Berkshire Hathaway in 2020-21

I have invested in Berkshire Hathaway for a decade or more based on the most simplistic investment thesis: this is Warren Buffett's company and he is the world's greatest investor. There was very little further due diligence after that. So is this investing or speculating?

"An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative." - Ben Graham

To satisfy Ben Graham, Warren Buffett's teacher, this post is a quick dive into of Berkshire Hathaway.

Here's a few numbers which should be read as average over the past few years:

Revenue c.USD250bn

Cashflow from operations c.USD40bn

Capex c.USD15bn

Free Cashflow c.USD25bn

Total assets c.USD870bn

Total equity c.USD440bn

Based on news report, Berkshire has rebounded with a 7% increase in overall profits with some of its businesses exceeding pre-pandemic levels. Cashpile is close to USD150bn and total equity portfolio has also rose to USD308bn and its market cap is now USD650bn.

Berkshire is the lifework of the world's greatest investor. It has compounded its value over the last 50 odd years, and should continue to grow its intrinsic value beyond Warren Buffett and Charlie Munger.

Merry Christmas and Huat Ah!

Charts #42: Offshore Wind

 This is an interesting chart from the Economist last month. Optimal offshore wind locations are at a certain latitude and we just need to build 500k offshore wind turbine to contribute to 7.5% of global energy output.

Offshore wind

Well, we are not starting from zero, we have 7,000 today. And to power the whole world, we just need to 7 million wind turbines at these optimal locations.

Economics: Factors of Production

I have never studied Economics academically and always felt it was my impediment as an investor. Now that my kids are taking the subject in school, I got hold of their textbooks and took this opportunity to learn with them. Yes, learning never stops.

In the first lesson in Economics, we are taught that there are four factors of production that is needed to produce finished goods and services. These are the building blocks that form the basis of any economy. Originally, there was only three, but over time, as knowledge increases, the fourth factor was added.

1. Labour: this refers to people, workers and manpower that make things and create services. People are also consumers and as such the largest economies tend to also have the largest populations.

2. Capital: this actually refers to financial and working capital (ie money in layman's term), fixed capital (equipment, servers, buildings) and also other forms of capital such as R&D and intellectual property.

3. Land: this is raw land and also the resources like copper, oil and gold under the land. This also includes forests for timber and water reservoirs. 

4. Entrepreneurship: this is human innovation and the ability to harness the top three factors and ingenuity to generate economic growth.

In the early days leading to the independence of Singapore, economic theory postulated that we could never have created any kind of economy since we have limited capital, labour and entrepreneurship. The biggest problem was that we didn't have land. We didn't even have enough water. Our forefathers really reinvented themselves to lay the foundations of the country and the abundance we have today. 

But it's fortunate we started in the 20th century and it became possible to create an economy and relying a lot on entrepreneurship and innovation.

Huat Ah!

NeverGrande: Is this China's Lehman Moment?

Last month, we witnessed the fall for Evergrande, the world's most indebted real estate developer, and the subsequent semi-bailout in stealth. While we do not know for sure if the Chinese government did step in, we have to assume so at the moment. Without the government's olive branch, Evergrande could  plunge China into pandemonium as the 80,000 retail investors who had invested in Evergrande rebelled, and the millions of Evergrande's homeowners could cause further unrest, threatening "common prosperity". Evergrande's share price has collapsed 90% since Jul 2020.

To recap, Evergrande owed USD300bn of debt which was accumulated to fund its crazy built-up of over 1.000 projects across 200 Chinese cities. It was reported that the company pre-sold 1.5m homes to Chinese citizens. Evergrande had always had issues. It just side-stepped them by launching new ventures and borrowing more money. But triggered by the pandemic which has caused disruption in the global supply chain, business workflow and money flow, rumor was that Evergrande would miss its bond payments and this would be the last straw that was going to take everything down.

This was really the last straw.

In summer, the cement, dynamite and sh*t hit the fan (figuratively, of course) and everything blew up. The courts took control of the firm's finances and the Central Bank even issued a rare warning. Losing confidence in Evergrande, workers, home-owners retail investors marched in the company's HQ claiming they were tricked and demanding to have their money back. Employees of the firm were similarly tricked alongside overseas investors and probably stand to lose the most. 

Evergrande's fallout then spread to the other developers. Smaller peers have defaulted and impacted bond and stock prices. While not picked up by the media, I am sure many homeowners are affected, losing their life savings. Tragedies abound. The old adage comes to mind: caveat emptor, buyers beware.

The worst is not over. The following table below from FT details the upcoming bond payments. In March and April 2022, there will be USD3.6bn or principal repayment due. If Evergrande or the Chinese government cannot raise the money, we are looking at the next rollercoaster plunge and perhaps China's Lehman Moment (which arguably, started in September when the problem was picked up by global media).

Courtesy of FT

Analysts have long warned about Evergrande. Amongst the big developers, it always stood out with more debt, more aggressive accounting and more issues. As early as 2012, short seller Andrew Left raised issues with Evergrande but was silenced by the Hong Kong authorities at that time. He was charged with market disconduct and banned from trading for five years. His ban is still on today despite his thesis being vindicated! 

This is another example of how the global system is pretty broken at times. It reminds me of the how Jho Low got to defraud Malaysia and got away with wiring billions across the world via major US and European global banks, making a fool of the SWIFT system and nobody caught him. He is still at large today. Well, that's the truth, nobody knows sh*t. People who run systems sometimes really have no idea.

So, what can we learn from Evergrande?

I think there are two important lessons, one for investors and one for understanding powers at play. As investors, we have to bolt when we smell trouble. This is a lesson that took me a while to learn because psychology is at work. We hate losing money and loss aversion clouds our minds. I made the same mistakes with Hyflux, Bayer, Sembmarine and so many other stocks which is in the portfolio.

When trouble brews and you have a position, the first thing to do is not wait-and-see. It is to cut loss. There is always a "canary in the coal mine" that died to warn us of danger. We must be vigilant to understand the tell-tale signs and more importantly take action by selling! 

The following timeline (courtesy of Reuters) shows how Evergrande's problems were well known. On hindsight, there was an optimal point to sell around Jul 2020 when the stock rebounded with the markets with the pandemic recovery rally. But one would have save some money by selling at any point.

August 2017 

Evergrande vows to cut debt for the first time, aiming to slash net gearing ratio to 70% by June 2020 from 240% in June 2017. 

November 2018 

Central bank names Evergrande as one of few financial holding conglomerates on its watch that it said could cause systemic risk. 

March 2020 

Evergrande targets cutting its debt by 150 billion yuan ($23.3 billion) annually for three years. 

August 2020 

Regulators meet with 12 major property developers, including Evergrande, to introduce caps for three different debt ratios in a pilot scheme dubbed “the three red lines”. Evergrande sells 28% of its property management unit for $3 billion ahead of the unit’s initial public offering (IPO) in Shenzhen.

September 2020 

Company offers 30% discount on properties for a month to push sales. 

October 2020 

Evergrande raises $555 million in a slimmed-down secondary share sale in Hong Kong. 

November 2020 

It terminates the Shenzhen backdoor listing plan. Some strategic investors agree not to demand repayment. Evergrande Property Services Group Ltd’s Hong Kong IPO raises $1.8 billion. 

January 2021 

China Evergrande New Energy Vehicle Group Ltd raises $3.4 billion by bringing in six new investors. 

March 2021 

Evergrande sells 10% of online real estate and automobile marketplace Fangchebao to 17 investors for $2.10 billion in a pre-IPO deal. It aims to meet all three caps on debt ratios by 2022-end. It plans to list Fangchebao by early next year, and spin off its water and tourism units among others. 

June 2021 

Evergrande says it will sell over half of its 58% stake in peer China Calxon Group Co Ltd, worth $386 million. Fitch downgrades Evergrande to ‘B’ from ‘B+’ with a negative outlook. The developer arranges HK$13.6 billion ($1.75 billion) to repay a maturing bond and interest on all other dollar bonds.

July 2021 

A court orders a freeze on a 132 million yuan bank deposit held by Evergrande at the request of China Guangfa Bank Co Ltd. Evergrande says the loan is not due until March and it plans to take legal action. 

 Some banks in Hong Kong decline to extend new loans to buyers of two of Evergrande’s uncompleted residential projects. Evergrande scraps a special dividend proposal. S&P cuts its credit rating on the company by two notches to B- from B+ with a negative outlook. Fitch downgrades Evergrande to “CCC+” from “B”. 

August 2021 

Moody’s downgrades Evergrande’s corporate family rating (CFR) by two notches to “Caa1” from “B2”. Legal sources say lawsuits against Evergrande across the country will be centrally handled by the Guangzhou Intermediate People’s Court. 

Hui Ka Yan steps down as chairman of flagship unit Hengda Real Estate Group which Evergrande says is due to the termination of its backdoor listing plan. 

China’s central bank and banking watchdog summon senior executives and issues a rare warning that Evergrande needs to reduce its debt risk and prioritise stability. Evergrande warns of liquidity and default risks.

September 2021 

Chairman Hui Ka Yan leads a pledge-signing ceremony to promise buyers it will complete construction of their homes.

Hui Ka Yan - Evergrande's founder

The second lesson is to understand people and powers at play. Undoubtedly, Hui Ka Yan, the still billionaire founder of Evergrande (after losing USD25 billion of his wealth) was a shrewd businessman and wasted no time to curry favor the new Xi's government and disassociate past links as early as 2012 when he dabbled into soccer to help bring China to the world's stage. In 2018, he was on the official list of 100 outstanding entrepreneurs, a recognition of his efforts by the Chinese government. He is also still a member of the Political Consultative Committee that advises the government on policy. 

But he was never in the inner circle and could never be in. So when Xi's anti-corruption campaign started and even Jack Ma was brought down, we must understand that a government bailout will always be difficult. This is now made even more difficult with the focus on "common prosperity". With USD11bn in his pocket, he probably has to dough out more to help the 80,000 retail investors and 1.5m homeowners first before his own prosperity becomes common.

A change in dynasty and/or paradigm is always big. It means that what we know hitherto no longer counts. Xi's rising in 2012 was big but it took the world a few years to realize that. The Lehman Moment defined global financial markets for more than a decade. We are still not out of the GFC's shadows. In China today, this focus on "common prosperity" is one huge paradigm shift. As for the next disruption in the financial world, crypto could be one.

So, stay tuned! Huat Ah!

Thoughts #26: Tesla at USD 1 trillion

Tesla became a trillion dollar market cap company last week (end Oct 2021). This is a company that has not made positive cashflow since its inception. Yet, the market is saying this company should be in the exclusive club of trillion dollar companies, of which there are only six members today.

Trillion dollar club

In my view, Tesla meteoric rise is a testament of two factors:

1. QE Infinity

2. We are in the biggest bubble of all times

It is a true irony that I am half-way through reading Ben Graham's Security Analysis and yet living in this moment when fundamentals do not seemed to matter anymore. In Ben Graham's days, he did not even bother to look at earnings because it was not possible to project companies' earnings with confidence. So he only looked at the balance sheet and only with co.s that has more current assets vs its market cap (a.k.a. net-nets).

Value investing then evolved to look at earnings of stable companies. Then we look at good businesses with strong moats. These are companies that can generate stable, growing cashflows. Today, I am not sure what we are looking at. Tesla has very little equity, no earnings, no cashflow and no moat. Yet, the market is saying it is worth a trillion dollars.

Tesla's $1.1trn market cap

 However, stocks will always revert to their intrinsic values. That is the truth like how gravity pulls objects down or how the sun rises from the east. It could be the case that QE Infinity will cause intrinsic values to be recalculated off different risk-free rates and different risk premium (ie like 50x PE for good stocks can be the norm in the future because investors simply cannot get better returns anyways) but stocks will revert to their intrinsic values.

Let's see if Tesla's intrinsic value is truly 1,000,000,000,000 dollars.

Charts #41: Breakthrough Energy

Breakthrough Energy is one of Bill Gates' company that is big on sustainability. The following chart and link provides good info for future reference.

https://www.breakthroughenergy.org/our-challenge/the-green-premium

The sustainability problem will become one of the biggest topic for us and our children. Let's hope we can solve it!

Books #15: Bill Gates' How to Avoid a Climate Disaster

I picked up this book without much expectations. After all, so much has been said about climate change, is there anything new? Bill Gates was the world's richest man, still a billionaire and recently more of a philanthropist, how much did he know about climate change? What's more, his womanizing history caught up with him and he got divorced! So, can we actually trust this guy?

Well, I have also learnt some time back to think about the message. Brilliant truths are not about the messengers. Of course, someone respected and credible saying something is always the gold standard. But there are intrinsic truths utter by liars that will nevertheless remain true. As a simple example, if Donald Trump says π equals to 3.14159265, it is still true. Despite the speaker having a track record as a recalcitrant liar.

Bill Gates is not a liar. He has no reason the write a book about some topic that already has so much publicity. At a time when he is having trouble with his wife! So, let's pay attention to his message. As such, I wanted to put this down for future readers and for myself to remember the important message.

I believe there are three key takeaways:

1. Big numbers to define the problems

2. We must do something now, if not the problem gets bigger.

3. The solution is to reduce the green premiums to zero.

Bill Gates, being a geek, likes to throw out a lot of numbers and as investors, we should take note. Numbers are important. So these are the important numbers:

51 billion tonnes of carbon. Humans produce this every year and we need to get this to zero. 

The world needs of the current electricity generation capacity of 5,000 GW to be from renewable and zero-carbon sources. If we want to achieve this, it will take a lot innovation and willpower. He also believes we need to use more nuclear power.

On the second point, it's really self explanatory. A stitch in time saves nine. If we don't do it now, the problem gets bigger and it may become intractable. I did not remember if the number came from the book. But roughly speaking, if we don't do anything now, the cost to do something 10 years later will be 10x higher and we are talking about trillions of dollars here!

The last point on green premium is really the core of the book. For almost all situations, the zero-carbon solution will cost more. The point is to reduce the green premium to zero. There are examples that this has been achieved. For example heat pumps to regulate temperature in buildings. If we innovate and use technology to reduce green premiums, we can incentivise the world to go green faster. 

This is definitely a book worth keeping. Hope to read again if there's time. 

Huat Ah!

2021 HK Dividend List - Bonus!

Hong Kong and China has matured as stock markets over the last 20 years. In 2005, Jim Rogers famously said that the 21st Century belongs to Asia and China, especially, which was awakening to capitalism after years of structural reform. The big beneficiary was the Hong Kong's capital markets. Shortly after, China went ahead to drive the commodities supercycle, became the world's largest exporter and now on its way to become the world's largest consumer market. Yes, we will continue to see the growth of China. 

2021 HK dividend list

This is the first list of interesting HK and China names and we see the corollary from the preamble above. Anhui Couch, China's second largest cement company and China Resources Cement were the Chinese companies that drove the commodities boom. Alongside was Zoomlion, the excavator manufacturer, helping to build up China's infrastructure over the last decade. Qingdao Port, an execution arm of China's export capabilities and Haitian, one of the plastic injection mold companies benefiting from the export trend. Then we have a bunch of consumer companies like Want Want and Uni-President which will be compounding growth in the years ahead. 

ROE and ROA driven screen

The criteria are similar to the Singapore list generated a few weeks ago whereby ROA and ROE drives the screener. The first part of the list shown here cuts off at market cap of HKD 35 billion (c.USD 5 billion) which is good. We do not like companies with small market caps as it's just risky. Remember Singapore only has less than 30 companies with more than USD 5 billion in market cap. That said, if we have done good analysis and are confident that they won't go belly up, it is okay to buy small caps. Those are the names that can give 10x returns (except Hyflux, which was USD 1 billion when it went belly-up).

If I were to pick one name from this list, it would be Want Want. We know that snacks are irresistible, the market will grow at high single digit and Want Want has the track record to keep growing. The metrics look pretty good too. ROE at 24% and ROA at 12% and operating margins are over 20%. Most importantly, the stock is not expensive at teens PE. However, the screen is always just the starting point. We must do more work. The stock price has collapsed from its peak and not moved for a couple of years. We need to find out why. 

That's what screens are about. We use screens for a first cut and then do the deep dive. It is hard work!

As usual, here's the past lists:

2021 Dividend List

2020 Dividend List
2019 Dividend List
2018 Dividend List - Part 4
2018 Dividend List - Part 3
2018 Dividend List - Part 2
2018 Dividend List - Part 1
2017 Oct Dividend List - Part 2
2017 Oct Dividend List - Part 1

2017 Mar Dividend List

2016 Dividend List - Part 2

2016 Dividend List - Part 1

2015 Dividend List - Part 2

2015 Dividend List - Part 1

2014 Dividend List

2013 Dividend List - Part 2

2013 Dividend List - Part 1

2012 Dividend List

2011 Dividend List

2010 Dividend List

2009 Dividend List

Huat Ah!

Charts #40: Meatless market

The meatless market has grown on the back of sustainability theme reaching USD 17 billion in size. The forecast below projected the growth to be flat but it's probably wrong.

Vegetarians used to have a hard time because people cannot understand why they want to stop eating meat. Living things have to eat livings to survive. I see them being ridiculed, sometimes it's not really fair.

With sustainability and vegan movements coming forth, the tide is finally turning. Now eating meat is increasingly a sin. But even if most of us cannot stop eating meat, we should eat less of it for Earth's sake. 

Be a flexitarian!

2021 Singapore Dividend List using Poems Stock Screen

When we first starting discussing screens more than 10 years ago, there were no good screens out there for retail investors. But technology advances, today we can easily screen for stuff. Just google "stock screener" and you get tonnes of screens. Even screens for ETFs! It is true that most would be made for the US and other big markets. But still, you can get good stuff.

I have been using poems as described in last year's post. This year, I would also be showing the poems screen. Singapore has been hit badly by the pandemic and we do get a lot of interesting results. So, this year's screen will be the first time in a long while we discuss Singapore stocks.

Here's the criteria I used for this year's screen.

I have focused on ROE and ROA (which are proxies for ROIC or return on invested capital) for this year to as these two metrics are really key in assessing both the quality of the business and the quality of the management. ROA of 10% means for every $100 I invested into the asset base of the business, I will get back $10. This is a decent return for most businesses when it's sustainable. 

As such, I would say that ROE and ROA drive the screen, while Operating Margin, Dividend Yield are really just cherries on the pudding. Remember, while we are looking for good dividends, it is what makes good company capable of paying good dividends that is important. Lastly, I have the market cap cut off at SGD100m.

These are the names ranked by market cap: Thai Beverage at SGD17.5bn, ST Engineering at SGD12.2bn and Keppel and so on and so forth. Nothing really stands out in this first part. Some of the names are repeated from last year as well while some others dropped off (Jardine Cycle and Carriage and SIA Engineering) mainly due to their inability to maintain paying 3% dividend. I continue to own Vicom which was discussed a couple of years back. 

First part of Singapore's 2021 Dividend List

The second part of this year's Singapore screen have a few interesting names: Boustead, Silverlake and Propnex. All three names generate extremely high ROEs without using too much leverage. We know this because ROA is also good at high teens. Most importantly, valuations are not stretched. Silverlake Axis trades at 4.6x PER!

That said, Silverlake Axis was issued with a short seller report back in 2015 which caused the stock to crash after that. It never recovered. It has been 6 years now but nothing was ever brought to light. So, did they really commit accounting fraud? If so, then the regulators should have clamped down and got the company delisted. If not, why is the stock price so weak after so many years? Inexplicable. In such cases, perhaps it is easier to just stay away. 

If anyone have any insights, would love to hear more in the comments section.

Second part of Singapore's 2021 Dividend List

I do not own any of these names. So Silverlake is not so great but I have been told many times that Boustead and Propnex are good companies. Boustead was built by a legendary entrepreneur called FF Wong. It was a darling midcap until 2014 when it's share price was almost two dollars. It has since derated quite a bit. I have not looked at it recently, but if its core engineering services business is not being disrupted, it should do okay.

Propnex is just the right business in the right place. Singapore's national pastime is to buy and sell properties. This stock IPO at 50c and is now at 1.5. How I wished I took my friend's advice to look at it seriously back then. It is after all the largest property agent in Singapore. It is not shown here but this is a highly FCF generative business making SGD30-40m against its market cap of SGD500+m. What's more: it has SGD100+m in cash and no debt. If it corrects 20%, I think this is a buy.

As usual, here's the past lists:

2020 Dividend List
2019 Dividend List
2018 Dividend List - Part 4
2018 Dividend List - Part 3
2018 Dividend List - Part 2
2018 Dividend List - Part 1
2017 Oct Dividend List - Part 2
2017 Oct Dividend List - Part 1

2017 Mar Dividend List

2016 Dividend List - Part 2

2016 Dividend List - Part 1

2015 Dividend List - Part 2

2015 Dividend List - Part 1

2014 Dividend List

2013 Dividend List - Part 2

2013 Dividend List - Part 1

2012 Dividend List

2011 Dividend List

2010 Dividend List

2009 Dividend List

Huat Ah!

The Future of Education in China, Singapore and the ROW

Last week, the Chinese government decided to overhaul its USD100bn tuition industry by declaring that education and tuition companies should be strictly non-profit and will not be allowed to use the now infamous VIE structure to raise capital from foreign investors in foreign markets. Tuition stocks subsequently crashed as exemplified by New Oriental Education crashing 70%. There is no money to be made here. It is unclear if these companies can stay listed. If they do, great, maybe you might be able to make 100-300%. But if not, then you will never see your money again.

New Oriental Education from >USD50 to USD 17

There have always been qualms about how capitalism should not encroach certain sectors like healthcare/hospitals, public services such as waste management and, needless to say, education. If these institutions are run for profits, then they could just go full throttle to make money and fail to provide the necessary public services. In China's education landscape, this has happened. Or rather, it was structured to happen because the rich can always pay up and get their kids onto the best platforms or employ the best tuition teachers for their children. 

Hence the Chinese government decided to do something - by clamping down on education (and also property and internet giants). In this way, you can level the playing field if not the current generation, then for the next generation. The next step is to get the nation's kids off "spiritual opium" - additive mobile games that has glued all our children's eyeballs to those screens. As such, Tencent is also falling like a brick. 

Actually, Singapore and the rest of the world are not that different. Our tuition industry runs into billions of dollars despite our population and economy being only a fraction of China's. Kids from lower income families are losing out in our highly competitive, elitist education system. And mobile games, that's every Singaporean parents' nightmare. We are all smoking "spiritual opium".

Spiritual opium

Addiction is as old as civilization. Our brains are wired to respond to incentives and it requires a lot of willpower to abstain. Think prostitution, tobacco, alcohol, gambling which has caused so much problems despite everyone knowing their harmfulness. What are our odds now to beat addiction when the lures are now right in our palms. It is a huge social problem as with our global education system.

Yes, (*sigh*) the global education system.

It is well-known that our education system is very outdated. When we look at our lives across various aspects, it is really hard to think of system that has not changed. The way we communicate across distances have changed so many times that we don't even know where to start counting. Broadly, maybe it started with human messengers, then letters, then telegrams, phones, emails, whatsapp and now zoom but in between we also had pigeons, pagers, car phones and SMSes. It is a similar story the way we work, the way we consume music, the way we commute and run our governments and so on and so forth. Everything has evolved. It is amazing how the classroom has not changed. 

Classrooms have not changed for 100 years!

Is this really to best way to learn? I have written a lot about Singapore's education system. But as I learnt about other education systems across the globe, the bigger picture remains bleak. Not only has learning not changed much since humans rode horses, it is totally inadequate in preparing our children for the connected future. What is the point of memorizing Shakespeare when you can always just google it? The other day, my kid just asked me did I ever use the solution to the quadratic equation in my adult life. I did not answer him.

Learning has to be made fun, multi-faceted and more about harnessing creativity. It is no longer about memory work and brute force. How do we incentivise our kids to learn when screens, games and Netflix are competing for the same eyeballs? There are no easy answers. It doesn't help when the best brains have also gravitated to work for Facebook and Google to write algorithms that will capture those eyeballs rather than staying in schools to teach.

It's at uphill battle. We desperately need better teachers. We also need to better use media to teach in fun ways and ensure knowledge is retained. Parents have to play even bigger roles. We also need to make sure our kids can learn to relearn, because knowledge keeps getting updated. I remember my periodic table was much simpler!

Today's periodic table

Learning is also about discipline. It takes effort to force the brain to rewire itself as it learns new knowledge so that it gets stronger. Games, Tiktok and Netflix do none of that. It is a different state of mind. It's inducing artificial dopamine kicks after dopamine kicks without the effort needed. As such, Our kids are increasingly addicted, getting used to the effortless lazy mode. In future, they might find it way much harder to get in the "flow zone" of focused studying or training. 

The joy of learning is being taken away.

Learning is for life. It doesn't stop after we graduate. I learnt what's most important in life way after school: human psychology, value investing and valuable lessons from best selling books such as The Selfish Gene and Bill Gate's How To Avoid a Climate Disaster. We are not teaching these in schools. At least not yet. It is pertinent that our schools emphasize that learning never stops. The twelve to thirteen years of core education simply prepared us for the important tertiary learning and then ultimately the University of Life. If kids are taught that learning is about brute mugging and exams and they have to find dopamine kicks from "spiritual opium", then all is lost. 

As parents, perhaps we have to step up and encourage holistic education, induce a home environment of learning, replace spiritual opium with physical stimulus (more sports and physical activities, it's the Olympics fever after all) and enforce the mindset of learning to relearn, discipline and help our kids discover the joy of learning. 

If China is doing something, Singapore should follow.

Happy National Day! Huat Ah!

Books #14: Daniel Pink's When

I have read two books written by Daniel Pink. Both were simple and good. The recent book was simply title When. This is a book telling us to be mindful of time and think a bit more how we should use it when. There were many gold nuggets. I shall list a few that were quite meaningful to me.

1. Every day, every project and every venture has a peak, trough and a rebound. We should be mindful of our own cycles and try not to make important decisions during the trough.

2. In the context of a venture or a project, the middle is a crucial moment where teams break or breakthrough. It is important to know this and garner all resources to make sure we handle the middle trough well. Daniel has the following four strategies to help us move towards breakthrough:

i) Go for small wins - if the task is too big and overwhelming, break it down and go for small wins.

ii) Moving beats stationery - walk around, exercise, do something. Not doing anything will mean falling down the slippery slope.

iii) Social beats solo - as retail investors, we tend to think alone, it is important to ask friends, seek help and advice. The wisdom of crowds beat solo thinking. This works in life, not just for investing.

iv) Outside beats inside - Daniel advocates that we should always connect with nature. It could be as simple as having plants around us. But nothing beats going to the park for a stroll to clear the mind.

3.  Here's the last bit about timing. There are times when we should go first and times we should not. We should go first when there are few competitors and we can make strong impressions. We should not go first when we are the default choice, or when there are too many competitors and when we are in an unknown environment.

Overall, I really like his style of writing. Simple and clear and hence worth the effort to jot this down for future reference. 

Thoughts #25: Lai Xiaomin

News on Lai Xiaomin and Huarong happened some time back but I have been so busy that it took me a few months to finally pay attention.

This guy was the head of Huarong Asset Management, one of China's bad banks whose purpose was to clean up bad debts in the system. He abused his position and did sorts of financial crime including accepting bribes, collusion and invested bad money into bad projects. 

He embezzled USD258m, the highest amount since the founding of People's Republic of China, enough money to fund the lifestyles of 100 mistresses, bought 100 properties and involved over 100 related persons.

As such, he was sentenced to death and executed 24 days after the sentence was passed. The first instance of someone getting capital punishment for financial crime, as the magnitude is big enough to cause societal problems. I guess Lai qualified, as he might also be partially responsible for the downfall of Huarong (happening now).

The lesson learnt for me here is that managing other people's money is not something trivial. Warren Buffett took it so seriously that he sacrificed his family time, partially his health to make things work. Alas, it usually is trivial, for many who are in for a quick buck. As such they are destined to manage small amounts, and to create negative goodwill because they think it is no big deal losing other people's money.

To truly be a good money manager, we must understand from the bottom of our hearts that this is a sacred job. It is more than just accepting the fiduciary duties of managing money. This is the secret of Warren Buffett's success. 

Charts #39: Cybersecurity

 The threats from cyberattack looms large. Cost of cyberattacks is going into the trillions.

Here's an older chart stating the no.s of attacks per year. We should be much higher today.

Cybersecurity will be one big theme in our lives. Buy HACK ETF listed in the US!

PS: just to complete the picture, Singtel, our beloved telco made a push into cybersecurity some years ago. Here's an old article from ST (5 Dec 2018).

SINGAPORE - The Singtel Group has consolidated its cyber security assets and resources under the Trustwave brand, it said on Wednesday (Dec 5), in a move that brings together resources from other arms such as Australia's Optus, and information and communications technology unit NCS. 

With the consolidation, Chicago-based Trustwave now numbers among its headcount the group's 2,000 cyber security employees worldwide. The resource-pooling also brings into the fold the Singtel Cyber Security Institute, a 10,000 square foot facility that opened in Singapore in 2016. The revamp comes with a new logo and a new corporate website for Trustwave. 

Mr Arthur Wong - Singtel's chief executive for global cyber security and also the chief executive officer of Trustwave - said in a media statement that the group will be "uniting the security assets and deep expertise of Singtel, Optus, Trustwave and NCS under one brand and single vision - what we call the new Trustwave". 

Singtel bought 98 per cent of Trustwave in 2015 for US$770 million (S$1.1 billion), excluding net debt, after working capital and other adjustments. It picked up the rest for US$12 million in May this year. Singtel most recently grew its cyber security portfolio with an A$23.3 million (S$23.3 million) deal for Australian consultancy Hivint in October. 

It said at the time that Hivint's services would be integrated with Trustwave's offerings in Australia and the Asia-Pacific. Singapore's larger telcos have been bolstering their expansion into cyber security, especially as their consumer businesses come under pressure from increasing competition. 

StarHub made the news in September when it set up a joint venture (JV) with Singapore investment company Temasek to set up the pure-play Ensign InfoSecurity. StarHub, which has a 40 per cent stake in the JV, merged its Accel Systems & Technologies subsidiary with Quann, which Temasek owned through security services provider Certis. 

 It agreed to buy Accel in several phases in 2017, with a price tag that could go up to $45.6 million. Later that year, StarHub went on to beef up its cyber security business with a deal to buy homegrown cryptography firm D'Crypt for as much as $122 million. Join ST's Telegram channel here and get the latest breaking

Lesson Learnt on Capitulation

At the height of the pandemic in early 2020, my portfolio was bleeding red ink (as with everybody else's portfolios) and I thought I should take measures to stabilize the portfolio. I looked across the stocks I owned and assess if there were any names that would have bankruptcy risks. I did own pandemic related names such as SIA Engineering and SATS. Some of which are still being affected today. 

STI's collapse and rebound, as per global stock markets

I took the opportunity to restructure the portfolio, sell out some names in the same sectors and deployed new money into interesting names which I always hoped to own. By and large, I believed I made good decisions and the portfolio has since rebounded. There was one name which I took a major loss because it did have bankruptcy risk. It has debt to equity ratio of more than 300% and net-debt-to-EBITDA almost doubling from 4x to 7x. 

I bit the bullet and sold it, taking losses only to see it rebound 50% from where I sold. Well, that's investing. You cannot predict the future. But this post is not about lamenting how I got whipsaw-ed. On hindsight, it is still the right decision to sell because if it did go belly-up like Hyflux, then I would have lost not 50% of my capital but 100%. This was the second biggest realized loss in my portfolio after Hyflux, which I did lose 100% and with these two painful memories, I hope to write down the lessons learnt on capitulation. Here's the process:

1. Reassess the situation.

2. Cut loss if the situation is bad.

3. Redeploy to a better name playing the same theme.

Reassessing the situation means looking closely at the business and the balance sheet. Has the business environment changed so much or is the business being disrupted such that there is no chance for the business to come back? Do they have the strong balance sheet to weather the storm? In Hyflux's case, it didn't have the balance sheet strength. It was obvious since the day I invested, yet I held hope that maybe the Singapore Government will lend a helping hand to save Olivia. It did not happen. Hope is a dangerous thing in investing.

So the related lesson is also never to hope. When things are looking bad, don't procrastinate. For this second name, which is a small resource company listed in Europe, I did not have the determination to cut fast enough. Thing started to unravel in early 2020 and the share price fell from EUR15 to EUR10. I should have cut then but again, I procrastinated. It fell all the way to EUR6.8 and I decided enough was enough. Remembering my experience in Hyflux, I figured that if I don't cut, it might go to zero.

For a while, the decision looks right, it continued to fall to EUR5 and I felt good. But has the stock market started to rebound, it rally past EUR 6.8 and is now back at teens. So, looking at it now, the outcome is such that even more procrastination would mean earning back a bit of money (it is still below my buying price though). However the business situation has not changed. It is still laden in debt, its position is further weakened by the pandemic. At this moment, my decision to cut was not great, but it could still turn out to be right in a few years. 

But more importantly, was my decision to redeploy the money.

The resource name was invested years ago with an investment thesis that certain niche commodities would be vital as the world develops and China was leading the boom at that time. There are actually bigger names to play the same theme. So while I cut losses and completely sold out of this name, I redeployed the capital into similar stocks. It turned out the be a great decision as these higher quality stocks also recovered as global stock markets recovered. 

As such, reassess, cut loss and redeploy would be a good strategy the next time you made a mistake and would like to move on. Do not let loss aversion cloud your mind. That said, it is much easier to invest a smaller amount to make sure your losses are never too big to begin with.

One final note on resource companies and high debt companies. Perhaps it is just much easier to avoid them. If you have to buy resource, commodities and energy names, then just go for the biggest fish or use an ETF. Hope this helps!

Huat Ah!

Books #13: Chris Voss' Never Split the Difference

Chris Voss was a FBI hostage negotiator turned consultant and I chanced upon his book on Kindle. It took quite a while to finish as I was busy with other stuff. Overall, it was a somewhat satisfying read although I probably need a lot of practice to become a better negotiator. Here's his lessons for winning negotiations.

1. Listen, mirror and label. Chris first lesson was simply these three words. We should listen to what the other party wants. Then mirror and label their emotions. Once they feel that they are heard, we can then negotiate. He encouraged to use phrases like, "it seems like..." and "I hear that you are feeling...". These are labeling techniques to confirm what has been said. It validates the other party and allows for the conversation to progresss.

2. Accommodator, Assertive and Analyst. The next three words are as stated. They should all be read as nouns to describe people. Once we understand their style, it is easier to negotiate with them. Accommodators are people who likes to agree. They tend to be silent when they are actually angry. Assertive people needs to be heard before they can hear anything and analysts can be won by numbers and facts. Most people are multi-facet so it is important to know when they change from say assertive to analytical.

3. Ackerman model. The best part of the book is probably the introduction of the Ackerman model and other tactics to negotiate salaries or when buying cars. There are a few interesting rules like let others go first and then when you state your price, be prepared to raise it just a little each time. The final number should also be an odd number like $35,505 to give the impression you are being squeezed to the last dollar.

It was just a somewhat satisfying book because I felt that it did not capture everyday negotiations. We do not negotiate for the release of hostages in our daily lives. We are negotiating with family members, bosses, colleagues and it takes a slightly different attitude because in the end we want win-win solutions. That said, hopefully the three lessons above are useful enough and can be applied at work or at home successfully. 

Huat ah!

Thoughts #24: Buy luxury!

The pandemic bubble is upon us all. QE Infinity flooded the world with liquidity with the bulk of the benefit going to the haves rather than the have-nots. Let's look at the following few charts.

LVMH share price

This is the 5 year chart for LVMH, the world's largest luxury company and it traded up swiftly after Covid19. LVMH represents the first class haves of the world. Their luxury portfolio includes, well, LVMH itself (the ubiquitous bag), Moet Hennessy (champagne), Mont Blanc (pen), Tag Heuer (watches), Tiffany (jewellery). The really aspirational coveted stuff. There are even more atas stuff like Hermes and Patek Philippe out there but they cater to super uber rich. Too niche. So, LVMH represents the haves. Hence I believe the chart above might be similar to how the wealth of the top 5-10% income earners would look like.

Tapestry share price

This is the 5 year chart for Tapestry. Tapestry used to be known as Coach. The mass luxury brand with a wider reach. It now has Kate Spade and hence the name change. Tapestry is luxury for middle income people. It did well in normal times, during 2015-2018, its share price was close to $60. Then it got hit terribly by the pandemic and the share price collapsed. Well, as things normalized, it came back. In my mind, this chart represents the middle income. We got hit but it's not so bad.

AMC share price

This third chart is the 5 year chart for AMC, the world's largest cinema chain. It wasn't really doing great because everyone is binge watching stuff on Netflix so the footfall to cinemas was already declining. Then the pandemic hit and literally nobody went any cinemas. Well they were closed anyways. So AMC fell like a rock. At rock bottom with share price $1.98, the reddit warriors who bought Gamestop decided they should support AMC too. So they cooked up a storm to squeeze short sellers (hedge funds who represented the haves and the uber rich and famous we talked about). Share price went up to $13 at its peak. Some short sellers did got hurt. But eventually, it collapsed because it's another mini bubble in the bigger scheme of bubbles from Tesla to Bitcoin. To me, this chart represents the have-nots. It is really tough. It's a one way street of dwindling wealth. It could be the biggest issue in our lifetimes - social class warfare.

Glux ETF

The stock idea here though is to buy a luxury ETF - GLUX. It has some of the top luxury traded names and it has done almost as well as LVMH (yes LVMH is also in it). The time is not right to buy now given that it is at all time high. But it is important to monitor this ticker because luxury stuff will get even more luxurious. Reddit warriors buying Gamestop and AMC would have done better buying this since their god - Elon Musk is also represented. Tesla is the largest component of GLUX. That is one risk though and the reason I haven't bought.

Let's keep monitoring and hopefully can huat on this ticker!

 

Don't rage, don't take umbrage, pls behave on stage!

Rage and umbrage has become unacceptable as society progresses. Today, social media picks up everything. So, when you want to say something inappropriate, well, better think well!

Two days ago (7 May 2021), SPH CEO Ng Yat Chung took umbrage at a reporter asking a difficult question and the whole thing went viral on internet. This was a classic case of shooting the messenger since the reporter was just asking a question sent to her mobile phone. She obviously didn't ask it for herself and would be wondering why she was getting shouted at.

Don't anyhow take umbrage

Actually, the CEO maintained his composure at the start, introducing to us a new word to enhance our English vocabulary. But his response grew more and more belligerent as he spoke. He denounced himself as a gentleman and then shouted almost savagely. This was the bit that caught the social media's attention. Now, we have umbrage T-shirts, advertisements and what not.

But the real people who really had to take umbrage were SPH's shareholders. SPH's share price had simply rolled downhill all these years. The chart below shows how SPH had always hovered at $4+ only to accelerate its decline after the current CEO took over. Then it got hit by the pandemic and collapsed even further. In the last few weeks, share price started to recover, perhaps because Singapore is vaccinating its population so well, but alas, the umbrage saga took it down by 15%! (Or may it was selling a profitable business at a negative price).

Umbrage strikes back!

It is not entirely the CEO's fault. Running a declining business franchise is a tough job. Newspapers are distributed for free Today (pun intended: for non-Singaporean readers, ironically, this free newspaper is called Today) and I am not sure who still subscribes to the Straits Times. Maybe corporates and rich people who just want it to wrap their breakable stuff after those daily papers pile up. In this day and age, the way people consume news had also completely changed since the days newspapers were invented.

Newspapers were a huge thing in the past. Their economics were so good. They had both subscription and ad revenue and both were raking it in while they simply pay reporters peanuts to write stuff that everyone had no choice but to read. But the internet and social media changed everything because now everyone can be his or her own reporter and they wrote things people really wanted to read. 

When the tide changed like this, it is hard for management in that business to adapt. Newspaper was a profitable business that will generate money even if you put a monkey to run it. Now, it has to fight  declining subscription, declining ad revenue and the social media. Warren Buffett puts it best:

When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.

To paraphrase, if the business is tough, then even brilliant management cannot win. I am not sure how brilliant our current SPH management team is. I hope they don't take umbrage :) But I am sure shareholders have taken umpteen umbrage seeing how their investment has declined c.70% over just a couple of years, not to the fault of anyone though. It's just business.

I don't think there is any easy way out for SPH. It is now a tough business. For the longest time, it was supported by its property business. Maybe there is an angle here by spinning off the tough media business and become a property company. It will take courage, not umbrage, to bring the share price back to its previous glorious days.

Books #12: Daniel Pink's Drive

I read this book a while back and has forgotten the bulk of it. It's good that we are in the internet era. So many people wrote good summaries and made it easier to simply recall the main messages and even come out with new ones that are relevant to me now.

Autonomy and mastery: Daniel believes that people has the innate drive to achieve autonomy and mastery. Rewards and nagging rarely get us anyway. For those of us with parental experience, gosh, how true! Goals that we set for others seldom work if there is no buy in. 

Goals people set for themselves, when we get there, we enter a state of flow. This is very blissful and this is the state that helps musicians create music. This is the state Michael Jordan is constantly in when he is on the basketball court. We all have experienced flow. We should strive to achieve flow in our work and life. 

In office work, positive feedback, useful information and meaningful information can be more powerful that monetary reward. Positive feedback can be given and reminded. Useful information from bosses will be able to help subordinates complete their tasks. Meaningful information will propel innate drives!

Lastly, two quotable quotes from Drive:

“At the end of each day, ask yourself whether you were better today than you were yesterday.” 

“One of the best ways to know whether you’ve mastered something is to try to teach it.”

The CPF Conundrum Explained - Part 2

This is a continuation of the previous post on CPF

In the last post, we spoke about topping up 7k to get tax relief and also earn 4%pa. From an investment perspective, this 7k top up will earn 6-7% guaranteed IRR over time. This is damn good return which why it is capped at only 7k per year. There are also other things that we should do. Here's a recap of the three top ups.

1. We should top up $7,000 in our Special Account every year.
2. We should top up whatever we had withdrawn from our CPF (usually for mortgage) asap.
3. We should top up CPF for our loved ones to the extent possible.

We also explained CPF Life. For the benefit of new readers, let's just recap also. CPF Life is a scheme to make sure that everyone will have enough to draw out because some Singaporeans, unfortunately, actually don't have enough in their CPFs. We do not actually know how many percent, some blogs out there says like 75% of Singaporeans don't have enough while the Government says more than 50% have enough. Maybe the truth is somewhere in between but the impt angle is that whatever money that had been put away in the CPF, do not just disappear, the contributors or their nominees would eventually get them back. It won't be eaten up by the Govt. People go to legal courts to get this back from mistresses or illegitimate sons/daughters or domestic helpers. So no, the Singapore Gahmen, despite the many flaws, does not usurp our CPFs. 

Hence we are not discussing if the Gahmen would give us this money or not. It is a given that it would come back. For our purpose today, we would determine that the returns on the three types CPF top up are actually very lucrative. We have already done that for the first one in the last post.

Back to CPF Life, this is a scheme structured as an annuity that will pay out a fixed amount, usually three or four digits payout per month, until death. The amount that we have contributed will definitely come back to us, just not in one lump sum but over our remaining years. The interest earned does not belong us and this goes into the pool to benefit others. If we outlive our contributions, we benefit and take from the pool. If we do not, the remainder less interest earned goes to our kids, or our nominees. In short, CPF Life is a very sustainable scheme. It is not a way for the government to usurp our monies. 

The whole issue is being made complex bcos CPF is almost always used to buy properties. Trading real estate is a national pastime and huge fortunes had been made and lost. It gets even more complicated bcos whatever that we used from the CPF to buy properties had to be put back, with interest. This rule, while logical, really creates one problem which is also the crux of some of the arguments out there. Hence:

2. We should top up whatever we had withdrawn from our CPF (usually for mortgage) asap.

To put simply, when money is in our CPF, we earn interest on it, this is around 2.5-4% in 2021. But when we use this to buy property, we lose this interest and we have to top it up some day, supposedly. In reality, almost nobody tops this up bcos over time, due to the nature of compound interest, this amount explodes! Just a simple illustration, say we took out $100k to buy a property from CPF. If we have to top it up after 20 years, based on a compound interest of 2.5%, the full amount is $100k principal + $63k in interest! This is $163k. If we took out $200k, it would be around $326k to put back in CPF. These are no small sums. By taking this $100-200k in the first place, we "lost" the opportunity to earn $63-126k of interest. Shit right?

Again, in reality, we might not need to ever "pay" this. Since property bought using CPF can be pledged for many things, including the minimum sum that we talked about and when we hit 55, the government would also not dictate that we pay back this lost interest, since we are legally allowed to withdraw money out of CPF by that age.

So why the fuss of topping up?

Let's review from an investment angle here. When we draw money out of CPF to buy property, we are actually choosing between two alternatives: CPF or mortgage from the bank. The mortgage from the bank will actually cost us interest. Currently (2021), SIBOR is at 20-40bps plus spread of 60-80bps which means we pay 0.8-1.2% to the banks. This is quite low by historical standards but still it's money out of our pockets. CPF, in contrast, is 0%, since it's our money. And when we do need to "top up" back to CPF, it's still our money, so in essence it is a 0% borrow. So between borrowing at 0% or 1.4%. It is then logical to borrow at 0% right? Taking this one step further, since if money is left in CPF, it would earn 2.5% which is more than the 1.2% borrowing cost, in fact, we should borrow more and keep the CPF money and earn that 1.3% spread! Alas, the banks are not stupid and there is a limit as to how much we can borrow.

This banker and others won't let you borrow w/o emptying your CPF!

So this is the first part. Strike a balance, although somewhat up to the bank discretion, between CPF and mortgage. Then assuming everything goes well. At some point we need to decide between prepaying the mortgage or top up CPF or having cash in our hands. So here's the new decision tree:

i. Prepay mortgage

ii. Top up CPF

iii. Hold cash

To make it more obvious:

i. Prepay mortgage - save 1.2%

ii. Top up CPF - earn 2.5%

iii. Hold cash - earn 0%

Between saving and earning, it's actually the same, so the first option could also be read as "earn" 1.2%. The answer then becomes obvious right? We should top up our CPF! Again, this decision might be frown upon by the banks, so we need to tread carefully. And when the day comes that we are done with our mortgages, then between holding cash and topping up CPF, we should top up CPF. The caveat is of course we always want to have enough cash (around 12 months of expenses) to meet emergency needs. Of course if we have good opportunities to earn more than 2.5%, then we should go for it. But bear in mind that CPF's 2.5% interest is money from the government, we shouldn't waste this opportunity to earn it! In the last post, we also talked about Special Account, which gives 4%, hence all the more we should top up!

As alluded to above, these decisions should also be viewed against other means of allocating money i.e. buying stocks or bonds, but we must understand that investing while almost definitely means more return, usually 5-8% or even more, comes with risks and also less liquidity. We might lose 20% while trying to earn 8%. And once we are invested, like CPF, we cannot take this money out easily. So depending on our age, CPF could be more liquid! Esp for those already in their 40s and 50s.

Having said that, I would give more priority to first clear the mortgage and topping back up CPF as it gives a peace of mind. Sometimes in life, we need to clear some of these literally mind boggling issues to be able to think better and make better decisions. Although that doesn't mean totally not investing. If a good opportunity comes about, money has to be put to work!

3. We should top up CPF for our loved ones to the extent possible.

Finally, on to the last point. Yes we should also top up CPF for our loved ones, usually our parents. This is also limited to $7k per year and also tax-deductible but only to retirees or with some other conditions. Hence the same rules for the previous post applies. The good, or perhaps better thing is that we can also receive the money back in cash from our loved ones if they have enough to spare. 

As mentioned, the risk of doing all this is really regime change, which is a low probability event. The PAP should stay in power for the decade at least given the vote of confidence in 2015 winning almost 70% of the popular vote. Changes to the CPF system while possible would also be gradual and hence the 4% should stay high even if it is changed (maybe 3+%).

So, that's the moral of the story, do think about topping up CPF, especially for 1 and especially for those in the high income tax bracket. For 2 and 3, it should be done for those with spare cash. It will definitely make life easier in the future!

Huat ah!

Charts #38: We are winning this war!

 

18 months. We are finally seeing light at the end of the tunnel.

The CPF Conundrum Explained - Part 1

CPF had been made into a big political issue in Singapore and confused a great many things for many people. It was first brought up by a certain Roy Ngerng many years back. Then it was brought up in the Noose, starring our beloved Leticia, I mean Michelle Chong! When I think about the whole issue now, over so many years, it really just blurred the whole picture for many. This has been the issue with misinformation. It sometimes takes years to understand the truth. By and large, I think Mr Loo Cheng Chuan who started the 1M65 movement got it right.

https://blog.seedly.sg/1m65-1-million-by-65-cpf/

If you are young enough to execute Mr Loo's plan pls go ahead. You need to be below 30 years of age. If not, fear not. This post serves to lay down a few action plans that would still help our CPF finances in the future.

Michelle Chong before the Noose

Yeah, she was actually on FHM when she was much younger. But never mind that.

The myth surrounding CPF was that the money put in would never come back to us. There is the minimum sum which is like in six digits, then there is CPF Life which allows you to only take out a few hundred dollars a month, hence the conclusion was that perhaps CPF is just this money sucking machine that usurps 20% of our salaries into government coffers and we would never see them again. As a result, a lot of Singaporeans became very unhappy and would think twice about topping of CPFs.

Okay, but here's what I think we should really do:

1. We should top up $7,000 in our Special Account every year.
2. We should top up whatever we had withdrawn from our CPF (usually for mortgage) asap.
3. We should top up CPF for our loved ones to the extent possible.

WTF? Really? Some readers might be wondering. The following would be detailed explanations for each point and it would take two posts to fully explain. 

1. We should top up $7,000 every year.

This is a scheme that had been put in place for some time, for reasons unclear to me now. Sadly I had not been able to "exploit" this for many years because I too had the notion that money in CPF means gone, so better think twice. Now that I think about it, that was quite stupid. The return on this $7,000 is simply so good that it would make Warren Buffett himself drool and yet a lot of investors in Singapore, I believe, would have failed to exploit this for years. 

The scheme goes like this: top up $7,000 into Special Account (SA) and enjoy tax break on this $7k. On top of that, this $7k stands to earn 4% interest per year compounded! Now for those who are not paying taxes, this might not make too much sense. That's actually like the majority of Singaporeans though, with our Gini coefficient, a measure of income inequality, ranked higher than US and most EU countries. But for the readers here, I would assume the majority would be income earners and hence paying taxes. So, if your income tax is 10%. You stand to make 10% on this $7k and then 4%pa until 55. Needless to say, if your tax income bracket is at the highest 22%, then you can't wait to put in even more. This is good money right? And what's more, it's guaranteed return. No risk.

Well, there is one risk. The PAP government changes the rules again or collapse all together (then it won't be just CPF we are worried about). Albeit, these can happen. Tomorrow, the Government can say, sorry no more 4%. Only 2%. Or sorry all monies in CPF goes into CPF Life, and you get a few hundred dollars per month until you bye-bye. Yes, these are real risks. But it is also a low probability event. Thanks again, to the political shit stirring some years ago, if the government changes the rules like that, then it would be voted out in the next election, so they would think twice if they want to do something drastically negative. In fact, the 4% on the Special Account had been there for 20 years now despite global interest rates falling to zero and now negative. It is rumoured it might have to change to a floating rate, rather than fixed, but still, it shouldn't be too bad.

Taken from CPF website, SA rate dropped from 5.9% to 4% in 1999 and stayed at 4% ever since

In fact, the story was that in the past, there was no limit as to how much you can put into the Special Account, so some smart aleck put in millions and earned 4% on that! Say, he put in $2m, after cashing out from his condo en-bloc windfall, that's $80k per year, from the government! So, there's a cap now, and it is actually stipulated at *drumrolls* the minimum sum, or what is now renamed as the retirement sum which is $186,000 today. And no prizes on why we can only top up $7,000 per year.

So, is it really as big a risk? And to us or to the Gahmen?

The other big mitigating factor is our age. Based on the age poll some years back, it seemed that most readers here would be in their late 20s, or early 30s. Some, would be in their 40s or 50s. Now if you are in your 50s, this is a no brainer, just top up whatever needs to be top up since you would be getting back in a few years. It's not too different than locking some money into a two or three year fixed deposit. Except, this gives 4%! Whereas fixed deposit is more like 0.5%. Just go dump those cash into CPF! For some of us in our 40s, in a decade plus, we will also get this money back. Yes we can deploy in stocks which could earn more than 4%, but we might also incur losses. So, it really make sense to put 7k into this.

CPF is supposedly guaranteed. This means 4%pa until 55 years old. With the magic of compound interest, the money doubles about every 15 years. So, if you are 40 this year, the 7k put in would be almost 14k when you hit 55. In fact, if you start putting in 7k at the age of 35, you will hit the minimum sum which means whatever excess money can be drawn out when you hit 55. The minimum sum though will stay in CPF to be put into CPF Life. This is the rule of the game now. So, the political shit storm is stirring up that this rule is unfair. Change it. Well, we cannot bet on that right? Even if we vote out PAP, there is no guarantee that WP will change it. So rather than waiting for something unlikely to happen, it's much better to play the game by the current rules well. Trying to change the rule is like arguing against offside with the referee in soccer parlance.

The other trivial point is that it's 7k. Not 100k. 7k can't even buy a car bonnet these days. Putting in 7k for a good 10+% return in the first year and 4% perpetually is good investing (although it's more like 6% IRR from age 40 to 55 though). Hence, the first actionable item is to top up $7k every year. This should be one of the new year resolution!

Next post, we discuss the other top ups.

PS: A short explanatory note on CPF Life. CPF Life is scheme to make sure that everyone will have enough to draw out because some Singaporeans, unfortunately, actually don't have enough in their CPF. Hence CPF Life is structured as an annuity that will pay out a fixed amount (a few hundred dollars per month) until death. The amount that we have contributed will definitely come back to us or our nominees, just not in one lump sum but over our remaining lifetimes. The interest earned does not belong us and this goes into the pool to benefit others. If we outlive our contribution, we benefit and takes from the pool. If we do not, the remainder will go to our kids, or our nominees. CPF Life is a very sustainable scheme.