Yesterday, I watched two videos.

One of the videos is on this YouTuber named Rishi, who made a few videos calling out scams. One of the person/company he called out decide to serve him a lawyer letter. So now he has a Go Fund Me campaign to fund his court case because he wishes to fight this case.

The second video was put up by IQuadrant who has been in the news a fair bit. They are in the news because a few people, including Rishi, tried to expose their “scams”.

In this video, the two co-founders explain in detail, with a lot of numbers, primarily how the little to no money down plan is not as dangerous as it looks.

The second video made me reflect upon something Morgan Housel wrote in his book The Psychology of Money.

I would comment on the Rishi video at the end. So let me talked about this IQuadrant thing in brief.

I think like a lot of things this year, Morgan describes it perfectly that a lot of these things would have good outcomes. But these things need a lot of things going right for it.

Financial ruin occurs when your plan, which is suppose to go right, didn’t go right and you have not build in the other what-if scenarios.

To be fair to Shawn from that IQuadrant video, he did build in some margin of safety in his example. The margin of safety is 24 months of vacancy, which amounts to 6 months of vacancy per year.

I think if you ask around with people in the know and ask them how they would build in reasonable assumption, this is fairly conservative. But the devils is in the detail.

There still has to be much things going right for this investor so that there would not be a risk of ruin.

The Story of Rick Guerin

Morgan cites what happened to Rick Guerin to help us contrast the concept of growing wealth and keeping wealth can be two different things.

They require us to have different attributes.

Here is from the book:

You’ve likely heard of the investing duo of Warren Buffett and Charlie Munger. But 40 years ago there was a third member of the group, Rick Guerin.

Warren, Charlie, and Rick made investments together and interviewed business managers together. Then Rick kind of disappeared, at least relative to Buffett and Munger’s success. Investor Mohnish Pabrai once asked Buffett what happened to Rick.

Mohnish recalled:

[Warren said] “Charlie and I always knew that we would become incredibly wealthy. We were not in a hurry to get wealthy; we knew it would happen. Rick was just as smart as us, but he was in a hurry.”

What happened was that in the 1973-1974 downturn, Rick was levered with margin loans.

And the stock market went down almost 70% in those two years, so he got margin calls. He sold his Berkshire stock to Warren- Warren actually said “I bought Rick’s Berkshire stock” – at under $40 apiece. Rick was forced to sell because he was levered.

Charlie, Warren, and Rick were equally skilled at getting wealthy. But Warren and Charlie had the added skill of staying wealthy.

Which, over time, is the skill that matters most.

Nassim Taleb put it this way: “Having an ‘edge’ and surviving are two different things: the first requires the second. You need to avoid ruin. At all costs.“

– Psychology of Money

Morgan summarized money success into a single word: Survival.

In one of the chapters, he showed us evidence that what propels our wealth are tail events. The majority of the companies failed or in my latest article, have a lifespan that is shorter than what you believe.

Not “growth” or “brains” or “insight”. The ability to stick around for a long time, without wiping out or being forced to give up, is what makes the biggest difference. This should be the cornerstone of your strategy, whether it’s in investing or your career or a business you own.

There are two reasons why a survival mentality is so key with money.

One is obvious: few gains are so great that they’re worth wiping yourself out over.

The other is the counterintuitive math of compounding. Compounding only works if you can give asset years and years to grow. It’s like planting oak trees: A year of growth will never show much progress, 10 years can make a meaningful difference, and 50 years can create something absolutely extraordinary.

– Psychology of Money

Morgan explains that applying the survival mindset to the real world comes down to appreciating three things. I will list out the one that is applicable to this case study.

Most Important Part of the Plan

Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.

What’s the saying?

You plan, God laughs.

Financial and investment planning are critical because they let you know whether your current actions are within the realm of reasonable.

But few plans of any kind survive their first encounter with the real world. If you’re projecting your income, savings rate, and market returns over the next 20 years, think about all the big stuff that’s happened in the last 20 years that no one could have foreseen:

1. September 11th
2. A housing boom and bust that cause nearly 10 million Americans to lose their homes
3. A financial crisis that caused almost nine million to lose their jobs
4. A record-breaking stock-market rally that ensued
5. A coronavirus that shakes the world as I write

A plan is only useful if it can survive reality.

And a future filled with unknowns is everyone’s reality.

A good plan doesn’t pretend this weren’t true; it embraces it and emphasizes room fo error.

The more you need specific elements of a plan to be true, the more fragile your financial life becomes.

If there’s enough room for error in your savings rate that you can say, “It’d be great if the market returns 8% a year over the next 30 years, but if it only does 4% a year I’ll still be OK,” the more valuable your plan becomes.

Many bets fail not because they were wrong, but because they were mostly right in a situation that required thigns to be exactly right. Room for error – often called margin of safety – is one of the most underappreciated forces in finance.

It comes in many forms:

• A frugal budget
• Flexible thinking
• A loose timeline

Anything that lets you live happily with a range of outcomes.

It’s different from being conservative.

Conservative is avoiding a certain level of risk. The margin of safety is raising the odds of success at a given level of risk by increasing your chances of survival.

Its magic is that the higher your margin of safety, the smaller your edge needs to be to have a favorable outcome.

Lawsuit Threats

The ironic thing also is that IQuadrant threathen another prominant person on Facebook who spoke out about their practices.

This is in the same way how Rishi got himself tangled up in this.

I have mixed feelings about this whole episode. Let me try and explain.

Imagine if you do everything proper and your business partner decide to create an elaborate scheme to get you off the company. Your now ex-business partner goes even further by doing all sorts of things so that you won’t have access to a single existing client. He then do a lot of things to drag your name through the mud so that you won’t have any new business.

You want a judicial system where you can fight it out and clear your name.

The issue is that there are some who have more resources than the others, and decide to use these means to get you to retract what you said or to get you to back off.

They know that for most people, they do not have the know-how or the resources to fight something lengthy.

This is not the first time that I am seeing this. For those of us in the industry, you would know what I am talking about. Most of the time, these folks with resources win.

And you know what hurts… it is that they continue with the business. The issue is that in the specturm of value delivery, they deliver on the very low end. For some, its not even value. It is outright scam.

In a Way, You want What They Give

I have developed this perspective: Some of the highest form of marketing is be able to know what you really want, appeals to you deep down inside, and deliver a message that speaks to you.

In a way, a lot of these internet marketing scams prey on those who do not have much options.

It also preys on those who are looking for passive income. (You do not see a lot of marketing materials telling you that you can have residual income or passive cash flow. There is a certain familiarity with that term)

While scams prey on those desperate folks, some of these courses prey on you because you have a lack of investment options, and you do not wish to do a lot of work, and a lack of sophistication.

But it is not always negative. We all have a starting point where we lack sophistication.

Two days ago, I had lunch with a friend who want to thank me for troubleshooting her stock portfolio tracker on and off. She came a long way from not knowing so much of personal finance and investing to somewhere where her friends turned to her for bits and pieces of advice.

While there are many free content, she shared that the difficulty during her less sophisticated phase was that investing is not written in a very procedural way.

Bascially, when you are learning, you need something more step by step.

I get very ticked off when I keep hearing people say information is free all around, why do you need to attend courses that are so expensive? You should just join this chat and learn from the people with more experience there.

Many experience folks forget how they started all this. They probably forget the knocks that they suffered along the way. There should be something procedural in their way of learning and for a lot of things, it is fundamental that we learn in a procedural way.

In November, the company send us to a 2-day ettiquete and learning course. If you ask me, for this kind of thing, it is even worse. There is less uncertainty and less impactful that we would need to invest money for this sort of thing.

For whatever that you need to learn there is a search cost. There is also tuition fees paid for making mistakes. If you do not wish to incur such a cost you would need to pay up.

There is a Spectrum of Value In Whatever Lessons You Pay For

In that spectrum, some are very useful but they are priced cheaply. Some are not very useful, but are not cheap.

There are some stuff that are priced very expensive and just do not work. They do not work because fundamentally, what they are asking you to do is not fundamentally workable over the long term.

This is what I would term close to being a scam.

The unfortunate thing is that, since you are not very sophisticated, you would not be the best person to evaluate that.

Even if you ask me, I would need to roughly know your level of sophistication and what the course provide, to know if going for a particular investing course is the right fit. I think is a total mismatch.

Often, there is a mismatch in expectation because the marketing was too good and the value provided is not up to the marketing.

So people feel cheated.

I think we got a lot of value out of our grooming course. There is a lot of nuances provided that are valuable.

Nuances in a particular subject are very very tough to learn and very valuable. How do you know that you have a problem? What is the problem? How do you articulate your problem clearly to yourself? If you cannot articulate the problem, how do you know what to search for? How do you know who to find to get this problem address?

Our more experience staff (which includes the advisers) are no slouch when it comes to grooming and looking very presentable in front of clients and prospects. Even then, there were enough questions in case studies that made us wonder if we really know how to dress well or not.

But at the end of the day, all our mileage will be different. Going for a grooming course like this is more of a primer to speed us our journey. We still have to build good habits to apply it in our daily lives.

The most fxxk thing I keep hearing people throw at these investing stuff is how good it works.

I came across this commenter who was sharing with us the amount of money paid to change people’s sleep routines:

The amount that they cited is probably around some investing courses.

Here is the rub:

1. This space is most likely not regulated
2. Some of the people know what they are talking about
3. Some are downright scams
4. Even if you attend, it might not work for you as well. The issue with addressing sleep-related issues dare I say, is more challenging than investing. We would roughly know more about how market works than why you cannot sleep well
5. Addressing this problem is much needed

I do not have a good solution for this. Some call for authorities to do more. But at the same time, if there is heavy regulations, positive and better investing ideas might not bobbled to the surface.

There are Potential Consequences

Lastly, if you made a decision to call out someone, always know that there are some consequences coming your way.

And you should prepare for these consequences.

Companies pay for indemnity insurance because there are always potential legal liability.

If the potential magnitude of the damage is big, then like financial risk management, you avoid it. If not, prepare the money!

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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

I used to work in my corporate IT job where the pace of work tends to be consistently busy. It did not start off that way. 6 years ago, the pace of work was much more balanced.

When life was less hectic, your mind could sneak in some questions such as “Do I have something that I need to buy so that I could bulk buy during some year-end sale” or “What have I not done before the year-end that I would regret being so absent-minded about?”

In the last few years, what I nearly regretted was not taking care of some of the money stuff such as topping up my CPF Special account, or my family member’s Special account and contributing to the Supplementary Retirement Spending (SRS) account to enjoy tax relief.

If I forget to do that by 31^st December of the year, I do not gain tax relief, more money flows out of my wallet and to the government.

This is money that could be used for other purposes.

I always like to say that the amount that I could save in terms of taxes is equivalent to about 250 packets of chicken rice.

I tend to favor contributing to the SRS versus topping up the CPF, but I think if you are privileged to earn a high income, you have both levers to pull to reduce your taxable income.

The SRS account is less well known, and, in this article, I would like to highlight some of its advantages and a special deal from MoneyOwl should you choose to invest your SRS with them.

What is the SRS Account?

SRS stands for Supplementary Retirement Scheme, which is a voluntary scheme to encourage individuals to save for retirement, over and above their CPF savings.

Your contributions would allow you to gain tax relief.

Suppose my total annual income is $130,000 a year.

I would have some tax reliefs such as CPF contribution, national service, and CPF top-ups that give me a total personal relief of $30,000.

My taxable income would be $100,000.

The total tax that I would need to pay next year is $5,650.

Now, if I make the maximum annual SRS contribution of $15,300, my taxable income will go down to $84,700.

The total tax that I would need to pay next year would be $3,890.50.

I would save $1,759.50 in payable tax.

The higher your annual income, the more worth it will be for your family to be onboard the SRS.

In short, the government is incentivizing you to be proactive in saving up for your retirement by rewarding you with tax relief.

SRS is a Tax Deferred Account -You will Pay your Taxes Next Time

The SRS is a tax deferral account because it does not mean you escape from paying income tax.

Rather, you will only pay taxes when you withdraw from your SRS.

If you withdraw from your SRS at the official retirement age (the official retirement age when you enroll), 50% of your withdrawal will be taxed at your prevailing tax rate.

The taxes are deferred through time and only paid at a different time. You enjoy an advantage if your income tax rate (based on your future taxable income) is lower than now.

For example, as an employed worker, your current marginal tax bracket is 11.5%.  When you retired, you do not earn much income. In that scenario, your marginal tax bracket maybe 2%.

In that scenario, it works well for you.

Once you start withdrawing from your SRS account, you have to finish withdrawing in a 10-year period. At the end of the 10-year period, any amount (except for life annuities) in the SRS account would be deemed withdrawn immediately.

For example, suppose over the years you have accumulated in your SRS account $400,000 in total.

At 62 years old, you decide to start withdrawing from your SRS account. This roughly means you can withdraw $40,000 a year. Of the $40,000, 50% or $20,000 will be subjected to the prevailing income tax.

If you are fully retired by then, the tax on your $20,000, based on the current IRAS tax bracket is…… $0.

What if you have accumulated $800,000 instead?

If you sequence your withdrawal over 10 years, that will be $80,000 a year. 50% or $40,000 will be subjected to income tax. If you are fully retired by then, the amount of tax you will need to pay is $550.

I think you get the idea. For more information on the current Singapore tax bracket, you can review it here.

The SRS account is conducive for retirement planning because realistically, you should have accumulated your wealth and not be working when you start withdrawing from your SRS account.

In that case, you should be paying a lower income tax. In some cases, you might not be paying any income tax.

Do remember that $1 20-years from now is worth less than $1 today due to inflation. This means that the $550 you are paying 20 years from now, may only be worth $370 today (based on 2% a year inflation).

What Can You Invest in With Your SRS Money?

You can let your SRS contribution sit in the SRS bank account and earn 0.05% p.a.

There are a myriad of investments or savings products you can deploy your SRS contribution into, to accumulate towards your retirement goal.

1. Endowment plans from various insurers
2. Unit trust from various platforms
3. Stocks and shares from various brokers
4. Exchange traded funds from various brokers
5. Singapore government securities
6. Structured deposits and time deposits

Based on the Ministry of Finance’s Dec 2019 stats there were a total of S$10.7 billion in SRS contributions.

Here is the breakdown:

While many have invested, there are a lot of people who have contributed still sitting on cash.

If your time horizon to when you need the money is long enough, it may be wise to deploy your SRS monies into higher-risk investments, so that you can build wealth for retirement in a more optimized manner.

You might want to explore MoneyOwl’s investment portfolios. MoneyOwl is a joint venture between NTUC Enterprise and Providend. They have a goal of empowering people to make wise money decisions and one way is through their fundamentally sound portfolios.

The Steps You Need to Take to Invest Your SRS in a Recurring Manner

Investing through MoneyOwl is very simple

1. Create an account at MoneyOwl. With MyInfo integration, the process can be done entirely online. Your account can be successfully set up in less than 10 minutes
2. MoneyOwl automated process will determine your risk tolerance. They want to ensure that the portfolio that you invest in matches your ability to take the risk and your willingness to take the risk.
3. An investment portfolio is then suggested
4. You can fund your MoneyOwl portfolio by specifying your SRS account (if you have opened one. If not, you would have to open an SRS account with one of the three administrators DBS, OCBC, UOB)
5. Every year, as you contribute more money to your SRS account, repeat step #4.

MoneyOwl will do much of the sound portfolio management for you, this includes:

1. Regularly rebalance your portfolio by systematically selling high and buying low
2. Review the product landscape, identify sound, cost-effective and implementable investments, and incorporating them into your portfolio

While this is a topic on investing your SRS monies, do note that you can invest your normal cash into MoneyOwl’s portfolio as well.

Invest your SRS with MoneyOwl and Get Up to $200 in Shopping Vouchers!

Currently, if you start contributing to your SRS and invest with MoneyOwl today, you will get some eCapitaVouchers.

eCapitaVouchers are very useful considering how many CapitaLand Malls there are in Singapore.

Here is how much you would stand to get:

The promotion period is from 9^th Nov 2020 to 31^st Dec 2020.

The above three tiers are applicable for lump sum SRS investments only. Only new MoneyOwl clients will be able to qualify for Tier 1. You would need to stay invested and not withdraw their funds for at least 2 months after the campaign is over (estimated till end Feb 2021) Visit their website for fuller terms and conditions.

These vouchers are only limited to the first 500 people.

So, if you would like to sign-up for this, you have a short window!

Now let me continue and explain the kind of portfolios you would be deploying your SRS money into.

The MoneyOwl Investment Portfolios

When you invest with MoneyOwl, you are investing in specially prepared model portfolios that give you the highest probability of capturing the returns of the market.

Each of the portfolios differs based on their equity/stock and bond/debt allocation:

1. Conservative: 20% equity 80% bonds
2. Moderate: 40% equity 60% bonds
3. Balanced: 60% equity 40% bonds
4. Growth: 80% equity 20% bonds
5. Equity: 100% equity 0% bonds

These portfolios are currently constructed with Dimensional Fund Advisors (DFA) funds.

I have written a very comprehensive article on what Dimensional Fund Advisers is about here.

These funds are what you would call unit trust. DFA has a 40-year history of implementing factor-based strategies. These factors, such as prioritizing smaller companies, cheaper companies, and more profitable companies have shown in the past to provide higher returns across different time periods and different markets.

You might not like unit trust but these unit trusts are unlike the unit trusts that you know previously:

1. Their total expense ratio is low. The average total expense ratio is between 0.28% to 0.32% In comparison, the industry average is between 1.35% to 1.89%. Typically, you do not see this expense ratio as it is deducted implicitly in the unit trust.
2. You do not pay a sales charge
3. You also do not pay trailer fees or retrocession fees. What you may not know is that for the unit trust that you purchase, out of the 1.50% annual total expense ratio, the unit trust has to pay about 0.50% a year to the distributor. This is transparent to you and if the distributor does right by you, this trailer fee can be cut out and lower your cost. The DFA funds do not have trailer fees which explain the low total expense ratio.

So how does MoneyOwl get paid? (The TER of 0.28% to 0.32% is paid to DFA and not MoneyOwl)

MoneyOwl charges an annual advisory fee of 0.50-0.60% of the amount of investment under management. This is periodically deducted from your investments and transparent to you. MoneyOwl has absorbed the platform fee.

If your investment amount is less than $100,000, the annual advisory fee you pay is 0.60%. If the amount is greater than $100,000, the advisory fee is 0.50%.

So, if you are investing $15,000 today:

The DFA based portfolio that MoneyOwl have implemented is broadly diversified, filled with high-quality bonds.

I would not go through all the portfolios, but the Balanced portfolio has the following characteristics:

1. Total number of companies: 8,723 (the MSCI World only has 1,600 companies)
2. Aggregate price-to-book: 1.88 times (MSCI World currently has 2.3 times price-to-book)
3. Total number of bond holdings: 267 bonds
4. Average bond maturity: 1.04 years
5. Credit rating: 30% AAA-rated bonds, 55% AA rated bonds, 15% A-rated bonds

In terms of equities, the portfolio invests in companies that you are familiar with. Here are the top 10 global and emerging market holdings:

To be fair, the top holdings constitute a much smaller allocation versus the MSCI World. It is very diversified.

So how are the Returns like?

We won’t be able to know the future and if you ask any decent money manager out there, they will not risk their reputation and guarantee you a return as well.

However, since DFA’s philosophy is to capture the market returns and try to do better by tilting to value small size and profitability, we can try and learn from history what kind of returns you may be able to capture.

While the history of the DFA funds implemented by MoneyOwl is rather short, DFA did provide reference indexes which give us an idea of how these portfolios may perform if the same systematic strategy is implemented.

We have about 27-year worth of back-tested returns from 1994 to Oct 2020.

This factors in:

1. SARS
2. Great Financial Crisis
3. The outperformance of emerging markets
4. The outperformance of the United States
5. Dotcom bust
6. The 3-year bear market of 2000 to 2002
7. COVID-19
8. European crisis and the PIIGS crisis
9. The underperformance of the United States
10. The underperformance of Emerging markets

The follows show the 15-year annualized returns if we roll the 15-year periods month by month:

Despite a history of ups and downs, there are no 15-year periods that these portfolios lose money for the hypothetical investor.

Investors in certain periods were able to capture as high as 11.6% a year return for the 15-year duration. Investors in certain periods may only capture only 4.7% a year return for the 15-year period.

Based on your risk tolerance, different portfolios may be more suitable for you.

The chart below shows how much $1 invested in 1994 would have grown to in these five portfolios 27 years later:

The portfolios with more equities were more volatile, but because of the higher short-term risk, the potential returns that you could earn is also higher.

Do note that past performance is not indicative of future returns.

Some Other Things to Note About the SRS

Foreigners can also open an SRS Account

The SRS account can be opened not only by Singaporean, Singapore Permanent Residents but also by foreigners!

The annual maximum SRS contribution for foreigners is $35,700 a year.

As a foreigner, you can withdraw from your SRS account 10 years from your first contribution penalty-free instead of the statutory retirement age (currently 62 years old). You will be taxed at 15% or the local resident rate, whichever is higher.

Thus, you can enjoy this tax deferred lever as well.

There is an Early Withdrawal Penalty

You can withdraw your contribution from your SRS account anytime.

However, the purpose of the account is to accumulate for your retirement. So, if you withdraw early, there is a penalty for the withdrawal.

If you withdraw early, 100% of the sum withdrawn will be subject to tax. In addition, a 5% penalty for premature withdrawal will be imposed.

However, there are some exceptional circumstances where the penalty does not apply:

1. Death
2. Medical grounds
3. Bankruptcy and
4. Full withdrawal of the SRS balance by a foreigner provided the following conditions are met
   1. Not a Singapore Citizen nor an SPR on the date of withdrawal and for a continuous period of 10 years preceding the date of withdrawal
   1. Maintained your SRS account for a period of not less than 10 years from the date of your first contribution to your SRS account
   1. You make a one-time full withdrawal from your SRS account

There is a Cap to your Maximum Tax Relief

There is a cap to how much tax relief we can claim, which is a maximum cap of $80,000.

This means that if you aggregate all your tax reliefs together (including SRS contribution) and it amounts to $85,000, you can only enjoy a tax relief of $80,000.

Contributing to SRS Versus Topping Up CPF Special Account via Retirement Sum Top Up (RSTU) – Which is Preferable?

I would think that if you are a rather high-income earner and you need to optimize your taxable income, you should consider doing both.

However, doing an RSTU is considered the low-hanging fruit because the current return you can get for your CPF Special account is north of 4% p.a..

With the SRS, it will depend on what you invest in. If you put your money in cash, then the rate of growth of your SRS will pale in comparison to the topping up of CPF SA.

The advantage of SRS is that you can withdraw anytime.

Yes, you may face a penalty and 100% tax on your withdrawal, but it might still be worth it.

For those pursuing early retirement, you might be concerned about the prospect that you need money for something and that with RSTU, you could not reverse the money out of your CPF.

SRS would be more advantageous over RSTU.

(Though in reality, if you retired early and  had to activate your SRS or CPF money, your plan might not have the adequate buffer.)

With solutions like MoneyOwl’s portfolios, you have every bit of a chance to do as well as RSTU with your SRS yet have some flexibility.

If you have a business venture idea in the future

For example, suppose along the way, you have a business venture that could potentially earn you a high rate of return. If you have computed that even after the tax expense and early withdrawal penalty and it is still mathematically viable, you could get your money out with the SRS.

If You Withdraw From Your SRS Early, You might still Benefit after Paying the Early Withdrawal Penalty

I do have friends who have this concern that in the future, they might need to tap upon this stash of money to spend if they are planning for early retirement.

With the early withdrawal penalty, they might have to plan their income in such a manner that they would only withdraw when they reach the official retirement age.

If you are planning for your early retirement, the sensible thing is to have enough income to provide for your expenses before the official retirement age.

But for some reason, if you need to access the SRS money before the penalty-free age, I think you would still benefit even if you withdraw the money from your SRS before the penalty-free age.

This is what I think:

The US has a very similar concept to our SRS with their traditional IRA. If you withdraw before 59.5 years old, there will be a penalty and tax implications. What I have learnt is that even if you take the penalty on your traditional IRA by withdrawing early (if you really have no choice but need to), it might still be worth it.

For example, suppose you have built up $200,000 in your SRS. The main idea is that you must sequence your SRS money to be used after the cash flow from your cash investments have been used up.

If it ever gets to that point, withdraw only the amount that you need. If you need $30,000 in that year, then withdraw $30,000 / 12 monthly.

You would still pay the 5% penalty but you would still benefit because if you did not contribute to your SRS, you would be at a marginal tax bracket of 7% or 11.5% or even higher. Even after paying the penalty, you would still come out tops.

Therefore, for those who are in a very high tax bracket, this gives you some peace of mind that if it ever comes to a situation where you would need to access your SRS earlier, it is not so bad.

This week, I read something Nick Maguilli wrote about why own bonds when yields are so low.

He basically came to roughly the same conclusion that I came to, but I think he has a better explanation then me.

Some things just stopped working so well. Not stop working. Stop working so well.

He gave a good example of what Buffett implemented in his earlier years:

For example, in the 1950s Warren Buffett and Benjamin Graham made lots of their money purchasing companies selling below their net current asset value (“net-nets“). This style of investing is the equivalent of paying $50 for a suitcase that has $100 in it. But good luck finding such “net-nets” today.

It is true that you would struggle to find net-nets, but that does not mean you could not make money. I have one or two friends whose portfolio are focus on the Graham style type of investing that is based on identifying mispricing, buying something worth $1 for $0.50.

And they have a few home runs.

In a year where that will lead you to believe that unless you are in tech stocks, you would get no where, they got somewhere.

But in a way, we are seeing enough shit talk about strategies like this that if the trend continues, less and less people will invest in strategies like this.

Maybe This is Better for the Strategy

But perhaps one of the reasons why these strategies could not work so well is because in this computer age, any inefficiency in the markets can be removed.

A lot of what Buffett did was based on what can be found in the financial statements. Computing the intrinsic value by computing what is worth liquidating is very fixed.

This can be done by computers which means that many of us can do it.

So do any of us have an edge over others?

But at least if less people feel that this is a long term investing method that give us an advantage, it is less crowded.

I have always favored the less crowded way. If something is crowded, it makes me wonder if there are alot of sentiments involved.

There are some rules or axioms that stays true throughout time and human behavior is one. So if everyone does something, it makes me wonder if certain strategy is too crowded that we are all paying too much for something that works (which can be rather bad in investing).

How does Investing in Ugly Things Feel Like?

For a large part of my investing journey, I realize what worked better was investing in fundamentally positive things.

When the fundamentals are well and things are healthy, but I feel there are enough people mispricing it.

The mispricing could be

1. The quality of the cash flow
2. In the duration of how long the quality of the cash flow can be

The turnaround plays do not work so well because I have this psychological issue of not sitting well with ugly things. Ugly things are stocks whose fundamental “seemed intact” but the share price will drift lower.

What is difficult about these stuff is that more often than not, I question if I got the thesis wrong, or that deductive work done lacks the depth required.

So if I know that my behavior is like that, I better shift to a strategy that does not put me in a position where I have to contend with ugly things.

However, in a way, if I were to buy a seemingly quality company, there would be a point where the prices does not “realize” that quality.

The stock price would go sideways or even go unloved. Then how would I feel about that? Would I second guess my decisions?

I admit I don’t like to invest in ugly things or things with ugly moments. The problem is…. quality investments go through ugly moments. So what are we supposed to do about it?

What made us hard to stay with ugly stuff… is often our own psychology. In this time and age where you have a lot of forums, chat groups, it is tough to not be affected.

Perhaps this is why some of the great managers choose to park themselves away from Wallstreet. This is so that they can make independent decisions.

Professional Managers and Advisers Have a Hard Time Sticking With Ugly Things

There are also strategies that would look pretty ugly if you put them against the basic indexing strategies.

For the past few years, trend following, Graham style value strategies, quality strategies based on profitability, multi-factor strategies, risk-parity, you name it have not worked well against indexing.

And it becomes a hard game when your investors chided you for doing worse than an index. Advisers don’t want to recommend your funds or switch away because they are under pressure to deliver returns.

You start shifting your strategy as well.

Shifting your strategy have its good points and bad points. The bad points would be how would you explain to new prospects or existing clients your constant shifting in ideology?

Perhaps you need not explain so much because what you “promise” your clients is that you are able to get them a certain rate of return.

If that is the case, you will live and die by your investment decision. Your clients would likely follow you when you are able to give them returns and leave you when you go into a funk.

You will have to Think About How You Handle Investments That Do not Go Your Way

I think each of us have to think about how do we handle our investments looking ugly.

• There are investments that look ugly and you should not hold on to them, and you should sell them off
• There are investments that looked ugly and there are reasons to hold on. You would just need to learn to compartmentalize and manage them well.

Sooner or later what worked will look ugly.

When Seemingly Good Stocks… Go Nowhere

A good example is when you have a seemingly fundamentally sound stock with a good network effect. Much of the growth is built into the current price.

There will be a point where the growth slows down. And the share price goes nowhere. What is your course of action then?

What if it is more than one stock but a bunch of them? This is very possible since… most folks invest in themes…. a bunch of REITs…. a bunch of tech stocks… in a portfolio of physical properties.

Would it be to stick to your guns, ride through the ugliness or would you shift to other “strategies”?

The earlier you confront this question, and think of how you handle this the better.

Bottomline

I wrote this because… I felt that when times are good people might not have pondered about this. There are enough optimism in the markets to lure folks to believe this optimism would sustain throughout your investment journey.

It doesn’t.

In investing, you need to put your money into something that have liquidity risk, credit risk, possible insolvency, fraud risk, entreprenueral risk to potentially earn higher expected return.

If there isn’t any volatility, then there should not be outsized returns.

The second reason that I wrote this is because of what I observed at work.

This is a business that cannot tahan uglyiness. When markets go a bit crazy, it is when advisers are suppose to earn their money by getting you to continue to stick with your investments. But it also places a lot of stress on the advisers because re-programming natural human instincts is a tough proposition.

In a way, I think most investors do not know how factors such as value, size, profitability, momentum, credit, term show up.

Hell, I have to dig deep to try and understand to know that these factors show up when they want to show up, and it is not something that we can predict. Sometimes when they show up, one or two occurrences make up for years of underperformance.

Sometimes, it is one thing to say “we do not know when these factors will show up because we cannot predict the markets” and it is another thing to truly understand what that statement means.

Factors can choose to not show up for months or years while in your head, you were hoping these gaps between factors showing up is in weekly intervals.

I came to a conclusion that most people cannot take ugly things. Only the odd weird souls are able to.

And it makes money management challenging if you are basing your investment philosophy on strategies where your client’s investment go through ugly moments.

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

On 29th Sep, URA has announced that they will restrict the re-issuing of options to purchase (OTPs) to the same buyer for the same unit within 12 months of expiry.

These new restiction written into the law would:

1. Restrict developers from providing upfront agreement to buyers to re-issue the OTP and
2. Restrict developers from re-issuing the OTP for the same property, to the same buyer, within 12 weeks after the expiry of the earlier OTP

Sometimes, when you are not in the industry, I did not comprehend the ramifications of these changes. My friend has to explain to me what it all means.

Typically, when I buy a property, the transaction starts with obtaining an option to purchase or OTP and a deposit of 1 to 5% of the property price. I would have 14 to 21 days to exercise the OTP, meaning I would have to cough out the rest of the amount needed for the downpayment.

If I do not do that, the OTP will lapse. If I put down a 5% deposit, I would forfeit 25% of the deposit. If I put down 1%, I would forfeit 100% of the deposit.

The issue is…. some developers decided to play around with this OTP.

After the 2018 cooling measures, some developers would extend the OTP validity period. Developers would also re-issue lapsed OTPs.

Now, if I do not have the finances ready to purchase the condo, some of the developers would be very happy to re-issue the OTP to me after the OTP lapse. This gives me enough time to sell off my existing property, getting some cash to pay for the downpayment.

What was achieve through this?

The sales figures for the projects looked better than the reality.

I think if you are on social media, you would see those images posted by your property agent friends how HOT the deal was.

This gives you the feeling that many of your peers are trying to get into some good deals here.

In reality, not all of those sales figures that you see were eventually followed through. You could have 600 units sold but 300 returned.

What URA wanted to stemmed out was: This creates wrong market signals.

It distorts the market into thinking like the whole of Singapore, despite the ABSD and TDSR, are so flushed with cash to afford.

But Re-issuing OTP is Not the Only Distortion to the Demand and Supply of the Property Market

Property Agents, like insurance agents and car sales people mostly work on incentives.

Incentives would motivate people to sell certain kind of things, as oppose to something else. For example, the quantum of premiums and the commission structure would motivate agents to sell cash-value insurance.

Higher commission for certain model of vehicles would nudge sales person to influence clients that certain vehicle should be strongly considered.

You could hide or withhold information about certain products that paid less well, but in truth, more suitable for the client. This is not lying just not revealing.

If a resale property agent list and successfully sell a resale property, this seller agent will earn 2% of the transacted value from the seller.

This seller agent would have to give 1% to the buyer’s agent.

Some seller agent may reduce their commission to 1.5% or even 1.0% of the transacted value. What this will result is that the buyer’s agent will get 0.75% or 0.50% respectively. It is debatable whether reducing the commission is a good idea.

The Fat Discount Given to Property Agents for Marketing New Private Property Developments

What I have explained above is the resale market. Post July 2018, property agents marketing newly launched properties have enjoyed a significant rise in commissions.

Developers of newly launched private properties started giving discounts to property agents in order to give them incentives to move sales to clear the developer’s inventory.

Take Treasure at Tampines for an example.

The developer of Treasure at Tampines was willing to give the property agents who was able to move sales 4% of the listed price in commission.

This is not fixed.

Arena Residence was able to give up a 4% discount to the listed price.

The discount for Mon Jervois was 6.5%.

Now, you may ask the question: Why don’t developers just lower the sale price?

These new launch are released in tranches to the public, if there is too much volatility in the sale prices, this would upset the buyers from the previous release if those who bought the latest release got it cheaper.

So the route that they take is to vary the margins they earned, vary the incentives given to property agents to motivate them to market the property in their own way.

How These Developer Discount Creates Incentives that May have Tilted the Market

These discounts given to agents as commissions could range from 3% to 8%.

The higher the discounts given as commissions to the agent, it usually means the property is less in demand and developers need to give a greater incentive to motivate agents to help move sales.

Suppose an agent sold a unit of Mon Jervois for $4.8 million. He or she will pocket $312,000 in commission.

For an equivalent resale unit that is worth $4.8 million, he or she would pocket $48,000 in commission.

Now if you are someone looking for a property agent for advice which would be a better purchase: A resale condo or a new development.

What would the property agent’s advice to this prospect? The one that he or she could potentially earn $312k or $48k?

The answer is quite obvious here.

It gives the agent an incentive to better market the proposition of new development, and emphasize the downside of choosing a resale.

It is no wonder those agents who were dealing with resale would now be more willing to do new launches.

There may be something more.

Now property agents cannot give these all or part of these commissions that they could earn from developers to the property buyer.

This is not legal.

If they were able to give some of these commissions to the buyers, the buyer would have gotten a cheaper private property.

But that does not stop some property agents from giving relatives of the property buyer an introducer fee. This is an indirect way for the property agent to give the prospective buyer a discount.

Some property agents were willing to do this, some are not willing to.

The buyers probably know about this, so they would try their luck and ask each agent. For those who toe the line, they risk losing the deal to those who do not toe the line.

As a client, for the same property development, you might not buy at a more attractive price as some of your future neighbours.

All this really creates an opaque layer that benefits those in the know and penalizes those who do not know enough.

Bottomline

The government wanted everyone to see the property market as real as possible. In a lot of ways, it means the demand and supply data should show what is actually happening.

But the tightening measures from the government have resulted in developers coming up with antics (re-issuing OTP, discount to property agents) that have created a market that looked like:

1. More buyers than actually is
2. Property agents recommending new launches over resale to prospects
3. Uneven private property cost price for buyers

Currently, you may be able to observe a spread between the values of resale properties and new launches. Are the resale private property cheap or are the new development units too inflated?

I do not have a good answer to that. The reality may be that actual demand for private properties is much more muted than what we perceive.

The carrots given out have swayed the marketing and messaging to the general public to the side of new launches.

When the incentives changed (e.g. government coming down hard on these discounts), perhaps the messaging to the general public will change to how undervalued these resale are versus the new ones!

These inefficiencies in pricing in the property market may have created areas where you may be able to profit from if you are in the know. This is much like the equities and bond markets.

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