Don't Worry, Merry Christmas!

http://www.playingforchange.com/journey/introduction

Merry Christmas dear all!

Competitive advantage and PE contraction

I find the Porter's idea on generic strategies immensely useful to think about business. The generic strategies are Cost, Differentiation and Segmentation strategy.

Look at our Singapore local supermarket market, you'll find Cold Storage (Strategy: Differentiation) running ads on TV telling you they are the fresh people, whereas Giant (Strategy: Cost) competes on price. A niche player like Guardian (Strategy: Segmentation) runs circles around strong rivals like Watsons and Unity NTUC healthcare.

The awesome thing is, Cold Storage, Guardian, Giant, 7-11 & Shop and Save, all operates under the DairyFarm Group. This gives the company tremendous bargaining power in buying terms from their suppliers and bargaining for favorable lease terms or advertising rates.

Look at DairyFarm's cash conversion cycle,

Inventory days = 50 days

Receivables days = 7 days

Payables days = 233 days

CAN YOU BELIEVE IT! it has a Negative cash conversion cycle of 176 days!

We further confirm this by comparing its operating profit with operating cashflow

Op Profit = 423.7 mil

Op Cashflow = 481.3 mil

Lastly, we compare Net Profit to Free Cash Flow

Net Profit = 364 mil

Free Cash Flow = 198 mil

Is this worrying? I don't think so, cuz the company is expanding its operations all over Asia with similar strategy. With ROA of 28% in 2009 and 31% in 2008, I'm happy that the company is expanding and not limiting its growth.

I quite sure Dairy Farm Group is a good company...but is it a good investment?

With 2009 EPS of 27 cents grows to 31 cents in 2010. The stock at 8.40 will be trading at a PE of 27X and PB of about 20X. Should I own this stock?

Let's assume we have a perfect mirror ball...We gaze clearly into the future that EPS will continue to grow at 18% for the next 5 years, but then the PE declines to a not-unreasonable 15x. Will it be worth buying today?

From the simple table, we see that by paying a spectacular 27x PE for a wonderful company growing at 18% per annum. The actual return just might not be that spectacular.

Of course you might want to say, what if in 2015, DairyFarm still trades at a PE of 27x (or higher), then you'd miss out an opportunity to make 18% per annum! True...The company's growth might also fall to a respectable 8% and PE declines to 12x.

Thanks, but this is just not the type of game i'm willing to play.

Regression

I couldn't squeeze into my loosest pair of pants. Tailored some new ones. The tailor was nice enough to make another 0.5 inch allowance and he said "做工了一定会再胖"。

This is getting out of hand. So guess what, i sat right down in front of an excel spreadsheet and started keying in weekly data I've collected on my weight and waist length. (yeah, i guess sitting down more isn't going to help one bit...hahaha...)

Anyway, this not-very-robust data was collected usually on a Sunday morning and 32 data points were collected over a 50 weeks period. The differences (50 vs 32) are due to laziness in some weeks and also I'm not crazy (enough) to bring measuring tape and scale on my trips overseas.

Below is a scatter-plot of weight (x-axis) vs. waistlength (y-axis)

What interests me most was that under regression analysis, the R-squared is only 0.191, which loosely translate to "19.2% of waist length variation can be explained by weight"...I've never been good at stats, so this is my understanding. haha. So loosing weight does not necessarily mean I'll start fitting into my old pants?!?

Contrary to my previous belief, I do not put on tremendous amount of weight during Christmas, but during Chinese New Year, my increase in weight is staggering.

So armed with this two piece of data...i dunno what to do next...maybe will start getting a chartist to find where my weight will lend next. Wait, does past weight drives future weight? mmm...or is it random event? Let me do more multi-factor analysis first.

OR...Maybe I should write a book combining random walk theory and weight management. Then launch some self-help/self-loathe group and run huge seminar to tell people, IT IS OK TO GAIN EXCESS WEIGHT, JUST THINK AND YOUR FATS WILL ALL MELT OFF. WILL IT OFF!!! IF YOU ARE NOT LOSING WEIGHT, IT IS BECAUSE YOU ARE NOT THINKING HARD ENOUGH. Gosh, piece of bull.

Ok, enough thinking, I should start doing something about it. But wait, let me read up on it first, there just could be a holy grail tucked away in some books, and with a 'swish and flick', it will all go away.

寡欲

吉凶祸福有来由，但要深知不要忧。
只见火光烧润屋，不闻风浪覆虚舟。
名为公器无多取，利是身灾合少求。
虽异匏瓜难不食，大都食足早宜休。

~白居易，感兴二首

越是忙，越是觉得空虚。不易从工作中得到使命感。尤其是不需要糊口，家也不需要自己负担，那薪水的实质意义就更渺小了。看着身旁的人忙忙碌碌，青春流逝了，不仅感到心寒。每天赶不同的deadline...人不早死才怪呢。

今天看到薪水比我大上五到十倍的人为着半给月华红与另外送的几千块而那么兴奋，让我觉得莫名其妙。但午餐时，同事看我为了一杯好茶而那么开心，让他们也摸不着脑袋。哈哈。

将来几年就作艘虚舟，亦浮亦晃，不沉就好...沉了就难救了。

Dementors, Fireworks and Ring of Fire

Have you met one of those people that sucks life and energy out of you?

I think these people are just like the Dementors in Harry Potter. These souless hopeless creatures have nothing to give and feed on other people happiness.

For those of you who don't know what Dementors are, watch this:

I generally run far away from them cuz i've yet to master a truly powerful Patronus Charm. But what if your work place is filled with souless creatures? I've so far only been forced to be around one such person for about 2 years, so whenever i'm near him, i'll bring an extra dose of happiness and sunshine to wield off the chill.

The scary thing is hopeless people attracts other hopeless people (not that they are hopeless, just that they have nothing that they look forward to in life), they gossip about others and bitch about how sucky their life is. The ranting attract more ranting, and soon they gather in size. Once a critical mass is gathered, a black hole effect appears. The culture of the organisation becomes poisonous and kills off stuff like creativity and enthusiasm.

Other than run, my only solution is that we must all be vigilant in preventing them into entering the organisation. Or we should brainwash them with this Katy Perry song ala Clockwork Orange style (warning,super disturbing vid on the clockwork orange treatment).

May we all find our own true Ring of Fire, which Gandalf wore in Lord of the Rings (passed to him by Círdan in the Third Age), "for thy labours and thy cares will be heavy, but in all it will support thee and defend thee from weariness. For this is the Ring of Fire, and herewith, maybe, thou shalt rekindle hearts to the valour of old in a world that grows chill".

a not so fun day

I actually enjoy doing different parts of my current work, doing cash recon and estimating depreciating expense is quite enjoyable.

Finished with my part of the work and helping senior with vouching...not so fun. My eczema fingers cracked after touching 12 months worth of sales invoices....not to mention a backache after plouging through papers for a day.

BUT, as i've promised to myself, i shall OPEN my eyes when doing the most mundane of jobs...today i learnt the true cost of a pack of a certain product, and a whole host of expense one must incur to start up a new office!

sadly i've forgotten what i've learnt in AFA on forex! Shall go revise on it this week, if not 对不起 prof. haha.

BTW....Buffett and his $200bn blunder...unheard of? Read on...

Halo halo halo / Fees & pricing

On Halo

Nope, this is not about the Beyonce song, this is about a book that i recently read. It is called "The Halo Effect", click on the link for a summary of the main points. Essentially, the Halo effect is the effect that people tend to project the perception of one trait on all the other traits. For instance, if I think that a person is really really good at singing, I'll tend to rate his ability for presentation or something as unrelated as cooking, as higher than average (even if real objective performance measurement will disprove it).

I think we rely on this heuristic a little too much on daily life. have you met those parents who obviously favor one child over another? Whatever the favored child does is cute/funny/brilliant; whatever the other child does is dull/gross/stupid even if they are doing exactly the same thing...like singing in the train....hahaha...(who does that? definitely not me...)

This works in hand with Cialdini's Liking Principle to create huge biases effects on the way we view performance and allocating attributes to someone.

The following video is a summary of Cialdini's 6 points of influence.

On Incentives, Fees, Pricing, Competitive Pressure

A cost plus model is really a very weird model to pricing, yet this is used frequently in many industries. For instance, if my cost is 100 and I'd like to make a 50% markup, my selling price will be 150. Many in the professional line of business does a cost plus concept, e.g. if a lawyer bill by the hour, he is essentially saying my one hour costs X amount and you shall pay me X+y%.

However, this creates perverse incentives for people to inflate their costs. If i bill by the hour, do you think i'll resolve issues as quickly as possible or as slowly as possible?

A cost plus is also bad for the service provider for he will not be attentive to upward cost pressure and downward pricing pressure if a competitor can offer the same thing for a lesser fee. In a cost plus world, there could be a disconnect between what the buyer thinks the value is and what the seller wants to charge. In a fast growing world where there are loads unmet needs, cost-plus pricing provider may easily pass on costs to buyers.

For the accounting profession, as labor and harmonisation of accounting standards be more common, the numbers of qualified supplier of accounting related service has increased. The market demand is a slow growing one. And intensity of competition within the existing players has always been high. The means lower margins for low value added projects or engagements that the client does not value.

Possible solutions to maintain high profits include employing greater leverage (ie higher junior to senior staff mix), hiring people with lower salary and invest in them to bring them up to par to international standards, provide higher value added jobs (e.g. audit + tax computation as lower margin , process re-engineering, risk management, HR & IT solutions support as value added services).

I think it will be hilarious for any professional service firm that seeks to sell "best in class" solutions to clients to think that they can ignore the prevailing wind of market forces and not practice what it preaches.

诫子书

Over the past month, managed to catch up with some old friends and I'm really impressed with their achievements. One friend chose a low paying - high job satisfaction job at ACRES, an animal welfare organisation, and another is starting a social entrepreneurship program in the Philippines. I salute their selflessness and devotion in improving the welfare of others.

Many has started work, yet i felt that there's only 2 engineer friends who are happy at what they are doing. Others enjoy the work itself, but has less than collegial colleagues. Yet others have boring unsatisfactory job but great company at work. And those who are happy at work felt a little underpaid. haha, perhaps labour market is pretty efficient. or humans just prefer to be unhappy.

在和朋友们的谈话中，我不时地也会自我怀疑是否在事业上做了对的选择。若是说在相比之下没一丝嫉妒他人在薪酬上和所谓prestige的悬殊，那时骗人的。但双眼睁着选择了这行，还需要有不凡的意志力才可不被他人的行为言语左右。

...自欺，欺人，被人欺...

看了一出《金锁记》，感触良多。又有多少人逃得出这金锁与情锁的枷锁呢？或需只求一日自明明人吧。

诸葛亮写给儿子的《誡子書》反复重读，从中学习，并身体力行。以他人的不是引以为鉴，而不沦落为《金锁记》中那‘怨妇’的悲惨结局。

夫君子之行，静以修身，俭以养德。非淡泊无以明志，非宁静无以致远。夫学须静也，才须学也，非学无以广才，非志无以成学。淫慢则不能励精，险躁则不能治性。年与时驰，意与日去，遂成枯落，多不接世，悲守穷庐，将复何及！


譯文：德才兼備人的品行，是依靠內心安靜精力集中來修養身心的，是依靠儉樸的作風來培養品德的。不看輕世俗的名利，就不能明確自己的志向，不是身心寧靜就不能實現遠大的理想。學習必須專心致志，增長才幹必須刻苦學習。不努力學習就不能增長才智，不明確志向就不能在學習上獲得成就。追求過度享樂和怠惰散漫就不能振奮精神，輕浮暴躁就不能陶冶性情。年華隨着光陰流逝，意志隨着歲月消磨，最後就像枯枝敗葉那樣，（成了無所作為的人）對社會沒有任何用處，（到那時，）守在自家的狹小天地里，悲傷嘆息，還有什麼用呢？

(http://zh.wikipedia.org/zh-hk/%E8%AA%A1%E5%AD%90%E6%9B%B8)

David Maister on Professionalism

David Maister changed the way I think about professionalism, the accounting profession and how a manager/employee/partner should manage oneself and others at work.

Perspective on Careers
1. The cold, hard, truth is that you’ve got to look after yourself.
2. You can’t assume that anyone is really looking out for your best interests (in spite of what they may say.)
3. There may be a human resources department in your firm, managers, coaches and a mentoring system. But don’t get fooled. Your career is up to you and you alone.
4. No one will tell you what experience you should be obtaining, let alone help you get it.
5. If you want a specific experience, ask for it.
6. Better yet, just go grab it.
7. Do not expect that you will be promoted because you deserve it - it is unlikely that anyone is really keeping track.
8. If you want to be promoted, ask to be promoted.
9. Generally, things do not come to those who do not ask for them.
10. None of this means you should be rude, disrespectful to others, or fail to be a team player. It just means don’t be naïve.
11. In spite of what they may say, it’s up to you. You’re on your own, kid.
12. Manage your own career. No one else will.

Anyone disagree that this is both the right philosophy to have and the cold, hard reality?

source: http://davidmaister.com/blog/329/Perspective-on-Careers

We always wonder which career path should we embark on. But this is an issue that confronts most people. See how Maister himself started his career as a Statistician and ended up as one of the most important consultants to professional firms. Read on.

Finally going start work in slightly more than a week's time. Will see how I score on my personal scorecard over the next few years.

Drucker on Learning and Knowledge

BusinessWeek called Peter Druker "the man who invented management". And while reading the book 'The Drucker Lectures', I'm just amazed at the breath and depth of the various topics Drucker lectured on. From philosophy to economics to sociology, he seamlessly integrated knowledge from different fields and sought to bring about greater efficiency for managers and in some cases, tried to lay out a roadmap for others to travel on.

Druker coined the term "Knowledge Worker", and his series of lectures on knowledge is extremely relevant especially to Singapore. We have no natural resources to export, we have little low end manufacturing in Singapore, so all that we are left with is the so called knowledge-based economy. Play around on this animation and you'll see the value and productivity of different industry in Singapore.

But what is knowledge? Druker first talked about information. He said that we are in an age (1986) of people drowning in data, not information. And we will have to learn that more is less, and that data is not information. And information is something that has to be selected. "Information is something that is pertinent to the task that can be converted into knowledge. And knowledge is information in action. One has to learn this."

With this growth in information, we will have many fewer layers of management and many more specialist. He drew on the analogy of a large symphony orchestra, where the triangle player has no ambition to become a bassoonist, and none to become first violin. And looking at university size, he lamented that with the growth in student population, sooner or later there'll be need for more vice president than student. It will be interesting to review the staff to faculty to student ratio in Singapore over the last 20 years.

Drucker drew on all branches of learning that he could. He said, "Every three or four years I pick a new subject. It may be Japanese art; it may be economics. Three years of study are by no means enough to master a subject but they are enough to understand it. SO for more than 60 years I have kept studying one subject at a time. That not only has given me a substantial fund of knowledge. It has also forced me to be open to new disciplines and new approaches and new methods--for every one of the subjects I have studied makes different assumptions and employs a different methodology."

His ability to bring knowledge and wisdom down from academic stratosphere into the nuts and bolts of what should be done is astonishing. He probably lived his life to the Confucius words: 博学之，审问之，慎思之，明辨之，笃行之。

13 Bankers

Just finished this amazing book called 13 Bankers. It discusses finance in a political setting. Essentially the struggle between pure laissez-faire economic system versus a tightly regulated banking system. It also discusses the regulation of banks from a historical perspective, and how the US achieved the lowest bank default rate post depression all the way till 1980s early.

It reminds me of my Accounting Theory course, where accounting standards setting is shown to be a political process. For instance, who gets the benefit of accounting for booking profit early say for a construction project? and can the people who benefits influence accounting standards?

Looking at Singapore's Accounting Standards Council board, it seems to me like a pretty balanced representation of different sectors in Singapore, but is everyone there as qualified as others to make accounting recommendations or does any member has great influence over others?

Also, a standard that is perhaps good for the stability of Singapore, for instance super conservative loan loss provision and prohibition of complex levered derivatives products, could mean that Singapore banks may not be able to compete effectively on an international arena. Furthermore, conservative accounting would usually lead to a lower earnings figure (relative to capital) compared to competitors, will this then lead to higher cost of capital which have a real economic impact on the competitiveness of our banks?

13 Bankers is an amazing book that strikes a balanced path in providing an end-of-book suggestion to such issues.

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

读了以下论语篇章，觉得太有趣了。孔子不讲一些深不可知的道理，多讲立身处事的原则。但要每时每刻做到，也太难了。

子张学干禄。子曰：“多闻阙疑，慎言其余，则寡尤。多见阙殆，慎行其余，则寡悔。言寡尤，行寡悔，禄在其中矣。

意思大略是说一个人需要博学但同时要保存怀疑的的能力，不能变书呆子。说话要恰到好处，不可多说，多则容易失信。 即时见识广了，如有不安于心之事，依然不做。要做的事，须中道而行，无过无不及。如此则少后悔。这升官的方法就在其中。

Starting work in a month's time. It will be great to apply these principles daily, and not read and chuck it aside.

15560

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Journey

Reading this book called Good Value by Stephen Green, Chairman of HSBC, who is also an ordained priest. A fun book to read detailing the history of man, urbanisation, and commerce and how it leads into the credit crises.

In the book, the following website - Journey of Mankind, was mentioned. In this interactive map, it shows us our origin and how mankind spread out and took over the known land. In particular, we see that we spread out from a single point, and finally 'meet again' after thousands of years as we take over more land. Then political and social pressure will mount, aka inter-state and inter-racial, and definition of sovereignty might even take on a new meaning.

While reading 论语, it laid out a road map to learning and constant renewal. Singapore loves to talk about 'skills upgrade' and 'technical upgrade'. However, witnessing the staff in my dad's office, i think that improvements and learning must be internally driven and not forced up by others. It pains me that while learning opportunities abound, many of them choose to stick to what's comfortable (and turning obsolete) then to just walk over to the other person and ask "How is this done, why?". When the next downturn comes...guess who will be at risk of being retrenched?

I love this line "学而不思则罔，思而不学则殆" 。baidu's explanation as follow: 一味的读书，而不思考，只能被书本牵着鼻子走，就会被书本所连累，从而受到书本表象的迷惑而不得甚解。所谓尽信书则不如无书。而只是一味的埋头苦思而不进行一定的书本知识的积累，进而对知识进行研究推敲，也只能是流于空想，问题仍然不会得到解决，也就会产生更多的疑惑而更加危险。只有把学习和思考结合起来，才能学以致用。

南怀瑾谈到这段，说了以下让人反思的话，“少年教育的问题，首先要注意他们的幻想，因为幻想是学问的基础... ...学问、事业... ...都建立少年时期这一段。一个人的一生，也只是把少年时期的理想加上学问的培养而以，到了中年事业就是少年理想的发挥。... ...思想没有学问去培养则‘殆’，危险。”

Watching NDP 2010, there was a video clips of kids telling Singapore their dreams and aspirations. I told my dad that there were only kids in the clip cuz if you interview the elderly, they'll tell you they dream that their ankles will not ache, if you interview housewives, they'll tell you they dream that their kids come home for dinner and show some appreciation. And if you ask most people in their 40s is this the life they thought they'll lead when then they were in their youth, most will tell us no.

Youth is a wonderful thing. What a crime to waste it on children.
George Bernard Shaw (1856 - 1950)

Inflation and Unemployment

It has been almost 2 months since I last blogged. Friends asked me what am I doing since I don’t start work till sept, and my answer has been always, Eat, Sleep, Read.

We all know that learnt unemployment and inflation is bad, but until we experience it ourselves, it is just ‘textbook’ talk. Since the day I was born, inflation has been benign and unemployment in Singapore was generally low. When I was in Argentina, I asked my guide what was it like during the Peso crises and general devaluation of peso (and inflation in local dollars). He said that many people lost their savings and affected their livelihood.

For instance, you could be working in Argentina collecting your pay in USD. Say you’ve saved $1,000 USD, which also translate to 1000 (Argentinean dollars) ARD before the devaluation. During the period of crises, bank will only allow you to withdraw in ARD even though you’ve deposited USD!!! If you insist on withdrawing in USD, they’ll convert it at the current (devalued) exchange rate and you’ll lose up to 30% of savings in a month! Also the super rich were withdrawing USD from local banks and depositing them in US banks, so local banks ran out of USD… bank run began and queues formed for days outside banks, ATMs got trashed, and many Argentineans who were studying overseas has to go back to Argentina because they can no longer afford expenses in USD.

Unemployement in South America is not low. From CIA Fact Book: Peru 8.1% Argentina - 8.7%, Chile – 9.6%, and official figures are probably under-reported. Through observation, you have a huge part of city life involved in daily protests on the streets. A very unproductive activity, all the squabbling yet nothing gets resolved. Also, when a person is unemployed and poor, he has got nothing to lose and no future to look forward to, law and order will not prevail. Anarchy follows. Economic destruction will tear apart a country's social fabric.

Percentage of population under poverty line: 20% (Chile), 44.5% (Peru) and 14.9% (Argentina). Looking at the young beggars on the streets who have their young ones strapped to their back, I can only see the vicious cycle of poverty repeating itself over the next generation. Very sad.

How fortunate that we are in Singapore! Unemployment 3.8%, Percentage of population under poverty line: Not Applicable!!!

Of course all statistic lies. At least these are not chronic problems in Singapore.

Me being currently fully unemployed, I see the risks that unemployment brings: you can sleep as late as you want, stay at home whole day in the clothes you wake up in, eat and watch Scrubs and True Blood (weird combi in know!) and then sleep as late as you want again. Soon, your brain goes numb, your body goes flabby and soon I’ll be like the crazy mom in the movie Precious. Ewww……So now I put in extra extra effort to stay industrious.

Benjamin Franklin on laziness:
1. Sloth, like rust, consumes faster than labor wears, while the used key is always bright
2. Dost thou love life, then do not squander time, for that’s the stuff life is made of
3. Lost time is never found again
4. He that riseth late, must trot all day, and shall scarce overtake his business at night
5. Drive thy business, let not that drive thee
6. Industry need not wish
7. He that lives upon hope will die fasting
8. There are no gains, without pains
9. Plough deep, while sluggards sleep, and you shall have corn to sell and to keep
10. One today is worth two tomorrows
11. Have you somewhat to do tomorrow, do it today
12. Be ashamed to catch yourself idle
13. Let not the sun look down and say, inglorious here he lies

Around the world...in more than 40 hrs

Getting to Lima, Peru, is challenging, first SIA couldnt tag my bag to Lima then they found 'a leak' on the plane from Narita to Houston, so it was delayed for 2 hour. Customs at Houston took over 1 hr. And i missed my connecting flight to Lima. Haha. The next flight out? 1 day later.

So...continnental put me up at a nice hotel near the airport, with complimentary dinner, breakfast and lunch...so far need not spend a extra dime during the one day delay. What more I get to claim for travel insurance! haha, this is the main purpose for my purhcase of travel insurance, while in queue during transit, i was busy reading the many many terms and conditions stated on my travel insurance written in (i think) font size 6.

I guess i'll just continue to expect lots of distruptions to this trip, and rejoice when everything falls into place :)

Saw that the hotel gym is open, maybe i should exercise....who am I joking! Going back to my warm soft bed for my post- (complimentary) breakfast, pre-lunch nap. Mom told me there's no need to bring a belt, she's sure i'll fill out my jeans soon. Momma's right. Haha.

By the way, finally watched Forest Gump yesterday on flight. What a wonderful movie. Love the quote 'My momma always said, "Life was like a box of chocolates. You never know what you're gonna get." '

Leap Year starring the beautiful Amy Adams is a delightful little movie, super sweet, yet not (yet) nauseating. From the movie, when a bride was toasting the groom, "May you never steal, lie, or cheat, but if you must steal, then steal away my sorrows, and if you must lie, lie with me all the nights of my life, and if you must cheat, then please cheat death because I couldn't live a day without you. Cheers! " awww....

haha. Lastly, got to watch Gambling Apocalypse (Kaiji) on flight. The simple idea that overconsuming and debt is the woes of all the 'losers' on board is such a powerful idea. We can work our butt off, but if we are overspending, we'll be forever getting into more debt. As our ovespending grow in proportion to our income, your absolute amount of debt will grow. There will be a tipping point where interest on debt will consume our entire income, this is where we'll forever be stuck in our-homemade hell.

Conversely, there'll be a point where interest on asset return will outstrip our total expense. Nope, this will not be homemade heaven. But life if hard enough as it is, there'll no need to inflict more pain on it ourselves.

Ok, back to my nap. Maybe i'll blog in Spanish next time. It'll consist of 4 words, No, Si, Gracias. Muahaha.

Adios!

Charlie Munger on Lee Kuan Yew

Munger was full of praise for Lee in the recent Wesco annual meeting.

From a forbes interview:

How would you make Paul Volcker look like a sissy if you regulated Wall Street?

Munger: I would economically restrain what investment banks and banks do more than he would. I would separate derivatives from the basic bridges of civilization. We don't want civilization contaminated by extreme speculation. I'd ban all the derivatives trading except for metals and commodities. The new stuff is a marvelous gambling game. It swamps any commercial transactions that are needed. Gambling does not become wonderful just because it pertains to commerce. It's a casino. You shouldn't be able to use $500,000 to do a $5 million trade.

If I were the Lee Kwan Yew (formidable former Singapore leader) I'd make finance far less attractive to go into. I'd raise taxes, maybe put a Tobin (Yale economist) tax on all transactions. If Warren was the benevolent despot of the U.S., these things (derivatives) would have never existed. Warren wrote a letter in 1982 objecting to the creation of the S&P 500 derivative contract. Its message: This is going to do more harm than good. He tried to prevent it from happening. I think he believes civilization would be better if they didn't exist. Still, Warren has great difficulty not buying a mispriced item in the financial market. We bought derivatives even though we didn't believe in their existence.

Excerpt from the Wesco annual meeting notes from The Inoculated Investor blog:

Is there an example of a prudent decision like the Marshall Plan after WW2?

The George Washington of Singapore, Lee Kuan Yew, decided to marry the smartest girl in his class. Their son is now the PM of Singapore. He was a very practical man. He didn’t want people dying of Malaria so he drained all the swamps and didn’t care if a little fish went extinct. He didn’t like the drug problem and he looked around the world to solve the drug problem. He found the solution in US by copying the US Military’s policy. Any time you can be tested and if you fail you go to jail. If something was going to grow like cancer he would check it hard with the wrath of God. He turned a country with no resources or agriculture into a prosperous country, starting from 0 mph. We need to pay more attention in our country to the Singapore model.

They hate Lee Kuan Yew in liberal arts colleges. They hate that Singapore doesn’t allow free speech. But, time after time he has been successful and even the leaders of China came to Singapore and learned from Lee Kuan Yew. Charlie doesn’t care whether the cat is black or white, as long as it catches mice. In many respects the US is too damn permissive. We don’t step hard enough on things that can grow into trouble. If some of the silly accounting practices had been stopped, then none of this would have happened

On accounting for financial institution
There is Alice in Wonderland and nut case accounting in the US. These people need to be thrown out and people who think more like Lee Kuan Yew need to be installed. Jamie Dimon of JP Morgan is actually complaining about this but he is the only one. Charlie takes his hat off to him but his derivative book needs to go away. He should not run a gambling parlor next to a legitimate business. Actually, in recent years, some of our banks actually bought casinos. “Why run a casino in drag when you can run a real casino?”

On the distorted incentives between banking executives and regulators
There is a huge pay discrepancy between regulators and bankers. What happens when they finish public service and then move into the private sector? Should that be curtailed?

Munger thinks that the revolving door between Wall Street and the US government regulators is a big problem. Lee Kuan Yew of Singapore decided to pay civil servants more to get around this problem. America’s main problem is not corruption-- it is cognitive inadequacy.

On moving to Singapore
Munger spoke very highly of Singapore. A member of the audience asked that given the problems in the US, would he ever move to Singapore?

Munger said he would never leave the US. Singapore could be a good place for someone else. If crime tripled in the US them Singapore could get an influx of rich people from the rest of the world. He doesn’t know what is going to happen but he will still be here (Los Angeles). He loves the US, despite the flaws.

I'm in the MOST SCREWED UP UNIT EVER!!!! Where got call-up people for ICT then cancel one month after issuing notice one! Stupid ICT screwed up my grad trip.

Bunch of incompetents maggots!!!!!

Now i rush back from my Latin America trip for nothing, but fixed air ticket already bought. Bloody fools.

Goodwill

Of course the goodwill i'm that i'm thinking about is nearer to the accounting kind, as compared to the chim chim moral philosophy kind which i was introduced to while doing the Ethics course.

According to FRS 103,

IN10 - The FRS requires the acquirer, having recognised the identifiable assets, the liabilities and any non-controlling interests, to identify any difference between:
(a) the aggregate of the consideration transferred, any non-controlling interest in the acquiree and, in a business combination achieved in stages, the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree; and

(b) the net identifiable assets acquired.

The difference will, generally, be recognised as goodwill.

Core principle :

IN5 An acquirer of a business recognises the assets acquired and liabilities assumed at their acquisition-date fair values and discloses information that enables users to evaluate the nature and financial effects of the acquisition

Which leads me to think that Prof JJ is absolutely correct, goodwill should be called BADWILL. It is the bad will of the manager that causes loss for the acquirer shareholder. Essentially, the more you pay over the fair value the asset, the greater the goodwill. What I don't get is - What's so good about over paying?

If I own a roti-prata store, and sell it to Company P(urchaser), my book value could be my stove and woks which have a worth 100k. But P is required to measure the value all the identifiable fair value in the business and get to the goodwill figure. So if P pay me 500k, and identified 100k worth of brand name/patented curry recipe, P will have to record a 300k goodwill figure.

If i used to earn around 40k per annum on my hard assets, the return on asset was 40%.

Post purchase, the return on asset for P including goodwill will be about 8%. So what is so GOOD about buying good assets at fancy price?

On a side note, we had a great evening spent at Coffeenation. We sang in C major key into the night; and the staff was warm and friendly despite us not ordering much after the main course. I believe their attitude and service had generated tremendous goodwill. If they keep this up day after day, their economic moat will widen in the Bugis/Bali Lane area and they may earn very satisfactory return on capital. This will not be captured by accounting numbers, but it is nevertheless a real advantage they can have over competitors like Swensens or Fish and Co..

We should understand that "It is better to be vaguely right than exactly wrong.", but as students get more skillful at complex mathematics and excel spreadsheet, i fear that we are more often "precisely wrong" than not.

Winning The Loser's Game

Re-reading Winning The Loser's Game by Charles D. Ellis (5th edition). I recall that when i was first getting started in learning about investing, Chales Ellis' book - The Investor's Anthology, opened my eyes to many different ways people get rich through intelligent investing. It includes original insights from people like Warren Buffett, Barton Biggs, Benjamin Graham, John Templeton and T. Rowe Price. Go read it!

In Winning The Loser's Game (5th edition), Ellis guides us to build the foundation knowledge of why Indexing is the way to go for most investors. The book is both intellectually stimulating and practical.

And i love the part where he compares investment returns from 1980 - 2008.

When we subtract the returns of the best 30 days over the period, annual returns over the years dropped from a 11.1% to 5.5%.

Over 19 years, a 10 k investment will yield a total return of $73,887 vs. $27,656!!!

In Singapore, the best way to invest in a cost effective manner is through ETF. It is sad that major index fund like Fidelity and Vanguard is not available to the retail public. I would gladly sign up with them if there's such a scheme. But i guess even if the WHOLE of Singapore retail public investable assets goes to indexing, it will barely make a dent in the total asset under management of Vanguard.

A good starting point is by going through SGX's website on ETF.

A simple portfolio could be:

60 % invested db x-trackers MSCI World TRN Index ETF or Lyxor ETF MSCI World
30% in a mixture of Lyxor ETF MSCI Emerging Markets & db x-trackers MSCI AC Asia-Pacific Ex Japan TRN ETF;
5 % Lyxor ETF Commodities CRB
and the rest in a cheap money market fund.

Trading cost will be a key concern, as most broker charge almost $25 per trade,try to keep your commission charges to less than 1%, ie invest about $2,500 every time.

If you do not have too much cash to start with, you may want to start by building up your portfolio over time. For instance, you can try to save about $800 bucks per month and invest every 3 moths into the MSCI World index. Over a few years, you can build up a decent portfolio size and then bring in more variety of ETF to have a better balanced portfolio.

If you are 35 years away from retirement, this 800 dollars per month will work out to a substantial portfolio at retirement.

At 7% return per annum, in 35 years the portfolio will be worth about $1.44 million

At 8% return per annum, in 35 years the portfolio will be worth about $1.83 million

at the historical 10% rate, it will be worth $3.037 million!!!

The hard part of the above scheme is NOT the percentage return but the dedication to put 800 dollars aside to work month in month out, and that in the assumption, i've let the numbers of years be 35, which for working adults in the 30 - 50s, it means a late retirement age.

The true enemy of sound investing is ourselves. Let us not be our enemy.

再多一下下

Saw this link from pris' fb. 再多一下下 is a short essay written by 新加坡才子 -- 梁文福。

读了这篇文章格外的感慨，转眼间，我20年的学生生涯就要结束了，不久就要‘投身社会’了。这么多年，读书读得最开心就是在大学的这四年，每日每周每年都在不断的学习，不断的提升自己。这是多么难得的机会啊！所结交的师友给我带来无限的欢乐与陪伴，认识他们让我觉得非常欣慰。

算了，中文打了十分钟也没打几个字，back to English. Over the four years in Uni, I'll always remember the wonderful time spent in E.y.E, and the amazing people that I met there. It was such a delight to work with such dedicated people.I'm sure our paths will cross again in the future.

The other bunch of great people in my life are those accounting pple - if u r reading this you are probably one of them :) . I am seriously biased, cuz i think that SMU's School of Accountancy is the BEST SCHOOL in SMU and perhaps in SINGAPORE!!! hahaha. The high quality people that I met in SOA gives me hope that the accounting profession may have a bright(er) future. The dedicated bunch of Profs that showed me what true PROFESSIONALISM is, continue to inspire me; Prof Pearl Tan, Prof Andrew Lee, Prof JJ, Prof Joanne Tay and all the other professors that put in their 110% to bring much knowledge and wisdom to the students, you have me deepest respect.

The last group of people that brings much joy to my life are my alumni choir people. I can always rely on my Sat practice to meet this joyous bunch of people. Special shoutout to Peiying, Longteng and Gerald for making the arrangements to make our performance come true, Mark - for jeopardizing his exams and leading us in this musical journey, and everyone else who came despite their work, exams (on and right after the performance night...gosh...), and whatever that prevents them from coming (like lazing in bed on a sat morning).

Any organisation is nothing more than the people that makes up that organisation. It is the nexus of relationship that defines an organisation, or a group of people. There is no contract, no obligation, but simply goodwill and the inherent joy of a job well done that keeps me going back. Not sure if I'll still be able to go for choir in the future, cuz my job OBLIGATION demands Saturday morning too, but, the beautiful memories of us making music and creating small miracles of our own year after year will stay with me for time to come.

人生不断的向前迈进，而我们却得在匆忙中寻找那片刻的静，来回味那美丽的回忆 -- 再多一下下。

天冷你就回来别在风中徘徊
哦妈妈眼里有明白还有一丝无奈
天冷我想回家童年已经不在
昨天的雨点撒下来那滋味叫作爱
呜~别在风中徘徊呜~天冷就回来

full lyrics here

Show Choir

Thanks to Aggie for this amazing post! Can't wait for Glee to be back.

Neil Patrick Harris on Glee = Wait for it....awesome!

Glee cast on Oprah! and she invited one of the show choirs to go on her show.



Which reminds me of Annie Lennox's Walking on Broken Glass



And this is still my favorite Annie Lennox's live performance



And how can I forget "Into the West" from Lord of the Rings - Return of the King




定風波 - 蘇軾

莫聽穿林打葉聲，何妨吟嘯且徐行。

竹杖芒鞋輕勝馬，誰怕？一簑湮雨任平生。

料峭春風吹酒醒，微冷，山頭斜照卻相迎。

回首向來蕭瑟處，歸去，去無風雨也無晴。

The Last Lecture

Attended the my last undergraduate lecture EVER yesterday - 走入中国, taught by the amazing Prof 李美勤。

It was one of the most enjoyable modules I've ever taken. The whole course was taught in Chinese and was filled with stories of the history, culture and economics of China. What was especially valuable was the writing of the individual essay. It summarized my learnings from the teachings of 儒道两家.

While preparing for exams, i'm also reading The Last Lecture by Randy Pausch . Read his book and watch his videos online even if you don't have the time. Laugh and cry with this very brave man.

BBC Business Daily is one of my favorite BBC program. Its on BBC Channel - 88.9FM Singapore. The show last night was on "Can Money Buy Happiness?" (05 Apr 10). You can download the podcast and listen to new episodes everyday. One of the points the speaker made was that money only makes us happy to the extent that we are better off than the next person that we know. ie. Absolute wealth does not bring happiness beyond sustenance level, it is relative wealth that matters.

Looking at the recently published SMU GRADUATE SURVEY 2009, assuming that the survey is largely accurate, I wonder if the 75th percentile earner will be happier than the 25th percentile in a few years time.

持而盈之，不如其已。揣而锐之，不可长保。金玉满堂，莫之能守。富贵而骄，自遗其咎。功成名遂身退，天之道也。
《道德经第九章》

故知足之足，常足矣。
《道德经第四十六章》

以上两点是我现在对财富的一种价值观。重点是要做到富贵而不骄傲，知道什么叫功成身退。以及从日常生活中所有的一切己得其乐。

人生能够修得五福，也算功德圆满了。

《书经·洪范》上所记载的五福是：“一曰寿、二曰富、三曰康宁、四曰修好德、五曰考终命”。
　　‘长寿’是命不夭折而且福寿绵长
　　‘富贵’是钱财富足而且地位尊贵。
　　‘康宁’是身体健康而且心灵安宁。
　　‘好德’是生性仁善而且宽厚宁静。
　　‘善终’是能预先知道自己的死期。临命终时，没有遭到横祸，身体没有病痛，心里没有挂碍和烦恼，安详而且自在地离开人间。
Source：http://baike.baidu.com/view/18513.htm#2

希望这辈子能够达到“不自见故明，不自是故彰，不自伐故有功，不自矜故长。夫惟不争，故天下莫能与之争”，逍遥的过一生。

Debate on financial innovation

Read this awesome commentary by Jeremy Grantham at http://www.gmo.com/websitecontent/JGLetter_ALL_4Q09.pdf

" “Beware the Financial Industrial Complex”

It is not often one gets the opportunity to debate a Nobel

Prize winner, but Richard Bookstaber and I went to Wall

Street to debate Myron Scholes and Robert Reynolds

(Putnam’s CEO) on a very topical topic: “Financial

Innovation Boosts Economic Growth.” There are no

prizes for guessing which side opposed the proposition.

Richard Bookstaber, by the way, is an experienced quant

who, despite that, wrote an excellent book, A Demon of

Our Own Design: Markets, Hedge Funds, and the Perils

of Financial Innovation – a title so superb you might think

it unnecessary to read the book, but do."

Mind blowing presentation below. People pays $1500 for the summit.

We get to watch if for free :)

The Letter that I've been waiting for

As usual, the annual letter by Warren Buffett to Berkshire Hathaway shareholder is an awesome read. This letter is particularly good as an Berkshire Hathaway introduction as its target readers are the tens of thousand of new shareholders that got their shares through the acquisition of Burlington Northern.

The letters are available here: http://www.berkshirehathaway.com/letters/letters.html

I love the part of where Buffett advised that for every deal, another investment banker should be employed whose fee will be paid contingent on the deal NOT going through. Haha. Another great section is the part of the letter where he discussed the issue with stock for stock acquisition. To me, this is another instance of Buffett publicly chiding the Kraft-Cadbury deal. I need to learn how to criticize without offending people...

On a personal note, I'm glad that i went to the shareholder's meeting last year, as this year on, Buffett will no longer meet the international shareholders individually. However, the school that i went on exchange in, Richard Ivey School of Business, sent their students in the Value Investing course led by Prof George Athanassakos, to meet Buffett in a closed door session last week!!! How I wish I was there.

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

Reading through Zkai's recent post on real estate makes me realize that this is one asset class that I am totally unfamiliar with. I have no clear idea of what are the economic drivers, and the intricacies of making a purchase (e.g. contract details). However, I believe that real estate as an asset class allow you to measure value in the same metrics that you'd measure an investment in the stock of a company.

We should be able to value the said property's prospective rental yield, potential for growth in the rental, accounting for a relevant financing charges and other maintenance cost; and compare the yield to the actual cash outlay that is required.

However, a property like 'land', will not allow us to subject the asset to the same calculation. This is because like other asset such as gold and silver, there is no inherent cashflow in undeveloped land. Thus its profitability will be fully dependent on the sale price, which is determined by supply and demand.

In my view, buying an asset with no underlying cashflow is much risker than buying an asset with cashflow. So unless prospective return is way higher than other alternative (rental properties, equities) this would be a highly speculative venture.

The following quotes are relevant to our above discussion. It is quoted from John Maynard Keynes, The General Theory of Employment, Interest and Money, Chapter 12. The State of Long-Term Expectation. Available here.


...If I may be allowed to appropriate the term speculation for the activity of forecasting the psychology of the market, and the term enterprise for the activity of forecasting the prospective yield of assets over their whole life, it is by no means always the case that speculation predominates over enterprise. As the organisation of investment markets improves, the risk of the predominance of speculation does, however, increase. In one of the greatest investment markets in the world, namely, New York, the influence of speculation (in the above sense) is enormous.

(...)

There are, moreover, certain important factors which somewhat mitigate in practice the effects of our ignorance of the future. Owing to the operation of compound interest combined with the likelihood of obsolescence with the passage of time,there are many individual investments of which the prospective yield is legitimately dominated by the returns of the comparatively near future. In the case of the most important class of very long-term investments, namely buildings, the risk can be frequently transferred from the investor to the occupier, or at least shared between them, by means of long-term contracts, the risk being outweighed in the mind of the occupier by the advantages of continuity and security of tenure.

Basically, It's Over - by Charlie Munger

Charlie Munger - Vice Chairman of Berhshire Hathaway and the right hand man of Warren Buffett wrote a story in Slate Magazine; detailing how "Basicland" grew, prospered and finally declined into "Sorrowland".

I especially love that the good wise man in the story is the fictional character, Benfranklin Leekwanyou Vokker. Sounds familiar, ya? Guess our leader has an admirer in the West.

In my fixed income class, the wonderful Prof Warachka reminded us repeatedly that derivative are not inherently dangerous, it is leverage that is dangerous. It is always excessive leverage that got people and society into trouble.

And in this article, Munger quoted Keynes "When the capital development of a country is the byproduct of the operations of a casino, the job is likely to be ill done."

Imagine if we can unleash all the amazing brains that are currently employed to create ever more complex financial instrument (and the accompanying risk management tools ) to build better bridges, communication systems, vaccines or harness energy better!!! Alas, even in SMU, operations people get far less 'respect' (and pay) than someone who gets a fancy finance job.

Enough of my ramblings, go read this yourself!
Basically, It's Over - A parable about how one nation came to financial ruin. By Charles Munger

Myth of Asia

Baby Chao sent me this article entitled The Myth of Asia's Miracle written by Nobel prize winner Paul Krugman. It is important to note that this article was written in 1994, which predates the greatest tech boom in US in the late 90s and the implosion of Asian financial crises in 1997.

The underlying thesis of this article is that "sustained growth in a nation's per capita income can only occur if there is a rise in output per unit of input". And that the growth in GDP of the Asian countries are driven by increasing inputs (capital and labour) and not increasing productivity (output per unit of input).

The message that was not made explicit is; collectivist, authoritarian state is NOT inherently better at achieving economic growth than free-market democracies.

Collectivist + authoritarian. Sounds like a country I know quite well.

Or do I?

The growth of Singapore between 1966 to 1990 was contrasted against the Soviet Union's method of growth. Essentially HUGE growth in input --> resulting in unsustainable per capita income.

Caveat: The last time i took formal econs lesson was many years ago in JC, so it is likely that I am totally wrong!

As i'm more familiar with finance and accounting stuff, the following is a loose analogy:

Assuming that all 'inputs' in a country are things like labour, factories, intellectual property, machines, etc. and that 'output' - GDP is like net profit.

To increase Net Profit, all you have to do is to increase your assets employed. As long as you can constantly raise capital to buy more assets, then your net profit can increase.

However, for the growth in earnings to be sustainable, there is a need to increase return on assets and not the asset base itself. There is a natural limit on the growth of a company as more assets are deployed, the return on capital revert to the cost of capital, and the company faces diminishing return, thus earnings growth slows down.

Though i know little economic theory and data, I find Krugman essay was very logical and may have great impact on economic policies.

I googled on Singapore's productivity, and is surprised at the ranking as shown below in chart form from Straits Times;

source: http://www.straitstimes.com/STI/STIMEDIA/pdf/20100201/020110productivity02.pdfdf

Of course productivity is not the end of the story. If it cost us $2 to employ a cheap foreign laborer who produce 1 unit of work, eg sweeping 1 kg of leaves, vs spending $1000 to employ Superman to blast off the leaves (100 kg), Superman is undoubtedly more productive by a factor of 100, but it does not mean that Singapore is better employing Superman to clear the street.

Now the issue is how do we ensure a prosperous country AND equity within the society. Some part of me believes that there must be a trade off between prosperity and equity.

Of course our forward looking government set up a committee to look into how we should position Singapore for the next phase of growth. Btw, I love the name of the committee - ESC...look at your keyboard...

It is interesting that key recommendations no longer focus so much on labor growth, but focuses growth on Innovation and Skill. "We must shift to achieving GDP growth by expanding productivity rather than the labour force. We must boost productivity in order to stay competitive, upgrade the quality of jobs, and raise our people’s incomes. A slower growing workforce makes it all the more important for every enterprise to innovate to create more value, and to maximise the potential and performance of every worker."

Now it seems that we are back to Krugman's issue that real economic growth comes from innovation. And innovation is supported by a liberal and vibrant marketplace, which creates new jobs, new opportunities, etc. The BIG question left unanswered is that can government plan for innovation? And to mobilize resources to create a innovative society? In a society which frowns upon failure, the path to innovation and creation will be challenging. I sure hope that somehow somewhat we'll get through this century stronger and better - but who and what will be sacrificed in the process?

To read the full ESC recommendation, click here.

You Pay A Very High Price For A Cheery Consensus

The annual letter to the value fund - Longleaf Partners Fund is out.

Buffett has said that the true test of a fund is to see its performance over a complete market cycle. Many called the last 10 years the lost decade, where stock investments yields you slightly negative annual return. However, over the same period, Longleaf Partners has returned over 67.7% in total.

In the above letter, there is some interesting discussion on the importance of macro economic understanding to a value investor.

Also read this 1979 Fortune article written by Buffett - You Pay AVery High Price In the Stock Market For A Cheery Consensus . Remember before 1980, for a decade almost nobody wants to own stock. I also love the analogy of treating a basket of stocks as a Dow when trading below book value to a discounted bond. And that the return on equity to be thought of as a coupon rate.

There was also a discussion on replacement value accounting vs. GAAP accounting. haha. Accounting Theory taken last year has opened my eyes to things I've not seen before.

And I can't help but laugh at the editor's note:

Warren Buffett is a down-to-earth man of 48 who prefers to operate out of his native Omaha rather than in the canyons of Wall Street, but the pros regard him as possibly the most successful living money manager, a direct descendant of the legendary Ben Graham under whom he studied. Buffett made a fortune for himself and his clients in the Fifties and Sixties but threw in the towel in 1969 because he could no longer find bargains. Then in late 1974, when the Dow Jones industrials were below 600 and the air was thick with doom, he told Forbes: "I feel like an oversexed man in a harem. This is the time to start investing." Within months, the greatest rally in history began, with the DJI running almost 450 points in a bit over a year. What does Buffett think now? In this article, he puts it bluntly: Now is the time to buy. "

The One with Cheese and Chocolates

Kraft sold its pizza business to Nestle and bought Cadbury.

Read this transcript to learn why Warren Buffett opposes the dealS.

On selling the pizza business:

1. Kraft sold the (frozen) pizza business at $3.7 bn, but net of tax will receive only $2.5 bn.

2. The pizza business earns 280 Million pre-tax income on $2.1 bn in sales which has been growing over the years.

3. He thinks that giving up $ 280 million in earnings in exchange for $ 2.5 bn is a bad deal for the seller. We can infer that paying $2.5 bn for $280 million is a GOOD deal for the buyer (ie PE of around 8.9x).

On buying the chocolate business:

1. Kraft stated that they are paying 13x EBITDA

2. Buffett told the interviewer that DEPRECIATION IS A VERY REAL EXPENSE. (i believe he meant capital expenditure to keep the business in place)

3. There will be about 1.3 bn in restructuring charges.

4. Part of the ''currency" used for this transaction is Kraft's undervalued stock. Thus they are acquiring Cadbury at more than 13x EBITDA based on intrinsic value of stock.

(the above two paragraph of numbered points were extracted from the transcript, the following is my analysis... ...proceed with care, cuz this author is famously careless)

"So, the actual multiple, if you look at the value of the Kraft stock, is more like 16 or 17 and they sold earnings at nine times. So, it's hard to get rich doing that. And I've got a lot of doubts about the deal."

From the above statement, we can reverse engineer what may approximate Kraft's intrinsic value per share.

Let us just convert all the deal details available at Kraft's website into USD.

840 pence per Cadbury share for 500 pence in cash and 0.1874 New Kraft Foods Shares

at the exchange rate of 1.63 USD/GBP

840 pence = 13.69 USD ----(1)

500 pence = 8.15 USD ---- (2)

0.1874 Kraft shares at $29.58 = 5.54 USD ----(3)

Check: (1) = (2) + (3) , therefore balance

Since Kraft's statement states that at the current deal price, it is acquiring at 13 x EBITDA, then

13.69 / EBITDA = 13

EBITDA = 1.0533

Mr Buffett said that Kraft is paying at least 16 x EBITDA based on kraft's intrinsic value, thus value of deal at

16 x EBITDA = 16 x 1.0533 = 16.853 USD ----(4)

0.1874 Kraft shares = (4) Less Cash component (2) = 16.853 - 8.15 = 8.703

Intrinsic value of 1 Kraft share = 8.703/0.1874 = 46.44

Compare this to the closing price of 29.58, no wonder Buffett is against the deal as (I think) he believes that the company is selling at 35% discount to intrinsic value!

However, I would like to add that Kraft is expected to earn around $2 per share. Is Kraft worth 23x PE based on share price of 46.44? Of course PE is a super shorthand to estimate value. However, i find this an interesting exercise as this is one of the few times in recent years that Buffett 'reveals' his estimation of intrinsic value.

Also note that for 2008, on 3 bn in net profit, almost 4bn of operating cashflow is generated and CAPEX (with growth) is about 1.3 bn. So maintenance CAPEX maybe way less than 1.3 bn, with free cashflow exceeding net income, which means that EPS multiple maybe a lousy way to estimate value to the long term owner.

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Actually I don't quite know who I wrote the above post for, cuz most friends who read this blog will probably stop at the first line. haha. So I wrote it mostly for myself, to remind me that Price does NOT equal Value, and that smart people may do things that are not too smart things, and that I must not fall prey to over-enthusiastic promoters (however well intended they might be).

Also any readers who find errors in my reasonings or calculations, please tag or comment to set me right.

Tiger IPO

Tiger Airways is launching an IPO to raise up to $246.8 mil dollars. A fellow SMU friend emailed and asked if we should subscribe to this IPO, here's my take on it. After scrolling through the 300 over pages of prospectus available on SGX homepage.

The following discussion assumes that you intend to buy and hold Tiger Airways for at least 5 years and beyond.

Should you decide to subscribe, please consider the following;

1. The airline industry is insanely competitive. Few airlines company makes accounting profit, much less generate free cash flow after capital expenditure needs.

2. The world class low cost carrier leaders are Jetblue and Southwest airlines. Both suffered terrible results over the last three years. Do you think Tiger will fare better should we face any economic turmoil in the future?

3. Financials:
(a) Income statement (pg 12 -13), the results for the past 3 years are dismal.

(b) Balance sheet (pg 14 -15), the company is in net NEGATIVE equity position

(c) Over 3.7 BN in operating lease commitment (pg 64), this is OFF BALANCE SHEET!!! So what is the 'true' financial standing of this firm? You decide.

Thought Experiment: Assuming that you can afford to buy the whole company and has to hold it in your family for the next 3 generations (without the option to sell), how much would you pay for it?

My answer is that I will not own it at any price cuz I believe this company (and most airline companies) will consume more cash than it can generate, and that my family will be worst off having this non-cash generating cow that eats way too much grass.

So do continue taking Tiger as we now know that the fleet is at a youthful 2.4 years (but depreciated over 23 yrs!!!). It is also likely that we are not overcharged when we buy our air tickets looking at the almost non-existent gross margins :)

Meanwhile hear the father of business strategy, Michael Porter, talks about competitive advantage and the terrible economics of the airline industry.

Suit Up for the 100th episode!!!

Can't wait!!!

The Daily Show

One of the best show in a while!

The best time in American history and George Lucas interviewed.