Don't Worry, Merry Christmas!

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

Merry Christmas dear all!

Competitive advantage and PE contraction

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

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

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

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

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

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.