Monday, November 26, 2018

Minimum Wage vs U.B.I.

This was a planned post for the last General Election in Singapore where some debate surrounding minimum wages sparked my interest. It was stated that 90% of all countries have minimum wages and why is Singapore not in that group. Five years on, the world has progressed and today we are talking about U.B.I. or universal basic income and not minimum wages. So like our beloved SAF still conducting training based on WWII tactics, our economic argument on minimum wages had fallen way behind.

We were very fortunate to have survived as a nation state. Looking back, this was only possible at that exact point of human economic development. If Singapore was founded in any other century other than 19th century, we would simply be absorbed by our neighbours. Further if we somehow gained independence in 1915 rather than 1965, we would had perished. We would just become collateral damage given the global belligerence at that time with WWI and WWII. Similarly, if we gained independence today, we stood no chance competing against Shanghai, Hong Kong, Bangkok and Tokyo. We succeeded because of sound economic policies and innovative growth strategies. Let's hope our new 4G Cabinet led by Heng Swee Keat and our current economic strategies will bring us further.

Singapore General Elections, exciting since 1959!

Okay, let's come back to minimum wages. The original arguments against minimum wages were these:

1. It would cause more unemployment because employers would decide not to employ more workers if being forced to choose between hiring one more worker at minimum wage or loading up more work to its current workforce.

2. It would reduce Singapore's cost competitiveness. We have a high standard of living and by setting a minimum wage, we make our cost base even higher, hence further widening the gap between us and our low cost neighbours.

3. Once implemented, there is no turning back and the minimum wage would just keep rising with inflation. This actually hurts SMEs and the poorest the most. This could be true and hence Singapore had moved to use a levy system instead whereby workers will receive both a salary from their employers and a get levy/subsidy from the government if they worked.

Fast forward to today, disruptions and changes in the past few years have made the minimum wage argument irrelevant.

With robots and automation taking over the world, the risk of 50-60% of the world's population losing their jobs is becoming real. The argument has moved on completely. Prominent economists proposed that governments should start thinking about the concept of Universal Basic Income to be given to everyone, rich or poor, fat or thin. (Or more realistically, every household.)

The idea has the genesis that income is a basic need much like air and water. This is probably similar today to mobile phones and internet. We cannot live without these anymore. To deprive someone of income and internet is much like depriving them clean air and drinkable water. So when robots take over 50-60% of all the jobs there is out there, maybe we should give everyone a basic income. Yes, just as industrialization brought in the welfare state catering for the disabled, technological disruption might need to bring about U.B.I.

We just want basic income!

To some extent, U.B.I. is also the logical evolution for the welfare state. Expenses that are already paid out via the welfare system could simply be transferred into the new U.B.I. Alas, Singapore also never implemented a full-scale welfare system. Maybe that would that bring about another set of major political arguments. But no fear! Singapore is the land of Crazy Rich Asians. Assuming our U.B.I. would be $500 a month amounting to $6,000 per year per household, U.B.I. for all citizen households would only cost $7.2 billion, this is just half of our defense budget. We can fund this easily!

There are two important arguments for U.B.I. The first one is that it would eradicate poverty. No children will go without food or shelter. They would be able to afford education, enjoy basic rights, as all kids should. All our aged uncles and aunties would no longer need to clear trays at kopitiams (local coffee shops serving hawker food). This is just socially and morally great! The second argument: it levels the playing field for everyone. While $500 wouldn't mean much for an affluent household, it would pay for good tuition in a middle income family and change the whole game for the low income family. If the Singapore government implements U.B.I., the opposition party would have to think really, really hard to attack the incumbents!

U.B.I would not encourage people to skive because everyone gets it. It is akin to the basic salary in the army. You will always have that. If you are good and get gold for IPPT* or get promoted, you get more. Super lazy bumps or naturally unfit ones might not get IPPT silver or gold or they might stay as a Corporal for the entire National Service but they are not "skiving" bcos of U.B.I. This is an important point and ties back to the previous one: levelling the playing field. 

Most critics would also point to funding, where is the money coming from? Hence it is also key to set the amount right. It cannot be too much nor too little. World experts believe it should be around $500-1000 for most developed economies. Well, as for our own funding, we answered the question, crazily rich Singapore will have no problem funding it.

Huat Ah!

*IPPT stands for the individual physical proficiency test, a compulsory test in the army for all Singapore National Service men. In 2010, 50% of reservists/NSmen failed their IPPT. The test was recalibrated in 2014.

Monday, November 19, 2018

Chart #16: Millennials

This is a recent chart from WSJ which shows that millennials while carefree and internet savvy faces some difficult problems vs the older generations. They have more student debt and would likely earn less than their parents.

This is a reflection of the higher cost of education as well as pay stagnation. As most types of work get commoditized, we see that only 50% of millennials will get the creative work and get to make more money than their parents. This ratio would continue to go down...

Sunday, November 11, 2018

The Essence of Value Investing

Here is a good analogy on investing and the concept of margin of safety from Buffett some time back.

If you see that a man is very fat, it makes little difference that you are able to precisely calculate his exact weight to enhance your conclusion. Is he 102kg or 110kg? Does it matter? Similarly in trying to determine the intrinsic value of the company, it doesn't matter if you get it at $102 or $110. What is more important is where is the price now? If it is $98, it means that you are aiming for 4-12% upside. That's not a lot of buffer against any calculation error. It means that the stock is not cheap enough. 

Margin of Safety

If the stock is at $70, then we are talking. The margin of safety now opens up to 30%. It takes a few more mistakes for us to be wrong vs if we bought it at $98. The chart above is quite enlightening in telling the whole margin of safety story. The blue line represents the intrinsic value of a company. Over time it creeps up as most companies create value for the society and earn profits that help it to grow stronger.

But the share price rarely track its intrinsic value. It moves above or below it with the vagaries of the markets. We buy it when there is a margin of safety. Usually, this doesn't come often. Maybe once every 12 to 24 months or longer. There are more times when stocks trade above intrinsic value, esp when their sectors are very hot, like technology in 2017 and early 2018.

This is essentially the essence of value investing. Ben Graham, the father of value investing, was famous for saying, if you have to surmise value investing in three words, it is this: margin of safety.

See also
Business moats
Intrinsic Value
Value Investing

Sunday, November 04, 2018

Thoughts #11: The Capital Cycle

Capital Account by Marathon Asset Management published in 2004 gave a good analysis of how global capital moved and why alpha or value add could be generated if we invest well in the cycle.

The Capital Cycle

The capital cycle move along with investors' interests which create competition at the peaks, driving down returns. Essentially a more academic way of saying, "be fearful when others are greedy". It doesn't do justice to the book by over-summarizing it here. 

Do read the book for some good investing stories!