A Different Box of Tools

2011-08-23T16:01:00.002+08:00

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.

Attributed to : Bessie Anderson Stanley

2011-08-05T16:24:00.001+08:00

Started a new blog to blog exclusively about investing and individual company analysis.

Visit me at http://arationalwalkdownshentonway.blogspot.com/

My checklist

2011-07-13T21:31:00.005+08:00

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.

The best investor letter I've read in a long time by Howard Marks: How Quickly They Forget.

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...

Investing Bottom Up

2011-05-24T22:13:00.004+08:00

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.

Worrying Top Down

2011-05-09T23:52:00.002+08:00

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.

b. On inflation, see Howard Marks’ notes to investor (http://www.oaktreecapital.com/Memos/Tell_Me_Im_Wrong_01_22_10.pdf)

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

Re-reading old post

2011-03-07T22:57:00.003+08:00

I'm revising physics while reading Six Easy Pieces by Richard Feynman, http://www.amazon.com/Six-Easy-Pieces-Essentials-Brilliant/dp/0465023924, if only JC physics could be thought this way.

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.

Berkshire Hathaway, bargain?

2011-03-01T23:11:00.002+08:00

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.

2011-01-21T22:51:00.001+08:00

Is this the real life?
Is this just fantasy?
Caught in a landslide
No escape from reality。。。

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。

功遂身退，天之道也。

Institution Imperative

2011-01-11T22:47:00.002+08:00

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.

Don't Worry, Merry Christmas!

2010-12-24T11:02:00.001+08:00

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

Merry Christmas dear all!

Competitive advantage and PE contraction

2010-12-19T17:28:00.006+08:00

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

2010-11-27T20:35:00.005+08:00

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

2010-11-25T22:21:00.003+08:00

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

2010-11-01T23:00:00.004+08:00

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

2010-10-21T20:31:00.004+08:00

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

2010-10-17T21:32:00.004+08:00

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

2010-09-21T11:21:00.006+08:00

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

2010-09-17T09:31:00.002+08:00

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

2010-08-31T10:01:00.005+08:00

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

2010-08-26T09:21:00.005+08:00

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

Moral Compass 5000

2010-08-19T14:15:00.001+08:00

The Colbert Report

Mon - Thurs 11:30pm / 10:30c

Moral Compass 5000 Action Center

www.colbertnation.com

Colbert Report Full Episodes

2010 Election

Fox News

Journey

2010-08-17T10:29:00.002+08:00

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

2010-08-06T19:18:00.002+08:00

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

2010-06-09T21:08:00.003+08:00

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

2010-05-22T13:04:00.002+08:00

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.

2010-05-21T22:12:00.006+08:00

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

2010-05-16T22:55:00.004+08:00

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

2010-05-14T10:19:00.002+08:00

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

2010-04-29T20:38:00.006+08:00

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

2010-04-09T22:50:00.003+08:00

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

2010-04-06T09:29:00.004+08:00

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。

2010-03-19T18:43:00.001+08:00

Debate on financial innovation

2010-03-12T21:47:00.002+08:00

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

2010-03-02T20:59:00.003+08:00

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

2010-02-22T23:02:00.003+08:00

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

2010-02-09T16:44:00.010+08:00

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

2010-02-02T16:06:00.004+08:00

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

2010-01-21T22:44:00.008+08:00

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.

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

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

2010-01-15T10:40:00.003+08:00

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!!!

2010-01-12T15:50:00.001+08:00

Can't wait!!!

The Daily Show

2010-01-10T21:09:00.003+08:00

One of the best show in a while!

The best time in American history and George Lucas interviewed.

Managing Oneself

2009-12-31T10:10:00.004+08:00

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."

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

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

Avatar

2009-12-29T08:26:00.007+08:00

Go watch AVATAR. Please watch it in 3D. It makes a difference, as the world of the Na’Vi comes alive in our cinema.

Official Avatar Movie

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.

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

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.

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

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

So Many Things yet So Little Time

2009-12-19T08:44:00.002+08:00

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.

Capital Ideas Evolving

2009-12-07T16:20:00.003+08:00

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/

Buffett and Gates with students

2009-11-20T22:34:00.001+08:00

Get full transcript here

source: http://www.cnbc.com/id/33940689

Money, happiness, great profs

2009-11-10T22:35:00.005+08:00

Read the following in a book somewhere; If you believe money can bring you happiness, forget it, only people who has not much money will believe this.

I think there is a lot of truth to this. Was talking to my mom about the idea of "Happiness"...and I said that i feel happy when i feel free and contented. When i feel that i'm in control of my life and all the wonderful things that has happened to me, i feel truly happy. I think that being happy is a choice. A state of mind.

For instance, when I think that I have to attend my strategy class to face my (sometimes) ridiculous and brilliant prof, i feel super sian. But when I felt that I WANT to attend his class cuz there is so much to learn, I felt energized and happy. Nothing has changed, except my attitude towards it.

I think that at our age, there is so much knowledge and skill to acquire. If we are passionate about what we do, we will enjoy the process and probably do a wonderful job compared to those who are in it for the material rewards.

Talking to Prof Pearl Tan, and she reminded me not to lose the ability to THINK. Even if an organisation discourages it, always think. Yet also try not to be a pain to work with (which sometimes happen when you are too independent). When you talk to people who LOVE what they do, you can feel it.

I think SMU students are a really lucky bunch. We have profs who love what they do. Prof Pearl Tan, JJ, Joanne Tay and Andrew Lee showed me what true professionalism is. They remind student that having technical skills is a must, but it is the our character that will determine our achievement.

Can you imagine looking into the mirror every morning and hating the man in the mirror? I can't imagine doing that.

Former Senator Alan Simpson famously said: “Those who travel the high road in Washington

need not fear heavy traffic.”

Let us take the road less traveled.

The best daily show on Earth

2009-11-06T12:29:00.004+08:00

The Daily Show With Jon Stewart

Mon - Thurs 11p / 10c

Al Gore

www.thedailyshow.com

Daily Show
Full Episodes

Political Humor

Health Care Crisis

The Daily Show With Jon Stewart

Mon - Thurs 11p / 10c

Daily/Colbert - Faulty Al Gore Interview

www.thedailyshow.com

Daily Show
Full Episodes

Political Humor

Health Care Crisis

This Is It

2009-11-02T22:30:00.003+08:00

Just watch the Michael Jackson "This Is It" movie. Blown away by the creative genius called MJ. He is a story teller. His music and videos are just tools for him to tell his story. Behind the glitz and glamor hides someone who I believe truly cares about the people around him and loves what he does. He is no doubt talented, yet the insane hours put in to perfect his performance shows us that talent can only bring us that far, there rest is still sheer hardwork and determination. The passing of a legend. This Is It.

On a Clear Day You Can See Forever

2009-10-30T10:23:00.004+08:00

I've made my choice. I've decided to join the accounting profession.

Note the word profession.

This is not a job. But a Profession.

As stated by David Maister, True Professionalism is about having "the courage to care about your people, your clients, and you career".

If not for my exchange, I would never come across David Maister's book, I would not think about joining a professional service firm, and I would still be looking for that ever elusive dream job.

Work for a company that you admire; I think PwC fits that choice. Audit may not be the most exciting job in the world, but I truly believe that it is a job that allows you to develop your business knowledge and ability communicate effectively with people who probably think you're a pest. It also provides a social good to the society at large. Wherever this road may lead, I don't know. But I know i will not treat this as a JOB, but as a chance to learn and grow myself, to be the best colleague and learner the firm has ever seen.

After looking at many auditors who are in their 30s with dry and sallow looking skin, I need to start drinking collagen soup and bring humidifier to the office. Haha. A friend said that I'll still get the same 'dry look'...let's see if i can defy age and gravity....mmm...maybe its time for me to have a portrait like Dorian Grey....looking at Ivan Albright's portrait...well maybe not.

A decision 6 years in the making. I'm happy.

Done with strategy proj!

2009-10-20T21:18:00.003+08:00

It has been really long since i felt so relieved after a project. We are done with our strategy presentation and I'm really proud of what our group has accomplished. It is such a wonderful experience to work with people who are committed, competent and trustworthy.

Kudos to my groupmates - pris, sok yih, and lius!

Awesome groupmates for tax and ama too.

Now i have to buck up for my GRA project given how i've 'buang' my mid term. haha. Going to sleep at 9.30. Probably losing my voice....mmm...need to go Ma Guang again. But my favorite sin seh is teaching at NTU now. haiz...dunno which new doctor to trust.

A tremendous number of people in America work very hard at something that bores them. Even a rich man thinks he has to go down to the office everyday. Not because he likes it but because he can't think of anything else to do.
W. H. Auden

...we can easily substitute "America" to "Singapore" or better still "SMU". ..

Investment Styles, Dividend Policies

2009-10-15T19:33:00.003+08:00

I attended a talk by Dr. Andreas Gruner from University of St. Gallen 2 days ago. The topic of the talk was "Successful future investments - Portfolio Management after the financial crisis".

He introduced major categories of investment styles and different type of asset class which generate extra returns during different market cycles.

In general, major investment styles include:

1. Buy and hold

2. Value : buy stocks with low valuation and sound fundamentals

3. Growth: buy stocks with growing sales, earnings,etc

4. Contrarian: buy what is unpopular

5. Momentum: buy stocks that exhibit positive price performance

6. Size: small cap vs. large cap

7. Cyclical: buy stocks that exhibits high correlation with market conditions

8. Defensive: buy stocks that exhibits low correlation with market conditions

9. Income generator: buy stocks with steady cash generation ability

In a latter part of his talk, he discussed the advantages and drawbacks of each strategy. He suggested that IF you know where in the 'market cycle' we are in, you can achieve higher return by rotating between different styles and asset class. The flip side is that if you are always SLOWER than the market and is always playing catch-ups, you'll face greater downside and limited upside.

Credit Suisse has a similar program that 'guides' investors on which style/asset class to focus in during different market cycle. Full diagram available here.

The professor also mentioned that in the LONG RUN (he used data that goes back to 1926), small caps value stocks beats large cap growth.

Tweedy, Browne has recently published a paper on the importance of dividends on investors returns. Do read this amazing article and you may want to rethink those debates between growth vs value.

Dividend Policy

We must always look analyse dividend policy in relation to the earnings potential and return on incremental of a firm. For a high growth company with decent return on capital, there is no reason why earnings should be paid out and debt be incurred to sustain growth.

For low growth company with HIGH return on capital, i think a high dividend payout policy prevents management from feeling the need to build empire with their spare cash. The recent corporate action of San Miguel to diversify from high return liquor business into low return utilities could be such an instance. Of course, you can also argue that they are creating a wider revenue base and the company can be more sustainable over the long term. However, i would also think that cash can be distributed to individuals and they can decide how the best diversify their portfolio.

On a separate issue, for my Singapore friends who are reading this post, do be cautious of your own bias when buying high yielding stocks. I have a mental accounting habit of looking at my portfolio as recorded on my brokerage account and 'forget' that a large part of annual returns is sent to my bank account. This could lead to certain unintended behavior like having a bias towards company that show price appreciation than high dividend return.

In time to come, I hope the SGX/CDP can work out a program to allow direct crediting of dividend to individual brokerage account. Furthermore, corporation can work directly with shareholders in administrating "DRIP" - dividend re-investment program, to allow individual shareholder to accumulate more shares when they are younger, and to reduce trading and commission expense of individual investors.

Fallen

2009-10-12T22:49:00.004+08:00

Over coffee

2009-10-10T22:30:00.002+08:00

I was the emcee for a friend's wedding today. Congrats once again to the beautiful couple Ying Jian and Wee Ling. Ying Jian is one of the most generous seniors I met when I was in year 1. When I was still struggling with the difference between operating income and operating cash flow, he was the only person who explained these accounting concepts to me in a easy to understand and intuitive manner. There is no expectations for any favors in return for such actions, but kindness and generosity are rare and precious, thus I'll always be thankful that there was once a Y3 who bothered to answer simple questions from a Y1.

Had a nice long chat with ZB and Joel. It has been too long since we talked. I'm always thankful for my experience in E.y.E, and how these two wonderful human being has helped me learn and grow. Super happy that ZB managed to get what he wants, if anyone deserves a ticket to success, its ZB.

Talked about our time in E.y.E, bitched a little about these and that. And then loh wei had to talk about morbid stuff. tsk tsk tsk. luckily i've got two accommodating friends who allowed me to rant. Talked about trading youth and time for career, money, and prestige. Is it worth it all?

We worked so hard to strive for excellence, to work for something...what if at the end of the day, the prize is not what you want?

Sometimes i wonder if being blissfully unaware that there is a 'better' world out there is truly a blessing. Awareness makes living clear, but it may lead to a lot more pain. Sometimes I feel that I torn from within, to search for an answer that may not exist.

As we lay in our coffin on the last day, who will attend our funeral? who will weep for us? who cares? why do i care...a dead man can't care.

Learnt a new word from "The Elements of Style" today: "Hopefully".

"This once-useful adverb meaning “with hope” has been distorted and is now widely used to mean “I hope” or “it is to be hoped.” Such use is not merely wrong, it is silly. To say, “Hopefully I’ll leave on the noon place” is to talk nonsense. Do you mean you’ll leave on the noon plane in a hopeful frame of mind? Or do you mean you hope you’ll leave on the noon place? Whichever you mean, you haven’t said it clearly. Although the word in its new, free-floating capacity may be pleasurable and even useful to many, it offends the ear of many others, who do not like to see words dulled, or eroded, particularly when the erosion leads to ambiguity, softness, or nonsense."

Funny vid

2009-10-01T10:36:00.002+08:00

Protect Insurance Companies PSA from Will Ferrell

The Landlord from Will Ferrell

Sizing

2009-09-24T09:45:00.004+08:00

An interesting discussion with dad on position sizing. He asked why so few people around him gets rich through investing.

My immediate response was that few people are investors but speculators. But then i realize the answer has probably got to do with focus. People who gets rich (ie comfortably, not those obscenely rich kind) does it through owning and running businesses. They obsess over every aspect of their business, and invest all their time and effort into running it.

The other factor is that most of them back their total net worth into their business when they first start out. Which means that the total return on capital has a direct impact on their net worth.

Contrast this with what most people do when 'investing'. Only a small portion of net worth is committed into every good idea. So even if the idea works out spectacularly, the impact on net worth is small.

Imagine Mr Smart, who has a net worth of 100 dollars, found a really good investment and back 10% of net worth into it. The investment return 100% over a year. End of year 1, his total net worth is $110.

Then there is Mr Not-too-Smart, who also has a net worth of 100 dollars. He found a mediocre investment opportunity which he has high confidence in. He invested 50% of net worth into the idea and it return 40%. At the end of the year, his net worth is $120.

Over a lifetime of compounding, guess who will win, who will lose?

Then its time to throw in all finance students' first love, DISCOUNTING!

given that

Future value = Present value x (1+rate of return)^no. of years,

IF you want to maximise your future net worth, there's only 3 things you can do,

1. Invest a lot today

2. Maximise your return (i guess this is harder)

3. Live to a ripe old age to get ahead in compounding (this is the hardest? but darn i'll try)

The new normal

2009-09-17T17:42:00.008+08:00

The following post is inspired by Xinhong's super short post. Here's my 'lor-soh' version.

It is interesting that many of my friends who read Bill Gross article finds it more and more technical. I have the same feeling too. So when Pimco talks about the new normal, and the DDRs - deleveraging, deglobalisation and re-regulation, it is great that we have our very own Dr Tony Tan to put it in simpler english for the rest of us.

From the speech by Dr Tan, my key takeaway is that as we enter into a world of sub-par growth and limited spending and leveraging, from a portfolio point of view, it pays to be cautious. Risk of inflation and deflation has both increased --> Probably means that if you do buy bonds, keep to those with short duration and of great credit quality. If you got housing loan, try to fix the rate now. If you pick individual stocks, do not overpay for growth, cuz the odds of high growth (in general) over the next few years are not high.

Emerging economies are likely to displace the G-7 as the world’s largest economies over the next 10-15 years, even if per capita incomes will still lag behind the developed economies. This relative outperformance will be driven by
(i) larger savings and domestic demand potential,
(ii) relatively healthy public and private sector balance
sheets,
(iii) policy flexibility, and
(iv) room for significant productivity catch-up.
The current Great Crisis has markedly accelerated such trends.

But the shift in economic power to the emerging world will also likely increase geopolitical risks. For one, the emerging economies, especially the BRICs will become key global powers and increasingly demand more say on world affairs. An awkward transition is likely to occur: In terms of military power the US is likely to be dominant for decades to come, and will be called upon to carry out most of the heavy lifting in global trouble spots. However, the US would still be heavily dependent on foreign countries including key emerging geopolitical rivals, to finance its large public debt.

< http://www.gic.com.sg/newsroom_speeches_060809.htm >

The above mentioned political risk cannot be underestimated. It scares me to think about the problems that the world would face as more and more resources demanded in industrial countries are sourced from politically unstable

The risk of de-globalisation and re-regulation are growing. In the recent "punitive tariff" imposed on Chinese tires imported into US, we may infer that economic policy will be greatly impacted by political will. Even food giant Nestle threatened to move out of Switzerland if the Swiss government imposes a salary cap. Executive compensation has always been a thorny issue. But to allow the government to dictate salary based on populist view could be catastrophic.

Haha. Here I am thinking about world issues. Haiz, gotta wrap my head around my school work and things to be done. Focus.

Obama on Education

2009-09-11T13:57:00.000+08:00

In a prepared remark to students ranging from kindergarten through twelfth grader, Obama talked about the importance of education, his own journey as a young boy, and the inspiring life stories of people who value themself enough to give themselves a chance to shine through education.

Read the full speech here.

Every single one of you has something you’re good at. Every single one of you has something to offer. And you have a responsibility to yourself to discover what that is. That’s the opportunity an education can provide.

But at the end of the day, the circumstances of your life – what you look like, where you come from, how much money you have, what you’ve got going on at home – that’s no excuse for neglecting your homework or having a bad attitude. That’s no excuse for talking back to your teacher, or cutting class, or dropping out of school. That’s no excuse for not trying.

I know that sometimes, you get the sense from TV that you can be rich and successful without any hard work -- that your ticket to success is through rapping or basketball or being a reality TV star, when chances are, you’re not going to be any of those things.

Don’t be afraid to ask questions. Don’t be afraid to ask for help when you need it. I do that every day. Asking for help isn’t a sign of weakness, it’s a sign of strength. It shows you have the courage to admit when you don’t know something, and to learn something new.

So today, I want to ask you, what’s your contribution going to be? What problems are you going to solve? What discoveries will you make? What will a president who comes here in twenty or fifty or one hundred years say about what all of you did for this country?

My outsourced Life

2009-09-06T18:56:00.001+08:00

My outsourced Life

Posted using ShareThis

Competitive Advantage

2009-09-03T22:55:00.001+08:00

Its been a while since the last post. School's busy, and i think i need to rev up my engine more to get back into the right gear. I wonder how i managed to go through 8 hours of sitting in a single position chewing through pages of AFA text book a year ago....

Anyway, I shouldn't be complaining so much as there is some form of synergy in my courses this year. I'm doing 'governance, risk and assurance', 'strategy', 'advanced management acct (AMA)' and 'tax planning' now. The 3 courses have a underlying theme running through them - you've got to understand your business, both at industry level, and at a process level.

The strategy course is taught in the 'case' method, which is an awesome learning experience, but super heavy in terms of course work. No pain no gain i guess.

Did an industry analysis on the airline industry last week and another on the carbonated soft drink industry this week. Its amazing how clearly Porter 5 shows us where does the profit flows to. I was inspired by my case study of Apple to understand IBM better. Read the book "Who say elephant can't dance" and must say that when we see what we learn in the class room applied by someone who did it so well, learning becomes a lot more interesting.

Anyway, during AMA class, our prof told us to apply different strategic analysis tool to ourselves and analyse what we should do with our self.

The SWOT framework works great on individuals too. Listing down my strengths and weakness, i think that i'm not exactly good for nothing, but also not great at anything. Hopefully being good in a few things would one day lead a great thing. Is this a true sustainable competitive advantage? NO, cuz anyone can emulate you with enough hard work. So the key is to constantly improve, learn and grow.

Applying the hedgehog concept, i think we can define what we want to do better.

I hope my self assessment is not too off. But honestly, the best analysis is sometimes futile. Part luck part hard work. Hopefully, it will all payoff one day.

By the way, of the 11 companies that was profiled in Good to Great, Fannie mae has gone under govermental ownership, and Circuit city has gone into liquidation.

We should feel happy when every thing kinda crashes around us, cuz life cannot get much worse after this. The converse is true. It is time to be truly worried when one is riding on a high, cuz mean reversion is ultimately one of the strongest forces.

Don’t Do What Others Do

2009-08-19T20:52:00.001+08:00

Job hunting season is starting soon. After my internship at the private equity firm last summer, i'm more convinced than ever that doing what you like is an important search criteria for me. Quote from a friend who had lunch with me during my internship, "Why do you look so radiant?" - how can i not look radiant if i'm having so much fun at work? haha. Deciding to work for free (for internship) was my best idea in 1H09.

Looking through a bunch of websites to look for asset management company that would probably be a good fit with my personal belief that investment decision should be bottom up, research and valuation driven, and long term in nature. I hope I'll thrive in a company where all employees share the same fundamental ideas and approach.

One of the fund house that i was looking at has an investment process that i think can truly provide excess return over the long run. I enjoyed the annual report which detailed the purchase and sell decision for certain stock also the interview by the chief investment officer on how best to invest. In summary, Don’t Do What Others Do, read the article here.

My take on being contrarian does not mean simply buying whatever is falling in price. Averaging down only works when you are RIGHT. If not, it simply means you are throwing good money after bad. It does not mean buying low PE stocks and shorting high PE stocks, the low PE stocks maybe may deserve its PE due to its poor return on capital or low growth potential.

Investment success comes when the investment public fails to recognise the potential of a company and there is mispricing going on.

My dad asked me why after reading so many annual reports, i only buy a few stocks for his portfolio which i told him to expect a return averaging 5-7%. I told him cuz if i venture far away from what i think i know (enough about), i run the risk of seriously impairing his retirement savings.

Why risk something you have for something you don't need?

A Crude Awakening

2009-08-17T21:51:00.000+08:00

National library allows all ordinary member (those not paying special membership fee) to borrow up to 2 audio visual materials for 2 weeks. Go make use of this facility and borrow great materials from the library!

Just watched the documentary A Crude Awakening, and this documentary discussed about (i) why we are probably near or has passed peak oil production. (ii) What are the probable political, enviromental and social impact of world with no cheap oil. (iii) Possible solutions to the problems and why without the political will to do so, we are simply living on borrowed times.

You can view the complete show free online on google video, it might just change the way you think about all the talk about alternatives energy and if there's anything you'd need to do to prepare for the day of reckoning.

The film interviews top experts who presented a balanced view of what should be done but why is not done. And the sad reality that even if we are to start tackling our problems today, there are still painful prices to be paid.

You'll get a glimpse of why exploiting ethanol fuel could be a pretty stupid idea as the tradeoff between world hunger vs. fuel depletion does not allow such transfer of land use. An interesting hypothesis was also presented - If the growth of financial market and wealth over the last century is due to efficient exploitation of fuel by mankind, then a fall in available fuel will cause global wealth to decrease or at lease slow to a rate absent any cheap alternative.

Investment Outlook

2009-08-12T19:16:00.001+08:00

Bill Gross wrote his August investment outlook that builds on his ideas from the previous months. The 'price of hope' is a very interesting concept. It is always easier to sell hope than reality.

Important take away - In a world where single digit return is the norm, then there should be even more emphasis on cost of investment.

Imagine a fund that has underlying return of 7% but charges a 1% annual management fee.

Over 10 years, $10,000 will should have grown to $19,671, but due to the 1% fee, actual return would be 17,908. A difference of over $1700!

Furthermore, there is a typical 'sales fee' of about 3% - 5% in Singapore.
Assuming a 5% fee and 1% annual management fee, after 10 years your return would be 17,013.

If you look through the fund reports of unit trusts that are available in Singapore, it is very common to see annual fee expense above 2%. This drag means that fund manager has to outperform the benchmark by 2% just to breakeven with the benchmark which can be purchased through a relatively low cost ETF.

I find it scary that 85% of people who took money out of their CPF special account with a garunteed return of 4% fail to beat it! and i have recently heard a sales pitch from an insurance agent saying that 'take your money out of your CPF (yielding 4%) and buy my product that yields 2%. Insane!

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

I have been re-reading the Intelligent Investor. This third read is very beneficial as i reflect on what i've learnt in the past year or so. I remember the first time jiechao recommended me the book in 2004, and i thought it is just one of those how to get rich books. I don't know anything about investing or finance then. I read the preface to the book at Kino and was hooked. By the way, the preface was written by a certain Warren E. Buffett, and I had NO IDEA who that is.

The first read was painful.

After a day of torture in my beloved Sungei Gedong Camp, i'll curl up on bed and seek wisdom in this classic. Realizing that to read this book requires basic understanding of accounting and finance, i bought a outdated version textbook on Financial Accounting from Bras Brasa and started my amazing journey with accounting and investing. During my last year in camp, i read an average of 2 books per week. Reading and thinking i believe is the first step of learning how to invest.

After 5 years, I have become more clear and steadfast than ever that my investment success will come from having a sound investment policy, a keen awareness of my limitations and biases and a truly long term perspective when dealing with the daily up and down of the manic depressive Mr Market.

Buffett’s Betrayal

2009-08-07T13:23:00.000+08:00

I was sent a link to the following article called Buffett's betrayal which sumarized how Buffett's investments got bailed out by taxpayers money and suggests that only by high level lobbying did he managed to secure his investments.

Main article here: http://blogs.reuters.com/rolfe-winkler/2009/08/04/buffetts-betrayal/

Rarely has an article generated nearly 200 replys. Furthermore, many of the replys are intelligent and non-biased.

Here's my take on it;

The 'true betrayal', I believe , is the faith the general public has invested in financial institutions which had created and sold instruments and products that should never be sold, and investors/speculators that bought things that should never be bought in chasing that ever elusive alpha. And the betrayal of accountants who allowed fuzzy accounting (lobbied by guess who? major US corporation) and shed all responsibility.

I guess we can never be sure about the amount of 'lobbying' that goes on behind the scene, but Buffett sure defended the value of his investments well. Most of 2008 investments are structured such that even without a bail out, the impairment on asset would not be a disaster to Berkshire Hathaway. As such, he has performed well as the steward of Berkshire's capital.

Did Berkshire do better due to the taxpayers bailout? Definitely.

Could the economy (and thus the taxpayers) sailed on without the bailout. Definitely Not.

If bailing out encumbered financial is inevitable, is it wrong to have profited by backing the right horse? I don't know.

p.s. does anyone know why in the çreate post page, i no longer see icons that allow me to format text and upload pictures or links?

(thx jie chao, for the solution)

Leverage and Minsky Theory

2009-08-04T08:03:00.000+08:00

Some people asked me where did I get my capital to invest after I'm almost 100% invested by July last year, and my reply is that I borrowed money to invest.

The common reaction i get is, 'Who did you borrow from?', 'isn't that very risky?', 'whoah you very brave hor'(which usually means you very stupid hor given my abysmal result in 08).

To clear up some ideas about leverage, let's introduce the different types of borrowers under Minsky's theory.

There are 3 types of borrowers,
1. Hedge Borrowers
2. Speculative Borrowers
3. Ponzi Borrowers

The hedge borrower can make debt payments covering both interest and principle from the cash flow from investment.

The speculative borrower can make interest payment, but require constant re-financing of capital to ensure solvency.

The ponzi borrower can cover neither principle or interest, but rely on ever increasing capital gain to refinance the debt.

The current financial crises fits this economic model of unsound credit expansion quite nicely. However, like most things in life, it looks only apparant to us in hindsight. But let's leave this issue to another day and continue out discussion on the 3 types of debt.

Imagine you are buying a house to live in, and you pay your mortgage month in and month out with your income. This is not a risky type of borrowing, because as long as you are employed, one day you'll pay off all debt and the house is yours.

However, if you buy a house HOPING that there will be a buyer who will bid a higher price to buy the asset from you such that you can pay off your debt, this is SPECULATIVE in nature, and such borrower may fit the 'ponzi borrower' description. Because if your asset has no buyer, it is likely that you'll not make the monthly payment and lose your house soon.

For my personal borrowing, I have structured it in a way such that I'll amortize my loan over a 2 year period making monthly repay at a higher than usual interest rate. This payment shall be made out of my salary. To decide what level of borrowing is appropriate, I assume that I'll earn the minimal starting pay of most graduate, and I have at least a 4x coverage. I belive that this is sound and non-speculative. Because in the worst case that the asset value falls to zero, it will in no way jeopardize my ability to pay (unless i'm unemployed). Furthermore, i get the capital that i need, my lender gets higher interest on the loan as compared to the paltry fixed deposit interest rate. Essentially my family's total investment portfolio moves towards the 'efficient frontier' (if such as thing truly exist).

Lastly, not all borrowing are risky. If a loan can be structured such that the maturity and cashflow of the loan and asset matches, and there is a small buy meaningful interest spread that can be made, such loans are not risky unless subjected to loan-to-value type of covenants.

Furthermore, a non-recourse debt can actually reduce the risk involved. Imagine you're property developer and the loan is collateralized over the property with non recourse. If every thing works out well, you pay off your debt and pocket the profit. If everything falls through, the bank seize the property and you're not affected financially. Such structure actually reduces the risk of the project instead of increase it.

However, most margin financing is HIGHLY risky. Frist, the cost of financing is highly, currently around 7%. For this financing to be sound, you must expect higher than 7% on your investment. This involves a rather optimistic assumption. But the greatest problem with margin financing is that if your asset value (e.g. stocks) plunge by a certain percentage, you are required to put up more capital or your broker will sell your stock. This type of financing essentially force the investor with liquidity constrain to buy high (when liquidity is ample) and sell low (when you are squeezed by falling asset prices and liquidity is nowhere to be found). Buy high sell low...not the best way to make money aye?

Please don't stop the music

2009-07-31T22:22:00.000+08:00

The following video is dedicated to a friend who has found and lost something he treasures.

Well the first piece is roughly translated into love's sorrow, and the second piece means love's joy. You can't have one without the other.

I just can't help but smile when i hear the second piece.

Joshua Bell is one of the top violionist in the world today. Recorded critically acclaimed classical and crossover albums. He was also involved in a Washington Post experiment.
" Can one of the nation's great musicians cut through the fog of a D.C. rush hour? "
Weingarten won the 2008 Pulitzer Prize for feature writing for his article on the experiment

While rushing from point to point. We often miss the journey.
Sometimes its the journey that counts.
Sometimes its worth while to stop and stare.

Secret Millionaire's Club

2009-07-28T13:56:00.000+08:00

Notes:
Characteristic of investment in 'durable competitive advantage'
1. People want to use your products
2. The business requires little upgrade (or upkeep)
3. You are free to re-invest profits
4. Best to re-invest profits into advertising, to create brandname and emotional attachement
5. Emotional attachment creates the competitive advantage
6. Business run by able and honest management
7. Purchased at a fair price

Think about Milo versus Ovaltine. These 2 similiar products have vastly different market share in Asia. Milo has a larger market share probably due to its strong advertisement and sponsorship of events. People associate sportsmanship and healthy young people running and jumping with Milo, but no such images are associated with Ovaltine.

Nestle Malaysia, which owns the Milo franchise in Asia, which in turn is owned by Nestle (Switzerland)has return on equity above 60% without undue leverage. Investors recognises the superiority of Nestle Malaysia, that is why the stock is trading at a PE of above 20x and PB of almost 14! That's why POINT 7 is important.

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

On a seperate note, I met a director from TSMP law corporation today. Amazing lady. Super sharp and smart. Love the advice she gave me; remember to have integrity, this industry is small and everybody knows everybody. You may make some money and get away with it, but by losing your integrity you'll miss out a lot of big opportunities. Don't cut corner. There will be temptations, don't lose yourself if you want to be in this profession (i guess she meant finance/banking).

Harry Potter - Crazy funny jap fan

2009-07-22T10:39:00.001+08:00

I can't help but laugh at this interview.

Only Human

2009-07-21T14:11:00.000+08:00

Reading through some annuity document and came across the mortality statistic for Singapore.

http://www.singstat.gov.sg/pubn/popn/lifetable06-08.pdf

Looking at the 2008 figures, for Males at the age of 24, I have a 0.00055% chance of dying within the next year. And expectation of life at 24 is 54.9 => I'm expected to live till 78.9.

So long term compounding is in my favour.

Female on average lives 4.8 years longer than males. How to explain this? Due to genetic makeup, willingness of female to seek 'social living' post retirement, male not willing to seek medical help when suspecting illness and i've got a 4th theory of my own --> Because the wife is always right in most relationship, the husband '气死了'.

Of course the 'expected' is not to be expected. I shall aim to 'beat' the expectation. Haha.

Tact

2009-07-15T09:31:00.000+08:00

tact
• noun adroitness and sensitivity in dealing with others or with difficult issues.
— ORIGIN Latin tactus ‘touch, sense of touch’, from tangere ‘to touch’.

source:http://www.askoxford.com/concise_oed/tact?view=uk

I've had an amazing learning experience yesterday during a client visit to conduct due diligence. I brought away 3 main lessons from this 2 hours session,

1. Fruitfulness of discussion depends on preparedness
2. Do not assume that you are dumb because you don't understand the issue
3. Be tactful when asking and answering question, it is important to empathize with the other party

1. Level of preparedness

There is no reason the other party should provide you with more information other than on a "need to know" basis. However, they are often willing to share information when you've asked the right question.

Asking the 'right question' depends on the thoroughness of the background check that was conducted. "Stunning" the other party with the depth of your knowledge is a great way to gain an upper hand.

2. Dumb questions and answers

Don't be afraid to ask seemingly 'dumb questions' like "Why?" and if you don't understand the answer given, ask for further explanation..."Sorry, I still don't get this. Could you explain it again?"

Often, not understanding the complex and convoluted reply may not be fault at our part, but that the other party has something to hide. It was amazing how much information could be dug out from this type of innocent question. There could be nothing sinister afterall, but it is almost always good to know more.

3. Be tactful

The way my bosses probe for information is done in a gentleman manner. They first thank the other party for their time, accentuate the fact that the other party are people of high integrity, and get them to agree on harmless issues first.

After 'accepting' the praise that they are men of integrity and worth, it is hard for them to contradict themselves by blaming issues on people who are not at the table or lie thru their teeth. They co-operated in a friendly manner and many grey issues were laid out on the table and dealt with accordingly.

Last month I attended a briefing by a listed company. Looking through the financials I came across some weird accounts. I pointed this out to the CFO who was the presenter. She garbled some accounting standards and tried to avoid the question. I asked further question in a non-too-friendly manner. She gave some useless reply and moved on to the next question. For the rest Q&A I didn't get to ask any other questions cuz she don't want to pick my question.

I must conduct myself in a manner such that the others are willing to share more with me. Put down my pride and I'll be able to learn so much more.

They cheat they steal they tell lies

2009-07-13T16:21:00.000+08:00

I think that the cash register is a beautiful invention. It allows owner to 'trust' his employees with the revered task of collecting cash for sales.

Today I've witnessed an unhonourable person 'steal' from the cash register. Sadly i did not act against it and allowed my cowardice (or laziness) to rule over.

I paid for $1 pancake right after a lady who bought soyabean milk before me. The stall auntie didn't key in my sale and simply put my $1 into the cash register. At the end of the day, i'm quite sure the difference between the cash balance and receipt sales will form part of her take home pay.

If she steals $2 per hour, on a 8 hour workday 16 dollars will be stolen ($400 a month). Assuming a (honest) salary of 1600, the stolen money will amount to about 25% of her salary. No wonder she's motivated to steal as the probability and severity of being caught is low and reward is high.

I've witness the same thing at a fastfood joint at Raffles City. The MANAGER did not key in my order, and placed my order with their mike system. A tell tale sign of such dishonest act about to happen is that the cashier will NOT CLOSE THE CASH REGISTER COMPELETY after the previous customer leaves, and not issuing receipt.

The first time this happened, i didn't even realise what happened after i got my change. The second time it happened, i demanded a receipt. The manager actually started keying in the order AFTER giving my change and said there's something wrong with the machine. That smooth operator is full of shit, must have done it a billion times.

In this perverse system whereby the police (the customer) has no incentive to act and the thief has LOTS of incentive to act, it is easy for the honour system to break down. Imagine stealing a Whopper meal ($8) every hour. Given a 12 hour work day and 30 days a month, almost $3000 bucks is lost. That could be the total salary of the manager. Mangager...yeah right...managing his own bank account...super disgusting.

p.s. of course it is still way easier to steal with a pen than with knife or other arsenal. Knavery is especially prevalent if there is clear informational asymmetry, or there is high motivated seller or buyer. Haiz. We must equipped ourselves with these tools of trade, such that we will be less likely to fall victim to such unethical behaviors.

Demetri Martin

2009-07-08T23:48:00.000+08:00

I think Demetri Martin is brilliant. Way funnier than Dane Cook...dun even know why i'm comparing them. Cook is funny too, but in a more in your face way.

Asia Investment Banking Conference

2009-07-07T14:58:00.000+08:00

Jointly organised by London School of Economics and Singapore Management University E.y.E Investment Interactive Club. Click on the poster to find out more!

free advertising for E.y.E organising committee :)

Guide to Sleeping Soundly

2009-06-30T10:17:00.000+08:00

Ok, the original name of the article is "David Swensen's Guide to Sleeping Soundly"

It reminded me of the title of Phil Fisher's book - The Conservative Investor Sleeps Well.

Yale Alumni Magazine interviewed its CIO David Swensen in this article. Read it and prosper! Haha. I've ran my parent's portfolio sticking to his principles stated in "Unconventional Success" and in Burton Malkiel's "Random Walk Down Wall Street" for the past 5 years. Of course there are no fantastic returns, i'm simply glad that a noob like me managed to not lose much when others are losing their pants. I'm simply thankful that my parents have the faith in me to manage substaintially their retirement savings. There's no faster way (or high pressured way) to learn than to do the thing itself, to truly care about long term performance and to have to the fortitude to do the right thing over time.

Excerpt from the Yale Interview that i truly enjoyed reading;
Y: Given all the turmoil and uncertainty, what should individual investors do?
S: If an individual investor followed the program I outlined in Unconventional Success, they probably did reasonably well, through the crisis, thus far. They'd have 15 percent of their assets in U.S. Treasury bonds. They'd have another 15 percent in U.S. Treasury inflation-protected securities. Those two asset classes have performed well.

Of course, the other 70 percent of assets are in equities, which have not done well. With all assets, I recommend that people invest in index funds because they're transparent, understandable, and low-cost. So, the equity holdings have gone down step-by-step with the declines in the market.

I recommend that investors rebalance.
But I also recommend that investors rebalance. Rebalancing is even more important amidst these huge declines in the stock market because it presents a great opportunity. People can sell the Treasury securities that have appreciated dramatically to bring their allocation to the 15 percent target, and they can redeploy those funds into domestic equities and foreign equities and emerging market equities and real estate investment trusts, all of which are now much cheaper, and therefore have higher prospective returns.

Y: Explain this idea of asset allocation, please.

S: Asset allocation is the tool that you use to determine the risk and return characteristics of your portfolio. It's overwhelmingly important in terms of the results you achieve. In fact, studies show that asset allocation is responsible for more than 100 percent of the positive returns generated by investors.

That's why the most sensible approach is to come up with specific asset allocation targets that you can implement with low-cost, passively managed index funds and rebalance regularly. You'll end up beating the overwhelming majority of participants in the financial markets.

Y: So people should not be afraid of stocks now?

S: Not only should they not be afraid, they should be enthusiastic. One of the great ironies is that if you had talked to the average investor 18 months ago, he or she would have thought it was a pretty good idea to buy stocks. In recent months, the same investors despair about their portfolio and are fearful about putting money into the equity market.

That's 180 degrees wrong. They should have been cautious 18 months ago, when prices were much higher than they are now. They should be enthusiastic today.

LW's comment: In the heart of his investment approach, he's a sound value investor, just that his tools and assets utilised goes beyond stocks and bonds. Price is what you pay, value is what you get!

Y: Unconventional Success delivered a scathing critique of the mutual-fund industry. You rightly pointed out that the vast majority of mutual funds charge high fees, trade too frequently, and under-perform the markets. How did the industry react?

S: I've heard stories of people in the fund management business being irate about the book. That's not surprising. The mutual fund industry is not an investment management industry. It's a marketing industry. And if somebody interferes with your marketing, you're not going to like that. So I was pleased to hear that there were senior people in the industry who were very, very unhappy with me and my book.

LW's comment: Ok, my aim in the future is to irate all those pseudo experts who 'teach' people how to lose money. Those who claim that you can secure your financial future simply by sitting 15min in front of the computer every day. These swindlers and con men sell dreams that destroy futures and families deserve a special place in hell where they can feast on each others rotting waste for eternity.

Take a deep breath, count to 3...calm down.

Read the article and pay some attention to the blue box in the right side of the page. The advise is remarkably similiar to "Random walk down Wall Street" and "When markets collide". Find something that is suitable and sound for you and I think we will get rich eventually.

Thank you for the music

2009-06-27T22:49:00.000+08:00

I LOVE AJALUMNI CHOIR!!!

It's a grand night for singing,
The moon is flying high,
And somewhere a bird
Who is bound he'll be heard,
Is throwing his heart at the sky!

I think we threw our hearts to the audience and they loved it! All the hard work that went into the preperation has paid off. A wonderful experience thanks to every single member who are all committed and passionate.

Singing in choir is addictive, the high you get from creating something amazing and the work that goes into creating that something special keeps you wanting more.

Thanks to Mark that brought the choir to another level. Beyond singing, we are now performing and connecting with the audience. I can hardly imagine the level of 'shagness' he experienced every week to keep the energy level of the choir up, and he did a wonderful job conducting us on D-Day despite all the stress.

We often forget the team that did all the background work to ensure that the people in the spot light can shine. Huge huge thanks to Peiying, Whee Geok, Chee Guan, Nad, Mei Rong, Saffie and all the rest that fret and fuss over scheduling, printing, design and all the 'zap ba lang'stuff that makes a performance possible.

To the best basses in the world (ok, at least my world), Guowei, Joel, CG, and Jing Kang, super awesome to sing with u guys, and i think for many songs the basses sounded like a united super Bass!

Can't wait for Gerald's video recording of the concert. H1N1 begone! Let Gerald out so he can compress and edit the video. haha...

Ajalumni choir is a place where i feel safe and happy. No need to be someone elses version of myself. It would be a sad day when i can no longer sing with the wonderful people.

Mmmm....I think my mom would want Zhengkai, Ryan and Mark to be her son. Vastly more talented and better looking then me. She asked which batch Ryan is from, and after telling her that he's from MY batch, she said something along the line of ' 'wah, one look so young and the other look soo....'' i shall not go into THAT. Haha.

On our performance itself, i must say that i enjoyed our 2 John Rutter songs the most. I was especially surprised by What Sweeter Music. When the girls started singing, it was so pure and innocent, and i simply closed my eyes and enjoyed the Sop-Alto duet. And it was even more surprising (cuz we nv sounded like that) to me when the guys started 'dark and dull night....' We sounded so warm and mellow. The dynamics was natural and the whole choir sound like ONE. Ahh....its like enjoying a molten chocolate cake - warm, smooth, sweet and have you wanting more. I'm definitely an addict.

The Pros

2009-06-25T13:42:00.000+08:00

Are you a prostitute or are you an auditor?

1. You work very odd hours.

2. You are paid a lot of money to keep your client happy.

3. You are paid well but your pimp gets most of the money.

4. You spend a majority of your time in a hotel room.

5. You charge by the hour but your time can be extended.

6. You are not proud of what you do.

7. Creating fantasies for your clients is rewarded.

8. It's difficult to have a family.

9. You have no job satisfaction.

10. If a client beats you up, the pimp just sends you to another client.

11. You are embarrassed to tell people what you do for a living.

12. People ask you, "What do you do?" and you can't explain it.

13. Your client pays for your hotel room plus your hourly rate.

14. Your client always wants to know how much you charge and what they get for the money.

15. Your pimp drives nice cars like Mercedes or Jaguars.

16. Your pimp encourages drinking and you become addicted to drugs to ease the pain of it all.

17. You know the pimp is charging more than you are worth but if the client is foolish enough to pay it's not your problem.

18. When you leave to go see a client, you look great, but return looking like hell (compare your appearance on Monday AM to Friday PM).

19. You are rated on your "performance" in an excruciating ordeal.

20. Even though you get paid the big bucks, it's the client who walks away smiling.

21. The client always thinks your "cut" of your billing rate is higher than it actually is, and in turn, expects miracles from you.

22. When you deduct your "take" from your billing rate, you constantly wonder if you could get a better deal with another pimp.

23. Your pimp seems to often abuse you, forgetting that without you, he would not have a business.

24. You do all the real work, but the pimp has a higher stigma and more money, and really just has to "coordinate" the work for you. Sometimes, you wonder if you could just make more money pimping out yourself.

25. You get so brainwashed into the lifestyle, that you don't realize that life can be better, until it is too late.

26. Personal time, or a work/life balance, is meaningless to your pimp, all he cares about is satisfying the clients, despite how many times he tells you he loves you.

27. After a few years, you find that all your non-prostitute friends are no longer your friends, because you lost touch and your schedule and lifestyle was difficult to manage, and you find that you associate primarily with other prostitutes.

28. The turnover rate is ridiculously high. Everyone thinks they can do it for a few years, no problem, but after just a few clients railing you, many break under the pressure, or quit for a better life.

29. Most of the time, your job could be performed by a well-trained monkey.

30. You thought college was a waste of time.

Sheep

2009-06-24T15:06:00.000+08:00

A teacher asked his class the following question: There are nine sheep in a pen, and one jumps out. How many sheep are left?

Everyone got it right, and said eight are left.

A boy alone said none are left.

The teacher said you don’t understand arithmetic, and he said ‘no you don’t understand sheep’.

~Charlie Munger at 2008 Wesco annual meeting

Twilight...Cullens' investment strategy

2009-06-23T10:28:00.000+08:00

Ok...i admit that i've committed the sin of reading the first 3 books of the twilight series and is waiting for my cousin to finish the last book so i can grab it from her.

Reading Twilight is like eating those bad dessert, you feel good while you're at it, but hate yourself afterwards. I don't think i'll ever re-read these books, but i can't not read the last one...argghhh.... It is so unlike the Harry Potter series which is so well crafted that you'll find this muggle going back to it again and again.

While i'm on twilight, here's a funny video featuring James the 'bad' vampire in the first movie vs. TWEENS....very scary tweens.... don't mess with crazy teen girls!

Cam Gigandet vs. Twilight Fans from Cam Gigandet

The Cullens are the good vampires in the book. They are 'vegetarians', vampires that don't drink human blood. The cullens are filthy rich vampires who in their spare time shop a lot, save life, fight other vampires and sometimes seduce young girl. All these takes MONEY, so where does the money comes from? According to the book, they INVEST. But they cheated cuz Alice can see the future...so i'm just thinking what should be done if there is no one to predict the future.

The most important advantage that the cullens have is that they DON'T DIE...ie LONG COMPOUNDING PERIOD.

Given that Future value = Present Value (1+ rate of return)^years, having VERY long years = HUGE Future value. But we also know that anything x ZERO is zero. So their first rule would still be NOT TO LOSE CAPITAL permanantly.

Edward Cullen is over 100 years old. If he had lived through the craz 1920s boom, the great depression, the world war period, the electronic boom and bust, the 1970s hyper-inflation, the 1980s great economic expansion, dotcom bubble and bust, real estate bubble in the early 2000s, the birth of all those exotic intrument, the deleveraging of the economy since 2007 and all those financial institution going belly up.

BUT he has the luxury of time, so all he has to do is run a balanced portfolio and let it compound over time, he would not need to depend on his 'dad' 's money...spoilt brat... at 6% return, a dollar invested compounds into 339 in a hundred years!!!

In frenzied investment world where results are meaured in days and months, those of us in our 20s could be considered immortal. Lets keep our head and not be greedy. Compound at a reasonable rate and not lose money. We may not live forever, but we should invest as if we do. Cuz that the only way to think long term. To keep our sanity in a crazy world.

1,2 Step

2009-06-17T11:36:00.000+08:00

No...this is not a post on the Ciara and Missy Elliot song...this is regarding a simple 3 step formula presentated by George Soros in today's Financial Times entitled "My three steps to financial reform."

"Banks should pay for the implicit guarantee they enjoy by using less leverage and accepting restrictions on how they invest depositors' money; they should not be allowed to speculate for their own account with other people's money."

"The issuance and trading of derivatives ought to be as strictly regulated as stocks. Regulators ought to insist that derivatives be homogenous, standardised and transparent."

"Custom-made derivatives only serve to improve the profit margin of the financial engineers designing them. In fact, some derivatives ought not to be traded at all. I have in mind credit default swaps. Consider the recent bankruptcy of AbitibiBowater and thatof General Motors. In both cases, some bondholders owned CDS and stood to gain more by bankruptcy than by reorganisation. It is like buying life insurance on someone else's life and owning a licence to kill him. CDS are instruments of destruction that ought to be outlawed."

Simple but not Easy

2009-06-11T21:46:00.000+08:00

Investing is not hard. The secret is to put in money today, and get back more in the future. Haha. If it is only as simple as that.

Value investing is simple. Find companies selling below intrinsic value, and wait for Mr Market to recognise its true worth and sell it back to him.

Buffett told us to invest in our 'circle of competence', and Munger said that it is the wise that operate within their circle of competence.

Circle of competence in my understanding, is to truly understand the business you're investing in. Its like if you're the 100% owner of the business, do you know what forces affects you business and what is your company's edge? Phillip Fisher has laid out all the 'steps' and questions to ask to help individual investor ask the right question. Yet for the past 2-3 weeks, after attending numerous analyst meeting, i realise few analyst cared about the business, but more about the financials.

People asked questions on sales growth, margins, SGA, ROE...but few questions was asked regarding what give rise to these numbers. Accounting and financial figures are simply a way of trying to express BUSINESS in a manner that every one agree upon. If we don't understand the business that is underlying those numbers, any sort of financial analysis or projection is not meaningful.

Furthermore, if numbers are expressed in a way that almost NO ONE understands, then what's the point of disclosing the numbers in the first place? Thus accounting principle should be reasonable and generally followed.

Read this article on Royal Sporting House on its weird line items in the income statement. Kudos to Jamie Lee, the reporter that covered this story. And boohoo to all those companies that have WEIRD accounting policy (that follows FRS but expressed in a convoluted way) and those pple who stayed in their aircon room and dream up weird accounting policies (yaya...those economist who want to 'fair value' every thing).

Re-reading Fisher's Common Stocks and Uncommon Profits. See new things that i've never seen before. Btw, i think as a general rule, if u see that cash flow from operations and income statement has NO RELATION,buyers bewares!'

...mmm....off to memorise choir scores. So happy that our Ajalumnichoir sounds like a choir now. haha. Amazing amazing.

Free stuff

2009-06-03T10:36:00.000+08:00

Ok. I'm a cheapo.

Here's a link to read Wall Street Journal for free. Think it works for Barrons too, but I have no luck accessing FT.com Lex.

http://www.businessinsider.com/how-to-read-the-wsj-for-free-online-2009-6

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Read another recent Stanford Lawyer interview with Charlie Munger; read full article here.

As we look at the current situation, how much of the responsibility would you lay at the feet of the accounting profession?
I would argue that a majority of the horrors we face would not have happened if the accounting profession developed and enforced better accounting. They are way too liberal in providing the kind of accounting the financial promoters want. They've sold out, and they do not even realize that they've sold out.

Would you give an example of a particular accounting practice you find problematic?
Take derivative trading with mark-to-market accounting, which degenerates into mark-to-model. Two firms make a big derivative trade and the accountants on both sides show a large profit from the same trade.
And they can't both be right. But both of them are following the rules.

Yes, and nobody is even bothered by the folly. It violates the most elemental principles of common sense. And the reasons they do it are: (1) there's a demand for it from the financial promoters, (2) fixing the system is hard work, and (3) they are afraid that a sensible fix might create new responsibilities that cause new litigation risks for accountants.

Can we fix the accounting profession?
Accounting is a big subject and there are huge forces in play. The entire momentum of existing thinking and existing custom is in a direction that allows these terrible follies to happen, and the terrible follies have terrible consequences. The economic crisis that we're in now is, in its triggering circumstances, worse than anything that's ever happened.

LW: the last paragraph sounds like what Prof JJ would say. I think it is so crucial to at least be aware of all forces that influence accounting policies....thanks to SMU's Accounting Theory course , i can at least guess where Munger is coming from when he said "there are huge forces in play".

How and why do you think economists have gotten this so wrong?
I would argue that the economists have not been all that good at working concepts of good and evil into their profession. Nor do they understand, at all well, the economic consequences of bad accounting.

In fact, they've made a profession of driving value judgments out of the subject.

Yes. They say it's not economics if you think about the consequences of good and evil, and good and bad business accounting. I think what we're learning is that when you don't understand these consequences, you don't have an adequately skilled profession. You have big gaps in what you need. You have a profession that's like the man that Nietzsche ridiculed because he had a lame leg and was very proud of it. The economics profession has been proud of its lame leg.
So in order to cure the lame leg, you would lean more toward an approach to economics that takes human nature into account?

If you totally divorce economics from psychology, you've gone a long way toward divorcing it from reality.

The same could be said of psychology. If you divorce economics from psychology...
That's what's wrong with psychology professors. There are so few of them that know anything about anything else. They have this terribly important discipline that all the other disciplines need and they can't communicate that need to their fellow professors because they know so little about what these other professors know. This is not an unfair description of much of academia.

You've often said that one of the keys to your success has simply been to avoid making the garden-variety mistakes that you see other people make.

Warren and I have skills that could easily be taught to other people. One skill is knowing the edge of your own competency. It's not a competency if you don't know the edge of it. And Warren and I are better at tuning out the standard stupidities. We've left a lot of more talented and diligent people in the dust, just by working hard at eliminating standard error.

Flow

2009-05-25T09:16:00.000+08:00

I am totally immersed in a book jiechao lent me last year; FLOW: The Psychology of Optimal Experience. This book changes the way you think about what makes an experience enjoyable, and underlying it all, what makes a good life.

This state of optimal experience involves a feeling of deep enjoyment, concentration, and generally satisfying. Most people have experience the state of flow in their life. When faced with a complex and daunting task, we feel challenged, energised and while conquering the challenge, we feel powerful and in control.

To me, it weird that i think i've only experience flow in choir and in a few exams i've taken in SMU. When we sing a challenging song beautifully, you feel totally immersed in it and you crave for that experience again. Maybe that's why challenging songs are a thrill to perform and people can get 'high' from music. The optimal mix of complexity and skill would produce this 'flow' effect.

In exams such as AFA, i didn't even know how much time has passed. I just know that it felt good during exam, i was focused and calm, and i felt refreshed after the exam, a sense of exhilaration. This contrast sharply to a recent mid term that i've taken, where the exam paper feels exactly like a 'ten year series' paper. Despite getting great results, i was not satisfied at all and feel vaguely insulted.

Mmmm....given that what most of us wants is a 'good experience', we should learn to create this pleasurable state by setting appropriate challenges for ourselves; goals which are attainable yet not too easy. Haha, maybe that's why i get high reading annual reports...which shows that they are a great read, and yet not too easy for me to comprehend.

Enjoying the process and learning during the process is what makes a journey so interesting. It was like when i was in the jungles of Palenque in Mexico...without the 3 hours hike across the jungle, there is no way the ruins of Palenque could be as breathtaking as it was. Without the hardwork, the results are simply less rewarding. No shortcuts.

Good to be back

2009-05-22T10:03:00.000+08:00

I LOVE SINGAPORE!!! Breakfast with Kopi-Gao and Kaya Toast. Chicken Rice with Teh Gao. Zup Chai Pung that costs around $3!!! Haiz.

Food glorious Food.

Ok, not a big fan of the heat and humidity....think showering 4 times a day is a little too much! haha. But its good to be back!

Haiz, think singapore NSmen are like me, cannot make it for IPPT rather 'volunteer' for IPT. But its booked all the way beyond my window period!!! die liao...must either pass or go for Remedial Training! booo...

love these corporate bullsht

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Was listening to Charlie Munger's commencement address to USC Law students again. I love the part on 'self pity'. Munger said that self pity is one of the worst emotion and is a prelude to psychosis. You feel worse about yourself and nothing gets better. Rather, take all failures and challenges as opportunities to grow and learn. It is our 'moral duty' to learn. Be a learning machine. If we can go to sleep everyday being just a little wiser than we were in the morning, for most of us who have a life time ahead of us, great things could be accomplished!

Watch the video, it changed the way i think fundamentally. Fast forward to about 42:00 in the video to skip the super long opening address by faculty and students.

Recycling and reading

2009-05-14T00:48:00.000+08:00

I have been having a wonderful time printing and reading over the past week. Its so wonderful to have free printing in the school though i must admit that there will be some wasteful printing as there is no 'price mechanism' in place.

I think that Canada is doing a great job promoting recycling. Its amazing how individual family sort through their waste, and put them in different bins (waste vs. recyclables) each week for collection.

Loblaws, a supermarket chain, recently started to charge 5 cents for each plastic bag. Previously they gave a discount of 5 cents for each bag you bring, but it didn't work well. With the new system of charging 5 cents, i'm amazed with the number of people who are bringing their own reusable bags, and plastic crates that allow them to load right into the back of the car. I think the success have got to do with people's attitude to asymmetric loss aversion. It 'hurts' more to 'lose 5 cents than 'gain' in 5 cents in rebate.

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

Wells Fargo
Following up on the previous post on my Berkshire Hathaway meeting, Buffett said that he gave his first and only stock recommendation to a group of students earlier this year. He said that if there's one stock he'd buy, its Wells Fargo when it was trading around 8 to 10 dollars. The said that it was obvious that the stock was undervalued at that price and it is unlikely that one could lose money over such investment.

Buffett stated that Wells Fargo has a business model that is different from the rest of the big banks. It is a relationship business, a service business and a distributor. Imagine that you run a small business, and that your corporate account and line of credit is managed by Wells. Your personal savings account and credit card is also with Wells. Also, you bought your house (to live in) and guess where do you get your mortage from? Wells. Lastly, you depend on the bank to manage your hard earned savings.

From many such relations, the bank 'makes money' on
(1) The interest it charges you on your line of credit, the interest you pay on your mortgage, the interest you pay on your credit card.
(2) It funds its lending from cheap deposit (cuz customers are sticky and will not move their savings based solely on interest) and external financing.
(3) The bank takes a charge on some credit lossess.
(4) It earns fee revenue from managing your investments and other fee income.
(5) It pays for employee expenses, overheads, infrastructure, etc.

In accounting terms, it is simply
(1) Interest Income
(2) Interest Expense
(3) Provisions for losses
(4) Non-interest revenues
(5) Expenses

(1) - (2) = Net interest Income (aka 'Spread')
Net interest Income - Provisions + Non-interest revenues - Expenses = Net Income.

The role of the analyst is to assess what is the earning power of the bank base on his assessment of the potential spread, fee, and expenses. And to compare the resonableness of his estimate with the assets and liabilities that the bank have.

Buffett stated that analysing such commercial banks is not hard, though harder than analysing industrial companies. But over time he said if the management and accounting is honest, most people would be able to work through the notes and 'understand' the business and estimate its worth.

The way he says sounds easy. I'm working through my second reading of AXP and USB. think it is not that simple and very laborious.Btw, USB is one of the few banks that constantly compares itself to conventional banking metrics and teaching investors how to assess its performance. Haha . Oh , from Buffetts recommendation of BUY at 8-10, WFC recently closes around $25.

Bruce Berkowitz and Fairholme Fund
Bruce Berkowitz is one of the best fund manager out there and has very good returns since the early 90s. I think in an early interview, Joel Greenberg (another prominient value investor) mentioned that in the early 90s, it was Berkowitz who gave the only BUY call on Wells Fargo.

On Fairholme Fund website, his recent interview with Outstanding Investor Digest, he gave us his rationale of selling oil stocks before oil stocks fell, how he invests well despite having a lousy crystal ball, and why is he buying HMOs and defence companies.

One interesting stock that he bought was Pfizer, positioned at over 17% of his portfolio. Everyone knows Lipitor, the worlds best selling drug, is going off Patent in a few years time. At 25% of Pfizer's revenue and with over 70% profit margin, it is apparent that sales and profit is going to decline significantly unless there are replacement. Berkowitz estimated that the earning power per share of Pfizer is about $2.00 to $2.50. At $15 currently, you are buyin one of the world's strongest Pharma at 6-7x PE. BUT, i simply couldn't figure out how he arrived at that. After reading through Pfizer's 10k for 2008. Haha.

It is also interesting that Fairholme is one of the largest shareholder for Sears. He said that liquidation value is at least twice the shareprice (Dec approx $40). He gave us the way he estimated liquidation value, and the author asked his why he was willing to share. Berkowitz said that even with this information out, no one is going to believe him. Whoohoo...open secret. This letter is highly entertaining (ok...my form of entertainment) and potentially profitable. Once again, download it here under the "Article and Interview Reprints" section.

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I should get packing. GOING BACK HOME!!!!

The Pilgrimage

2009-05-09T22:25:00.000+08:00

The actual day of the Berkshire Shareholder meeting was May 3rd, Sunday. Woke up at 5.30am hoping to get a good seat in the areana. But when i got there at 6.30, there was a crazy queue formed outside quest centre. When we asked the security personnel later, they told us some people started in line overnight!!! Ok. So i'm not the most crazy one.

People filled up Quest centre quickly and 2009 was a record turnout of over 35,000 people despite the swine flu. The event started with the annual video starring different celebrities and of course Warren Buffett and cameo appearance by Charlie Munger.

The Q&A started at 9.30 and lasted all the way till 3.30. The most amazing thing is how much Coke and candy Buffett and Munger eats. Yep, cherry coke and original coke for Buffett and diet coke for Munger. Munger EATS NON STOP. It was really fun to see how laid back and real the two of them are. The quality of the question this year was really great. Half of the questions was asked by 3 jounalist who recieved the emailed questions before the event. Carol Loomis, editor for fortune magazine and long time editor of Buffett's Shareholder Letter, asked some of the toughest question. Of which Buffett simply diverted them to Munger, claiming that its too tough for him.

Opening

The Q&A session started with a screen shot of a bond that Berkshire sold in late 2008. I forgot the exact figures, but it is simply a govt bill that matures in a few months time selling above par. Which means the buyer has bought something that has guaranteed a loss!!! Buffett said that november 2008 was an exceptional time. And it is unlikely that he'll see this in his lifetime again. Negaitve yield!!! Crazy!!! So much for rational, expectations calculating investors. Hahaha.

On Inflation

Buffett said that the greatest financial risk going forward is the risk of high inflation. To protect against inflation, it would be unsound to hold on to debt obligation if the yield does not compensate for the risk taken. Buying companies with 'moat' and pricing power is still the way to go. Return on Capital in real terms may not be high but will be satisfactory. For Berkshire, he will continue to seek out companies earning income outside of United States. But given the large pool of capital he need to deploy and his familiarity with the US market, Berkshire will continue to invest in the US.

When answering question on 'how to best protect ourselves against inflation', both Buffett and Munger suggested that "be the best in the field you are in". E.g best lawyer, plumber, hairstylist...etc. You'll recieve a premium on the available pool of capital (regardless the size) for your skill and knowledge.

On Financial Literacy

Someone asked Buffett how do we promote financial literacy. Buffett said it is a very hard problem to tackle, but he's doing his part by talking to students in hope to rub off some knowledge to them.

Munger gave biting comments on the crazy stuff that is being taught in Business School, namely EMH and the host of advance math used to 'price security'. He said that if at higher level of education people are taught crazy stuff, then its likely that these crazy stuff will be passed down the line. But he suggested that the first thing is to understand that the only way to invest is to first spend less than you earn. The other is to understand the power of compounding and how it works in reverse, e.g. credit card debt costing you 18% p.a. . It is also crucial to understand when is accounting useful and intelligent and when is it not.

Munger and Buffett recommended us to read Jamie Dimon letter to shareholder available here. It is a wonderful read. I shall be re-reading it over the next few days.

On Foreign Exchange Risk

A question was asked by a shareholder from a Euro demoninated country. He asked if he should hedge his exposure to USD/EURO exchange risk. Buffett commented that he is no expert in currency. Munger then said "you've done pretty well in that". Then Buffett off handedly replied "just a few billions...". It was one of the funniest moments in the hall. Everyone was laughing.

But he said that if it is cheap enough to perform a rolling hedge with a widely traded derivative like USD/EURO contract, then you can choose to hedge....not much was said...hahaha.

On Moodys

Loomis asked why Buffett didn't use his stake in Moodys to influence the credit rating agencies. And since he has criticized the way rating agencies work, why did he still hold the shares in Moody's.

His answer here was vague and a little evasive. First he said that the underlying assumption that all the rating agencies made many banks and regulators that was WRONG was that home prices will go up and up and up. If Moody's is the only one that use other assumption, it will have no business to do. (not the best answer in my opinion). Then he said that even in the case of Fannie Mae and Freddie Mac having their own regulator didn't help these two GSE become less foolish.

He also said that Moody's still has a business model that is sustainable, with little need for capital infusion, and has a moat with only 2-4 players in each of the industry they are engaged in. So he would not sell.

Munger and Buffett further added that on their part, they will NEVER rely on any ratings...but exploit them to the extent that if the rating and yield differs greatly with their assessment, there is a profitable opportunity.

The Pilgrimage (prelude)

2009-05-08T09:26:00.000+08:00

Attending the Berkshire Hathaway shareholder meeting was a dream come true. First up, has to give a BIG THANKS to Xin Hong who helped arranged to sent the shareholder credential all the way from Singapore, back to Omaha, then to London, Ontario. Him doing so much for me helped me make up my mind on whether to go or not. What a wonderful man, 言行一致。

I bought 1 Brk B share last wed after selling some stock holdings. Can't believe that i sold off my BAC shares at 8 and today it closes at 13!!! About 60% increase!!! Haha. Once again proving the theory that if lw sells, you buy, if lw buy, SHORT THE STOCK. This has been a reliable strategy over the last 2 years.

Looking back over the last 6 years, i recalled my first introduction to the financial market was in JC 2 (year 2003) when Mr. Choy talks about the bond market. I found it interesting enough to read the textbook on how interest rates was determined and how it affects the economy.

My next big step was when Jie Chao called me and asked if i wanted to "learn a way to make over 20% in return". It was late in 2004 and i thought if something is too good to be true, it probably is. However, what he recommended was actually a book. The book was The Intelligent Investor, by Benjamin Graham. The first read was excruciating, took me 2 months to plough through it. In my beloved Sungei Gedong Camp, I managed to read about 1 - 2 books a week. After reading at least 10- 20 books relating to investing, and now i'm ashamed to say tons on "how to get rich" (not to mention the kiyosaki series), i find that Value Investing as practised by Warren Buffett is the ONLY sensible way to get rich. Thanks Jie Chao, for introducing 2 books that fundamentally changed the way i think and behave, the later being dao de jing.

In terms of investing, there's only 3 books that form the basis of I know about investing, everything else are simply an extension to these books.
1. The Intelligent Investor by Benjamin Graham
2. Common Stock Uncommon Profit by Phillip Fisher
3. Random Walk Down Wall Street by Burton G. Malkiel

What i've learnt most from is Warren Buffett's letters to shareholders. This includes (1) letters of Berkshire Hathaway - how it grows from a struggling texile company to today's Behemoth both on Wall Street and Main Street, and (2) his early partnership letters, which reads more like a hedge fund and is instructive on asset allocation , and his super early view on concentrated portfolio (e.g. i think 40% allocated to American Express in 1964).

What i've learnt also helped me tremendously in school. Value investing is like my main frame to organise knowledge, information and know how. Most courses taught in SMU would fall onto one of the branches. E.g. What makes a good biz, how to value biz, mechanics of market and how it behaves. This allowed me to find greater meaning in what I studied, and since i love what i study (can't say that for BGS though...), it is easier to devote the time and effort to do it.

Smart

2009-04-30T11:07:00.000+08:00

My dad gave me one dollar bill
'Cause I'm his smartest son,
And I swapped it for two shiny quarters
'Cause two is more than one!

And then I took the quarters
And traded them to Lou
For three dimes -- I guess he don't know
That three is more than two!

Just then, along came old blind Bates
And just 'cause he can't see
He gave me four nickels for my three dimes,
And four is more than three!

And I took the nickels to Hiram Coombs
Down at the seed-feed store,
And the fool gave me five pennies for them,
And five is more than four!

And then I went and showed my dad,
And he got red in the cheeks
And closed his eyes and shook his head--
Too proud of me to speak!

- Shel Silverstein

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Quater (0.25), Dime (0.10), Nickel (0.05), Penny (0.01)

Wake me up before u go go

2009-04-29T10:25:00.000+08:00

Was reading through the book 'Nudge' in Chapters today. Now my favorite place to read since it is like having a kino right next door. Very good book. Will be back tmrw to read the rest tmrw.

On the chapter on Temptations - we were introduced to this product "Clocky" - the alarm clock that runs away from you when you snoooooozzzzzzzzzzeeeeeeeee....a favourite hobby of many of my friends.

The book is about decision making and why human being predictably makes some bad choices. I love the way they distinguish the following two beings:

Homo economicus: The person from a standard economics textbook. Someone who, when facing a decision, thinks about every available option, and always makes a great choice. Home economicus has the brainpower of Albert Einstein, the storage memory of IBM's Big Blue, and the self-control of Mahatma Gandhi.

Homo sapiens: You and me.

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SWINE flu. Damn scary. Got its upside too. managed to book a hotel in Omaha on May 1st.
Should avoid crowds.
But gotta go gotta go gotta go.
excited.

Sum of Parts

2009-04-23T05:09:00.000+08:00

In a world with perfect market efficiency, if a company owns only publicly listed stock, the value of the firm should approximate the value of the stock it owns. But this does not hold in the real world. Many closed end funds are now trading below their NAV for the past 6 months, and some companies which holds publicly traded stocks are also trading at such level.

One such example is LOEWS, a holding company that has built up bookvalue and shareholder value for over half a decade. The Tisch family is said to be one of the smartest value orientated business manager/owner, and also has donated generously to the different causes. Btw, the Tisch gallery at The Mets is splendid.

The value of Lows is the sum of their majority holding in 3 public company, holdings in 5 unquoted companies, and corporate cash & investment less corporate debt. Without attempting to value the unquoted companies, the value of firm is 12.3 Bn and the market cap is 10.4 bn.

This works out to a price to value of about 0.85.

On a per share basis, the value per share is 28.3 and the share price is 24.03.

And this is not counting the values of HighMount, with proven resources of natural gas, and other investment in Boardwalk, and CNA. Furhtermore, it could be argued that the public company that Loews holds is undervalued. CNA for instance is trading at Price to Book of about 0.6.

Warning: I'm NOT recommending this stock. Just that simple +-x/ shows that it is likely that the stock is undervalued.

Vitas

2009-04-21T10:56:00.000+08:00

Vitas born Vitaliy Vladasovich Grachyov (Виталий Владасович Грачев) from Daugavpils, Latvian SSR, Soviet Union.

Very weird. can't say its really enchanting. but i spent half an hour watching Vitas' video on youtube.

Back to Earth, we have SUSAN BOYLE singing "I dream a dream" from Les Miserable on Britan's Got Talent. It blows the judges away. Here's a very interesting article "It wasn't singer Susan Boyle who was ugly on Britain's Got Talent so much as our reaction to her".

youtube disabled embedding the video. so watch it here!

“Transformation” Defrauded Stakeholders

2009-04-20T09:55:00.000+08:00

Just came back from an amazing week of travel around Canada. Vancouver, The Rockies, Victoria and Nigara Falls...my beautiful Butchart Gardens, I miss you already.

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Browsing through some of the value investor's website and came across this lawsuit between MBIA and Thrid Avenue Funds. The activist investor who protects its shareholder.

Long story short: Last year MBIA Parent ("P") needed to raise capital, and Thrid Ave bought the bonds for one of the MBIA subsidiary (call it "S") - essentially the only viable going concern in the whole MBIA. Now P created a new entity and transferred the business of S to P, which left the value of S to be essentially zero. So Third Ave is suing MBIA "P" and saying that it is illegal and unfair, thus seeking damages.

Haiz...so sad...To me, it sounds like a case of - when u need money, people lend you, now you have money (ie earning power), u dun want to pay back. If only i can rule like those TV judges and just scold MBIA's management on public television.

The Compliant, MBIA CEO's statement, Third Avenue's Statement

Auto-insurance

2009-04-09T05:00:00.000+08:00

Selling auto insurance in the US is ultra-competitive. In my opinion, car insurer primarily competes on rates (cost of car insurance) and service quality (like how easy and fast claims are made). A few insurer also create strong brand for this commodity product in order to differentiate their auto insurance. Lastly product innovation through unique packaging of insurance (auto insurance combined with auto insurance for pet, or certain home insurance) allow some players to create a differentiated product.

I've long been facinated by the story of GEICO. This stock was recommended by a very young Buffett in 1951, See page 25 of the annual report for the article and a picture of young buffett.

One of GEICO's competitor is Progressive. Both companies have very strong brand names in US and Canada partly due to the agressive investments to acquire and retain policies. However, after watching numerous advertisement by different insurance company, i must concede that only GEICO's adverts make u want to pick up the phone to go buy some insurance.

Let me know what u think.

Need an amazing colored coat

2009-04-07T09:57:00.000+08:00

Close every door to me,
Hide all the world from me
Bar all the windows
And shut out the light

Feeling a little like this these days. Somethings that you really want you can't get. Think at this stage i'm like a negative npv project, no matter how low the discount rate is. Haiz...after today's derivatives i've got no more exams. Free to do whatever, but have no real drive to do anything.

May I return to the beginning
The light is dimming, and the dream is too
The world and I, we are still waiting
Still hesitating, any dream will do

Did the following test after reading Nad's blog, think it is quite zun. The test is available here

You are the sort of person that needs a peaceful environment. You seek release from stress and freedom from conflicts and disagreements, of which you seem to have had more than your fair share. But you are taking pains to control the situation by proceeding cautiously and you are right in doing so as you are a very sensitive person.

Ah-bu-den, work in conflict how painful.

You are feeling very disillusioned at this time and you feel that you are being left out of things. You know - or you think you know - what you want, but you seem unable to exert the effort to achieve your objectives. As a consequence, you are feeling left out and neglected. You would like to be afforded greater security and fewer problems.

Super powerful, pick colors only and they know i'm feeling left out....haiz...自己找来的压力

You are trying to break away from the mundane existence that you have been experiencing of late. You have many high hopes and ideals but you are concerned whether circumstances will allow you to realise these ambitions. You want to spread your wings - to broaden your fields of activities - but you are concerned that your dreams are just that - 'dreams' which are not realistic. It concerns you that you are not thinking clearly at this time - what you need is to get away from it all, to give you time to think. A short vacation could well restore your confidence.

Gotta weigh dreams, ideals and what's practical mah. At least must be able to feed myself first. I'm just afraid that i'll get so comfortable feeding myself (ok and those around me) that i forgot my dreams. Dreams get crushed. Think "The Alchemist"...need to go find the pyramid to realise that the pot of gold is just back door. Ok, going Vancouver and some national park next week...maybe it'll "restore my confidence".

You are an emotional, sincere and impressionable individual experiencing frustration and unnecessary stress. You are carried away by other people's enthusiasm and looking for that idealised relationship, be it in a business or personal situation, which you are able to share with a mutual depth of understanding. You have lowered your defences in the past and you have been hurt, so you are now extremely wary of being exploited. You are still ready to trust people on the condition that they are prepared to offer you proof of their sincerity.

So far i think i've been really blessed to be surrounded by really awesome people. But i don't trust easily. love the chinese word - 知己。

You are inclined to be too trusting and you feel that you need to be on your guard against the possibility that your endeavours and actions may be misunderstood. Too often you have been taken advantage of and you have been mentally abused. Now you are seeking a relationship which can provide peace of mind, where you can be yourself and not have the need to put on a false front.
Aiyo, don't think i'm the like-to-get-mentally-abused type leh, except doing more torturous courses like derivatives and value investing. Haha. Guess that peace of mind thing is super important to me. duh...if i can't be at peace with myself, i'll puke when see i the guy in the mirror when i brush teeth and floss.

Last week of class

2009-04-01T10:34:00.001+08:00

It feels really weird that its now the last week of class. 2 more days of lessons and 2 essays and i'll be done with lessons. After that, it is just one more exam to go then my time at Ivey is over.

Had our last Value Investing class today. We have learnt so much under the guidance of Prof George Athanassakos and I believe that every single student will benefit from this course for a long time to come. Doing one valuation per week is a really good experience. There is no better way to learn then to get your hands dirty. I'm also really proud of our group project.

We did a valuation of Black & Decker, and valuation shows that the stock is currently undervalued by about 33%. If we assusme that sales would fall back to 2002 level, then its selling at about fair value. The whole framework that Prof taught us is a way to think about valuation. Some may think that what we have learnt is like 'valuation by numbers'. But i think it is a framework to go through a check list system to ensure that you have covered all the bases for business and financial risk, for competitive advantage, and always keep in mind not to overpay for growth or glamour.

To quantify most of these things would probably take a life time of practise, but we have to start somewhere, and i think this Value Investing course taught by George at Richard Ivey School of Business is a great place to start.

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Was thinking about Singapore food on my way home today. I still can't bear to eat "饭菜" that costs $9 SGD here. Its just 2 meat with rice. Haiz, even SMU foodcourt sounds appealing now. hahaha. I miss kaya toast and really good coffee, aka Purvis Street 喜园coffee. I miss Ba Chok Mee and Nasi Lemak and Prata and Rojak and my grandma's cooking.

So the closest Singapore thing that i got was to go listen to 梁文福's song on YouTube....lame right?!?

And i just love 一步一步來. Never get sick of this song. I guess what makes a song great is how it stands the test of time and how people over different generations could relate to it.

The case for long term investing

2009-03-24T22:42:00.001+08:00

Watched the Jon Stewart show last night when he was grilling Jim Cramer. It was sad to me that so many people relied on snakeoil peddler who sells hope bottled in 24/7 news, dishing out advice and market forecast. Watching financial new non-stop and having ticker symbols flashing in your face all the time create a sense of false urgency to act and encourages short termism.

Tuning them out, aka the bloomberg and cnbc of the world is the best i can do. News are important as they contain information. However, to what extent are these news noise or information is dependent on the thoughtful user to seive out the junk. Even price has information, but does the market over-react to good and bad news, i think it does.

After doing my derivatives course in Ivey, taught by the really really great Prof Walid, i'm convinced that many of the hedging strategies out there are actually pretty risky. Riskless arbitrage opportunities simply doesn't exist in huge quantities to make it a profitable pursuit. Not so riskless arbitrage like merger arbitrage exists, but investor must have a good handle on the dynamics of mergers and acquisitions, the parties involved, time horizon, deal structure, probablity of success to have any chance of making profits in these area.

However, as XH argued with Prof Chua last year, time arbitrage probably exist. A person with a true long term view and long term holding power may choose a course of action that is vastly different from the rest of the crowd. I think this is the true edge a long term investor has in order to outperform. Another edge would be a stomach for lumpy performance. Short term volatility is NOT RISK. Permanent impairment of capital (aka lw's attempts at buying bank stocks on the cheap last year) is RISK.

I can't help but quote the following paragrah from Keynes again. It just amazes me that after 70 years since The General Theory of Employment, Interest and Money was published, it still rings true today.

"But there is one feature in particular which deserves our attention. It might have been supposed that competition between expert professionals, possessing judgment and knowledge beyond that of the average private investor, would correct the vagaries of the ignorant individual left to himself. It happens, however, that the energies and skill of the professional investor and speculator are mainly occupied otherwise. For most of these persons are, in fact, largely concerned, not with making superior long-term forecasts of the probable yield of an investment over its whole life, but with foreseeing changes in the conventional basis of valuation a short time ahead of the general public. They are concerned, not with what an investment is really worth to a man who buys it “for keeps”, but with what the market will value it at, under the influence of mass psychology, three months or a year hence. Moreover, this behaviour is not the outcome of a wrong-headed propensity. It is an inevitable result of an investment market organised along the lines described. For it is not sensible to pay 25 for an investment of which you believe the prospective yield to justify a value of 30, if you also believe that the market will value it at 20 three months hence.

Thus the professional investor is forced to concern himself with the anticipation of impending changes, in the news or in the atmosphere, of the kind by which experience shows that the mass psychology of the market is most influenced. This is the inevitable result of investment markets organised with a view to so-called “liquidity”. Of the maxims of orthodox finance none, surely, is more anti-social than the fetish of liquidity, the doctrine that it is a positive virtue on the part of investment institutions to concentrate their resources upon the holding of “liquid” securities. It forgets that there is no such thing as liquidity of investment for the community as a whole. The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future. The actual, private object of the most skilled investment to-day is “to beat the gun”, as the Americans so well express it, to outwit the crowd, and to pass the bad, or depreciating, half-crown to the other fellow.

This battle of wits to anticipate the basis of conventional valuation a few months hence, rather than the prospective yield of an investment over a long term of years, does not even require gulls amongst the public to feed the maws of the professional; — it can be played by professionals amongst themselves. Nor is it necessary that anyone should keep his simple faith in the conventional basis of valuation having any genuine long-term validity. For it is, so to speak, a game of Snap, of Old Maid, of Musical Chairs — a pastime in which he is victor who says Snap neither too soon nor too late, who passes the Old Maid to his neighbour before the game is over, who secures a chair for himself when the music stops. These games can be played with zest and enjoyment, though all the players know that it is the Old Maid which is circulating, or that when the music stops some of the players will find themselves unseated.

Sometimes the game of Musical Chairs turned out ugly. When the music stops, there turned out to be no chairs after all....that's the illusion of a growing economy built on leverage creates...

Pain of investing

2009-03-21T08:20:00.001+08:00

Until Seth Klarman said it out explicitly, i haven't been aware that my investing behaviour has changed quite a bit over the last 2 years after being down by about 50% for my personal portfolio. Two years ago, i could be said to be fearless, knowing that i'm committed for the long run - therefore as long as i pick good companies, i'll do fine in the long run.

However, after seeing some companies you own plummet over 50%, your behavior changes. I managed to raise some long term debt from family members to allow me to average down in this market. This was what Xin Hong and I talked about in early 2007 (before the whole financial crises started to happen) that we need to stay committed to our long plan. After i have my cash in hand in late november, i committed a portion of it to the MSCI world index monthly for the rest of the time until i graduate. The rest is supposed to be deployed into individual stock picks. HOWEVER, i have been sitting on this warm pile of cash earning next to nothing for the past 4 months.

I could have justified my behaviour as 'i know the market is going to plummet further, so i stayed on cash...i could show you the charts if you want...' That would of course be a blatant lie.

The truth is that i'm afraid that i'll be wrong again, and there's also the pain avoidance behavior that prevents me from logging into my brokerage account to see the loss amount. Reviewing my individual stock positions, it is amazing how the market help u reduce your stock holding in financials by slashing their value by over 75% and the more defensive stocks by less than 40%.

Be fearful when others are greedy, said Buffett. I'll be the first to admit that this very profitable strategy is very hard to follow psychologically. Therefore i believe for the majority of us, we should simply commit ourselves to a long term portfolio with diverse asset mix, invest monthly, and rebalance (semi) annually.

But I hope i can do better. If intrinsic value has fallen by 20% over the last year and stock price has fallen 50%, if i liked it last year, i should LOVE it this year. Its hard, but i'll darn well try.

Ivey interview with Seth Klarman – Value investing course

2009-03-18T11:22:00.000+08:00

I’m so happy today. We had a video conference with Seth Klarman. I want to be this man in 35 years time. Unassuming and really knows his stuff, and btw…rich too. So glad that Prof George Athanassakos arranged for such an amazing speaker.

Seth Klarman is the President of Baupost Group and has been running the investment house for more than 20 years. His annualized return over that period is over 20%. Over the last few years, astute side-stepping of land mine and holding cash when no margin-of-safety could be established allowed the firm to perform well in this volatile market.

Klarman wrote the now out of print Margin of Safety which is sold on ebay and amazon for over 1400 USD. Pssst….SMU library has a copy, donated by our librarian - Ruth

The 3 underlying pillars to his investment approach

1. Focus on risk

Be a big fan of worrying. Risk is NOT BETA. Risk is the probability and size of losing under different scenarios. It is most important to not be obsessed about single point estimate, focus on range of outcome.

2. The world is orientated to relative performance

Mutual funds are largely asset gatherer, as they earn management fee from % of underlying asset than by outperformance. Mutual funds are hugely penalized when they underperform as client defect, thus this encouraged many actively managed funds to be closet index fund. Being mediocre is perfectly fine in the mutual fund world.

To gain an edge, we should focus on absolute return. Thus we would rank not losing money as more important than not underperforming index. Losing 18% when the world is losing 20% is just insane.

3. Bottom up orientation

Very very few people has shown that they are able to predict the macro economy. And even if they are accurate, then asset class and security chosen may not work out as well as they macro prediction.

Focus on bottom up approach to investing. Analyze the individual company/security thoroughly and work out all the possible outcome for that individual security under different stress test scenarios.

Identify an edge
Klarman told us to focus and identify an edge. Every investors needs to think about this, but few of us do. One of Baupost’s edge is that it has a long term orientated investment policy backed by long term money. Many good funds couldn’t invest right now as they are afraid that they’ll have to sell more stocks to meet redemptions demands. Having committed long term capital is crucial to long term investment success.

Another edge Baupost has is that it loves messy situation. A favorite asset class right now is distressed debt that has been recently downgraded. Many pension funds and bond funds invest in high credit rating bond because they want safety, and that their fund mandates it. When a downgrade occurs (ie ‘safety’ condition removed, many such investors are forced to sell. Good investors love to buy when the other party is in panic selling mode.

Know who you are buying from. Think twice about buying when you know that the seller is a good investor who has done due diligence; or the other party is an insider. You don’t want to be the pasty :)

Other Mispriced Situation
A stock that is knocked out of S&P index would have huge selling pressure. About 10% of all S&P stocks are owned by index fund. Being kicked out would mean that many funds would be forced to sell.

Corporate Spinoff – It is often the unloved child that is being spun off. Normally it has low ROA, litigation, or weak management. Owners of the parent company stock don’t want to own the ugly child, causing huge mispricing opportunity

For beginners – there are some close end fund trading way below NAV. If you think there is sufficient MOS, this could be a beautiful opportunities.

Margin of Safety
Only buy when an appropriate Margin of Safety could be established. Hold cash when you can’t find any. Klarman’s fund entered 2008 with over 35% in cash, and it is now in the low 20s. However, he sold some assets to maintain a high cash position as he said this is a period of time where you don’t want to be caught without cash. (interestingly, Buffett sold some JNJ after his buying spree late last year to maintain high cash position).

One of the biotech company that his fund owns has a royalty streams of over 30% IRR. There is no need for great things to happen, and the price is lower than the value of this highly predictable stream of royalty. There is no place for optimism for valuation.

He currently price in several years of GDP decline into every scenario analysis and would only buy if he’s comfortable with that.

Risk
Perform intensive sensitivity analysis on every security that you purchase. For instance, when he stress test mortgage backed security (where there are some interesting mispricing going on), Factors such as housing prices changes, default rate changes, and repayment of loan rate chages would be fed into the model. And at depression level, would the security still be a good buy? If yes, then BUY!

Academics thinks that more risk (volatility or beta) more return. But Value investor know that the less the risk (P(of loss)xloss) and MOS, the more return.

On a macro level, in 2006 when financial institution grew to 40% of S&P, Klarman got worried because it showed that the growing economy is driven by growing leverage. Over the last 2 years, many traditional value investors got killed as they are not quick enough to re-calibrate their understanding of book value. He also noticed that for most investor, once you lose 30% - 50% of capital, your thinking gets fuzzy.

Further example of modeling financial Armageddon – For instance, when analyzing car loans (many originator are keen to sell this off, but the traditional securitization market has dried up) would the security still be of value if historical loss rate quadruple? Can we still be safe?
Or when analyzing housing related security, if housing prices in the area goes back to 1979 level, can we still be safe?

Some things are easier to forecast in this current environment; earnings from gaming houses in Las Vegas is down 20%, but it is very hard to guess what next year earnings will be. However, the sale of Kleenex is unlikely to decline by 20% over the next year as people are still going to buy Kleenex.

Valuation
Make use of MULTIPLE scenarios and valuation method to value. If the current price is right smack in the middle of your multiple case, you know you don’t have a Margin of Safety.

Valuation technique used - liquidation value, replacement cost, book value, PV of cashflow, earnings and cashflow multiples, breakup value, private market take over value (not levered) , LBO or MBO.

If everyone in the market looks at a business and values it a certain way, e.g. as a LBO target, it is often beneficial to look at it another way – e.g. at liquidation value. This provides both margin of safety and a more dynamic approach to valuation.

Optimism

The period with the highest return going forward would be the worst period of return looking backward. He simply don’t understand why some people believe that the world is not going to wake up tomorrow. Klarman has not seen so many opportunities to invest in since the day he graduated.

--------------AWESOME DAY!!!--------------------

One Short Day in the Emerald City

2009-03-14T07:47:00.000+08:00

I'm currently laptopless as i've sent my aging (not so gracefully) Acer for repair after 2 days of grueling phone marathon with Acer Canada to get it fixed. Something like Jie Min's laptop, the screen just turns a greyish green after i switch it on. Hope it would comeback to me in a week's time. Meanwhile, I'm using the school's computer to check emails and stuff, but couldn't update facebook. Gotta install Firefox (secretly) to access my blog. haha.

Spent the last weeked in NYC. It was the most amazing weekend ever! I got to watch 2 of my favorite musicals - Mary Poppins and Wicked!!!

I remember that the Mary Poppins soundtrack was one of the first CDs that i memorized the lyrics from the first track to the last. The stage version is just as magical as the movie starring Julie Andrews and Dick Van Dyke. We have to give it Disney to re-create something so special every night on stage. Some things you expect of a Disney production - beautiful costumes, choreography and great actors are of course there. But there are wonderful surprises for all - like Bert tap dancing across the stage (not on the ground mind u, but on the pillars) and the wonderful Mary Poppins flying on and off stage with her super powerful umbrella. I was half tempted to buy one of those ridiculosly priced items after show! haha.

The next night, i tried my luck with the lottery at the Wicked booth. Thanks Playbill! for getting me affordable tickets so many times!

There were about 180 people queing for 27 tickets. And i was the first name called ~ Looiii Wee! I guessed it was me, so i rushed forward with my heart pounding and blood rushing to my ears! I guess i got lucky because i went alone, so i got the 26 + 1 odd man ticket. Odd man indeed...

It was a first row seat, and the whole experience was amazing. I swear that i caught Glinda looking at me twice! Maybe she's wondering who's that freak that knows all the lyrics to the songs. Whoohoo. Alli Mauzey who plays Glinda sings well, but what was exceptional was her comic timing. The audience laughed so hard during her rendition of Popular, which was like a sultry + legally blond version. Nicole Parker was the new Elphaba, a good singer and u can really feel that the 2 actors were connected on stage. During the song - For Good, Glinda's voice wavered a little as u can see some tears in her eyes. The harmony for that song wasn't perfect, but the raw emotions on display were.

It was such a wonderful experience. Just hope that my family and friends were here to share my joy and excitement :)

By the way, i was in New York for an interview. It went ok, but i'm up against very strong candidates. Hope i did well enough to secure an intership, but like i often say, its the process that matters. Good process + Good outcome = Deservedly so. Good process + Bad outcome = unlucky. Hopefully i belong to the first category.

Till i get a chance to use my computer in school again or get my laptop back....Aidos!

Out of touch

2009-03-05T11:43:00.001+08:00

After 2 weeks in Mexico, i felt completely out of touch with financial news and stuff. Not having a fully functional laptop does not help.

Read and re-read Buffett's latest shareholder letter. Nothing calms me down better than reading his letters. In a world where everyone seems to be anxious over when will we hit the next low or when are we going to recover, Buffett timeless approach to business seems idiosyncratic. Find great company run be great manager, buy at fair price, repeat. Find mis-priced securities (stocks, bonds, insurance contracts, or derivatives) wait for mis-pricing to correct, repeat. Build a impreganable balance sheet, hold ample liquidity, minimise counter party risk.

Keynes wrote about liquidity crises years ago, "...the professional investor is forced to concern himself with the anticipation of impending changes, in the news or in the atmosphere, of the kind by which experience shows that the mass psychology of the market is most influenced. This is the inevitable result of investment markets organised with a view to so-called “liquidity”. Of the maxims of orthodox finance none, surely, is more anti-social than the fetish of liquidity, the doctrine that it is a positive virtue on the part of investment institutions to concentrate their resources upon the holding of “liquid” securities. It forgets that there is no such thing as liquidity of investment for the community as a whole. The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future."

I'm simply glad that i've followed simple asset allocation plan for managing my parents portfolio by following simple strategies put forth by David Swensen. When i lose my own money, i sleep reasonably well....but when i lose money that has been entrusted to me, i felt that i had let others down. Reviewing the investment policy, i believe that it is still sound and the portfolio should do relatively well over the next 5 years despite the recent calamity. However, 5 years seem like an eternity if u are fretting over the next market meltdown and thinking about how much the market has to rebound for you just to breakeven. Find great company run be great manager, buy at fair price, repeat....sounds easy, but will take me the rest of my life to master.

Mexico Trip

2009-03-03T12:41:00.000+08:00

My 2 weeks mexico trip was the most amazing trip i've taken so far. Within the short span of 2 weeks, we covered a HUGE distance, and visited some of the most amazing ancient ruins, beautiful cities untainted by macdonalds and starbucks....and tourists, and some of the very beautiful natural wonders of the world.

This trip across mexico was organised by GAP Adventures and led by our very competent tour leader - Rebecca. Our group consists of pple from Australia, Denmark, Switzerland, UK, New Zealand, Czech, France, Brazil and Slovenia. My tour group is simply fantastic. I miss them already. haha.

My arrival at Mexico is pretty exciting. My flight from Toronto to Washington was overbooked, so we waited for people to be bumped around to other time slots. Then in Washington, the plane that we are supposed to take had one control panel down, the pilot is not willing to take off (phew...) so we waited 4 hrs for another plane. Finally arrived at Mexico City near mid night and guess what? my luggage didn't arrive. It was still in Washington. Lukily, i have all my important stuff with me with 2 days worth of clothes. See, diversification is super important. The airline promised to deliver it to mexico on the next flight in from Washington. Haha. One of my tour mates joked that it is possible that my bag will always be one day behind me as we move around every 1-2 days. Luckily it arrived on the following night.

One of the most breathtaking ruins that we visit is the one at Teotihuacan. The scale of the city and the Till this day, we don't know who built this city and why was it abandoned. There are thesis, but none could be verified.

The abv pix is the Pyramid of the Sun (viewed from the Pyramid of the Moon).

There no wonder why the view from the Pyramid of Sun is breathtaking. You could see every one trying to catch their breath after getting all the way to the top of the pyramid.

I would really love to write more about my trip and this amazing experience. But my left eye (ya. the sleepy one) is closing on its own now.

I've uploaded my pics in Mexico City, Puebla and Oaxaca on Facebook.

Does anyone know how to let people view pictures on Facebook without account?