Flow

I am totally immersed in a book jiechao lent me last year; FLOW: The Psychology of Optimal Experience. This book changes the way you think about what makes an experience enjoyable, and underlying it all, what makes a good life.

This state of optimal experience involves a feeling of deep enjoyment, concentration, and generally satisfying. Most people have experience the state of flow in their life. When faced with a complex and daunting task, we feel challenged, energised and while conquering the challenge, we feel powerful and in control.

To me, it weird that i think i've only experience flow in choir and in a few exams i've taken in SMU. When we sing a challenging song beautifully, you feel totally immersed in it and you crave for that experience again. Maybe that's why challenging songs are a thrill to perform and people can get 'high' from music. The optimal mix of complexity and skill would produce this 'flow' effect.

In exams such as AFA, i didn't even know how much time has passed. I just know that it felt good during exam, i was focused and calm, and i felt refreshed after the exam, a sense of exhilaration. This contrast sharply to a recent mid term that i've taken, where the exam paper feels exactly like a 'ten year series' paper. Despite getting great results, i was not satisfied at all and feel vaguely insulted.

Mmmm....given that what most of us wants is a 'good experience', we should learn to create this pleasurable state by setting appropriate challenges for ourselves; goals which are attainable yet not too easy. Haha, maybe that's why i get high reading annual reports...which shows that they are a great read, and yet not too easy for me to comprehend.

Enjoying the process and learning during the process is what makes a journey so interesting. It was like when i was in the jungles of Palenque in Mexico...without the 3 hours hike across the jungle, there is no way the ruins of Palenque could be as breathtaking as it was. Without the hardwork, the results are simply less rewarding. No shortcuts.

Good to be back

I LOVE SINGAPORE!!! Breakfast with Kopi-Gao and Kaya Toast. Chicken Rice with Teh Gao. Zup Chai Pung that costs around $3!!! Haiz.

Food glorious Food.

Ok, not a big fan of the heat and humidity....think showering 4 times a day is a little too much! haha. But its good to be back!

Haiz, think singapore NSmen are like me, cannot make it for IPPT rather 'volunteer' for IPT. But its booked all the way beyond my window period!!! die liao...must either pass or go for Remedial Training! booo...

love these corporate bullsht




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Was listening to Charlie Munger's commencement address to USC Law students again. I love the part on 'self pity'. Munger said that self pity is one of the worst emotion and is a prelude to psychosis. You feel worse about yourself and nothing gets better. Rather, take all failures and challenges as opportunities to grow and learn. It is our 'moral duty' to learn. Be a learning machine. If we can go to sleep everyday being just a little wiser than we were in the morning, for most of us who have a life time ahead of us, great things could be accomplished!

Watch the video, it changed the way i think fundamentally. Fast forward to about 42:00 in the video to skip the super long opening address by faculty and students.

Recycling and reading

I have been having a wonderful time printing and reading over the past week. Its so wonderful to have free printing in the school though i must admit that there will be some wasteful printing as there is no 'price mechanism' in place.

I think that Canada is doing a great job promoting recycling. Its amazing how individual family sort through their waste, and put them in different bins (waste vs. recyclables) each week for collection.

Loblaws, a supermarket chain, recently started to charge 5 cents for each plastic bag. Previously they gave a discount of 5 cents for each bag you bring, but it didn't work well. With the new system of charging 5 cents, i'm amazed with the number of people who are bringing their own reusable bags, and plastic crates that allow them to load right into the back of the car. I think the success have got to do with people's attitude to asymmetric loss aversion. It 'hurts' more to 'lose 5 cents than 'gain' in 5 cents in rebate.

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Wells Fargo
Following up on the previous post on my Berkshire Hathaway meeting, Buffett said that he gave his first and only stock recommendation to a group of students earlier this year. He said that if there's one stock he'd buy, its Wells Fargo when it was trading around 8 to 10 dollars. The said that it was obvious that the stock was undervalued at that price and it is unlikely that one could lose money over such investment.

Buffett stated that Wells Fargo has a business model that is different from the rest of the big banks. It is a relationship business, a service business and a distributor. Imagine that you run a small business, and that your corporate account and line of credit is managed by Wells. Your personal savings account and credit card is also with Wells. Also, you bought your house (to live in) and guess where do you get your mortage from? Wells. Lastly, you depend on the bank to manage your hard earned savings.

From many such relations, the bank 'makes money' on
(1) The interest it charges you on your line of credit, the interest you pay on your mortgage, the interest you pay on your credit card.
(2) It funds its lending from cheap deposit (cuz customers are sticky and will not move their savings based solely on interest) and external financing.
(3) The bank takes a charge on some credit lossess.
(4) It earns fee revenue from managing your investments and other fee income.
(5) It pays for employee expenses, overheads, infrastructure, etc.

In accounting terms, it is simply
(1) Interest Income
(2) Interest Expense
(3) Provisions for losses
(4) Non-interest revenues
(5) Expenses

(1) - (2) = Net interest Income (aka 'Spread')
Net interest Income - Provisions + Non-interest revenues - Expenses = Net Income.

The role of the analyst is to assess what is the earning power of the bank base on his assessment of the potential spread, fee, and expenses. And to compare the resonableness of his estimate with the assets and liabilities that the bank have.

Buffett stated that analysing such commercial banks is not hard, though harder than analysing industrial companies. But over time he said if the management and accounting is honest, most people would be able to work through the notes and 'understand' the business and estimate its worth.

The way he says sounds easy. I'm working through my second reading of AXP and USB. think it is not that simple and very laborious.Btw, USB is one of the few banks that constantly compares itself to conventional banking metrics and teaching investors how to assess its performance. Haha . Oh , from Buffetts recommendation of BUY at 8-10, WFC recently closes around $25.

Bruce Berkowitz and Fairholme Fund
Bruce Berkowitz is one of the best fund manager out there and has very good returns since the early 90s. I think in an early interview, Joel Greenberg (another prominient value investor) mentioned that in the early 90s, it was Berkowitz who gave the only BUY call on Wells Fargo.

On Fairholme Fund website, his recent interview with Outstanding Investor Digest, he gave us his rationale of selling oil stocks before oil stocks fell, how he invests well despite having a lousy crystal ball, and why is he buying HMOs and defence companies.

One interesting stock that he bought was Pfizer, positioned at over 17% of his portfolio. Everyone knows Lipitor, the worlds best selling drug, is going off Patent in a few years time. At 25% of Pfizer's revenue and with over 70% profit margin, it is apparent that sales and profit is going to decline significantly unless there are replacement. Berkowitz estimated that the earning power per share of Pfizer is about $2.00 to $2.50. At $15 currently, you are buyin one of the world's strongest Pharma at 6-7x PE. BUT, i simply couldn't figure out how he arrived at that. After reading through Pfizer's 10k for 2008. Haha.

It is also interesting that Fairholme is one of the largest shareholder for Sears. He said that liquidation value is at least twice the shareprice (Dec approx $40). He gave us the way he estimated liquidation value, and the author asked his why he was willing to share. Berkowitz said that even with this information out, no one is going to believe him. Whoohoo...open secret. This letter is highly entertaining (ok...my form of entertainment) and potentially profitable. Once again, download it here under the "Article and Interview Reprints" section.

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I should get packing. GOING BACK HOME!!!!

The Pilgrimage

The actual day of the Berkshire Shareholder meeting was May 3rd, Sunday. Woke up at 5.30am hoping to get a good seat in the areana. But when i got there at 6.30, there was a crazy queue formed outside quest centre. When we asked the security personnel later, they told us some people started in line overnight!!! Ok. So i'm not the most crazy one.

People filled up Quest centre quickly and 2009 was a record turnout of over 35,000 people despite the swine flu. The event started with the annual video starring different celebrities and of course Warren Buffett and cameo appearance by Charlie Munger.

The Q&A started at 9.30 and lasted all the way till 3.30. The most amazing thing is how much Coke and candy Buffett and Munger eats. Yep, cherry coke and original coke for Buffett and diet coke for Munger. Munger EATS NON STOP. It was really fun to see how laid back and real the two of them are. The quality of the question this year was really great. Half of the questions was asked by 3 jounalist who recieved the emailed questions before the event. Carol Loomis, editor for fortune magazine and long time editor of Buffett's Shareholder Letter, asked some of the toughest question. Of which Buffett simply diverted them to Munger, claiming that its too tough for him.

Opening

The Q&A session started with a screen shot of a bond that Berkshire sold in late 2008. I forgot the exact figures, but it is simply a govt bill that matures in a few months time selling above par. Which means the buyer has bought something that has guaranteed a loss!!! Buffett said that november 2008 was an exceptional time. And it is unlikely that he'll see this in his lifetime again. Negaitve yield!!! Crazy!!! So much for rational, expectations calculating investors. Hahaha.

On Inflation

Buffett said that the greatest financial risk going forward is the risk of high inflation. To protect against inflation, it would be unsound to hold on to debt obligation if the yield does not compensate for the risk taken. Buying companies with 'moat' and pricing power is still the way to go. Return on Capital in real terms may not be high but will be satisfactory. For Berkshire, he will continue to seek out companies earning income outside of United States. But given the large pool of capital he need to deploy and his familiarity with the US market, Berkshire will continue to invest in the US.

When answering question on 'how to best protect ourselves against inflation', both Buffett and Munger suggested that "be the best in the field you are in". E.g best lawyer, plumber, hairstylist...etc. You'll recieve a premium on the available pool of capital (regardless the size) for your skill and knowledge.

On Financial Literacy

Someone asked Buffett how do we promote financial literacy. Buffett said it is a very hard problem to tackle, but he's doing his part by talking to students in hope to rub off some knowledge to them.

Munger gave biting comments on the crazy stuff that is being taught in Business School, namely EMH and the host of advance math used to 'price security'. He said that if at higher level of education people are taught crazy stuff, then its likely that these crazy stuff will be passed down the line. But he suggested that the first thing is to understand that the only way to invest is to first spend less than you earn. The other is to understand the power of compounding and how it works in reverse, e.g. credit card debt costing you 18% p.a. . It is also crucial to understand when is accounting useful and intelligent and when is it not.

Munger and Buffett recommended us to read Jamie Dimon letter to shareholder available here. It is a wonderful read. I shall be re-reading it over the next few days.

On Foreign Exchange Risk

A question was asked by a shareholder from a Euro demoninated country. He asked if he should hedge his exposure to USD/EURO exchange risk. Buffett commented that he is no expert in currency. Munger then said "you've done pretty well in that". Then Buffett off handedly replied "just a few billions...". It was one of the funniest moments in the hall. Everyone was laughing.

But he said that if it is cheap enough to perform a rolling hedge with a widely traded derivative like USD/EURO contract, then you can choose to hedge....not much was said...hahaha.

On Moodys

Loomis asked why Buffett didn't use his stake in Moodys to influence the credit rating agencies. And since he has criticized the way rating agencies work, why did he still hold the shares in Moody's.

His answer here was vague and a little evasive. First he said that the underlying assumption that all the rating agencies made many banks and regulators that was WRONG was that home prices will go up and up and up. If Moody's is the only one that use other assumption, it will have no business to do. (not the best answer in my opinion). Then he said that even in the case of Fannie Mae and Freddie Mac having their own regulator didn't help these two GSE become less foolish.

He also said that Moody's still has a business model that is sustainable, with little need for capital infusion, and has a moat with only 2-4 players in each of the industry they are engaged in. So he would not sell.

Munger and Buffett further added that on their part, they will NEVER rely on any ratings...but exploit them to the extent that if the rating and yield differs greatly with their assessment, there is a profitable opportunity.

The Pilgrimage (prelude)

Attending the Berkshire Hathaway shareholder meeting was a dream come true. First up, has to give a BIG THANKS to Xin Hong who helped arranged to sent the shareholder credential all the way from Singapore, back to Omaha, then to London, Ontario. Him doing so much for me helped me make up my mind on whether to go or not. What a wonderful man, 言行一致。

I bought 1 Brk B share last wed after selling some stock holdings. Can't believe that i sold off my BAC shares at 8 and today it closes at 13!!! About 60% increase!!! Haha. Once again proving the theory that if lw sells, you buy, if lw buy, SHORT THE STOCK. This has been a reliable strategy over the last 2 years.

Looking back over the last 6 years, i recalled my first introduction to the financial market was in JC 2 (year 2003) when Mr. Choy talks about the bond market. I found it interesting enough to read the textbook on how interest rates was determined and how it affects the economy.

My next big step was when Jie Chao called me and asked if i wanted to "learn a way to make over 20% in return". It was late in 2004 and i thought if something is too good to be true, it probably is. However, what he recommended was actually a book. The book was The Intelligent Investor, by Benjamin Graham. The first read was excruciating, took me 2 months to plough through it. In my beloved Sungei Gedong Camp, I managed to read about 1 - 2 books a week. After reading at least 10- 20 books relating to investing, and now i'm ashamed to say tons on "how to get rich" (not to mention the kiyosaki series), i find that Value Investing as practised by Warren Buffett is the ONLY sensible way to get rich. Thanks Jie Chao, for introducing 2 books that fundamentally changed the way i think and behave, the later being dao de jing.

In terms of investing, there's only 3 books that form the basis of I know about investing, everything else are simply an extension to these books.
1. The Intelligent Investor by Benjamin Graham
2. Common Stock Uncommon Profit by Phillip Fisher
3. Random Walk Down Wall Street by Burton G. Malkiel

What i've learnt most from is Warren Buffett's letters to shareholders. This includes (1) letters of Berkshire Hathaway - how it grows from a struggling texile company to today's Behemoth both on Wall Street and Main Street, and (2) his early partnership letters, which reads more like a hedge fund and is instructive on asset allocation , and his super early view on concentrated portfolio (e.g. i think 40% allocated to American Express in 1964).

What i've learnt also helped me tremendously in school. Value investing is like my main frame to organise knowledge, information and know how. Most courses taught in SMU would fall onto one of the branches. E.g. What makes a good biz, how to value biz, mechanics of market and how it behaves. This allowed me to find greater meaning in what I studied, and since i love what i study (can't say that for BGS though...), it is easier to devote the time and effort to do it.