Sunday, August 24, 2014

Sunday Weekend Roundup: Discussing 3 Myths in The Sunday Times Invest Section

Every Sunday, the Sunday Times will have a section called "Invest" where they talk about personal finance. I decided that like many of the other prominent bloggers that I know, I would also like to have a weekly roundup session where I share my thoughts about recent discussions around the internet and in the real world, though I would say the majority of the discussion would probably fall on the most recent end-of-the-week topics.


1) Sunday Times Interview with Aviva CEO: Insurance =/= Investments

The running joke that I constantly tell my friends is about how EVERY Tom, Dick and Harry that gets featured in the interview section of the Sunday Times Invest section will answer the bread and butter question of "What financial planning have you done for yourself? What do you invest in?" with insurance.

I'm bloody sorry for all the people who were conned into taking up whole life insurance, limited pay insurance or ILPs. Insurance is not an investment. If it was, it would be called an investment, duh. Even if you can encash out and have a cash value to it, congratulations, you have just paid a high price for an investment that returned less because of all the costs involved. You had an underperforming investment.

Anyway, my friend read the Sunday Times article and chided, "Wa, Aviva CEO with no Aviva products... sounds funny, right?". My friend got it right, but for the wrong reason. His intention was to say that Aviva products must be lousy, which is why their own CEO does not "invest" in Aviva products. But, it is my friend that is the silly person. NO insurance CEO would ever "invest" in insurance. Because it's not investing. Duh.

Which is why THIS week's interview with the Aviva CEO is so important. I salute Rennie Whang for getting to interview him, just to slap me in the face and say "Hey, not everyone thinks that insurance is investment, okay?". I think what makes this interview even extra special is that I knew Rennie in my school days. It's nice knowing that people I used to know are going places. But I digress.

Oh gawd. If there is one myth that is holding many Singaporeans back from the holy grail of the elusive "financial freedom", it is the HUGE FALLACY AND DELUSION that insurance is an investment. Please understand. It. is. not. period.

2) Investing is a bit of Gambling, Richard Ng's commentary

There is another Sunday Times article written by Melissa Tan titled "Investing is a bit of a Gamble". Richard Ng briefly talks about it and gives his views as well.

I politely disagree with both of them.

When you are gambling, the odds of winning the game is usually just under 50%. This is the LONG-TERM infinite number of tries probability. The house will have to have a small advantage, which is how they make their money in the long run.

Investing, is not the same. For this, I quote some statistics from the book that I am currently reading titled "Value Averaging" written by Michael Edleson. You might not agree with the strategy of value averaging, but the point here is about the statistic that I am going to reveal.

The dataset is from 1962 to 1991, which is when he published his book. He showed a table looking at investment horizon and percentage of positive returns. This is his findings.

Daily returns: 55% positive
Weekly returns: 57% positive
Monthly returns: 62% positive
Yearly returns: 74% positive
Four-Year returns: 91% positive

I hope that I made my point clear. In a casino and gambling, you can only win in the short-run if you were lucky early on. In the long run, you will lose more games than you win.

For investing in the stock market, you can lose money in the short-run if you were unlucky. But the longer you play the game, the much higher chances you have of winning.

Investing isn't a gamble if you are looking at a long-term time horizon. If you time horizon is short, then yes, you are gambling. But that is because you are trading, and not investing. They are two different things.

3) Diversify or Concentrate? No simple answer

Big Fat Purse wrote an interesting article with a philosophical theory that I loved when I first read about it early on, which is "The Ship of Theseus". Although the main point of his article was about Buffet's new style of value investing vs. Graham's old style of value investing, my takeaway was a particular quote from Buffet.
Diversification is protection against ignorance, it makes little sense if you know what you are doing. - Buffet
This links to something else which I found similar, which is an interview with an ex-Mob boss from New York City. Again, although his main point was that much of Wall Street is shady, he thinks stocks are in a bubble and that physical gold is awesome, I got a different message.

An anchor asked him about his view on diversification, and his answer is just golden.

Q: As a retail investor then, what about diversification? That is what is drummed into everyone's head.
You have to have knowledge in what you are diversifying in, and not trust someone else to pick those spots for you - Michael Franzese
Too many people are looking for the golden goose, the holy grail. Again in the Sunday Times, there is an article interviewing the AllianceBernstein's CEO. He mentioned how so many investors don't care about the backstory.

"My question is X, please answer X and don't give me a history of the issue. Focus on the issue."

Honestly, if you don't care where your money is going, then you also shouldn't care when you lose that said money. It is much better to know what are you doing, and why that "investment" will actually be able to grow money. Sure, you can be one of those many people that start-up a company and run a business. If you don't know what you are doing, you are going to fail. Starting up a business isn't a bad idea. It is, if you don't know what you are doing.

Investing isn't a bad idea. It is, if you don't know what you are doing.

Well, that's it for my first weekly roundup. I don't know how many people actually care about the stuff I write and my opinions, but at the end of the day, I don't really care. I just have to pen down my thoughts on all these issues, if not I can't get closure. You don't have to agree or disagree with me, but of course I would love to hear anything that anyone has to say regarding these issues that I touched on.

2 comments:

  1. Richard may need 10 years to understand the difference. LOL!

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  2. Hi Uncle CW8888,

    I think most people that say they invest don't look far enough. Personally, I also want strong positive short-term returns so I can use the money and move out ;) but I also know that the market might not be very nice to me. From the daily and weekly point of view, it really does seem like gambling. But from the annual and even longer time frame, probability and history is on the side of the longer-term investor.

    I am sure Richard just needs to see some evidence about long-term returns to convince him, and then he will be able to save many years :)

    95% positive returns over 10-year investment periods

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