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?
Wednesday, August 19, 2009
Monday, August 17, 2009
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.
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.
Wednesday, August 12, 2009
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!
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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.
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.
Friday, August 7, 2009
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)
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)
Tuesday, August 4, 2009
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?
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?
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