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Sunday, March 2, 2014

Can't start your own firm? Invest in someone else's

Published on Mar 02, 2014

Depending 100% on wages won't help when costs go up, so buy shares in companies

By Jonathan Kwok

I was shocked and disappointed when the price of my "fan choy" was raised yet again.

The dish - basically a small snack of rice topped with roast pork and a bit of egg - will now cost 10 cents more at $1.70, I learnt last week.

It does not even contain alcohol, so my regular food stall could not blame the rise in duties announced in last month's Budget.

"What to do, it's the decision of my boss," said the tubby, middle-aged stall assistant in Mandarin.
I was surprised because the price already went up 10 cents in 2012.

A serving of "fan choy" cost $1.50 at end-2011 and is now $1.70 - an increase of 13 per cent in about two years.

At 6.5 per cent a year, the increase is higher than the inflation rate.

I asked the helper if his salary is going up as well. After all, the stall will be making more money, right?

"No, in fact he wanted to cut my salary," he said with a sigh. "But I told him that I won't work any more if he cuts my pay."

That struck me as quite unfair. After all, the helper is the one staying up through the night - it is a 24-hour stall - and sweating buckets in the stuffy hawker centre.

I've never once seen the boss at the stall.

Of course, we can argue that raw material costs are rising so prices need to go up too. I hear from hawkers that the prices of flour and some types of meat have risen significantly in recent years. But there is every chance that the extra money is going either to the hawker centre landlord - as increased rent - or to the boss of the food business as higher profits.

No matter how we look at it, the increase surely isn't going into the wages of the stall helper.
It is an issue I've thought about for some time.

Singapore has one of the highest national incomes in the world, when divided by its population. But the share going to workers is lower than most other developed countries.

About 50.4 per cent of Singapore's national income went to companies as profits between 2000 and 2009, said a Ministry of Trade and Industry (MTI) report last year.

A further 7.1 per cent went to the Government as taxes and 42.5 per cent to workers via wages.
Most developed countries have workers pocketing about 50 per cent or more of the national income.
About 57.1 per cent of national income went to workers' wages in the United States from 2000 to 2009, while the figure was 52.3 per cent in Hong Kong and 51.2 per cent in Japan.

Singapore's Government has taken pains to emphasise that our country's low wage share does not mean that workers are underpaid, and it makes some valid points in the MTI report.

Wage shares in capital-intensive sectors, like biomedical and electronics, will be lower as higher profits are needed to provide returns that are commensurate with the high level of investment.

Importantly, the MTI says that "Singapore's wages are in fact higher than that in some developed economies with higher wage shares".

The wage share has also risen slightly over the past three decades.

In last month's Budget speech, it was also highlighted that median wages among citizens have risen by about 9 per cent, after adjusting for inflation, in the five years to 2013.

The wage share data does not dissect how much money goes to owners of property as rental income. I suspect this figure will be quite high in Singapore.

But looking at the figures that we have, how should we as individuals react?

Very few of us are in a position to substantially influence Singapore's economic structure so that is out of the question.

Many people around my age have read the situation and taken to the high-risk, high-return route of setting up their own firms. A lot of them are Internet businesses while there are also more traditional enterprises in food and beverage and fashion.

But some of these folks are from richer families that can afford to support them in case the business goes bust. Most of us don't have the same appetite for risk.

A more pragmatic solution would be to be what academics call "worker capitalists".

This refers to those who earn wages, save, and invest those savings to be part-owners of companies. It has served many Singaporeans well over the years.

There are several reasons why market watchers advocate some form of investing.

One point of view is that money should be viewed as your personal workforce, working hard and earning more money for you.

But an additional reason can be gleaned by looking at the structure of the economy.

With much of the country's income going to companies as profits, it makes sense to be joining them, rather than to remain purely in the ranks of the employees. It may be an exaggeration to call the company owners the "winning side", but we can say that they seem to be the ones with an advantage.

Let's say that costs rise with inflation. A business owner at least has the option to pass on some of these costs to consumers via higher prices.

But if you depend 100 per cent on your wages, your bargaining power is essentially zero as it is extremely difficult to go to your employer and demand a higher wage, just because living costs have gone up.

For those who can't set up their own business, we can at least buy shares to become part-owners of companies.

As the Government says, we may not be underpaid as workers. But still we can improve our financial health by investing more.

Some are still holding back. I learnt last week that a colleague who has been in work for more than four years still does not have a Central Depository account - needed to keep shares - despite her father being a remisier.

"I'm just lazy, lah," she said, as a friend and I looked on with some disbelief.

Of course, there are many issues with investing. We need to find out which industries are going to do well, and which companies in those industries.

The game feels stacked against smaller investors, who have fewer chances to meet top management and read analyst reports.

Even if you do end up with shares of an awesome profitable company, you are subject to the whims of the majority shareholder who may choose not to pay out any dividends.

But these are risks I'd rather take. The worst thing is to avoid investing altogether.

jonkwok@sph.com.sg

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