Archives for category: Economics

For the life of me, I can’t remember where I read it but I’ve found sources that provide more of less the same arguments that were made.

Basically, what I read was that automation hasn’t really caused job losses (yet). After all, if automation and robots were the reason for job losses, then why is productivity so low? In economics, productivity is measured as the output per unit of input. Inputs can be either labour or capital which means that if more and more jobs were automated, productivity should start to increase.

That hasn’t been the case, even in Japan, where robots play a huge role in manufacturing. In Japan’s case, there are alternative explanations (for example, see here) such as Japan’s corporate culture but that doesn’t explain the similar observations made in other developed countries.

Singapore’s attempts at increasing productivity haven’t been all that great either. So, where is the evidence that automation and robots are taking our jobs? Well, I think economist David Autor (nice, long essay) has made a very compelling argument that automation and robots, at least at this point in time, have not caused job losses or the end of employment as some people say they will. (For a nice background on what happens as technology replaces labour, see here and here)

The historical relationship between technological improvements and labour

It’s an indisputable fact. As technology has progressed, jobs have been displaced but that often leads to job increases in other areas. As farms used more capital (think tractors), the amount of labour on farms has decreased. That led to increases in employment in other sectors such as manufacturing. And as manufacturing started getting more high-tech, that also led to increases in employment in services.

Paradoxically, improvements in technology have also led to increased employment in the same jobs. The often-cited example in labour economics is the role of the bank teller. As ATMs were introduced, many people thought that that would spell the end of the bank teller. Interestingly, the number of bank teller jobs in the US actually increased after the introduction of ATMS. What gives? Well, it turns out that the ATM reduced the need for tellers per branch and that meant that the ATM made it cheaper to open up new branches. Since branches were cheaper, banks opened up more branches, increasing the need for tellers. Bank tellers were still necessary to perform certain banking functions as well as guide customers on how to use the machines.

What lies ahead?

If the above holds true, we should expect that the coming age of automation and robots will bring about some changes but it won’t necessarily spell the end of work as we know it.

(1) Augmentation of labour

First, automation and robots will definitely replace some jobs. Off the top of my head, in the more severe scenario, drivers (as an occupation) will no longer be necessary. Instead, they may be employed to sit in self-driving cars just to hit some emergency button or take over manual controls in the event the whole system goes down. In the less severe near-term scenario, drivers may still be needed to take over in certain driving conditions much like what goes on in modern passenger aircraft.

Any labourer lifting heavy loads (such as nurses or constructions workers) may use robots or exoskeleton suits that help them in their work. If it helps them to their work quicker, then obviously, there will be less of these labour needed given the same level of demand. However, it’s probable that nurses will see a greater demand given the level of ageing in developed societies while construction depends on different demand condition altogether.

(2) Growth in other/new industries

Let’s not forget that it’s not just blue-collar jobs that are at risk. In fact, due to the digitisation of information, software and AI can probably do repetitive, routine functions that people are used to doing. Administrative functions like filling forms, templates and other such bothersome activities can be automated.

As AI developed, even less routine jobs can be replaced. In the world of finance, trading, to some extent, has been replaced with AI and software. Robo-advisory, or being advised by software, is also increasingly being used by money management firms (see here).  The days of buying insurance directly from your insurer are here but dare we go one step further and leave the endowment and investing portions up to software as well? This would eliminate the so-called financial advisor whose only value-added service thus far is the relationship built between the advisor and client. It may be argued that many such ‘advisors’ exploit the relationship for a commission. While advisors may say that they bring clarity to the otherwise lengthy and complicated terms and conditions, it is difficult to take that stand when your income depends on it. Much better is the independent advisor who compares all the offerings available and provides balanced advice.

So, where are the likely pockets of growth? Leaving out the sectors that only the truly visionary can imagine (hyperloop anyone?), we can already see a greater switch to sectors that depends on creativity and novelty.

In Singapore, this has manifested itself in the form of various restaurants and cafes that offer products slightly different from each other. Some tout a special item on the menu while some brandish the fact that they were trained at famous schools, restaurants or bakeries or the fact that its the outpost of a celebrity chef. The ones that really get ahead though, are the ones that grind it out on the ratings (informally on platforms like Yelp or HungryGoWhere or formally in the Michelin guide). In retail, it’s even tougher. Competition based on price happens on platforms such as Qoo10.sg while a novel idea can help you out on Etsy, Kickstarter or Indiegogo.

In short, if you aren’t a big company reaping economies of scale (lower average cost of production as output increases) are opening outposts all across the world, it seems that for individuals, we’re back to the age of a craftsman where uniqueness and emphasis on dedication triumph mass production.

This isn’t unique to just physically creating products. We have robots that can now produce articles that transmit the facts of the matter. However, in the blogosphere or on YouTube (if you prefer), superstars are being made of those whose opinions provide clarity, prognostication or simply, a breath of fresh air. The software and AI haven’t gotten there yet.

Industries will change

If demand for goods and services change, obviously there will be winners and losers from it all. After all, what good is it to a manufacturer if costs are reduced by saving on labour but that also leads to a reduction in demand? In econ 101, we learnt that households provide labour and it is also households that form the demand for goods and services. So, companies and corporations have a vested interest to ensure that whatever labour is displaced gets employed once more. Hopefully, they get employed in a higher value-add job and therefore, draw higher wages than before. Realistically, that would take a lot of training and in meantime, the unit of displaced labour would depend on dissavings and/or handouts from the government.

The industries that will weather all these relatively well will be those that have income inelastic demand for their products. After all, even if one loses his/her job, one still needs to eat. Therefore, the basic triumvirate of food, shelter and clothing will do well. They will do even better if they are large enough to reap the cost savings of adopting new technology bearing in mind that labour gets cheaper relative to automation and robots as more and more labour gets displaced.

The likely scenario is that this pace of change will be more acceptable in developed, ageing countries where labour gets more scarce with each passing year. In developing countries, there might be possible problems as highlighted in this article. When you have a young, growing population without jobs, that’s just a recipe for disaster.

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Recently, I came across an article about how a fresh graduate from SIM Global Education (SIM GE) who graduated with a University of London degree in Accounting and Finance has been trying to get a job that pays at least $2,500 a month. However, he has sent his resume out 40 times but only received a handful of interviews and an offer of a basic salary of S$2,000 with added commission from sales.

One of those clickbait sites that pass news off as politically charged nonsense basically took the article and even offered additional commentary on how even a S$2,500 salary would be below an average graduate’s starting salary. I’ve also seen further comments on forums about how S$2,500 as starting salary for graduates is a figure from 10 years ago.

The thing is, these people don’t understand Demand and Supply. The don’t understand product differentiation or inelastic demand either.

The simple fact is that the number of people graduating with degrees has gone up over the years. While the proportion of each cohort going to NUS, NTU and SMU may have been relatively stable, we have seen much more graduates from overseas and private universities.

At this point, some people may start to go along the usual anti-government stance of how many foreign workers we have on employment passes in Singapore but before one goes down that path, I suggest thinking of how many of those passes belong to workers in jobs that a fresh graduate can’t or won’t do. If you have those numbers, by all means, make an argument.

The other part of the article that I have a problem with is the implicit assumption that all universities are equal. They are not. A quick look at the University Rankings will show that and any prospective employee should know that any employer knows this. If employers know this, then any prospective employee with a degree from a lesser-known university should have spent their time in university not just studying but thinking of how to differentiate themselves from the bunch. For example, if I went to a business school known more for accepting students who can afford the tuition instead of acceptance due to meeting a stringent entry criteria,  I would have actively participated in business plan competitions, tried starting a business, actively networked to get to know and ask business people or C-suite personnel to be a mentor.

I suspect the student profiled in the article is a sign of things to come. Graduates, as a group, need to expect lower starting salaries in the near future with the increase in the number of graduates in the job market as well as the fact that more entry-level jobs can be automated.

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As Warren Buffett once said:

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

In my experience, many fundamental investors focus on the financials without knowing much about the economics of the business. It’s true that the economics of the business affects its profitability and hence, just looking at the financials can give us an insight into the economics of the business. However, just looking at the financials means that we may not appreciate the true nature of the business. Appreciating the true nature of the business can help us foresee how the business will be like in the years to come.

Price elasticity of demand

Price elasticity of demand refers to buyers’ responsiveness to a change in price. Knowing how responsiveness the demand for a good is in relation to a change in its price will give us a good idea of how much power sellers have to raise prices in the future should their costs increase. This means that we can count on their profitability to continue. This is why Warren Buffett once famously said that he couldn’t take on Coke even if he was given a billion dollars to do so. It also explains why Old Chang Kee can sell their curry puffs (But NOT drastically more!) for more than any simple ‘ol curry puff stall in a market.

Market Structure

In general, there are four market structures that firms can operate in. The market structure refers to the environment that firms are competing in. This affects firms’ profitability because in general, any industry that earns supernormal (or economic) profit will attract more competitors. More competition means that there is less chance that the incumbents’ profits will remain high for a long period.

However, some markets are not as competitive as others. Knowing what keeps competitors from entering the industry means we can make a good guess what the likelihood of a firm earning its current level of profits is in the near-term.

For example, SPH is the only licensed newspaper publisher in Singapore. This gives it very high profit margins and has shielded it from competition. Of course, in this digital day and age, technology has upended many markets that used to have high barriers of entry (e.g. Uber and Grab have changed the taxi industry, Airbnb has disrupted the traditionally high capital requirements of the hotel industry etc.)

Obviously, knowing economics alone is not enough to be a good investor but without knowing the economics of the business, we can’t guess whether the numbers as reflected in the past financial statements are likely to persist, grow or decrease. That will ultimately affect the valuation of the company.

 

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Not many people know this but besides having studied and dabbled in finance and investing, I also majored in economics and I’m actually an economics lecturer by profession.

Here’s the first of my 3-parter on traffic jams (written for students and layman) on my sister site.

Part two is up.

So is part three.

Kyith over at Investment Moats has a rebuttal to why REITs aren’t the main culprit of rental woes.

I completely agree with his main point but based on the public sources he’s implicitly referenced (here and here), I suspect that’s not the gist of what the sources are saying. Therefore, I suspect his post was made in reference due to private conversations he’s had with other people and given the news, I’m not surprised that there are some people who would blame the big, ugly machinations of a corporate entity like the various REITs for the woes of mom-and-pop tenants.

Nonetheless, he’s done a very good analysis of why REITs aren’t the culprit. Without taking you through his analysis, let’s do a little thinking of our own on why his analysis is spot-on. It’s all simple economics.

If REITs had that much power and really controlled much of the supply of retail space, then it would automatically mean that they have a monopoly and as a group, would be earning enormous profits for their shareholders. If that were so, investors would and should have also pushed the prices on such investments to a price where yields, relative to other investments are unnaturally low. Any market observer will tell you that this certainly isn’t the case.

Furthermore, if we think about how REITs could go about obtaining such a monopoly, then it would mean that other non-REITs would find hard to develop malls of their own due to difficulties obtaining land to build the project on etc. To this point, it certainly helps that REITs have sponsors who are typically large developers that provide a pipeline of malls that can be injected into the REIT at a later date but this hasn’t stopped non-REIT related developers from developing malls. The failed iluma and Jurong Point are examples of non-REIT related malls.

Also, the malls with lots of vacancies are evidently ones that have been doing badly for years- think Pacific Plaza or those that are badly in need of rejuvenation but find it difficult to do so because of the ownership structure – e.g. Far East Plaza.

Add to that the successful suburban malls that have popped up over the last few years- think jem, Westgate and Seletar mall for example and you have a complete story of why the bigger problem for the retail sector is one of oversupply for a lackluster demand (last I heard, the Singapore and world economy isn’t exactly peachy).

If REITs were the main contributory factor, instead of complaining, you should go out and exchange fistfuls of dollars for REIT units.

So, on my last post, Dividend Knight left me a nice comment. The part I found really interesting is that he mentioned that he’s on track to collecting $1,600 per month in dividends. Using my handy back-of-the-envelope calculation, I figured that his portfolio might be in the $300K region.

A day later, I happened to click on the link to his latest blog post and lo and behold, his current portfolio value is $316,000.

This brings me to the point of some useful rule of thumbs that I often use:

  1. The 4-5% dividend yield
  2. Rule of 72

4-5% Dividend Rule

While this is in the Singapore context, the same rule can be modified to suit your local market conditions. The way it works is that, in Singapore, while the dividend yield* can range from as low as 0% to as high as 7-8% for REITs, I find that the yield on a portfolio typically comes up to around 4-5%.

What this means is that I can a) find out the size of the portfolio or b) find out the yearly dividend amount of a portfolio quite easily.

For a), all you would have to do is take the annual dividend amount and divide that by the yield. So in Dividend Knight’s case, given his $1,600 per month figure, his portfolio should be $384,000 – $480,000. As you can see, my estimates are higher than his actual portfolio but that’s probably because he holds a fair number of REITs which, by law, are required to distribute at least 90% of their net investment income in order to qualify for tax incentives. Another explanation is that if most of Dividend Knight’s purchases were at market extremes (such as 2008-09), then his yield would, of course, be higher. However, in the long run, the rule-of-thumb should work quite well.

As for b), that 4-5% figure basically says that if you plan to live off your dividends, then given a certain portfolio size, that’s the amount you can expect to get in an average year. For example, if you retire with $100,000 in your bank and plan to invest it all in stocks**, then you should reasonably expect to get $4,000- 5,000 each year.

Rule of 72

The rule of 72 (and this is something any Graham reader would know) is a quick hack for calculating how long it would take for something to double.

For example, at a growth rate of 7% 9% (thanks to putongren for pointing out my mistake) , a portfolio would take 8 years to double. This is calculated by simply taking 72 divided by the growth rate. Of course, this assumes that the growth rate remains constant and all dividends are reinvested but really, this rule has a much broader application- one could also use GDP growth rates and therefore calculate how much time it would take for a country to double its standard of living (although by doing so, one would probably make the grave error of putting too much stock into forecasts) or knowing the growth rate, one could calculate how much the standard of living has progressed.

Either way, remember that while rules-of-thumb are convenient, they are not the law. Growth rates don’t last forever and dividend yields are subject to change- just look at the USA where rates used to be much higher.

 

*Sustainable dividend yields and not the one-off yields that defeats the point of stock screeners.

** I’m not saying this is the way to go. Portfolio allocation is a much more multi-faceted subject than this.

Today, I attended a lecture by Prof. Bernard Yeung on State-owned banks and the efficacy of monetary policy. You can read a draft version of their (Yeung and his collaborators) here but in short, they continue exploring whether the findings from a previous paper on China translates into a more generalised case.

The earlier finding was that monetary policy only seems to be (more) effective in countries where state-owned banks effectively do the bidding of the central bank by lending in times where privately owned banks tend to be more cautious.

This paper of theirs shows that their finding in the China case can indeed be generalised across countries (their sample is 44 countries). Of course, Prof. Yeung made the point that while their work only looks at the effectiveness of monetary policy in the short-run and it is pretty clear that while monetary policy works better when banks play their role in the transmission of the policy (hence the efficacy of state-owned banks), this leads to misallocation of resources in the long-run. Case in point, once again, being the state of China’s economy now as a result of their monetary policy carried out in 2010/11.

I won’t go into the details of the bases they cover to shoot down alternative explanations as that involves some statistical technicalities which I’m not familiar with but it seems that he has a pretty solid argument. The implications I’m thinking of are more interesting; namely:

  • Monetary policy is ineffective for most free markets without fiscal policy pulling their weight (think US, Eurozone and Japan right now)
  • Asset bubbles will most certainly develop (and subsequently deflate) in countries with huge state-owned banks that bring out the bazooka.

Fits pretty much into whatever the mainstream economic community is thinking of right now.

Before we begin, repeat after me:

Hope is a double-edged sword. Hope is a double-edged sword.

If you’re feeling greedy and hopeful, don’t. We’re going to look at two case studies fresh off the pages of the local news and we’ll see why hope, which is something generally regarded as a good thing, can be such a terrible thing that people with ill intentions can exploit.

Case 1: Kong Hee and Friends

So after what seems like an eternity, the verdict on the City Harvest Church (CHC) six is out and the courts here in Singapore have found them guilty of ALL charges. I’m not going into too much details here as this case has been covered to death and almost everyone who’s someone (and some who aren’t) in Singapore’s cyberspace  has weighed in on the verdict. (I highly recommend Mothership.sg’s coverage of the CHC verdict.)

The more interesting thing to see was how the CHC followers reacted to the news. It’s pretty clear that their followers are some really ardent fans of Kong Hee and gang. And to be fair, who are we to tell them how these followers should be spending their time and money right? After all, they ARE giving their tithe out of their own free will and it’s not like CHC is pointing a gun at their heads.

The problem with that whole line of reasoning is that sometimes, people really do need to be protected from their own stupidity. I’ve heard the odd story of how the only ones who seem to be really benefiting from this so-called Prosperity Gospel are the pastors of these mega-churches themselves while their church-goers continue to tithe month after month while being stuck in the same dead-end job without realising that what they believe in may only make them richer in spirit but definitely poorer in their pockets. If they are in the church, bearing that in mind, then by all means, go ahead. However, if they really believe that this church is going to make them rich while they continue with their normal lives, then to these people, I would say, “I have a bridge I’d like to sell.” If anyone thinks that the mega church pastors here are doing anything new, they should go check out what John Oliver has to say about how such churches operate in the US. And please don’t tell me that we have higher standards here than in the US. If that were true, we wouldn’t be seeing mega churches in the first place.

Case Study 2: Valiant Capital’s investors left in the lurch

And while everybody is focussed on Kong Hee and friends, they may have missed this piece of news- Gold investment firm director ‘goes missing’. I recommend reading the whole thing, going to google for that fella’s name and realising that the local newspapers even featured him in their ‘poster boy/girl’ series, Me and My Money, in the Sunday Times.

As the old adage goes- if it’s too good to be true, it usually is. There is no quick and easy way to riches. Those who run a business that ends up being successful will usually make it quicker than the rest but even so, it won’t be something you expect to happen within a year or two; And it certainly won’t be easy.

Those who take a much easier path such as being prudent in spending and investing those sums for the long haul will also make it but they definitely won’t do it in a year or two either. In fact, make that a decade or two. Or more. Those who fail to heed the above two truisms can probably prepare themselves to be like the poor security guard who fell prey to this horrible scheme. I leave you with his story (excerpted from the article).

Singaporean investor Chandran Nair, 63, lost $374,000 with Genneva Gold, and said he invested another $79,000 with Valiant Capital because he trusted Mr Goh…

…The retired army officer and father of three said he is now working as a security officer to make ends meet. “I trusted (Mr Goh). He was a real sweet talker. Now we’re all in limbo.”…

…But for some investors, the safeguards come too late. Mr Nair said: “My 36 years of work, my lifelong savings are all gone.”

For some reason, an article titled “How much do you need to earn to be above Singapore’s “average”?” was making its rounds on my Facebook feed. Although I know that these kind of headings are link baits but what can I say? I’m a sucker for these kind of articles.

It’s painful to read stuff like this from a website in Singapore that is supposed to be promoting financial literacy. After all, this is supposed to be the reason why their site exists.

Enter DollarsAndSense.sg, a local website that aims to be the destination for timely, relevant, and useful information on personal finance matters presented for the ordinary Singaporean in a bite-sized, interesting, and enjoyable manner. Being run by a group of young Singaporeans in their mid 20s, DollarsAndSense.sg has no hidden agendas, no sales pitches to make and best of all, no credit cards to charge.

Anyway, the beef I have with the article on that site is that they obviously have no clue what they’re talking about.

The article starts with using GDP as a measure for income. While in theory, there should be no difference in calculating GDP using the income or the expenditure approach*, the problem here is should we even be using GDP as a proxy for one’s income?

Common sense would tell you not to since the salaries to workers are just part of the remuneration for the value created that GDP measures. At the end of the article, the writer even tells us the more important statistic that the median income in Singapore is SGD 3,770 per month which is all you really need to know if you want to figure out whether you earn more than the bottom half. By the way, even that is not completely true to the title since the average and the median in Singapore is far from being the same. Those that don’t know why should go learn some statistics.

So, given the title, most of the article is completely useless because it just tells us what the GDP per capita is (so is the useless calculation of adjusting the per capita figure for just the labour force) and the main point is actually in one sentence somewhere near the bottom.

By the way, the average Singaporean probably doesn’t know this but you can easily get average and median income data from MOM’s website (here and here) that shows you median income over time and even categorised by industry occupation so any one who’s really interested  in comparing doesn’t really need to read a half-assed article to know.

So what’s the value of THIS post?

1) Don’t believe everything you read out there. Most of it is bullshit written by people who don’t know any better.

2) GDP is not a good proxy for worker’s income. However, GDP and wages are correlated which is why, all else equal, most citizens in a country with higher GDP is able to have a higher income than most citizens in countries with lower GDP.

3) People trying to improve financial literacy should just leave economics out of it. There are economic theories that could help people become more financially literate but I’ve found that what helps more is a dose of common sense.

Anyway, the people running that site should be happy that some people who read this are probably going over to check them out but in my book, at their current level, I think that they are the ones who need help.

Notes:

*GDP measures the market value of all final goods and services produced in a country in a calendar year. Since there is a buyer and seller for each good, the value of the good produced is also the income earned by the seller of the good. This is where the writer of the article tripped up since the full value of the good sold doesn’t go to the worker. Not all of us are workers, some are bosses.

– By the way, it looks like they have the guts to acknowledge some of the mistakes in their article by posting some of their readers’ comments in an edit and I wrote this post after seeing those updated comments but my opinion hasn’t really changed much.

2014 has been an eventful year to say the least.

Globally, it was the year of terrible air disasters (for this region, at least) where one Malaysian Airlines flight went missing (MH370) and another was allegedly shot down (MH17). As I write this, an AirAsia flight from Indonesia to Singapore has gone missing (QZ8501). These are terrible events and only hopes that the family and friends of those on board find comfort and peace soon.

As terrible as these events may seem, one cannot forget that there were many more affected by typhoons (Philippines), floods (Malaysia) and famine (in parts of Africa). Some others are adversely affected by the tyranny of a few- think North Korea, wars in the Middle East, shootings in the USA, the  people in the Sydney cafe that was held hostage by a lone madman or the crazy guy that went on a shooting spree in Ottawa.

Bad things happen every year and news channels have a duty to report it. That’s their raison d’être. But just in case anyone thinks that their year has been shitty, maybe a look at my year will make you think twice and take stock of the good things in your life.

Wealth

It’s been another great year as far as wealth building goes.

The STI did ok this year. It started at 3167.43 and closed at 3365.15 for a gain of 6.24%. Coupled with a dividend yield of 2.5% (I’m making a rough guess here but if the distribution yield on the STI ETF is anything to go by, this is a reasonable long term approximation.), you have a 8.74% gain. Not mind-blowing but nothing to scoff at either. In fact, it’s pretty much at or in fact, just above the long term compounded annual growth rates that one would expect from constantly being in the market.*

My own portfolio saw a 13% return if I count pure investing returns (capital gains + dividends reinvested). I’ll take it. But I won’t expect the same kind of returns year after year on a consistent basis. Including savings added to the portfolio, the portfolio actually grew by 26%.

For those unsure about what the two numbers mean, the pure investing returns (13%) are calculated using a NAV calculation which eliminate the effect of adding more cash to the portfolio. This is a better reflection of the contribution of skill and luck towards returns. The total growth (26%) includes savings which also reflects the added dimension of discipline because I have to forgo current consumption.

So, which number is more important?

That depends a great deal on what answer you seek. If I want an accurate assessment of my investment luck and skill, then I should look at the first number and traditionally, this is the number when evaluating any investment. This is also the number I keep records of every month.

The second number, for me, helps in two ways. First, it helps me track how close I am to my investment goal. A portfolio of a certain size will give me enough scale to go into investing full-time and this is the number I need to meet. Second, it helps illustrate the importance of savings. This is especially true when you have a small portfolio. Even for a portfolio like mine (in the six figure range), it contributed to about half of my portfolio’s growth for the year. However, this number will definitely get smaller as the portfolio grows bigger as salaries don’t tend to go up by much so unless I save larger and larger proportions of my income, the contribution due to savings must become a smaller and smaller part of returns. But for the young investor and those who have just begun working, I hope it illustrates that savings are important! It will be the “ballast” you need to keep your investing ship going and gets you to your target much much quicker.**

I hope I don’t send the wrong message by posting my returns here because in case anyone thinks I’m the next Warren Buffett (I’m far from where he is), just remember that although I did better than the STI, the S&P500 went up 12.55% on capital gains alone. Throw in a dividend yield of somewhere between 1.5-2.0% and the appreciation of the USD against the SGD, my 13% returns has not beaten a passive strategy of just buying the S&P500 ETF. Even if I was on par, the passive strategy would have required a lot less effort.

The past five years have been very kind to my portfolio (well, accept 2011 where the only gain to my portfolio came from savings). I hope the next five will be kind too.

I’m a big believer in the CAPE ratio (it has its critics) and if you used the CAPE ratio as I did, the best 3 months to have bought Singapore stocks in 2014 were (in order from best to third best): February, March and October.

While I don’t buy the STI directly, this gives a good indicator of the current sentiment in the market. When sentiment is as bad as it was, it’s time to look for bargains. Of course, if you don’t know how to value a stock, then please just buy the STI ETF. As it is now, I won’t be looking to buy stocks unless the markets come down a little or there are bargains too good to ignore.

How much of a drop would get me out of hibernation? The STI has to come down by at least 60 points before I’ll even think about it. For me to start nibbling, it has to come down by at least 160 points.

Personal

While I experienced the loss of my paternal grandmother, there was also some relief as she had been suffering for some time. She was pretty much immobile after a bad fall a year or two ago- while she could walk with the aid of a walker, that also meant that most times, she had to be pushed around on a wheelchair or walking was only confined to short distances. With the reduction in mobility, she also stopped cooking which I think was one of the few things that she enjoyed doing.

She was also on a long list of medication which had some side effects such as a lack of appetite and it was the fact that she needed to be on some medication that eventually led to the complications when her kidneys started to weaken.

My grandmother was a practical person. She never hankered after a life of luxury and she hardly bought anything for herself. Her passing was peaceful and being the practical person she was, she wouldn’t have wanted her passing to be any trouble to us. I really think she’s in a better place and just as she would have wanted, we’re not grieving over our loss.

On a happier note, the wife and I have finally moved into our own place. Doing housework took some getting used to but thanks to my wife who had the best of upbringings, we’ve settled into a routine that is manageable.

Our interior designer/contractor really did a fantastic job. The design exceeded our (or more of my wife’s  because mine are low) expectations and while their work didn’t come cheap, they weren’t exorbitant either. They kept to the budget and the quality of work is good. What more could we ask for?

Financially, this is one of the best decisions I’ve ever made. Private housing is painfully expensive in Singapore but Public Housing is another story. My place has a total floor area of 1184 square feet. While that isn’t much in other countries, in cities like Singapore, that is a considerable amount.

The more amazing part is how much we paid for it. Just 289 Singapore dollars per square foot. You’ll never find a per square foot price like that in the private housing market here where 700-800+ dollars per square foot is considered cheap. Most apartments I know are smaller and go for anywhere near 1000 dollars per square foot.

What this means for us is that it is extremely unlikely for us to experience a loss on this place if we ever have to sell it. The other cool thing (which I wrote about before) is that because the place cost us so little, we managed to take a floating rate loan that caps the interest we pay at the interest rate that our CPF ordinary account*** pays us. The tenure is for eight years which means that the total interest on the loan is small and with current interest rates at such low levels (currently, we only pay about 1.9% per year), we are effectively getting paid to take the loan. Furthermore, there’s a cap on the interest rates we pay, so there’s only upside and no downside to this loan. (For those who still can’t see it, CPF pays us 2.5% interest while we pay the bank 1.9%. Since we’re getting more than what we pay, the loan is effectively interest free.) The icing on the cake is that we DON’T pay anything out of our pockets for the mortgage i.e. there’s no impact on our monthly cashflow since payment for the mortgage comes from our CPF accounts.

Having said that, we wouldn’t have been able to do this if (a) we didn’t already have a substantial sum already in our CPF accounts, (b) we didn’t both have jobs that pay us slightly above the median (you can check where you stand here) and (c) were willing to wait two whole years for the place to be built. Big thanks to my wife for willing to put up in just one room while we had to wait and my parents for letting stay rent-free for two whole years.

This post has gotten way too long so I’m ending it here. Here’s to hoping that 2015 will be even better than 2014!

*Please don’t expect returns like this by investing in the STI ETF. The State Street one seems to be more heavily traded but the spreads are still wide enough that you won’t get the returns as calculated by the STI. On top of that, you still have to pay State Street for managing the ETF. It’s a reasonable approximation to the STI but don’t expect the EXACT return as calculated using the STI.

**Using the rule of 72, a return of 13% per annum doubles you portfolio every 5.5 years. With a 26% return, your portfolio doubles every 2.8 years. Of course, we can’t expect to see these kind of returns every year and as the portfolio gets larger, the contributions from savings will become less important if one remains an average salaried worker.

***The CPF is Singapore’s idea of a pension scheme where it is compulsory for workers to contribute a portion of their monthly salary towards the fund. The fund has been tweaked to allow for a range of uses, one of which is towards the payment of one’s mortgage.