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.