Archives for category: Economics

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.



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.


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?


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 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.

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’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.”