A year older, hopefully a year wiser.
Thanks for all the kind messages on facebook, whatsapp, and mobile.
He has achieved success who has lived well, laughed often, and loved much; who has enjoyed the trust of pure women, the respect of intelligent men and the love of little children; who has filled his niche and accomplished his task; who has left the world better than he found it, whether an improved poppy, a perfect poem, or a rescued soul; who has always looked for the best in others and given them the best he had; whose life was an inspiration; whose memory a benediction.
Read this most amazing book "The Most Important Thing: Uncommon Sense for the Thoughtful Investor". It is simply about how to think about risk and reward. It also discusses common blindspots of investors. Of course there is no "most important thing", but if i have to venture a guess, it goes back to good old "Margin of Safety".
MOS protects us from making wrong assumption, from chasing hot stocks, and provides an additional booster to return when MOS shrinks and "market" takes the stock off your hand.
Reviewing my stock selections over the past 5 years, a few good selection boost the return of the entire portfolio despite having many laggards in the entire portfolio. However, the percentage weight of the few good ideas must be heavy such that if they work out as expected, there will be a meaningful contribution to the entire return. It should also be that if it turns out to be wrong, it should be no catastrophe to the portfolio.
So after these few years, this is my checklist for stock selection:
1. Pristine balance sheet
2. Cashflows generating entities that does not rely heavily on external financing
3. Companies with high return on capital, with min threshold of about 15%...unless company in super rapid growth phase
4. Do not pay for growth, if growth materialises, it will just be an additional booster
5. Sum of the Parts valuation does not always work out...unless there is a fixed schedule already in place to release value, via spinoff, listing, securitisation policy, etc.
6. Discount to NAV scenario does not always work out...unless there are corporate actions that will help narrow the gap (e.g. stock buy-backs).
7. Insist on a MARGIN OF SAFETY, so far all the stocks that i've lost significant money on are simply due to insufficient MOS in place...
After discussing all the conflicting views in the previous post, I'll share my thoughts on investing in this uncertain environment.
1. Importance of current yield
As the current market is neither super cheap or crazy expensive, there is a good chance of it trading sideways for a long period of time. While buying cheap and good companies is fine, if it offers decent yield, it is an added plus as you get paid to wait.
2. Importance of cash
I'm currently holds more cash than usual because while cash yields almost nothing, if or when there is a crises, on cash allows us to hunt for great bargains.
3. Staying away from leverage
The last thing on my mind is to think about margin call when every thing is falling apart.
4. Consider only companies with very strong balance sheet and pricing power
I will not buy stocks of company that relies heavily on external refinancing as any external shock might force the company to raise dilutive equity. Furthermore, as commodity prices eats into profit margins, it is important to buy companies with significant pricing power who can transfer cost to customer while maintaining its own return on capital.
5. Consider tail risk hedging
I have not implemented this in my current portfolio but is considering doing this. For an over simplistic scenario, see the following:
Currently SPY (S&P 500) trades at 132.
A December put option with strike price of 108 costs about $2.
The payoff if S&P falls say 25%, (ie from 132 to 99), the payoff is = 108-99 = 9
For a $2 dollar cost, i get at $9 return.*
If i spend about 2% of my portfolio on insurance, should the disaster happen, then the insurance will grow to 9% of my portfolio. The major advantage of this $9 is that it can serve as dry gun powder to hunt for new target during the disaster. The disadvantage is that you'll have a sunk cost of 2% every year cuz you won't have disaster every year.
*Thanks D for your comment. I've amended the payoff accordingly. After the amendment, the payoff doesn't sound as enticing ya.
On a side note, from my understanding of options, usually the only thing that will be mispriced in a option model is the implied volatility. So after many month/years of smooth sailing return, usually implied volatility will be low, thus downside protection can be bought at a cheap price. Conversely, using Black-Scholes model will spit out awkward results for very long dated options when current volatility is high, as it will ignore the compounding effect of retained earnings inherent in the stock market. So Buffett was a put seller during the financial crises.
A sound article that I've read on tail risk hedging can be found here.
Recently read a few books on investing. After a month of thinking and reflection, I’ve repositioned my family to reflect my current conviction. There are great uncertainties ahead of us. The following consideration to risks and its tradeoff has great impact on my portfolio allocation for the family and stock picks decision.
1. Inflation vs. Deflation – Over the next decade, are we entering a period of inflation or deflation
? Different asset classes behave differently under these two scenarios (e.g. long dated bonds, commodities, equities, etc).
Two different point of view is presented by two astute investors (Gary Shilling vs. Howard Marks):
a. On deflation, see Gary Shilling and his book, the http://www.forbes.com/2011/02/04/gary-shilling-deleveraging-china-treasuries-intelligent-investing-video.html
10 investments to buy (Gary Shilling – Deflation View) • Treasury and other high-quality bonds – Shilling says he has been a 30-year Treasury bull since 1981. The “bond rally of a lifetime” is going to continue as deleveraging causes deflation. • Income-producing securities and dividend payers – There won’t be much growth, so you might as well collect dividends. • Food and other consumer staples – Consumer discretionary spending is getting whacked, but people still need to buy bread and socks. • Small luxuries – People want to spend money on something. Shilling says items like snakeskin tote bags, five-blade razors and designer jeans could be the new type of conspicuous consumption, taking the place of big ticket items like sports cars. • The US Dollar – With Europe and Japan drowning in debt and emerging markets verging on a crash, the dollar is going to start looking pretty good. Shilling says the dollar will remain the world’s currency, with no real competition from gold or the yuan. Meanwhile, America will be mired in deflation. • Investment managers and financial planners • Factory-built houses and rental apartments – Cheap small homes are the order of the day, as old people look for a cheap retirement spot and young people look for a small mortgage. Renting will be a more and more popular strategy. • Health care companies – As America ages, the health care industry seems unstoppable. • Productivity enhancers – Anything that helps juice bottom lines will do well in the new era. This includes consulting groups, computers, internet, biotech and telecom. • North American energy – Shilling is bullish on deepwater drilling and natural gas, as well as coal and nuclear.
Investments to buy (Howard Marks – Inflation View) “From today’s levels, I think rates are more likely to go up than down (there’s so little room for the latter).” What to do about them? The list of possibilities is long: • Buy TIPS. • Buy floating rate debt. • Buy gold (but only at the “right” price, and what’s that?) • Buy real assets, such as commodities, oil and real estate (ditto). • Buy foreign currencies. • Make investments denominated in foreign currencies. • Buy the securities of companies that will be able to pass on increased costs. • Buy the securities of companies that own commodities, or that own assets denominated in foreign currencies. • Buy the securities of companies that earn their profits outside the U.S. • Hold cash (to invest once interest rates have risen). • Sell long-term bonds (and possibly go short).
2. Stocks Valuation: Are stocks in general expensive or cheap? Using PE as a proxy see Robert Shiller and Jeremy Siegel debate this on cnbc.
3. SGD versus major currencies, in particular, the USD. As a balanced portfolio, I will unavoidably have exposure to USD and other major currencies. Yet there are costs to hedging, and also timing and size of hedge will have an impact on the portfolio.
4. The importance of cash
In November 2010, Jeremy Grantham commented that “The Fed is driving the S&P [500], which is overpriced … driving it from already substantially overpriced into what I would call dangerously overpriced,” Grantham told CNBC in a lengthy interview. “It wants us to go out there and buy stocks, which are overpriced because bonds they have manipulated into being even less attractive. So, we’re being forced to choose between two overpriced assets. That is not always a terrific choice to make because there is a third choice, and that is don’t play the game and hold money in cash.”
See interview here: http://video.cnbc.com/gallery/?video=1640401359
In the book, Feynman teaches very basic principle - like conservation of energy, and applied it to a wide range of phenomenon. And he also talks about how physics interact with other sciences, or even psychology, simply fascinating.
Today I was talking to an audit senior regarding accounting led incentives, e.g. book sales early if bonus tied to sales, slash much need staff cost to justify 'synergy' in acquisition, etc. Sad that the conversation didn't go anywhere, people at the table simply goes back to what the audit procedures 'should be' and no one discussed why the audit procedures was there in the first place.
Anyway, saw this MV today, very interesting
Somehow i watched this video way more times than i watch "Born this way".
I found a old post in 2008 on a friend's two favorite companies, APPLE and McDonalds.
Let's see how this two companies has performed over the last few years since the post dated Jun 2008. Chart here.
Over the last 2 year plus, Apple returned over a 100%, McDonalds over 24% and S&P a -3.84%.
Guess that buying great companies still works!
For any Buffett stalkers out there, the full transcript of his interview with CNBC is out. See here.
In the recently published annual letter and annual report, Berkshire Hathaway reported great earnings and little new news.
However, Buffett did 'help' us with the calculation of the intrinsic value of Berkshire Hathaway (BRK) stock.
In thefirst page, he said that in his estimation, the current earning power of BRK is 15 bn before tax and 12 bn after tax.
To verify this 12bn dollar figure, we can look at BRK's cashflow statement and see that operating cashflow is about 19bn and capex is about 6bn, thus 12 bn does not seem like an over-optimistic valuation.
A simple valuation would be as follow
(1) Value of operations = 12bn / 9% =133 bn
(2) Value of invested assets = 158 bn
(3) Less value of debt = 47.6 bn
Total value of Berkshire Hathaway = (1) + (2) - (3) = 243.4 bn
Number of Class A equivalent shares = 1648 k
Intrinsic value per A share = $147,694
Intrinsic value per B share = $147,694/1500 = $98.5
Current book value per A share = $95,453
Implied P/B = 1.55
Current Price per A share = $130,250
Current Price per B share = $86.7
Current BRK is trading at approximately 90% of this very conservative estimation of value.
The above calculation ignores to potential of BRK earnings substantial underwriting profit in the future, and also growth operating earnings in redeployment of it enormous cash hoard.
Thus these 'growth' would serve as further buffer against inaccuracy of the intrinsic value.
Disclosure: I'm a happy owner of Brk.B shares.
Friday, January 21, 2011
Is this the real life? Is this just fantasy? Caught in a landslide No escape from reality。。。
From Buffett's 1989 Letter to shareholders - on "Institution Imperative"
(1) As if governed by Newton's First Law of Motion, an institution will resist any change in its current direction;
(2) Just as work expands to fill available time, corporate projects or acquisitions will materialize to soak up available funds;
(3) Any business craving of the leader, however foolish, will be quickly supported by detailed rate-of-return and strategic studies prepared by his troops; and
(4) The behavior of peer companies, whether they are expanding, acquiring, setting executive compensation or whatever, will be mindlessly imitated. Institutional dynamics, not venality or stupidity, set businesses on these courses, which are too often misguided.”
I'm now fighting my mini battle for independence and against the institutional imperative within our firm.
Note the word "imperative"...do you recall a certain spell in Harry Potter? Yes, the Imperius Curse: "Total control. I could make it jump out the window, drown itself, throw itself down one of your throats..."—Barty Crouch Jr. as Alastor Moody on the Imperius Curse
There is great social pressure to conform, and I think a social norm created by "niceness" is even harder to break. If everyone stays late because everyone else is staying late, there is great pressure to wait and see if anyone else wants to go home. This is especially silly if we are staying just to stay, and no work waits to be done.
Also, the actions by those higher up are often governed by the unshakable Imperius Curse, while say that we need to gain efficiencies, many harp constantly on immaterial items (while some more hairy issues remains un-rectified cuz no-one wants to be the first to unravel the ball of hair..ewww this is even grossing me out).
Will risk be reduced by harping on immaterial low risk issues? Of course not. Does spending 2 days performing vouching substantially reduces risk? Hardly. Is it possible for everyone to go home at decent hours - sometimes.
Can I break social norms and not be viewed as a bastard? I'll try and see.
