Tuesday, August 29, 2017

Is Investing The Same As Gambling?

There are plenty of myths about investing, among which is the comparison between investing and gambling. Here’s why they are nothing like each other. There are plenty of misconceptions about investing, but the most overused comparison is between investing and gambling. This is far from correct, as the comparison finds only one element (risk), and declares the two to be similar. Here’s why proper investing is not like gambling.

The Confusion Between Investing, Speculating, and Gambling
There are two main types of investors in Singapore. There are investors who put their money on an asset for the long term, such as people who buy index funds and hold on for 15 to 20 years. Then there are traders: investors who aim to buy low and sell high, to see a return as quickly as possible. There’s also a third type of “investor”, who is more properly called a speculator. These types put money on small chances, such as funding a start-up, in the hopes that they will see big rewards. Intelligent speculators are aware that they’ll lose money most of the time, but all it takes is one big payoff to make it all worthwhile. Which of these are like gambling? The one that comes closest is speculating, but even then, none of them is truly like gambling. Here’s why:

    Proper investing skews the odds toward you in ways gambling never will
    Gambling is almost always a zero-sum game
    Investing is only like gambling if you treat it as such


Proper Investing Skews the Odds Toward You in Ways Gambling Never Will
A well-understood rule of gambling is that “the house always wins”. The longer you gamble – be it at a jackpot machine or a Poker table – the more you tend to lose to the casino. The odds have been calculated to skew things in their favour. With proper investing – especially long term investing in blue chips or index funds – the opposite is true. There is a historical precedent for stock prices and property prices to rise in the long run: while it may not be true next year, it will almost certainly be true over 15 or 20 years. For example, look at Singapore’s property asset prices since 1976: While this doesn’t completely remove the possibility of a loss, it does mean the odds are skewed in your favour. In a casino, time is on the casino’s side. But when you’re a long term investor, time is on your side instead.

Gambling is Almost Always a Zero-Sum Game
When you gamble, the outcome always involves a winner and a loser. For you to win, the casino – or another player – has to lose. This isn’t always the case when it comes to investing*. Say you invest in a property that’s worth S$1.2 million. By the time you’ve paid it off  25 years later, its value has appreciated to S$1.7 million. The extra S$500,000 isn’t a “loss” to other property investors – you haven’t taken it from them, it’s grown as a result of the overall economy/property market becoming more developed. The same goes for assets like stocks, which grow in value as the company develops. When you gamble however, the winner’s gains always come from the loser. For the casino to win, you have to lose, and vice versa. The problem with zero-sum games is that, in the long run, one player tends to walk away with almost everything, whereas the majority of players will walk away with a loss (observe the typical Poker table, or jackpot session). *Some forms of high-risk trading, such as options trading, may be zero-sum games. But these are not typically available to lay investors.

Investing is Only Like Gambling if You Treat it as Such
There is a way for investing to become gambling, and that’s if you treat it as such. If you decide to buy and sell stocks based on “intuition”, or superstitions (e.g. the stock price matches your car’s license plate), then it indeed becomes a form of gambling. What sets investing apart is that the odds can be in your favour, if you make reasoned decisions. This means properly diversifying your assets, learning to read the fundamentals of a company before buying its stock, and being disciplined enough to follow a system.

But What About Speculating?
Speculating is not like gambling, because it is even less predictable than gambling. When you gamble, the risks are known. For example, if you are playing Blackjack, you know the main risk is going over 21, or that the dealer will have a number higher than you. As such, you can develop systems to deal with those risks: if you draw an 18, you should stand. If you draw a nine, you need to hit, and so forth. When it comes to speculating, the real world introduces so many variables that such systems are hard to develop. The start-up you invest in may turn out to be a scam, the land you bought in Nicaragua may be re-zoned as a garbage dump, and your investments in a developing country may be void as a result of a civil war. You may know some of the probable risks, but there are too many others for you to account for all of them. While expert gamblers can tell you the odds of a round, such as “10 to 1” or “47 per cent”, most speculators honestly don’t know how their investments will turn out. Their “game” is governed by fewer rules, and encompasses too many possibilities. That’s why speculating is only ever done by investors who can afford the losses. A billionaire, for example, might place two per cent of her portfolio in a company that might create the next Facebook, or might go bust in two weeks with nothing to show for it.


SingSaver.com.sgSingapore's #1 personal finance comparison platform by transaction volume, provides consumers with timely money insights and aggregates the latest credit card offers and up-to-date personal loan deals.

Thursday, August 24, 2017

Why Singaporeans Are Angry About Not Owning Their HDB Flats

When you buy an HDB apartment, do you own your flat, or are you merely leasing it for 99 years?
There has been an ongoing debate the past few weeks, over whether or not Singaporeans “own” their HDB flats. Some of it is due to confusion over terms used in documents (e.g. where the term “tenant” is used instead of “owner”). But it stokes an old worry among Singaporeans, that they don’t “truly own” their flats. Why does this matter? It’s as much psychological as well as practical:

Do Singaporeans Own Their Flats?
HDB has stated, many times, that Singaporeans who buy their flats do own them. However, it would be more accurate to say that HDB has provided a definition of what ownership means, by HDB’s standards. HDB has said that Singaporeans own their flats because they can sell them, rent them out, and do other things that owners would be able to do. However detractors argue that there’s no real ownership, due to the 99-year lease, and the many restrictions that don’t apply to private property. For example, you can rent out a whole private property immediately, whereas you have to wait for the Minimum Occupancy Period (MOP, currently, 5 years) for a HDB flat. There are also neighbourhood and block quotas that have to be considered, when renting out to foreigners. Ultimately, it comes down to a definition debate: do you own something if there’s a lease, and there are restrictions? So while there’s no clear answer there – it’s strictly a matter of perspective – it’s important to look at why the issue of ownership means so much to Singaporeans. After all, if you have a roof over your head, it’s affordable, and it generally appreciates in price, what’s the difference? Well, here’s why it’s a sticking point:

    There’s increasing worry about the 99-year “timebomb”
    There are estate planning issues
    The right to make money off your flat
    Psychological and political factors



1. There’s Increasing Worry About the 99-year “Timebomb”
This is the biggest bone of contention for most Singaporeans. HDB flats have leases that expire after 99 years, after which they are returned to the government. To be fair, this isn’t specific to HDB flats or even Singapore. Many private properties also have 99-year leases (commercial properties typically have 60-year leases), and these types of leases are used in some other countries as well. That said, there’s a worry that when your flat’s lease runs out, you may be too broke to afford a new one. And of course, you may find it hard to sell your flat once there are 30 years or less on the lease (buyers can’t use their CPF to buy it from you). The government has stated, quite clearly, that we can’t always count on the Selective En-Bloc Redevelopment Scheme (SERS). There is a very real possibility that our flats will slip into their last 30 years, be impossible to sell, and then see us booted out to find a new house. To some Singaporeans, that means the S$1,800 to S$3,000+ they pay every month (a typical range for HDB flat loan repayments) is nothing more than rent.

2. There Are Estate Planning Issues
While Singaporeans can, of course, leave their flat to their children/grandchildren, there are many restrictions to consider. For example, the beneficiaries may be forced to sell the flat, if they currently already own private property. In a broad sense, this is because HDB flats are meant to provide housing, not to act as investments. But it remains a sore point among some Singaporeans, who feel they should be able to leave such a legacy, when they’ve spent 25 to 35 years of their lives paying for it. Which leads to…

3. The Right to Make Money Off Your Flat
Ask some Singaporeans, and they’ll tell you true ownership of a property means they can use it how they please – that includes using their flat to make money. If they have to work under stringent restrictions, such as controls on how and who the flat can be sold/rented to, then they aren’t really owners. To be fair, HDB flats are sold at subsidised prices (due to the various housing grants). Many would argue that HDB restrictions are justified, given that the aim is to provide affordable housing, and not an appreciating asset. But then – detractors will argue – don’t call it ownership. It’s (indirectly) a form of renting from the government.

4. Psychological and Political Factors
There’s a great sense of relief in fully owning a house, from which you can’t be kicked out (such as with freehold property). Many people will never feel the comfort of home ownership, unless it happens on those terms – they want a house that will stay in the family for generation unto generation. Politically, this is about denying the government its bragging rights. Currently, Singapore has the second-highest rate of home ownership in the world (above 90%). However, if we were to redefine HDB ownership as a type of leasing scheme from the government, that accomplishment would be a fraud, and have no choice but to be struck off.

Either Way, These Debates Miss the Main Point
Singaporeans certainly have a long conversation ahead, on whether we really own our HDB flats. But this mainly semantic or academic issue needs to give way to a broader one: Singaporeans in possession of older flats may need to start budgeting, especially if they’d be retired when their flat lease runs out. They need to plan without the expectation of SERs, and stockpile enough savings that they can afford another house (even if the flat they are living in goes back to the government without a single cent paid).


SingSaver.com.sgSingapore's #1 personal finance comparison platform by transaction volume, provides consumers with timely money insights and aggregates the latest credit card offers and up-to-date personal loan deals.

Tuesday, August 22, 2017

Why Singaporeans Should Not Rush To Buy Bitcoin Right Now

Now that bitcoin is valued at US$4,000, some Singaporeans are wondering if it’s worth investing in bitcoin. Here are some things to know first.
Bitcoin has steadily raised in value this past year and hit the US$4,000 mark last week. This has led some Singaporeans to question if bitcoin, or any other cryptocurrencies, are the “thing to get into”. After all, endowment plans look boring at 5% per annum, while Bitcoin has quadrupled its value over the year. But here are some things to know first:

What Caused the Recent Surge in Bitcoin Value?
In a word, North Korea. Due to fears of nuclear tests and possible war in the Korean peninsula, stock markets are in a panic (stock markets like to find something to panic about every few years, and they’ve decided this event is it). When there are fears of global instability – such as would be caused by the outbreak of war in Korea – investors flee to safe haven assets and alternatives. Gold and the Japanese yen are two such safe-haven assets, and gold is also at a two-year peak. One aspect of Bitcoin is that it’s often touted to be a fixed “store of value”, such as gold. The idea is that, as there’s a finite number of them (there’s an intended cap of 21 million bitcoins), their value won’t crash like fiat currencies (such as the US dollar). And, of course, Bitcoin is not tied to the fate of any one country, as no government issues it. This may add to the impression of “safety”. But this is as much a drawback as it is a benefit – as no government backs Bitcoin, that can make it hard to use as payment outside of niche markets.

Before you rush to buy it yourself, here are some key things to consider:
    It may be too late to buy bitcoin now
    Cryptocurrencies are a form of speculation
    Cryptocurrencies can be hard to spend or liquidate


It May Be Too Late to Buy Bitcoin Now
If you decide to buy bitcoin right now, after hearing about the big surge, you’d be buying high. The price of bitcoin may already have peaked (it had to happen before the news covered it, obviously), so anyone who buys right now are taking a dangerous bet. 


Despite bitcoin being at its highest ever recorded value, you’re counting on it to go even higher. That outcome is based on a volatile geopolitical issue: it depends on how North Korea reacts to current tensions. If North Korea does back down – or agree to do so due to concessions – then bitcoin values (like gold and the Japanese yen) can wind down just as quickly as they spiked.

Cryptocurrencies are a Form of Speculation
As the Monetary Authority of Singapore (MAS) has warned, cryptocurrencies such as bitcoin remain a speculative investment. Bitcoin is volatile, and has gone through several spikes and crashes. When these happen, the price movements in bitcoin don’t happen in small increments. Their value follows a whipsaw pattern, and it’s not uncommon to see losses or gains happen in increments of 20 per cent or more. While big gains are possible, it’s equally possible to lose much more than you initially invested. That makes bitcoin appropriate only if you’re looking for a high-risk alternative to complement your portfolio; it’s definitely not something to stake your life savings or retirement fund on.
 
Cryptocurrencies Can Be Hard to Spend or Liquidate
The main worry with bitcoin – and other cryptocurrencies – is the collapse of secondary markets. If things look bad, few investors will be ready to buy (even if they are, it will be at an extortionate price). When this happens, there are few avenues to exchange your Bitcoin for cash. One of the long term issues with bitcoin has been its lack of use in mainstream markets: you can’t go ezbuy or Carousell and start buying things with it or spend it in your grocery store. This results in a situation where, if bitcoin crashes, your only solution is to (1) sell it for dirt cheap to the few people willing to buy, or (2) hold on to it and hope it recovers, risking the loss of your entire investment if it never does. In any case, this means that money committed to bitcoin is likely to stay that way. You can’t cash it out without risking a loss – so make sure you have other savings on hand before you buy into it.


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