Marriage: A risky business

Lately I came to know a few friends from different social circles getting married. I am not sure if you call it pre marriage jitters, but 2 different couples who have already bought HDB houses are already having 2nd, 3rd thoughts about that person they want to marry.

One couple was together for 6 years, and the reason for getting married is because they have already known each other for 6 years and time is running short! The guy in the relationship really hates to receive SMS and calls from his fiancée, often trying to avoid her whenever possible. Breakups have been tried and failed due to pressure from the fiancée’s whole family, he was time and again held hostage emotionally by them.

As for the other couple, they rushed into a marriage less than 1 year of their relationship as they were keen to receive the 40k CPF housing grant by buying a resale HDB. Both are unwilling to go through the marriage now, but the house had been bought, banquet booked, bridal shoots taken and renovation paid. All by installments. There is little they could do but carry on with the mistake. And by the way, they no longer talk anymore, even over dinner.

Needless to say, we can foresee that they might not live happily ever after upon marriage.

Risk: Considering sunk costs

“It will be a waste if we don’t get married after being together for so long” is not a good reason to get married. Even if we were to analyze the issue from finance perspective, knowing each other for years is actually a “sunk cost” which should not be considered when making cost benefit decision. (Sunk costs are costs that cannot be recovered once they have been incurred. However sunk costs greatly affect actors' decisions, because humans are inherently loss aversive and thus normally act irrationally when making economic decisions. )

Actually marriage is a cost benefit decision between 2 persons. We should be choosing the person we love that would provide the biggest benefit and lowest cost to us in FUTURE. In order words, we want to maximize returns and minimize risk. Hence, “sunk costs” like knowing each other for years, already spent a lot of money on him/her, already bought the house etc should never be considered for marriage decision making, if you are a rational person.

We should rather, be concern about opportunity costs. If I forgo this girl (or project) and I invest time and money in another girl (or project), what is the projected benefits (cashflows) from the new selection? Is the net present value or internal rate of return higher? It depends on your expectations (discount rate) though!

Unfortunately, for marriage, the payback period for the investment is often minimum 40 years. Hence, it is a risky investment!

Risk: Non diversifiable risk

The other reason to consider marriage as a high risk activity is because of its non diversifiable nature. I can only choose one spouse and live with it. I cannot marry many (for non muslims) and spread my (their) eggs over few baskets. Hence, it is of paramount importance to choose the correct one! Even if one may argue that you can choose the best wife from many girlfriends (though not ethical), choosing the correct girlfriend may not turn out to be the correct wife, mother (for you children) and daughter-in-law.

Just like business climate, tax policies and consumers’ taste change rapidly; your spouse will also change. The same spouse today may not be the same one 10 years later. You will need to discount and adjust your expectations accordingly, which may be painful and difficult experience.

Risk: Unfavourable historical returns

Look around yourselves. Are there happier married couples or happier singles? What is the percentage of divorce and broken families? Again, from current statistics and “historical perspectives”, most people are better off single, which again points to the risky nature of marriage!

So if you are considering to get married, do think carefully! Do not get married for the wrong reasons!

After all, life can only be understood backwards; but it must be lived forwards.

Temasek sells BOA stake, loss estimated to be US$ 4.28b

Just read online that Temasek has sold its 13.7b percent BOA stake during 1Q 09.

Reuters cited a source briefed on the deal saying that the shares were sold for between US$2.53 and US$14.81 in the first quarter.

Based on a Reuters calculation which assumed an average price of US$8.67, Temasek may have suffered a loss of about US$4.26 billion.

SIGH

I thought the banks bought in were supposed to be for long term? 2007 till now is barely 2 years, "long term" is defined like this?

SIGH

They better have a good reason to realise the loss at the worst possible time. US$4.26b is not a small sum, considering Temasek can even buy 100% of SPH for S$4.26b.

SIGH

Portfolio balancing is definitely not the best reason to sell. More news on this will definitely follow.

When facts are false

"There are three kinds of lies: lies, damned lies, and statistics." The statement refers to the persuasive power of numbers, the use of statistics to bolster weak arguments, and the tendency of people to disparage statistics that do not support their positions.

Statistics is a powerful to induce people to make wrong decisions based on numbers.

Consider the following statement: “Attempting to move in and out of the market can be a costly affair, particularly because a significant portion of the market’s gains over time have tended to come in concentrated periods. Looking back at the performance of the S&P 500 since 1980, an investor who missed out on only the five best performing days in the market would have ended up with a portfolio worth roughly 26% less than one that had been fully invested throughout the period.

Further, missing just 30 of the best performing days for the market since 1980 would have reduced the value of a portfolio by about 73%, compared to one that remained fully invested.”

Source: MARE: Market Analysis, Research and Education, Oct 16, 2008. “Stock market, exit at your own risk”

There is nothing wrong with the statement. All the above stated are known facts. However, it gives people the false impression that you will definitely lose out if you exit the market “prematurely” upon investing and you only miss out the 5 or 30 best performing days but got hit by all the worst days, which is unlikely. Basically, it condemns market timing and embraces long time investment.

Consider the market turmoil last year, if you had exited or cut your losses in Jan 08, you would have missed the 40% downturn. You would probably miss the 20% recent rally, but you will still be better off!

The notion that statistics lie is common knowledge, but we should also be mindful that the motivation behind each statistics evidence is to induce people to make certain decisions. Consider the following fictional examples:

There is an epidemic in Singapore. 10,000 people are infected and on the verge of death. A new drug is available. If you choose to administer the drug, you will save 5000 people. If you do not use the drug, 5000 people will die. What will you do?

There is an epidemic in Singapore. 10,000 people are infected and on the verge of death. A new drug is available. If you choose to administer the drug, 5,000 people will die. Will you administer the drug?

You should be indifferent on both choices. However, the above simple example shows that the way numbers are phrased and presented will induce different emotions (thus choices), formation of different perspectives and possibly even different investment or life philosophies.

I once had an IFA agent who used to service my insurance polices and investment, 2 years back. The first thing he did when he met me was to scrutinize my then present polices and lament on how poor protection I had, how irresponsible my past insurance agents were.

He gave me his blog address to show his superb knowledge on finance and his “many” testimonials of satisfied customers. Eventually, when I invested with him, he disappeared and when I asked him difficult questions, requested financial transactions, he even scolded me (without my name) in his blog and classify me as one of the “clients from hell”.

Eventually, I fired him and sold off all my holdings for his poor and tardy after sales service in 3 months. Today, he is still doing extremely well, possibly earning in excess of $150k per annum. (When I met him, he was earning $120k per year!) Well, he made use of statistics to help him earned a good reputation. Uploading positive testimonials of satisfied clients (minus the complains component); bragging on how accurate his prediction on market was by linking his past posts when 50% of his predictions were wrong; portraying an upright image on himself by thrashing tie insurance agents etc.

All the above are just another form of manipulation of numbers and facts to induce people to make favourable decisions, to erm the “owners” of statistical evidence.

So the next time people show you numbers to prove a point, take it with a pinch, opps, I mean with a bucket of salt!

Sales talk

My property agent called me today to promote a 500 sq ft property selling at $950/sq ft at balestier area. He claimed that the swine flu is similar to the Sars period in which after that, it is likely that properties would soar. The property is only a 15 minutes walk to Toa Payoh MRT station, good buy best buy must buy!!!

I kindly declined his “lobang”.

To put things in perspective, the swine flu is not even 1% of Sars impact. Firstly, swine flu though contagious is not as lethal as Sars. Many people have recovered from the flu virus and it is still a mystery why people in Mexico die from it.

The global financial crisis is still unfolding, GM, Chrysler and Ford may face bankruptcy and that means millions of jobs off the table. Weak recovery is expected only in 2010 2Q.

Banks are still not lending, credit crunch is still at its thawing stage.

Property market have reached the peak 6 months ago and are now sliding slowly now. Buying a property now is akin to catching falling knives. And if you are leveraging, it means catching falling knives naked!

Usually when they claimed that it is “10 mins” from town or MRT station, you have to add another 50% margin error. Their estimation is usually grossly misleading.

It doesn’t take rocket science to figure out if that person is trying to earn commission or giving sound investment advice.

In another case, my colleague was persuaded to offload their newly TOP at a loss by their property agent as he claimed that their house has depreciated 20% and banks will demand top up on their depreciated amount. Example, they bought the house at $1m, taking an 80% or $800k loan. Now the property is only worth $800k and the bank is only willing to loan them $640k. Hence they are liable to return $160k, “anytime”.

Again, unless they default on their monthly mortgages, banks do not demand sudden top ups for no good reasons.

I believe there are knowledgeable, good property agents around. But the only way not to get ripped off by agents is really to educate yourself.

Sorry agents, but my money is hard earned and hard to earn.

Stocks or residential property investment?

Needless to say, property and stock markets are the most unlikely places you want your money to be right now. But the question is, given that you have $300,000 to invest now, do you buy a private residential property beside a MRT or a blue chip like DBS for passive income?

Many would argue that in Singapore, buying property would never go wrong. Well, perhaps it is because you have not seen people who have got their hands burnt in property market to live and tell their stories?

Which one offers a higher return and lower risk?

Some parameters of comparison:

DBS: $6.80/share

Assuming you purchased 44 lots.

Dividend per quarter: 10 cents (conservative guesstimate, could be higher or lower)

Income per annum: $17,600

Probability of losing 40% of your $300,000 in 6 months time: 30% (my conservative guess)

Income tax payable: None, as it has already been taxed at source

Yield: 5.89%

Probability of selling and earning a profit in 20 years time: 90% (guesstimate)

Net dividend income at the end of 20 years: $352,000
Assuming a conservative adjustment of 30% error, net dividend income would be: $246,400.

The argument here is that even the best banks in the world can fail, can we even trust to put our money with Singapore blue chips?

There is still a fair chance to lose 100% of our money in stocks.

Next

99 year leasehold Property: E.g: Kovan Melody/Compass heights

Cost: 1000 sq feet, 2 room property purchase @ $580/sq foot, costing $600,000 after stamp duties and other transaction fees. Minor renovations and fixtures have also been accounted.

Loan amount: $300,000 @ 2.5% for 20 years (interest is more likely to be 3.5% on average)

Monthly installment: $1500 (conservatively speaking)

Income from rent: $2100 (conservative estimate)x12= $25,200

Property tax: 10% of $25,000= $2,500

Agent expenses: $1,100

Wear and tear yearly maintenance: $600

Net rental yearly income: $3,000

Yield: 5,400/300,000= 1.0%

Probability of losing 40% of your $300,000 in 6 months time: 30% (my conservative guess)

(Should the property market falls another 20%, the fall in your property price will be $120,000, or 40%.)

Net rental income at the end of 20 years: $60,000

Probability of selling and earning a profit in 20 years time: 99% (based on historical records)

Apparently, property market is a more appealing investment as most people can tap on their CPF funds to finance their property while earning cash returns. From the above example, it is likely that the owner is able to sell the property 20 years later for at least $540,000 and earn a little profit, or carry on renting out the property for a $20,000 annual income.

This risk is considered “lower” as it is unlikely that the property will “fail” due to earthquakes or tsunami.

In the event that nobody wants to rent, the owner can simply move in and enjoy the home himself. You cannot even use the DBS’s branch toilets even if you are a major shareholder!

However, the short term risks are more or less the same. Yet the investment emotions involved are different. The feeling of seeing my property price falling 20% and pain of seeing my investment portfolio falling 50% is totally different even if the amount involved is the same.

Property gives people a sense of security. People need a roof over their heads, no matter what happens. It let investors feel that they can earn some rental income as long as they lower rent. However for stocks, investors do not see themselves owning an essential business. Actually, many businesses are also essential ones. Without them, people cannot own houses or even get a job.

Personally, I feel that property investment carries a higher risk of failure. The rental income might not be stable and one depends on rental income to service the loan. Tenants may default or destroy your house fittings, there might be unhappiness when negotiating new rental contracts or handle difficult tenants.

Still stocks for me for now.

Any inputs?

Personal updates

Apologies to my faithful readers who have waited so long to read my post. I was literally struggling with work and studies these days, as many of you know. Now that I study part time, I have enormous respect for people who complete their masters and undergraduate degree the same manner. It is really sheer discipline, hardwork, time and stress management in one package.

Other than taking out time to attend lectures and tutorials, the most traumatising part is to prepare for tests and submit assignments on time. With little knowledge and limited time, I have to work like a bull almost every day just to put everything together.

Work definitely suffered as a result. I became more forgetful and careless at work, making several silly mistakes that caused sleepless nights for me. Luckily it is all over now.

I just got back my tests and assignments. I am really glad that all were above 80%! I always fear that I will fail the tests and have to put in extra hours to make sure that I pass. Compared to classmates who are already finance analysts, accountants and traders, it was a personal achievement just to do as well as some of them.

Going forward, I am really unsure if I can stand the stress of the many more modules ahead. The time, effort and price for a masters is taking a toil on my work and health. I might be considering other careers apart from finance when my bond ends.

Hopefully there is a better place for me out there, somewhere.

Stretch the dollars series: Terminate your broadband and get a free home line

I am beginning to enjoy $35 of monthly savings after terminating my Singnet broadband. I have switched to using the starhub hubstation (additional $4 monthly, as compared to digital setup box), which provided 1MPS free internet. The catch is that your computer has to be near the hubstation before connection can be made. Alternatively, you can also fix up a router for wireless home access. However, connection may be much slower.

I see little speed differences between Singnet’s 1MPS paid subscription and the hubstation connection. Best of all, I am able to get a free home line from starhub with my old number being port over to them. There is free incoming and outgoing local calls and no monthly fees.

Singtel made a last attempt to waive off my home line fees if I sign up a 2 year 3 MPS plan @ $30 monthly with them.

Too bad, it wasn’t appealing enough.

Goodbye Singtel. No more fines from you again!