Amsterdamned

I've been in Holland for about a day, and I've been here before, and have come to really enjoy Holland. The people are invariably friendly and things function really well.

I'm particularly impressed by how the Dutch somehow balance the dynamic creativity of capitalism with certain social institutions and safety nets of the stereotypical "socialist" European society: when you go through Amsterdam, it has the feel of a very lived-in and dynamic place, with lots of entrepreneurs setting up businesses. It's a very capitalistic society (they had the earliest stock exchange in the world, and also pioneered the concepts of the corporation).

But then it is also interesting that this same society seems relatively egalitarian: there are practically no homeless drunk people in the streets (if you exclude the drunk/stoned Brits drooling on the sidewalks), and their entire social system (from what I can gather) seems to place an equal weight not just on pure profit, but also on fairness (a concept that most capitalistic societies seem to treat as a luxury good), with a focus on making sure all sides are heard and all parties are taken care of. For example, employers have to pay 8 percent of your salary in "vacation money", meant to pay for tickets, hotel bookings, etc., for you to go on vacation. This is on top of the paid vacation time that you are already entitled to as your normal compensation packet, and (get this) even if you are unemployed! The reasoning (based on the NY Times, the Oracle of Manhattan) is that "if you can’t go on vacation, you’ll get depressed and despondent and you’ll never get a job".

With a society like this, it's little wonder that there is quite a strong social glue holding the whole society together. I went to the Dutch Resistance Museum today, which was awesome (though the same can NOT be said of the owner of the cafe next door: please avoid the cafe unless you want to get harangued about "manners") and extremely eye opening about how diverse, yet united Dutch society is. The Dutch seem to have taken great pains to ensure that all groups are included in the societal dialogue, with no single group being superior; as a consequence, even though the Germans in WWII treated them as "pan-germanic brothers", the general sentiment across the society was one of resistance. A particularly funny episode I read there: this Dutch woman was arrested for anti-German sentiment. In prison, she was given the socks of SS soldiers to mend. She proceeded to "mend" by sewing up the sock holes entirely (so they were unwearable) "by accident"!

This led me to think about Singapore, and how tenuous the link is between most Singaporeans and Singapore. Can I honestly look at a fellow Singaporean who has migrated to Australia, and tell him that "your country has done so much for you"? Can we honestly say that our dialogue includes all strains of thought, that our system is fair, that we tried our best to help the disenfranchised and the unfortunate? I'm not sure.

There are times when I consider certain things (like the lack of consumer rights in Singapore) and wonder, if my friends and family left, "would I still go back to Singapore?" Having come to Amsterdam, that question continues to ring loudly in my mind as I think about this.

A Goodyear for Temasek's corporate governance?

I was surprised to hear that, after all the positive noise and fireworks (which even had the Economist saying a good word), Mr. Chip Goodyear won't be joining Temasek after all.

It's a pity, as I was hoping to see what changes Mr. Goodyear would have brought on board when he took over the helm. Mr. Goodyear would probably have brought in much-needed expertise in corporate restructuring and an outsider's perspective that is missing in a company which increasingly gives the impression that it's losing its grip, especially with their sales of Barclays (amazingly bad timing: they sold during the low-volume months of December and January, when even seasoned day-traders stay out of the markets as there is too much noise).

What is interesting to me was something that isn't immediately apparent. The contradiction between the official press statement from Temasek (which blamed the decision on "(unresolved) differences regarding certain strategic issues") with what Temasek Chairman Mr. S. Dhanabalan said to Today ("The differences in and of themselves are not the issue, but they have helped both the Board and Chip to assess that it is in our mutual interest not to continue with the planned leadership transition") is stark and notable: they are self-contradictory and mutually exclusive. I smell spoiled sushi.

Quite disturbingly, from the press releases of the Ministry of Finance, it seems that Temasek's largest shareholder is effectively powerless over Temasek. This seems to be confirmed by the selection process of Mr. Goodyear as reported in Parliament, which involved "first getting the backing of the Cabinet, before Temasek's board put its recommendation to President S R Nathan for his approval": note how the Ministry of Finance receives no mention, even though it is nominally supervising both Temasek and GIC. And now that Temasek decided on not getting Mr. Goodyear, the Ministry says that "Temasek informed MOF (Ministry of Finance), but MOF was not involved in the decision," which seems like a denial of responsibility for the decision. You can bet that some civil servant in the Ministry is sweating buckets on behalf of his minister to explain away this fiasco in Parliament.

To paraphrase Oscar Wilde, to lose some money is a misfortune, but to lose money and a CEO-designate looks like carelessness. I really do hope that there is a proper review over the oversight of Temasek and their decisions, especially this incident, otherwise a casualty of the rumour-mill will probably be the Prime Minister's wife (unfairly, I should add: I have heard she is actually a very smart, capable and humble person). If this episode serves as a catalyst for Temasek's improved corporate governance, then perhaps all this soap-opera is ultimately not for nothing.

Review on article in the Economist about bank stocks and employees

Sorry to my non-existent readership for not updating this in a while, as I have been busy being funemployed.

My favourite magazine in the world, The Economist, just published a brillant article over the weekend about bank employee compensation and their returns to shareholders (over the same holding period). The most striking thing about this article was the diagram that they used to illustrate the investment-turkey-payoff vs. the employee compensation for Lehman Brothers (see below, from the Economist website). From this, it is fairly obvious that (a) it sucks to be a shareholder of an investment bank that is going bankrupt, and (b) it's great being an investment bank employee, as you get all upside and absolutely no downside whatsoever.

The second thing that was striking about this article was the last paragraph, which is much the same said by Nassim Taleb, phrased in a different way:

Banks pay low dividends, and when they get into trouble the capital that shareholders have retained in the firm typically gets wiped out. Employees have taken money out of their firms each year. It may be time for the owners of banks to mutiny over the bounty.

Read the article, and then think for yourself whether speculation in bank stocks really is worth the risks involved: you might be better off trying to get into a bank as an employee than playing with their stocks.

As I'd previously highlighted in this blog, we Singaporeans hardly have a choice in the matter, given Temasek's huge investments in banks as a proportion of its portfolio. But I do hope that the powers-that-be are looking closely into their portfolio, and demanding more "bounty".

And in response to Temasek's repeated exhortation that they are investing in stocks "for the long run", it is worth considering what ex-Morgan Stanley Asia chief economist Andy Xie (who apparently got into trouble for his candid remarks about Singapore, ball-carrying Westerners and PM Lee) has to say about stocks in the long-run:

It's a widely accepted notion that long term stock investors make money. Actually, this is not true. Most companies don't last for more than 20 years...In the long run, all companies go bankrupt.

(from the English 财经 magazine, link here)

From my other blog: http://daftfadertrader.blogspot.com

I've been reading Jim C Collins' book Good to Great (Why some companies make the leap and others don't), which is a very well-reasoned book backed by lots of data.

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Introduction to the Stockdale Paradox

The Stockdale Paradox was coined by Jim Collins, and was named after Vice Admiral James Stockdale, USN, who was the highest ranking US prisoner-of-war in the Vietnam War, and who was held for eight years (from 1965 to 1973) and tortured over twenty times. Most impressively he actually took command within the Hanoi Hilton (together with Brigadier Risner), and never allowed himself to be used by the Vietnamese for propaganda, even slitting his face on purpose.

During an interview with Admiral Stockdale, Jim Collins asked "Who didn't make it out?"

Admiral Stockdale's reply was enlightening:

"Oh that's easy; the optimists. They were the ones who said, 'We're going to be out by Christmas.' And Christmas would come, and Christmas would go.

Then they'd say, ' We're going to be out by Easter!' And Easter would come, and Easter would go.

And then Thanksgiving, and then it would be Christmas again. And they died of a broken heart."

He then ended with this:

This is a very important lesson.You must never confuse faith that you will prevail in the end - which you can never afford to lose - with the discipline to confront the most brutal facts of your current reality, whatever they might be.

The Stockdale Paradox is something that I have thought about many times before. What Admiral Stockdale called the optimists, I call them the unhealthy optimists, guilty of unhealthy optimism. How does unhealthy optimism manifest itself? It very often manifests itself in explicit and outcomes-focused positive self-talk, like "best training", "cutting edge", "best performing", "peerless" and other superlatives. You can see this in certain people (especially, in my experience, inferior managers) who talk about "positive thinking" and "positive self-talk"; arguably what these people are doing instead is positive denial. They refuse to confront reality, instead cling on desperately to their illusion of positivity.

A friend of mine not so recently remarked to me that she had tried positive thinking for a while, but gave up because it made her feel worse. I suspect that her positive thinking is what I call positive denial, and her reaction is exactly what happens when unhealthy optimism meets with brutal reality.

When you believe in your own bullshit, you end up in really deep shit, especially when you are finally confronted with the reality of the situation. This applies to organizations that believe their own propaganda, and to individuals who believe their own self-talk, and to both organizations and individuals who do not face up to reality.

The reverse of unhealthy optimism is healthy optimism. Healthy optimism is implicit: if you're good, you don't need to say it out. In fact, it is often impossible to spell it out without sounding like a broken record. Far more often, you would prefer to not say it out and just focus on what you need to do. This is something that can be trained: arguably the healthy optimism mindset is the basis of all sports training and self-improvement, allowing the mind to actually focus on feedback instead of feeding on emotional fears and internal dialogue.

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Crystalizing moment

Personally for me, the crystallizing moment between unhealthy and healthy optimism actually occurred during Basic Military training, during the final 24-km route march. After the fifth time of telling yourself "I can do it!", this self-talk begins to sound like what it really is: an empty promise to yourself. Internally it becomes very clear that there is a very sharp contrast between what your head is saying and what you are actually feeling: your rational voice is saying "I can do it!" but in actual fact you are despairing at the sheer pain.

Instead, what actually worked for me (especially since I developed a huge blister by the 4th kilometer) was to internalize the belief that I can do it, literally by saying to myself, "yes, you can do it, so shut up and do it" and then I just focused on the reality of the situation: that I will only finish this one step at a time. So I literally focused on one step.

Then the next. And so on, for the remaining 20-km with the blister.

It was the confrontation of the reality that allowed me to cope, because ultimately reality is what you experience. Interestingly enough, the memory of this has also given me the confidence to overcome other things that I have experienced before in my life. Healthy optimism begets more healthy optimism.

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Stockdale paradox in relation to trading

Specifically, in trading, the Stockdale paradox is the ideal trader's mindset: ideally a trader will never lose faith in his/her ability to learn the markets and to trade profitably, while confronting the realities that manifest in his losing trades.

Unhealthy optimism manifests itself (I think) in some of the following ways:

1. A trader looks only at the opportunities, and overlooks the risk: a case of positive self-talk ("There is plenty of opportunity in the markets!") without focusing on the reality ("You could lose your pants in the markets too!")
2. A trader adds to losing trades: again, a case of positive self-talk ("The market will turn! This is good value! I am right!") vs. market reality ("There go your pants again, thank you, O liquidity provider!")
3. A trader looks perpetually for the perfect indicator, the perfect broker, the perfect market, and the perfect trading teacher who will teach one to be a perfect trader: this is less obvious a manifestation. Underlying this search for perfection is an optimism that such perfection actually exists, and that this panacea will be readily available to the trader looking for such a thing. Like the wishful thinking in the examples above, this is usually an evasion of self-control and self-responsibility. Usually this trader's self-confidence in the perfect indicator/broker/market/trading teacher lasts until the first big loss, after which the trader's mindset turns around from "this indicator/broker/market/teacher is perfect" to "damn this scheisse!!" Again, when wishful thinking meets brutal reality, brutal reality usually wins.
4. A trader who trades without a plan, only with self-confidence: wishful thinking.

Undoubtedly everyone has gone through some of these flaws at some point or another. What differentiates the (eventual) winners from the losers is their ability to face up to reality, and to take steps to deal with reality. Often these steps are small baby-steps, but these are still very important. Many times, you will dance the Annoying Tango of Frustration ("one step forward, three steps backwards").

But ultimately, my belief is that the person who most readily faces up to reality, and who most actively seeks rational solutions to his/her reality will be the most likely to succeed in the longer term.

Rules-based naïveté

Singaporeans are stupid. - Li Ao

新加坡人笨。 － 李敖

When Chinese television personality Li Ao made the above comment in 2006, it sparked off a furor in Singapore, with a wave of indignant anger mostly from the Chinese-educated Singaporeans (most English-educated Singaporeans don't even know who Li Ao is).

In general, I frown upon such generalizations and stereotyping, as labels tend to stick and often set up the basis of bigotry. Most of what he said on television about Singaporeans is hugely debatable and plain wrong (including his assertion that "Singaporeans have poor genes" and "no culture", as our "ancestors came to Singapore from China with only their underwear, let alone any culture whatsoever"). I think what Li Ao said is hilariously funny (especially if you don't take him too seriously), and I think what he says needs to be taken with enough salt to cause kidney failure in an elephant.

But what Li Ao says is not without a seed of truth, especially if you translate the Chinese word 笨 into clumsy or naïveté, rather than stupidity.

While I would not be so extreme as to say that Singaporeans are stupid, I would say from my limited personal experience that Singaporeans can be very naive; they tend to be pre-occupied with rules and regulations, and often have their thinking limited by those rules and regulations (see my previous blog post on my condominium's security guards).

When I see Singaporeans in a rules-free environment, I am often reminded of this Zen story about a horse that worked its whole life turning a grinding stone in a mill; when it was retired and allowed to graze on a large field, it went to the only tree in the field, and continued walking circles around the tree (like it did when it turned the grinding stone).

Like the horse, a lot of Singaporeans who grew up with a lot of explicit and implicit rules tend to be lost when they are thrown into an organic environment where the only limits are the ones you set for yourself. Like the horse, they then draw their own rules, and limit their own thinking to the imaginary box that they grew up with. So even if they are in a large open field, they will find their own tree and orbit around it.

I myself am not immune to this, as I remember what it was like in the Matrix, and the shock I had upon stepping out into the New World. I still vividly remember my surprise at how freely and easily my American classmates challenged professors in class (once, about the need for homework!) I also remember how pleasantly surprised I was when a venture capitalist who was guest-speaking at my course said that venture capitalists prefer entrepreneurs who had failed before, which surprised me as failure in Singapore is a social stigma to be buried and never talked about.

I suspect that is why there are so many implicit social rules for Singaporeans, like "marry and have three kids", "get a stable job", etc., often without any real questioning of assumptions. Most people in Singapore complain about the pressure of social norms; they really only have themselves to blame if they unthinkingly accept those norms and apply them to their own lives.

This naïveté is also perhaps why I have heard more than one Singaporean prescribe a standard set formula to developing nations: "Why is everything so disorganized? They should pass some laws and fine people to get them to behave. They should put bad people in jail, death to drug smugglers. They should have laws and rules forbidding pollution, corruption, etc. They should attract foreign investment."

But in my experience, mainland Chinese and Indian (especially those from the big urban centers of both nations) will understand that, it's often not that simple, especially in big countries with large populations (i.e. very complex systems) and myriad conflicts of interests by myriad parties. Some Singaporeans can be very simplistic, because we have grown up in an engineered-environment where we often do not see the larger consequences and ramifications of decisions because we are not big nor complex enough for these decisions to go wrong. (My working hypothesis is that people from big and populous nations have seen enough central plans go awry, because they come from nations which are big and complex, and where simplified engineered solutions often go completely wrong.)

Despite this, things are definitely changing in Singapore, as more Singaporeans study and travel overseas and as the next generation comes to being. You can see that in the younger generation, with people questioning how things are done in the Straits Times forums and in the local blogs. We can only change our viewpoint one assumption at a time.

The question I have for you, dear non-existent reader, is this: what assumptions around you and inside you have you questioned today?

Bank stocks and investment turkeys

I recently had a beer with a friend and we started discussing about Temasek, a topic that seems to be losing steam in the press (perhaps intentionally?). I pointed out how Temasek's huge concentration in financial stocks (40% of their portfolio) is a huge concentration of risk, especially since banks are hugely susceptible to "negative Black Swan payoffs" rather than positive Black Swan payoffs.

For the uninitiated, negative Black Swan payoffs are like Taleb's analogy of the turkey being fed steadily by the butcher (i.e. stable returns over an extended period of time) before dying quite abruptly in the abbatoir. The returns look like this (taken from Taleb's article in Edge.org):

To compare this turkey with bank and financial stocks, look at IndyMac's earnings before insolvency:

You really could replace "IndyMac" with just about any big bank that were former stars: UBS, Citibank, RBS, etc. (Aside: I've noticed that some of the banks that took the biggest hits have names and acronyms that end with S-es: UBS, RBS, MS. Perhaps they were thinking with their S-es while trying to follow the trendsetting S: GS.)

On this basis of the payoff structure, I said it's quite inadvisable to put too large a portion of your portfolio in banking stocks. My friend took issue with it, saying "you're saying all banks are bad investments"; what I was really saying was that, if you're going to invest in banks, then you better hedge your bets (e.g. by buying a put option on the S&P Financials index ETF or by portfolio diversification) rather than put most of your eggs in this basket of turkeys.

Personally, I wouldn't go anywhere near a bank in terms of investments, as I don't know when they will be impacted: an ex-girlfriend's grandfather was a long time investor in a Singapore bank, and he got very badly burned in this recent turmoil. The negative payoffs are completely not predictable ex ante. By the same logic, I won't go near an insurance company (except as their client), but this is especially with my working hypothesis on the interaction between global warming and increased human growth and urbanization [Note: my working hypothesis is that the confluence of both factors increases the likelihood of natural disasters happening with greater frequency (global warming), and with ever greater economic impact (human population growth and widespread urbanization). E.g. the huge 1883 eruption of Krakatoa killed an estimated 30,000 people, when the Indonesian archipelago was relatively unpopulated; in contrast the much smaller-scale Asian tsunami killed around 180,000 people through Southeast Asia despite being a relatively minor geological event. I shudder to think what should happen if Lake Toba blows up, or if a super typhoon hits China].

Essentially my view is that buying an insurance stock is akin to writing an option, while being their customer is to long an option. I'm not too keen on being an investment turkey, so I think I'll stick to being a bank and insurance company customer, rather than an owner, for now.

In the meantime, now is probably a very good time to go into stocks of companies that provide reliable services that will definitely be required, the so-called defensive stocks, like utilities, waste management, commodities, pharmaceuticals, etc. It's well worth looking into these, particularly into waste management companies, which is something I've been promising myself to do ever since the Economist published a special report on waste.

Should Singapore focus more investment in "soft" science research?

Lately I've been toying with the possible idea of doing a graduate degree in behavioural economics, and started doing some online research on any programmes.

Not surprisingly, most of the graduate programmes available are in the US, with an additional programme in Nottingham, UK. But what surprised me was that there were next to no behavioural economics/finance research programmes here in Asia that was picked up by Google.

So this got me thinking, and I thought about what a great idea it will be for Singapore as a test-bed for behavioural economics: most of the research currently being done seems to focus primarily on test samples from the West, but nobody seems to yet have done a categorical study into the possible variations of key behavioural concepts (anchoring, frames, etc.) across different cultures. Given that Singapore is centrally located, and is a confluence point for both East-West, perhaps this is the best place for such inter-cultural behavioural studies to be done.

Also, instead of the Singapore government spending huge amounts of money on technological research programmes and fixed technological infrastructure that might or might not work (does anybody still remember the calls of Philip Yeo for Singaporeans to study engineering and biotech?), perhaps Singapore should increasingly focus on developing our "soft" research. "Soft" research areas in the social sciences are relatively cheaper: compare the amount of specialized equipment needed in a chemistry lab (mass spectrometers, lasers, NMRs, etc.) vs. a behavioural psychology lab (attractive female research assistants, hidden cameras, cookies, etc.).

As a consequence a large portion of investment in hard-science research facilities go into fixed costs (equipment), while investment in soft-research tends to go to variable costs (man-hours): the operational leverage of hard-science research is a lot higher.

Which logically means that perhaps the risks/rewards are higher if we put our research money into "soft" research than "hard" research. If Singapore puts more money and emphasis into "softer" research like psychology, economics, behavioural economics, sustainable development, etc., we might be able to boost our economy by creating niche industries and innovations that spinoff from such research.

We actually already have exported some behavioural economic innovations, albeit innovations that have come from our government. For example, congestion road pricing was first implemented in Singapore. Now, drivers in London curse and swear at their own road-pricing system, which was adopted by their Singa-phile ex-mayor Ken Livingstone. As another example, the Singapore Government's Central Provident Fund has been quoted in Akerlof and Shiller's latest book "Animal Spirits" to be a potential way to increase savings rates in the US.

Suppose that we invest in a research center focused on behavioural economics, and our research generates interesting findings of the different behaviours between, say, Chinese and American consumers. It's not unthinkable that our researchers will be able to setup consulting firms to advise foreign companies on the best ways to attract Chinese/Indonesian/Indian consumers.

Or if we setup a research institute on sustainable development, then Singapore could not unthinkably become a Southeast Asian hub for sustainable development research across different countries and regions.

This strategy of trying to improve one's academic standing by focusing on the "soft" sciences was adopted by New York University in 2003: New York University tried to revamp its reputation as a top liberal arts research institute by aggressively expanding its economics department , which seems to have been quite successful.

Having setup a Biopolis, perhaps it is time for us to look at a Behaviouropolis?