Month: November 2014

What Does It Mean To Be Human?

I returned to being atheist on Jan 2014 after having been Christian for a bit more than 3 years from 2010 Nov – 2014 Jan. I’d probably write about why the conversion in another article, but the question that dawned upon me when I made the decision to become atheist again was, how do you want to play the game of life?

For the next few months since becoming atheist again, the thing I wanted to do most with the rest of my life, was to be more human. Solving this would be a huge hurdle in finding sustainable satisfaction in life.

Many self reflections into the past has always bothered me on how much I’ve de-humanized over the years.

To provide context on who I was before – My grandmother always kept saying that out of all her grandchildren I was the one who had the most “人情味”, which roughly translates as was the most human (eg. thoughtful, authentic, empathetic). My mother always said that I just loved being in the company of crowds. My sister once remarked how the brother she used to know was a warm human being that really cared. I had a high school friend who I met up with after not seeing for a long time who said he remembered me as someone who really had a passion in life, being interested in many things.

I’ve always wanted to be like a fairy in a sense that I’d just fly around crowds and light the whole room up with joy, laughter and love. It’s just who I am. And I think I let myself not be a fairy over the years for fear of how others would view me (eg. questions about my masculinity) or hurt me.

And I’ve always been interested in many things. This is also something I’ve let myself not do over the years for fear of being seen as wishy washy, and also for fear that a shotgun spread of time, energy and effort on multiple interests simultaneously wouldn’t get me anywhere in life.

And the anywhere in life I want to get myself into, is freedom. Freedom to be a fairy and free to pursue many interests in life without fear of any repercussions that would threaten my survival. This fear is very strong because before I can be financially free and really not give a crap about losing opportunities just because people’s biased views deem me not worthy of opportunities after revealing who I am, not revealing who I am is essential to getting opportunities to get myself financially free as soon as possible.

Which is ironic, because the pursuit to be who I am without fear of any repercussions is exactly the thing that’s been suppressing who I really am. Thus the strong need to really come up with an answer to what does it mean to be human, because ultimately, being human is how I want to play the game of life. If I don’t know the answer, my current pursuit to financial freedom really has no meaning.

So what does it mean to be human?

I’ve given glimpses of what I think it means in the previous few paragraphs, but it really surrounds the Taoist mentality that all should return to the state of a child.

Returning to the state of a child is to return to the state where everyone was most human. For me that means (in no particular order) being authentic, being spontaneous*, being curious, being funny, being empathetic.

I’m not saying who I am now is bad, since acquiring the skills to being smooth, being structured*, being efficient, being mature and being logical has helped me immensely in achieving things in life so far. It’s just important to remember who I really am and who I really want to be like everyday. Being 100% human doesn’t have to start after achieving financial freedom, I can be as human as non-opportunity threatening as possible before I get there.

*I would note that I am inherently more structured than spontaneous (I’m an INFJ in MBTI personality test), but I found out that I really do love to spontaneously send warm messages to people around me, which is why I want to be more spontaneous as it is part of what makes me more human


Importance of Not Losing Money

One of the nice things about our investment approach is that we always have cash available to take advantage of bargains – Seth Klarman
Reading the transcript of the interview “Opportunities for Patient Investors” of Seth Klarman made me re-think my approach for my Money Accumulation Phase investment strategy. In pursuit of trying to generate returns from my idle cash, I didn’t think thoroughly about the opportunity cost of future investment prospects. Even if I can’t measure it, I can’t ignore it.

I’ve also been thinking that even if I was buying index funds based on Earnings Yield of 10 year AAA Bonds with Margin of Safety, the Margin of Safety wasn’t enough. The reasons are two-fold.

Firstly, if Earnings Yield of AAA Bonds were to drop, then theoretically speaking the price I’m willing to pay for stocks increases, but this doesn’t take into account that the drop in Earnings Yield of AAA Bonds AND the increase in stock prices could be irrational at the same time.

Secondly, Seth Klarman mentions that when stocks approach full value, the birds start chirping. Even if Earnings Yield of AAA Bonds AND increase in stock prices are rational, buying closer to full value means I’m buying with less margin of safety.

Therefore further margin of safety is required in the form of hedging with cash. Not only does it allow me to hedge against losses, it also allows me to take full advantage of ridiculously excellent investment opportunities. In the words of Benjamin Graham, “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return.”

The reason why safety of principal is so important is because it is far harder to make money than lose money percentage wise. An example would be if a stock’s priced dropped 1/3 (33.33%) in price from $100 to $66.66, it would have to increase by 1/2 (50.00%) in order to recover back to $100. This conviction basically means I’ve completely invalidated my previous essay “When Does Investing with Debt Make Sense“, because the potential to lose all my principal makes investing with debt not make sense at all despite the potential for very attractive returns.

So in practice, not only does buying index funds have to compare to Earnings Yield of AAA Bonds with 2/3 margin of safety (max AAA Bond Yield), I will only allocate at most 2 times the % the index funds is undervalued compared to the max AAA Bond Yield to the index fund I’m investing.

So for example, as of Nov 16th 2014, the max AAA Bond Yield is 2.62% (10 year Bond of Microsoft expiring on 15 Dec 2023), which would mean with a margin of safety of 2/3, the maximum P/E * P/B multiple I’m willing to pay is 25.45. Since Vanguard Asia ex Japan High Div Index Fund (SEHK:3085)’s Graham Number is 18.77, thus 26% undervalued against the max AAA Bond Yield, I’m willing to invest 52% of my portfolio into Vanguard Asia ex Japan High Div Index Fund while hedging it with 48% cash.

If I have multiple index fund investments, then my portfolio will be equally split by the number of index funds I’m invested in, and the index fund to cash allocation will then be further split with the formula above.


Not advice. No offer. Do not rely. May lose value. Risky. Conflicts hidden/obscured. (Borrowed from Terrence Yang‘s Disclaimer on Quora)

When Does Investing with Debt Make Sense

The bank I use for my savings account has been pestering me for the past few months to borrow money, and every time they pester me, they keep increasing the pre-approved loan amount and also reduce the interest rate.

Right now they’ve just made an offer of pre-approved loan amount of $237,000 (HKD) with APR of 2.99% for a repayment period of 24 months.

To be frank, 2.99% APR is very enticing, cause I keep thinking to myself, “I could generate ~10% return just by solely actively managing index funds, 2.99% is nothing”.

But whether investing with debt makes sense can only be done after understanding the nature of debt, and my current cash flow and cash reserve situation.

The nature of debt makes 2.99% APR look too cheap.

With investing with debt-free cash, it’s like building a house on a solid foundation, the house building (time needed for investment to materialize profits) being the potential returns from your investment and the solid foundation being the principal. By the end of your investment cycle, you hopefully can salvage (sell) not only the built house (potential returns) but also your solid foundation (principal).

But when you invest with debt, it’s like building a house with a sinking basement, the sinking basement being the principal and debt you have to repay the loaner over time and have to use debt-free cash to pour into the sinking basement to keep the foundation solid so that the house building can continue.

The reason why you need to shovel debt-free cash into the sinking basement is because lots of investments require 1-3 years in order to materialize profits, so you’ll have to have cash flow or cash reserves be occupied by debt repayment until the investment can materialize full profit to repay debt or re-fill your cash reserves. Any pre-mature salvaging of your house building would most likely yield less than optimal results, which defeats the purpose of having to borrow money to invest in the first place.

So when thinking about debt repayment, you should consider whether you have enough cash flow (and if not, cash reserves) to service principal repayment so that your investments’ returns can service interest rate repayment.

For cash flow, if I did borrow the full $237,000 as pre-approved, I’d have to repay the bank $10,119.9 monthly. I’m frugal, but even I couldn’t finance that kind of monthly repayment schedule from my monthly income alone. Even if I only borrowed $100,000, which is the minimum needed to keep interest rates at 2.99% on a 24 month repayment schedule, that’s still a monthly repayment of $4,270.0. Sure I can afford it now, but what if I lose my job? What if rent rates hikes? And if I have to repay by dipping into my cash reserves, why wouldn’t I invest with my cash reserves instead, which is interest-free in the first place?

So if I do borrow to invest, then I have to make sure I can service debt repayment with my current cash flow, but also prepare cash reserves just in case my cash flow does fail on me in the future, and the only time it makes sense to invest with debt instead of investing with my cash reserves immediately, is when I want to capitalize on an investment opportunity while maintaining enough liquidity in my emergency reserves, which for me is 18 months worth of expenses.

As for at most how much I’m willing to leverage, the answer is debt-to-equity ratio of 1.0. When I analyze companies, the most I can accept for debt-to-equity ratio is 1.0, so the same should be applied to my own personal finance. What the debt-to-equity ratio of 1.0 implies is that I have double the assets to my debt, since equity is assets minus debt, so if my assets (eg. investments) drop in value by 50%, I can still theoretically service my debt repayment if my cash flow can’t.

So if I can’t service debt repayment with my cash flow or have more than 1.00 debt-to-equity, I can forget about borrowing money to invest even if it’s offered at attractive APR rates.


Not advice. No offer. Do not rely. May lose value. Risky. Conflicts hidden/obscured. (Borrowed from Terrence Yang‘s Disclaimer on Quora)

Earnings Yield of AAA Bonds Needs a Margin of Safety

In the article called “Why the Earnings Yield of AAA Bonds is Better than Graham Number“, I talked about the need for valuations of index funds adapting to the macro environment rather than sticking to a fixed valuation number that was set decades ago to the situation back then.

However, I recently came to the conclusion that Earnings Yield of AAA Bonds is a good valuation method that reflects the macro environment at the moment of valuation, it’s a bit too risky.

The risk comes from two parts.

The first part comes from the fact that if all index funds are very close to the Earnings Yield of AAA Bonds, then if following the valuation method I’d still put in 100% of my free cash flow into these index funds. However, buying index funds close to Earnings Yield of AAA Bonds means valuations are almost over-valued, and that any given moment a significant drop in price is very probable.

The second part comes from the fact that stocks are inherently more risky than AAA grade Bonds. Even though I demand that P/B value to be used as margin of safety, but the demand for P/E * P/B multiple being less than or equivalent to Earnings Yield of AAA Bonds assumes that P/E * P/B can deliver returns with the same amount of risk as AAA grade Bonds, which is not the case because Earnings and Book Value (the “E” and “B” in P/E and P/B) can fluctuate a lot, thus making my original pricing decision overvalued just because fundamentals deteriorate.

Both of these has made me consider adding a margin of safety to the Earnings Yield of AAA Bonds when doing future purchases.

As for what degree of margin of safety, I’ve decided upon demanding a margin of safety of 2/3. There’s no very scientific reason why except for the fact Benjamin Graham and Peter Lynch favors that degree of margin of safety, the former for net net stock valuations and the latter for PEG ratio valuations, and I think it’s a good enough rule for my needs for now.


Not advice. No offer. Do not rely. May lose value. Risky. Conflicts hidden/obscured. (Borrowed from Terrence Yang‘s Disclaimer on Quora)

When Does Buying Bonds Make Sense?

I mentioned in an earlier post that when buying index funds, it makes sense to value it based on earnings yield of AAA grade bonds.

But when does it make sense to buy bonds when all index funds are indeed overvalued versus the earnings yield of AAA grade bonds? I used to think it was whenever the overvaluation occurred until I stumbled upon this quote from Warren Buffett:

“We could take the $16 billion we have in cash earning 1.5% and invest it in 20-year bonds earning 5% and increase our current earnings a lot, but we’re betting that we can find a good place to invest this cash and don’t want to take the risk of principal loss of long-term bonds [if interest rates rise, the value of 20-year bonds will decline].”

The point of parking money into bonds is to have a safe haven where permanent loss of capital is minimized while still being able to generate a return on it, which means that two criteria must be fulfilled before parking cash into bonds when index funds are overvalued, which is:

  • The P/E & P/B multiple of index funds are above earnings yield of AAA grade bonds
  • Interest rates of short term, mid term and long term US treasury bonds are flat

As explained by Preston Pysch, Every time the US Department of The Treasury thinks the economy needs more inflation for economic growth, the yield curve of short term, mid term and long term US treasury bonds is a S curve trending upwards from low short term interest rates. When the US Department of The Treasury thinks the economy needs to cool down, the yield curve of short term, mid term and long term US treasury bonds will trend a flat line to discourage borrowing by making it expensive.

What this implies is, if the US treasury bonds resemble a S curve, even if I can’t predict when interest rates are going to hike, the fact is that it is going to hike some day, which present a risk of permanent loss of capital since bond values decrease when interest rates increase. The opposite is also true.

This checklist thus helps me better make the decision of going all cash or all bonds when index funds are overvalued.


Not advice. No offer. Do not rely. May lose value. Risky. Conflicts hidden/obscured. (Borrowed from Terrence Yang‘s Disclaimer on Quora)

The Role of Margin of Safety for Cost Disadvantage of Extremely Small Sums of Money

There’s a follow up article called “The Role of Concentration for Cost Disadvantage of Extremely Small Sums of Money

Managing small sums of money is a bliss in terms of investment options, but extremely small sums of money when starting out on the other hand is frustrating in terms of not only investment options but also cost disadvantage.

Not only does many investment options that require simultaneous multiple investments become off limits as you don’t have enough money to minimize risk to a minimum with Kelly criterion, you also face huge commissions percentage wise due to purchases that warrant the minimum commission fee (eg. $100 commission for $1000 purchase is much more expensive percentage wise than $100 commission for $10000 purchase).

Not only are there frustrations on the investment front, there are also frustrations with capital allocation. When you are starting out with extremely small sums of money, it can be an emotional struggle between allocating more money to your emergency reserves or to deploy large chunks of your emergency reserves into investing to save on commission fees. I’ve definitely been tempted to start investing again even though I’ve yet to hit 1 year worth of expenses in cash (very close though).

I think this is why margin of safety is that much more important for those with extremely small sums of money starting out.

During Money Accumulation Phase, 1 year worth of expenses in cash is absolutely uncompromisable until you really run out of money, which provides a margin of safety in terms of career (you can afford the time needed to find another job if need be), investment (you’re not completely screwed if all your investments go to zero), and life (you can pay for the unexpected emergencies of life).

Another aspect of margin of safety that comes to play is to always buy index funds during Money Accumulation Phase that is undervalued EVEN AFTER taking commissions into consideration. This allows me to stick to the 1 year worth of expenses in cash and bear the pain of expensive commissions percentage wise when making small sum stock purchases since as long as the index fund is undervalued even after taking commissions into consideration, meaning I have a realistic chance at making a profit.


Not advice. No offer. Do not rely. May lose value. Risky. Conflicts hidden/obscured. (Borrowed from Terrence Yang‘s Disclaimer on Quora)

Why the Earnings Yield of AAA Bonds is Better than Graham Number

In My Investment Philosophy section of this website, I previously stated that the way I’d evaluate if an index fund was overvalued or not was through the Graham Number.

The Graham Number is the maximum multiple (P/E * P/B = 22.5) that Defensive Investors should pay for stocks according to the book The Intelligent Investor.

I started thinking that the Graham Number was too conservative a value due to new facts.

Firstly, investment figures such as John Bogle have been commenting recently that the US stock market is not cheap but definitely not in a bubble, which shocked me considering as of Nov 4th 2014, the Total Market Index [1] is deemed significantly overvalued at 124.9%, and the Shiller P/E ratio [2] is 26.4 (59% higher than historic median).

Secondly, Jae Jun from Old School Value pointed out that the modern day equivalent to the Graham Number “could mean something like staying away from stocks with a PE above 25 and P/B greater than 3.

Thirdly, Kiran Dhanwada from Quest for Value mentioned that Benjamin Graham derived the P/E should be 15 value from the AAA bond yield back then, which was around 7.5%.

Which forced me to come to the conclusion that how I value whether index funds are overvalued or not should be more reactive to the current market environment rather than a valuation formula created decades ago. Using the Graham Number would generate decent results, but I want to optimize my results better.

As a result I think the modern day equivalent to the Graham Number would be the maximum multiple a Defensive Investor should pay is the Earnings Yield of AAA grade Bonds, which is 35.84 [3] as of Nov 4th 2014. The reason I still include P/B is because it acts as a measure for margin of safety in terms of balance sheet, so if the margin of safety is below 100% then it should be compensated by a lower P/E valuation. The reason why P/B’s function as margin of safety is needed is because AAA grade Bonds are almost risk-free, so index funds (or stocks for that matter) should not only at least match the earnings yield of AAA grade Bonds but also provide a certain degree of margin of safety to compensate fluctuating earnings yield or the inefficient re-investment of earnings (earnings not distributed as dividends almost never 100% convert to book value due to all kinds of inefficiencies).


[1] Total Market Index is US GNP / Total US Stock Market Cap. One of Warren Buffett’s favorite method of measuring if the stock market is overvalued or not

[2] Shiller P/E ratio is calculated by using S&P 500’s inflation adjusted earnings in the past 10 years

[3] The highest yielding AAA grade Bond I could buy in USD/HKD as of Nov 4th 2014 was the US Treasury Bonds maturing at 15 May 2038 which had a yield to maturity of 2.79%. The reason I only value USD/HKD bonds is because I deal mostly in HKD, and since HKD is pegged to USD, buying USD bonds that have higher yields than HKD bonds would produce minimal currency risk.


Not advice. No offer. Do not rely. May lose value. Risky. Conflicts hidden/obscured. (Borrowed from Terrence Yang‘s Disclaimer on Quora)

Say No To Monthly Stock Investment Plans

I’ve had serious headaches with Monthly Stock Investment Plans for the few months I’ve used it, for the following reasons:

  • Odd board lots means it takes a lot of time to process the trade, meaning you might miss great opportunities due to timing
  • Odd board lots forces you to sell at market orders, thus having to sell at unfavorable prices that could’ve been prevented through price-limit orders
  • Depending on your broker, it’s annoying as hell to cancel. I can start one with ease online, but have to physically queue in line to cancel.
  • Depending on your broker, they are horrible for tracking how much stock you bought at what price if you get sent paper statements of such trades while your non-Monthly Stock Investment Plan trades can be accessed through e-statements

All of these cons do not compensate the only pro I see with Monthly Stock Investment Plans, which is commissions are excluded when purchasing through Monthly Stock Investment Plans for my broker. The only other pro I can think of is that it automatically “pays yourself first“, but I’m quite disciplined with allocating my monthly income, so this pro is of no use to me.

If these reasons aren’t enough to convince people to stay the heck away from Monthly Stock Investment Plans, I don’t know what will.


Not advice. No offer. Do not rely. May lose value. Risky. Conflicts hidden/obscured. (Borrowed from Terrence Yang‘s Disclaimer on Quora)