The Last Lecture

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。

Debate on financial innovation

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

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

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

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

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. "