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Tuesday, February 4, 2020

The FI Checklist

You are on the verge. 

So close your ears are tingling with anticipation.  Your fingertips rattle across the keyboard. Your lips purse into a wry smile.

You can barely contain the pent-up ecstasy as the words appear on your computer screen:

"... I would like to resign my position with effect from.... "




WAIT A MINUTE. 


I know you have literally waited a decade to type this letter.  But hold your horses first.  Have you done the FI checklist?


The FI Checklist


1.  Have you set aside a cash buffer for income tax payments, which will persist for at least one more year in your unemployed life?  


Since you would no longer have an active income, it is pertinent that you have set aside sufficient cash reserves to meet your tax obligations. If your passive income level is high enough to cover your expenses plus taxes, good on you. If not, prudence dictates that you ring fence some money for Singapore's most powerful debt collector.



2.  Have you set aside a cash buffer for one year of expenses?


Why is this necessary you ask? In addition to the "usual" reasons, i.e., market downturns, stock market crashes, wealth-destroying emergencies, etc., another important but often overlooked reason is: it is a FI key performance indicator (or "Fik-pi" pronounced "phic-pee").

Ideally, in a steady-state situation, this cash buffer should increase Y-o-Y,  since the passive income inflow should (by right) be (significantly) greater than the cash burn rate. 

If you find this cash buffer slowly dwindling, implying that you are burning cash at a rate faster than you can replace it, then you are doing FI wrong. Either cut your expenses (bleh) or go back to working (double bleh). 


3. Is your passive income at a level which allows you to re-invest a fraction to defend against inflation?


Your 100k a year passive income will not be worth much in 40 years time if it remains 100k per annum.  To avoid outliving your portfolio, one needs to continually grow the investment portfolio and farm more passive income. 

In other words, having your passive income exceed annual expenses means a grand total of jack-shit. If you are not generating at least 150% annual expenses in passive, you are not ready. With lifestyle inflation, 150% might even be a tad conservative.

If you ask me, aim for 200% annual expenses before even contemplating hanging up your gloves.


4.  Is your passive income at a level which allows you to take on new debt if necessary?

It should come as no surprise that as you age, new and sometimes unforeseen financial liabilities appear.

COEs only last 10 years. 

Your kid might be too stupid   not be sufficiently academically inclined to enroll in a local U, necessitating in the application for a M&D bursary (proudly sponsored by the bank of Mom & Dad).

Your two bedroom condo, while presently cosy for a husband and wife duo, is starting to look like Hong Kong's public housing after your second kid arrives.  (insert joke about stupid games, stupid prizes).

When (not if) that time comes, would your passive income cashflow support the undertaking of new debt? 

FI-Readiness Review


Did you answer YES to at least three of the above questions?  If no, then please kindly stop deluding yourself and delete that career-ending letter saved on your desktop. Remember also to empty the Recycle Bin!  Please continue to grind for a couple more years. 


If you answered YES to all questions, then my hearty congratulations. You have won the race.  Your prize:  FREEDOM.


Onward to FI friends. 





Monday, January 20, 2020

Netflix Original - Downsizing and its parallels with FIRE

If you have not watched the Netflix Original Downsizing starring Matt Damon, I would not recommend it unless you really have nothing better to do on a (very) slow weekend afternoon.


SPOILER WARNING



NO REALLY.





MINOR SPOILERS AHEAD.








YOU HAVE BEEN WARNED.




The story's premise starts off interesting enough.

To address the global crisis of depleting resources and overpopulation, scientists have invented a technique to shrink a person down to about 3% of their original mass (or something like that).

Companies start selling residency memberships in small communities for the shrunken people, touting sudden amplification of wealth (due to reduction of cost) as a major benefit.  In one scene, Neil Patrick Harris cameos as a salesman for one of these communities, wherein his "wife" buys herself a full set of diamond jewellery for $83.

Matt Damon plays a struggling physiotherapist who did not manage to complete med school due to financial difficulties. He and his wife decide to undergo the irreversible procedure to allay their financial woes.  However, after waking up from his procedure, he was a tiny-bit shocked that his wife had chickened out last minute. They end up getting a divorce and he attempts to eke out a new living on his own in the brave, new, and miniaturized world.  No small feat. Heh. 

When your wife leaves you and sues you for everything you got


But that was as interesting as the story got. It did touch on a number of relevant social, economic and political implications of "shrinking" but only very superficially. Instead the story focused needlessly on a banal love story between MD and a Vietnamese refugee (diversity points scored!) who was forcibly subjected to the shrinking procedure by the Vietnam Government as punishment for her activism.  What a waste, I thought.

For example, in one scene, Matt Damon and friends get heckled in a bar when a nearby patron overhears that MD is contemplating shrinking.  The rowdy patron contends that "small persons" who are mostly living large as a result of economic arbitrage at the expense of "regular sized people" should not have the same rights as those actively working and contributing to society.  That part struck a raw nerve with me because the accusation felt similar to those commonly thrown at the FI movement. 

"You should only get 1/8th of a vote, if at all!" he taunted. 

The underlying debate is a non-trivial one, which I felt the movie should have explored further. Should those who choose to cease "active" economic production by reducing consumption be penalized for making such choices?  Of course, the movie cannot be considered a critique of the FI movement (I think) since shrinking and FI are not directly comparable.

The economic benefits associated with shrinking requires a certain degree of arbitrage.  In Downsizing, the arbitrage can only exist if the regular sized people continued to exist and that they work and produce goods in the "normal size" for the "usual costs". If everyone shrunk, the economic arbitrage will immediately cease to exist.  In contrast, FI works even if you do not reduce consumption, as long as you have accumulated sufficient income-producing assets. That is, the FI community does not need to live at the expense of people who actively work. 

It was not that bad a movie, and the acting (for the most part) was not cringe (props to Christopher Waltz).  Except when Hong Chau (actress for the role of the Vietnamese refugee) tries to pass off short, terse, badly pronounced English sentences as an "accent".  Er... apparently that two-bit "performance" earned her a Golden Globe nomination for best supporting actress. Which tells you a bit of just how far SJWs have hijacked the entertainment industry with their diversity-at-all-costs tokenism.

If you have 90 mins to burn and you are waiting on your Grabfood delivery man to press your doorbell, sure, give Downsizing a go. But don't say I never warn you.

Onward to FI friends!








Wednesday, January 15, 2020

Mapletree North Asia Commercial Trust MNACT


MNACT's share price was pummelled after months of HK protests, which saw parts of Festival Walk (MNACT's largest rent generator) set on fire and vandalized.  

Some quick notes:

Festival walk contributed 62% of total Net Property Income for MNACT based on their 1H FY2019/20 results.

Festival Walk has been closed since 13 Nov. 

Festival Walk is slated to reopen 16 Jan 2020, prior to Lunar New Year.  Assuming rent collection will only resume after 16 Jan, the expected loss of rental income would be for about two months plus a bit. 

The Manager will rely on external borrowings to partially top up FW's distributable income while waiting for insurance to pay out (assuming there would be any).  This top up is expected to be about 40% of the lost rental income. 

Hence, it is inevitable that distributable income for 2H FY19/20 will drop. 

Share price of MNACT has dropped from a peak of $1.44 (July 2019) to $1.12 (20 December 2019) representing a 22% correction.  

A 22% correction seems unjustified. Even if the loss in rental income could not be recovered via insurance, whether partially or entirely, the expected drop in NPI is only around 10% (2 months/12 months multiplied by 62% of NPI). All things unchanged, a $1.30 share price should have represented a "safe entry" point. 

Alas the market is unpredictable, and MNACT sunk as low as $1.12. 

Sadly, I did not catch the bottom, but I did acquire around 50k worth of MNACT units at $1.17/unit around November 2019.  

I have faith in the quality of the Mapletree brand and management. Their recent diversification into Japan is a small but long overdue move to reduce concentration risk in HK.  

But more importantly, I found the correction overdone, and it was a good opportunity to buy a well managed REIT with quality assets and at a reasonable price. 

Happy Lunar New Year in advance my fellow FI brethren.