Monday, August 10, 2015

More Singaporeans need to be entrepreneurs but ...

I have always respected entrepreneurs. Even more if they are fellow Singaporeans. They dare to execute on their dreams despite the high odds of failure. How to not respect? I am glad to be of assistance to give free product reviews of fellow worthy entrepreneurs on my blog in the past.

I recently stumbled on an article which lamented that Singaporeans are not risk-taking enough and that this is bad for the country because the country needs more entrepreneurs and more workers to join risky entrepreneurial start-ups to create value. The writer, Mr Devadas Krishnadas, is an entrepreneur with a shining career history in the civil service. He earns my admiration to have the courage to quit a high-paying and stable job to become an entrepreneur. He walks the talk. However, there are some points which I do not agree with the article from the perspective of a salary worker and investor.
The young woman sitting across me was being interviewed to join my firm as a consultant. Well-travelled, highly qualified and poised, she spoke eloquently on why she wanted to join the firm - indigenous, small but growing.

Having gone through several stages of recruitment, we were finalising her appointment. She suddenly said she wanted a much higher compensation than the range discussed.

When prompted as to why, she replied that it was a great risk to work for a small local firm. I asked her to expand on her logic. She said her best option was to work for the civil service or a multinational company and that she was, in effect, doing the firm a favour by joining, and thus merited a market premium.

This attitude towards risk is disappointing individually, but troubling when we expand it to the national scale. It suggests that the young generation value the payoff for their education in terms of occupational safety. While at one level rational, such an attitude may help explain why small and medium-sized enterprises (SMEs) have great difficulty engaging the best talent.

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The attitude of the job applicant makes perfect sense and not at all troubling even if we expand it to the national scale. When a SME asks for a loan from a bank, the bank charges higher interest rate compared to a big company because of the higher risk. Similarly, for someone applying for a job at a SME, it is absolutely reasonable to ask for higher compensation because of the higher risk. It will be very troubling if a bank does not expand this risk-management practice on a national scale. The country's financial system may face systemic risks due to too much bad debt later. Likewise, given the very low odds of success for start-ups, several families will be in financial trouble if there are many Singaporeans who are not compensated enough when they lose their jobs working in start-ups.

Job seekers should not be expected to take risks. Otherwise, they would have become entrepreneurs. What is troubling on a national scale is that we do not have enough talented Singaporeans who have a higher chance of success as entrepreneurs but choose to remain as salary workers. Singapore needs more people like Mr Devadas Krishnadas who resigned from a good job to create risk-driven value as an entrepreneur. However, can we blame most Singaporeans, including myself, for not being like him?

Some reasons I can think of why there is a serious shortage of entrepreneurs in Singapore. I am not qualified to comment as an entrepreneur. I write from the angle of a salary worker.

  • It does not make financial sense for Singapore's best minds to become entrepreneurs
The dumbest reason to become an entrepreneur is to become rich. Look at the numbers. Most start-ups fail. Not just that. Most of the promising start-ups who got venture capital funding fail. Why would our best and brightest Singaporeans who have the option to work in the civil service and big MNCs want to become an entrepreneur? The risk-reward ratio simply does not make sense. Does it make sense for someone to exchange a low-risk-high-gain job, say in the civil service, to become an entrepreneur with no work-life balance, negligible or negative pay and despite all these sacrifice, the odds of having nothing to show at the end of the day is very high? I have met entrepreneurs in the course of my engineering work. I know they have no work-life balance because some have unwittingly made appointments on weekends and public holidays. They worked so hard until they forgot which days are weekends and public holidays. Unlike salary workers, they fail to appreciate that today is Friday although they have no Monday blues as well because they HAVE TO love what they do. Given the low odds of reward and guaranteed sacrifice, how to sustain without passion?

A worrisome trend has been developing in the Singapore economy in recent years. Some big MNCs are moving out. This explains the government's generous moves to support local SMEs in the form of grants and innovation support. Singapore has got to build our own indigenous big companies to replace these MNCs. Fortunately or unfortunately, I believe there will be more entrepreneurs as a result of the MNCs moving away. Mid-career professionals who got retrenched by the MNCs may start thinking of becoming entrepreneurs because they have lesser to lose now. Besides, their chances of success is higher due to the long experience and network built working in industry. Unfortunately, I believe most of the concentrated local talent in the civil service will remain locked in the public sector because the risk-reward ratio is simply too compelling to stay.

If a person just wants to be rich, please don't become an entrepreneur. He will surely give up later. He has a better chance at becoming rich by slogging as a high-level big company executive or government scholar earning a high-paying, stable salary. If he holds a middle-class job that pays around the national median-income, he still has a fair chance of becoming comfortably well-off by keeping to a simple lifestyle, patiently saving and investing for at least a decade.

Just don't be an entrepreneur if your sole objective is to be rich.

  • Cannot afford to take the financial risks of an entrepreneur
Many Singaporeans have financial obligations to support the family. For a Singaporean breadwinner, it would actually be irresponsible of him to become an entrepreneur if he does not have adequate savings to cover the initial years of building up the business. During this dry period, there is probably no income to feed the family. Even if he is able to get funding from investors, it is unlikely the salary will be high. If I were a venture capitalist, I want the entrepreneur to have skin in the game and not pay him as if he is back to working as a salary worker in a low-risk environment. The entrepreneur should not expect his investor to take risk that he would not take himself. The entrepreneur's workers, if any, will probably earn more than him in the initial years.

Most young, energetic Singaporeans have taken up huge loans to buy property. This cannot be helped. In the Singapore context, they probably have to in order to get married. The girlfriend and future parents-in-law may disapprove if the man cannot afford a HDB. Unfortunately, some middle-aged Singaporeans who have otherwise accumulated enough savings to take on the financial risks to become an entrepreneur have taken up even larger loans to invest in a second property. A person in huge debt cannot afford to take on the financial risks of an entrepreneur. His interest expense comes due every month. Without a salary job that generates a stable cash-flow, the risk of financial ruin is not low. This issue indirectly affects me not because I invested in a second property (I prefer stocks and avoid huge debt to keep my options open for entrepreneurship), but because I am not able to find peers as potential entrepreneurial partners. I have personal weaknesses and I hope to find partners who can complement and make up for my weaknesses before taking on this risky path. However, if I want to become an entrepreneur, I do not want a heavily indebted partner who is forced to be in a hurry to make money. From my investing experience, those who are in a hurry to make money end up making less or lose money. I believe it will be even worse for entrepreneurs who are in a hurry to make money. They may end up not only losing money but their reputation as well by short-changing customers and their investors. I can afford to lose money but not my reputation. Emotionally, I find the latter extremely depressing whereas I am numb to losing money. As an investor, you have got to get used to losing some $$$ now in order to make more $$$ later.

  • Majority of people do not have the temperament to be entrepreneurs
This is a problem common everywhere and not just Singapore. For an economy to function normally, most people should work as salary workers. If not, where are the entrepreneurs going to find the workers? Besides, most people do not have the temperament to be entrepreneurs. The moment you broach the idea of becoming an entrepreneur, everyone around you, particularly your family, starts to make discouraging remarks. This happened to me and my beloved, normally supportive wife was the strongest opposition voice. It is not easy to go ahead with a risky project when well-meaning friends and family says negative things and they all sound right. Like investing, there is merit in being contrarian as an entrepreneur. A contrarian entrepreneur is likely to move into or even create a niche business where the profit margins are higher and the competition is lesser. In this kind of business environment, it is easier to earn more money while working less hard compared to businesses with cut-throat competition. It is easy to be a contrarian investor but much harder to be a contrarian entrepreneur. I am a lone operator in my investing/trading activites. I think being a lonewolf helps in the investment process because I do not have to deal with distracting and negative views. No entrepreneur can be a loner because there is so much to do and so little time and no one person can possibly have both the strengths and time to do everything himself. An entrepreneur has to persevere against all odds despite the negativity from well-meaning people around him.

Fellow financial blogger Christopher Ng has suggested that a fertile soil to cultivate potential entrepreneurs are kids from rich families. I will add one more group - middle-aged workers who have accumulated enough savings and investments to weather the storm. I agree with Christopher and will not repeat the details on the how. I will talk more about the why. Given that most start-ups fail, would-be entrepreneurs better be able to afford failure. Rich people can afford to fail. In fact, this may even help narrow the wealth-inequality social problem if losses from failed start-ups are concentrated to the rich. On the other hand, out of the few who will succeed spectacularly, no one will begrudge them for getting even richer if they create value to their customers, employees and suppliers as entrepreneurs. The poor will not begrudge the rich if the wealth-inequality is caused by value-driven entrepreneurial activity. If those who cannot afford to fail rashly choose to become entrepreneurs, there will be social problems when enough of them fail and most of them will.

Singaporeans have been complaining about job discrimination in our own country. The foreign PMET (Professionals, Managers, Executives and Technicians) workforce has gained critical mass in Singapore labor market, giving rise to the foreigner-hire-foreigner complaints. It is only human nature that people tend to feel comfortable working with people similar to themselves and hire according to these in-built prejudices. To be fair to the foreigners, they could complain the same about Singaporean employers preferring to hire Singaporeans. I am confident our government is able to solve the infrastructure-overload problem given the talents employed in the civil service and the money they can throw at the problem. However, I am doubtful the rising PMET unemployment problem attributed to unfair discrimination can be eased. It is a problem that money and intelligence cannot solve. It is a social problem that involves changing people's behavior and this will take lots of time. Furthermore, even if this problem does not exist in Singapore, foreigners can still take away our jobs without coming here. Foreign MNCs are already moving out of Singapore to cheaper locations. Instead of complaining and waiting for solutions from the government, unemployed PMETs who can afford to take risk should partner each other to start their own companies. Create jobs for yourselves. You have lesser to lose financially when you are jobless. Having said that, I admit I lack the moral authority to encourage entrepreneurship. I am hiding behind a full-time salary job on weekdays and a part-time investment job on weekends/public holidays. As an investor, I do not feel as socially useful compared to entrepreneurs. I mean no offense to fellow investors but entrepreneurs do create much higher social value. (*I take a deep bow to all the entrepreneurs in Singapore*)

Tuesday, June 24, 2014

A value investment course that is simple to understand and simple to execute

Alvin first communicated with me after I wrote a eulogy on his late teacher (Dennis Ng). He wrote books on trading and published interviews with Singapore Trading Gurus. Today, he conducts a value investment course. It is good to be open-minded and flexible. There are many ways to make money from financial markets. Without being exposed to the different ways, it is difficult for a person to pick the best one that is suited to his temperament.

Alvin asked me if I would like to attend his course. I had always been a lone operator in investing and never attended any course except read books and paying school fees to Mr Market (I lost lots of money as a newbie and it is more beneficial to share such experiences than boast about winnings). As I preferred to remain anonymous, I refused his request but offered to review his course based on his training materials. Since I am not paid, I am free to write negative stuff, if any.

I do not know how Alvin is like as a trainer. I have never met him in person but I like his intellectual honesty.

It is inevitable to pay school fees to Mr Market along the way. A prerequisite to benefiting from the school fees is to admit your mistakes and take the blame on yourself. Don't blame unfair practices like market manipulation, insider trading, bad advice from brokers etc. Blame yourself because ultimately, the buy and sell decisions are yours to make. I was very impressed with Alvin's honesty when he revealed that he blew up SGD100k in his trading account. Potential students of his value investment course may ask ... why would I want to learn from a loser? Most of us will lose big at some point (me included) no matter how prepared. The loser has a better chance of becoming a winner in future if he is honest about it to himself and family who are affected by the loss. I have reservations in a guru of an investment course who spends more time harping on his winnings than sharing the lessons from his losses. You cannot learn much from someone who boasts about his achievements but you can learn much from someone who reflects on his past mistakes. 

I doubt Alvin's training style would be to impress, boast about past achievements to appeal to the greed of newbies who want to get rich quick. If he is which I doubt so, I apologize for writing this positive article on his course.

The CNAV strategy that will be taught in the course involves buying stocks at prices way below their conservatively estimated net asset value. Suppose you buy a company with net assets worth $100 on its balance sheet at $50. Your downside is well-protected. If the company is liquidated today, it is quite unlikely to sell below $50 because of the asset backing. In addition, given that the asset base has adequately compensated the investor for the price paid, he is getting the earning power of the company for free. The company need not be a growth stock or highly profitable as long as its operations are not burning cash. In fact, any profits will be a bonus to the investor.

A few things to note is the quality of the assets. For this kind of asset play which is probably low growth, high quality assets are those that are easy to value and hard to defraud. Cash, marketable securities, real estate fall into this category. Assets whose values are hard to estimate should be discounted heavily to be conservative. Almost 4 years ago, I wrote an article which describes a case study using a method similar to the one employed in Alvin's course.

One problem with this method is the risk of stumbling onto value traps. After all, when something is too cheap to be true, it probably is. To reduce the risk of stumbling onto minefields, Piotroski score is added as an additional screening criteria as taught in the course. A Piotroski score of at least 7 would be good enough.

Every investment strategy has its pros and cons. The problem with the CNAV method is that the stocks uncovered tend to be illiquid and few. A bad scenario will sound like this. Someone runs the CNAV screens and uncovers only 4 stocks. He puts his entire capital into these 4 stocks. Something goes wrong with 2 of them. He tries to cut his losses but the stocks are too illiquid for him to run. There are a few things to note to counter the weaknesses of this strategy. Using the CNAV strategy, does today's market generate enough stocks to provide adequate diversification? If no, the investor needs to watch his position size in each individual stock. It should not be so large that he cannot cut his losses fast enough if something goes wrong later. Fortunately, these problems are less of a concern to the small retail investor as his capital is small.

The CNAV strategy is not suitable for investors with large amounts to invest. This is bad for the big institutional investors but good for small retail investors. Because CNAV stocks are illiquid, they are not worth the attention of the big players. It is because of this neglect that they become so cheap for retail investors who do not mind the illiquidity to pick. Since CNAV is not a scalable strategy, retail investors will need to look for other strategies after they have become successful. That is a good problem to have.

What I like about this course is that it is highly focused on a single concept that is simple to understand and simple to execute. Value investing is simple to understand. What is so hard to understand about the concept of buying something worth $1 and paying $0.50 for it? What is really difficult is its execution. How do you really know it is worth $1.00? The problem gets even more complicated when the investor tries to project future earnings and cashflow. The CNAV strategy has nothing to do with the future. No projection. The investor only needs to know how to read the balance sheet to extract net asset value and apply a discount. A one day course is quite sufficient.

The course costs only SGD98. It is too cheap for the trainers to make meaningful profits. Therefore, it is quite fair that other products/services will be promoted during the course. I cannot review on this aspect because I did not attend the course.

PS: This is not a paid advertising post. Nobody knows my real identity except my wife. I like to share good financial products/services, particularly from fellow Singaporeans. Other similar posts are (Link) and (Link) and (Link)

Sunday, June 2, 2013

Stocks versus property. Why I prefer stocks over property.

Singaporeans love the property market. The fact that it took our government seven anti-speculative measures to dampen Singaporeans' love affair with property since 2007 is evidence that it is very hard to break this strong love. In the meantime, the lack of success is not exactly bad news to the government. They have made 1 billion in tax revenues from the property curbs.

There is substantial anecdotal evidence that more Singaporeans made more money from property than stocks. Just ask and look around. Our parents' generation who dared to invest in property have secured their retirement. It is small wonder the next generation will do the same thing since property investments have worked for decades for so many people.

I have peers who took the plunge and invested a second property 5 years ago. I am sure they are doing quite well. Some have urged me to stop hoarding my money and take a plunge into the property market. Another told me I will never become rich because of my steadfast refusal to take the risk to buy a second property. I probably look stupid to these people. However, I think it is fine to look stupid for good reasons which will be explained here. 

In one sentence why I refused to buy an investment property - I cannot control risk with property investments with the same ease as stocks.

Given the very high property prices in Singapore and my own financial resources, I only have enough money to buy 1 property for investment.  Only 1. What can be more concentrated than that? The lack of diversification makes it hard to manage risk. With stocks, I can construct a portfolio of 30 stocks with not a single one taking up more than 5% of my net-worth. I can afford to make several mistakes without facing financial ruin. Can the same be said with a concentrated property portfolio consisting of only 1 property? To make matters worse, this single property has to be bought with leverage. How many Singaporeans can buy a property with cash? When an investor uses leverage, his margin of error is greatly reduced. The mortgage debt is usually quite substantial because it can take 20-30 years to repay with today's high property prices. It is quite common to pay 25% cash with the rest using borrowed money to purchase a property. The investor loses 20% when the property drops 5%. Leverage introduces the risk of margin call. Although banks seldom ask borrowers to top up their mortgage loan when property price drops, they are legally allowed to do so. If the borrower misses the interest payment because he loses his job, the bank may foreclose and force-sell his property in a battered-down market at a lousy price. With stocks, there is no need to use leverage. One can build a diversified portfolio with as little as SGD30000 with cash.

Value investors tend to steer clear of bubbles. I do not shun participation in a bubble if the underlying asset is liquid. The end period of a stock bubble is historically characterized by a parabolic rise of stocks in a short time. Being out of the market at this stage means missing out the opportunity to make lots of money in a short time. Thus, I will join in the crowd despite knowing that it is a stock bubble, although only a manageable portion of the net-worth will be inside the market. (Don't try this if you are a newbie in the stock market, particularly if you have yet to suffer gut-wrenching losses) The reason why I dare to join the bubble is that stocks are liquid. The moment danger is sensed, one can get the hell out in a single trading day. This is one of the advantages of being a retail investor with a small fund to manage. It makes risk management much easier. Properties are illiquid with high transaction costs. Unlike an equity investor, there is no way for a property investor to get the hell out even if he desperately wants to because of property's illiquid nature.

If a hired fund manager shows me a portfolio with a highly leveraged, super-concentrated and illiquid portfolio, I will sack him straightaway so that I can sleep better. How to manage risk with a portfolio like that? Middle-class Singaporeans who took on a 20-year mortgage to buy an investment property are doing just that.

Besides the inability to manage risk, there is another good reason to avoid property investments. I hate debt intensely. The only time I overcame this hate was to buy my first residential HDB Singapore flat so that I can marry the love of my life. While this article frowns on property investment, a HDB flat is highly desirable. One motivation foreigners convert to become a Singapore citizen is to have the privilege to buy our HDB flats. Particularly for Singaporeans who have sacrificed for National Service, don't ever miss your privilege to buy a HDB flat. It is almost a sure-win as it is subsidized by the government. Besides, everyone needs a roof over our heads that provides the stability for us to marry and start a family.

Buying an investment property today usually involves taking on a huge debt that requires at least 20 years to repay. This makes a person a financial slave. If the goal of investment is to be financially free, then does it make sense to take on so much debt for an investment that it risk making one a slave for the next 20 years? It is not just money anymore. It is freedom. With a heavy debt, a person has to tolerate bullies at work. It is easy to slip into mental depression if a person has to drag his feet every day to work in an environment that drives him crazy. Although my present workplace is wonderful and I am working with and for pleasant and smarter people at the moment, there is no guarantee that this can continue. The advantage of investing and saving hard is to accumulate enough "fuck-you" money to have the freedom to show the middle finger and quit when faced with unreasonable behavior at work. Buying a second property at this point will take away all the "fuck-you" money that I have painstakingly accumulated over the years.

For high net-worth individuals with enough money to buy up multiple properties with cash, property is an appropriate component in this investment portfolio. It is easier for the rich to manage risk in their property portfolio. For the majority of middle-class Singaporeans like me, I think they should think twice before committing to a highly leveraged, concentrated and illiquid investment that can potentially make a slave out of them for the next 20 years.