Arbitrage, 麻油鸡& Acquisition

I love the way my Derivatives class is taught. Often in Singapore, we first learn the definition, then the formula, then we 'apply' to question. The way Prof Busaba teaches derivatives is to first help us get the intuition behind the instrument, then move on to a numerical example. From there, we generalize the case and arrive at the 'given formula'. A very refreshing way to learn new concepts.

He shared with us a fact that has been bugging arbitrageur and folks that support EMH - 1 year oil futures vs. spot oil price has HUGE spread that cannot be easily explained by pricing model.

FACTS: Spot price = 43.81, Futures (Mar 09) = 55.61

Given the figures, the implied cost of carry is about 23.8%. For oil, the cost of carry is basically cost of capital + storage cost. If cost of capital is 10% (hey, 30 risk-free rate is only abt 3%) and cost to store is about 5%, then there is a 8% spread that CANNOT be explained.

Can u imagine if we see an advertisement in Straits Times saying that in one year's time NTUC will be buying toilet paper from me at 55.61 if i enter into agreement with it. All i have to do is borrow 43.81 from my dad, buy the toilet paper, store at some dry basement...sell the toilet paper back to NTUC at 55.61, pay my dad some interest, and compensate whoever lent me their basement, and the rest of the money is mine to keep!

ie. Profit = Agreed selling price - cost price - interest - storage cost!!!

Haha. Any friends here that have low cost access to capital and also a HUGE basement to store barrels of oil ?!?!?! Call me :)

To the see the intraday futures prices, click here.

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Managed to cook 麻油鸡today, my most ambitious dish yet! Super proud of it given that it was my first attempt and the final product is quite edible. I couldn't find 米酒, so i used some super strong liquor i found in the cabinet. Haha. So my 麻油鸡 is super nice for the super cold weather.

The soup u see was prepared by my landlord. and the dumpling thing beside veg was bought from a neighbour that sells homemade food. Since it reminded me of 锅贴, i 'educated' my host that it SHOULD be taken with ginger and vinegar. Sadly there no 黑醋 around, so i used red wine vinegar. Taste great!

My latest acquisition is my HUMIDIFIER!!!

Now my room is Warm and Moist. Sounds a lot like the weather back home huh?

Haha. My summer palace in the winter wonderland!!!

Home away from home

This week the weather is really a killer. On a good day its -10 degrees and on a cold day its -27 degrees!!! I'm wearing 5 layers and has given up walking to school in the morning. 2 weeks away from mid term exams. Have to start mugging. Haha. Didn't expect to study hard for this exchange, but i guess i'll do so anyway.


Did my home cooked meal today. Since I'm just feeding me myself and I, cooking is really quite a hassle. But i managed to prepare my Lemon Chiken Rice meal today. It cost 8 CAD to buy this outside. Prepare at home, the chicken i bought + sauce + veg prob cost less than 3 CAD. Of course have to do some allocation of overhead and labour cost. Haha, but how to measure the sense of satisfaction of creating ur own meal :)



Going healthy here, my landlord eats organic food and such. So my chicken rice is BROWN RICE. My daily bread is Organic Whole Meal Bread.

What a better way than to end off a meal with a cup of hot chocolate and home made (organic) apple pie.

My landlord and morning walking buddy 'jack', i still don't think he's 66.

Gosh! I think my double chin is getting more prominient! gotta wear more scarf!!! ~correct ans would be to exercise. Haha.

A small ski slope 15 mins away from where i stay.

Spencer - a really old dog and quite friendly to me.

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When i reached home yesterday, i was shocked and moved by the news of the airplane that 'crashed' in to the Hudson river. Leaving minutes after leaving La Guardia Airport, both engines of the plane went down (probably due to some stupid birds flying into it). Not finding a place to land, the pilot took the decision to land on the Hudson River, between New Jersey and New York City. Minutes after this crash landing, all 155 passenger (& 1 baby) and crew was saved from the sinking plane by other boats on the river. A miracle.

U can see that people are standing in the frigid Hudson river on the wings of the plane waiting for help. They were mostly calm. Hypothermia probably would have been deadly if any one feel into the river.

This once again emphasis the importance of regular re-training. Mentally rehearse for all possible scenarios, unlikely as it might sound. And the importance of keeping calm during uncertainty and that a great team is surely more than the sum of the parts.

Impressed

Was trying to log into the Ivey school network today during class and i can't. It has been like that all the time. But whenever i get into the library the wireless thing works. So i was convinced that there's something about my laptop absorbing the energy in the library so the wireless works.

Today during the value investing class, David told me that in class session (as shown in the eZone...something like SMU Vista), you are not allowed to access the internet...just eZone. 

Wow. No wonder no one messages or facebook during class. And i was thinking that everyone in Ivey is so disciplined. Hahaha. 

Some thoughts on investing

Over the past 2 days in the nice cozy basement where i stay, i've been thinking (not too hard) about what have i learnt about investing over the last year or so. What prompted me to do so was Xin Hong's post on his reflections. His comments on Bill Miller's portfolio action is particularly close to my heart as a substantial portion of my personal net worth is invested in Miller's Value Trust. Given the additional layer of fees Fundsupermart.com charges, Miller would have to Value Trust would have to outperform its index by almost 2-3% just to be on par with the S&P 500 index. 

His untimely stock pick for financials caused him to underperform severely. Basically, the last 5 years, he missed out on the natural resources and oil & gas sector boom, started holding substantial amount of financial companies and building companies early in 2007. Averaged down on these sectors when prices declined significantly, piled a few percent of his portfolio into Freedie Mac alone, which later went to almost zero, and has positioned the portfolio for rapid recovery way too early.

For a good summary of what happened in 2007 (hey that's 2 years ago), read this Bill Miller's 4th Quater 2007 commentary.

His decision that "What took us into this malaise will be what takes us out." laid the path of further underperformance in 2008. What got me pissed is that during the 1Q 2008 letter, Miller quoted his friend as saying his underperformance is just a form of “You mean, your deferred outperformance,”. It shows a form of misplaced arrogance. A hubris that is timely punished by a unmerciful market. 

However, look at the honesty Miller displayed in this 3Q letter, "Our portfolio has performed worse than most others, and worse than I would have imagined, in this current financial crisis. It has suffered from my overall optimism, long-term orientation, and inability to anticipate the depth and duration of the financial crisis in time to take proper action to mitigate losses." 

Why have i stuck to Miller over the past 2 years? My answer is sure dissatisfactory to any rational investor. Why Miller? over the over 10+ value funds that i admire, only Value Trust is offered in Singapore. The rest has SEC and MAS regulation governing against unaccredited Singapore investor from owning it. 

Why did i not sell when he wrote his super arrogant letter? Cuz i'm stuck with the notion that i've already paid 2% commission on it, the net asset value per share has fell by over 30%, and if i sell and it goes up, i'll bite myself. Totally irrational portfolio decision.

Why am i still holding it? Cuz i like the new portfolio mix now. He's defensive, but not TOO defensive. I understand most of the rationale for the stocks holding in the Value Trust, and mostly agree with them. I'm still shackled by my damned bias to make full rational decisions. And i think Miller will perform well after this crises. He's super smart and i think honest, he'll do well...or i wish i hope. 

On a lighter note, I'm absolutely thrilled about my lessons at Ivey. I love their case method which is used to teach both technical subjects (derivatives and value investing) and the general business management courses. I'm amazed at the level of preparedness of the students in here. By end of discussions, the profs will then go through their slides, and i see that most if not all the key issues are discussed and 'taught'.

And i must say that i'm so lucky to done AFA in SMU last semester. The ability to tackle a tough subject on my own makes learning so much more fun as we can then move pass the 'how to' and move into the 'why;. And given that Prof JJ tortured us with the crazy amt of readings last sem, now reading case and academic journals are just plain fun. haha. A classic case of  先苦后甜。

This Thurs is projected to be -15 degrees celsius and with wind, it will feel like - 25. Think i'll have problem walking to the bus stop....burr....

There'll be a spring break from 11th Feb to 1st March, and Ontario is still projected to be in frigid winter. Thinking of going West coast in US or Mexico to escape the winter chills. Haha. Can't sell my portfolio to finance the trips. Will try to further extend my credit line with Pop and Mom finance house. Haha. Hope there won't be any credit terms or such. 

Ivey

3rd day of school today. It was great fun for the past few days. You guys who read this blog probably know that my notion of fun is rather odd, doing financial ratios are fun, balancing balance sheets are fun, getting AFA analytical checks are fun. Haha.

For Jan, my lessons would start at 8 and lasts all the way to 5 with some breaks in between. On NOT SNOWY days, i walk to school with Jacques (i think that's how to spell it), he's 66 and he struts across the snow with ease, and this poor chinese guy is trying to catch up constantly. Haha. I think that's the way to not get fat here, cuz Anita cooks the best soup and i'll have them at 7pm after i have dinner at 5 pm in school. I'm like having 5-6 meals; not all those mini-meals by the way, so getting REAL fat is a high probability event. Anita n Jacques rented their basement room to me, equipped with TV, microwave, fridge, boiler, bed WITH linens, and they are the sweetest couple in the world.

I'm doing 6 modules here, and students here told me that i've picked 2 of the most hardcore electives here - Derivatives, and Value Investing. I enjoyed my first 2 lessons. Instead of 'teaching' you the equations so you can just 'plug it in' (aka my "beloved FIIM" class in SMU), the professor here starts with very simple numerical examples, then build on it with more assumptions and scenarios, and at the end of the lesson, he'll 'generalise' the examples into equations. So if one is able to do the examples, he'll be able to understand the intuition behind the formulas. Wicked.

Posting pictures up on the blog is a real pain. And i have 2-3 business case to read each night, before the lesson next day. SO posting in January will be sloooowww. Once my mid term exam is done, I'll be left with 4 modules, of which there's only 1 exams. But January will be tough, cuz i'll have 4 exams in late Jan, and its pretty heavy weight...the courses, not me. Haha. Here's some pictures i took in school today. Its snowing, but not too windy, abt -4 degrees...so its considered warm. Haha.

that's supposed to be the ivey bldg behind my overexposed face

i think this is one of the oldest building in University of Western Ontario, where Ivey is situated in.
my eyes are like two slits, gotta learn how to open them....hahaha....



Time to go read my cases for tmrw! Oh ya, daylight saving means i sleep more!!!

Eat, read, sleep - my type of life :)

New York New York

Back in London, Ontario, Canada near Toronto after my awesome one week trip to New York.

Lesson will start tmrw at 8am! I'm super excited!!! Real lucky to have an elderly couple as my landlord. They're so warm and lovely. And my room is awesome. Equipped with fridge, microwave, tv...thinking that "WEI LOH" is a girl, as WEI is a girl's name in polish, she bought me a pink toothbrush. Haha.

Will write more on my wonderful new york trip this weekend. Meanwhile, let's see if my first attempt at flickr works.

Why zebras don't get ulcers?

I must first admit that i don't understand more than half the book, and that i cheated and skimmed through certain chapters that don't interest me yet.

However, given the subject nature - the science of stress and its impact on our well being, it is a reader friendly and very interesting book. I don't think i can introduce this book as well as Amazon.com Review, so i shall lift their text and show it here.

Amazon.com Review
Why don't zebras get ulcers--or heart disease, diabetes and other chronic diseases--when people do? In a fascinating look at the science of stress, biologist Robert Sapolsky presents an intriguing case, that people develop such diseases partly because our bodies aren't designed for the constant stresses of a modern-day life--like sitting in daily traffic jams or growing up in poverty. Rather, they seem more built for the kind of short-term stress faced by a zebra--like outrunning a lion.
With wit, graceful writing, and a sprinkling of Far Side cartoons, Why Zebras Don't Get Ulcers makes understanding the science of stress an adventure in discovery. "This book is a primer about stress, stress-related disease, and the mechanisms of coping with stress. How is it that our bodies can adapt to some stressful emergencies, while other ones make us sick? Why are some of us especially vulnerable to stress-related diseases, and what does that have to do with our personalities?"

Sapolsky, a Stanford University neuroscientist, explores stress's role in heart disease, diabetes, growth retardation, memory loss, and autoimmune diseases such as multiple sclerosis. He cites tantalizing studies of hyenas, baboons, and rodents, as well as of people of different cultures, to vividly make his points. And Sapolsky concludes with a hopeful chapter, titled "Managing Stress." Although he doesn't subscribe to the school of thought that hope cures all disease, Sapolsky highlights the studies that suggest we do have some control over stress-related ailments, based on how we perceive the stress and the kinds of social support we have.

Read this book and you will find out more about why many of us fall sick around exam periods, or whether claims we often hear regarding stress and its association and stomach ulcers or cancers are valid. I'm now more aware of what my body is going through when i am stressed, and will now actively monitor myself to take note of the danger signs and try to lower my glucocorticoids level.

Here's a short story regarding one of my favorite board games that is in the footnotes of the book. Prof JJ has taught us well to learn to appreciate footnotes, that's where the juicy stuff is...

I listened to a tape of this sermon, called "Back in the Box," by Rev John Ortberg. It concerns an incident from his youth. His grandmother, saintly, kind, nurturant, also happened to be a viciously competitive and skillful Monopoly player, and his summer visists to her were littered with his defeats at the game. he described one year where he practiced like mad, honed his Machiavellian instinct, developed a ruthless jugular-gripping style, and finally mopped up the board with her. After which, his grandmother rose and calmly put the pieces away.

"You know," she said offhandedly, "this is a great game, but when it is all over with, the pieces just go back in the box." Amass your property, your hotels...[the sermon takes off from there]...your wealth, your accomplishments, your awards, your whatever, and eventually it will all be over with and those pieces go back in the box. And all you are left with is how you lived your life.

Life is too beautiful and short to be spent chasing after things that at the end of the day means nothing. Treasure those around us. Life is fragile, we have to nourish it. It will finally mean something someday.