This is from November but still interesting.

Personal wealth per adult grew strongly in Singapore up to 2012. Since then it has risen slowly in domestic currency units, and declined a little in terms of US dollars. Despite this drop, average wealth remains at a high level – USD 268,780 per adult
in mid-2017, compared to USD 115,560 in 2000. The rise was mostly caused by high savings, asset price increases, and a favorable rising exchange rate from 2005 to 2012. Singapore is now ninth in the world in terms of household wealth per adult, giving it the highest rank in Asia.
– Credit Suisse Global Wealth Report 2017 (source)

The report puts our mean and median wealth per adult at 268,776 USD and 108,850 USD respectively. This isn’t hard to imagine for most people whose HDB flat has more or less been paid up for* which probably puts most middle to senior Singaporean residents in this category. Also, the study looked at wealth per adult which excludes children who are unlikely to have any substantial assets to their name. In other words, the wealth of a family with children is not diluted to the presence of children.

What got me searching for the wealth of an average Singaporean is because I was updating my own spreadsheets the other day and I was quite surprised at the total staring back at me on my spreadsheet.

Also, I had a hunch that I might be considered pretty well-off by other people’s standards. The problem for me was: What is “other people’s standards”? So now, I finally have some idea.

What’s interesting is that the CS report takes its data from the Department of Statistics Singapore (SingStat) so let’s dive a little deeper into what SingStat counts as assets and liabilities in calculating net worth.

Thankfully, that can be summed up in one picture.

 

 

Singapore Household Balance Sheet

Singapore Household Balance Sheet (source)

So looking at this, I’m actually quite surprised that the average Singaporean adult only has 268,776 USD (362, 815 SGD) in net worth if his primary residence and CPF is included in the calculation. Here’s why.

A typical four-room flat should be worth around 400,000 SGD. Assuming that it’s jointly owned by a couple, that would be about 200,000 SGD per adult. Are the mortgage and other loans so huge that their Cash, CPF monies and life insurance** add only 163,000 SGD per adult to their net worth? Furthermore, the average has been skewed upwards by outliers as the median isn’t even half the average.

 

So, am I missing something here? Or is the average Singaporean’s net worth really the sum of his/her HDB flat and CPF and they save next to nothing plus carry a mortgage and some personal debt (e.g. credit card, car loan)?

Let me know what you think in the comments.

 

 

 

Notes:

* You can quibble about whether it’s appropriate to include your primary residence as part of your net worth but that’s how it was done in their study.

** I’m not even going to bothering adding equities as the average Singaporean probably doesn’t have much invested in the markets. Most people I know treat the market as a quick punt. There are very few people my age or even slightly older who have anything more than 50,000 SGD in the markets. For every one of me, there’s probably 7-8 more who have at most a five-digit portfolio.

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In case you haven’t been following the news, the property market in Singapore has come back to life (kind of) with quite a number of en-bloc deals. MAS (Singapore’s central bank) also had to come out and caution that there was a little ‘exuberance’ in the market. MAS also noted that prices have transaction volumes have picked up while interest rates have remained low.

The commonly used reference rate for housing loans stood at 1.1 per cent in mid- November, compared to a peak of 3.6 per cent recorded in 2006.

However, vacancies in the rental market have remained high. According to the article, MAS noted that there are some 30,000 vacant rental properties in the market. Redevelopment of the land sold through en-bloc deals, together with existing private property developments, could add another 20,000 units to the market (of course, not all would at to the rental market).

What bothers me is that interest rates seem historically low and we seem to be at the start of a rate hike cycle.* Almost every property buyer in Singapore buys their property with a long-tenured loan (think 25 to 30 years) and if you’ve just begun to start servicing the loan, you have to be prepared for the fact that interest rates may be on their way up and drive the lifetime interest rate on your property loan to a level more like 3-5% over the lifetime of the loan.

I’m not an expert in real estate but I’ve heard stories and I have three stories that point towards what’s going on in the property market. Namely, those problems are (1) property owners not expecting a drastic rate hike, (2) vacancy rates are high but understandably so because buyers paid a high price and therefore demand steep rents, and (3) prices are (still) high despite the recent rosy outlook.

Anecdotal Evidence #1: Not many people are expecting rates to go up drastically

I’m not sure how many people are prepared for that. Anecdotally, I’ve had a friend question if rates could even get that high and I was about to slap my forehead because this friend works in a bank. How could he not know what interest rates have historically been like? The interest rate on loans have typically been much higher than they are now and we’re at the zero-bound so unless you believe the world is about to go the way of Japan, you need to prepare for the fact that interest rates will most probably go up.**

Anecdotal Evidence #2: Plenty of vacancies in projects that didn’t make sense

On the other hand, there are some property buyers who seem stuck with a horrible investment. I heard from my boss (he’s an avid follower of the property market) over lunch that some investors in a certain property have problems finding tenants. The property sits atop an MRT station (one of the last stops though so it’s at least 30mins by train to town) and is one of those shoebox apartments (1 bedroom apartment) where the price paid per square foot is ultra high (~S$1700 psf) but the actual cost of the apartment is “low” (~ S$600,000 -700,000).

A glance at listings online shows that owners are asking for close to S$2,000 per month to rent a one-bedder. And I see plenty of listings for the project which means that unless someone’s listed his unit many times over or the same unit had to be listed again week after week, there are many apartments there begging for tenants.*** Whoever has a unit there better be happy letting it stay vacant or I can’t see why someone would choose to pay almost S$2,000 per month to stay in what is effectively a hotel room when you could rent a room in an HDB flat (of course you have to share with some flatmates) in a better location for one-third the price. You have to remember that someone who can afford to pay S$2,000 per month in rent must be making at least S$8,000 per month. Most Singaporeans don’t make that much (median salary is more like S$4,700) which leaves you with foreigners. Foreigners making that much have to be at least on some sort of expat package which means that they come with families and won’t be looking at one-bedders, what more in such a far-flung location.

If there is one property like this, there are more. And my guess is that owners aren’t too bothered by the lack of tenants as long as they have the ability to service the loan. Their ability to service the loan is currently helped by historically low interest rates.

Anecdotal Evidence #3: Property prices are still high (sorta)

The third story comes from a friend of mine. Recently, he bought an Executive Condominium (EC)**** located just across the street from my flat. What this means is that our location is basically the same as far as valuation is concerned. However, the price he paid is almost 3x what I paid for my flat for an apartment of a size about 90% of my flat.

When both our apartments hit the resale market (say in 10 years) which is subject to the forces of demand and supply, I’m not sure if he will see any further upside to the price he paid for his unit. Why? Imagine a potential buyer for his unit surveying the area. The buyer will easily find that 5-room flats (~ 1200 square feet) in the same neighbourhood can be bought for around S$500,000 (assuming prices of HDB flats in this area remain as they are now). If my friend is looking to sell his place for S$1 million, the buyer will have to seriously wonder if it’s worth paying double the price of a 5-room flat in a similar location for a slightly smaller unit that comes with amenities such as a swimming pool and security post.

The only other way to justify the selling price of the S$1 million EC is to assume that the prices of HDB flats in this area will jump so much that the premium for an EC shrinks to maybe 20-30%. Based on that analysis, the upside for buyers of EC at that price is quite limited while the buyers of BTO flats like mine are much more optimistic. On the other hand, the downside is quite limited for flat owners as opposed to EC buyers.

I know my friend didn’t buy the property as an investment (i.e. to make money) but it still points towards the fact that property prices in Singapore remain elevated and we haven’t seen a fall in demand like the likes of post-’97 or ’08-’09. As with any asset class, the usual adage is well-bought is well-sold.

 

Notes:

*I’m not an inflationista. Rather, the fed has already begun the hike so it’s not like I’m being a Cassandra.

**I read that someone at the fed did a study showing how Amazon is a factor keeping prices low and I guess if this remains so, then interest rates may not need to be hiked.

***The truth is probably someone in between. Some agent listed the property many times and had to list it multiple times over the weeks. But still not a good sign, no?

****ECs are this weird scheme where the governments allow private developers to bid for land in their landbank to build a condominium development that is sold more along the lines of public housing. After 10 years, the development becomes private and is not subject to the rules that govern public housing. In essence, Singaporeans and PRs get to buy a condo for a discounted price.

With all my recent posts on bitcoin (here, here and here), I started thinking a little bit more about how people build wealth over time and I’ve come to realise that building wealth over time isn’t rocket science. It mainly comes down to what you spend your money on.

In general, there are three things in life you can spend your money on- one, things you consume immediately; two, things that will go up in value, and three, things that produce things of even greater value.

The first type of things – Cheeseburgers

Suffice to say, it’s clear that if you spend most of your money on the first type of things, you’re not going to get very far. Think of a cheeseburger. It tastes good when you eat it but after you eat it, it’s gone. It comes out as waste and gets flushed down the toilet. Even for things that last longer than a hamburger (e.g. a t-shirt), it’s clear that once the good is bought, it’s unlikely to be sold for at anywhere near the same price as when it was first bought. Therefore, if most of the things you’re buying are cheeseburgers, you’re unlikely to get wealthy.

The second type of things – Treasure Boxes

The next category of things is like treasure boxes. You buy one, thinking that it contains treasure and sometimes, they really do. People have gotten rich by being able to (through skill or otherwise) ascertain whether the treasure in the box is worth more than the price they’ve paid for it. Unfortunately, how much you can sell the treasure for in the future depends on how much people in the future are willing to pay for them.

Things like art or collectables are like this. You could pay $1,000,000 for a piece of art and in a hundred years, for reasons unknown even to the by-now long-dead artist, someone else may be willing to pay $2,000,000 for it. Or just as easily, it could be worth $100,000. Who knows.

The third type of things – Geese (golden, if you like) or Fruit Trees

Things like these produce even more wealth for you as time goes by. Geese can produce more geese if you don’t turn them into roast geese and fruit trees produce fruit that you can consume as well as, with a little sweat, use to grow even more trees. Starting with a pair of geese, you could get a whole flock. Or with a bag of seeds, you could get a whole orchard over time.

Don’t buy too many Cheeseburgers

This question is probably the one question that will determine how wealthy you eventually get. Obviously, you need to purchase some ‘cheeseburgers’. You have to have a certain amount of food, shelter and clothing for basic survival. For entertainment, you need some spending on simple luxuries like watching movies, an ice-cream, or even a holiday.

The point is, these things are all ‘cheeseburgers’. Consumed today and provides immediate satisfaction. The danger of consuming too many ‘cheeseburgers’ is two-fold. One, as you consume more ‘cheeseburgers’, you start to find that you need more ‘cheeseburgers’ than before to feel as satisfied as you once did. Driving a Toyota is cool when you didn’t have a car. Once you’ve had one, the next step is a Mercs or BMW even though its primary function is still to bring you from point A to point B.

Or take going to the club. The first experience is cool and exciting but after going to the same club many times in a week for multiple weeks and the mind starts to get bored. It’s the same with restaurants. With ‘cheeseburgers’, the mind needs that constant stimulation of novelty in order to feel the satisfaction derived from a ‘cheeseburger’.

The second danger is consuming ever-greater quantities of ‘cheeseburgers’ lead to an addiction that has unhealthy consequences. Indulging in too much food literally makes you unhealthy with the onset of obesity and the health problems associated with it. But buying ‘cheeseburgers’ like a more fancy car also leads to an unhealthy mental state like never being satisfied with what you have and always being envious of what others may have that you don’t. Using our earlier example, the Mercs or BMW takes on a second function of showing off one’s wealth.*

Treasure boxes or Geese?

Therefore, beyond the amount of ‘cheeseburgers’ needed for a sufficiently satisfactory life, we should be deciding whether to buy ‘Treasure Boxes’ or ‘Geese’. There isn’t a clear answer as to which one is better but we’ll look at the characteristics of each type. Both things will make you much more well off compared to people who only buy cheeseburgers but that will also depend on whether you have the knowledge, fortitude and good sense to know WHEN and WHAT types of ‘treasure boxes’ and ‘geese’ to buy. Let’s start with ‘treasure boxes’.

‘Treasure boxes’ contain objects of value. That value is decided in a market of buyers and sellers. In econ 101 terms, that means that whatever the value of the good is, depends solely on whatever other buyers are willing to pay for it and whatever existing sellers are willing to sell the good for. This also means that no one is really sure of what the ‘treasure box’ is worth and that its worth at any point in time is determined by what someone else would be willing to pay for it. In other words, it’s price is its current value.

A good example is the story of how diamonds came to represent love and commitment around the world. Prior to De Beers’ marketing campaign and control over the diamond market, no one would have bought a diamond as an engagement stone because diamonds were so rare and therefore reserved only for the super elite. However, as the supply of diamonds increased, the price of diamonds came down. De Beers, having substantial control over the supply of diamonds then restricted the supply in order to keep the price high while also paying to run a successful ad campaign that increased the demand for diamonds. However, for us, the more important question is: “Has the value of the diamond changed merely because its price has?”

And that is the thing with most treasure boxes. Without knowing what is inside, your best guess at its value is the price someone else is willing to pay for it and the price that the seller is willing to accept for it.

Making lots of money from treasure boxes in the long-run depends largely on having someone pay a lot more for your treasure box than what you bought it for. Many times, this can result in manias that drive the price sky-high when everyone wants to buy the “asset” due to greed which was probably fuelled by envy. After all, who likes it when you see your neighbour whom you probably think isn’t much more clever than you take a holiday in the alps while you are forced to work through the holidays? What more, he did it not by doing anything particularly clever or special. He just happened to buy (and sell) the right thing at the right time.

And finally, Geese

‘Geese’ are a special class of things. They can be traded just like treasure boxes but they can also be raised to produce more ‘geese’. If you keep a close watch on your ‘geese’, you’ll also have a good idea of whether your ‘geese’ are ill or your ‘geese’ are healthy.

And while ‘geese’ have a price in the market where there are buyers and sellers of other ‘geese’, that price is typically based on a value of what the ‘geese’ can produce over its remaining lifetime. For example, let’s take the example of a real goose. You can estimate the number of eggs a goose can produce over a lifetime. Furthermore, a goose can also be used for meat. Both goose eggs and meat are things whose value you could ascertain by checking out what goose eggs and meat currently sell for. Therefore you could roughly tell what the value of your goose would be. And if you so happen to come across an honest seller who is selling a goose for less than the value of the eggs and meat, you have found a good deal, haven’t you?

That is typically how the stock market works. You can roughly calculate the value of a company based on its current business and a plausible estimation of its future business if you know the industry well enough. And sometimes, Benjamin Graham’s Mr. Market comes along and offers to either buy or sell you a share of the company that is out of line with the estimate of the future business. In this scenario, price and value have diverged and there is a good chance that there is some profit to be made by taking advantage of Mr. Market.

Or, you buy cheap from Mr. Market and hang on to your ‘geese’ and have them produce more eggs for you over the years. You may want to consume those eggs or you could try hatching them to get more ‘geese’. That analogy is exactly how dividends are. You can choose to spend your dividends or you could choose to reinvest the dividends and have your returns compound.

Last word

I hope its pretty clear that spending most of your money on things to consume i.e. ‘cheeseburgers’ is a sure way to remain at your current level of wealth. If you want to get wealthy, you need to focus on buying ‘treasure boxes’ or ‘geese’.

If you choose to buy ‘treasure boxes’, make sure you know the market very well. After all, the price of ‘treasure boxes’ is determined mostly by demand and supply conditions for the item. There are also other factors like whether you use leverage or whether you can predict where that market is going. You may succeed but remember that it’s a zero-sum game. For you to win, someone else must have lost.

Personally, I prefer collecting ‘geese’. Right now, my ‘geese’ may be all equities but it could easily extend to rental properties or private businesses. I’m pretty certain that my own temperament is also more suited to collecting ‘geese’ rather than competing with others for ‘treasure boxes’ so this is what works better for me. Having said that, this is a much slower path to wealth as businesses don’t turn into an overnight success.

Notes:

*Of course, the level of wealth can be an illusion. Many things can be bought on credit and give people the outwards appearance of wealth while their true financial situation only reveals piles of debt.

**To a certain extent, this is also true of ‘Geese’ but we’ll see that with ‘Geese’, we have other yardsticks for value instead of relying on price alone.

So, today’s that kind of day where there’s a bunch of interesting stuff on bitcoin.

First, there’s this fantastic piece by Josh Brown that sums up a lot of what “investing” in bitcoin right now is like.

For the Bitcoin price to remain at $9,250 it requires approximately US$16,650,000 per day of capital inflow from new hodlers.

That’s a snippet of a quote from a commentary he has in his piece. Together with lots of examples about how some penny stocks have seen an influx of investors just by becoming associated with bitcoin, how the bitcoin mania resembles the dot-com bubble (early 2000s) as well as Thanksgiving-fuelled bitcoin conversations. There’s a lot more where that snippet came from so if I were you, I’d go read the whole thing. (full link here)

Anecdotally, I shared something about bitcoin on facebook with the caption saying how the new wave of people with some money to buy into bitcoin are probably too young to remember what the last crash looked like. A former student who’s now serving his National Service (NS) commented saying how half his bunk is already in bitcoin and that one of them is a trader of cryptocurrencies and is saying that “the price will never go down”.

Now, we just have to wait till the mainstream media* picks up stories of how 20-something-year-olds have “helped” their parents “invest” their entire life savings in bitcoin.

 

*You know it’s too late to join the party when the mainstream media puts it on their front page. In 2007, there was a story of how a university student was making tons of money and helped his family invest their life savings. Subsequently, he lost it all. Personally, I saw many others like the student in the story when I was at the university in late 2007.

 

Focus on what you can control.

– Michelle Obama

In just six words, Michelle Obama reminded me of the most important thing that I’ve already come to know but constantly forget to apply.

Life constantly throws things our way. Sometimes, those are nice things like someone saying something nice about you or, someone doing you a kind deed or favour. Other time, you just get hit by something terrible like someone saying or doing something unkind to you or, some stroke of bad luck which could be minor or major.

You can’t change that.

What you can change is your perception and reaction to the event.

Someone cuts your lane in traffic. You can curse and swear, put your foot to the pedal and give him/her a taste of his/her own medicine. Or you could always take a deep breath and realise that the person behind that wheel is just a fly that happened to buzz around you and that fly is long gone. Why bother with a fly?

You find out that you have a major illness and require major surgery. You can curse the gods and question why this had to happen to you, be angry at the world for not having to experience the uncertainty and anxiety that you have to go through. Or, you could try to find out more about the procedure and think about how to best deal with the recovery from it. Perhaps the awareness of the fragility of life will make us treasure each passing moment more? With that recognition, maybe we’ll spend less time on unimportant things with unimportant people.

The stock market tanks and takes your portfolio down by 50% or more. You can panic and give in to the mania; Turn to drugs or alcohol to (temporarily) forget about the problems. Or, you can look at the evidence that manias tend to pass and be thankful that you didn’t overextend yourself and were forced to liquidate. The same is also true when you see and hear people around you with stories of wildly profitable “investments” in esoteric asset classes. You can develop a major fear of FOMO or you can breathe in and remember that all bubbles (in tulips, the South Sea Company, over-priced growth stocks, unprofitable dot-com companies, over-leveraged bets on real-estate) don’t end well.

You can choose to be angry and unkind. Or you can choose to be calm, firm, grateful and kind.

Most importantly, you can choose. This is something I have to remember. Always.

I was going to do a piece of bitcoin as an asset class but this morphed into a very long piece so I’m splitting this up into two parts. This part covers how to value bitcoin and a guess on what the future holds for bitcoin speculators. Catch up on part 1 here.

Putting a value on bitcoin

If bitcoin is unlikely to be the next form of a widely accepted currency, then why has the price gone up so much? Well, the short answer to that is that the price has gone up because the demand for it has done up relative to the supply.

In economics, the theory goes that there are three reasons why people demand any sort of money:

  1. Transactional purposes
  2. Precautionary purposes
  3. Speculative purposes

The above is for money in general but it’s useful to think along those lines for the demand of any particular form of money. And since almost all societies already have an accepted form of payment (the local currency or a foreign one), the demand for bitcoin is mostly confined to the last purpose- the opportunity cost of holding money is low, therefore, let’s hold in the form of a moonshot such as cryptocurrencies.

The next question, then, is whether buyers of bitcoins are buying it cheap, fair or at ridiculous prices? The only way to answer this question is to figure out what is the intrinsic value of a bitcoin and what is the price today relative to the value.

With asset classes as such bonds, equities or real estate, the typical way to value these assets is to ask ourselves: what are the payoffs (coupons, dividends, rental) over the remaining life of the asset, the associated probabilities of those payoffs and arrive at a value of the asset as it is today. Comparing that with the price one would pay for the asset, we can then determine if the asset is priced fairly or not.

In contrast, valuing an asset class such as commodities or foreign exchange is inherently more tricky. After all, before bitcoin, there was another commodity that was a darling for some “investors”. Unfortunately, this is what Warren Buffett has to say about it:

“I will say this about gold. If you took all the gold in the world, it would roughly make a cube 67 feet on a side…Now for that same cube of gold, it would be worth at today’s market prices about $7 trillion – that’s probably about a third of the value of all the stocks in the United States…For $7 trillion…you could have all the farmland in the United States, you could have about seven Exxon Mobils (NYSE:XOM) and you could have a trillion dollars of walking-around money…And if you offered me the choice of looking at some 67 foot cube of gold and looking at it all day, and you know me touching it and fondling it occasionally…Call me crazy, but I’ll take the farmland and the Exxon Mobils.” – Warren Buffett on CNBC, March 2, 2011 (source)

If you think about the amount of utility by investing in an asset that doesn’t provide any income, then you better be darn right about the capital gains. Unfortunately, none of us are time travellers (if you are, please get in touch!) or have a crystal ball so betting the farm on an outcome that is speculative in nature is a fool’s errand.

Don’t misunderstand, I think gold has some utility. It has served as a hedge against inflation, is used in jewellery and as insurance in the event you need to escape your country but the price of gold beyond the costs associated with those options is pure speculation. bitcoin, I believe, has even less utility apart from being a conversation at a cocktail.

Prof. Aswath Damodaran has a fantastic post on bitcoin and cryptocurrencies and how to think about the definitions of various asset classes (read the full thing here) but I present his brilliant summary of my point:

 You cannot value Bitcoin, you can only price it: This follows from the acceptance that Bitcoin is a currency, not an asset or a commodity. Any one who claims to value Bitcoin either has a very different definition of value than I do or is just making up stuff as he or she goes along.

In short, what a bitcoin is worth is only as much as the next person willing to pay for it.

Will it end well?

This is where things get interesting. What I’ve covered so far shows that bitcoin has value only insofar as people’s willingness to pay for it and the willingness to pay for it, right now, seems to be pretty much only because people think that it’ll continue to go up further. Why would it go up further? Simply because it may gain widespread acceptance and be the currency (amongst many others, crypto or otherwise) of choice.

The last line hints at a plausibility of reality or what Howard Marks calls a “grain of truth”. Unfortunately, Marks was referring to how bubbles form and in his checklist, he listed nine bullet points that lead to a boom/bubble:

  1. A benign environment
  2. A grain of truth
  3. Early success
  4. More money than ideas
  5. Willing suspension of belief
  6. Rejection of valuation norms
  7. The pursuit of the new
  8. The virtuous cycle
  9. Fear of missing out

Of course, Marks was referring to the investment climate in general but when applied to just Cryptocurrencies, I think 2, 6 and 7 have either already been covered or are pretty obvious. What some people don’t realise is that 1, 3, 4, 8 and 9 have played out in some fashion.

The general investment environment has been pretty positive since Trump’s election with equity markets all up substantially since the beginning of the year (point 1). The price of bitcoin going up 700% in one year has already given plenty of laypeople some success (think bitcoin jesus and Ms bitcoin Mai) and that the feeling that the only way for bitcoin is up (point 3 and 8). After all, when civil servants (that’s referring to me, by the way) in the education sector start about bitcoin, beware.

As for point 4, the whole concept of Initial Coin Offerings (ICOs) just underscores how there is too much money floating around that people are willing to part with money* for nothing more than a digital representation to an idea. The worst part about the idea is that the startup is practically joining a space that is already crowded with a thousand other similar ideas. And that’s just in the cryptocurrency space. Softbank has a 100 billion dollar venture capital fund which just shows how much money there is floating around to fund ideas that are probably more moonshots than sure things.

As for point 9, there are now traditional Wall Street firms getting in on the boom (admittedly, they are just dipping their toes there) and there are cryptocurrency hedge funds and even fund-of-funds. If you don’t know what those mean, no worries. Basically, it just means that more money is being channelled towards cryptocurrencies.

Closer to home, just a few months ago, a student of mine was looking into buying bitcoin and while my school may not be looking to buy the currency, the fact that suddenly interest in the subject has increased drastically shows that no one wants to miss out on knowing what this exciting, new thing is all about. News about Google searches for buying bitcoin getting more popular than buying gold just strengthens the point that there are many people who are trying to get on board a ship that (perhaps?) has sailed.

Well, that’s just Howard Marks’ checklist. I saw a chart (it’s a little dated) that compared the rise in the price of bitcoin to other bubbles that have come before it.

 

bitcoinVsBubbles

The thesis here is that most bubbles increase a 1000% over 10 years before popping.

Well, from the chart, bitcoin rose a 1000% in just three years. And with the benefit of hindsight, we now know that the bubble hasn’t burst but has expanded further to 3700% since 1 Jan 2015.

So, that’s it from me. I think I’ve pretty much convinced myself that while the technology underlying bitcoin has its use, I’m not so optimistic on the token itself given the competition from existing currencies as well as new cryptocurrencies. And it’s ironic that the price of bitcoin is still quoted in USD so that says a lot about what our anchor still is.

Furthermore, the psychology behind bitcoin has pretty much fueled a buying frenzy (as evidenced by the exponential increase in price) and has checked off a lot of boxes that have plagued other manias before it. I’m not sure if the bitcoin/crypto boom is over but I’m pretty sure it’s not going to end well.

 

 

snarky notes:

*remember, money can be used to consume goods today or invested for surer returns.

It’s been another year and what a year it has been.

I don’t re-read what I’ve read and it appears I should. Because this is what I wrote in my birthday post last year (emphasis mine*):

Of course, life is about pushing one’s limits and in the coming year, I’m going to push those limits much more.

I can think of at least three areas – health, wealth and new skills.

I definitely need to get healthier. Recently, I’ve begun doing morning runs but that’s still pretty infrequent.  I need to get those in on a more regular basis like every other day or at least once every three days. That’s on top of my gym sessions which need to be at least once  a week.

As for wealth, I don’t want to make this an explicit goal but rather it should be a byproduct of something like picking up a new skill that I can freelance some stuff with or creating some little business that can be run in my spare time.

For skills, getting more proficient in coding would be something. Right now, I’m probably familiar enough with python to get other people’s packages to work for me. I need to get to the level where I can program enough to get it to do simple repetitive tasks for me. Also, trying to put together a machine would be awesome as I can get more bang for buck. That would also give me the chance to get more familiar with modifying systems.

I’m happy to report that I failed spectacularly on every count.

First, let’s see where I went with getting healthier. This year, for the first time ever, I hit a new high in terms of my weight. I haven’t been all that regular with my once-a-week gym routine either. Thankfully, it’s not like I had any serious health issues due to the weight gain and fortunately, I’ve gotten my weight back down to below that high but looks like it’s going to take a lot more to get my health to where I want it to be.

The upside is…I’m happy to say that after serious reflection, I’ve realised that the weight gain always comes after a deviation of my usual routine. That is to say, my usual eating habits, while not perfect, weren’t contributing to my weight gain. It was usually after a holiday or a gathering with friends when the weight gain happened. Why? Usually, because there was either a smorgasbord of food that I had to try or an increase in consumption of beer. Or both.

On the second count, wealth, I’m glad to say that the portfolio has done exceptionally well (by my standards at least) this year. Unfortunately, I didn’t end up creating some sort of side hustle because I lost sight of all my goals.

The upside is…that my system of accumulating wealth is pretty much running on autopilot and has proven that it can survive the vagaries of my horrible lack of focus. In fact, the portfolio might have worked so well because of my horrible lack of focus on things.

In late April, I shared a graph showing how much my portfolio has grown since 2011.

Here’s how it stands today.

 

navVSwealthNov2017

Basically, I have 3.5x what I had in 2011.

.

 

This isn’t really much of an update but a reminder that while your portfolio is small and tiny, it pays to have a good habit of saving and adding to that portfolio. Keep saving and keep letting your dividends and gains compound until you reach a stage that your savings can’t move the needle much on your portfolio.**

Third, I was getting better at coding but for some reason, I took a holiday and now I’m in a funk. The problem was also that I kept getting pulled in all directions with respect to learning how to code. One moment it was learning basic programming. Next, it was learning Flask. And because a website is pretty much useless without data, I started learning how to scrape and add data to a database. Then I realised that without being able to analyse the data, it was useless so I started on Data Analysis. Then sometime later, I realised the language of the web was JavaScript so that’s where I went.

In short, I went in so many different directions without having mastered any one first that I got burnt out. It’s really difficult to learn things on your own without having someone to guide you. -_-”

The upside is…I’ve managed to get a grasp on how to solve many different coding problems despite the lack of focus on a particular area. In fact, the one common thing that you keep having to do in coding is to sift through whatever lots of other people have encountered and thankfully there’s stackexchange.

Other stuff

Besides failing to do any of the above, this year has also been a year that I can only label as volatile.***

On the downside, I had a near nuclear meltdown somewhere in the middle of the year. Thankfully, it didn’t take too long to recover from it. The reason for that episode is personal and shall remain so. The irony of the whole situation is that earlier in the year, I was blogging a lot about rationality and mindfulness. (see here, here and here) yet when it came down to it, I was overcome by a flood of emotions and I actually felt the physical effects that come with being depressed. It’s a serious thing and it’s no fun.

Also, on the work front, I was supposed to leave the school. To be honest, I didn’t know why I accepted the posting at that time because right now, I love my colleagues and the environment is fantastic. I guess I was thinking that I should challenge myself and put myself in a situation where I would have to work probably 2-3x as hard as I have to right now. Anyway, things happened, and I’m not going anywhere.

Also on the work front, I screwed up big time. I made a major mistake that no one ever should. I felt really bad about it though and I hope none of my colleagues ever make the same mistake ever again.

What’s the upside to all this?

The upside is that having a year like this gives you plenty of fodder for reflection and introspection. Giving myself enough time to think about the things that happened, how I felt about each event, and whether I could have handled things differently has led to a few conclusions.

One, in order to be a better person, I need to cultivate better habits. After all, there’s a famous quote attributed to Einstein that goes like this:

Insanity is doing the same thing over and over again and expecting different results.

Your habits will definitely lead you to the same results. If you want different results, you have to change your habits. Some of my habits are downright terrible.

Two, in order to change your habits, you can’t just depend on willpower. I should have realised this sooner given how my wealth accumulation strategy was going. In fact, even with some semblance of a strategy, you need some great incentive or disincentive to stick to it. For example, I had come up with a simple rules-based strategy to lose weight. Basically, I already decided that on days where I go canteen A, I would only have the sandwich from there and if I went to canteen B, I would order the salad.

What actually happened is that whenever I had a lunch kaki**** and when classes started,  this plan would utterly fail as I didn’t have the willpower to stick to the strategy. When you’re tired and want to relax, your willpower is spent. Your mind then naturally thinks of stuff that gives you the most reward. In my case, that would be fried stuff or carb-laden dishes as most local foods are.

The only solution I can think of is to increase the stakes of committing to the plan. As discussed in an episode of the freakonomics podcast, you can do so in many ways such as having a pre-commitment to donate a painful enough sum to the person you like the least or, my favourite, hanging a jar of vomit around your neck and opening the lid to take a whiff of it whenever you feel hungry.

Three, getting majors fails and feeling really lost is not fun but there is some good that came out of it. I feel a lot more grateful for my life. I’m grateful for a family that loves me and that has confidence in me.

I’m grateful for the fact that I was part of the lucky sperm club. Just being born in the right country means that I never had to face the threat of war and that basic infrastructure has not been a concern. Being born at the right time also reinforces those notions as one or two generations before mine would have endured a lot more hardship. Being born into the right family meant that I basically only faced #firstworldproblems. And all of the above also increased the odds that I would meet the right person to spend the rest of my days with.

My wife isn’t the perfect person (show me someone who is and I’ll show you a phoney) but she’s the perfect person for me. She’s smarter than I am but she never lets me feel inferior for it. That automatically makes her more humble than me as well. When baking, she’s the one who will follow a recipe to a T while I might read the recipe to get a feel and then adjust accordingly. I don’t tell her enough but I love her.

Also, we adopted a cat! I never had a cat in the house before so it’s a whole new situation that we have. Initially, there were a lot of known unknowns. Will he scratch the furniture? Will he pee outside his litter box? Will he leave us alone when it’s time for bed? All those fears turn out to be unfounded because cats, like everyone else, can be trained to a great extent. Watch enough “My Cat from Hell”, do your research and through trial and error and you’ll see that most of the horror stories you hear about are due to bad owner behaviour. In other words, it’s not the cat. It’s you. I’m glad to say that our cat loves it here and we love having him around.

What’s next?

30 something years of life isn’t that short but yet it’s far short of a lifetime in this day and age. I’ve already decided on my goal for the next few years and it’s for me to embark on the path to being a craftsman.

In this day and age, with the threat of automation to jobs that are repetitive and mundane, I believe that there isn’t a future for those who take on a job hoping to go through the motion of passing each day while meeting the bare minimum.

Therefore, I need to hone a craft. Get the fundamentals right, repeat the fundamentals until they become second nature. Then push the boundaries and create something new.

That’s what I need to do with investing.

Notes:

*lol. who else could it be? I only realised the irony of the parentheses after I typed it. Hence this very meta-sounding comment.

**Let’s say you have an average job that pays S$4,000/month (that’s literally the average in Singapore). Saving 10% (S$400) a month easily adds about 10% of growth when your portfolio is $48,000. However, once your portfolio hits $480,000, that same savings rate only adds a percentage point a year. The solution is, two-fold, either (a) increase your savings rate over time and/or (b) increase your income. The problem is that for most people, both options are pretty difficult to do.

***I use the term as it would have been in the finance world i.e. flucuations.

****kaki is the local term for a buddy.

I was going to do a piece of bitcoin as an asset class but this morphed into a very long piece so I’m splitting this up into two parts. This part covers what bitcoin is and the economics of money as applied to bitcoin. Part 2 is up.

First of all, bitcoin (or any other cryptocurrency) isn’t blockchain.

My thoughts are on bitcoin* which refers to the unit of currency and not Bitcoin which refers to the blockchain technology that the currency rides on. There is a difference and I believe blockchain has its uses but what I’m more interested in is bitcoin (as a proxy for cryptocurrencies) because that’s where people are putting their money into which has caused the price of bitcoin to be up some 700% this year alone.

First, what is bitcoin?

bitcoin is a digital token created by an unknown person or person(s) with the alias Satoshi Nakamoto. bitcoin can be used for electronic transactions and is created when computers (mining rigs) solve complicated mathematical problems.

As such, no one controls the supply of bitcoin and the theoretical maximum number of bitcoins is 21,000,000 bitcoins. Facilitating the transfer of bitcoins is the decentralised network that bitcoins transact on. People with mining rigs power the network in the same way people distribute content via a torrent file. Their systems provide the computational power needed to update the records anytime someone transacts using bitcoin. For this, the quickest one that solves the computational problems needed to confirm the transaction get bitcoin. This is essentially the process of mining bitcoins.

Bitcoin is set up to reward users for verifying transactions. Miners who package transactions into “blocks” receive two kinds of rewards: The additional Bitcoin they produce by using their hardware to solve mathematical problems (an income stream that will eventually cease since 21 million bitcoins are the maximum that can be mined) and the transaction fees paid by users to get their payments into blocks. – Bloomberg

In short, bitcoins are a digital form of currency just like how you would spend cash (e.g. USD or SGD) to buy virtual currencies in a game (e.g. “gold” in the mobile game, Candy Crush) which you can then use to purchase things. The only difference here is that it’s possible to use bitcoin to pay merchants that accept them rather than being restricted to only using “gold” (the candy crush currency) to buy power-ups or items in Candy Crush.

When making payment using bitcoin, the Bitcoin (deliberately using capital “B” here) network facilitates the transaction and every computer on the network gets updated with the same record of which account the bitcoin now belongs to.

Supporters of bitcoin champion bitcoin as a new currency for the following reasons:

  1. No one entity controls bitcoin and hence, can’t cause a debasement of the currency through undisciplined expansion of the money supply.
  2. It’s relatively anonymous because bitcoin addresses aren’t tied to a real-world address or name, although the public ledger will show how many bitcoins are held by a particular bitcoin address.
  3. A transaction is supposed to be fast and low-cost.

The economics of bitcoin

The problem with bitcoin is that being a digital currency, there is no shortage of other competing currencies. Existing competitors include all the other currencies in the world and there aren’t many technical barriers to entry for other digital currencies to enter the space. At last count, there were more than a 1000 cryptocurrencies in circulation.

bitcoin’s only advantage is the first-mover and top-of-mind recall when it comes to cryptocurrencies. In order to become a viable alternative, it will also need existing currencies to become shaky enough that they find alternatives. What comes to mind are countries that are experiencing bouts of inflation due to the government mismanaging the local currency. Even then, bitcoin has to contend with major currencies like the USD and Euro.

As a form of money, bitcoin may be portable (all you need is to connect to your digital wallet) and divisible (see here) but the first point requires internet access which could be stumbling blocks in countries where internet access is expensive.

Also, transaction costs for bitcoin do not seem to be as low as it’s touted to be. Due to the nature of how transactions get recorded, much computational power is required to solve the mathematical problems needed to record a transaction. Depending on the volume of transactions (which vary), this can cause bottlenecks and those with the computational power are starting to charge different prices in order to facilitate transactions. As I write this, the median transaction fee for a size of 226 bytes is 103,960 satoshis** or 8.30 USD. Try convincing merchants to accept or people to pay for a coffee, beer or sandwich using bitcoin if that’s the processing fee.

The biggest issue so far is whether bitcoin qualifies as a store of value. In economics, anything considered money should be a good store of value. Simply, this means that if I can buy 10 beers with 1 unit of this currency, I should be able to buy roughly the same amount of beers with the same unit of currency a week, month, or even, a year later.

And this is where bitcoin truly fails. In fact, the only reason most people have suddenly sat up and taken note of bitcoin is due to the fact that bitcoin has increased some 700% relative to the USD within this year alone. And within weeks of hitting 7000 USD, it fell to 6000 USD and then within a few weeks, shot up to 8000 USD.

While the increase in the price of bitcoin is good for holders of bitcoin, we have to remember that those who sold their bitcoin is kicking themselves in the foot. From a medium of exchange point of view, someone who used a bitcoin to buy a computer earlier in the year is kicking himself because he or she can now buy 7 while the merchant who accepted bitcoin (hopefully he/she didn’t use it to pay off a supplier) has now seven times more profit as compared to the start of the year by doing absolutely nothing! What kind of viable currency causes such changes in purchasing power?

While bitcoin, if accepted, will reap network economics (one phone is useless on its own but as more people have phones…), it seems unlikely to me, at this point in time, that bitcoin is going to be a viable alternative to a shitty currency.

Stay tuned for part 2.

Update: Part 2 is up.

snarky notes:

*Or any other cryptocurrency for that matter but bitcoin is probably the most prominent and manic example right now.

**Another reason why bitcoin is a terrible currency is due to the notion of divisibility. People hate decimals and having to come up with names like ‘satoshi’ for a fraction of a bitcoin just makes everything more confusing when thinking of the value of one thing relative to another. i.e. which looks like a better price for a pint of beer? 10 USD, 126,105 Satoshi or, 0.00126105 BTC?

 

Sorry for the clickbait-y title but what I’m about to say is actually quite true for almost anyone in Singapore with a half-decent job and of at least lower-middle to a middle-class family background.

And to show you that’s entirely possible, I present exhibit A- (although most Singaporeans in the financial blogging community probably already know) Mr. 15-hour-work-week (15HWW).

Mr 15HWW recently wrote a post, summarising his 7 years (so far) in investing and it shows you exactly how (link here) most middle-class people around the world actually accumulate a decent amount of money.

If you read his post, you’ll realise that for two people in their mid-30s (counting both Mr and Mrs 15HWW they pooled their resources together), they have accumulated a six-figure portfolio that is probably the envy of even some Singaporeans who should be retired or are near-retirement. The sum doesn’t include their CPF or their home*.

For many younger people about to enter, or just in, the workforce, a six-figure sum is something that seems out of reach but many people have been there and done that. More importantly, Mr 15HWW’s post reveals that it doesn’t take a genius to do it.

His returns in the market were only about 6% p.a., something that you could easily replicate if you blindly invested in an index-tracking ETF such as the STI ETF or the SPDR’s S&P 500 ETF.

The bulk of the increase in their wealth came from an amazingly high rate of savings. I really take my hat off to Mr and Mrs 15HWW because my own savings rate is nowhere near theirs. If it was, my portfolio would probably be 25% larger than it is now.

Most people think investing is complicated or they try to aim for the stars but very often, a simple investing plan of (a) saving a lot of money, (b) investing it and (c) letting it compound will lead to wealth that most people can only dream of.

So why do most people fail to get there?

Well, that’s another story for another time.

Notes:

*You will be surprised at how many people are counting on their CPF to retire and how the government is encouraging a reverse mortgage on your HDB flat**.

**Ok, technically it’s a lease buyback scheme which means the HDB pays you to stay in the flat that you’ve already fulled paid up for. And I can see the merit in the argument that you might as well monetise an asset that you can’t take with you to the grave. Also, since HDB flats are on 99-year leases, handing it down to beneficiaries when you pass away means that the asset may not be worth much when it’s passed on.

 

So, a day after I wrote a report about SPH’s business, the company releases its results for FY2017.

As expected, results are better than last year, all thanks to the divestment of the online classified business which netted them a gain of about $150 million. No one really cared much about that though because, as highlighted by SPH in their press release, their operating revenue was down about $108 million, or 13%, from a year ago.

The difficult thing for SPH now is the fallout from their retrenchment exercise. It’s bad press (pun totally intended!), especially for the new CEO that hasn’t come in with that great a reputation.

While SPH hasn’t slashed the dividend by much, their payout ratio looks terrible. Of course, that little ^ mark matters. Their payout ratio is calculated based on recurring earnings. What does that mean? Only earnings from media and property (and now possibly the education and healthcare) part of the business are counted? If so, that leaves quite a bit of earnings from the investment side and this payout ratio can be considered pretty conservative. After all, with an investment fund of $1.1 billion*, you can get more than pocket change (relative to SPH’s core businesses) in interest and returns. Anyhow, I don’t have enough information to make a conclusion.

 

sph_payoutratio2017

Are SPH’s dividends sustainable?

In short, I don’t think SPH’s results are anything out of the ordinary. Mr. Market apparently thinks the same way which is why there has been hardly any reaction to the release of the results. That’s it from me. This will probably be the last post in a long while on SPH unless something interesting develops.

*See their latest (FY2017) presentation slides, page 13.