Complexity and Impossibility transformed into Simplicity with higher dimensions

 

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Dear Readers,

Thank you for coming here!

If you are in a room, how do you describe the exact position of a spider hanging from the wall?

With only two dimensions, it is difficult and complex to say the least, if possible at all.

However, with three dimensions (three lines from a corner of the room), it is simple.

Complexity and impossibility under two dimensions is transformed into simplicity under three dimensions.

This is how three dimensions was invented.

Simplicity is the result of having enough dimensions.

Therefore, upgrading our thinking models to incorporate more dimensions will help us understand and solve the complicated problems in life.

This also aligns with Charlie Munger and Scott Page, who advocate the model thinking.

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To have more dimensions, we need to both go up and go down.

Going up to discover and incorporate more dimensions, such as going from 2-D to 3-D.

Drawing up the whole picture, such as the value chain, helps. 

When we select suppliers, we do not only look at the prices, but also the quality, maintenance frequency and costs, consumable cost, lead time and even payment terms.

When we deal with packaging, we do not only look at how visually appealing to customers, but also the branding image it reflects, the cost, the transportation requirements and even the environmental friendliness.

Going down to break down something into pieces, such as breaking down working hours into number of FTEs and working hours per FTE or breaking down revenue into price and sales volume.

This is critical to isolate root causes and engineer targeted fixes.

This is the basics for consulting, by the way.

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We also need to know when to stop. 

There is always the practicality. 

It means two things:

1. It is enough to solve the problem
2. It is cost-effective and affordable

Going up to incorporate too many dimensions or going down to break down into too detailed levels is not necessary, wastes resources and often decreases the efficiency in solving the problem.

We do not need 5-D to describe the position of the spider in the room.

We do not need to know the behavior of any specific customer as long as the segment he/she belongs to is adequately represented in the analysis.

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Conclusion

Simplicity is the result of having enough dimensions.

To have more dimensions, we need to both go up and go down

Meanwhile, we also need to know when to stop to cater for practicality.

I know it is hard. That is why it is valuable and appreciated!

Till next time!

Murphy's Law & A Rethink On Investment

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Dear Readers,

Thank you for coming here.

This is going to be a short post, just expressing some of my random thoughts.

Photo by Iñaki del Olmo on Unsplash

1. Murphy's law in my reality: It can always get worse

In my post "Monthly Net-Worth Update - Jan 2020", I wrote:

• From next week, I will be on a new job, one with likely lower net income, less stability, more stress, heavier workload, less free time and much more traveling. Hopefully, it will also provide more learning opportunities and in time, opportunities to advance in career and income.

I was thinking starting the new job was not ideal. I expressed similar feelings in a few other posts during that period too.

I was thinking that was bad enough. And I never thought for a minute that I would not even be able to start the job.

It can always get worse, and probably it will! (Touch wood)

Thinking about my life, I have had quite a few such cases and they all concentrate in the past 2 years or so. 

It could be due to my memory bias. 

But, I think it is time for me to adjust my expectations with life and be more cautious with both of my feet on the ground!

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2. A rethink on investment

In my post "Basics 03: My investment journey and outcome", I wrote:

• Secondly, my wife is abssessed now with some A-share active investment course. She has paid quite a bit tuition and is really eager to try. I don't know how to stop her. Guess I will just let her try it out.

I was pretty unsupportive at that time.

I was already putting time and efforts into investing. Why did she need to do it again?

And based on my understanding, she was not the very logical type of person and was vulnerable to sales pitches etc

But she insisted.

I never really showed interest in how she did, as I always believed she was just "trying it out" and she probably would just give it up after the initial "interest" faded. 

I also never thought she would do well.

Then she gave me an update yesterday and I was shocked!

She had made more profits within a much shorter period of time with a much smaller capital!

So her "8 months" has beaten my "2.5 years" and she did it with a much smaller capital.

I always believed in the buy-and-forget long-term approach. Well, the return so far has not been great.

Maybe it is because the time span is not long enough yet. 

On the other hand, am I being lazy and less open-minded?

My wife learned from the courses and acted. She tried so many things related to investing, while I read a few books in the beginning, fixed my strategy and have been lazy since then.

And I refuse to spend a penny on courses as I do not believe the learnings is valuable enough to not waste my time and money.

It is pretty evident in many aspects of life. 

My wife is more active and willing to try out new things, while I am more likely to be passive and refuse to accept new ideas.

Maybe I should get more active and open-minded!

[This is not to say the long-term approach is wrong.]

Till the next time!

How much money do you "Really" need to be completely "Financially Free"? Have you "Really" thought about it?

Dear Readers,

Thank you for coming here.

If we are asked how much money we need to be completely "Financially Free", I am sure many will say "a huge amount", like millions or billions or even an infinite amount. At least that was my answer until not long ago.

And that was a problem. That showed that I had not really thought about it and only had a very vague idea: I need a looooot of money.

What really got me into thinking about it was an article I read. That was an interesting article, in which the author split the population into 10 classes in China context. When describing the class with annual income 5-50 million RMB, the author stated (not exact words):

- Luxury was not an issue at all. Let's say you spend 10K RMB a day and that is only 3M a year. Do not think spending 10K every day is easy. Think about it, 10K, every day, pure consumption.

That clicked with me. It is not easy to spend 10K RMB or 2K SGD every day on pure consumption.

I recall my days as a consultant in the prestige firm. When I was serving a client in Toronto, my daily average spend was about 600-700CAD, aka 600-700SGD.

- Hotel: ~400CAD a day

- Meal: ~150CAD a day

- Transport: ~100CAD a day

This represents the highest daily average for me and that is only 30% of 2K SGD.

So there is actually an earning amount, exceeding which we will be free to enjoy "Luxury".

But what would be that "Amount"?

For me, I think 1K per day is enough for me. Of course, I need to consider my wife and kids. I think 2K should be enough. That would be equivalent to ~600K SGD a year. Double that, 1.2M sounds good to me.

For you, I can think of two ways to derive the "Amount".

1) Estimate a daily "hard to spend all" amount and basically do it in a similar way above

2) Look at your dreams. List them out, estimate the cost of each one, and sum it up. This will give you a lump sum amount you will need to fulfill your dreams. Divide that into each year, and add the "normal" annual spend, and then you will have the annual amount you need. Double that and there is your "Amount"

I am sure there are more ways to do this. But the logic behind is interesting: Once you are rich beyond a certain point or earn more than a certain figure, it would be hard to spend all your money.

Maybe that point seems far away. Stay at it and try our best. We will be there.

Till next time!

Monthly Net-Worth Update - Dec 2019

Dear Readers,

Thank you for coming here.

Wish you a belated Merry Christmas and Happy New Year!

It is the end of the month, which means it is time for another monthly Net-Worth update.


Net-Worth increase from last month: ~34K SGD

This is a pretty good month for us. Apart from our salaries, the increase mainly comes from our stock investments. Again, these are ETFs tracking World, Singapore and China markets.

I hope this trend can continue. However, I might be out of a job after January next year. Finger crossed that I will find something by then. Otherwise, our Net-Worth will probably be declining until I find my next income sources, be it a job or a business or anything else (not breaking any laws for sure).


Investment: 6.47% annualized return, incl. dividend 

Compared to the annualized return of 5.49% last month, this month is a very good one. We are actually thinking whether we should sell our position to take the gains, even though the absolute number is not big. This is also due to the possibility of me being out of a job after Jan and that we might need the money for our monthly cash flow.


Anyway, shit happens in life and no one can say they have complete control over it. We believe this is a temporary set-back that reminds me to learn the lessons in the hard way and thus positions us for greater greatness. But at the same time, it is still damn scary and worries me a great deal. No more holiday mood, that is for sure.

My wife has been really supportive and always trying to ease my worries. I am lucky to have her. My two kids as well. I will do my best to make sure they are not affected. They deserve what they have now and more.

Till the next time.

Basics 01: How our Net-Worth is calculated

Dear Readers,

Thank you for coming here.

As the 1st post of the "Basics" series, we will introduce how our Net-Worth is calculated.


Net-worth, by definition, is "Asset minus Liability". We, of course, follow this definition. What we might do a bit differently is that we divide our Net-Worth into different categories and we calculate "Asset minus Liability" for each category before integrating them all to get the total Net-Worth, instead of calculating the total Asset minus total Liability.

We think there are three advantages to our way of calculating the Net-Worth.

First, it makes it easier to account for all assets and liabilities.

When we look at category by category, the chance of missing out one or more components in that category is smaller, compared to when we try to think of all the assets and liabilities in one shot.

The challenge, if there has to be one, is that we need to ensure the categories are MECE (Mutually Exclusive, Collectively Exhaustive), a term frequently used in my previous job as a consultant.

• "Mutually Exclusive" means the categories cannot overlap with each other. Otherwise, you will double-count. 
• "Collectively Exhaustive" means the categories listed need to cover everything. 

How we did it was first list out all the categories we can, by braining-storming and going through all related channels, such as broker accounts, banking accounts etc. It was not as easy. It took us a few months to get all categories listed. For example, we only realized that we did not count the CDA (Child Development Account) balance until the 4th month of tracking.

Then, we examined all the categories listed and adjusted the calculation to make sure they do not overlap and double-count. For example, we cannot include dividend income in both our "Stock" category and the "Cash-equivalent" category.

Second, it makes the calculation easier.

In some cases, Liability and Asset are connected and it is easier to calculate them together. For example, the "would-be" fee of selling our stocks is dependent on the market value of our stock portfolio, once we have chosen the broker. Yes, we deduct the "would-be" selling fee from our stock portfolio when calculating Net-Worth.

Third, it enables us to get more clarity.

With everything split into categories, we can easily do analysis by category, tracking their percentage in our overall Net-Worth and changes month-over-month. We also split by region inside each category, which enables similar analysis over region as well (like SG and Overseas etc).


OK. So what are the categories we include in our Net-Worth?

1. Stock/bond portfolio - market value minus the "would-be" selling fee
2. Real Estate - conservative estimation of market value minus the remaining loan (I know I do not consider the interest expense on the loan here, because when you sell your property, the reaming loan is what you will pay back to the bank. We do not have the early-payment penalty problem)
3. "Fix-term" asset - this is like fix deposit. No liability here
4. CPF
5. Cash-equivalent - balance of bank/broker accounts minus credit card balance and other loans other than housing loan

We track both our investment portfolio and Net-worth in the same tracker we built ourselves, with investment portfolio numbers automatically transferred to the Net-Worth tracking. We update monthly, towards the end of the month, and take a snapshot to build the below graph




I hope this post helps you understand how we calculate our Net-Worth. If you are thinking of starting your own Net-worth tracking, hope the details above can help you get started and then you can refine your own model based on your own situation and needs.

Till the next time.