We are the lucky bunch

Totally enjoyed Daniel's post on some of the perils of value investing. It is both insightful and thought provoking. Daniel made a good case against jumping into US equities and why us mortals not being Warren Buffett should not emulate his every move, Xin Hong's post on his blog as usual gives us much to learn from. 

I agree with Daniel to a very large extent. However, as a cock eyed optimist (or at least an optimist with lazy eye), i think that the decision to 'jump in' or not is totally dependent on the investor's time horizon and risk appetite. I have a 30 year time horizon and can stomach a fall of my portfolio of over 50%, thus i'm fully invested. And Daniel, reading Cramer and Buffett's dueling view, i think they could be both right depending on holding horizon.

Some reflection...

Should i have lighten up on stocks earlier last year? on hindsight, yes. 

But given what i know then, should i sell? maybe. 

Looking at what i know today, should i buy/sell/hold? I'm cautiously optimistic.

As on the thesis of diversification, i believe that the two extreme ends make sense. Extreme diversification in the form of globally diversified index fund is how i do it, and that's where the bulk of my assets are. On the other hand, my portfolio picks consists of less than 10 stocks, with the top 3 making up almost half of the active management base. I'm surprised that this portfolio has held up quite well over the past 2 years against major indices, despite committing stupid mistakes like CFC and LEH. The common thread that runs through the failed investments is that i would never want to own the WHOLE company. So it is also not right that i would want to hold a slice of the company. 

In this world which prolong recession is probable and tight credit market,  i would ask myself the following question after finding a GOOD COMPANY before buying what is seemingly cheap.

1. Does the company depends on the credit market to maintain its operation? 

This would rule out many financial institutions, developers and companies that rely on debt refinancing to maintain operating cashflow.

2. Does the manager have substantial stake in the company? 

Angelo Mozilo, the CEO of CFC was busy selling shares before the share price went down and down.

3. Does the company have enough cash on hand and HIGHLY liquid assets that is not encumbered (e.g. pledged as collateral)? should there be a need to raise cash to pay for whatever.

4. After all the above criteria has been satisfied, can the company survive if they do no business over the next year or so while maintaining the required cash expenses (wages, rental etc)?

5. Is equity the best form of security to hold?

Holding debt or quasi equity investment in a perfectly decent company may be more advantageous than than common equity.

6. Following qn 5, are there more senior securities in the company that any upside of the firm no long accrues to common equity holder?

We are really lucky to have this crises to learn from. Imagine that those bankers who are in their forties wouldn't have experienced the late 70s crazy inflation and early 80s S&L crises. Even the banking crises in late 80s was comparatively short lived. The relative prosperity of 90s sprinkled with the dot.com bust and LTCM debacle is nothing compared to the current crises.

PIMCO's Bill Gross Oct commentary is out. Fear the McFear! Go read it.

 

The Great Crash

Finished "The Great Crash (1929)" by John Kenneth Galbraith last night. It was an amazing read and it is both highly entertaining and insightful. Thanks Prof JJ for recommending it. Wow, the nature of Man's greed has not changed at all. The author gave a short summary of the characteristic of a speculative bubble;

"... But here is a basic and recurrent process. It comes with rising prices, whether of stocks, real estate, works of art or anything else. This increase attracts attention and buyers, which produces the further effect of even higher prices. Expectations are thus justified by the very action that send prices up. The process continues; optimism with its market effect is the order of the day. Prices go up even more. Then for reasons that will endless be debated, comes the end. The descent is always more sudden than the increase; a balloon that has been punctured does not deflate in an orderly way."

The financial orgies that bankers and speculators engaged in came to an abrupt end early last year. But 2007 was the calm before the storm. Banks that have thrived on loose credit and rising home prices have suffered (to say the least) when home prices start to fall. As banks faced higher defaults, 'disciplined underwriting' came back to vogue suddenly and risky borrowers that have been been enjoying the high life by refinancing previous loans suddenly faced calls on loans with no available lenders. 

Home owners in some many american states could no longer use their houses as ATM and drawdown their home equity. Many faced negative home equity instead. Exotic financial instruments such as CDO, MBO, CDS exploded. The banks start to suspect each others balance sheet (due to the toxic mess in the assets) , inter-bank short term financing becomes expensive and for some banks, their oxygen source was cut off and left to wither in the dried out land.

Where do we go from here? This is exactly the moment where the strong gets stronger and weak gets wiped off. Examples of Wells Fargo's bid for Wachovia and Eli Lilly's purchase of ImClone is a good example of well capitalised firm taking advantage of the credit crises.  Others firms like and Leucadia and Berkshire are also finally moving their huge pile of cash to some other uses. Can we identify these strong companies and capitalise on their strength? Are they available at not too high a price? Seek and i hope i'll find some more. 

Anyway on the topic of the Great Crash, my terrible driving skill finally materialized as a physical damage to my dad's car. It happened in a rather spacious carpark. While reversing into a parking lot, the front side of the car brushed against the rear bump of a van (that is OPPOSITE the lot i was reversing into). Haiz. My dad's hand was cold when he calmly told me to change over and he parked the car in. He didn't even scold me, and even managed to say something like 'study hard hor, can't be a taxi uncle next time'. WOW! the papa that explodes to things like me/my mom being 5 mins late has EVOLVED.

Think i must really find ways to be pretty rich before too long. If i can't drive my parents around next time, must at least get a trustworthy chauffeur to ferry them around. 

For me? i think i'll just have a deal with SMRT to have my private cabin so i can do my part in keeping mobile accident rate and blood pressure of other road users low.

The impersonal claim

I really like Jie Chao's post on Darth Vader. So i shall shamelessly quote from his blog here, haha.

Joseph Campbell: Darth Vader has not developed his own humanity. He's a robot. He's a bureacrat, living not in terms of himself but in terms of an imposed system. This is the threat to our lives that we all face today. Is the system going to flatten you out and deny you humanity, or are you going to be able to make use of the system to the attainment of human purposes? How do you relate to the system so that you are not compulsively serving it? 

On how to not lose our humanity: By holding to your own ideals for yourself and, like Luke Skywalker, rejecting the system's impersonal claims upon you.

(see full post here)

Looking at myself and those around me, i guess most of us are shaped by the world around us. The expectations of our parents, friends, loved ones, those of the institution (think getting high GPA = good job) and 'social norm' influenced us to make many decision that we would otherwise not make. 

I applaud Xin Hong's reply to his friend's qn on why doesn't he apply to "prestigious institution". He said that wants to work for a firm which live the principles that he agrees with and work for a person (a prof who taught a course in SMU) whom he admires. 

How refreshing! when he asked me if it made sense, i told him it totally does. My only caveat is that he must not be envious of others (whom i believe mostly less exceptional then him) who will earn way more than him (at least in the beginning). 

To see Chin Ta dance in the library was quite stunning at first, but now there's a bunch of his Caderas friends who'll dance with him in that corner in the library. Not distracting cuz they count their dance steps to silent beats, but very entertaining. He has essentially re-shaped the 'imposed system' in his idiosyncratic way. Btw, HAPPY BIRTHDAY!!! 

End of Mid-term exam week today. 'Buang' my MS exam today. Probably got 40 odd marks out of 100. Now my grades depend on my relative 'buangness' of my classmates. Dunno how to do well in a class where they can talk about gradients and coefficients and make much sense out of it. They are having a private conversation in class with the prof which i'm not part of. 

Yippee! Mid Term Break. Time to read my Buffett biography and sit around and do nothing (at least for a few days).

Once again, the same quote from a previous post:

The vulgar thus through imitation err;

As oft the learned, by being singular; 

So much they scorn the crowd, that if the throng

By chance go right, they purposely go wrong.

~Alexander Pope

3 mil dollar trip to Phuket

It has been a week since US Treasury proposed the bail out plan (version 1) to save the financial system. A professor of mine described the plan as similar to a student going to a vacation to Phuket and asking 3 mil bucks as travel allowance. When asked about how he's going the spend it, the student answers "i don't quite know how i'm going to use it, but let me reassure you that i'll be responsible about spending it".

Almost all commentators agree that the current condition is a crises of confidence, so taxpayer's money should be used to restore confidence, such that the financial crises does not flow from "Wallstreet to Mainstreet". However, there are huge disagreement to what's the best plan. 

George Soro, Nouriel Roubini, and the guys at FPA commented that the is fraught with dangers, such as the issue of moral hazard, the rationale behind socializing losses but not gains, and whether this plan is going to stem systemic risk. Underpinning their arguments, is a common theme that the market economy should be allowed to work, un-disciplined lender's equity should be wiped out and new players should emerge. Some suggested that a model could be Buffett's infusion of highly dilutive capital into Goldman (great for him, but dilutive for existing shareholders), or allowing companies such as WalMart and others with un-levered balance sheet to be granted banking license. 

In 10 years time, we will look back to these days as the days where over-levered institutions engulf in flames for their greed. We'll vow to never make the same mistakes again. But we'll surely find new ways to burn, for humans have an enormous relish for folly.

The Snowball

Warren Buffett's authorised biography written by Alice Schroeder will be out tmrw! The publishing house has posted a interview with the author on Youtube. At 976 pages, it details the personal side of Buffett, his insecurities, and mistakes in life. 

Financial Times posted an excerpt of the book here. For some reason, i couldn't view the full article the second time around without registering. Nevertheless, the first reading has piqued my interest enough to decide to 'reward' myself by reading this book for the rest of tuesday afternoon after my AFA quiz. Hope MPH will the the book in place tmrw.   

I've not felt this excited about a new book since Harry Potter! 

All righty, back to slaying the AFA and MS monster , before i can find peace and sit down and read interesting stuff again. 

I must find the middle path between incessant focus and balance.

The Tale of Icarus

Icarus, I advise you to take a middle course.

If you fly too low, the sea will soak the wings;

If you fly too high, the sun's heat will burn them.

Fly between sea and sun!

Take the course along which I shall lead you.

作中庸，乃孔伋。中不偏，庸不易。~ 三字经

 

Kla kla kla

Learning a new song at choir today - Pasigin. 

It's supposed to be about fishing, but due to the cluck cluck cluck sound we make while singing it, it sounds like we're a bunch of chicken. hahaha. 

Thanks Mark! for finding new songs and and new vocal warmups for us. Sometimes his philosophical musings while conducting is really chim! And i thought Jie Chao is the only chim one. And thanks to Nadia, we have music lessons every week. She's like superwoman, doing everything and taking care of everyone. having weekly quizzes from Nad is intense! haha. maybe that's why everyone's late today. Our alumni choir is really lucky to have all these amazing pple contributing to it. Despite all our busy schedule, weekly turn up has improved a lot. Chee Guan and gang must be doing something right!

Christabel gave me an envelope of 5 different sachets of tea today, with the following quote written on it;

Tea's proper use is to amuse the idle, and relax the studious, and dilute the full meals of those who cannot use exercise, and will not use abstinence. ~ Samual Johnson

How appropriate! Thanks for the tea!

A little learning

A little Learning is a dang'rous Thing;
Drink deep, or taste not the Pierian Spring:
There shallow Draughts intoxicate the Brain,
And drinking largely sobers us again.

[...]

The Vulgar thus through Imitation err;
As oft the Learn'd by being Singular;
So much they scorn the Crowd, that if the Throng
By Chance go right, they purposely go wrong; [...]

Alexander Pope, "An Essay on Criticism"