Friday, 29 March 2019

Investing vs Trading vs Hybrid (part III)

In a previous article (Read more here), we talked about investing vs trading from expected return perspective.  Now, we shall look into the third type – Hybrid type.
Most of the investors or traders skid into Hybrid type when their investing or trading has turned sour after a certain period of time.


An investor may have started his investment using the “buy and hold” principle.  After he bought the stock, the stock price went down another 50% in 3 months.  A true hardcore FA (fundamental analysis) supporter will buy more stock at a bargain but not many people could withstand the stress when the portfolio has depreciated by 50%.   At that moment, the investor may probably ask the million-dollar question – Is the analysis correct?  Frankly, nobody knows the answer.  This is purely a psychological affair.

If the answer is a weak yes, the investor might upgrade the “buy and hold” principle to “buy and forget” belief.  If the answer is no, then the investor might execute cut loss procedure, switching to trading mode, which transforms the overall strategy to Hybrid type.

Another example,

A trader identified a trading opportunity that could generate 20% return.  The cut loss level is -10%.  After the investor bought the stock, the price appreciated 17%, then took a deep dive and settled at -11%.  A true trader will execute the cut loss procedure sternly but not many people could pull the trigger, especially when the stock was at positive 17% return at the beginning.   The trader might switch the strategy from trading to “buy and hold”, changing the strategy to Hybrid type.

Both the above examples show the process of switching from either investing or trading method to hybrid type.  Whether the investor or trader would benefit from the hybrid strategy is hard to quantify using common logic.  But from the observation that we had, the chances of generating positive return from Hybrid type is extremely rare.

Does this mean investing and trading cannot co-exist?  The answer is no.  You can do it by keeping separate accounts for investing and trading.  We shall talk about that in another article.

Thursday, 28 March 2019

Banking Trends with Millennials

Many millennials rely on current and savings accounts to manage personal finances.  They are, however, increasingly swapping brick and mortar banks for new banking options.  According to Rebecca Lake (“the balance”, updated March 5, 2019), when millennials are unhappy with their bank, they move.  Gallup poll suggests millennials are 2.5 times more likely than Baby Boomers and 1.5 times more likely than Gen Xers to switch banks.

What are the factors?
·        Convenience and perks – 47% (in U.S.)
·        Fintech companies that are focused on tech approach are more attractive.

Millennials value others recommendations highly-twice as much as convenience and almost as much their own experience.  After a positive experience, millennials are 2.5 times as likely as boomers to post about it online.  As such, the quality of their experience will certainly have a sizable multiplier effect on the bank concerned.

As new technology evolves, including AI and machine learning, banks will have to keep pace.  The balance is to manage personalized experience with digital banking features and products.

Reference: Medallia Institute, “What do Millennials want in a banking experience?”

Wednesday, 27 March 2019

U.S.’s New Trade War!

After a trade war with China, U.S. is brandishing a new one with India and Turkey. After months of simmering trade tensions, President Trump is pushing through with his threat to punish India (Washington Post, March 5, 2019). The preferential treatment or a duty-free status for a number of Indian goods will end. The changes will not take effect for at least 60 days. Turkey’s benefits under GSP will also end.

The move against India is contrary to a one-time desire of the U.S. to cultivate India as a strategic partner. Trump’s frustrations are reflected on Harley-Davidson’s motorcycles being levied a 100% tariff by India. Harley-Davidson has bypassed this by assembling its bikes in India. The U.S. trade deficit with India is at USD27.3 billion in 2017. India is GSP’s biggest beneficiary and exports about USD5.6 billion in goods to the U.S. – about 10% of India’s total exports to U.S. Despite trade frictions U.S. exports to India grew by more than 25% in past 12 months.

Compared to U.S.-China trade of USD648.5 billion (in 2016), the U.S.-India trade is only USD114 billion for the same period. U.S. Commerce Secretary, Wilbur Ross defended Trump administration’s decision to impose tariffs, saying it is a defence against years of “bad practice”.

U.S. is invariably driving nations together through its actions. China, India, Europe and Asean could form a new trade bloc (“Euciean”) while America is left with Mexico and Canada (“USMCA”). That my friends, is Trump’s idea of “free trade” and “globalisation”.

1. It’s official: India is Trump’s next target in trade wars, Nina Masih, The Whashington Post,March 5 2019
2. India imposes retaliatory tariffs on U.S., widening global trade war, Annie Gowen, The Washington Post, June 21, 2018

Tuesday, 26 March 2019

Are Costs of Medical Procedures in Malaysia Rising?

Medical inflation in Malaysia is estimated to rise by 10% - 15% annually based on the track record of the last 15 years.  In 2000, open heart surgery cost about RM30,000 but in 2015 it was already RM62,000.  Cost of knee replacement (single) was RM14,000 in 2000 but in 2015 it was RM25,000.  Angiograms and one stent angioplasty was RM4,000 and RM15,000 respectively in 2000, But by 2015 it rose to RM10,000 and RM25,000.

The medical costs between private and public healthcare in Malaysia is significant:

Hospital services and supplies differ widely between private and public healthcare in Malaysia.

Why do they continue to rise?

1.      Private healthcare will boast state-of-the-art equipment and a better service level from doctors and nurses.  But in some private facilities their services are below that of a good Government hospital.  The common issue with the Government is the waiting time to secure consultation and medication.
2.      Demand is outpacing supply – more are ageing and requirements will keep changing.
3.      Life expectancy is increasing – it is now in the 70s but very good possibility for people to live to mid-80s and 90s.
4.      Lifestyle diseases – sedentary lifestyle, stress, work schedule cause heart disease, stroke, diabetes and a whole host of other problems.

How do we overcome?

Plan ahead on healthcare cost, especially for retirement.  Survey the hospitals – both private and government – and observe their competencies and use the cheaper one.  Try to secure an appropriate insurance plan and shop around before settling into one.  Join an advocacy group and report on unethical practices of medical professionals, i.e. recommending procedures not required but insisted upon to generate higher revenue.  The regulators or governing bodies must set price guidelines and standards which are published on a half-yearly basis.  And monitor hospital practices.
Hospitals should generally be operated on a not-for-profit basis.  Isn’t it depressing for someone to make money from the misery of another?


Monday, 25 March 2019

Rising Costs of Living Impacts Households!

The impact of rising costs of living on households in Malaysia is incredibly diverse.  Complaints about the rapid rise in cost of living is a common grievance in Malaysia, a major topic in any public discourse or engagement.  However, the rise in inflation reflected through consumer price index (CPI) has been low.  The average prices of goods and services have only risen an average of 2.7% annually over the last three years.  Households expenditure as a percentage of household income has also decreased from 68% in 1993 to 58% in 2016.  These numbers somehow do not reflect the sentiments on the ground.  Are these numbers inaccurate or fabricated?

While national analyses yield a positive outlook for households in Malaysia, they hide the different realities lived by lower income households compared to higher income households.  Households earning below RM2,000 in 2016 were spending around 95% of their income, increasing from 92% in 2014.  This means that the savings left for these households have gone down from RM124 per month in 2014 to RM76 per month in 2016.  In contrast, households earning above RM15,000 spend less than half their incomes, leaving them with higher savings.

The difference in spending patterns between households of different income levels are also apparent.  Households earning above RM5,000 have increased expenditure in both food at home and food away from home.  The quantity consumed at home has been reduced and replaced by food consumption away from home.  Noticeably, they have reduced the quantity of food from both sources.  This means that as food prices rise, households earning below RM5,000 are forced to spend more money on food, and reduce amount that they eat to meet ends meet.

For higher income households, the rise in expenditure is mostly attributed to increasing or maintaining their state of living, as indicated by their expenditure patterns.  For example, the quantity of recreation and cultural services of households above RM8,000 have increased between 2014 to 2016.  With residual income to spare, these households are sheltered from shocks and uncertainties that lower income households experience.

The stark difference in household expenditure across income groups provide some of the real grievances and struggles that lower income households have in making ends meet.  Understanding these changes is critical for targeting policies to address the high costs of living.

Reference: “Beyond Inflation: How Rising Costs of Living Affects Different Malaysian Households”, Allen Ng, Tan Zhai Gen, and Alia Muhammad Radzi, November 1, 2018, Khazanah Research Institute.

Friday, 22 March 2019

Investing vs Trading vs Hybrid (Part II)

In a previous article (Read more here), we talked about expected return E(R) = (p)(RW) + (1-p)(RL).  How do we relate this equation to investing and trading?

The most notable method in investing is the fundamental analysis (FA).  There are many books and articles in the market that describe fundamental analysis.  Just google “fundamental analysis”, it will respond with many results.  Back to our business, how E(R) relates to investing (fundamental analysis)?  The key concept of investing using fundamental analysis is the “buy and hold” principle.   The FA supporters believe that their investment will provide them positive return in the long run.

First, they put a lot of effort in their analysis, baking in a good margin of safety when deriving the target price or intrinsic value.  Second, once they determined the stock is undervalued, the lower the stock price, the happier they are because they can buy more at a lower cost.

What do these imply?

These imply that FA supporters only care about one variable in the expected return equation, which is the RW.  They assume p = 100% because lower price is a great opportunity for them to buy more, so making the second part of the equation (Risk), zero.


Michael is a FA supporter.  After rigorous analysis, he came to the conclusion that stock ABC is worth $5.   The stock now is at $3.  Thus, his RW is 66.67%.  Since his p = 100%, his expected return is 66.67% too.  Michael will invest in stock ABC because in the long run, he believes he will make 66.67% from this investment.

Trading, in contrast, does not advocate “buy and hold” theory.  Most trading believers are short term traders.  Many experienced traders have their own set of rules for trading.  One of them is the cut loss point.  Depending on the trading duration, the profit and cut loss points may vary.  For day traders, the profit and cut loss points may range from 0.5% to 2%.  For traders that have longer trading duration such as weeks or months, the profit and cut loss points may be ranged from 5% to 20%.


John likes short term trading, using either technical chart or news (rumours) to make a trading decision.  Based on his insight, he believes that stock XYZ will hit $6 in two months.  As the stock is now trading at $4.5, the potential return RW is 33.33%.  John has a strict cut loss point at $4.  So the potential negative return RL is about 11.11%.  What is John’s expected return for this trade?

The missing part in this example is the probability, p.  Most traders do not have a quantitative way to determine the p, they base it on their experience and gut feeling.  This is the reason why we always hear people say “you have to pay tuition fees in financial markets before you can make a profit from it”.  For John’s case, let’s assume p = 70%, so the expected return for this trade is (70%)(33.33%) + (30%)(-11.11%) = 19.9%.

All the above examples seem to have good returns on investment.  But all of them share the same weakness – the accuracy of the variables.  If one cannot have a good estimation of the variables in the expected return equation, or half way thru the investing or trading period he or she found will find that their assumption may be wrong, and most of the time this will lead the person into the third territory, which is the Hybrid mode.  Let’s discuss that in part III.

Thursday, 21 March 2019

Top 5 Jobs in 2030?

Do you remember life before iPhone, Uber, Internet, GPS, Waze and the like? Most of our current useful tools didn’t exist 15-25 years ago.

By 2025, we will lose over 5 million jobs to automation. But jobs will be more interesting. Future jobs will involve knowledge creation and innovation. Although no one can accurately predict what jobs will look like in the future, these are seven skills for your future success:

(i)        Mental Elasticity
            Mental flexibility is to think outside the box, see the big picture, re-arrange things and find a solution.

(ii)       Critical Thinking
            Constant analysis of situations, multiple solutions and making decisions.

(iii)      Creativity
            Robots may not be able to do creative, original thinking, so it is less likely for you to lose your job.

(iv)       People skills
            You need to learn to manage and work with people in the future.

(v)        STEM
            As technology progresses, more advanced STEM skills are required, including coding.

(vi)       SMAC
            SMAC is not St Mary’s Anglican Church but stands for social, mobile, analytics and cloud. Learning all of these makes you standout.

(vii)      Interdisciplinary knowledge
            For creativity, knowledge of different fields helps. So do a double major in college!

So what are future jobs? Crimson Education listed ten jobs but I am only listing my favourite five:

(i)        Waste Engineer – humans produces 2.6 billion pounds of garbage and what do we do with it? Fill a landfill. So turning rubbish into power or other items will help the planet.

(ii)       Organ/Body Part Creator – creating parts from stem cells and other materials. Every day twenty one people die because they could not get an organ.

(iii)      Commercial Space Pilot – with flying to other planets becoming possible, commercial space pilot is a probable career route.

(iv)       Memory Surgeon – surgically removing bad memories, mental illness and destructive behaviour. Ethical issues are involved here but there are far less prisons and policemen.

(v)        Personal Productive Person (PPP) – this is not the political party but a job that analyses people’s daily lives and reducing distractions in order to work harder and smarter!

So plan for the future with good skill sets from a reputable institution.

To 10 jobs in 2030: skills you need now to land the jobs of the future, Crimson Education

Wednesday, 20 March 2019

Private Investment to Remain Flat in 2019?

MITI has set a “realistic” target of RM200 billion for approved investments in 2019. In 2018 it was RM201.7 billion while in 2017 it was RM200.6 billion. So for almost three years private investment remains flat!

Why? Domestic direct investments (DDI) has declined by 17%. So although foreign direct investments (FDI) increased by 48%, DDIs declined to RM121 billion from RM146 billion. In other words, DDIs share of total private investment declined to 60% from 73% in 2017.

MITI is focused on electrical and electronics, aerospace, chemical and chemical-related manufacturing, amongst others. Of the major foreign investors, China at RM19.7 billion was the largest followed by Indonesia (RM9 billion), Netherlands (RM8.3 billion), Japan (RM4.1 billion) and the U.S. (RM3.2 billion).

So how do we improve DDI?

The usual top seven measures to stimulate private investment may include tax “breaks”; Government spending; pump priming; reduction of interest rate; stability of wage level; price policy; and reduction of monopoly privileges. Some of these are being pursued by the Government while others are not within the Government’s present ambit or ability.

John Maynard Keynes used the term “animal spirits” in his “General Theory” referring to “spontaneous urge to action...” George Akerlof and Robert J Shiller in their book “Animal Spirits” describe five different aspects of animal spirits:

·       confidence;
·       fairness;
·       corruption and anti-social behaviour;
·       money illusion; and
·       stories

They place great emphasis on confidence about the future to unleash animal spirits. Basically, do people feel good things will happen in the future; will they be treated fairly; and, will their interests be taken care of. If rules of governance and societal attitudes are against them, they would be reluctant to invest in new ventures.

Nevertheless, MITI needs more dialogue with key players in the industry; selective discussions on a one-to-one basis with companies with a cash-pile in their books; re-look at incentives available; more conducive investment environment, with less red-tape; and remove “hidden” taxes that dis-incentivises businesses. Maybe, with more forums, dialogues and one-to-one sessions the Government will be seen as an enabler and encourager for the investment eco-system.

Private Investments unlikely to grow much in 2019 - Tan Xue Ying, The Edge Financial Daily, Friday, March 15, 2019.

Tuesday, 19 March 2019

Income Classification in Malaysia 2014 and 2016

Official data classifies Malaysians into three income groups:

·       Top 20% (T20);
·       Middle (M40); and
·       Bottom 40% (B40)

The median monthly household income is classified as follows:

Median Monthly Income By Household Group
Household Group
Median Income 2016 (RM)
Median Income 2014 (RM)
CAGR (%)

The above does not account for inflation and/or slower wage growth. The median income level for each state is as follows:-

Median income for a household in different states in Malaysia
Median Income 2016 (RM)
Median Income 2014 (RM)
W.P. Kuala Lumpur
W.P. Labuan
Pulau Pinang
Negeri Sembilan

Penang is in the middle among its peers despite being second highest in terms of per capita income after Kuala Lumpur. The above data is useful for bankers, developers, retailers in mapping-out strategies for their products.

1.         The T20, M40 and B40 income classifications in Malaysia, Ooi Chia Shen, 7 Nov 2018

Monday, 18 March 2019

Implications of an Ageing Population

Population growth in Malaysia has declined to 1.1% in 2018 from 2% in 2000. This is partly due to Malaysia becoming a more developed nation. By 2035, the percentage of population in Malaysia above 65 is forecasted to be 13.2%. By 2040, 20% of the population will be 60 or above (UM’s Social Wellbeing Research Centre).

The most common problems that senior citizens face include:
·       Deteriorating health;
·       Malnutrition;
·       Shelter;
·       Fear;
·       Depression;
·       Dementia;
·       Isolation;
·       Boredom;
·       Financial incapacity; and
·       Non-productive lives

For ease, one could group the above as physical, mental and financial issues.

In Japan, one in three people are aged over 65. Japan has the best healthcare and social safety net for its senior citizens but the ageing population puts a strain on the financial system, retail industry and prisons. Japanese men and women find loneliness and boredom unbearable and so they opt to be in prison. How? By deliberately breaking the law. The prison environment is regimented with shelter and food. Then other inmates provide interaction.

Malaysia only has one geriatrician for every 100,000 older persons. Our medical emphasis has to move from cardiology and oncology to geriatrics. Many children have little clue of what to do with parents with dementia. The easiest way is to abandon them in a senior citizen’s home, hospital or another rehab centre.

We need to incentivise children to look after their parents. It has to be a 3-generation approach in home development or new property estates. Local councils should encourage developers to have independent living or assisted living for the aged. Tax shields may help the entrepreneur and the family member in looking after older folks. We have to address the question “what’s in it for me?” The old Asian mentality of filial relationships are loosening or have loosened, and surprisingly this transcends both race and religion. So we need to re-map / re-draw the physical aspects – shelter and health to financial capacity in order that the aged can sustain a reasonable, lucid quality of life.