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The suiting thread


kotmj
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Sometime early 2017, the thought came to my mind that the EPF is operating under a perfect set of conditions to make it a Ponzi scheme, the largest known to humanity. It would make Bernie Madoff's look like a minor case. So when the chief economist of a certain central bank came to the shop, I asked him what indications there are that the EPF is NOT a Ponzi scheme. I no longer recall his reply, but it did not kill my doubt about EPF's integrity.

Whenever financial types come to the shop, I ask them this question. I asked it of the Chief Investment Officer of a bank which invests primarily EPF money. He said there is such a thing as an EPF act that regulates what the EPF may and may not do. They are also audited, he says. That was what I was looking for. An act of law they must conform to, and auditors to make sure they really do. Not to mention oversight bodies, etc. However, even Madoff was audited. Auditing does not seem to uncover Ponzis. Actually, nobody knows anymore WTF auditing achieves. Even 1MDB was satisfactorily audited. Of course when the scandal broke they asked us, the public, to ignore their endorsement of the accounts.

More recently, I asked a private equity guy that question. I don't remember his reply. I normally forget replies that are not memorable. A reply is not memorable when it doesn't really answer the question and when it isn't a particularly stupid answer. A middle-of-the-road reply. Reasonable, but not very strong.

In Feb 2017, I asked Wong Chen this question. I wrote him this email:

Hi!

 
I have a question you may want to answer on your Monday night chat.
 
What evidence is there that the EPF is not a Ponzi scheme?
 
I ask because several decades ago as a teen, I read the "annual report" of one of the funds managed by PNB and I thought it was very opaque. In particular, I could not make out what they invested in and how the value of those assets faired.
 
I imagine the same is true for the EPF.
 
Cheers,
Jeremy
 
Wong Chen's reply was very memorable because I could not dream of a stupider reply. It was the reply of a mentally retarded person. Here's his video reply to my question:
 
First off, I have to give him an "F" for reading comprehension. I did NOT ask if the EPF is a Ponzi scheme. Who does he think I am---one of his dumb interns? I asked for EVIDENCE that the EPF is not a Ponzi scheme. He went on to answer the question I did not ask by saying he does NOT think it is a Ponzi scheme. Wong Chen, I don't give a fuck what you think. Who do you think I am---one of your dumb interns who hang on your every word? I asked you for what you KNOW, not what you think. You tell me what you know, and I'll do my own thinking. I don't even insist on evidence. Just an indication will do. He then goes on about his respect for Dato Shahril. I don't give a fuck.
 
Then comes the truly retarded portion. He says the EPF can afford the dividends it declares because back in the 70s, 80s and 90s it made successful investments in Malaysian blue chips. Those investments have balooned in value.
 
That's when I knew my EPF money is fucked. This MP is retarded. Malaysian GDP has grown at 4-6% per annum in those decades he mentioned. Every day, EPF receives fresh money it must invest and pay "dividend" on. That cash, which is of such staggering sum today compared to 1980 because of GDP growth, can only be invested today, at today's equity prices. And the "dividend" has to be paid today, on every ringgit of fresh cash received. In other words, investments you made in the 80s and 90s cannot pay the dividends on the fresh cash you have since received. And there is a lot more recent cash in EPF than old cash (because of GDP growth).
 
Moreover, most of what EPF buys isn't equity. It's bonds. Those do not appreciate in value like equities.
 
Wow, Wong Chen, you're such a disappointment. Life must be very confusing for you.
 
All this is now current because of revelations at Tabung Haji. It's a Ponzi scheme. Despite the Tabung Haji Act 1995. Despite being audited by Jabatan Audit Negara, the same body that audits EPF.
 
TH actually has less fertile conditions for Ponzi than EPF.
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Well, there are a few other factors you may want to take into account:

1) EPF board has some industry/union, non-governmental representatives to hopefully provide some additional oversight. TH has none.

2) The EPF Act guarantees the contributor's principal as well as a 2.5% dividend per annum. So the government can always print more ringgit to give you back your nominal investment. (yes I know this is not exactly the most comforting thing).

3) EPF's actual investment returns are higher than the declared dividend. The balance of the returns are kept as reserves against fluctuations in investment value. Of course the recent MYR devaluation has also helped their foreign investments show leveraged returns in addition to the typical equity appreciation + dividend.

4) EPF has the advantage of being able to invest in the entire universe of investment assets whereas TH is restricted to syariah compliant instruments.  Regardless of actual performance/characteristics of syariah compliant assets, this does restrict potential opportunities as well as increase cost of compliance.

5) EPF's liability/asset ratio is much healthier at circa 6% compared to TH's (official) 50%.

6) EPF actually restricts non-salary contribution amounts. Not a typical Ponzi scheme characteristic, you'd think they would encourage more contributions rather than less. Clearly they recognise it's a tough job managing that much cash. They also allow withdrawals once your individual total EPF holdings has exceeded RM 1mil

At the end of the day you will always have imperfect information as an outsider. But there's not a lot you can do about it...... I do know someone who uses EPF as a government guaranteed fixed deposit replacement.

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Year

          Per Annum             (Simpanan Shariah)

        Per Annum            (Simpanan Konvensional)

2017

6.40

6.90

2016

-

5.70

2015

-

6.40

2014

-

6.75

2013

-

6.35

2012

-

6.15

2011

-

6.00

2010

-

5.80

2009

-

5.65

2008

-

4.50

2007

-

5.80

2006

-

5.15

2005

-

5.00

2004

-

4.75

2003

-

4.50

2002

-

4.25

2001

-

5.00

2000

-

6.00

1999

-

6.84

1997 - 1998

-

6.70

1996

-

7.70

1995

-

7.50

1988 - 1994

-

8.00

1983 - 1987

-

8.50

1980 - 1982

-

8.00

1979

-

7.25

1976 - 1978

-

7.00

1974 - 1975

-

6.60

1972 - 1973

-

5.85

1971

-

5.80

1968 - 1970

-

5.75

1965 - 1967

-

5.50

1964

-

5.25

1963

-

5.00

1960 - 1962

-

4.00

1952 - 1959

-

2.50

 

I always knew we have smarter people on this forum than in parliament. Above, the dividend declarations for EPF. Two things: In 1997 during the Asian financial crisis, the KLCI went down 79%. The only asset class than went up is probably gold. Real estate, equities, sovereign bonds (especially Malaysian) were all junk. Yet, EPF declared a dividend of 6.7%. How is this possible? Am I to believe EPF really made at least that much that year?

Then in 2008, the KLCI went down 40%. EPF is "up" 4.5%. How is that possible?

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Well, due to lack of data it's a bit hard to pin down, especially for the 97-98 crisis. The website only provides the annual reports from 2001 onwards, and other financial market data is tough to come by. For all I know they could have shorted the Malaysian market in 97.

Essentially what could have happened was profit taking on the bond portfolio in 2008. BNM cut interest rates from 3.5% to 2% as economic stimulus. This could have pushed up the prices of the bond portfolio by a good 10% on 10 year bonds and all EPF would have needed to do is sell some to realise the capital gain. (Dividends are based on realised gain). As you pointed out, the majority of EPF funds was and still is in bonds/fixed income, so smart profit taking on a small portion of the large bond port would be enough to offset the (likely unrealised/unimpaired) loss on the equity port. 

The biggest hole in this argument is of course how the realised and unrealised gains/losses are taken into account when determining the profit and hence dividend. Accounting standards have changed hugely in the last 20 years, especially since the GFC, so methods could have changed over time.  Also, choosing when to impair assets (recognizing a permanent loss of value) is largely a management decision. So in theory, what they could have done during crises is 1) not impair the equity port 2) sold down the bond holdings, thus inflating the 'profits'. But this type of manipulation of profit numbers is still within the rules of the game.....

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Then it's really as bad as I had suspected. If the dividends are based on realised profits, then basically it is an arbitrary figure. The only reason they do not have a higher dividend declaration would be to avoid having a higher outflow of cash to those eligible to withdraw.

The probability it is Ponzi is higher in my mind than ever before.

I don't understand why they structured it this way. The EPF can be structured like any open end fund. The figure you watch is not an arbitrary dividend, but net asset value per unit, published daily. With NAV, there is nowhere for management to hide. Their performance as managers of money becomes completely transparent. We then also all know how much money there is in our collective retirement fund.

Measuring performance through realised profits while ignoring market value of assets (which the EPF must have been doing) leads to major distortion of management focus. Instead of focussing on growing net asset value per unit, they are organising the fund so that they are able to realise some trading profits no matter what.

The sort of conversation we are having about EPF is singular in the whole country. The others are just looking at the stupid dividend. This includes the entire civil service, including the MPs. I mean, you've seen just how retarded Kelana Jaya is, and he's one of the smarter ones. In fact, he's one of the very few who even welcomes questions from the public and gives a video reply.

This charade, unfortunately, can go on for a very, very long time. As long as GDP grows and employee+employer contribution rate is not adjusted downwards, this Ponzi scheme may never be exposed.

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https://www.thestar.com.my/business/business-news/2018/12/12/th-cutting-exposure-to-stock-market/

Wow. Just wow. The gov bails out TH.

TH gives all its manure to the gov. The gov pays it 5% per annum for the pleasure.

No changes to the TH Act. Still audited by Jabatan Audit Negara. Oversight by Bank Negara. Those people at BN are themselves clueless.

Basically nothing has changed. A decade or two from today, the gov will have to bail it out one more time. Why? Because nothing has changed, and going forward, the fund managers there will still buy the same crap. Incidentally, the same crap EPF buys. Because they don't know it's crap. Because they don't care it's crap. Only the dumbest people work at these public funds. They also don't know how to manage a portfolio.

In the very best case scenario, they will grossly underperform the market. In the typical scenario, they lose money. When they have lost enough money, they start having to cover it up. That's when they become criminal.

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Tabung-Haji-Top-20_Table_FD_theedgemarke

http://www.theedgemarkets.com/article/tabung-hajis-top-20-companies-lost-rm274b-market-value

Some of you think I exaggerate the stupidity and complete incompetence of the public funds. I do not. See for yourself.

Nearly every one of their top 20 securities lost them money this year. Not a little bit of money. A lot of it.

It's pretty much the same at EPF, at least the equities portion.

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There are mitigating factors. 

EPF only began investing offshore only recently in the past 10 years or so. In the previous 50 years of its life, it basically grew so big it amassed huge stakes in many local listed corporations, not necessarily by choice, but because of limited alternatives. These stakes are so large that should they decide to liquidate it immediately, the wealth destruction will be basically a financial crisis in itself. This also means that the stakes have to be long term in nature, so they cannot profit take at their whims and fancy. By the same token, they are unable to cut losses as freely as other private funds.

Tabung Haji's stakes highlighted above are essentially bound to the same problem. Every one of those stakes, if sold on the open market, would crash the stock immediately, and they would be in a worse position than they started off in. 

That is also why an NAV structure is equally deceptive for funds this large. Each sale of shares only indicates to the market that something is wrong, and each buy order is set lower than the last. Each transaction is then matched immediately because the stake for sale is so large that there is the market cannot absorb that amount of selling, hence causing a vicious selldown. Once the prices hit other funds' cut-loss levels, even more selling happens and the cycle goes on. Therefore NAV cannot be a good benchmark as the value is derived from mark-to-market, but the mark-to-market value is not the same as actual realizable value in the case of a fire sale.

(Due to this reason, I cannot disagree with the declaration of dividends based on realised profits. If they measured on unrealised profits, the big fund boys would just buy and sell among themselves and manipulate the prices upwards.)

If you look at the daily announcements on Bursa, you would see that EPF does a lot of buying and selling , but the volumes are not large. That's because the core stake has to be maintained, and any buying or selling is really small movements that would not significantly disrupt the market. This is also why a lot of outsourcing has to be done, because they are just too big to manage it on their own, and to maintain liquid assets since their own equity holdings are essentially illiquid.

Of course, in the investment direction by these funds, there is a huge amount of political influence + national strategic interest involved. No comment on that bit, except that Khazanah would be an easier vehicle to manipulate.

iMoney did a decent article on EPF. Basically they are taking comfort in the transparency of the fund in its disclosures. https://www.imoney.my/articles/facts-about-epf-investments-overseas. I would also take comfort in the fact that management wise, they managed to get fairly qualified CEOs and so far they have been less scandalous than the other funds. 

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Oh and 1 more thing. Generally unit trusts charge something like 1% p.a fees + 1% upon entry and 1% upon exit. EPF's operating expenditure was RM 3bil, of a fund size of RM 817.5 bil, which makes it around 0.4% p.a., with no entry or exit charges. And it comes with a government guarantee + 2.5% returns in the EPF Act. So it's really quite a cheap way of investing, and for me if I were looking at local UTs (which I don't), I would be benchmarking the total return of the UT against EPF and not the funds' composite benchmarks.

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Yes, I can see the attraction of the EPF for that part of a personal portfolio that needs to be very low risk. You have guys clawing each other in the face out there for 3%, and here you have a guaranteed 2.5% but more typically 6% of government handouts.

I don't agree 0.4% is a low expense ratio. You can buy into index funds in the US for a fraction of that. At least the index funds have historically made a lot of returns just tracking the S&P500. In the case of EPF, they probably lost money historically. You pay them to lose money. Somebody can try disproving this.

There is this problem of too big to fail. What you're describing is the problem of too big to sell?! My thoughts: Mutual funds have learnt decades ago how to avoid this. They impose a limit on their shareholdings. For example, they may own no more than 5% of the total outstanding shares of a company. And, no more than 5% of assets under management can be in a single company. This is very, very common!! This policy is there is to exactly avoid the "too big to sell" problem. TH obviously does not have this policy. EPF also probably not, but I didn't check. Why not? What else don't they have?

People who have large blocks of shares and wish to divest rarely do it on the open market. It's not possible anyway. They do it off market. Prices are negotiated.

NAV vs declared "dividends": If I'm privately wealthy, say dynastic wealth, and I am assembling a home office, I would never let management go the "dividend" route. NAV all the way. The "dividend" route is too easily abused, as we have seen with TH.

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Since I don't really have that much money in EPF, all this is just my curiosity manifesting itself. Not much skin in the game for me. (By choice.)

What really matters is not government guarantee or not. What really matters is wealth destruction, or wealth creation. When the EPF builds wealth, due to its collossal size, the country as a whole becomes noticeably wealthier. When the EPF destroys wealth, the country as a whole loses, government guarantee or no government guarantee. When EPF loses money, that loss is "socialized", i.e. spread across everyone by the government.

When EPF buys Maybank at RM3 and it goes down to RM2, that is wealth destruction. That lost RM1 has benefited nobody. It just vanished. But if Maybank goes to RM4, EPF would have created wealth.

All this is just an intellectual exercise for me. It has been a rewarding inquiry. I've gazed into the psyche of humans: their mediocrity, their stupidity, their haplessness.

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To give an idea, if the EPF manages to grow NAV just 5%, that is equivalent to GST collection for the whole of 2017. But if they lose 5%, that's like doubling the GST rate. Except, the GST is mostly redistributed. If EPF loses it, these is no redistribution. It's like lighting 40b on fire.

Alas, I think they achieved the latter, not the former. You guys are very welcome to disprove this.

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I was paying for my vegan meal just now when I noticed a stack of The Edge weekend edition newspapers next to the counter. I have not bought newspapers in years. Not even when a story about me comes out in one. I bought it.

IMG_20181215_220948.jpg?raw=1

Inside, I find a curious list of what passes for luxury items and how their prices have changed in the past year. Cigars were very inflationary, followed by boarding schools, which went up as much as men's suits.

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IMG-20181218-WA0003.jpg?raw=1

I was sent this picture today of a groom-to-be wearing his brand new wedding suit by Sam's Tailor in HK. It's a dark brown.

I don't find the suit particularly interesting. But the egg steamer and assortment of coffee-making equipment in the background are intriguing.

He's to have his wedding soon (in HK). His best man is my customer. I had previously made him two suits, one of which is this:

DSC02075-Edit.jpg?raw=1

So his best man, who is based in Malaysia and owner of the suit pictured immediately above, asked me for a suggestion about a suitable outfit for the wedding. It's to be held during the day, outdoors.

I suggested this.

IMG-20181218-WA0004.jpg?raw=1

IMG-20181218-WA0005.jpg?raw=1

IMG-20181218-WA0006.jpg?raw=1

Maybe stone-coloured pants to go with it

IMG-20181218-WA0007.jpg?raw=1

I'm actually pretty gleeful for having found such a good solution. It's summery, fresh, young. The only danger is the best man makes the groom look prehistoric.

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So I think I know now what sort of video I will have the student produce. It will be a manifesto. Unfortunately, I will be acting in it. I will explain in the video what we aim to produce, and why. 

I suppose it's not too different from how Mark Cho went about explaining how they fit their suits. But I'm looking for much higher production values in camerawork, as well as a more conceptual explanation. It does not just impart specific fit features, but also transmits the spirit of what we do. At the end of the video, you're supposed to feel quite edified.

If left to myself, the video will never happen. So I will make the student the producer and director. He's supposed to make it happen. When it happens, I pay him. When it doesn't, I don't.

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DSC02383.jpg?raw=1

Experimented with a new technique for the lapel hole. It produces a much better result.

Also, from Sunday for 11 days, and ad will run to recruit a finisher. She will be responsible for all hand finishing: buttonholes, pick stitching, embroidery, attaching buttons, etc.

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It looks like quite a video/photo shoot is being planned. I initially thought we'd just shoot Dominic in the shop (for B-roll), but that seems like such a retarded idea. The video student is currently trying to rent a place at Colony Co-working Space nearby KLCC. It is not certain if it's possible.

colony1_edited.jpg

 

11-1543304847.jpg

colony-best-rooftop-pool-kl-1024x512.jpg

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I went to a place today to have a post-dinner (alchoholic) drink with my family. It's inside a gated community. I am almost never in that place, though it is near.

When I reached, I was stunned. It's pretty much the sort of place I'd been looking for for a shop. I did not know such a place could really exist, but there it was. I checked out the rent levels online, and am surprised at how affordable they are.

I eagerly texted a friend to tell him of my discovery. He said he was there last week to bring his kid to a paediatrician. He said the place is "full of vain snobs". I told him that's the perfect description of the JT customer. The place is crawling all over with potential customers. The surroundings are genial, quite pleasantly landscaped and green. Parking is underground, and the entire complex is pedestrian-only. The place has a large center courtyard (open air) that buzzes with life the way European pedestrian town centers are. It is located and built in such a way that a large portion of the complex immediately faces the main artery that connects this gated community to the outside. Everyone who lives there would have to drive past the window frontage of this complex several times a day.

So excited at my discovery I can't sleep.

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Working with students, I've come to realise there is something fundamental they do not understand. It's not only students who don't understand this, but the vast majority of the population don't either.

Formula 1 drivers drive very differently from average drivers like you and me. If you don't drive the way they do, you won't win a race. Over the decades that they've been training, they've changed the way their nervous system have been wired. They've developed into creatures of the racetrack.

If you, as a normal person, were to go into a sportscar with them as a passenger on, say the Nuerburgring, you would be shaken to your very core. They way they drive is completely unacceptable to most people. It feels suicidal.

In much the same way, people who rose to the top in the very competitive sports of business do not deal with things like normal people. They deal with things very differently. If you're to spend a week with them as, say, a personal assistant, you'll be shaken to your core at how he deals with people and with issues. As a well-adjusted normal person, you find this so crazy. You find him so crazy.

You put a normal person in the driver's seat of a business, and, in a few years, there is no business.

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