Investment wisdom

Costs are the best single predictor of the future performance of an investment. Keep costs lower — by tracking an index rather than investing in attempts to beat it — and for any given level of risk your returns should be a little higher.

Why investors need to know about indices.

Research by London’s Cass Business School shows that randomly chosen portfolios — that might as well have been picked by monkeys — are overwhelmingly likely to beat market-cap-weighted indices. But most monkeys failed to match equal-weighted indices, or indices based on most sophisticated measures to limit risk.

So the hierarchy is that simple equal weighting indices beat monkeys, who beat value-weighted indices like the S&P, which beats the average active manager (who nonetheless complains that the S&P benchmark is unfair).

Yet our money is still mostly run by active managers, while none that I am aware of is run by monkeys. For these reasons, and many more, we need to know more about indices.

Mr Markowitz’s comment on this: “One lesson from 2008 is that if it’s very complicated and you don’t understand it, maybe you shouldn’t buy it.”

Anyone with a simple rule that required them to keep 40 per cent in bonds and 60 per cent in stocks would have “rebalanced” — bought stocks — near the market’s nadir five years ago, he points out. 

Innovation from scientific research

Often, we see amazingly successful products emerging from research. The original research purpose can be entirely different from the eventual commercialized product. You would recall that Post-it notes emerged from a project to discover adhesive. Viagra emerged from heart disease research. Many claim that these innovation were random outcomes. This is an easy assumption because it does not require further discussion.

But we can breakdown the innovation path into two: Demand led or Supply led. We are familiar with demand led innovation because that is what marketers believe in. They think that it is always possible to discover what consumers value and create a product that meets that value. Yet, it is arguable that consumers may not be aware of their future demands. In many instances, disruptive technologies emerge from such supply led innovation.

We must allow scientists to follow their intuition in developing something that may not have clear commercial value. Because of their curiosity, they just might discover something that an entrepreneur can bring to the market years later. Scientific discovery is not always a straight path. In many cases, a seemingly useless discovery can spark off a bunch of ideas.

Existing demands can change. Consumers may decide to weigh product attributes differently over time. Firms have to make incremental changes to meet these incremental or changing demand. But meeting existing demand does not stimulate innovative activities. In an industry where every firm attempts to read demand more accurately, it leads to a commercial bloodbath and unsustainable operations.

Radical technologies create new markets. New markets are less defined but it gives a firm more parameters to grow

The case against large immigration flow

The economic effect of positive net immigration to Singapore is negative relative to older people working longer. When the population base remains stable and retirees extend working life, we have a higher GDP per capital.

If we continue to bring in more immigrations without an end, there will be more stresses on our infrastructure. Comparatively, except for healthcare infrastructure, old people demands lesser for road usage, transport services and natural resources.

Intuitively, it makes more sense to retrain our aged population and to encourage them to work longer than to expand our population without end. This is perhaps why Japan rather deal with an aging population than tolerant aggressive immigration.

(I understand the need for a critical mass of population. Perhaps 6.9m or 10m is the defined figure, but there must be an eventual limit to our planning parameters)

Want to invest in Commodities? — Must Read

Commodities usually involves high costs of storage and procurement. For this reason, investors have relied on futures or commodities firms to obtain commodities exposure. With the introduction of commodities ETF, there is renewed interests. ETFs provide cheap and transparent way to invest in commodities futures.

Factors affecting commodities comprise weather, geopolitical developments, supply constraints in physical production, unanticipated increases in demand as a result of prosperity in emerging markets, and incidents that create political or economic turmoil.

Recent crisis have shaken investor’s confidence in equities. This motivate investors to explore alternative investments in commodities. What are some ways an investor can invest in commodities?

Exchange Traded Funds provide the cheapest way to buy commodities exposure. These ETF track major commodities index
Exchange Traded Notes track non interest paying debt and the credit risks of commodities contracts. Payoff to the ETN depends on the counterparty risk of the futures issuer.

Unit trusts have higher fees than ETFs as they typically employ discretionary management methods to invest in commodities or companies in the businesses related to commodities.

An investor can also trade derivative contracts such as futures and swaps directly. The most direct way of investing in commodities is to buy the physical commodities incurring storage costs. One of the most indirect ways to gain exposure to commodities is to buy equities of related businesses.

Commodities have unique characteristics. Metals are seen as safe haven for investors and demand can be driven by the stability of the value of money. Soft commodities such as grain, crops and coffee generally react well to extraordinary detrimental events.

Agriculture sector is less dependent on economic conditions and more dependent on factors such as global weather. The low correlation (even lower than bonds) is an important tool for portfolio allocation. Commodity prices can also hedge inflation.

For long term investors, commodities will be a strategic allocation tool for the portfolio due to the low correlation with equities. For short term tactical allocations, commodities rise when inflationary pressures increase.

HDB is not your retirement plan

Depending on your HDB asset for long term retirement?

This is not an attack of the policy. I believe the HDB system of providing for housing is cool. But it is not a sufficient retirement asset provider. This article seeks to urge Singaporeans to prepare for adequately for their retirement.

Your HDB is a lease

When your house has a maximum lease of 99 years, you may be really just renting the space for 99 years. It is unlike the traditional freehold structure. In other words, the amount of money you are paying is considered advance rent. The financial implications are clear. The value of the lease decrease as your time runs out. A 40 year old HDB flat will be worth much lesser than a 99 year old HDB unit. This may not behave like a real asset.

You don’t sell, you just transfer your lease

When you decide to sell your HDB flat, you are actually transferring your lease to another family. HDB as your ultimate land lord needs to approve your unit’s assignment. If someone pays a premium to take over your unit, he believes that he is willing to pay a monthly rent more than you do. Perhaps this is due to the proximity to the MRT or a famous school.

Your CPF pays prepaid rental expense and it is not being invested!

Remember what you are using to pay for the HDB — CPF. Yes, in fact, you are using your retirement fund to pay for rent. How is this preparing for your future? If your HDB price does not increase or if you decide to live in the unit for 99 years, your unit will surely, without any possibility, be an asset. In fact, you are not well utilizing your CPF for investments and there is an opportunity cost.

What’s worst? You are prepaying 99 years of lease but you are borrowing to prepay the lease. HDB grants you a loan, makes interest off you and wants you to pay them the entire rent upfront. Do you ever want to pass your asset to the 2nd or 3rd generation? This is not possible in Singapore. Your lease ends in 99 years and the value of the house drops quickly after 50 years. Ask yourself, would you buy a flat with less than 50 years lease?

Simply put, you will still need to invest wisely. Do consider the lowest cost and broadest index funds!