Book Review: Fooled by Randomness by Nassim Nicholas Taleb

I picked this e-book from the online library (National Library Board - Overdrive) as it was available and I didn't have to deal with a hardcopy book reservation and pick up. It was really convenient to read the e-book.

The book is about an ex-trader who believes that traders deal with random events everyday. The whole book is about his musing about different aspects of randomness that he has noticed in traders and why he didn't agree with them. For example, he believes that the guys who follow trend analysis to buy and sell stocks are simply lucky that they are buying and selling in an uptrend, so anybody would have made money. And these guys will be so convinced that they have the skills to analyse trends that they convince themselves that once in a while, when there are unexpected/unpredictable events, they will be "wrong", and find some excuse to convince themselves that they are still right.

It made me reflect about the way rewards are structured in a fund house. Outcomes are favoured and many times, outcomes can't really be controlled too. One fund manager may be luckier and gets a 20% return, whereas another fund manager may be less lucky and gets a 2% return. On paper, the one with the 20% is better. There may be also other funds with -20% return, that will never be on the recommendation list to customers until it yields a positive return. When customers look for fund managers, they only look for those with high returns, and they ignore everything else because returns are all that counts. While there may be some truth behind position sizing, asset allocation, diversification strategy, risk assessments, if we think about it logically, it boils down to fundamental analysis, i.e. whether or not there is an income-generating element. It amazes me how some people can convince themselves to part with their money and trust fund managers that do not even disclose the underlying assets. What if they are just buying a bunch of lottery tickets?

If you would like an alternative take to looking at stock markets, this is a really good book because it introduces the concept of probability, and after reading it, I am quite sure that you even doubt fundamental analysis. The authors suggests that you have nothing certain, which is true, you don't know what will happen tomorrow, and although probability of these unpredictable events are low, the impact can be very high to wipe out everything. Thinking about how some companies become bankrupt is a good example, despite what people say about the fault lying in poor financial management and all, there are many companies with poor or worse financial management too, yet they survive, so there is really no way to tell when these companies will go bankrupt.

Survivorship bias is another topic that really resonated with me because it am always told to follow "tried and tested methods", follow that the boss says, etc. What worked in the past may not always work in the future. While there is a low probability of the "may not work in the future" event happening, the impact, if of the event can be very severe, for example, you may not have enough time to change a system, may not have enough time to raise money to do certain things you need to do, etc. Always thinking and assessing every situation, no matter how routine, is essential.

Buying with probability of events in mind will certainly help factor in margin of safety, which is the principle preached by Graham. As a whole, the author advocates being conscious about randomness, so that we don't become overly complacent, we don't think get controlled by emotions, we are mindful when luck plays a part, we don't show-off, we make decisions with more awareness of possible outcomes to set realistic expectations so that we don't get crushed by black swan events. I am certainly heading to his next book The Black Swan next.

How much have I earned and lost in 2018?

How much have I earned and lost in 2017?

I am writing this earlier this year as the total amount should be more or less the same by year end. Objective for 2018: Increase REITs by 10%, increase portfolio yield by 0.5%, increase income to $14,000.
Verdict: Didn't meet, didn't meet, meet.

Average dividend yield in 2017 was 4.56%. I didn't meet my target, and my average yield was 4.73% this year. This was achieved by buying stocks with >5% yield to increase the average, but it got pulled down by other non-performing stocks that cut dividends. In 2017, the plan was to support the increase by increasing REITs to 50% of my portfolio, starting from REIT ratio of 23% in 2017, and slowly rebalancing and capital injection at the right prices over 3 years, from 23% -> 33% -> 43% -> 50%. I did not buy that many REITs. In fact, I bought Singtel instead because yields were more attractive than REIT yields.

In order to further increase the average yield by another 0.5% will not be as easy as it will require buying stocks with >6% yield to increase the average. I may want to increase the growth stocks proportion, but I will see how prices are next year.

Income was $15,500 ($1,290/month), so I exceeded the target of $14,000. The additional increase was due to better dividends and also high bank interest rates from Bank of China 2.75%, UOB One 2.43%, Hong Leong Finance 1.7%, CIMB Fastsaver 1%, Singapore Savings Bonds 1.8%.

I didn't increase my Autowealth portfolio much as I found the prices too eratic. I will continue to contribute $400/month after the prices reverse closer to the mean. After an insane annualised yield of 15% in 2017, in 2018, the returns are a mere 4%, and could have been lower if I had continued to contribute as prices escalated 2% per month only to watch a big fall a few months later.

Unrealised profits/losses:
Autowealth = S$50 (+$260 in 2017)
Singapore Stocks = -$20,000 (+$20,000 in 2017)
Overall, gains in 2017 had been reversed to losses.

Objective for 2019: Increase REITs by 10% (Trying this again, hope to have good bargains), increase portfolio yield by 0.5%, increase income to $16,800 (or $1,400/month).

Chart of humble beginnings

Lifetime accumulated dividends and interest, net of losses, excluding portfolio valuation gain/loss = $65,000

I am also sticking to my slow and steady turtle income "methodology": Assuming that I continuously invest $36,000/year or $3,000/month,
In 2 years, accumulated dividends and interest = $100,000, $1,600/month
In 6 years, accumulated dividends and interest = $200,000, $2,200/month
In 9 years, accumulated dividends and interest = $300,000, $2,700/month

It may seem slow, sticking to $3,000/month for 10 years without factoring any increases, but I prefer the approach of buying on dips, which may not be the most optimal thing to do, but I feel that it helps to make my stock acquisitions dividend accretive (portfolio cost price wise). If there is a big market correction or flash crash then I will likely activate my warchest.