from Malaysia. Is this an acceptable outcome?

Always know that the future is unpredictable and do not make decisions that is unacceptable in a worst case scenario.

Eren's teammate Petra, who perished after his wrong decision

In Eren's case, the worst case scenario couldn't really be avoid. If he had rely on his powers rather than his teammates, the worst case could still be everyone's deaths. So it's a 50:50 bet. Such cases call for innovation and thinking out of the box. Could there be something else that could be done? It is not easy.

Pt 2 is related to the matrix below, made famous by Michael Mauboussin but actually originated by someone else. It's quite famous and self explanatory. Basically good processes doesn't always give you good outcomes. And more importantly, good outcomes doesn't mean good processes.

As explained earlier, by focusing on outcome, you have no idea whether it was luck or skill. In most cases, it would actually be just dumb luck. But I would say that 80% of the population doesn't understand this. We make all sorts of sacrifice to put our kids into the so-called good schools based on their past results. We follow "star" investors and listen to self-proclaimed gurus. But what's more important is actually to study how they did it. Process, not outcome.


Process vs Outcome

However, a good process does not ensure a good outcome. In investing, even with the best investment processes, we only have 60% chance of getting things right. Because this is an art. This is a game where too many variables go into the system. It's a bit like golf, or trying to make a blockbuster movie, or trying to produce a #1 selling product.

Good processes are not easy to achieve. It's hardwork. Lots of hardwork. In investing, it's about first learning all the relevant skills: honing literacy in financial accounting, adopting a good investment philosophy, understanding businesses and their economic moats. Then it is doing lots of reading. And finally lots of mistakes in actual investing, trying to overcome emotional and behavioural biases. And it does not end. It's continuously learning and adapting.

In other aspects of real life, it is also about diligence and tenacity. Golf is about lots of practice trying to get the right swing, trying to get the short game right. Important decision making is also about a lot of rational thinking, opinion seeking and mustering courage to execute. Focusing on outcomes is like a championship manager who looks only at the scoreboard to make decisions in a soccer game.

So Eren made a decision to trust his team and it turned out to be disastrous. But was it a bad process? It was hard to say. They had a plan. It almost worked. On hindsight, he would be right to trust the team with the seasoned team leader around. When the team leader was absent, the decision should have been trusting his own powers. In the end, Eren and his team did capture the enemy. And they then mounted their Attack on Titans!