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