Investment Eightfold Path - Part 2

As discussed in the last post, we have simply borrowed the above term from Buddhism to help us think about the eight ways to build wealth. The Noble Eightfold Path is actually super profound and I would urge readers to study it for our own sakes in order to pursue enlightenment someday.

For today, we shall discuss from where we left off in the last post. To recap, we have divided the components of wealth-building as per below and discussed the first four:

1. Active Income
2. Cash, T-bills
3. Pension / CPF
4. Property
5. ETFs
6. Stock Portfolio
7. Top picks for the home run
8. Moonshots

ETFs

Exchange traded funds or ETFs would be the best way for any individual investors to build wealth. The way to do it is also to simply buy regularly. I would suggest every quarter or so, when there is spare cash not needed for daily lifestyle, after paying down mortgage, after investing in T-bills, you would want to put some into risk assets to make more returns, then yes, buy ETFs.

It is always best to start with the S&P500, the largest, most liquidity and most well-known ETF which has generated adequate returns since capitalism began.

Stock Portfolio

Investment professionals do not like to buy ETFs. It is their job to beat the index, i.e. by generating more return than the index. So to buy ETF is to admit that they cannot do their job. Warren Buffett certainly won’t buy the S&P500. So, if Warren can do it, so can I. That’s the thinking. But it’s flawed.

I think the way to do this is actually to have two buckets of capital. One to buy ETFs, the other to create your own stock portfolio to try to beat whatever index you want to beat. I would say 99.9% of all investors should not try this.

It is a lot of work. You need to study a lot of companies better than ChatGPT and the next generation of Generative A.I. and you need monitor these companies closely. Frankly, with all our commitments in life, who has time to do this?

Unless you are really interested, really committed and have that spare resource, time and energy and you think you can beat Generative A.I. to it. Then go for it.

Otherwise, just buy the S&P500 or some other broad base ETF.

Top Picks

Once in a blue moon, we see something that makes a lot of sense. This could be an opportunity of a lifetime where there is a huge valuation arbitrage opportunity. We have done the work, we know the risk reward and it makes sense to make an outsize bet on something.

For readers following this substack, it could be Warner Bros Discovery (WBD). I have studied this stock for years. My model shows more than 100% upside. It could even be more. Some time in the past, Warner Bros was the arch nemesis of Disney. If Disney is worth hundreds of billions, today isn’t WBD way too small at c.USD18bn? If I am wrong, the downside seemed limited, but if I am correct, then all the work done should warrant a bigger bet, to make a difference to the portfolio.

The other relatable example would be Nvidia. Many shrewd investors have identified the name a few years ago. It didn’t even have to be an outsized position. If you had just a bit of Nvidia, would you have made a lot of money today. In Singapore’s context, the name was right under our noses - DBS. Singapore banks had gone up 10x if you have held it since 2003, just 20 odd years ago. DBS’ market cap is SGD100bn today.

Of course, hindsight is 20/20.

Moonshots

We are calling the last section Moonshots but it should be thought of an all-encompassing catch-all to cover every possible remote scenario so that our wealth can be preserved and enhanced. Let’s talk about alternative assets first.

For the rest of the post, please visit 8percentpa.substack.com

Investment Eightfold Path - Part 1

This post is also on 8percentpa.substack.com 

In Buddhism, the Noble Eightfold Path refers to the following:

• Right Understanding
• Right Intent
• Right Speech
• Right Action
• Right Livelihood
• Right Effort
• Right Mindfulness
• Right Concentration

It is is a core and profound teaching providing a practical guide to living. Today we are just borrowing the term to use it for our purpose. The analogy ends with the number (eight) and perhaps how we should have important foundations (i.e. Right Understanding and Intent) before we progress. For those interested and want to learn more about the Noble Eightfold Path, please ask ChatGPT :)

For our investment journey, I have thought long and hard about what would be the several important components of our balance sheets (assets) or types of investments to build wealth over time, in the Singaporean context. The following is what I have come up with, based on my own experience, which I will go through point-by-point in this post and another follow-up post.

1. Active Income
2. Cash, T-bills
3. Pension / CPF
4. Property
5. ETFs
6. Stock portfolio
7. Top picks for the home run
8. Speculative investments / Private equity / Gold / Others

Active Income

Years ago, Robert Kiyosaki wrote a so-called seminal book named Rich Dad, Poor Dad. He introduced the concept of passive income. His message was that we should all aspire to generate passive income, through investment, property etc. Then we didn’t have to work etc etc. It was a big myth. Looking back, I think the book did the world a dis-service. We all have to work. That’s the way it is.

Today I would turn the concept on its head. Passive income can never surpass active income. Take your work seriously. If you don’t like your job, quit and do something else. The active income is the basis of building wealth. Importantly, save up so that you have cash, a big retirement nest egg or pension and property (#2, 3, 4 below).

At a certain point in life, you may acquire the capabilities to not work for someone else. You have achieved the pinnacle in your career and it’s time to slow down. You will still need active income. This is where things get interesting.

The interplay between cash, investments, property can support your transition to do something else. Hopefully this still generates active income which can become supplementary to your investment income which can sustain your lifestyle.

Cash, T-bills

Next we have cash and T-bills, we cannot live without cash in the modern world. While it has no meaning in the animal kingdom, or if you own a farm which can sustain yourself, it is essential for most people today. There are real-world examples of people running out of money and then starving to death. As such, it is important to always have cash. The rule of thumb is 12-18 months worth of liquid cash in case shit happens.

Related to cash is my favourite investment today, which is the first post on my substack. Some of the cash should be invested in T-bills. Singapore 6 month T-bills continue to give 3.4%pa and US ones are even higher. It comes back after six months (effectively you only get 1.7% for 6 months). Honestly, there is no need to do any other investment for most people. Just put all the spare cash (minus what you need for the next 6 months) into T-bills. If you want to remember the one thing from my last 2-3 years of writing, this is it. Buy T-bills. Read this post.

Pension / CPF

In Singapore, almost every worker needs to contribute to the national pension fund which is called CPF. For young readers (ie in your 20s), this is more a pain because you think what is rightfully yours is being locked away. But as you age, the payout day gets closer, then things become really, really relevant.

If you have made the right decisions, you stand to take out a lot at age 55. It could be hundreds of thousands of dollars. Alas, CPF is being used to fund property (the next topic), children’s education and what not. So a significant number of Singaporean cannot hit what is known as the minimum sum which is about SGD200,000. So there was a big backlash that the Singapore Government has cheated us, locked away all these monies. We never see them. We die and it only gets passed on to future generations.

To me it’s a case of mis-concept and not getting all the right information. It is complicated, but it’s all out there. While people called CPF a scam, on the flipside, a guy name Loo Cheng Chuan started the 1M65 movement that utilized the compounding of CPF and grew his money to >SGD1,000,000. Originally, he believed he would get a payout of SGD1,000,000 when he turns 65 (hence 1M65). But he way surpassed his own calculations. He now has way more and he is only in his 50s.

So, think hard about the decisions you need to make with CPF. It can be literally life-changing. Aspire to be like Loo Cheng Chuan.

Property

I have have written one important post about property. In sunny Singapore, we are fortunate to have great leaders who had the foresight to devise a national strategy which allowed 80-90% of Singaporeans to own their homes. So I would presume most readers here would own your own homes.

Your first home is very precious. Don’t trade it.

The second property onwards is then investment. Property provides leverage for individual investors and usually generate positive returns over time. But you could also lose a lot of money if you are not careful. Strive to pay down mortgage fast, then the real investment game begins.

The abovementioned are more like bread and butter of our financials in this lifetime. Please make sure they are secured before you think about anything else. In the next post, we shall discuss the risky stuff. Stay tuned!

TO BE CONTINUED...

Charts #51: Olympics

Found a good chart on the usual Visual Capitalist site, one of the most powerful visualization of data and statistics platform around.

Will we see a day it costs USD100bn to host the Olympics? That would just be a matter of time. Inflation should most certainly take care of that. We will also see the first 10 trillion dollar company, the first trillionaire, the economies would be measured in quadrillions!