Thursday, December 31, 2009

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."

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

Tuesday, December 29, 2009

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.
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.

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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.

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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




Saturday, December 19, 2009

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.

Monday, December 7, 2009

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/