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A (lack) of forecast for 2019

January 5, 2019

It’s that time of the year, when investment strategists all over the world perform an annual ritual of predicting where the markets will go...

“Those who have knowledge, do not predict. Those who predict, do not have knowledge.”
- Lao Tzu, 6th-century Chinese philosopher

“Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”
-Warren Buffett, 20th and 21st-century investor

You have probably received a dozen articles on 2019 predictions. It’s that time of the year when investment strategists all over the world perform their annual ritual of predicting where the markets will go in in the upcoming year. They put on their thinking caps and evaluate everything from the global economy, political instability to interest rates. Full of confidence and bravado, they predict what stocks to buy, year-end targets for market indices, and when the markets will tank.

Memories are short and there is naturally little mention of the nearly universal failure to predict with any precision. Their forecasts and clairvoyance are, for the most part, exercises in futility. Predicting the future does not seem to be a strong suit of the investment world.

We looked back at predictions made a year ago for the S&P 500.

In 2018, the S&P 500 returned -4.38%, including dividends, closing out at 2,506.

Of the Wall Street bigwigs, JP Morgan and Credit Suisse were two of the more bullish banks and forecasted the S&P 500 to end the year at 3,000. They were only off by about 20%. Morgan Stanley was the least far off but had predicted a gain of 2-3%, so they still missed the target by over 6%.

2017 was no different - not a single strategist at the top banks saw the S&P 500 Index rising as much as it did. The average gain predicted was 5.5%, versus the actual gain of over 21%.

Isn’t it strange that we never see anyone refer to their prior forecast at the end of the year? Despite all the effort they put into making and promoting it?

A caveat to this statement: In the rare case that the forecaster is accurate (or even just closest), we will hear it paraded in the news for weeks as he or she goes around town, chest pumped, spitting forecasts of the future.

Most of the time, strategists at investment houses will forecast high single-digit returns for the S&P 500, even though the index has fallen outside of the range of most forecasts almost all years. Historically, the US stock market has indeed averaged high single-digit annual returns over decades, so these forecasts do make sense but are clearly meaningless on shorter time horizons.

Most years, returns are not near to the long-term average. Though the long-term average is a good indicator of what to expect in the long-run, few single years fall anywhere close (Read more in our article here).

Career risk also stops the investment gurus from making outlandish forecasts (this is not the case in the Bitcoin world for example, where it was predicted by some to hit US$100,000 in 2018).

Central banks surprisingly do no better in their forecasts. A Brussels economic think-tank Bruegel has shown that ECB forecasts for inflation and unemployment rates have proven to be systemically incorrect over the past 5 years.  Core inflation has remained broadly stable at 1%, despite their prediction of increases since December 2013, when these forecasts were made publicly available for the first time. Other central banks have made similar erroneous forecasts.

It’s safe to say that short-term predictions are fairly worthless, and paying attention to forecasts is a wasted effort. As economist John Galbraith once put it:

“There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.”

With a healthy dose of humility, we need to admit that we all have little clue of where the markets will go over the next year.  

Historical data provides a good understanding of the behaviour of asset classes over the long-term. Global equities, for example, have produced a real return of around 7%. But any near-term price movements of 1, 5, or even 10 years are merely noise for the long-term investor. If you believe in the long-term economic progress of the world, then you should own the market through ups and downs, and ignore the noise, or any ‘gurus’ who claim to offer psychic advice.

Just for fun, here is a summary of predictions for 2019:

If you enjoyed reading this article from The Know, you can subscribe to our weekly newsletterFollow us on LinkedIn or connect with us on Facebook as we bring you financial insights from endowus.


A phoneless vision: Masayoshi Son floats part of SoftBank to help pay for his huge tech bets (The Economist)

Embracing Apple's boring future (The Atlantic)

This is why economists are increasingly studying sports (World Economic Forum);


Ray Dalio: To help put recent economic & market moves in perspective (Linkedin)

The worst-performing endowments have these things in common (Institutional Investor)

For hedge funds this year, $1 billion is the loneliest number (Bloomberg)


Tesla's Musk says Singapore government has been unwelcoming (Bloomberg)

Banks partner fintechs in quest for digital dominance (Business Times)


How much of the Internet Is fake? Turns out, a lot of it, actually. (NY Mag)


How to be happy: Secrets of Denmark's happiness epidemic (Freakonomics // 37 mins)

Good to Know

1 woman, 12 months, 52 places (NY Times) 

Amateur buyers of fine Burgundy fear a speculative bubble (The Economist)

Lab-grown meat is coming, whether you like it or not (Wired)

99 good news stories you probably didn’t hear about in 2018 (Medium)

Japan’s sushi king shells out record US$3 million at Tokyo’s new year fish auction (SCMP)

Where to go in 2019 (Bloomberg)

“Hindsight is 20/20” - we all love to say

December 15, 2018

Trying to asset allocate tactically by market is not easy. Passively’ owning the S&P 500 only this actually an active decision that forgoes...

Let’s rewind to the early 70s:

Nixon was President.
Mao was Chairman.
Elvis was on tour.
The first pocket calculator was released.
Japan’s stock market was the darling of the investment world.

From 1970 to 1979, Japan’s stock market was up 396% versus the US, which was only up 77%.

Then the 80s happened:

Michael Jackson released Thriller.
E.T. was the highest grossing film of the decade.
The War on Drugs began.
Apple Computer introduced Macintosh.
Japan’s stock market remained the darling of the investment world.

From 1980 to 1989, Japan’s stock market was up 1,143% versus the US, which was only up 404%.  

Japan’s stock market grew so big that it accounted for 45% of the global stock market cap. The US followed at 33%. Eight out of ten of the largest corporations in the world were Japanese.

And the 90s were interesting too:

The World Wide Web arrived.
Friends and Seinfeld ruled TV.
We all bought a Discman.
Microsoft hit its stride.
Global warming became a concern.
Japan’s stock market lost itsluster.

From 1990 to 1999, Japan’s stock market was down 7% versus the US, which was up 433%.

The 2000s were globalising:

The iPod showed up, then the iPhone.
9-11 shocked the world.
Euro was adopted.
Google and Facebook connected all of us.
The global financial crisis.

From 2000 to 2009, Japan’s stock market was down 30%, the US was down 9%, and emerging markets led the pack, up 162%.

Decade-by-Decade Returns of Global Markets (USD)

Over the course of 20 years from 1970 to 1989,
Japan market rose over 6,100%,
US market rose 890%,
and the rest of the developed world rose just over 1,100%.

How would you have positioned your investments for the future at that point in time? It would have been easy to say Japan was overheating after the 1970s, but you would have missed another ten years of Japan’s dominance.

In the following 27 years from 1990 to 2017,
Japan returned a pathetic 120%,
The US returned 1,374%,
and the rest of the developed world rose 1089%.

Trying to asset allocate tactically by market is no easy feat. Some investors say they want to ‘passively’ own the S&P 500 only, but this is actually an active decision that forgoes most of the world.

We prefer to own a truly globally diversified portfolio - one that we can stick with through geopolitical, economic, and pop culture shocks.

It will likely not be the best performing portfolio at some points in time, as it will be dragged down by its level of diversification. But that being said, it will avoid the far bigger evil: periods of missing out on stock market growth in other parts of the world.

If you enjoyed reading this article from The Know, you can subscribe to our weekly newsletterFollow us on LinkedIn or connect with us on Facebook as we bring you financial insights from endowus.


How the 0.001% invest (The Economist)

This San Francisco investor wants to revolutionize private equity. Is he crazy? (Institutional Investor)

A surprising push by the invisible hand: Why more companies are doing better by being good (Forbes)

Startups aren't cool anymore (The Atlantic)


2019 forecast: Predictions will be wrong, random or worse (Bloomberg)

Why do so many people fall for financial scams? (The Economist)


Laws of attraction, dating and factor-based investing (Business Times)

Singapore's US$200k starter salaries: Why education pays the price (SCMP)

All together now: The growing co-living scene in Singapore (Business Times)


Jeffrey Sachs: The war on Huawei (Project Syndicate)

Uber is headed for a crash (NY Mag)


TED: What does everyday courage look like? (NPR // 12 mins)

Good to Know

How Tim Cook, CEO of Apple – who buys his underwear in sales – spends his US$625 million fortune (SCMP)

Real crazy rich Asian wedding to cost $100 million (Bloomberg)

Why are we still so fat? (NY Times)

The joy of no-gift Christmas (The Atlantic)

2018 wasn’t a complete horror show. Here are four things that probably got better. (Vox)

Researchers found one way that long-term marriages get happier (Qz)

Your apps know where you were last night, and they’re not keeping it secret (NY Times)

What to expect when you're expecting

November 3, 2018

When you invest, you expect to get the return due for the risk taken.  


We are creatures of habit. When you go to your favourite coffee shop, you expect to get that same coffee, made by that same barista. When you go to that Thursday morning yoga class, you expect to see your favourite yoga instructor. When someone you have never seen before skips into the room and takes the instructor mat, you sigh a little and shake your head before getting on with the class.

When you invest, you expect to get the return due for the risk taken. An example: if you buy an index fund or ETF tracking the MSCI All Country World Index, you will expect it to give you an annual return in-line with its long-term average (minus costs). Though the long-term average is an indicator of what to expect in the long-run, there are very few single years of return that will fall anywhere close.


MSCI All Country World Index annual return minus average annual return (USD)

In the 23 years from 1995 to 2017, only 6 years fell within a 10% range (+/-5% radius) of the long-term average annual return of 9.12%.

Furthermore, the best and worst 12-month return in the period ranged from +59.0% to -47.9%. This is an enormous dispersion of returns.

Each year is made up of 365 days of ups and downs, sweaty palms, hair-raising news, and your beating heart. It is not easy to patiently allow the fluctuations to work themselves out.

Diversification does remove some volatility, but if you expect to achieve anything close to the average annual return every year, you will be sorely disappointed and should probably steer clear of equity markets.

Ignore the desire for gratification in getting what you expect and try to ride out the market fluctuations, knowing that you have positioned yourself for long-term investment success.

If you enjoyed reading this article from The Know, you can subscribe to our weekly newsletterFollow us on LinkedIn or connect with us on Facebook as we bring you financial insights from endowus.
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Start-ups ask, ‘Are we making money for Saudi Arabia?’ (NY Times)

How Pony Ma went from Halley’s Comet to building Tencent (SCMP)

Ubernomics: The social costs of ride-hailing may be larger than previously thought (The Economist)


Banks struggle with global payments that look easy for Venmo (Bloomberg)

Paul Volcker’s guide to the almighty dollar (The Atlantic)


Singapore ousts Hong Kong as No. 1 for luxury home-price gains (Bloomberg)

Raise CPF withdrawal age amid growing lifespans (Business Times)

Singapore's PropertyGuru raises S$200m funding from KKR (Channel News Asia)


‘Superstars’: The dynamics of firms, sectors, and cities leading the global economy (McKinsey)

Inside fortress Maotai: secrets of China hard liquor that’s rocket fuel for its soft power ambitions (SCMP)


Blacklisted in China: China's social credit system (NPR // 20 mins)

Good to Know

The story of how Kit Kats became a booming business from Hokkaido to Tokyo — and changed expectations about what a candy bar could be (NY Times)

Superfoods are a marketing ploy (The Atlantic)

In China, the future of retail is already here (Bloomberg)

WeWork's first school teaches math and science but yoga and farming, too (CNN)

Sea cucumbers lead China’s logistics blockchain charge (Technode)

The big meltdown (National Geographic)


Are you skilful or just lucky?

October 20, 2018

With luck on one end and skill on the other, where does investing fall on this scale?

“I think it may be true that fortune is the ruler of half our actions, but that she allows the other half or a little less to be governed by us.”
- Niccolo Machiavelli in “The Prince”


Credit: Jimmy Chin, National Geographic

On June 3, 2017, Alex Honnold scaled El Capitan “free solo” without a rope: he climbed a 3,000-foot vertical granite wall with his bare hands and some chalk, in what is probably the most impressive feat in sporting history. 3 hours and 56 minutes of sheer concentration, strength and most importantly, skill.

Buying Tencent a year ago at $354, and watching it go up 34% in 3 months to $474, then crash 40% to $282 - that can be attributed to good luck followed by bad luck.

The influence of luck on outcomes has been understood for a long time. Despite having every manipulative trick up his sleeve, political mastermind Niccolo Machiavelli acknowledged the role that luck played in successful outcomes in his handbook for future rulers. Five centuries later, Michael Mauboussin wrote about the difficulty of distinguishing luck from skill in business, sports and investing in “The Success Equation”. He shows how different activities sit on the scale of luck and skill: Chess sits on the far right of the chart (pure skill), and slots machines sit on the far left of the chart (pure luck). Where does investing fall on this scale?

Nobel Laureate Eugene Fama and Ken French published a paper ‘Luck versus skill’, where they analysed the performance of over 3,000 US mutual funds from 1984-2006 through the lens of their Fama-French 3 factor model (i.e. adjusted the performance for the excess risk that the funds took).

They discovered that in aggregate, the entire active fund universe underperformed the market by about the fees they charged their investors.  

Naturally, some funds outperformed and some funds underperformed. How much of that outperformance was due to skill and not luck? Professors Fama and French determined that only the top 3% of mutual funds outperformed consistently net of fees. But “the number that did outperform the market with a high degree of certainty was less than what is expected by random chance.” (Source: IFA)

Mauboussin believed that the reason why luck is so important in investing is not that investors are not skilful - it’s actually the opposite.

Imagine if AlphaGo, Google DeepMind’s champion-beating computer program, played against itself. The winner of each game would be more dependent on luck, as skill would be the same. This is an extreme example, but the same applies to investing.

Investors are smarter, more skilled, and have access to more information today. Collectively they have become more efficient at incorporating information into stock prices.  As a result, the outcome becomes more uniform with less dispersion of good and bad outcomes. Mauboussin calls this the paradox of skill (Source: CNBC):

As skill improves, as the average skill level improves, it actually increases the dependence of luck in determining results. Perhaps recognizing the importance of luck in investing (and life) is a skill in itself.

The more dependent an outcome is on luck, the more important it is to focus on the process. If you rely solely on luck, you may get to a good (or poor) outcome with some random probability.

A good process will give you the highest probability of achieving successful outcomes over the long-term. If markets have taught us anything - it is to be humble and admit that we are not all ‘above average’, and we do not know what the future holds. Instead of gambling our hard-earning savings and relying on luck, we would rather invest with and stay committed to an evidence-based disciplined process.

If you enjoyed reading this article from The Know, you can subscribe to our weekly newsletterFollow us on LinkedIn or connect with us on Facebook as we bring you financial insights from endowus.
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The Chinese phone giant that beat Apple to Africa (CNN)

It’s better to be born rich than gifted (Washington Post)

Four out of top five most successful women entrepreneurs globally are Chinese (SCMP)


Not filthy rich enough: The billionaires too poor for 2018's Forbes 400 (Forbes)

Hedge fund stars crying uncle gives industry hope (Bloomberg)

The next recession: How bad will it be? (The Economist)


Malaysia’s Rosmah Mansor, Singapore’s Ho Ching: BFFs? You must be kidding! (SCMP)

FA managed portfolio services gaining ground (Business Times)

Singapore outclasses Hong Kong when it comes to minimum home size (SCMP)


Charles Schwab has a $3.6 trillion edge on the Fintechs (Bloomberg)


Moneyland: The shadow world of the super rich and how their money moves in shell companies and offshore accounts (NPR // 21mins) 

Good to Know

Banksy auction stunt leaves art world in shreds (The Guardian)

‘Made in China 2025’: How 5G could put China in charge of the wireless backbone and ahead of the pack (SCMP)

Why would anyone ever pay $558,000 for a bottle of wine? (Bloomberg)

The retreat from meat: Why people in rich countries are eating more vegan food (The Economist)

Jamal Khashoggi: What the Arab world needs most is free expression (Washington Post)

We can now customize cancer treatments, tumor by tumor (MIT Technology Review)

Original Microsoftie: Paul Allen (The Economist)


Do Crazy Rich Asians only invest in real estate? 

September 14, 2018

Owning real estate has been heralded as the ‘best’ way to grow your wealth. But is it really better than investing in the market? 


Unless you’ve been living in a cave, it’s probably safe to say that even if you haven’t watched Crazy Rich Asians, you’ve heard about it. It’s both a depiction of the life of the 0.1 percent and a marketing coup for the Singapore Tourism Board. The Youngs are absurdly rich, and one of the most opulent symbols of their wealth is the matriarch's family mansion at Tyersall Park. It’s an over-the-top, sprawling home in Peranakan style, and so secluded that it can’t be found on Google Maps.  

Owning real estate, or in this case, a mega-mansion, has always been a status symbol in Asia. It’s heralded as the ‘best’ way to grow your wealth, and if all else fails, it’s a fixed asset and roof over your head. Many of the real ‘Crazy Rich Asians’ have indeed built their fortunes on real estate. But is it really better than investing in the market?

You would think that Hong Kong real estate blew stocks out of the water, but this is a misconception.

We always hear wonderful 'get rich' stories on fabulous property purchases, but looking back at the data, they were more likely just fabulous acts of holding on.

Here are some things to think about when investing in property:

  1. Leverage - This is perhaps the largest driver of outsized equity returns in owning real estate, and also the biggest trigger for the 2008 Global Financial Crisis. If you pay $250,000 for a $1 million property, and the value goes up by 10% ($100,000), you have effectively made a return of 40% on your initial investment (excluding any interest costs etc). It’s quite unlikely you will lever your investment portfolio 4x. Remember, leverage is a double-edged sword that will also amplify your losses in a downturn.

  2. Liquidity - Stocks are far more liquid than real estate investments, and prices are transparent. You can buy or sell stocks anytime during market hours, and you can see the bid/offer spread on your screen. You can list your property for months without any buyers, or perhaps the best ‘offer’ for your property is vastly different from the last transacted price. However, the ease of trading stocks also means that you are more prone to poor behaviour and the whims of your emotions. It’s far easier to sell off your investment portfolio in a panic - all you need is a few clicks. You can’t really sell a property in 5 minutes.

Real estate forces you to behave as a 'good investor' given its frictions. Imagine if you had the same frictions when it came to investing in the stock market?

  1. Diversification - Adding real estate as an asset class to your overall investment portfolio can offer diversification benefits. However, unless you are in fact a Crazy Rich Asian who can afford properties in different cities around the world, it’s difficult to diversify within your real estate investment. For most of us, buying one property will make up the majority of our net worth. It’s much easier to diversify when you invest in stocks - you can buy shares of a globally diversified fund with thousands of holdings with just a small amount of cash.

  1. Income - Both stocks and real estate investments can generate steady income from dividends and rental income respectively. There are different risks involved: dividend payouts are not guaranteed, and the amounts are subject to the underlying company’s discretion. Rental yield is subject to supply and demand dynamics of the real estate market, and there can be periods when your property can’t be rented out at all.

  1. Holding and transaction costs - There is a cost to holding real estate - you have to pay maintenance fees, utility bills, insurance, property taxes and more.  It’s also more hands-on work - you have to deal with leaking aircon units, clogged bathrooms, and pest infestations in the garden. Transaction costs are also much higher for real estate - Singapore property agents on average charge 2%  to broker transactions, and there are additional stamp duty costs.

Investing in real estate should rightfully lead to higher returns because you should be compensated for the illiquidity and transaction costs, but that is not always the case. There was a study done entitled “The Rate of Return on Everything, 1870-2015”, where researchers looked at 16 advanced economies over the past 145 years. They adjusted the returns for inflation, included dividend income for equity returns and rental income for residential real estate returns.  

Source: Bigger Pockets

There are real estate tycoons and stock market tycoons.

Both real estate and publicly traded securities  are better investments than staying in cash, and both have a place in your portfolio and in your life. Owning properties is the Asian dream but there are alternatives to think about before just the diving in.

If you enjoyed reading this article from The Know, you can subscribe to our weekly memoFollow us on LinkedIn or connect with us on Facebook as we bring you financial insights from endowus.
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Who is the man taking over as chairman of Asia's biggest company? (SCMP)

Opposites attract: NGOs and money managers unite (The Economist)

Singapore plans new bill to attract more of world's millions (Bloomberg)


We’re living in what may be the most boring bull market ever (Bloomberg)

Warren Buffett's biggest wins and fails (Visual Capitalist)

Do you know how much you're paying when you invest via regular premium insurance plans? (Business Times)


China, Japan are Malaysia's priorities: Anwar. But Singapore? (SCMP)

Singapore orders return of first batch of pilfered 1MDB money (Bloomberg)


How Led Zeppelin came to be (Rolling Stone)


Malcolm Gladwell: Do more choices make us happy? (TED // 12 mins)

Good to Know

Elon Musk’s brain isn’t like yours (Bloomberg)

Japanese, Haitian, and now a Grand Slam winner: Naomi Osaka’s historic journey to the U.S. Open (Washington Post)

China, the birthplace of fake meat (The Economist)

What happened to Fan Bing Bing, China's most famous actress? (NY Times)

Technology is creating an ideal of beauty that literally doesn't exist (The Economist)

Finally, a cure for insomnia? (The Guardian)

JP Morgan is gamifying credit scores (Business Insider)


Finding patterns where there are none

May 25, 2018

We humans are wired to find patterns, even when they don’t exist. It’s why people see faces in nature, religious figures on toast and come up with...


Jackson Pollock photographed at work by Hans Namuth

Let’s play a few rounds of roulette. Which outcome is more likely?

Red | Red | Red | Red |Red |Red |Red |Red

Red | Black | Black | Red | Black | RedRed | Black

The first outcome seems rigged. Intuitively, the second outcome seems more likely because it looks more random and exhibits less of a pattern. But in reality, both outcomes are equally likely. Each roulette spin is independent, and on each spin you have a 47.4% chance of hitting red or black. The outcome of each spin is not influenced by the previous spin, and cannot affect the upcoming spin in any way. The belief that if something happens more frequently than normal during a given period, it will happen less frequently in the future is called the gambler’s fallacy.

We humans are wired to find patterns, even when they don’t exist. It’s why people see faces in nature, religious figures on toast and come up with conspiracy theories. (Read Scientific American for more on Patternicity) When Apple first launched the iPod shuffle, people complained that the ‘random shuffle’ wasn’t random enough because they would sometimes hear the same song twice. The truth was, Apple did too good of a job in making it truly random, which meant that it didn’t take into consideration whether a song had been played recently. They had to later change their algorithm to be less random to seem more random.

We also tend to make investment decisions based on seeing historical patterns and trends that may amount to little more than random chance. We love to draw price charts and find ‘Head and Shoulders’, ‘Double Bottom’, or ‘Triangle’ patterns, then predict where prices will go. But this is largely an exercise in futility. British mathematician and philosopher Frank P. Ramsey proved that randomness will always exhibit some patterns, no matter how complicated you make a system. Basically, he showed that given enough variables to play around with, you can find any pattern you want.

We try to find rhyme and reason in everything. Things happen and we look for an explanation, finding meaningful patterns in meaningless noise. It is important to ignore the noise, stay disciplined in following time-tested empirically-proven investment plans, rather than be swayed by your human condition.



Opening the gates: Chinese travellers of all sorts have become ubiquitous (The Economist)

Banks adopt military style tactics to fight cybercrime (NY Times)

Why China’s payment apps give U.S. bankers nightmares (Bloomberg)


Mohamed A. El-Erian: Managing the risks of a rising dollar (Project Syndicate)

Markets may be underpricing climate-related risk (The Economist)

China's got a $46,000 wealth gap problem (Bloomberg)


Billionaire Cheng family grabs more land in Singapore for record price (Forbes)

Go-Jek to launch in Singapore (Straits Times)

Singapore passport no longer the most powerful in the world (SCMP)


How the math men overthrew the mad men (New Yorker)


60 mins: How did Google get so big? (CBS News // 13 mins)

TED: How do great leaders inspire us to take action? (NPR // 18 mins)

Good To Know

Does anyone want to hear my internal voice? MIT's device can read your mind (NY Mag)

How income affects the brain (The Atlantic)

Here’s how much money you need for bankers to think you’re rich (Bloomberg)

Following a tuna from Fiji to Brooklyn - on the blockchain (Wired)

The Marshall Islands replaces the US dollar with its own cryptocurrency (The Verge)

Thoroughly modern Meghan (The Atlantic)

Bitcoin estimated to use 0.5% of the world's electric energy by end of 2018 (EurekAlert)

+What the Mona Lisa tells us about art in the Instagram era (NY Times)

Pizza massively outperformed Amazon and Google

May 11, 2018

If you had to choose one stock through the decade, would you have bought the cutting-edge tech titans or a company that delivers greasy pizzas?


Let’s rewind to the start of this decade. If you had to choose one stock through the decade for the best returns, would you have bought the cutting edge tech titans (Apple, Google, Amazon) or a company that delivers greasy pizza to your neighborhood at discount prices?

Your gut should be used to pick the food you eat; not the stocks you buy.  A humble pizza company has generated more than twice the returns of most high-flying tech companies since 2010. What are the chances you would have picked a low tech commoditised pizza company in the past decade? Probably slim to none.

Trying to identify the next Domino’s or a group of future winners is a guessing game. By trying to outguess the market and pick a concentrated number of ‘winning’ stocks, you’re in fact significantly increasing the likelihood of missing out on the top performers. The fact is that the bulk of the returns of any index is concentrated in just a handful of stocks that generate a disproportionate amount of overall market gains. This is what is known as positive skew in the distribution of returns in the market. It is one of the major headwinds to stock-picking. So many active fund managers fail to beat the benchmark because of a simple reason - the absolute number of stocks that beat the benchmark is few and most stocks perform far below the average. This is before the costs involved in stock-picking or high fees you pay active managers for their services.

Diversification improve the odds of holding the best performers. In a study done by Dimensional Fund Advisors, a portfolio of all global stocks returned 7.3% per year from 1994 to 2016, . But if you missed out on the best performing 10% of stocks, the return declines to 2.9%. If you missed out on the best performing 25%, the return drops to -5.2%.

Source: Divest Invest Guide

We’re not saying that stock picking is a worthless endeavour, but the normal investor starts at a disadvantage. Heaton, Polson and Witte published a paper explaining the math behind why active management is challenging. They distilled their argument into this illustration:

You have five poker chips, four worth $10 and one worth $100. 
If you pull one chip out, the average expected value is $28 
If you pull two chips out, it the average value is $56. 
But most of our choices will fail to get the $100 chip and in fact ...
6 out of 10 times you’ll grab a pair with the lowest sum of $20.

This is similar to active stock-picking: most fund managers will miss the high-performing $100 stock, which consigns them to underperforming the benchmark. We can help improve the chances of capturing the market returns through diversification. (Source: The math behind futility)

We all want to be the star fund manager that discovers the next Domino’s Pizza, but even picking it once does not guarantee that you can replicate your success. Holding a diversified portfolio will ensure that you are well positioned to capture returns wherever they occur in the market. You can have your pizza and eat it too.



China's got Jack Ma's finance giant in its crosshairs (Bloomberg)

Let's destroy Bitcoin (MIT Technology Review)

How Amazon’s fashion business continues to evolve (Slate)

Shanghai to LA in 6 hours: Online travel giant Ctrip bets China travellers are in a hurry (SCMP)


Who runs mutual funds? Very few women (NY Times)

Economists focus too little on what people really care about (The Economist)

Why Elon Musk and Warren Buffett are trolling each other over candy (Fortune)


Historic Trump-Kim summit set for Singapore (Channel News Asia)

CapitaLand joins booming Chinese co-working office segment (SCMP)


The $100bn bet: How Masayoshi Son is shaking up Silicon Valley (The Economist)


Tim Ferriss: How can we become comfortable with discomfort? (WNYC // 12 mins)

Good To Know

Tech envisions the ultimate start-up: An entire city (NY Times)

The gambler who cracked the horse-racing code (Bloomberg)

Fake it till you make it: meet the wolves of Instagram (The Guardian)

How health care changes when algorithms start making diagnoses (Harvard Business Review)

Best supporting actress: Can Meghan Markle modernise the monarchy? (The Economist)

How the chicken nugget became the true symbol of our era (The Guardian)

You can make your Google assistant sound like John Legend (Slate)

That’s why I chose Yale

April 27, 2018

34x returns. That’s how much you would have made if you invested with the Yale endowment fund over the last 30 years. The Yale Investment Office...


34x returns. That’s how much you would have made if you invested with the Yale endowment fund over the last 30 years. The Yale Investment Office has had annualized returns of 12.5% during this period. For reference, if you had the brilliant foresight to put all your money in the S&P 500 and not touched it for 30 years, you would have made 19.5x your money.

Many homeowners have probably been patting themselves on the back as they witnessed the surge in value of their square footage over the last 30 years, but it is likely that their homes have underperformed Yale significantly, and the S&P 500 for that matter.

What is Yale’s secret sauce?

The Yale fund is run by David Swensen. Sitting in New Haven, in a corner of Yale’s campus and away from the noise of Wall Street, Dr. Swensen has pioneered and implemented the ‘endowment model.’ When he took over Yale’s ~$1 billion portfolio in 1985, it was 80% invested in US stocks and bonds. He transformed the portfolio and redeployed ~90% into a diverse mix of alternative asset classes, including foreign equities, private equity, venture capital, real estate, hedge funds and natural resources. Take a look at Yale’s target allocation over the years:

Source: Yale Investment Office

Diversification is at the heart of the endowment model’s investment philosophy. Swensen applied the academic principles of the Modern Portfolio Theory to Yale’s sizable endowment, and believed that achieving true diversification required allocating to asset classes with low correlation, which will reduce the volatility of a portfolio as a whole.

Read more in our article: Free Lunch

With a disciplined and long-term investment approach, the Yale endowment can commit to the markets and their strategy for an extended period of time, which means they can hold assets that are less liquid than the public markets. Asset classes such as private equity and venture capital require at least eight to twelve years of commitment. Owning a forest or investing in a large infrastructure project may require fifteen to twenty years. Illiquidity is rewarded with what the industry calls the illiquidity premium, which experts estimate to be an extra 3% in returns per annum over the liquid (public) markets.

Unfortunately, ‘invest like Yale’ isn’t so simple. They have a few advantages over us:

  • Time. They are uniquely able to take a very long-term view (theoretically an infinite horizon), which means that they can stomach illiquid investments and unwaveringly stick to their plan during periods of high volatility.
  • Size and influence. Not only do they have huge sums of money to invest, Dr. Swensen has also achieved Jedi status in the investment world. Every money manager wants his stamp of approval and will roll out the red carpet for Yale.
  • Access. They can access anything and everything they want, a much broader range of investment opportunities than us mere mortals. In most cases, even if we are able to access investments in alternative asset classes, any extra returns will get eaten up by the layers of fees.
  • Fees. Their size and clout also allows them to negotiate favorable fee terms.

Brilliantly executed diversification will improve risk-adjusted returns over the long-run (as proven by Yale), but may not work in any one year. Yale underperformed the S&P 500 last year; this doesn’t mean they should have switched their portfolio into an S&P 500 ETF. Dr. Swensen’s long tenure in running the fund and and sticking to his investment strategy has shown enviable outperformance and success over almost all investment strategies known to man.

Food for thought: What if we could pool our money together and invest like Yale?

On the timeline of 30 years, and in honour of Earth Day, below are snapshots of the surface of our home over the last three decades:

Deforestation, Brazil
Source: EarthTime

Glaciers, Alaska, USA
Source: EarthTime

Cities, China, Shanghai
Source: EarthTime



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Temasek to open private equity door for retail investors (Business Times)

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Is wine a good investment? The liquid illiquid asset.

April 13, 2018

So what if wine was not only pleasurable to consume, but also a lucrative investment? t’s a rather tempting proposition...

Michael Caine: “You can’t drink them, Freddy. They’re far too valuable.”
Steve Martin: “So you sell them?”
Michael Caine: “I’d never sell them, they mean too much to me.”
Dirty Rotten Scoundrels (1988)


There’s no need to feel guilty - It’s been scientifically proven that wine chemically boosts your mood like an antidepressant. So what if wine was not only pleasurable to consume, but also a lucrative investment? It’s a rather tempting proposition - after all, if the bottom falls out of the market, you can always get out your corkscrew, open up the bottle, and drown your sorrows.

Wine as an alternative investment has seen growing interest. There are various ways to invest in wine during and after its production. In fact, thousands of wine merchants and critics from around the world have descended on Bordeaux this week for ‘en primeur’, a system by which wine is sold two years in advance while still maturing in barrels - in essence, wine futures. You can also invest by buying physical bottles of wine on the secondary market, or invest in a wine fund.

But let’s examine whether DRC and Le Pin have a place in your investment portfolio:

  1. Liquidity: There is a limited selection of investible wines. Only 1% of the world’s supply of wine production is deemed “investment-grade”. Besides, you can’t just knock on the door of Domaine de la Romanee-Conti and buy a case or even a bottle of 1990 Romanee-Conti (which if you are lucky would cost you about US$18,000 for a single 750ml bottle). You will likely have to play the auction market: buying wine at an auction will incur 15-25% buyer’s premium, and you’ll pay another premium when you sell. This means you’d need at least 30% in capital appreciation before you see daylight - plus it could take weeks or months to sell the wine.
  2. Fair market: There is no fair market price for wine. It is an opaque and markedly inefficient market where you can’t see where the bid/offer prices are at any time. Most transactions are not reported so the insiders will win, which means most of us will likely lose.
  3. Authenticity: Making fake wine is an extremely profitable business. Sour Grapes on Netflix is an incredible documentary on one forger who is responsible for $550 million of counterfeit wine still circulating the market today. Insiders say Las Vegas restaurants serve more Petrus 1982 in a year than the Pomerol estate ever made. (In case you’re wondering if you should add this to your collection - a 6 liter Imperial Petrus 1982 sold for US$64,200 this past March at Sotheby’s London)
  4. Time: Wine has a sweet spot in terms of age for consumption, and it changes with certain vintages and different wines. Hold on to your investment too long and you may end up with an expensive bottle of vinegar.
  5. Cost: Wine requires physical attention. Temperature, humidity, light (or lack thereof) need to be maintained. As a result, expect to incur hefty storage and insurance costs. Wine needs to be in perfect condition for resell - the auction world has a standardized set of measurements for the distance between the bottom of the cork and the top of the liquid in the bottle. If you hold an MSCI World ETF, you will receive a dividend yield of ~ 2.4% p.a. If you hold wine, you get no yield and you’re out insurance and storage costs.

Wine makes more sense as something to savour, rather than as an investment. In the long run, equities have outperformed fine wines, with a global annualized real return of 5.2% since 1900 vs wines at 3.7% before costs (Source: Credit Suisse).  

Source: The long-term returns from collectibles (The Economist)

Our advice: find wines you like at a price point you are comfortable consuming. If your taste aligns with the market and it runs up in value to a point where you would prefer the cash, sell some and feel good about yourself. In the case that you don’t sell it, just drink it and feel good about yourself. Either way you win. 



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Source: Visual Capitalist

The price is right

April 6, 2018

We are clearly irrational beings. So can markets be efficient if the players are irrational?

“The fact that people will be full of greed, fear or folly is predictable. The sequence is not predictable.”

- Warren Buffett


Let’s play a game. I will sell you a $20 bill for what you’re willing to pay for it.  It’s free money - you can bid $1. The catch is, if someone outbids you, you still have to pay for your final bid.  A bidding war starts as the bids climb, and you realise you could end up paying a lot of money for nothing in return. Eventually the sassy girl in glasses bids $21 for the $20 bill, because she thinks she will 'win' by losing only $1 while you are out $20. That’s when the game really blows up - it becomes a fight to see who can lose the least, rather than win the most. A Wharton professor said a military officer once paid close to $500 for a $20 bill. (Source: Motley Fool) We are clearly irrational beings. Can markets be efficient if the players are irrational?

Professor Eugene Fama believes that price is the best approximation of intrinsic value, and won a Nobel Prize for his work on his Efficient Market Hypothesis. Markets assimilate all known information about a stock/bond/diamond, constantly. If people consistently pay for assets at prices greater than they’re worth, they’ll lose money. If those people keep losing money, they will exit the market. Only people willing to pay the ‘right’ price at least some of the time will remain. 

Let’s look at today. Recent gyrations in the prices of tech stocks, and Bitcoin’s drop of over 60% since December, have made it hard to argue that markets are rational.

Perhaps markets can be both irrational and efficient? Professor Fama states that prices reflect all available information of a security, but this does not imply that people are rational, or prices are always right. Since we are irrational, we will still create markets with bubbles and busts, marked by our greed and fear.

Just think about Amazon stock over the last two weeks - it has lost ~6.4% or ~$45 billion in value despite little to no change in its business model, number of customers, or profits. Markets can absolutely be irrational.

Although short-term mispricings can and do occur, they do not happen in predictable patterns that can lead to consistent outperformance. In the long-term, markets do get the price right. Market efficiency implies that it is very difficult to beat the market, and this has proven to be true. Market prices represent the decisions of millions of investors - this is inherently more consistently accurate than the efforts of any of us single humans.



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