Investment Moats

How Long Can a $1 Million Portfolio Last if I Spend The Dividend Income before the Interest Income?

by 2 Comments

When the market took a ferocious plunge this March, I wrote an article titled Retiring into a 2020 Bear Market. The first three months.

One of my readers came away with a question that I thought I will spend sometime to address. (If you write in to me and I do not reply to you, it is not that I am ignoring you but that my mail box is pretty jammed up)

So my reader would like to know my take if a prospective retiree setup their retirement this way:

Suppose he has accumulated $1 million dollars. He will deploy his capital this way:

  1. $500,000 is invested in reits and high dividend stocks. Let’s say he expects that they generate a 6% dividend yield. This will give him a dividend income of $30,000 a year but he expects the dividend to drop.
  2. $500,000 is invested in bonds, fixed deposits, and cash instruments. This will give him an interest income yield of 2% a year, which will give him an income of $10,000 a year.
  3. He expects that his annual spending is drawn from the reits and stocks dividend first. If that is not sufficient, the rest will be drawn from #2.
  4. He wishes to be very disciplined to ensure that the maximum he spent every year can only be drawn from #1 and #2.

How long would it be before he runs out of money?

What are the pitfalls and blindspots? Strength, weakness?

How long would it be before $1 million dollars runs out for retiree?

This reader did not provide some vital information:

  1. Will he adjust this income requirement for inflation? I would assume he would
  2. From what he says, he wishes to be flexible about his spending. If he cannot be flexible with his spending then that is another permutation
  3. REITs and high dividend stocks in which market?

Based on the data that I have read, the long term returns of REITs are pretty similar to the broad-based equity index in the US. So I can use the S&P500 as a simulation. For the past 90 plus years, the compounded growth of the S&P 500 is 9.5% a year.

For the bonds and cash, I would use the 1-Month US Treasury Bills as a proxy. For the past 90 plus years, the compounded growth of the 1 month treasury bills is 3.3% a year.

From what he says he will withdraw an initial income of $40,000 from this $1,000,000 portfolio.

Let us first assume that we adjust the income every year based on the prevailing inflation rate for the previous year.

I tested whether this reader money can last 30 years.

This setup will last 93% of the time.

In 4 instances, this would not last:

  1. The 1937 30-year period
    1. Runs out after 25 years
    2. Ending income $84,940
  2. The 1966, 1968, 1969 30-year period
    1. Runs out after 27-28 years
    2. Ending income about $171,514

His income keeps up with inflation.

If Retiree is flexible with $10,000 of his income, how long would his money last?

Now let us simulate the scenario where he draws from his REIT and dividend portfolio, but when his spending is too high relative to his current portfolio value, he choose to tune down the $10,000 of his spending.

This means that

  1. $30,000 is adjusted for inflation
  2. $10,000 will not go up or even go down if the portfolio cannot take it

The simulated result is:

  1. His money lasts for 30 years 100% of the time
  2. His money lasts for 40 years 99% of the time
  3. His money last only 71% of the time for 50 years

Let us compare how his 30-year retirement will be like for the tough 1937 and 1969 periods that caused his plan to fail previously:

Retiring through 1937 to 1966

I do not understand why 1937 to 1966 was so hard versus 1936 and 1938, but that is the intriguing nature of sequence of returns.

Instead of running out of money in 1961, my reader would spend through this period. Instead of spending $84,940, spends only $64,697.

He loses 23% of his purchasing power.

His income is higher than when he starts off though.

Out of his $40,000, the $30,000 is adjusted for inflation, the $10,000 eventually gets wittled down to $0.

Retiring from 1969 to 1998

It is not deflation that kills retirement. It is high inflation.

The 1960s is brutal because inflation averages above 5%. In this sequence, you will realize that the biggest portfolio drop is only -9.47% in 1974!

Instead of spendingn $171k, he would only spend a total of $130k by 1995. He lost 23% of his purchasing power.

What if he assumes a constant 2% a year inflation?

If he assumes a 2% a year constant inflation, his portfolio cannot last over the 30-year period as well.

There were 4 instances out of the past 61 instances that the reader will run out of money.

These are the years that starts in 1928 to 1931.

The reason: He consistently tries to spend more even though things are getting cheaper.

What if he assumes no inflation adjustment?

There will still be 1 instances out of the past 61 30-year instance where his portfolio will not last.

Why is that so?

The reason is the same. In a deflationary period, things are getting cheaper but you still insist on spending $40,000 a year, the reader is putting pressure on his portfolio.

Wait… These Simulations are not Exactly What He is Asking About!

If you re-read what my reader is asking, you will realize that my simulation is a bit different from what he is asking.

The truth is that… there is no way of simulating that.

But I realize sometimes how unrealistic that is to simulate:

  1. The dividend income is variable
  2. If not enough take from interest income up to $10,000
  3. Not sure if I should adjust for inflation or not. If I were to adjust, then do I adjust the $10,000

I could simulate this with Singapore REIT’s past returns but if you ask me, would you trust the result of 1 set of historical results that is less than 30 years and in a period where REITs have done relatively well?

I do not think so.

The Most Important Consideration Was Not Provided

When you try to conceptualize how much you need to be financially independent and your spending plan, start by thinking also about:

  1. How much income you need
  2. Out of all your income requirements, how much are recurring or one time expenses
  3. Out of all your income requirements, how much are you willing to be flexible and how much you would definitely need to have

This will drive a lot of the planning.

In my article How Much Money do You need to be Financial Independent? A Deep Dive, I covered how to go about planning how much you need. Everyone can start with that. It will give you a sound rule-of-thumb amount.

Spending Dividend Income Before Interest Income

The strength of spending dividend income before interest income is that if dividend income is enough, the interest income builds up.

When dividend income is not enough you can spend on interest income.

This is a bit different from my simulation in that the interest income is not spent at all.

If we go back to my historical simulation, the modification is that my reader is spending $30,000 instead of $40,000 in the initial year.

In that case, his money should last 30 years even if it is inflation adjusted.

I think if you only need $30,000 a year and the interest income is good to have, there is quite a fair bit of buffer.

But if you need all of $40,000 a year for your spending, then based on my simulation, some situations will be a bit challenging.

Future Returns May Not Be Good

Whenever I was asked retirement questions here or at work, I realize everyone is trying to suss out whether they can get a 7% a year return or a 5% a year return.

After looking at so much data, I get abit skeptical about using a certain return rate.

Don’t get me wrong, we definitely need a standard rate of return for planning purpose. If not, it will be quite hard to have a focused wealth accumulation target for the clients and the adviser to have a conversation.

But it would be better to figure out that:

  1. You have done your best to optimize your income requirement for financial independence
  2. You have allocated your wealth, based on your risk tolerance into financial investments that are sound and enable you to capture market returns

What you get in the end, you have to pivot.

When my reader was posing this question, he was expecting a conservative fixed deposit income of 2% a year.

If we look at the rates now… how conservative is 2% a year?

The Bloomberg Barclays Aggregate bond index has an average maturity period of 7 years. The bonds are a mixture of government bonds, corporate bonds, treasury bonds.

The yield to maturity is 0.93% last I check.

What we are livng through right now is the period where you do not need to simulate:

  1. Dividend income being cut for banks and REITs
  2. Interest income that is below your expectation
  3. You cannot find work easily because everyone is looking for work and businesses are cutting people than taking in people

If you retire today, what would you do? You might be able to figure out this on your own (but we can have a conversation about this as well if you wish to)

Think in Terms of Total Returns Not Dividend Yield

Lastly, I know that my reader is trying to compartmentalize protecting his capital and spending only his income.

If he does that, his income is going to be variable and he has to be OK with that. (Read Why Living Off Dividend Income in Retirement is Not Perfect)

The toughest picture to swallow is: How do you frame putting 50% of your portfolio or $500,000 in something that yields 0.8% a year?

You would not like that picture a lot.

However, if you think in total return of the bond portion and ask if you could get a 2-4% total return (based on yield and capital appreciation), deploying 50% in bonds may be justifiable.

This goes the same for the equity portion as well.

It Can Be Dangerous to Spend 100% of Your Average Returns Assumption

What do I mean by this?

If you assume the conservative long term returns of the porfolio of REITs and high dividend stocks is 6% and you decide to based your income requirements on 100% of that 6%, it can be rather dangerous.

This is because your returns are not 6%, 6%, 6%, 6%, 6%.

During the years when returns are -15%, and if you continue to spend 6%, that puts more stress on the portfolio.

I have explained in the past a more conservative dividend model. If you assume your conservative dividend yield is 6%, plan with less, say 4% dividend yield.

This buffers the years where your total dividend is lower and yet you can still maintain your lifestyle instead of cutting some expenses that you cannnot cut.

In a sense…. you realize this is like a 6% total return but spending 3% of it. We are back to a withdrawal rate model.

That is all that I can think of.

If you have your own perspective about my reader’s situation, do comment below. As always, he is a fellow reader just like you, so do be as respectful in your tone as possible.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works

My Thoughts on Syfe’s New Equity100 Portfolio. Is the Equity100 Worth Investing In?

by 12 Comments

I think the folks at Syfe wanted to see if I could write about their Roboadviser offering for some time but I did not get round to doing it.

Some readers have asked me as well.

Since Syfe just announced their Equity100 portfolio, I thought I will let everyone know what I think about it.

What is this Equity 100 Portfolio?

The Equity 100 portfolio is like a fund of funds managed in a rather active manner.

The illustration above gives you a glimpse of the composition of the portfolio. There are a few more funds but it is not shown.

The Equity 100 portfolio thus is made up of exchange-traded funds that are listed on the United States stock exchange (except for CSPX which is listed on the London Stock Exchange).

From what I understood, they will always make use of exchange-traded funds.

By putting your money into this portfolio, you gain exposure to a diversified basket of stocks.

The allocation of equity to bonds to cash is 100%:0%:0%.

In other words, your money is allocated to equity, which in the past is the asset class that gives the highest expected return over the long run.

This portfolio has the least damping because of its zero exposure to bonds and cash. By investing in this portfolio, you are expecting that if you go through another roller coaster in February and March this year, this portfolio will face the full force of the market.

The Smart Beta Aspect of the Equity 100

What is unique about Syfe when compared to the other Roboadvisers out there is their tilt towards the quantitative approach such as risk parity (for their Global ARI and REIT+ portfolios) and in this case smart beta.

You can read more about their Smart Beta strategy for the Equity 100 here.

Smart Beta may be new to you, but in my own words, managers or funds that does smart beta believe that there are certain methodology of securities selection that if you are able use these methodology to select a subset or these securities from the general basket of securities, or to overweight certain securities versus the other securities, you are able to gain outperformance over different time periods.

They are grounded in rigorous academic research and backed by Nobel prize-winning work, the most famous being the Fama-French three-factor model. Conceptualized by Nobel laureate Eugene Fama and Kenneth French in 1992, the model states that market returns can be explained by three factors – size, value, and market risk.

Fama and French found that, over time, small-cap stocks earned higher returns than stocks with a large market cap on a systematic basis. The value factor was established based on the stronger performance of stocks with a low price to book ratio (i.e. value stocks) as compared to stocks with a high price to book ratio (i.e. growth stocks).

Since then, other factors have been identified and become widely accepted within academia. Fama and French even expanded their three-factor model to include two additional factors in 2014.

Syfe

Based on what Syfe described, their Smart Beta work is based on the foundation built by Fama and French’s five-factor model research.

Syfe’s investment team identified three factors that based on past data, generate better risk-adjusted returns.

  • Growth. Since 2010, growth stocks have handily outperformed value stocks. Over the past years, much of that outperformance has been driven by technology stocks the likes of Facebook, Amazon, Apple, Netflix, and Alphabet (FAANG). This is further reflected by the 260% gain made by the Russell 1000 Growth index from 2010 to 2019. Comparatively, the Russell 1000 Value index only rose 139%.
  • Large-cap. For many years, small and mid-cap stocks have underperformed relative to their larger counterparts. During the March market sell-off, the disparity widened as small-cap stocks suffered much steeper losses than large-caps. This was perhaps because smaller companies have been much harder hit by the COVID-19 crisis and associated lockdowns than their larger peers.
  • Low-volatility. Contrary to what many people think about “high risk, high return”, numerous studies have found that lower-volatility stocks have historically generated better risk-adjusted returns over time. Stocks, or portfolio of stocks, with low volatility, tend to avoid extreme swings in price. While prices can swing upwards for a volatile stock, it can also plunge. Over the long term, it may be harder for a high volatility stock to make back what it has lost.

But Syfe investment team also believes in mean reversion:

So they believe that due to mean reversion, this is why small cap and value factors have not done well over time.

The Allocations are Dynamic

The nature of each stock in the ETF change over time. Their prices rise and fall. Their business do better, stays well, or become worse off.

Thus, their valuation changes, their size relative to their peer’s changes, and at times some of these stocks exhibit momentum as well.

Syfe’s investment team from time to time will change the weightage and allocation based on the change in these factors.

For example, if large-cap stocks go out of favor over time, we might reduce the exposure to this factor by using equal-weighted ETFs instead. That’s because equal weighting greatly increases the footprint of smaller stocks.

To be sure, dynamic factor selection does not mean we will be rushing in and out of factors. In a multi-factor portfolio like Equity100, it means that we might choose to over- and underweight selected factors to generate the most optimal risk-adjusted returns based on cyclical market conditions.

Syfe

Currently, the Equity 100 is overweight in growth, large cap and specifically NASDAQ technology stocks.

The Possible Future Expected Returns and Management Cost

Your question would be, given that this fund is gonna expose me to the full market forces what kind of returns should I be expecting?

Based on the past 10 years return, Syfe is expected to give you 13.4% a year.

Do note that these are historical returns and likely what they backtested (this means that they go through the past returns data and simulate that if you were to invest through this period, using their strategy, you would earn this kind of return).

You may have noticed that in the illustration above, the annual management fee is 0.4%. How much Syfe charges will depend on the amount you invest with them.

Here is a better breakdown of their fee structure:

Syfe holds a CMS license issued by the Monetary Authority of Singapore. The CMS is essentially more of a fund management license versus an advisory one. The primary advantage is that it allows them to chop and change the composition of their product without the constant authorization of the clients.

If your invested amount is larger (currently more than 100k), Syfe will assign a dedicated adviser to you. They will be able to give you financial planning advice.

As to the extent of their coverage, that one I am not too sure.

What Does Kyith Think?

Ok, before you hear what I think, you need to know some background here.

I wouldn’t profess to know everything about Smart Beta, but in my work, I get bombarded by factors and dimensions from time to time. On a frequent basis, I get the stuff of Fama and French pushed into my head even if I do not wish to receive the information (you know too much, you need to do too much.)

But still, I am not a thought leader in this space, so take what I said with a pinch of salt.

The Impetus for the Equity 100

What I understand from the Syfe team is that, they introduce this Equity100 partly due to the request by their clients.

They have a risk parity strategy in their Global ARI portfolio that if it works, are suppose to reduce the downside volatility for their clients. So that worked well enough that the clients felt that they could not dollar-cost-average into something well.

When you are in your accumulation stage, you would hope that you have more down periods than up periods, but over the long run, the things you invest in eventually ends up higher.

So those volatility period presents the investor opportunities to accumulate at the low.

If the price does not fall, they do not get as good of an opportunity.

Hence the Equity 100, which expose your funds to the full force of the market. This will be volatile and you will get opportunities to dollar cost average.

Ok, there are two contrasting feelings here:

  1. Dollar cost average and volatility is good for accumulation. We cannot deny that
  2. People do not handle volatility well in general. They tend to do stupid things. If you are able to help people avoid that, they can stay in the game longer and able to capture the return

So their GRI strategy handles #2 better and Equity 100 handles #1 better. But which one makes a bigger impact?

I think #2 makes a bigger impact. And I think while risk parity reduces the volatility, it does not mean there are no volatility.

And if you know your strategy do not go down much, just keep investing!

So that is my thoughts about the reasons for the impetus for the Equity 100.

Syfe’s Smart Beta Strategy

From what I understand, the dynamic allocation will not be super frequent. Perhaps twice a year (don’t take my word for it).

The exchange traded fund used, from what I see are market-capitalization weighted.

Syfe’s smart beta strategy is not in ranking or selecting a subset of stocks in the underlying stocks but selecting based on the attractiveness of the exchange-traded funds.

This makes their management easier and perhaps cleaner.

As to the strategy? I am not sure how Professor Fama and Professor French will feel if you tell them that the eventual result of their work results in a portfolio that is tilted towards large-cap and growth.

I have not associated any of their past work to favoring these factors.

I think what Syfe is trying to do is to explain what Smart Beta is about, and the two professors work may have brought about the attention to factor investing.

It does not mean Syfe’s work is based on this.

It is either that, or they would like to plaster the name Fama and French in the same breath as their stuff.

Another thing is that Syfe’s investment team are currently overweight on the growth, large-cap and tech.

However, they believe that from time to time, the value and small-cap premium will show up.

And then they can pivot accordingly into it the moment those premium showed up.

From my understanding of the professor’s view on this, these value, profitability, market, small-cap premium show up from time to time, but it is difficult to time them.

That means that Syfe means that they are able to time and get in, when the value and small premiums showed up.

This to me is another level of work already. If Syfe is able to do that, they are better than a lot of funds out there.

Could they do it?

I am not sure.

Our conversations with Dimensional folks tell us that there are alot of factors out there, or the way to implement factors. However, if we remove a lot of the layers, their premium may go away, or show us that the premium is due to the small, profitability and value premium.

It will take a long time for these to be verified.

The thing about investing is that you know it better after you have seen the result. However, when you see the result, you cannot turn back the clock to amend your decision. You only live one life.

This is why there are risks and perhaps there are returns.

The Lack of Ability for you to Track Equity 100 Performance

I forgot to add this point into my original article.

If you realize, Syfe did not publish what is the factors they are targeting.

The factors are not based strictly on Fama and French’s five factor model.

So if we do not know what are the factors, there is no way for you (the investor) to verify if the strategy is underperforming or outperforming.

You will also not know if you are taking excessive risk by them just tilting their portfolio to high beta.

  1. If you have a fund that benchmark against the index, you will know if they are doing better or worse
  2. You will know a value fund is sticking to it’s core when you know the value factor is not doing well and your value fund is not doing well. If your value fund is doing well while the value factor is not showing up, this can be a discussion point with your manager

If we do not have a way to verify, there are no easy way for you to verify performance.

Some First Principles of This Area of Investing

Ok just some things to recalibrate everyone after reading so much of what I have to say:

This is still an equity portfolio. Whether smart beta or not, the volatility (in terms of standard deviation) of this portfolio is not going to be veered far from equity.

In fact if the returns are higher, the volatility is expected to be higher.

So do be aware of your tolerance to volatility.

Execution Counts. I learn that there are a lot of strategies out there. But strategies that can be implemented and executed well is another matter altogether.

How do we identify good or poor execution? I have no idea at this point. Perhaps this is a topic for another day.

Estate Duty and Dividend Withholding Tax Considerations. Majority of the funds used in the Equity 100 are the ETF are domiciled in the United States.

If an investor passes away, the country where the fund domiciled in may levy an estate duty or death tax depending on the tax rate in that country.

In the case of United States, the estate duty is 40% of your assets above US$60,000 (the first $60,000 not subjected to estate duty) for non-resident aliens.

The UCITS ETF mentioned in the fund is domiciled in Ireland and have less of this problem.

Update: I did some pondering over the weekend and I remembered that Syfe holds CMS license but they are operating the portfolios as a discretionary manager.

This means that the investments are still under the client/investor’s name, which should still make estate duty an issue for the client/investor.

This also does not eliminate the dividend withholding tax between the ETF’s declared dividends and the Singapore entity, although based on the holdings, their ETF is not overly focused on dividends.

Your Surplus/Savings Rate Matters As Well. There are investments that get you from $20,000 to $300,000 but majority of the investments do not go like that.

A large part of the growth comes from continuous contributions. But in order to contribute all your money into it, you got to build conviction in the investments.

There is no shortcut but to take some time to learn more about what you put your money in.

If you are interested in the Equity 100, you can check it out at Syfe today.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works

The Future of Real Estate with the Boss of Starwood Capital Group

by 2 Comments

As a REIT investor, I got to take in whatever perspective that I can come across about the supply and demand of properties going forward.

Our newest associate adviser have not even started work in the company but he has alerted me to this pretty good interview by the chairman and CEO of Starwood Capital Group.

Some of these people are motivated by their personal interest about the issue, so what they tell us might be a little or very bias.

I think this is a pretty balanced interview.

Starwood Capital group is an investment firm that was born out of the US Savings and Loans Crisis in 1991.

The failed banks had to let go of their properties and Barry Sternlicht raised $20 million from a few New York families to fund the purchases of these properties. Today, they hold $60 billion worth of assets.

I have always associated the Starwood name with hotels but turns out as a group entity, Starwood operates more as an investment firm doing all sorts of deals trading properties, improving portfolio and bringing in investors.

“Starwood Capital sought to acquire well-located real estate assets at a discount to replacement cost that has the potential to benefit from improving fundamentals. In so doing, we have invested in a wide range of distressed securities and non-performing loans, single assets, portfolios of assets, and companies.”

As the head of the firm, the chariman should have a pretty good view about how the state of affairs after Covid-19.

Here is the interview:

The biggest discussion point was on one of the most densest cities in United States: New York.

  • In the hotel segment, the cities which typically thrive on big conventions like Chicago, New York, New Orleans will be the most affected. That will take a while to come back
  • Zoom meetings will cut the rate of growth (the finance side of him speaking. This will affect the valuations of the properties)
  • The office will have less of an impact. Going to the office is an experience that will not go away. Companies will take less space.
  • 20 years ago, office spaces have gone denser from 225 sqft to 300 sqft per person. Likely, the density will go back the other direction
  • The retail shopping center is the most hard hit. A lot of the retailers are upping their online game and have done really well. So those shopping centers that depend on tenants are going to get a hard hit. This is not an easy asset class to be in.
  • Single-family housing is strong
  • Barry believes a lot is how the employment will be going forward. If we stay at 20% unemployment for a prolonged period, this will have an impact on demand and rent, which will affect property prices
  • New York has a lot of things not going for it
    • Covid-19 and the protests in a very dense environment have worsened the problem
    • Tax rates are high
    • Strong unions mean that generally, the cost of doing business is high relative to other places in the United States.
    • If you tax the rich, the rich leaves, less tax revenue, it places more pressure on those who stay, and that further exacerbates the problem.
    • In the past few years, the more active players are less of the financial firms but the communications and internet companies. The reason they come to New York is that the talents want to be in New York. If the talents had a change in perspective in the future, then the demand for properties may shift accordingly.
    • There is huge pressure on real estate. Rents could drop 25% and expenses could climb 25%
    • However, every foreign investor wants to own properties in New York
    • Just before Covid-19, a law was passed that if you put in investments to the property to improve it, you are not allowed to charge additional rent for it. Effectively, this is rent control and this disincentivizes owners to improve their property. The result of this, as seen in other areas is that the place becomes more and more run down.
    • WeWork was New York’s largest tenant. That likely means this segment in New York will not grow any time soon.
  • Starwood Capital prefers to add assets in the Red states (Republican) primarily because they are growing, they are adding people, lower in taxes
  • Shared office space makes sense but the valuation of the companies may be wrong. WeWork makes good money from countries like Tokyo and Singapore and it makes less sense in lower-tier cities
  • WeWork is paying the rent in the majority of Starwood’s properties
  • Barry thinks that WeWork can make pretty good money. He cites the example of their London space which they leased from Starwood Capital. They charge tenants $160 and after netting their cost they earn $130. They then pay Starwood $65.
  • Retail is damn tough
    • Properties are bought when rent is $10,000 PSF and if tenants ask to pay the rent at $3,000 PSF, the value of the property will fall so much that it will go back to the financier. So landlords would rather keep the property empty
    • It is very very difficult to underwrite retail properties because you got tenants but you do not know what is the rent that they will charge.
    • It will take some time before they reached equilibrium
    • Amazon is the pandemic of retail. They practice predatory pricing (sell their products below the cost of goods) and in some other industries, this would have to be regulated.
  • Barry thinks that there will be a wave of distressed assets coming.
    • The FED just encouraged the banks to work with the borrower but they are not doing it
    • 1/3 or 1/4 of hotels in New York will go bankrupt
  • Hotels catering to high-end clients are not much affected
  • Hotels that build their business around conventions are going to be severely affected.

Overall, I think there is nothing new here. What will be difficult is that it is difficult to see demand and supply. This translate to the stabilized rent. And that translate to the valuation.

There will be moderation but we are not sure how the terminal state will be.

This is not unique to real estate but other business segments as well.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works

Some Thoughts of This Robinhood Design Issue

by Leave a Comment

There was a time in my previous job that I had to take some system safety course.

A system safety course are courses where the participants learn how to design systems that are sound, putting safety as a priority.

System safety courses are dry shit. A lot of us don’t like it. Software safety are even worse. You learn ways to code software that puts safety as a priority.

I do not like to look at codes. As a support engineer, I was glad that most of what I had to do are look at codes and not code them.

Despite how much of a chore it was, deep down we know if we fxxk things up, its not just about losing our jobs.

In the system safety course, we were told of how an actual aircraft crashed.

The pilots observed that parts of the software system controlling the plans were abnormal.

Their training taught them that in the event of such issue, go through a list of steps to remedy the situation. If those remedy fails to fix the problem, reboot the system.

So one of the pilot rebooted the system.

The problem was… there was a glitch in the software pathway. When the system rebooted, the software checks a few conditions before they proceed to the next phase of the software.

If those system conditions are not met, the natural system result is to…. reboot the system.

When the system rebooted, the system conditions were in such a mode that it will not allow the system to proceed, so the flight system kept rebooting…. and rebooting… and rebooting…. until the whole plane crashed to the ground.

This case study seared into my brain that you can design very nice systems by following the best practices out there. But when it comes to systems that are safety-focused, those best practices could be rather dangerous.

How Safety Critical Should a Finance App Be?

I am sure you must have came across the story of Alexander Kearns.

Alexander Kearns threw himself in front of a train. Kearns left a note which indicates that he was distraught and confused over his Robinhood account.

Kearns, 20, was using the very popular app Robinhood to trade options.

When he saw that his balance was -$730,000, he lost it.

When I saw the headline, I thought it was one of those kids who punted on some of those near-bankrupt stocks like Hertz and go very wrong.

It was nothing like that.

Kearns’ cousin-in-law Bill Brewster originally thought that Robinhood had improperly granted Kearns vast amounts of leverage to trade with.

When Bill tweeted this out on Twitter, some twitter users alerted him that options traders on Robinhood sometimes see a negative cash balance until the other half of their trades are executed.

Now most believed Kearns died over nothing.

“My sense is that it was all over nothing. It was a user interface issue,” said Brewster.

Robinhood since then has acknowledged the problem and announced changes:

  1. Roll out interface improvements on how the buying power is displayed
  2. Make improvements to its in-app messages and emails that get sent to customers about options transactions
  3. Changes to the in-app history page to help users “understand the mechanics” of options trades
  4. “Considering” additional criteria and education for customers that seek authorization to trade sophisticated options to help them understand how they work

Bill Brewster Asks Some Hard Questions of Robinhood

Alexander Kearns story got so viral, in part because of his cousin-in-law.

When I came across the story, I did not pay attention to the cousin-in-law.

However, I had listened to a podcast his cousin-in-law was on.

The Acquirers Podcast is a podcast by Tobias Carlisle. On the show, he interviews many investors and if you subscribe to the podcast, you will be able to catch certain nuances of individual stock investing, particularly the traditional value investing approach or portfolio management from many of the episodes.

What I really dig about the podcast was a weekly segment called Value: After Hours. Tobias is usually joined by Jake Taylor, CEO at Farnam Street Investments, an independent firm managing $17 million in individual accounts as well as Bill Brewster, who runs family firm Sullimar Capital Group.

Through their interactions, listening to why they decide to purchase, discard certain holdings, and their opinions on various aspects of fundamental investing, you can grow overtime.

The latest episode of Value: After Hours was very weird for me because I was enjoying the light-hearted interactions between Tobias, Jake, and Bill.

Suddenly (you can listen to the episode here), Bill decided to warn us that if we do not want to be bothered by some “personal family drama”, we should tune out that at that point (start at 42 min of the podcast).

I did not get the relation until the point when you hear a grown man starts weeping while reading through the letter.

It was such a hard part to listen to.

This is especially so when for the first 42 mins of the show, you did not detect any sadness coming from him!

That was when I realize HE was the cousin-in-law.

Through his half weeping commentary, Bill raised some notable comments:

  1. “I see an ad saying how Robinhood’s app has gamify investing. How the founders are proud of their design features.”
  2. “How about you design an internal settlement figure into the background function rather than the home screen. Even an experienced trader referred to that as an alarming sight.”
  3. “In what world is it OK to show your users a negative balance of -$730,000 when you know a lot of your money is retail money?”
  4. “Why is it that kids are able to get that notional exposure at all?”
  5. “What is it about your product that made my (Bill) story go so viral?

“You name your company Robinhood obviously to draw some images of wanting to help the less fortunate. You allegedly gamify investing and democratize trading. That is not good for society and it is toxic. You claim to enable people by granting access but you really make money incentivizing orders so hedge funds can front-run clients. That attitude gives finance a black eye and it is the type of stuff that gives Elizabeth Warren a leg to stand on.

Some Finance Stuff Stayed Complex No Matter How You Dumb it Down

I think that whether you have a new age platform like Robinhood or a traditional account with Fidelity, Charles Schwab, or Interactive brokers, you cannot stop human’s animal instinct to gamble.

During this period, if you give people support checks in their mailbox, a lot of time, and a volatile stock market, you can expect the animal instinct to come out.

But there is something very unassuring about these new peer-to-peer lending, roboadvisers platform that the old birds might find it hard to get used to.

They abstract many of the complexities and make things so much streamlined, so much easier.

In a lot of aspects, it is good. Youngsters and old birds alike have an aversion to complexities. Finance has a lot of complexities (sometimes the industry deliberately made it that way to enable them to charge more) and this turns off people of all age groups from investing.

Simplifying things gets more people that wish to invest but find it hard to start investing.

But fxxk. For some things, it make sense to be hard.

Can you imagine a 20 year old university student trading futures and upon expiry, they didn’t know they need to take delivery of a few barrel of oil?

Going back to my flight system example, while the systems can fly a plane on their own, the pilots are trained to understand the system as well as fly the plane if the system breaks down.

There is a barrier to becoming a pilot for good reasons because the plane cost a lot of money, there are a lot of lives at stake. There are risks involved.

Options is a form of derivative and margin is borrowing money.

If you do not know them well enough, they can blow up in your face. Even if you are an experienced trader, they will still blow up in your face because they interact with markets.

While most of the time markets can be very predictable… we know very well this year that markets can switch rapidly. You may have a great trading algorithm that you have extensively backtested. Yet, the unpredictable nature of the markets may create a situation your algorithm is not build to handle.

There should be enough oversight in certain areas of finance that is complex enough that people who do not wish to get educated or lack the necessary competency.

Products Evolve for the Better Over Time But We Should Prioritize Certain Aspects of Products Above All Deliverables.

The decision on systems and product design lead to this unfortunate incident.

These decisions sometimes is not a simple thing.

At my work in Providend, my first draft of the tool to the advisers or the clients (some of you might have seen my handy work) always looked overloaded with stuff.

It took many iteration of internal deliberations on whether

  1. We want to show this to the clients
  2. Can we show more of this to the clients
  3. I think it is better to present this data in this kind of chart
  4. Will they get the wrong impression about things if we show them this

Going back to the drawing board is damn frustrating. Sometimes you get hot inside because you put in enough thinking and its back to the drawing board. Maturity is when you realize that if you put out something slip shot, the whole firm gets more problems because you create more misunderstanding with the clients or the adviser.

Given all this, all the materials in the financial planning process often are an iterative process. There will always be things you missed out and bugs here and there. We get a version that is deliverable and keep iterating.

It is just the way it is. We are not perfect.

As a company, you can put priority to certain aspects of the business. If I remember correctly, in the book Good to Great, a CEO turned around his company by elevating the emphasis of safety in his company.

Why that worked out is because to be a very safe company, it requires everyone to be conscientious, accountable, and communicate well.

I do not think a trading app is classified as safety critical. However, I think poor design, leads to poor communication, leads to misunderstanding, and a whole lot of other problems.

But sometimes you got to wonder the motivations of these startups.

They got this grow at all costs, hacking mindset that they would just close an eye to some stuff.

And it might lead to incidents more incidents like this.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works