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How to Teach Basic Finance to Students (The Big Picture)

While the article is written in the context of the American Education System and Americans’ knowledge of financial literacy, the same can be said of Singapore and Singaporeans.

I like the points made on how financial literacy needs to be taught in order for it to stick . Namely, the lessons need to be hands-on, include repetition, and train critical thinking skills.

By the way, my school recently introduced financial literacy as a compulsory subject for students. However, I believe the execution leaves a lot to be desired.

Financial Superpowers (A Wealth of Common Sense)

Ben Carlson has come up with a great list of what it takes for someone to be financially well-off. It’s a great list but the last sentence of his post sums it up best.

Find me someone who is content with their life and I’ll show you a person who is truly wealthy.

What Makes a Great Investor? (Enterprising Investor)

From the official blog of the CFA Institute comes this gem which is really about how great investing is more of an art than a science. In recent years, the use of massive computing power to sieve through huge amounts of data has become very attractive.

With that, many people believe that the future of investing is largely hands-off and robotic. To be honest, I believe that this is best for those that do not do investing as full-time work. However, the necessary trade-off is that if you go with the mechanical approach, you’ll never be great.

The greatest investors need to be able to stay ahead of the curve and to zig when others zag. That’s probably not something a computer will be able to do just yet.

China bond defaults hit record in 2018. The 2019 pace is triple that (The Straits Times)

Uh oh. Look out below?

How gangs used Vancouver’s real estate market to launder $5bn (BBC)

Money laundering is fascinating me to no end. The article doesn’t really elaborate on how the perpetrators get away with it but it does highlight some of the reasons why the Vancouver real estate market has been a channel for these activities.

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I did a similar post last year.

Wasn’t a long one but it was everything that I felt and still do.

7 years together is obviously nowhere near a lifetime and that’s where we eventually will be but still, I like to think that after 7 years of marriage and counting, we’ve both learned a few things.

I’ve mentioned it before but married life has truly made me a better person. Before marriage, I couldn’t cook, didn’t have to wash the dishes, clean the bathrooms, clean the sink, mop the floors, take care of a cat.

I also didn’t have to worry about how to comfort someone else who’s having a bad day or to worry about someone else’s future other than my own.

If the above sounds attractive or easy, it’s not. (Ok, other than cooking because I kind of enjoy it). While the things listed in the previous paragraph may sound like chores, it’s not exactly a bad thing is it?

In many areas of life, doing the easy thing is exactly the thing that keeps people in a rut. Think of the student who decides to go on to Netflix when he/she is supposed to be studying or the people who turn to some form of escape (like drugs or alcohol) when life gets tough. In many of those cases, avoiding the hard stuff precisely the problem.

Now, I’m not saying that people combating alcoholism or drug addiction can simply will it off. What I’m saying is that the initial decision to pursue the easier path is sometimes the cause of all our troubles. In the first place, if we embrace what is not necessarily the most attractive option, it may be better for us.

In short, when we should have listened when we were told to eat our vegetables. The funny thing is, over time, we can learn to love our vegetables.

And this is where my wife comes in. Unlike me, she knows the value of a disciplined mind and hard work. And she has the brains to back it up. All the best decisions in our marriage have come from her. The biggest one so far is to adopt Teddy, our lovely tabby cat who rightfully took his place as king of the house.

Growing up, I used to tell people that I had quite a bit of luck (with studies, exams, friends and all that). But even that was an underestimation given how lucky I am to have met my wife* and to for us to feel the same way about each other.

7 years and more to come.

Note:
*There really is some element of luck to this because I very nearly didn’t go to the university that I went to and if didn’t, I would have never have met my wife.

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A Definitive Guide to CAP Rates, Net Property Income Yield in Property Investing (Investment Moats)

If you can get past Kyith’s longform posts and his sometimes awkward phrasing, he provides very well-researched and in-depth articles. In this case, he has produced a piece that’s likely to be of interest to many Singaporeans.

Are financial literacy programs a waste of time? (Quartz)

Financial Literacy is one area of knowledge that many people could benefit from and as an educator, it’s begun to trickle into schools. This semester, I’m forced to make my students go through a financial literacy module but I’m not sure that the people who designed the module ever questioned how effective it might be.

Thankfully, I’ve found the wonderful Allison Schrager who is an economist by training and her area of research happens to be the economics of retirement. I’m also halfway through her book, “An Economist Walks into a Brothel” which is an interesting read. Not the best or most definitive on financial economics but Schrager tries pretty hard to show how basic financial economic concepts are applied through some interesting stories.

Podcast Ep#26: Lies Behind Property Ads In Social Media (Property Soul)

Another property-related piece and this one is interesting to me because we’ve been getting flooded with advertisements from property agents inquiring about our desire to sell our property given that it is reaching the minimum occupation period stipulated by the government agency that sold us our public housing flat.

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This week at work, I had to sit in a meeting attended by senior management and while I cannot reveal any specifics, I got the message that my school (a business school) was trying to align what we teach students to be closer to the “real” world.

How did they plan to do so? Mainly by thinking of ways to encourage entrepreneurship among students, especially in the digital realm that seem to get all the news nowadays.

Unfortunately, this plan comes at the expense of fundamentals. And as I reflected on the bizarre scenes of the meeting, I realised that perhaps the way that businesses operate.

Raise cash, Spend it. Rinse and repeat

It almost seems to me that even though we’re in 2019, the way to start and run a business hasn’t changed all that much.

Have an idea, raise some cash, focus on selling, and hope for the best.

After all, some of the best-known names being bandied around as examples to follow are hardly profitable or take ages to reach profitability. However, these are being held up as paragons of business excellence.

Take Grab, the Southeast Asian version of Uber that’s trying to be the WeChat of Southeast Asia. It’s raised billions of dollars but hasn’t turned a profit yet.

Or Carousell, another name that the local media loves to cite. The online marketplace app has raised hundreds of millions but is still making losses that are many times its revenue.

The Madness

Anyone with a fundamental sense of business knows that you cannot continually make losses as investors and debts have to be repaid. The only reason why companies can continue to raise and burn cash is because much of these funds are being raised from investors awash with cash in a low-interest rate environment.

The recent spate of tech IPOs in the U.S. show that the credit cycle may be coming to an end for these tech companies. Investors are increasingly seeking a way to cash out on their investments and going public is that endgame. However, if Lyft’s IPO is anything to go by, the markets may not be willing to cooperate for much longer.

The funny thing is, it wasn’t long ago that we’ve seen this madness. Once in the dot-com era where companies that had no proper business plan or semblance of profitability were bid up to levels previously unheard of; And once more when profitability was dangerously elevated through the use of debt in the real-estate and financial sectors.

Is this the endgame?

Unlike the dot-com boom of the late 90s, the recent madness in tech has been fueled by venture capital funds (think Softbank). This is why we haven’t seen the madness spread far and wide as only a handful of investors and executives/owners involved in these so-called “unicorns” have been getting rich on paper.

In the dot-com boom, lots of these “I have a business plan but no profits” companies were going public and the wider public was participating in the madness. That breadth of madness was also seen during the real estate/stock market boom of ’05-’08.

But with the recent spate of “unicorns” going public, it seems that the investors in the VC funds are trying to cash their chips. Unfortunately, with the performance of Lyft’s IPO, perhaps the market isn’t biting the bait. We’ll have to see if Uber IPOs and how that performs to confirm the state of the markets.

However, now that even public institutions like my school are sold on the idea that businesses in this day and age are all about “innovation”, going digital, selling ideas without much regard for fundamentals, is this a sign of the end?

Perhaps, it is.

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How Hard is it to Become a 401(k) Millionaire? (A Wealth of Common Sense)

Basically, the point of the article is that saving more at an earlier age gets you there much more easily. There’s also a guy in Singapore who’s an advocate for tapping your CPF to become a millionaire and I kind of pointed out that while I don’t disagree with the possibility of the feat, his explanation for getting there is a little ‘off’.

The 3 Levels of Wealth (A Wealth of Common Sense)

L1: I’m not stressed by debt.
L2: I don’t care what stuff costs in restaurants.
L3: I don’t care what a vacation costs.

Ben Carlson quotes Slack Founder, Stewart Butterfield on a simple heuristic to determine how wealthy you are. I think it’s a terribly useful rule-of-thumb to follow.

At this point in time, I’m definitely a L1 person. I’m not sure if I’ll ever progress to L2 because I keep telling myself how overpriced certain things are on the menu at some restaurants.

The Problem With Most Financial Advice (Of Dollars and Data)

A really good read about how some popular financial advice doesn’t apply to a wider population at large. I must admit that I’ll probably be guilty of this too because my experience probably doesn’t apply for the average Singaporean.

Happy Easter Weekend!

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Your home may be an investment but don’t expect it to fund your financial goals (Abnormal Returns)

A paper (highlighted in the post) has come up which finds that owning a house provides returns on par with equities but at a lower risk. I think many people in Singapore would agree with this but I’m not exactly convinced.

I’m still in the camp that the data on returns to property are hard to calculate because the data may not account for transaction costs, lack of liquidity and bad sampling due to infrequent transactions.

Getting rid of debt may actually make your brain work better (MarketWatch)

A study by researchers at NUS (nice one!) confirms what other researchers have found (you can read more about this in Mullainathan’s book, ‘Scarcity‘). This is precisely why those in poverty need more help than people assume.

Are Plastic Bag Bans Garbage? (NPR)

As much as I love the environment, I think we need to respect the data. After all, if bans on plastic cause more harm to the environment than good, then perhaps we need to hold our horses and reevaluate.

I’m not saying that we should stick to plastic bags but I’m saying that if a ban causes more harm than good, then perhaps we need to find another solution.

Alan Krueger, a master-economist for our age (Tim Harford)

Another obituary on Alan Krueger and it’s amazing to realise the breadth of the topics that Krueger applied his talents to. Every economics student should be inspired.

Postings have been light because I’ve been away on holiday.

The upside of it all is that I managed to get through two really great books and I highly recommend both of them if you’re looking to get smarter about the world.

Book 1 – The Globalization Paradox: Democracy and the Future of the World Economy by Dani Rodrik

In the book, Harvard economist Dani Rodrik provides a compelling argument of how the conventional mantra of freer trade, financial liberalisation, and lower trade barriers may not be the best solution for all economies.

In my opinion, this book is a great counter-balance to the theories that every economics student learns at university. It’s also a great insight into how the economics profession seems to go through fads and that this latest fad hasn’t worked out all that well (cue the global financial crisis as well as crises in Argentina in the 1990s).

Anyone interested in world trade issues, the World Bank, IMF, globalisation, free trade, and politics should read this.

Book 2 – Billion Dollar Whale by Tom Wright and Bradley Hope

This amazing account of the 1MDB scandal focuses on Jho Low’s role in the whole affair. It’s a tale of how the immense greed fueled the actions of a few individuals. They siphoned billions of dollars from a state fund to their personal accounts and went on a spending spree that few individuals would ever experience in several lifetimes.

It’s also a tale of how Hollywood, the global banking system, and corrupt political systems endorse or enable such shenanigans to take place. After reading the book, I would be really, really disappointed in myself if I were Leonardo DiCaprio.

Despite Bill Gates recommending the book, Billion Dollar Whale has its flaws. For one, it focuses too much on Jho Low’s role in the affair which kind of diminishes the role played by other actors in the story. Second, it leaves out more technical details on how rules were circumvented or how Low managed to hoodwink supposedly smart people into carrying out the transactions. I would have loved to know more about how Low, or others, managed to concoct and execute the schemes that they did but I suppose that the authors did so to keep the main narrative going without having readers bogged down by more technical aspects of the various deals.

I’m currently making my way through ‘The Sarawak Report‘ which is the other exposé on 1MDB that focuses more on rot in the Malaysian political system. That should also be interesting.

First quarter 2019 is over! The yield curve has inverted, the economy looks like it’s slowing down but hey, the markets have recovered swiftly from last December’s sharp drop. So who knows what’s going to happen?

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Why happiness is easy to venerate, hard to generate (The Undercover Economist)

Tim Harford highlights the biggest problem for social justice warriors and all the positive thinking people. It’s one thing to come up with a nice-sounding, politically-correct paradigm that you can hardly find anyone to disagree with. However, it’s another thing to actually produce scientifically reproducible results to justify the claim. Read the article for some points made about Bhutan’s oft-lauded ideal of Gross National Happiness.

THAT TIME A VIDEO GAME HAD AN ECONOMY ALMOST AS STRONG AS RUSSIA (Today I Found Out)

Another one for the annals of obscure research turned important. Who knew that virtual worlds could be a useful way to model how economies in the real world work?

Is home ownership for everyone? (Property Soul)

Great read because it challenges the commonly-held assumption that home ownership is a must.

The Singapore Government loves to sell this line of thinking but you must remember that the original thinking behind this idea is that home ownership gives a sense of belonging and therefore ties people to the country for a longer period of time. No doubt, this is important for nation-building but remember that’s good for the government. What’s good for the government is not necessarily good for you.

Home ownership has its pros in that that you are not subject to the mercy of landlords when housing is in short supply and that since, in the long-run, home prices tend to increase, you’ll be relatively protected from an increase in rents over time. Furthermore, homes are an asset that can be monetised (think: home-equity loans, reverse mortgages etc.),

However, home ownership comes with some costs as well. The biggest one would be the opportunity cost of not being exposed to other asset classes. By paying for a house, your main asset class resides in the housing market. In Singapore, most people use their CPF monies to pay for housing, which means that you give up the opportunity to compound at interest that CPF pays you. It also means that you have to be prepared to monetise your house in the event you need to cash out. Buying too much house also means having the albatross of a mortgage hanging around your neck for a good two decades or so.

The article doesn’t cover all the pros and cons but it’s a good start to bust the myth that home ownership is a must for everyone. In fact, some people take it too far by buying too much house.

The yield curve has inverted!

So what’s next? Why does this even matter? Where do I go from here?

What’s the Yield Curve?

The yield curve is simply https://www.marketwatch.com/story/the-yield-curve-inverted-here-are-5-things-investors-need-to-know-2019-03-22a two-dimensional chart showing the relationship between the yields paid (on the Y-axis) on bonds of different maturities (on the X-axis). The bonds here are U.S. government securities and hence, the only difference is the length of the maturity (i.e. how long investors have to keep their money invested in the bond until maturity)

By Ldecola – Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=69078386

So what you can see is that for bonds with longer maturities, the yield paid is higher. For example, a 2-year bond might pay 2.5% p.a. while a 10-year bond pays 3% p.a.

In a normal world, this makes sense. After all, to entice investors to keep their money invested in a bond for a longer period, borrowers need to pay more interest.

Why Does the Yield Curve Invert?

That’s all good and fine but if that’s the case, then why does the yield curve invert? Well, as it turns out, if you hold a bond (which is an asset) but you need cash, you can always sell the bond on the secondary market. However, you’ll will have to accept whatever the market is willing to pay for your bond.

Let’s work through an example.

So, the way bonds work is that bonds pay investors a coupon (i.e. the interest) based on the Face Value of the bond. This Face Value is the principal amount that the investor receives upon the maturity of the bond. So for example, if a bond pays a coupon of 5% on a bond with maturity of 5 years and a face value of 100, then the investor receives $5/year for 5 years and $100 at the end of the fifth year.

So far so good?

However, if you have to sell the bond on the secondary market before it matures, the price that buyers are willing to pay may be less than the face value. This happens because would-be bond investors are weighing their other options given the environment at the time you, the bond seller, are trying to sell your bonds.

If there are more attractive investments out there or there is pessimism in the air, would-be buyers would offer a lower price for your bonds and vice versa if things seem to go swimmingly well.

So using the same example of a bond as above. If the market is willing to pay only $80 for your bond, the yield on this bond is now $5/80 which is 6.25% which is higher than the coupon yield.

This is exactly how and why yields change.

So, what is the inversion? And why it matters

An inversion happens when short-term yields are higher than long-term yields.

The short end of the curve is easy to explain because the Fed rate hikes have most influence on short-term rates and given the fact that the Fed has been raising rates since late 2015 and somewhat accelerated the hikes last year, the short end of the curve must have increased.

But what about the longer-term rates? Going by the logic in the previous section, this means that prices of bonds at the long end are much higher which is why yields at the long end have fallen.

This basically means that bond investors don’t mind getting less return for longer maturities since they expect things to get worse in the short-term and therefore, it’s a good return to “lock in” for the next X number of years. Furthermore, if a recession hits, the Fed will be forced to lower rates to ease monetary policy and when interest rates fall, bonds at the long end see greater capital gains as their Duration is longer*

The inverted yield curve has also freaked people out because the inversion of the yield curve has historically been a good leading indicator of recessions.

Final Thoughts

So while a recession may be imminent, I think we need to keep an eye on other indicators such as unemployment and payroll numbers etc. Singapore will obviously be hit bad in the event of a global recession since we count many of the major economies as our trading partners.

However, I think a recession and slowdown has been long overdue and maybe markets have already priced the worst in (or maybe, they haven’t) but we haven’t seen over-extended markets or exuberance like we have in the dot-com or GFC eras.

Personally, I’ve been on the defensive for some years and if the downturn comes, I’ll be one happy camper because it’s probably one of those moments that I’ll be able to deploy some cash.

Notes:
*Duration is a finance thing. Basically, it shows how many percent a bond price will change for a one percent change in interest rates.

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Neo-Nazis Bet Big on Bitcoin (And Lost) (Foreign Policy)

What do Neo-Nazis and Bitcoin fans have in common? A common sense of anarchy and distrust in the institutions that run the world today. Great read.

STAT FIGHT! want to have money when you’re old? Don’t have kids! (The Basis Point)

Chart says it all. But notice that Couples with children have more money socked away up until the point where they turn 65? Probably the drop in savings after 65 is because these couples help their children fund their marriage, starter home, or education.

Paul Krugman’s latest opinion piece is a must-read for those who think that robots are coming for your jobs. He was absolutely right about the Asian Miracle in the late 90s and I sense he’s right about this one too. In short, it’s not the robots killing the lower income class. It’s politics.

Diversification Isn’t Sexy (The Belle Curve)

A back to basics article on the definition of diversification as it applies to investing.