Managing Oneself

Re-read this classic article by Peter Drucker - Managing Oneself. I was first introduced to me in my Management of People at Work course. Sometimes I think that the value of some courses in SMU simply lies in the prof introducing students to awesome articles.

Drucker urged his readers to answer some of these questions; What are my strength and values? Where do I belong? How do I learn?

He also urged cross disciplinary learning. It is no good if a technical guy (e.g. engineer/accountant) don't know anything about human behavior, or that a HR manager know nothing about how technical guys work.

On Ideas vs Execution

"...he believes that ideas move mountains. But bulldozers move mountains; ideas show where the bulldozers should go to work."

On learning and its problems
"Schools everywhere are organized on the assumption that there is only one right way to learn and that it is the same way for everybody. But to be forced to learn the way a school teaches is sheer hell for students who learn differently."

To Jie Chao (Drucker is speaking to YOU!): "But most people, especially highly gifted people, do not really know where they belong until they are well past their mid-twenties. By that time, however, they should know the answers to the three questions: What are my strengths? How do I perform? and. What are my values? And then they can and should decide where they belong."

--------------------------

Wishing all my readers a great New Year ahead of you!

Avatar

Go watch AVATAR. Please watch it in 3D. It makes a difference, as the world of the Na’Vi comes alive in our cinema.

Official Avatar Movie

There are times where technology steals the story line, yet sometimes proper use of technology enhances story telling. I would declare UP my favorite movie of the year, followed by Avatar and District 9. Watching Alvin and the Chipmunks tonight...don't think it will post a challenge to the 3 listed movies.

This review by New York Times on Avatar is worth reading.

The plot is simple enough, and it reminded me and my friends of the plot of The Last Samurai combined with Pocahontas. I half expected (neh...hoped for) Colors of the Wind to be played when the scene sweeps though the enthralling forest on Pandora. Also, it follows the classic hero's journey quite closely...thanks to Baby Chao who introduced me to Joseph Campbell.

----------------------

Had a awesome 4 hours discussion session with some E.y.E pple yesterday. Really enjoyed the dedication to learning shown by Jason, Eric, Darryl and Jin Wen.

I'd like to comment on a few key learnings:

1. There is a link between Return on Invested Capital and the range of Price to Book ratio a company sells for. Company earning high ROIC will rarely be available for low PB. Investors do recognize there is some intangibles at work that create return on capital over cost of capital.

2. For asset heavy industry, do look out for off balance sheet items and capitalize operating lease before calculating ROA or other ratios as different financing method will create HUGE difference.

3. Value of Growth

(a) Growth creates value for shareholder only when ROIC > WACC. When return is less than cost, you are destroying value.

IMAGINE:

I can borrow $100 at 5% interest (WACC) to purchase a T-bill yielding 3% (ROIC). EVERY 100 dollars investment LOSES 2.

If i can GROW this to a 100,000 dollar business, I will be losing 2,000 due to this growth!

The challenges we face with equity analysis is that both WACC and ROIC are hard to estimate. However, we just need to be roughly right, and if the spread is wide enough, it should satisfy us.

(b) Estimating free cash flow

In some of the spreadsheets for cash flow projection, depreciation expense added back is less than the capital expenditure and projected into infinity. Should this be the case, the analyst is expecting Return on Asset to increase over time and the company can do more with less!

Example:

Given that

Return on incremental asset = 10%

Net Profit margin = 20%

If incremental sales is 100, then Net profit is 20 and Need of additional asset is 200.

Assume net profit = operating cashflow, then,

Operating Cashflow ---- 20

Add back dep ----- xxx

Capital Expenditure ---- (200)

It is most likely that the to grow, free cash flow will be negative. Only in the very rare case of super high return on asset (e.g. due to very high asset turnover or profit margins) can a company grow quickly without huge investment in fixed asset.

Furthermore, working capital charges is a real charges. If your growth is partly due to expansion in Account Receivables, you are not making cash profit. Worse still, there are some companies out there that incur debt at the corporate level and lend to customer to buy their own things? This should only be considered sales with Alice in Wonderland accounting.

----------------------------------

After reading about investing and doing it for about 6 years, i can simply say that I learnt not to get easily conned by snake oil peddlers.

“[A] respect for evidence compels me to incline toward the hypothesis that most portfolio decision makers should go out of business — take up plumbing, teach Greek, or help produce the annual GNP by serving as corporate executives. Even if this advice to drop dead is good advice, it obviously is not counsel that will be eagerly followed. Few people will commit suicide without a push."

- Paul Samuelson

So Many Things yet So Little Time

Things on my mind:

Reflections on working with Blood Donation Drive and the challenges of sales.

My most-shiong ever ICT and the amazing platoon I serve in.

On re-reading Phillip Fisher's book and the amazing things he said in the 60s that was finally executed in the late 90s.

Some further thoughts on personal finance and the folly of spending more than you earn, albeit just a little more.

Will think harder over the next few days while i relax in Langkawi. Can't wait for Xmas eve for the caroling session.

Capital Ideas Evolving

Exams are finally over. Time for reading things that stretches my mind.

Just finished an amazing book by Peter Bernstein, Capital Ideas Evolving. It profiles how "Capital Ideas" - EMH theory, CAPM and Mean-Variance analysis has evolved over the past 2 decade and have become a mainstay in finance.

What amazes me is that the very people who are pushing the boundaries of Capital Ideas and formulating new ways to explain the market and punch holes in the original Capial Ideas are the same pioneers. Can you imagine winning a noble prize for some work that you've done and then 20 years later invalidate those work that you've spent half your life working on? This is real creative destruction at work.

There are many interesting ideas that he posted, but a recurring theme to me is that the search for Alpha - excess risk adjusted returns, is elusive. And that after fee excess returns is even harder to come by, due to the intense investments in technology and human capital.

Also RISK should not be defined as a number, but as different scenarios. The chapter on William Sharpe, of the famous Sharpe ratio, will change the way you think about risk.

Lastly, we cannot control returns, but we can control risk and fees. Minimize fees and set your own risk tolerance level (however you defines it). And the return take care of itself.

New York Times profile of Berstein: http://dealbook.blogs.nytimes.com/2009/06/08/peter-l-bernstein-explainer-of-stock-risks-dies/

Buffett and Gates with students

Get full transcript here

source: http://www.cnbc.com/id/33940689

Money, happiness, great profs

Read the following in a book somewhere; If you believe money can bring you happiness, forget it, only people who has not much money will believe this.

I think there is a lot of truth to this. Was talking to my mom about the idea of "Happiness"...and I said that i feel happy when i feel free and contented. When i feel that i'm in control of my life and all the wonderful things that has happened to me, i feel truly happy. I think that being happy is a choice. A state of mind.

For instance, when I think that I have to attend my strategy class to face my (sometimes) ridiculous and brilliant prof, i feel super sian. But when I felt that I WANT to attend his class cuz there is so much to learn, I felt energized and happy. Nothing has changed, except my attitude towards it.

I think that at our age, there is so much knowledge and skill to acquire. If we are passionate about what we do, we will enjoy the process and probably do a wonderful job compared to those who are in it for the material rewards.

Talking to Prof Pearl Tan, and she reminded me not to lose the ability to THINK. Even if an organisation discourages it, always think. Yet also try not to be a pain to work with (which sometimes happen when you are too independent). When you talk to people who LOVE what they do, you can feel it.

I think SMU students are a really lucky bunch. We have profs who love what they do. Prof Pearl Tan, JJ, Joanne Tay and Andrew Lee showed me what true professionalism is. They remind student that having technical skills is a must, but it is the our character that will determine our achievement.

Can you imagine looking into the mirror every morning and hating the man in the mirror? I can't imagine doing that.

Former Senator Alan Simpson famously said: “Those who travel the high road in Washington

need not fear heavy traffic.”

Let us take the road less traveled.

The best daily show on Earth

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Al Gore
www.thedailyshow.com
Daily Show Full Episodes Political Humor Health Care Crisis

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Daily/Colbert - Faulty Al Gore Interview
www.thedailyshow.com
Daily Show Full Episodes Political Humor Health Care Crisis

This Is It

Just watch the Michael Jackson "This Is It" movie. Blown away by the creative genius called MJ. He is a story teller. His music and videos are just tools for him to tell his story. Behind the glitz and glamor hides someone who I believe truly cares about the people around him and loves what he does. He is no doubt talented, yet the insane hours put in to perfect his performance shows us that talent can only bring us that far, there rest is still sheer hardwork and determination. The passing of a legend. This Is It.

On a Clear Day You Can See Forever

I've made my choice. I've decided to join the accounting profession.

Note the word profession.

This is not a job. But a Profession.

As stated by David Maister, True Professionalism is about having "the courage to care about your people, your clients, and you career".

If not for my exchange, I would never come across David Maister's book, I would not think about joining a professional service firm, and I would still be looking for that ever elusive dream job.

Work for a company that you admire; I think PwC fits that choice. Audit may not be the most exciting job in the world, but I truly believe that it is a job that allows you to develop your business knowledge and ability communicate effectively with people who probably think you're a pest. It also provides a social good to the society at large. Wherever this road may lead, I don't know. But I know i will not treat this as a JOB, but as a chance to learn and grow myself, to be the best colleague and learner the firm has ever seen.

After looking at many auditors who are in their 30s with dry and sallow looking skin, I need to start drinking collagen soup and bring humidifier to the office. Haha. A friend said that I'll still get the same 'dry look'...let's see if i can defy age and gravity....mmm...maybe its time for me to have a portrait like Dorian Grey....looking at Ivan Albright's portrait...well maybe not.

A decision 6 years in the making. I'm happy.

Done with strategy proj!

It has been really long since i felt so relieved after a project. We are done with our strategy presentation and I'm really proud of what our group has accomplished. It is such a wonderful experience to work with people who are committed, competent and trustworthy.

Kudos to my groupmates - pris, sok yih, and lius!

Awesome groupmates for tax and ama too.

Now i have to buck up for my GRA project given how i've 'buang' my mid term. haha. Going to sleep at 9.30. Probably losing my voice....mmm...need to go Ma Guang again. But my favorite sin seh is teaching at NTU now. haiz...dunno which new doctor to trust.

A tremendous number of people in America work very hard at something that bores them. Even a rich man thinks he has to go down to the office everyday. Not because he likes it but because he can't think of anything else to do.
W. H. Auden

...we can easily substitute "America" to "Singapore" or better still "SMU". ..

Investment Styles, Dividend Policies

I attended a talk by Dr. Andreas Gruner from University of St. Gallen 2 days ago. The topic of the talk was "Successful future investments - Portfolio Management after the financial crisis".

He introduced major categories of investment styles and different type of asset class which generate extra returns during different market cycles.

In general, major investment styles include:

1. Buy and hold

2. Value : buy stocks with low valuation and sound fundamentals

3. Growth: buy stocks with growing sales, earnings,etc

4. Contrarian: buy what is unpopular

5. Momentum: buy stocks that exhibit positive price performance

6. Size: small cap vs. large cap

7. Cyclical: buy stocks that exhibits high correlation with market conditions

8. Defensive: buy stocks that exhibits low correlation with market conditions

9. Income generator: buy stocks with steady cash generation ability

In a latter part of his talk, he discussed the advantages and drawbacks of each strategy. He suggested that IF you know where in the 'market cycle' we are in, you can achieve higher return by rotating between different styles and asset class. The flip side is that if you are always SLOWER than the market and is always playing catch-ups, you'll face greater downside and limited upside.

Credit Suisse has a similar program that 'guides' investors on which style/asset class to focus in during different market cycle. Full diagram available here.

The professor also mentioned that in the LONG RUN (he used data that goes back to 1926), small caps value stocks beats large cap growth.

Tweedy, Browne has recently published a paper on the importance of dividends on investors returns. Do read this amazing article and you may want to rethink those debates between growth vs value.

Dividend Policy

We must always look analyse dividend policy in relation to the earnings potential and return on incremental of a firm. For a high growth company with decent return on capital, there is no reason why earnings should be paid out and debt be incurred to sustain growth.

For low growth company with HIGH return on capital, i think a high dividend payout policy prevents management from feeling the need to build empire with their spare cash. The recent corporate action of San Miguel to diversify from high return liquor business into low return utilities could be such an instance. Of course, you can also argue that they are creating a wider revenue base and the company can be more sustainable over the long term. However, i would also think that cash can be distributed to individuals and they can decide how the best diversify their portfolio.

On a separate issue, for my Singapore friends who are reading this post, do be cautious of your own bias when buying high yielding stocks. I have a mental accounting habit of looking at my portfolio as recorded on my brokerage account and 'forget' that a large part of annual returns is sent to my bank account. This could lead to certain unintended behavior like having a bias towards company that show price appreciation than high dividend return.

In time to come, I hope the SGX/CDP can work out a program to allow direct crediting of dividend to individual brokerage account. Furthermore, corporation can work directly with shareholders in administrating "DRIP" - dividend re-investment program, to allow individual shareholder to accumulate more shares when they are younger, and to reduce trading and commission expense of individual investors.

Fallen

Over coffee

I was the emcee for a friend's wedding today. Congrats once again to the beautiful couple Ying Jian and Wee Ling. Ying Jian is one of the most generous seniors I met when I was in year 1. When I was still struggling with the difference between operating income and operating cash flow, he was the only person who explained these accounting concepts to me in a easy to understand and intuitive manner. There is no expectations for any favors in return for such actions, but kindness and generosity are rare and precious, thus I'll always be thankful that there was once a Y3 who bothered to answer simple questions from a Y1.

Had a nice long chat with ZB and Joel. It has been too long since we talked. I'm always thankful for my experience in E.y.E, and how these two wonderful human being has helped me learn and grow. Super happy that ZB managed to get what he wants, if anyone deserves a ticket to success, its ZB.

Talked about our time in E.y.E, bitched a little about these and that. And then loh wei had to talk about morbid stuff. tsk tsk tsk. luckily i've got two accommodating friends who allowed me to rant. Talked about trading youth and time for career, money, and prestige. Is it worth it all?

We worked so hard to strive for excellence, to work for something...what if at the end of the day, the prize is not what you want?

Sometimes i wonder if being blissfully unaware that there is a 'better' world out there is truly a blessing. Awareness makes living clear, but it may lead to a lot more pain. Sometimes I feel that I torn from within, to search for an answer that may not exist.

As we lay in our coffin on the last day, who will attend our funeral? who will weep for us? who cares? why do i care...a dead man can't care.

Learnt a new word from "The Elements of Style" today: "Hopefully".

"This once-useful adverb meaning “with hope” has been distorted and is now widely used to mean “I hope” or “it is to be hoped.” Such use is not merely wrong, it is silly. To say, “Hopefully I’ll leave on the noon place” is to talk nonsense. Do you mean you’ll leave on the noon plane in a hopeful frame of mind? Or do you mean you hope you’ll leave on the noon place? Whichever you mean, you haven’t said it clearly. Although the word in its new, free-floating capacity may be pleasurable and even useful to many, it offends the ear of many others, who do not like to see words dulled, or eroded, particularly when the erosion leads to ambiguity, softness, or nonsense."

Funny vid

Protect Insurance Companies PSA from Will Ferrell

The Landlord from Will Ferrell

Sizing

An interesting discussion with dad on position sizing. He asked why so few people around him gets rich through investing.

My immediate response was that few people are investors but speculators. But then i realize the answer has probably got to do with focus. People who gets rich (ie comfortably, not those obscenely rich kind) does it through owning and running businesses. They obsess over every aspect of their business, and invest all their time and effort into running it.

The other factor is that most of them back their total net worth into their business when they first start out. Which means that the total return on capital has a direct impact on their net worth.

Contrast this with what most people do when 'investing'. Only a small portion of net worth is committed into every good idea. So even if the idea works out spectacularly, the impact on net worth is small.

Imagine Mr Smart, who has a net worth of 100 dollars, found a really good investment and back 10% of net worth into it. The investment return 100% over a year. End of year 1, his total net worth is $110.

Then there is Mr Not-too-Smart, who also has a net worth of 100 dollars. He found a mediocre investment opportunity which he has high confidence in. He invested 50% of net worth into the idea and it return 40%. At the end of the year, his net worth is $120.

Over a lifetime of compounding, guess who will win, who will lose?

Then its time to throw in all finance students' first love, DISCOUNTING!

given that

Future value = Present value x (1+rate of return)^no. of years,

IF you want to maximise your future net worth, there's only 3 things you can do,

1. Invest a lot today

2. Maximise your return (i guess this is harder)

3. Live to a ripe old age to get ahead in compounding (this is the hardest? but darn i'll try)

The new normal

The following post is inspired by Xinhong's super short post. Here's my 'lor-soh' version.

It is interesting that many of my friends who read Bill Gross article finds it more and more technical. I have the same feeling too. So when Pimco talks about the new normal, and the DDRs - deleveraging, deglobalisation and re-regulation, it is great that we have our very own Dr Tony Tan to put it in simpler english for the rest of us.

From the speech by Dr Tan, my key takeaway is that as we enter into a world of sub-par growth and limited spending and leveraging, from a portfolio point of view, it pays to be cautious. Risk of inflation and deflation has both increased --> Probably means that if you do buy bonds, keep to those with short duration and of great credit quality. If you got housing loan, try to fix the rate now. If you pick individual stocks, do not overpay for growth, cuz the odds of high growth (in general) over the next few years are not high.


Emerging economies are likely to displace the G-7 as the world’s largest economies over the next 10-15 years, even if per capita incomes will still lag behind the developed economies. This relative outperformance will be driven by
(i) larger savings and domestic demand potential,
(ii) relatively healthy public and private sector balance
sheets,
(iii) policy flexibility, and
(iv) room for significant productivity catch-up.
The current Great Crisis has markedly accelerated such trends.

But the shift in economic power to the emerging world will also likely increase geopolitical risks. For one, the emerging economies, especially the BRICs will become key global powers and increasingly demand more say on world affairs. An awkward transition is likely to occur: In terms of military power the US is likely to be dominant for decades to come, and will be called upon to carry out most of the heavy lifting in global trouble spots. However, the US would still be heavily dependent on foreign countries including key emerging geopolitical rivals, to finance its large public debt.

< http://www.gic.com.sg/newsroom_speeches_060809.htm >

The above mentioned political risk cannot be underestimated. It scares me to think about the problems that the world would face as more and more resources demanded in industrial countries are sourced from politically unstable

The risk of de-globalisation and re-regulation are growing. In the recent "punitive tariff" imposed on Chinese tires imported into US, we may infer that economic policy will be greatly impacted by political will. Even food giant Nestle threatened to move out of Switzerland if the Swiss government imposes a salary cap. Executive compensation has always been a thorny issue. But to allow the government to dictate salary based on populist view could be catastrophic.

Haha. Here I am thinking about world issues. Haiz, gotta wrap my head around my school work and things to be done. Focus.

Obama on Education

In a prepared remark to students ranging from kindergarten through twelfth grader, Obama talked about the importance of education, his own journey as a young boy, and the inspiring life stories of people who value themself enough to give themselves a chance to shine through education.

Read the full speech here.


Every single one of you has something you’re good at. Every single one of you has something to offer. And you have a responsibility to yourself to discover what that is. That’s the opportunity an education can provide.


But at the end of the day, the circumstances of your life – what you look like, where you come from, how much money you have, what you’ve got going on at home – that’s no excuse for neglecting your homework or having a bad attitude. That’s no excuse for talking back to your teacher, or cutting class, or dropping out of school. That’s no excuse for not trying.

I know that sometimes, you get the sense from TV that you can be rich and successful without any hard work -- that your ticket to success is through rapping or basketball or being a reality TV star, when chances are, you’re not going to be any of those things.

Don’t be afraid to ask questions. Don’t be afraid to ask for help when you need it. I do that every day. Asking for help isn’t a sign of weakness, it’s a sign of strength. It shows you have the courage to admit when you don’t know something, and to learn something new.

So today, I want to ask you, what’s your contribution going to be? What problems are you going to solve? What discoveries will you make? What will a president who comes here in twenty or fifty or one hundred years say about what all of you did for this country?

My outsourced Life

My outsourced Life

Posted using ShareThis

Competitive Advantage

Its been a while since the last post. School's busy, and i think i need to rev up my engine more to get back into the right gear. I wonder how i managed to go through 8 hours of sitting in a single position chewing through pages of AFA text book a year ago....

Anyway, I shouldn't be complaining so much as there is some form of synergy in my courses this year. I'm doing 'governance, risk and assurance', 'strategy', 'advanced management acct (AMA)' and 'tax planning' now. The 3 courses have a underlying theme running through them - you've got to understand your business, both at industry level, and at a process level.

The strategy course is taught in the 'case' method, which is an awesome learning experience, but super heavy in terms of course work. No pain no gain i guess.

Did an industry analysis on the airline industry last week and another on the carbonated soft drink industry this week. Its amazing how clearly Porter 5 shows us where does the profit flows to. I was inspired by my case study of Apple to understand IBM better. Read the book "Who say elephant can't dance" and must say that when we see what we learn in the class room applied by someone who did it so well, learning becomes a lot more interesting.

Anyway, during AMA class, our prof told us to apply different strategic analysis tool to ourselves and analyse what we should do with our self.

The SWOT framework works great on individuals too. Listing down my strengths and weakness, i think that i'm not exactly good for nothing, but also not great at anything. Hopefully being good in a few things would one day lead a great thing. Is this a true sustainable competitive advantage? NO, cuz anyone can emulate you with enough hard work. So the key is to constantly improve, learn and grow.

Applying the hedgehog concept, i think we can define what we want to do better.

I hope my self assessment is not too off. But honestly, the best analysis is sometimes futile. Part luck part hard work. Hopefully, it will all payoff one day.

By the way, of the 11 companies that was profiled in Good to Great, Fannie mae has gone under govermental ownership, and Circuit city has gone into liquidation.

We should feel happy when every thing kinda crashes around us, cuz life cannot get much worse after this. The converse is true. It is time to be truly worried when one is riding on a high, cuz mean reversion is ultimately one of the strongest forces.

Don’t Do What Others Do

Job hunting season is starting soon. After my internship at the private equity firm last summer, i'm more convinced than ever that doing what you like is an important search criteria for me. Quote from a friend who had lunch with me during my internship, "Why do you look so radiant?" - how can i not look radiant if i'm having so much fun at work? haha. Deciding to work for free (for internship) was my best idea in 1H09.

Looking through a bunch of websites to look for asset management company that would probably be a good fit with my personal belief that investment decision should be bottom up, research and valuation driven, and long term in nature. I hope I'll thrive in a company where all employees share the same fundamental ideas and approach.

One of the fund house that i was looking at has an investment process that i think can truly provide excess return over the long run. I enjoyed the annual report which detailed the purchase and sell decision for certain stock also the interview by the chief investment officer on how best to invest. In summary, Don’t Do What Others Do, read the article here.

My take on being contrarian does not mean simply buying whatever is falling in price. Averaging down only works when you are RIGHT. If not, it simply means you are throwing good money after bad. It does not mean buying low PE stocks and shorting high PE stocks, the low PE stocks maybe may deserve its PE due to its poor return on capital or low growth potential.

Investment success comes when the investment public fails to recognise the potential of a company and there is mispricing going on.

My dad asked me why after reading so many annual reports, i only buy a few stocks for his portfolio which i told him to expect a return averaging 5-7%. I told him cuz if i venture far away from what i think i know (enough about), i run the risk of seriously impairing his retirement savings.

Why risk something you have for something you don't need?

A Crude Awakening

National library allows all ordinary member (those not paying special membership fee) to borrow up to 2 audio visual materials for 2 weeks. Go make use of this facility and borrow great materials from the library!

Just watched the documentary A Crude Awakening, and this documentary discussed about (i) why we are probably near or has passed peak oil production. (ii) What are the probable political, enviromental and social impact of world with no cheap oil. (iii) Possible solutions to the problems and why without the political will to do so, we are simply living on borrowed times.

You can view the complete show free online on google video, it might just change the way you think about all the talk about alternatives energy and if there's anything you'd need to do to prepare for the day of reckoning.

The film interviews top experts who presented a balanced view of what should be done but why is not done. And the sad reality that even if we are to start tackling our problems today, there are still painful prices to be paid.

You'll get a glimpse of why exploiting ethanol fuel could be a pretty stupid idea as the tradeoff between world hunger vs. fuel depletion does not allow such transfer of land use. An interesting hypothesis was also presented - If the growth of financial market and wealth over the last century is due to efficient exploitation of fuel by mankind, then a fall in available fuel will cause global wealth to decrease or at lease slow to a rate absent any cheap alternative.

Investment Outlook

Bill Gross wrote his August investment outlook that builds on his ideas from the previous months. The 'price of hope' is a very interesting concept. It is always easier to sell hope than reality.

Important take away - In a world where single digit return is the norm, then there should be even more emphasis on cost of investment.

Imagine a fund that has underlying return of 7% but charges a 1% annual management fee.

Over 10 years, $10,000 will should have grown to $19,671, but due to the 1% fee, actual return would be 17,908. A difference of over $1700!

Furthermore, there is a typical 'sales fee' of about 3% - 5% in Singapore.
Assuming a 5% fee and 1% annual management fee, after 10 years your return would be 17,013.

If you look through the fund reports of unit trusts that are available in Singapore, it is very common to see annual fee expense above 2%. This drag means that fund manager has to outperform the benchmark by 2% just to breakeven with the benchmark which can be purchased through a relatively low cost ETF.

I find it scary that 85% of people who took money out of their CPF special account with a garunteed return of 4% fail to beat it! and i have recently heard a sales pitch from an insurance agent saying that 'take your money out of your CPF (yielding 4%) and buy my product that yields 2%. Insane!

--------------------------

I have been re-reading the Intelligent Investor. This third read is very beneficial as i reflect on what i've learnt in the past year or so. I remember the first time jiechao recommended me the book in 2004, and i thought it is just one of those how to get rich books. I don't know anything about investing or finance then. I read the preface to the book at Kino and was hooked. By the way, the preface was written by a certain Warren E. Buffett, and I had NO IDEA who that is.

The first read was painful.

After a day of torture in my beloved Sungei Gedong Camp, i'll curl up on bed and seek wisdom in this classic. Realizing that to read this book requires basic understanding of accounting and finance, i bought a outdated version textbook on Financial Accounting from Bras Brasa and started my amazing journey with accounting and investing. During my last year in camp, i read an average of 2 books per week. Reading and thinking i believe is the first step of learning how to invest.

After 5 years, I have become more clear and steadfast than ever that my investment success will come from having a sound investment policy, a keen awareness of my limitations and biases and a truly long term perspective when dealing with the daily up and down of the manic depressive Mr Market.

Buffett’s Betrayal

I was sent a link to the following article called Buffett's betrayal which sumarized how Buffett's investments got bailed out by taxpayers money and suggests that only by high level lobbying did he managed to secure his investments.

Main article here: http://blogs.reuters.com/rolfe-winkler/2009/08/04/buffetts-betrayal/

Rarely has an article generated nearly 200 replys. Furthermore, many of the replys are intelligent and non-biased.

Here's my take on it;

The 'true betrayal', I believe , is the faith the general public has invested in financial institutions which had created and sold instruments and products that should never be sold, and investors/speculators that bought things that should never be bought in chasing that ever elusive alpha. And the betrayal of accountants who allowed fuzzy accounting (lobbied by guess who? major US corporation) and shed all responsibility.

I guess we can never be sure about the amount of 'lobbying' that goes on behind the scene, but Buffett sure defended the value of his investments well. Most of 2008 investments are structured such that even without a bail out, the impairment on asset would not be a disaster to Berkshire Hathaway. As such, he has performed well as the steward of Berkshire's capital.

Did Berkshire do better due to the taxpayers bailout? Definitely.

Could the economy (and thus the taxpayers) sailed on without the bailout. Definitely Not.

If bailing out encumbered financial is inevitable, is it wrong to have profited by backing the right horse? I don't know.

p.s. does anyone know why in the çreate post page, i no longer see icons that allow me to format text and upload pictures or links?

(thx jie chao, for the solution)

Leverage and Minsky Theory

Some people asked me where did I get my capital to invest after I'm almost 100% invested by July last year, and my reply is that I borrowed money to invest.

The common reaction i get is, 'Who did you borrow from?', 'isn't that very risky?', 'whoah you very brave hor'(which usually means you very stupid hor given my abysmal result in 08).

To clear up some ideas about leverage, let's introduce the different types of borrowers under Minsky's theory.

There are 3 types of borrowers,
1. Hedge Borrowers
2. Speculative Borrowers
3. Ponzi Borrowers

The hedge borrower can make debt payments covering both interest and principle from the cash flow from investment.

The speculative borrower can make interest payment, but require constant re-financing of capital to ensure solvency.

The ponzi borrower can cover neither principle or interest, but rely on ever increasing capital gain to refinance the debt.

The current financial crises fits this economic model of unsound credit expansion quite nicely. However, like most things in life, it looks only apparant to us in hindsight. But let's leave this issue to another day and continue out discussion on the 3 types of debt.

Imagine you are buying a house to live in, and you pay your mortgage month in and month out with your income. This is not a risky type of borrowing, because as long as you are employed, one day you'll pay off all debt and the house is yours.

However, if you buy a house HOPING that there will be a buyer who will bid a higher price to buy the asset from you such that you can pay off your debt, this is SPECULATIVE in nature, and such borrower may fit the 'ponzi borrower' description. Because if your asset has no buyer, it is likely that you'll not make the monthly payment and lose your house soon.

For my personal borrowing, I have structured it in a way such that I'll amortize my loan over a 2 year period making monthly repay at a higher than usual interest rate. This payment shall be made out of my salary. To decide what level of borrowing is appropriate, I assume that I'll earn the minimal starting pay of most graduate, and I have at least a 4x coverage. I belive that this is sound and non-speculative. Because in the worst case that the asset value falls to zero, it will in no way jeopardize my ability to pay (unless i'm unemployed). Furthermore, i get the capital that i need, my lender gets higher interest on the loan as compared to the paltry fixed deposit interest rate. Essentially my family's total investment portfolio moves towards the 'efficient frontier' (if such as thing truly exist).

Lastly, not all borrowing are risky. If a loan can be structured such that the maturity and cashflow of the loan and asset matches, and there is a small buy meaningful interest spread that can be made, such loans are not risky unless subjected to loan-to-value type of covenants.

Furthermore, a non-recourse debt can actually reduce the risk involved. Imagine you're property developer and the loan is collateralized over the property with non recourse. If every thing works out well, you pay off your debt and pocket the profit. If everything falls through, the bank seize the property and you're not affected financially. Such structure actually reduces the risk of the project instead of increase it.

However, most margin financing is HIGHLY risky. Frist, the cost of financing is highly, currently around 7%. For this financing to be sound, you must expect higher than 7% on your investment. This involves a rather optimistic assumption. But the greatest problem with margin financing is that if your asset value (e.g. stocks) plunge by a certain percentage, you are required to put up more capital or your broker will sell your stock. This type of financing essentially force the investor with liquidity constrain to buy high (when liquidity is ample) and sell low (when you are squeezed by falling asset prices and liquidity is nowhere to be found). Buy high sell low...not the best way to make money aye?

Please don't stop the music

The following video is dedicated to a friend who has found and lost something he treasures.



Well the first piece is roughly translated into love's sorrow, and the second piece means love's joy. You can't have one without the other.

I just can't help but smile when i hear the second piece.

Joshua Bell is one of the top violionist in the world today. Recorded critically acclaimed classical and crossover albums. He was also involved in a Washington Post experiment.
" Can one of the nation's great musicians cut through the fog of a D.C. rush hour? "
Weingarten won the 2008 Pulitzer Prize for feature writing for his article on the experiment



While rushing from point to point. We often miss the journey.
Sometimes its the journey that counts.
Sometimes its worth while to stop and stare.

Secret Millionaire's Club

Notes:
Characteristic of investment in 'durable competitive advantage'
1. People want to use your products
2. The business requires little upgrade (or upkeep)
3. You are free to re-invest profits
4. Best to re-invest profits into advertising, to create brandname and emotional attachement
5. Emotional attachment creates the competitive advantage
6. Business run by able and honest management
7. Purchased at a fair price

Think about Milo versus Ovaltine. These 2 similiar products have vastly different market share in Asia. Milo has a larger market share probably due to its strong advertisement and sponsorship of events. People associate sportsmanship and healthy young people running and jumping with Milo, but no such images are associated with Ovaltine.

Nestle Malaysia, which owns the Milo franchise in Asia, which in turn is owned by Nestle (Switzerland)has return on equity above 60% without undue leverage. Investors recognises the superiority of Nestle Malaysia, that is why the stock is trading at a PE of above 20x and PB of almost 14! That's why POINT 7 is important.

---------------------------

On a seperate note, I met a director from TSMP law corporation today. Amazing lady. Super sharp and smart. Love the advice she gave me; remember to have integrity, this industry is small and everybody knows everybody. You may make some money and get away with it, but by losing your integrity you'll miss out a lot of big opportunities. Don't cut corner. There will be temptations, don't lose yourself if you want to be in this profession (i guess she meant finance/banking).

Harry Potter - Crazy funny jap fan

I can't help but laugh at this interview.

Only Human

Reading through some annuity document and came across the mortality statistic for Singapore.

http://www.singstat.gov.sg/pubn/popn/lifetable06-08.pdf

Looking at the 2008 figures, for Males at the age of 24, I have a 0.00055% chance of dying within the next year. And expectation of life at 24 is 54.9 => I'm expected to live till 78.9.

So long term compounding is in my favour.

Female on average lives 4.8 years longer than males. How to explain this? Due to genetic makeup, willingness of female to seek 'social living' post retirement, male not willing to seek medical help when suspecting illness and i've got a 4th theory of my own --> Because the wife is always right in most relationship, the husband '气死了'.

Of course the 'expected' is not to be expected. I shall aim to 'beat' the expectation. Haha.

Tact

tact
• noun adroitness and sensitivity in dealing with others or with difficult issues.
— ORIGIN Latin tactus ‘touch, sense of touch’, from tangere ‘to touch’.

source:http://www.askoxford.com/concise_oed/tact?view=uk


I've had an amazing learning experience yesterday during a client visit to conduct due diligence. I brought away 3 main lessons from this 2 hours session,

1. Fruitfulness of discussion depends on preparedness
2. Do not assume that you are dumb because you don't understand the issue
3. Be tactful when asking and answering question, it is important to empathize with the other party


1. Level of preparedness

There is no reason the other party should provide you with more information other than on a "need to know" basis. However, they are often willing to share information when you've asked the right question.

Asking the 'right question' depends on the thoroughness of the background check that was conducted. "Stunning" the other party with the depth of your knowledge is a great way to gain an upper hand.

2. Dumb questions and answers

Don't be afraid to ask seemingly 'dumb questions' like "Why?" and if you don't understand the answer given, ask for further explanation..."Sorry, I still don't get this. Could you explain it again?"

Often, not understanding the complex and convoluted reply may not be fault at our part, but that the other party has something to hide. It was amazing how much information could be dug out from this type of innocent question. There could be nothing sinister afterall, but it is almost always good to know more.

3. Be tactful

The way my bosses probe for information is done in a gentleman manner. They first thank the other party for their time, accentuate the fact that the other party are people of high integrity, and get them to agree on harmless issues first.

After 'accepting' the praise that they are men of integrity and worth, it is hard for them to contradict themselves by blaming issues on people who are not at the table or lie thru their teeth. They co-operated in a friendly manner and many grey issues were laid out on the table and dealt with accordingly.

Last month I attended a briefing by a listed company. Looking through the financials I came across some weird accounts. I pointed this out to the CFO who was the presenter. She garbled some accounting standards and tried to avoid the question. I asked further question in a non-too-friendly manner. She gave some useless reply and moved on to the next question. For the rest Q&A I didn't get to ask any other questions cuz she don't want to pick my question.

I must conduct myself in a manner such that the others are willing to share more with me. Put down my pride and I'll be able to learn so much more.

They cheat they steal they tell lies

I think that the cash register is a beautiful invention. It allows owner to 'trust' his employees with the revered task of collecting cash for sales.

Today I've witnessed an unhonourable person 'steal' from the cash register. Sadly i did not act against it and allowed my cowardice (or laziness) to rule over.

I paid for $1 pancake right after a lady who bought soyabean milk before me. The stall auntie didn't key in my sale and simply put my $1 into the cash register. At the end of the day, i'm quite sure the difference between the cash balance and receipt sales will form part of her take home pay.

If she steals $2 per hour, on a 8 hour workday 16 dollars will be stolen ($400 a month). Assuming a (honest) salary of 1600, the stolen money will amount to about 25% of her salary. No wonder she's motivated to steal as the probability and severity of being caught is low and reward is high.

I've witness the same thing at a fastfood joint at Raffles City. The MANAGER did not key in my order, and placed my order with their mike system. A tell tale sign of such dishonest act about to happen is that the cashier will NOT CLOSE THE CASH REGISTER COMPELETY after the previous customer leaves, and not issuing receipt.

The first time this happened, i didn't even realise what happened after i got my change. The second time it happened, i demanded a receipt. The manager actually started keying in the order AFTER giving my change and said there's something wrong with the machine. That smooth operator is full of shit, must have done it a billion times.

In this perverse system whereby the police (the customer) has no incentive to act and the thief has LOTS of incentive to act, it is easy for the honour system to break down. Imagine stealing a Whopper meal ($8) every hour. Given a 12 hour work day and 30 days a month, almost $3000 bucks is lost. That could be the total salary of the manager. Mangager...yeah right...managing his own bank account...super disgusting.

p.s. of course it is still way easier to steal with a pen than with knife or other arsenal. Knavery is especially prevalent if there is clear informational asymmetry, or there is high motivated seller or buyer. Haiz. We must equipped ourselves with these tools of trade, such that we will be less likely to fall victim to such unethical behaviors.

Demetri Martin

I think Demetri Martin is brilliant. Way funnier than Dane Cook...dun even know why i'm comparing them. Cook is funny too, but in a more in your face way.

Asia Investment Banking Conference

Jointly organised by London School of Economics and Singapore Management University E.y.E Investment Interactive Club. Click on the poster to find out more!

free advertising for E.y.E organising committee :)

Guide to Sleeping Soundly

Ok, the original name of the article is "David Swensen's Guide to Sleeping Soundly"

It reminded me of the title of Phil Fisher's book - The Conservative Investor Sleeps Well.

Yale Alumni Magazine interviewed its CIO David Swensen in this article. Read it and prosper! Haha. I've ran my parent's portfolio sticking to his principles stated in "Unconventional Success" and in Burton Malkiel's "Random Walk Down Wall Street" for the past 5 years. Of course there are no fantastic returns, i'm simply glad that a noob like me managed to not lose much when others are losing their pants. I'm simply thankful that my parents have the faith in me to manage substaintially their retirement savings. There's no faster way (or high pressured way) to learn than to do the thing itself, to truly care about long term performance and to have to the fortitude to do the right thing over time.

Excerpt from the Yale Interview that i truly enjoyed reading;
Y: Given all the turmoil and uncertainty, what should individual investors do?
S: If an individual investor followed the program I outlined in Unconventional Success, they probably did reasonably well, through the crisis, thus far. They'd have 15 percent of their assets in U.S. Treasury bonds. They'd have another 15 percent in U.S. Treasury inflation-protected securities. Those two asset classes have performed well.

Of course, the other 70 percent of assets are in equities, which have not done well. With all assets, I recommend that people invest in index funds because they're transparent, understandable, and low-cost. So, the equity holdings have gone down step-by-step with the declines in the market.

I recommend that investors rebalance.
But I also recommend that investors rebalance. Rebalancing is even more important amidst these huge declines in the stock market because it presents a great opportunity. People can sell the Treasury securities that have appreciated dramatically to bring their allocation to the 15 percent target, and they can redeploy those funds into domestic equities and foreign equities and emerging market equities and real estate investment trusts, all of which are now much cheaper, and therefore have higher prospective returns.

Y: Explain this idea of asset allocation, please.

S: Asset allocation is the tool that you use to determine the risk and return characteristics of your portfolio. It's overwhelmingly important in terms of the results you achieve. In fact, studies show that asset allocation is responsible for more than 100 percent of the positive returns generated by investors.

That's why the most sensible approach is to come up with specific asset allocation targets that you can implement with low-cost, passively managed index funds and rebalance regularly. You'll end up beating the overwhelming majority of participants in the financial markets.

Y: So people should not be afraid of stocks now?

S: Not only should they not be afraid, they should be enthusiastic. One of the great ironies is that if you had talked to the average investor 18 months ago, he or she would have thought it was a pretty good idea to buy stocks. In recent months, the same investors despair about their portfolio and are fearful about putting money into the equity market.

That's 180 degrees wrong. They should have been cautious 18 months ago, when prices were much higher than they are now. They should be enthusiastic today.

LW's comment: In the heart of his investment approach, he's a sound value investor, just that his tools and assets utilised goes beyond stocks and bonds. Price is what you pay, value is what you get!

Y: Unconventional Success delivered a scathing critique of the mutual-fund industry. You rightly pointed out that the vast majority of mutual funds charge high fees, trade too frequently, and under-perform the markets. How did the industry react?

S: I've heard stories of people in the fund management business being irate about the book. That's not surprising. The mutual fund industry is not an investment management industry. It's a marketing industry. And if somebody interferes with your marketing, you're not going to like that. So I was pleased to hear that there were senior people in the industry who were very, very unhappy with me and my book.

LW's comment: Ok, my aim in the future is to irate all those pseudo experts who 'teach' people how to lose money. Those who claim that you can secure your financial future simply by sitting 15min in front of the computer every day. These swindlers and con men sell dreams that destroy futures and families deserve a special place in hell where they can feast on each others rotting waste for eternity.

Take a deep breath, count to 3...calm down.

Read the article and pay some attention to the blue box in the right side of the page. The advise is remarkably similiar to "Random walk down Wall Street" and "When markets collide". Find something that is suitable and sound for you and I think we will get rich eventually.

Thank you for the music

I LOVE AJALUMNI CHOIR!!!

It's a grand night for singing,
The moon is flying high,
And somewhere a bird
Who is bound he'll be heard,
Is throwing his heart at the sky!

I think we threw our hearts to the audience and they loved it! All the hard work that went into the preperation has paid off. A wonderful experience thanks to every single member who are all committed and passionate.

Singing in choir is addictive, the high you get from creating something amazing and the work that goes into creating that something special keeps you wanting more.

Thanks to Mark that brought the choir to another level. Beyond singing, we are now performing and connecting with the audience. I can hardly imagine the level of 'shagness' he experienced every week to keep the energy level of the choir up, and he did a wonderful job conducting us on D-Day despite all the stress.

We often forget the team that did all the background work to ensure that the people in the spot light can shine. Huge huge thanks to Peiying, Whee Geok, Chee Guan, Nad, Mei Rong, Saffie and all the rest that fret and fuss over scheduling, printing, design and all the 'zap ba lang'stuff that makes a performance possible.

To the best basses in the world (ok, at least my world), Guowei, Joel, CG, and Jing Kang, super awesome to sing with u guys, and i think for many songs the basses sounded like a united super Bass!

Can't wait for Gerald's video recording of the concert. H1N1 begone! Let Gerald out so he can compress and edit the video. haha...

Ajalumni choir is a place where i feel safe and happy. No need to be someone elses version of myself. It would be a sad day when i can no longer sing with the wonderful people.

Mmmm....I think my mom would want Zhengkai, Ryan and Mark to be her son. Vastly more talented and better looking then me. She asked which batch Ryan is from, and after telling her that he's from MY batch, she said something along the line of ' 'wah, one look so young and the other look soo....'' i shall not go into THAT. Haha.

On our performance itself, i must say that i enjoyed our 2 John Rutter songs the most. I was especially surprised by What Sweeter Music. When the girls started singing, it was so pure and innocent, and i simply closed my eyes and enjoyed the Sop-Alto duet. And it was even more surprising (cuz we nv sounded like that) to me when the guys started 'dark and dull night....' We sounded so warm and mellow. The dynamics was natural and the whole choir sound like ONE. Ahh....its like enjoying a molten chocolate cake - warm, smooth, sweet and have you wanting more. I'm definitely an addict.

The Pros

Are you a prostitute or are you an auditor?

1. You work very odd hours.

2. You are paid a lot of money to keep your client happy.

3. You are paid well but your pimp gets most of the money.

4. You spend a majority of your time in a hotel room.

5. You charge by the hour but your time can be extended.

6. You are not proud of what you do.

7. Creating fantasies for your clients is rewarded.

8. It's difficult to have a family.

9. You have no job satisfaction.

10. If a client beats you up, the pimp just sends you to another client.

11. You are embarrassed to tell people what you do for a living.

12. People ask you, "What do you do?" and you can't explain it.

13. Your client pays for your hotel room plus your hourly rate.

14. Your client always wants to know how much you charge and what they get for the money.

15. Your pimp drives nice cars like Mercedes or Jaguars.

16. Your pimp encourages drinking and you become addicted to drugs to ease the pain of it all.

17. You know the pimp is charging more than you are worth but if the client is foolish enough to pay it's not your problem.

18. When you leave to go see a client, you look great, but return looking like hell (compare your appearance on Monday AM to Friday PM).

19. You are rated on your "performance" in an excruciating ordeal.

20. Even though you get paid the big bucks, it's the client who walks away smiling.

21. The client always thinks your "cut" of your billing rate is higher than it actually is, and in turn, expects miracles from you.

22. When you deduct your "take" from your billing rate, you constantly wonder if you could get a better deal with another pimp.

23. Your pimp seems to often abuse you, forgetting that without you, he would not have a business.

24. You do all the real work, but the pimp has a higher stigma and more money, and really just has to "coordinate" the work for you. Sometimes, you wonder if you could just make more money pimping out yourself.

25. You get so brainwashed into the lifestyle, that you don't realize that life can be better, until it is too late.

26. Personal time, or a work/life balance, is meaningless to your pimp, all he cares about is satisfying the clients, despite how many times he tells you he loves you.

27. After a few years, you find that all your non-prostitute friends are no longer your friends, because you lost touch and your schedule and lifestyle was difficult to manage, and you find that you associate primarily with other prostitutes.

28. The turnover rate is ridiculously high. Everyone thinks they can do it for a few years, no problem, but after just a few clients railing you, many break under the pressure, or quit for a better life.

29. Most of the time, your job could be performed by a well-trained monkey.

30. You thought college was a waste of time.

Sheep

A teacher asked his class the following question: There are nine sheep in a pen, and one jumps out. How many sheep are left?

Everyone got it right, and said eight are left.

A boy alone said none are left.

The teacher said you don’t understand arithmetic, and he said ‘no you don’t understand sheep’.

~Charlie Munger at 2008 Wesco annual meeting

Twilight...Cullens' investment strategy

Ok...i admit that i've committed the sin of reading the first 3 books of the twilight series and is waiting for my cousin to finish the last book so i can grab it from her.

Reading Twilight is like eating those bad dessert, you feel good while you're at it, but hate yourself afterwards. I don't think i'll ever re-read these books, but i can't not read the last one...argghhh.... It is so unlike the Harry Potter series which is so well crafted that you'll find this muggle going back to it again and again.

While i'm on twilight, here's a funny video featuring James the 'bad' vampire in the first movie vs. TWEENS....very scary tweens.... don't mess with crazy teen girls!

Cam Gigandet vs. Twilight Fans from Cam Gigandet

The Cullens are the good vampires in the book. They are 'vegetarians', vampires that don't drink human blood. The cullens are filthy rich vampires who in their spare time shop a lot, save life, fight other vampires and sometimes seduce young girl. All these takes MONEY, so where does the money comes from? According to the book, they INVEST. But they cheated cuz Alice can see the future...so i'm just thinking what should be done if there is no one to predict the future.

The most important advantage that the cullens have is that they DON'T DIE...ie LONG COMPOUNDING PERIOD.

Given that Future value = Present Value (1+ rate of return)^years, having VERY long years = HUGE Future value. But we also know that anything x ZERO is zero. So their first rule would still be NOT TO LOSE CAPITAL permanantly.

Edward Cullen is over 100 years old. If he had lived through the craz 1920s boom, the great depression, the world war period, the electronic boom and bust, the 1970s hyper-inflation, the 1980s great economic expansion, dotcom bubble and bust, real estate bubble in the early 2000s, the birth of all those exotic intrument, the deleveraging of the economy since 2007 and all those financial institution going belly up.

BUT he has the luxury of time, so all he has to do is run a balanced portfolio and let it compound over time, he would not need to depend on his 'dad' 's money...spoilt brat... at 6% return, a dollar invested compounds into 339 in a hundred years!!!

In frenzied investment world where results are meaured in days and months, those of us in our 20s could be considered immortal. Lets keep our head and not be greedy. Compound at a reasonable rate and not lose money. We may not live forever, but we should invest as if we do. Cuz that the only way to think long term. To keep our sanity in a crazy world.

1,2 Step

No...this is not a post on the Ciara and Missy Elliot song...this is regarding a simple 3 step formula presentated by George Soros in today's Financial Times entitled "My three steps to financial reform."

"Banks should pay for the implicit guarantee they enjoy by using less leverage and accepting restrictions on how they invest depositors' money; they should not be allowed to speculate for their own account with other people's money."

"The issuance and trading of derivatives ought to be as strictly regulated as stocks. Regulators ought to insist that derivatives be homogenous, standardised and transparent."

"Custom-made derivatives only serve to improve the profit margin of the financial engineers designing them. In fact, some derivatives ought not to be traded at all. I have in mind credit default swaps. Consider the recent bankruptcy of AbitibiBowater and thatof General Motors. In both cases, some bondholders owned CDS and stood to gain more by bankruptcy than by reorganisation. It is like buying life insurance on someone else's life and owning a licence to kill him. CDS are instruments of destruction that ought to be outlawed."

Simple but not Easy

Investing is not hard. The secret is to put in money today, and get back more in the future. Haha. If it is only as simple as that.

Value investing is simple. Find companies selling below intrinsic value, and wait for Mr Market to recognise its true worth and sell it back to him.

Buffett told us to invest in our 'circle of competence', and Munger said that it is the wise that operate within their circle of competence.

Circle of competence in my understanding, is to truly understand the business you're investing in. Its like if you're the 100% owner of the business, do you know what forces affects you business and what is your company's edge? Phillip Fisher has laid out all the 'steps' and questions to ask to help individual investor ask the right question. Yet for the past 2-3 weeks, after attending numerous analyst meeting, i realise few analyst cared about the business, but more about the financials.

People asked questions on sales growth, margins, SGA, ROE...but few questions was asked regarding what give rise to these numbers. Accounting and financial figures are simply a way of trying to express BUSINESS in a manner that every one agree upon. If we don't understand the business that is underlying those numbers, any sort of financial analysis or projection is not meaningful.

Furthermore, if numbers are expressed in a way that almost NO ONE understands, then what's the point of disclosing the numbers in the first place? Thus accounting principle should be reasonable and generally followed.

Read this article on Royal Sporting House on its weird line items in the income statement. Kudos to Jamie Lee, the reporter that covered this story. And boohoo to all those companies that have WEIRD accounting policy (that follows FRS but expressed in a convoluted way) and those pple who stayed in their aircon room and dream up weird accounting policies (yaya...those economist who want to 'fair value' every thing).

Re-reading Fisher's Common Stocks and Uncommon Profits. See new things that i've never seen before. Btw, i think as a general rule, if u see that cash flow from operations and income statement has NO RELATION,buyers bewares!'

...mmm....off to memorise choir scores. So happy that our Ajalumnichoir sounds like a choir now. haha. Amazing amazing.

Free stuff

Ok. I'm a cheapo.

Here's a link to read Wall Street Journal for free. Think it works for Barrons too, but I have no luck accessing FT.com Lex.

http://www.businessinsider.com/how-to-read-the-wsj-for-free-online-2009-6

-----------------------------

Read another recent Stanford Lawyer interview with Charlie Munger; read full article here.

As we look at the current situation, how much of the responsibility would you lay at the feet of the accounting profession?
I would argue that a majority of the horrors we face would not have happened if the accounting profession developed and enforced better accounting. They are way too liberal in providing the kind of accounting the financial promoters want. They've sold out, and they do not even realize that they've sold out.

Would you give an example of a particular accounting practice you find problematic?
Take derivative trading with mark-to-market accounting, which degenerates into mark-to-model. Two firms make a big derivative trade and the accountants on both sides show a large profit from the same trade.
And they can't both be right. But both of them are following the rules.

Yes, and nobody is even bothered by the folly. It violates the most elemental principles of common sense. And the reasons they do it are: (1) there's a demand for it from the financial promoters, (2) fixing the system is hard work, and (3) they are afraid that a sensible fix might create new responsibilities that cause new litigation risks for accountants.

Can we fix the accounting profession?
Accounting is a big subject and there are huge forces in play. The entire momentum of existing thinking and existing custom is in a direction that allows these terrible follies to happen, and the terrible follies have terrible consequences. The economic crisis that we're in now is, in its triggering circumstances, worse than anything that's ever happened.

LW: the last paragraph sounds like what Prof JJ would say. I think it is so crucial to at least be aware of all forces that influence accounting policies....thanks to SMU's Accounting Theory course , i can at least guess where Munger is coming from when he said "there are huge forces in play".

How and why do you think economists have gotten this so wrong?
I would argue that the economists have not been all that good at working concepts of good and evil into their profession. Nor do they understand, at all well, the economic consequences of bad accounting.

In fact, they've made a profession of driving value judgments out of the subject.

Yes. They say it's not economics if you think about the consequences of good and evil, and good and bad business accounting. I think what we're learning is that when you don't understand these consequences, you don't have an adequately skilled profession. You have big gaps in what you need. You have a profession that's like the man that Nietzsche ridiculed because he had a lame leg and was very proud of it. The economics profession has been proud of its lame leg.
So in order to cure the lame leg, you would lean more toward an approach to economics that takes human nature into account?

If you totally divorce economics from psychology, you've gone a long way toward divorcing it from reality.

The same could be said of psychology. If you divorce economics from psychology...
That's what's wrong with psychology professors. There are so few of them that know anything about anything else. They have this terribly important discipline that all the other disciplines need and they can't communicate that need to their fellow professors because they know so little about what these other professors know. This is not an unfair description of much of academia.

You've often said that one of the keys to your success has simply been to avoid making the garden-variety mistakes that you see other people make.

Warren and I have skills that could easily be taught to other people. One skill is knowing the edge of your own competency. It's not a competency if you don't know the edge of it. And Warren and I are better at tuning out the standard stupidities. We've left a lot of more talented and diligent people in the dust, just by working hard at eliminating standard error.