Temasek FTX Review, 6% Early Stage Startups AUM Cap, Crypto Regulatory Debate & Retail Investor Democratization - E282

In their discussion, Jeremy Au and Shiyan Koh touched upon several key insights, with a particular focus on crypto and Temasek's independent review of FTX. They emphasized the risks and potential rewards associated with different investment strategies. Jeremy Au highlighted the contrasting nature of public markets and private equity investments, emphasizing that public market investments can fluctuate day-to-day but are unlikely to plummet to zero as quickly as off-private equity investments. He emphasized the inherent riskiness of venture capital as an asset class, where only one out of twenty investments may yield significant returns while the rest may result in zero or negative outcomes.

Shiyan Koh brought attention to the potential of emerging markets as the most intriguing areas for crypto adoption. She pointed out that these markets often face inadequate financial infrastructure, making them more open to alternative solutions that are not subject to government control. Use cases in Latin America, for example, demonstrate a demand for inflation hedging, where people seek to protect their money's value by exchanging it for stable cryptocurrencies like USDC.

Furthermore, the discussion touched on the distinction between financial education and access. Shiyan Koh expressed skepticism towards approaches that merely focus on democratizing access without providing comprehensive education. She cautioned against teaching individuals solely about technical analysis or day trading, emphasizing the importance of understanding the broader context of financial markets.

Supported by Pollen

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Jeremy Au: (01:20)

Sorry, I'm just like forced-start in the morning, limber up.

Shiyan Koh: (01:27)

That's not exercise.

Jeremy Au: (01:29)

There's exercise. I try to be okay. Morning, Shiyan.

Shiyan Koh: (01:33)

Good morning, Jeremy.

Jeremy Au: (01:35)

Well, you look much more rested compared to the last around-the-world flight you took before last week's session.

Shiyan Koh: (01:41)

I go to Manila tomorrow.

Jeremy Au: (01:45)

We just saw the Endeavor team. We saw Manny Ayala right from the Philippines. Shout out to Manny for tuning in sometimes to our show.

Shiyan Koh: (01:53)

Yeah, it's crazy now to have all these in-person events and then people will come up to you and you're like, ah, I watched the show and I'm always kind of shocked. No offence, Jeremy.

Jeremy Au: (02:03)

You're like, boo, this is a dark secret.

Shiyan Koh: (02:07)

No. I was like, it's just, I thought it was just me and Jeremy talking to each other, apparently other people listen in.

Jeremy Au: (02:13)

We just saw this incredible event that the Endeavor held in Singapore for the matching event between investors and startups. I thought it was just nice to see, obviously in-person return, but I think they've always done a great job organizing everything in terms of how they match investors to folks. They focus in-person, they focus on the right format and the right setting. So I think they ally, world-class jobs. I had a lot of fun. My only complaint was I got to the buffet line too late, so I didn't get any proteins, it's just all rice.

Shiyan Koh: (02:45)

Rookie move, Jeremy.

Jeremy Au: (02:50)

Rookie move. I got to get to the buffet line first, then have chats. Not the other way around.

Shiyan Koh: (02:57)

Well, you have to eat before you start drinking. That was actually most surprising. I was like an hour into the event. I was like, is there water anywhere?

Jeremy Au: (03:04)

Yeah, it was hidden.

Shiyan Koh: (03:05)

They kept coming around and trying to fill my wine glass and I was like, no. I need to drink water and it was hidden behind.

Jeremy Au: (03:11)

Yeah, you get to go all the way out, hook left, find yourself a mug and then it was like they were trying to disincentivize water from being in the event, which is why the event was so good, right?

Shiyan Koh: (03:22)

No. It was a great event and it was really fun to also get to see some portfolio founders who are in town for the event. I got to meet a portfolio founder that I've never met in person.

Jeremy Au: (03:32)

Who you've got to say the name? got to say, do a quick shout-out.

Shiyan Koh: (03:35)

Of course. Belanjaparts CEO, Hizkia. We actually found ourselves next to each other in the buffet line, aforementioned, and he looks over and he's like, Shiyan? And I'm like, Kiki? It wasn't awkward, I promise.

Jeremy Au: (03:52)

I think the thing is, you felt weird because it was like, you know a lot of people from Zoom and then you're just like finally making that mind-body connection, where you're like, oh, this is what you look like in real life.

Shiyan Koh: (04:04)

Oh my God. Darvesh from Payd. I've never met him in person and he was standing there and he's like, I'm Darvesh. I was like, oh, you look so different. He's like, I'm told I'm shorter in person.

Jeremy Au: (04:17)

Really? I think in person, everybody looks better, because I think cameras don't do a good job. Low resolution, whopping. I think everybody looks better in person.

Shiyan Koh: (04:25)

Oh no, and then someone was like, oh, you look like you've lost weight. And then I was like, do we say that to people now? I was like, I think we say, “you look fit”, right? And then he is like, no. He's like, as a British person, don't tell me that I look fit when I don't look fit.

Jeremy Au: (04:42)

Yeah. One of the interesting things we were discussing last night was a course that was about what's been on the tech news that's out there and I think some folks were discussing a little bit about it. Temasek for example, just announced that they had completed their independent review of exposure to FTX, and how it happened and I know three major positive findings. One was that they didn't assign any kind of blame writing. They said they felt like the process for the investment decision and the due diligence was sufficient and adequate. That was their finding.

The second was that they decided to cut the pay of the folks or the folk investment team volunteered to cut their pay. It is a bit fuzzy there because of this. So they announced that obviously, we don't know what the magnitude was.

The third thing was that they announced that they were going to do a cap of 6% on early-stage investments moving forward, as a response to that. Obviously, this was picked up not just in local news. I was reading this on BBC, NPR, and is this kind of like an adjacency to the SBF show of FTX, right? So, I want to take a pause actually. What do you think?

Shiyan Koh: (05:47)

I mean, I think there are a couple of different threads we can pull on here, which is like, I think as a sovereign wealth fund it can be hard to operate in the public eye because it's like, it’s grandma's money, and so it has this quality of like, is it being well-managed? Are people fulfilling their fiduciary responsibilities? And I think there's this aspect of like, “don't lose grandma's money”. So that's item one, but I think the second piece of it is they're also an asset management business and so they're actually in the business of taking risk to generate a return and that just means that there are no guarantees.

In order for them to do their job well, particularly at the early stage, they have to take risks otherwise they are, by definition, capping their returns and I think that's probably a harder argument to communicate politically and so I think do you sort of tell your citizens like, “hey, this is kind of part and parcel of what we're going to do.” Maybe that's a nod towards that, because they say, “hey, we're going to cap our exposure at 6% of the total fund.”I think when the news first broke, they tried to do the thing that Sequoia and everyone else did, which was like, this is only 0.0, like a very small percentage of my total portfolio, on a portfolio basis. It doesn't matter, but of course, because it is public funds, that just doesn't work as well as telling your LPs. So it seems like there's still a gap in communication or education, which is like, we are going to take risks with public money, a portfolio level. This is kind of what we expect the set of returns to be, but that does mean that there can be individual investments that will fail and in fact, if nothing fails, that actually probably means we aren't taking enough risk in that portion of the portfolio.That is a sort of more complex political communication to make.

I think what's unusual, maybe for non-Singapore's or even Singapore, I don't know if what percent of our national budget, our operating budget is actually investment income from the sovereign wealth funds. It's not insubstantial, right? We can put this in the show notes too, right? If you look at the fiscal year 2022 budget, net investment returns contribution was like 21 billion. So that's pretty substantial on total operating revenue of 90 billion.

Jeremy Au: (08:26)

So that's almost one-fifth? It's actually almost one quarter.

Shiyan Koh: (08:32)

Sorry. We ran a slight deficit last year, but I think this is the tail end of the covid expenditure. So the total expenditure was 106 billion and the investment contribution was 21 billion. So yeah, it's huge.

Jeremy Au: (08:47)

It's something that America doesn't have. For example, in terms of having investment returns, generating that operating budget.

Shiyan Koh: (08:55)

Yeah. So, there's no risk, no reward type of thing.

Jeremy Au: (09:00)

In fact, it's almost like the opposite because America is running the total deficit on a federal and government level, right?

Shiyan Koh: (09:08)

I mean we, to be fair, ran a deficit last year. So there's all the sort of major COVID expenditures and I think if are semi-seriously, like our friends at GIC and Temasek, when they saw all the expenditures, they're like, man, we got to work harder. We took, put money in, and more money back into the system.

Jeremy Au: (09:25)

I think they do a great job in aggregate over the long term. They've done a good job shepherding the reserves, shepherding investment returns, and I think there's a very strong dynamic where they're using that investment and ownership income and dividends to fund the rest of the budget, but it's not an uncommon problem for software and wealth fund, and government-linked funds to have this issue, which is, like you said, the communications of it, which is that the goal is to make that 10, 20% net IRR over the medium to long term. In the short term, you're going to stick hits, and I think that's where adding venture capital and the startup ecosystem, it's very difficult by itself, category to digest.

I think if you do a public markets investment, good or bad, day-to-day sorts of off-market, there's something you can do there, but you're not going to slide to zero straight away a sense of off-private equity. There's obviously a set of decisions, a lot of pool, the returns. We all know, and we talked about it in last week's episode. It’slike venture capital as an asset class is very risky, and so you have 1 out of 20 that's a home run if you are an above average VC and 19 out 20 does right and effectively to go to zero. Some are going to land a plane gracefull, some will lean the plane very roughly, and some will just crash. I think this asset class by itself is not. I don't think it says Singapore problem. I think it's just if you have a public accountability piece where you are, in some ways your investors, not institutional, but it's a retail investor base. Now, technically, obviously, we know Temasek and GIC, there are institutional investors called the government, but in some ways.

Shiyan Koh: (11:02)

The end customer.

Jeremy Au: (11:03)

The end customer, grandma. Grandma's son and grandma's grandchildren, like all of them, are on.

Shiyan Koh: (11:09)

Yeah, but the power law is actually quite hard to wrap your head around.

Jeremy Au: (11:13)

I mean, I barely wrap my head around its time, either because you're making the decision. I just don't think it's politically feasible. It's like, can you go out there? You just say okay, we're going to make 20 investments and 19 of them are going to go to effectively zero from a returns perspective, and one would do well, but that's not even the math. We're going to make 20 investments in 6% of the portfolio. True, but I think from a press perspective.

Shiyan Koh: (11:41)

Yeah, but the press has an obligation to also not to be lame. There is explanatory responsibility. I don't think we should treat our citizens like idiots. I think we should treat them as smart, capable people and we explain it like it isn't a soundbite. You have to actually sit there and do a little bit of math, but it's not hard math and it's 6% of the portfolio and the rest of the portfolio is in more traditional like bonds or infrastructure projects or things that are more like yield-like types of properties. But it's a hard thing, right? It's not about like, part of it is like what you do, but the other part of it's like, well, how do you talk about what you did so that people can feel confident in what's actually happening?

Jeremy Au: (12:24)

I mean, I agree that there's some level of messaging that can improve, and I think that I'm an optimist. I think that people gradually understand more and more about this ecosystem over time. Honestly, I think that the tricky part is the naming. Just FTX. I mean, it's going to be all over the news for next year. Michael Lewis did Liar's Poker, a classic, right? Big Shot, has some great books that turn into movies and basically, he's going to be releasing a book later this year.

Michael Lewis decided to shadow this billionaire when he was on his rise to the peak, and he washed his flame out and he was doing a chat with him for apparently half an hour every two weeks, just an entire time period and then now that he's under house arrest, he's still meeting them every two weeks and has four hours now. I'm like, what is this guy thinking? He's under house arrest, he's going through legal discovery and he's just talking nonstop to this author. Anyway, so it's releasing later this year, it’s going to be tremendous. This is not really about this, right? I mean, we're talking about the Temasek exposure, obviously, but is this more like FTX, the fraud, the accounting standards, the individual decisions, the casa characters, the Hollywood? Apple's bidding for the rights of the book already because they know it's a good story. They get they have a male founder, you have a female founder for Alameda. You have the Head of Engineering.

Shiyan Koh: (14:02)

Yeah, It's like Hollywood couldn't have written it better, right?

Jeremy Au: (14:05)

It's a caper movie, a caper. It's a heist. There's the worst part. It's a crime. True crime. It's everything. And obviously, we talked previously in the past episode, we do have a Singapore connection. Constance Wang was the COO in charge of this, and her name keeps popping up.

Shiyan Koh: (14:21)

Jeremy, you got to get her on the pod, man.

Jeremy Au: (14:23)

Maybe. You know what? I'll promise you. I'll consider this. I'm going to send her an invite to this talk, but I mean, I think she's going to be wiser, right? She can't talk about anything during FTX because she is probably a plaintiff in this suit.

Shiyan Koh: (14:38)

No, of course separate from the specifics of power law and venture returns and whatever. There is the fraud component of FTX, which I think everyone is very disturbed by, and the scale of the fraud is mind-boggling. But I also mean this is like a really terrible thing, but if your founder wants to lie to you, there's not a whole lot you can do because they're working on their business 24/7. You are not.

It means you need to sort for honest people and then there's this whole kind of gray area between where is honesty, where is carelessness and where's fraud? Because in startups, honestly, there is quite a lot of carelessness as people are growing and scaling and whatnot. Then, you have to bring in appropriate controls and compliance and regulations and things like that. I worked on this deal and they had some angels, and the angels were like, we need to write in provisions about A and B and C. Like, how can you just invest on a SAFE note? I was like, dude your angel check whatever is like, 10K. Okay?

I was like, if you want to go through legal turns, your 10K's going to get eaten up in lawyer fees, and if you don't trust this guy, you shouldn't invest. That's the most basic thing. We don't even know. Okay. And so writing in all these provisions is not going to actually make this deal better at this stage. Right now obviously these things all change as the companies mature and you actually have something to audit and follow and track, but it still does require you to really choose the founder properly. It has to be someone who has integrity.

Jeremy Au: (16:25)

That's where I think the risk-reward dynamic, as you said, the business of risk for reward and is it on that right curve. I think the truth is it's not just Temasek. There's an Ontario teacher's pension plan, as well as Sequoia was part of that same dynamic, right? And there are lots of other investors that were following investors that were piggybacking off the due diligence of these lead investors. So I think there's a very interesting dynamic, which is like, I think there's a lot of nuance here, which is, we're saying as a fund is about the right risk and right reward, but venture capital is an asset class.

From my perspective, it has a lot of aspects that are politically very difficult, reality-wise to explain and then you have the FTX dynamics, which is like flat out you had a founder, does other mislead, and I think what's starting to ship up on a legal discovery stage now, is that there were a lot of risk factors that were known or waived but were not, they were material, but I think the conversation is like, what's normal? That's okay, what versus the reward of their growth curve and then after that, I think later on, they started ballooning their fraud.

I think there's a certain stage where they kindof like stepped up the activity and they were hiding that from their board and the investors. So it's not like a fraud from day one. It was like this hockey shape of fraudulent activity and I think there's there's conversations that goes back also to the board, and was there any ways they could have done that oversight and management, which is another conversation. So I think what I'm trying to say here is like, I think there's nuance about what aspects to really focus on and what aspects to have there and honestly, I think my takeaway from this is that if you are in a public eye, my perspective at least, is that it's difficult to make direct investments because if you're making a direct investment in about 600 investments, then you're expecting maybe half of them at least, to effectively go under. And I think that's a very difficult conversation to have, but I think if you're deploying this capital through funds.

Shiyan Koh: (18:28)

But let's be clear, right? Temasek is not investing in pre-seed companies.

Jeremy Au: (18:33)

Oh, a hundred percent.

Shiyan Koh: (18:34)

Their check size just makes that impossible. So the things that they're investing in, I don't even know what their definition of early stage is for this 6% cap, but like, by the time Temasek shows up and writes their check, the business is a going concern.

Jeremy Au: (18:49)

But there's still series B, series C. I think there's still a very significant amount of risk that still happens. So, it's just difficult. I mean, we saw the end financial kind of stake that was taken and then there was like a political correction, so they weren't allowed the list, and that turned out to be very problematic for a lot of investors.

Shiyan Koh: (19:06)

Although now I think it's going to happen, right?

Jeremy Au: (19:09)

Yeah, but I think the evaluation is quite different now that they're going to split up the whole unit into different parts. It's quite clear the regulators are going to manage their profitability moving forward, so all I'm just trying to say is that this asset class, frankly, from a communications perspective, I think it's easier to delegate this to venture capital funds to manage on their behalf, that is happy to accept the capital, be a specialist, and also be able to provide arm's length independence and thoroughness so it doesn't fall upon the main body. From my perspective, that.

Shiyan Koh: (19:45)

So your argument is that to avoid public scrutiny, they should just do fund-to-fund investments.

Jeremy Au: (19:51)

No, as you said, I think they should be clear that they invest in the early stage, let's just focus on what we're good at, and let's have some experts who are doing that and final investments are very normal and lots of, It’'s the strategy for lots of LPs and capital allocators. I'm just saying that it's just I don't say that at the end about performance over a 10-year time period. And I think that's the thing that we should really be focused on. The individual investment, as you said, there are going to be incidents and I think it's going to reveal the organizational learning, which is like, did we learn from this era? Are we going to change how we do the process? And if they pick up the fragments, in that sense of the deal, but they learn what needs to be done and they can outperform in future deals, I think that's good. It's just that I think venture capital as an asset class is difficult to explain.

Shiyan Koh: (20:51)

Yeah, agreed. But I would also say that I think their job is really hard. It's actually really hard to deploy that much capital, so, can make fun of them because we make fun of everyone, but I still have a ton of respect because their job is hard.

Jeremy Au: (21:10)

I think it's a stewardship role, and it's no joke. And I think the Harvard endowment, for example, is another example of university endowments and now of course we see the sovereign wealth funds from the Nordic countries as well as the Middle East, right? There are kind of like entering this dynamic which is how do you manage wealth? But I think one of the big differences from my perspective is that for a lot of other sovereign wealth funds, they're managing capital that is, mineral rights. Or attractive resources, right? And that's how to use shepherd this for a rainy day down the road, right? And transform the economies.

But I think for Singapore's institutions, they are citizens, right? Grandma's savings, everybody's savings. Heck, even I put money into my kid's CPF account, right? So my infinite toddler CPF as well is there as well. So it's not easy. For sure. On that note, what do you think about this whole crypto? I think we've been talking about FTX or about crypto. We've had winter that was called winter's still ongoing. But how do you see that? I think people are going to be curious, right?

Shiyan Koh: (22:12)

I mean, I think in a sense it's a good thing for the industry because it takes a lot of the noise out. So, whoever's left is actually trying to build. I think we still see some good activity in Singapore. Hong Kong has been making a big push. And so, it seems like it's going to be kind of like a test bed for China to see kind of how some of the digital asset stuff plays out in a more controlled environment and then, Dubai in the Middle East, they've also been pretty aggressive in trying to promote more crypto innovation.

So I kind of think like the most interesting markets for crypto are actually emerging markets because that's where the rails are the worst and that's where people have a real need for alternatives that are not kind of subject to, the whims of their government per se and they really do have a need to transact, right? So, like I know companies who have Burmese engineers right, they get paid in crypto and that's like a big deal for that engineer, right? You get paid in USDC, you can actually support yourself and your family even though you know your country is undergoing upheaval currently. Right, and so, I'm kind of interested to see some of those use cases and I think in Latam you see a lot of use cases around inflation hedging, right? People want to get their money out of the peso or the real and get into USDC, and it's not even a speculative use case that's literally just like, I just want my money to hold value.

I mean, I think people are still pushing forward. It's good. This is like the time to build. KK also has a quality that it attracts a lot of gambling personalities. And so it almost feels like people are kinda like waiting for that next pump, that next thing to sort of get the animal spirits going again so that they can all jump in and, take things to the moon.

Jeremy Au: (24:08)

I hope that stage is over.

Shiyan Koh: (24:10)

I don't think it's ever going to be over. People have gambling personnel. It's not going to. It's human nature. Humans love the idea of easy money.

Jeremy Au: (24:19)

You think Satoshi was like, when he wrote his paper about how to build trust around the world and like you said, make what global currency be a smoother place and then he's like, yup and then I'm going to coin a new language called, Dogecoin, Shiba Inu.

Shiyan Koh: (24:35)

I don't know Satoshi, would love to meet him.

Jeremy Au: (24:37)

I would like to know who he is either, but I'm just saying think there's a vision, which is, like you said, there's a trust component and that was happening on the chain, and then everybody was like, guess what? On the chain, the technology is too slow, or we want to do all these other stuff, so they're going to move everything off the chain, which sounds very fancy but it just means that there's this totally transparent part and then everything happens opaquely afterwards, and then turns out, that turns out to be an iceberg, under the waterline. I think that's the tricky part for crypto from my perspective is, it's like there's casino land, which is some retail consumers are treating it like, as a casino, like you said, and mixed up with traders who are trying to trade against each other. And so, so far and hypey and whatever.

Shiyan Koh: (25:22)

There's a documentary called “This is Not Financial Advice” and it follows people through the meme, stock and crypto madness. You don't even need crypto, the meme stock thing. Wall Street bets and all that stuff that happened, like, even sports betting, right? There are so many different vehicles that people can express this desire to like to get rich quickly. And in the past, I spent a lot of time working on personal finance and financial education and I don't know whether you can actually educate someone to take away the thrill of fast money.

Jeremy Au: (25:58)

Yeah, it is like he imagines it's like Nerd Wallet or Robo Advisor, then the slogan is get rich slow. It's such a terrible tagline, but I think that that's the crux of it, which is that people are making decisions about investing. So I think that's why crypto has so many different aspects about it, but I think we were talking about the coins and so, so forth, right? The trading and so, so forth.

I think the biggest part I remember is that a lot of people are making the argument that because there's all these stimulus checks, it turns out that the dollar was losing value, so people were buying Bitcoin and Ethereum in order to preserve value, right? And then it turns out is actually the opposite, which is that we have got the stimulus, and we end up creating a lot of liquidity and liquidity moved into the coins and pumped the prices, which is like when I was reading these two things, I was laughing, but this reminds me of my Economics class and it's like the same thing happens from point A to point B, but nobody can agree on why point A is point B in terms of time.

It's the total opposite. So you're just like watching them, re-emerge. I don't know if that makes sense for this kind of monetary argument, right? It is, in this a hundred percent at that point of time, very low regulation, a hundred percent globalized, zero barriers to entry kind of zone, and I think, as you said, to some extent, good actors also got washed out by the bad actors. Can you imagine somebody who's like promising, like, okay, I figured out a decent use case, versus someone who's promising 20%?

Shiyan Koh: (27:36)

Yeah, you look like an idiot, basically.

Jeremy Au: (27:39)

You look like an idiot, right? Exactly.

Shiyan Koh: (27:41)

But I think product makers have a responsibility too. You give some 18-year-old kid an app and let them buy stuff on margin and they don't even know what margin is and they could just go click. I mean, that's not great.

Jeremy Au: (27:58)

Yeah. I mean the tricky part is that it's good that they get a chance to financially educate. It's good for them to be able to get access.

Shiyan Koh: (28:09)

But financial education and access are not the same. So I get pitches on this all the time. We're going to democratize access. We're going to teach people and then you read the deck and I was like, well, what are you teaching people? You're teaching people about technical analysis, you're teaching people how to day trade, in good conscience. I just don't think that's what we should teach people or it's an incomplete lesson. You can teach them hey, these are things that people do. But in the context of what's actually happening, I think that's really hard. You don't even talk about the fundamentals of capital formation. You just want to watch the lines move up. So are you really educating someone? I think you have a fiduciary, right? If you're going to make something and put something out in the world, is encouraging people to gamble stuff that they can, ill-afford, responsible? I don't think so.

Jeremy Au: (29:08)

It's hard, for someone to learn something if you don't have access to it, and then you just end up not watering to learn it. I've met folks in the Philippines and in Thailand who just historically just couldn't trade. So they're just having this, I was going to use the word masterclass, but I think that's a bit too high. I think just having these lessons that they have from YouTube, from Substack, from other people on Discord about trading, and it's a kind of an interesting debate. In my head, it’s super scary to watch them because I don't have conviction in myself and it takes so much time. The effort is so much shot players who have inside information and their approach and it's hard, but it turns out, people can now work from home and day trade.

Shiyan Koh: (29:56)

10 years ago, we did all these marketing experiments to try to drive traffic to the website and I ran a personal finance contest called “So You Think You Can Finance”, play on “So You Think You Can Dance” and it was a sort of four-week competition where contestants had to do like a personal finance task each week and then, people would vote and someone would win a thousand dollars. It's not a lot of money and we had a college kid who basically, his whole sort of thing was he was going to put all his money into Zynga. People would counsel him and explain to him why it wasn't a good idea to put everything into a single stock, especially to a pretty volatile tech stock, but he was convinced and so it made me think that sometimes you actually can't teach anybody anything until they lose money.

Jeremy Au: (30:47)

That's exactly the point, which is that when you have access, you lose a bit of money, but it's as long as there’s no leverage. Again I'll say this, I'm happy to be on a record. You cannot give leverage to somebody who doesn't know what leverage is or cannot use it responsibly, and I don't know what the right accreditation for this or that thing.

Shiyan Koh: (31:08)

But I do feel like you, if there's a way you can make someone take a class before you let them invest money, it’s fine. It's free will. We believe in free will. So people should be allowed to lose their own money. Why stop them? But it's like, there are some things you can't learn until you viscerally experience it, and so then, the question is, can you learn it in a way that isn't deathly or put you in such a big financial hole that's really hard to recover from?

Jeremy Au: (31:38)

I mean, that's what accredited investors are for, right? Accreditation component where you say.

Shiyan Koh: (31:43)

But the accreditation is just that you have enough money to lose. That's the bar.

Jeremy Au: (31:52)

Because you don't want people to lose what they cannot afford to lose. Because then, it eats into food. It uses for rent, and it eats into energy. It eats into education. It eats into healthcare, when you're at that stage. So I think that's the democratization spiel. It’s that, people should be allowed to take on that risk if they want to, as long as they're aware of it and will be able to learn from it, because I think you go to Rich Dad, Poor Dad, write a book.

Shiyan Koh: (32:24)

My dream is I'll have a personal finance curriculum for kids, but it'll be like learning by doing.

Jeremy Au: (32:39)

Learning by doing, and they wouldn't be allowed to use it unless they do day trading, unless they use one of these democratization apps.

Shiyan Koh: (32:47)

Well, I think you need to learn about what causes the trading, who's on the other side of that trade. People just don't even really ask the question.

Jeremy Au: (32:56)

Robots and full-time people working together as well as the Central Bank.

Shiyan Koh: (33:01)

I think yeah, but like how do you think about it? I think there's some sort of like, and I think part of the lesson is also figuring out which games you should play and which you shouldn't, and how do you think about that? I think that's like a kind of not an instantly intuitive thing. My kids, they did a garage sale at the park down the street and five families. They brought toys and books, old toys and books to sell. My daughter also baked cookies to sell. So like, at the end of it, I asked her what her learning was and she was like, books don't sell, which is true.

The kid who sold the most stuff was the kid who had brought the most toys because the neighborhood children who were at the playground, their customer set was impulse buying toys, not books. So that's a good insight and then the neighbor’s kid noticed that my daughter had sold a lot of cookies and so her insight was, next time we do this, I'm selling food. I'm not selling books or toys. But it’s kind of like, okay, well you got to pick which game to play. You just sort of wandered around and said, okay, I'm going to sell them, but then you watched customer behavior and you're like, oh, okay. It helps them think a little bit more and they had tried earlier, but they had picked a morning time.

There weren't as many kids this time. They did it, it was evening time and then she was like, yeah, I think there are more kids in the evening and I was like, that's a good observation. They're little, they're six, right? So they're just starting to think about it and, next time they're not going to sell books in the morning, they're going to sell cookies or toys in the afternoon. I think slowly, we could kind of build up this understanding of the economy. I don't know if we can like to talk about the stock market and just kind of cash flow quite yet. I don't think they have the math skills to understand that, but, the core idea of a business with like revenue, cogslike a profit. They could, they understand that, and they care about profit. They want money to buy toys. That's their goal.

Jeremy Au: (35:06)

Welcome to capitalism.

Shiyan Koh: (35:09)

I love it. I love that. I love that it started to click, and it made me really happy.

Jeremy Au: (35:15)

I think the crux of it is just like, I think when it comes to trading, I think that there's a certain level of requirements that you have, which is that you should be able to preferably be able to gain or lose in accordance with what you're able to afford. I think that's an essential part. That's like gambling kind of like dynamics there that you should be as educated as possible and that it should be resources to help you get educated as fast as possible. I don't think you should be a minor. I mean, there were a lot.

Shiyan Koh: (35:51)

I think they could do it in schools too. When I was in elementary school, I ran the school snack bar.

Jeremy Au: (35:58)

Well, I mean, but the snack bar is different from trading.

Shiyan Koh: (36:02)

Yeah, but like you got to start somewhere, right? You don't jump straight into trading.

Jeremy Au: (36:06)

Secondary school stock trading club. Actually, I did go to an inter-school stock trading competition.

Shiyan Koh: (36:14)

Did you really? Did they teach you anything before? Or they were just like hey, pick some tickers. Let's see what happens.

Jeremy Au: (36:19)

Yeah. So I mean, we didn't have Montreal, but we picked some tickers.

Shiyan Koh: (36:22)

That doesn't achieve the goal. The goal is actually about how the thing works.

Jeremy Au: (36:29)

Yeah. Anyway, all I was going to say is that, all I learned was I identified a really good opportunity and I think there was like a certain number of rounds and then things will move up and down and then the game was supposed to end with a certain number of rounds. I knew that, but I didn't get that in the sense that there was a, I think I identified like maybe one or two rounds before the end of the round that these stocks were going to do really well and so I made a decision with the team to come by.

Shiyan Koh: (36:53)

But like on what time horizon?

Jeremy Au: (36:54)

So two more rounds. I don't know what the rounds were. I don't recall. It was, I'm just going to say that we were in the lead, we're doing really well, and it turns out that pop didn't happen till like supposed to lead a round after that, so we crashed out.

Shiyan Koh: (37:10)

But see, this is poorly designed, because it's not actually teaching you anything. It could, but the problem is the timescale. It's like, well over what timescale can a kid understand this? Like, you need years, but kids don't have a multi-year attention span.

Jeremy Au: (37:26)

I know. I was trying to go for that Warren Buffet buy-and-hold strategy but turns out, the school needs to end the competition by a certain point in time, so they needed momentum investing.

Shiyan Koh: (37:35)

We had one and I asked my parents and my dad is like, Philip Morris. People always smoke, it's called addiction. So I went to school and I was like, I want to buy Philip Morris, the teacher was like, no, it's a vice-like stock. You can't buy it and I was like, it's what my dad told me to do. It's not clear what I learned from that exercise either. So, like I'm not sure we achieved the goal, but in any case, I think there's like a huge gap in entrepreneurship. Kids' education is very experiential and could be like really fun.

Jeremy Au: (38:13)

Yeah. I think what we're trying to say here, what I'm kind of getting away from this is, oh yeah, what's the decision?

Shiyan Koh: (38:18)

So off our tangent. I don't even know what this topic is anymore.

Jeremy Au: (38:21)

I think we're just talking a little bit more about the concept of democratizing finance. I think there's a lot of tension there, and I think that's what Robinhood ran into, which is they had this conversation which was like hey, we're opening access to everybody, and I remember there's this number that I think I can't put the regulators were asking. It was like, what percentage of your folks made a profit over this time period? And I don't think they answered it yet today.

That boils down to the heart of it, which is that the truth is by opening up access, more people get to enter the arena and out of the arena, a small percentage will be able to do well and they learn, and a lot of people will not do well, and so what's the net gave the society in that scenario democratizing access to financial instruments, right? You can focus on that chunk of people who did have eventual upside or you can focus on a chunk who lost money, the longer group of people.

Shiyan Koh: (39:24)

Yeah, I mean, that's a hard one.

Jeremy Au: (39:26)

Yeah, because accredited investors, they continue to trade. They already are trading.

Shiyan Koh: (39:32)

I mean, I think if you did the math right if everyone just bought the S&P and didn't touch it for 10 years, they would all make money.

Jeremy Au: (39:41)

Like I said, it is such a boring 10 years. 10 years to have returned. I mean this actually goes back to CPF. It's just like, how do you maintain your principle without losing the nut right here, but continue having consistent returns over that time period in both the bull markets and the bear markets and the macro and the global situations.

Shiyan Koh: (40:05)

Yeah. but that's why we go back to this fundamental is, how does capital formation happen? And why is a diversified approach the way to go, because if you believe over a reasonable time scale, right? There are increases in productivity and population growth, all that sort of stuff like capital formation will occur.

Jeremy Au: (40:28)

It's like, this is the worst YouTube channel. I was like, here's my secret to get rich over 10 years, buy ETF, and then it's like a 32nd ad.

Shiyan Koh: (40:38)

Yeah, it's called the dollar cost average. Set it and forget it and it's shockingly boring.

Jeremy Au: (40:49)

Yeah, I mean I think that's for the average investor. I think that's probably the best strategy and I think that's how I think about it my ex-public personal exposure as well is but I don't know. Okay. That's another good T-shirt. Get rich slow. That's all.

Shiyan Koh: (41:05)

You better open up this store, right?

Jeremy Au: (41:07)

Yeah, I know.

Shiyan Koh: (41:07)

I've got all sorts of great t-shirt slogans.

Jeremy Au: (41:11)

So okay. If you had someone thinking about investing and thinking about that, what's your advice?

Shiyan Koh: (41:20)

Like in life?

Jeremy Au: (41:23)

You don't give some advice. Talk about what games to play.

Shiyan Koh:(41:25)

This is not financial advice. I'm not qualified to give financial advice. I mean, I would say like most people don't actually want to spend their time looking at the market, and so I would say hey, think about a number. Let's say you want to save, I don't know, a thousand bucks a month. ?I would put maybe like 950 of that into a broadly diversified basket of stocks and maybe $50 of that, 5% I could sort of mentally create as like a learning pot, and with the understanding that I could lose that money. But I would use that to like do riskier stuff, learn about new industries, things like that. Yeah, and so, the act of regular saving and compounding is going to stand you in good stead, but you still want to do fun stuff, invest in your friend's thing, buy a dogecoin. Sure, but you can do it within a constraint like, I'm not going to blow myself up. If it does well then, you're like, oh, I'm a genius. Yeah, but at least you don't blow yourself up. I think it's like a basic principle.

Jeremy Au: (42:35)

Yeah. On that note, thanks so much and see you next week.

Shiyan Koh: (42:40)

See you next week.