Coffee With The Compounding Dad and Investment Moats
Kyith Ng is the brainchild behind the popular local personal finance and investing blog, Investment Moats. Here’s an interview with him.
Investment Moats is one of the OGs of the Singapore investment blog scene. Set up by Kyith Ng in 2005, his blog aims to share his unique experiences around money. Some of the themes discussed in Investment Moats are growing and managing wealth, achieving financial independence, and navigating the world of investing.
The Compounding Dad (TCD): Can you share a bit about your upbringing and how money was perceived or discussed in your family?
Kyith: I believe I grew up in a lower-middle-income family. My dad was the sole breadwinner. I never knew his exact salary, but seeing how frugal my mum was, I assumed it wasn't a large amount.
Even so, I later realised they had managed to save $100,000 in the 1990s. While this might not seem like a fortune today, it was a considerable sum back then.
My mum was a housewife. I don't recall my parents frequently talking about the difficulty of earning money or the need to be careful with spending. I used to go with my mum to the void deck to collect discarded advertising leaflets. We'd bundle them together to sell to the rag-and-bone man (locally called the karang guni man). Looking back, I realise how little money we made doing this, but I think I spent some quality time with my mum.
TCD: Spending quality time with our parents is always nice. Were there any common phrases or lessons about money that you remember hearing frequently when you were young?
Kyith: The strange thing is, I don't recall my parents ever explicitly teaching me about money. We always had food and clothes, but perhaps my experiences subtly shaped my understanding. I realised I was closer to being not-so-rich than poor.
Qualifying for the Edusave bursary was one clue, as there’s a cap on household income or per capita income. Not being able to buy certain toys was another. A particularly striking example was when I discovered the grandmother of a good friend in junior college gave him a $1,000 ang bao every year, while my total ang bao collection averaged around $200.
Perhaps the biggest lesson I learned, albeit indirectly, was that winning the lottery (4D and Toto) could significantly boost savings (TCD’s note: Winning the lottery is a game of chance. Do not gamble with money you cannot afford to lose. Gambling can be addictive.) I remember once looking at my parents' bank passbook. It was quite old, and there was a six-figure sum in it. I vaguely recall Mum telling me they'd won 4D once.
I think they had occasional winnings here and there.
We used to live in Yishun and would usually buy our 4D and Toto tickets from a 7-Eleven in Chong Pang. That shop has since become a very popular Singapore Pools outlet, as rumours spread that the odds of winning are higher there.
Despite my current views on gambling, interpret this anecdote as you will: After we moved to Sengkang, we never won any 4D or Toto, to my knowledge.
TCD: How do you think those early experiences have influenced your current views and behaviours around money?
Kyith: If you have less money, you learn to evaluate trade-offs early on. However, having parents who don't discuss finances openly can put you at a disadvantage compared to your peers. Some of my friends' parents involved them in checking stock prices on Teletext (Google what is that!), sparking early conversations about stocks and how they work.
I suspect that constantly following stocks during childhood can foster a scarcity mindset rather than a growth mindset.
TCD: At what age did you start investing and how did you get interested?
Kyith: My interest in investing began during my final year at university. I was experiencing burnout after 17 years of continuous study. During that last year, I started researching safe investment options that offered better returns than fixed deposits. That's how I fell down the rabbit hole of investing.
TCD: Can you share with us what your investment portfolio consists of? What’s the thought process behind coming up with this allocation?
Kyith: My main portfolio currently consists of exchange-traded funds (ETFs) and unit trusts. I use these ETFs to implement my systematic-active investment philosophy.
It took me some time to understand that higher returns require higher risks. However, there are certain risks we should avoid. To effectively compound our wealth, we need to buy and hold investments long enough for the compounding effect to work its magic. The constant challenge is generating returns while mitigating the risk of significant loss.
We can achieve this by taking calculated risks in appropriate areas.
Individual equities offer high potential returns because the risk of business failure is also high. Fixed income investments have lower return volatility, and their risks are correspondingly lower. We want to avoid the risk of a large portion of our capital being wiped out. The solution is adequate diversification, holding a mix of equities and fixed income. While your returns might be lower than investing in just a few companies or bonds, you mitigate the biggest risk: an unexpected event wiping out a significant portion of your net wealth.
A portfolio's returns often come from a small number of stocks. This is true for a cap-weighted index-tracking fund, an equal-weight strategy, or a factor strategy. The challenge is that you can only identify the winners in hindsight. Therefore, diversification is key to capturing the returns of these successful investments.
You might have heard of some stock selection strategies:
Buying undervalued companies and selling them when their prices rise to a higher mean.
Buying high-quality companies with a history of consistent profits.
Buying companies with strong momentum.
Academic research suggests that systematically selecting stocks, holding them, and selling them at the right time can lead to better performance. The question is, do these strategies consistently work over time? Empirical evidence from research indicates that these systematic strategies when executed over the long term, can generate higher excess returns. Fortunately, we now have unit trusts and ETFs that can implement these strategies for investors at a low cost, reducing the workload considerably. This makes it a relatively passive approach for the investor.
With all this in mind, I've chosen to invest in a few ETFs that are:
Geographically diversified.
Low-cost.
Systematic-passive and systematic-active.
Low-maintenance in terms of portfolio management.
TCD: How has the investor in you evolved over the years?
Kyith: I was first introduced to investing through unit trusts. A few years later, I began researching individual stock investing and pursued that for a considerable time. Two or three years ago, I shifted to a more passive portfolio focused on ETFs and unit trusts.
TCD: What advice would you give to beginners who want to start investing?
Kyith: I believe it's important to experiment with different strategies, but also to develop a thorough understanding of the ones you choose to implement. Even seemingly simple strategies, like buy-and-hold, low-cost investing, have nuances.
They often appear straightforward initially, until you discover the complexities of financial markets and find yourself facing more questions than answers.
Growth comes not from dismissing these questions, but from patiently unravelling these mental threads to develop a more complete and accurate understanding of each strategy.
TCD: What do you think is the biggest misconception people have about money?
Kyith: It's difficult to pinpoint the biggest misconception about money, as there are so many.
However, one common misconception is the belief that one's current financial resources are insufficient, leading people to fixate on a specific target amount.
I think very few people take the time to explore what their current wealth actually allows them to do or acquire.
If they did, I suspect some might realise they are in a better position than they thought.
TCD: What is the one thing, in your opinion, that people need to succeed in investing?
Kyith: Understanding the behavioural aspect of investing is crucial for success. When we begin this journey, we're often so focused on learning the strategies that we overlook the importance of our mindset. There's simply so much to learn.
We tend to believe we're somehow immune to emotional biases and that our mental fortitude is sufficient.
Experience has taught me that this is often our biggest downfall. It's vital to respect our risk capacity. Many of us think we can handle significant volatility. While we might tolerate upward swings, I suspect few can truly stomach substantial downward movements.
When we're confident in our investments, even with volatility, we can usually hold on. But the reality is that certainty is rare in the markets. Firstly, many of us lack extensive market experience.
We often tell ourselves, "This has never happened before," or "This time it's different." However, a long history of market data reveals that similar events have occurred repeatedly.
Our brains struggle with uncertainty, which is why people sometimes convince themselves to sell investments at the bottom (or vice versa).
TCD: What are the habits one must follow to have a sound financial life?
Kyith: Here are some I can list:
Earning more and optimising your spending will create a healthy surplus.
Investing that surplus, whether in personal development through courses or in financial assets, should lead to positive outcomes.
Strive to learn as much as possible about all aspects of personal finance that you deem important.
Choose a spouse who shares good money habits.
TCD: You are a well-established investment blogger who started very early in the scene. What keeps you going?
Kyith: My blog currently serves as a sort of personal journal. I jot down notes on investing and life lessons (that I'm happy to share) so I don't forget them. I like to think there are readers out there striving for a better life, and if I can offer even a little help, I'm happy to share my thoughts and experiences.
TCD: What does financial freedom mean to you?
Kyith: To me, financial freedom means having the security of knowing that my essential needs are covered. A significant part of this involves establishing a passive, perpetual, and inflation-adjusted income stream.
This income stream should be conservatively sized to cover my most important expenditures (not all spending is essential). I'm comfortable not securing a large portion of my discretionary spending or continue working to fund it.
Having established a conservative asset-liability match, you're empowered to pursue the things you want in life, free from financial worries.
TCD: A parting shot for the readers of The Compounding Dad…
Kyith: Subscribe to The Compounding Dad!