Going back to camp for my 2nd ICT. Happy that i'll get to see old friends and it is also a nice break from my internship. For a week, i'll get to sleep early and get disconnected from the wired world. Except for my very reliable Nokia camera-less phone, i have no access to the outside world.
Looking forward to read the 2 books i've brought in, and maybe watch a few more episodes of Friends on my ipod thanks to Ryan who converted the videos to make it ipod ready.
I'm also going to listen again to Warren Buffett's MBA talk which lays the foundation of my investing philosophy. So much to do over the next 5 days.
to Ajalumnichoir - we've ushered in a new era. Thank you to those who have served the choir so well over the past few years, especially Pei Ying, for working hard for us despite being seriously sleep deprived. And to our new team, i look forward to another exciting year under you all, new blood, new ideas, new challenges, same old love for music. What would i do without all my choir people...
Sunday, June 29, 2008
Wednesday, June 25, 2008
Simple portfolio and on compounding
Over the past few days different people have discussed with me some investing related topics. I think that the more i talk to people, the more i realise that getting "average return" for most people is a very hard thing to do. The heart wrenching feeling of watching your investments from your hard earned savings getting halved is too great a pain to bear. Thus most people buy when everyone is buying, and sell when everyone is selling (feeling safety in numbers), inadvertly causing disappointing performance.
I think that for some people, simply buying an insurance plan that has not much hidden expenses is a good way to save for retirement. It is not that insurance plan are great investment, but the fact that people can't access daily quotations save them a lot of pain and that you are lock into the plan for the long term also forces people to stay the course. If lower investment return and higher expense is what it takes to instill dicipline in people to save for their retirement, then so be it.
For those that have the ability to control their emotions when it comes to investing, i still think that have a simple portfolio plan that is low cost and then sticking to it is the most optimal way to save for a comfortable retirement. Zhao Bin sent me this article last week and it think its advice is both sound and timely. I especially like David Swensens's portfolio, but it is expensive to create such a portfolio in singapore. I've applied largely the Dr. Bernstein's No-Brainer portfolio for the portfolio i manage for my parents. Over the past 3 years, the results have been fairly decent.
I think that for most of us, active stock picking should be more of a hobby (hopefully not an expensive one) than to think to get rich through that. And unless you are diligent enough to find those companies that you truly understand, have great economics (as Andrew said, those that 'shit cash' year after year), and purchased at a inexpensive price, it is most likely a foolish to think that we can do significantly better than long term market average.
On Compounding (and on how to become a millionaire...at a rather old age)
We have all learnt arithmetic and geometric series in our secondary school days. To get really rich, we HAVE to engage in geometric return type of activity.
I've shared the following example with many of my friends from E.y.E. Investment Club.
A) Boi boi started teaching tuition at 18, and makes $800 a month. He invested every single cent into an stock index fund and does this for 4 years. And once he reached the age of 22, he stopped the plan and never touched the money in the fund ever again. So the total amount of money invested is $38,400. Boi boi retired at the age of 60.
B) Mr I'm-so-smart, is great at studying and and finally managed to get a PhD by the age of 28. He is now a chemist employed at a big oil firm earnings 10k a month. He realised the importance of saving and started saving $10,000 every year for the next 31 years before he retired at the age of 60. The total invested amount $310,000.
At 10% compounded return, guess who will be richer when they retire?
a) boi boi who invested $38k by the age of 22
b) Mr I'm-so-smart who invested a grand sum of $310k.
The answer is...as most of you would have guessed, Boi boi!
By the age of 60, (old) Boi boi would have accumulated $1,833,148 and Mr I'm-so-smart $1,819,434.
The main difference is that Boi boi invested about one tenth of what Mr I'm-so-smart did and ended up ahead.
Morale of the story: START COMPOUNDING EARLY!
and yes, anyone younger than me stand a way better chance at beating me in the game of compounding. So i'll strike back by either compounding at higher rate of return, or i'll stay in the compounding game longer - Outwit . Outplay . Outlast
Anyone who's interested in the spreadsheet used to arrive at the above numbers just drop me an email. It quite fun to see how total retirement sum is affected by years of compounding, invested capital and rate of return.
I think that for some people, simply buying an insurance plan that has not much hidden expenses is a good way to save for retirement. It is not that insurance plan are great investment, but the fact that people can't access daily quotations save them a lot of pain and that you are lock into the plan for the long term also forces people to stay the course. If lower investment return and higher expense is what it takes to instill dicipline in people to save for their retirement, then so be it.
For those that have the ability to control their emotions when it comes to investing, i still think that have a simple portfolio plan that is low cost and then sticking to it is the most optimal way to save for a comfortable retirement. Zhao Bin sent me this article last week and it think its advice is both sound and timely. I especially like David Swensens's portfolio, but it is expensive to create such a portfolio in singapore. I've applied largely the Dr. Bernstein's No-Brainer portfolio for the portfolio i manage for my parents. Over the past 3 years, the results have been fairly decent.
I think that for most of us, active stock picking should be more of a hobby (hopefully not an expensive one) than to think to get rich through that. And unless you are diligent enough to find those companies that you truly understand, have great economics (as Andrew said, those that 'shit cash' year after year), and purchased at a inexpensive price, it is most likely a foolish to think that we can do significantly better than long term market average.
On Compounding (and on how to become a millionaire...at a rather old age)
We have all learnt arithmetic and geometric series in our secondary school days. To get really rich, we HAVE to engage in geometric return type of activity.
I've shared the following example with many of my friends from E.y.E. Investment Club.
A) Boi boi started teaching tuition at 18, and makes $800 a month. He invested every single cent into an stock index fund and does this for 4 years. And once he reached the age of 22, he stopped the plan and never touched the money in the fund ever again. So the total amount of money invested is $38,400. Boi boi retired at the age of 60.
B) Mr I'm-so-smart, is great at studying and and finally managed to get a PhD by the age of 28. He is now a chemist employed at a big oil firm earnings 10k a month. He realised the importance of saving and started saving $10,000 every year for the next 31 years before he retired at the age of 60. The total invested amount $310,000.
At 10% compounded return, guess who will be richer when they retire?
a) boi boi who invested $38k by the age of 22
b) Mr I'm-so-smart who invested a grand sum of $310k.
The answer is...as most of you would have guessed, Boi boi!
By the age of 60, (old) Boi boi would have accumulated $1,833,148 and Mr I'm-so-smart $1,819,434.
The main difference is that Boi boi invested about one tenth of what Mr I'm-so-smart did and ended up ahead.
Morale of the story: START COMPOUNDING EARLY!
and yes, anyone younger than me stand a way better chance at beating me in the game of compounding. So i'll strike back by either compounding at higher rate of return, or i'll stay in the compounding game longer - Outwit . Outplay . Outlast
Anyone who's interested in the spreadsheet used to arrive at the above numbers just drop me an email. It quite fun to see how total retirement sum is affected by years of compounding, invested capital and rate of return.
Galadriel to Frodo...
Galadriel: You are a Ring-bearer, Frodo. To bear a Ring of Power is to be alone.
[pulls out her hand]
Galadriel: This is Nenya, the Ring of Adamant. And I am it's keeper. This task was appointed to you, and if you do not find a way, no one will.
Frodo: I know what I must do, it's just that... I'm afraid to do it.
Galadriel: Even the smallest person can change the course of the future.
[pulls out her hand]
Galadriel: This is Nenya, the Ring of Adamant. And I am it's keeper. This task was appointed to you, and if you do not find a way, no one will.
Frodo: I know what I must do, it's just that... I'm afraid to do it.
Galadriel: Even the smallest person can change the course of the future.
Monday, June 23, 2008
You never know what you are capable of...
Had a nice long chat with Ivan today. He shared his exploits from his Eurotrip with me and i'm truly facinated by both his experiences over there and that he managed to spend a GRAND sum of about $5,000 on a 31 day trip.
He travelled to countries like Austria, Italy, Germany, England, France, Czech Republic and a few more. He planned an innovative route to fly to England (via brunei and dubai) and saved himself a hundreds dollars. Along the way the gets to meet a fun company of travel mates and experienced things that was 'showcased' in Eurotrip the Movie. (hopefully not the one that involves a really huge battery operated toy...u'll get it if you've watched the show)
He encouraged me to go on my exchange and see beyond our sunny island. And also not to get tunnel vision and miss out all the life that is happening around us. So wise. I really admire his openess to experience and willingness to embrace the big unkown. Partly inspired by him, I've submitted my international exchange application today! hope i get it.
--------------------
Reading David Novak's book for the past 2 days. He's the CEO of YUM! Home to KFC, Pizza Hut, Taco Bell and A&W. He tells the story of how he grew up in a trailer park, how he became a marketing guy, and his rise to being the CEO of the company. There's 2 main takeaway from the book;
1) Give recognition to those around you. How many times have you felt overworked and underappreciated? Have you felt the warm feeling when you've done a good job and people recognise and thank you for that?
Human being yearns to be acknowledged. Giving recognition is totally different from paying lip service. Giving praise when you think the other person doesn't deserve it makes you a phony. But if you can find that ONE thing that he did well and you thank him for that, you are acknowledging his strong points, and that may be the ONLY thank you he gets for the day. He'll remember it.
2) You never know what you are capable of. How can a trailer park kid ever dream of being the head of one of the largest restuaruant chain in the world at the young age of 47? He kinda of stumbled upon it.
David Novak takes risks that few dared to take. Like asking outright to be the chief of YUM when Pepsico decided to spin it off. Or when he attached a corny poem behind his resume that landed him his first job with an advertising agency. He believed in stretching yourself, and learning from the best in the field. I really liked their "founding truth". So i've attached it below.
On advice given to young people starting out? Find where your passion lies, for that's the time you'll be able to walk the talk, take responsibility for both yourself, your company, and those around you.
"I tap dance to work, and when I get there, I think I’m supposed to lie on my back and paint the ceiling. It’s tremendous fun.” Warren Buffett
Saturday, June 21, 2008
Ryan, the oracle of Bishan
Was talking to Ryan in J8 today. I asked him which fast food chain would he want to own if he could own the whole company. He said McDonald's.
Next i asked if he can own any company in the world, which one will he own? He said Apple.
Then i asked if he has to own the company for the next 50 years, which one will he choose? He chose McDonald's as he's more certain that it will be around for the next half century.
Let's see how ryan would have done if he had bought these 2 stocks 4years ago.
Assume a equally weighted portfolio of 500 dollars each, over the last 4 years, the porfolio would have grown from $1,000 to $10,143 (excluding dividend). A staggering 78.5% return annualized!!!
$1,000 invested in the S&P 500 would have grown to 1360, a respectable 8% annualized.
So Ryan's portfolio would have beaten the index by over 10 times!!! Whoohoo!!!!
My numbers may not be very accurate, for i've simply pulled it off from google finance.
Click link to see the stock chart.
Of course investing is by NO MEANS as simple as buying Apple and McDonald's and get rich. But if you stick with investing in good companies that you know (i'm quite sure ryan will beat most Apple stock analyst in terms of product knowledge) and did not grossly overpay for the stock, the odds of you being a successful investor is rather high.
Loh Wei does NOT understand the economics of Apple, but i do think i know somethings about YUMS! (KFC, longjohnsilvers n pizza hut), McDonald's, Johnson and Johnson, Pepsico and/or Coke. And i'm confident that they'll be around for the next quater of a century. Most likely bigger and stronger.
Psst psst, next time if we need a stock idea, let's see what's Ryan spending his money on...
Next i asked if he can own any company in the world, which one will he own? He said Apple.
Then i asked if he has to own the company for the next 50 years, which one will he choose? He chose McDonald's as he's more certain that it will be around for the next half century.
Let's see how ryan would have done if he had bought these 2 stocks 4years ago.
Assume a equally weighted portfolio of 500 dollars each, over the last 4 years, the porfolio would have grown from $1,000 to $10,143 (excluding dividend). A staggering 78.5% return annualized!!!
$1,000 invested in the S&P 500 would have grown to 1360, a respectable 8% annualized.
So Ryan's portfolio would have beaten the index by over 10 times!!! Whoohoo!!!!
My numbers may not be very accurate, for i've simply pulled it off from google finance.
Click link to see the stock chart.
Of course investing is by NO MEANS as simple as buying Apple and McDonald's and get rich. But if you stick with investing in good companies that you know (i'm quite sure ryan will beat most Apple stock analyst in terms of product knowledge) and did not grossly overpay for the stock, the odds of you being a successful investor is rather high.
Loh Wei does NOT understand the economics of Apple, but i do think i know somethings about YUMS! (KFC, longjohnsilvers n pizza hut), McDonald's, Johnson and Johnson, Pepsico and/or Coke. And i'm confident that they'll be around for the next quater of a century. Most likely bigger and stronger.
Psst psst, next time if we need a stock idea, let's see what's Ryan spending his money on...
Friday, June 20, 2008
Investing in Property and Casualty insurance business (P&C)
This post is written to remind me of what to look out for when investing in P&C companies. Charlie Muger cautioned that for most of us, we will often miss out things if we don’t use a check list. Thus I’ve created a ‘checklist’ in the second part of the post for companies to pass before I would purchase them.
-------------------------------
What is P&C?
Property/casualty insurance is insurance on homes, cars, and businesses. Technically, property insurance protects a person or business with an interest in physical property against its loss or the loss of its income-producing abilities. Casualty insurance mainly protects a person or business against legal liability for losses caused by injury to other people or damage to the property of others.
(source: http://www.iso.com/index.php?option=com_content&task=view&id=12&Itemid=399)
The Checklist
1. Combined Ratio should be low.
2. Expense Ratio should be low if they are a low cost competitor (who issnt?)
3. Loss Ratio should be low, but not artificially manufactured by under-reserving. Warren Buffett talks about the buried suit problem. If a family buried their deceased in a rented tux, the bills will arrive long after the person dies.
4. Cost of Float if positive (ie UNprofitable underwriting) should be low compared to risk free government yield. If it is negative, then people are providing capital to the firm to invest at cheaper than free rate.
5. Book value (adjusted for distributed earnings) gives a good indication of historical growth rate of intrinsic value.
6. Investment performance determines the long term prosperity of many firms
7. P&C firms NEED to have extraordinary financial strength (indicators: net debt to total capital & liquid asset to potential claims)
8. Insiders should be significant shareholders due to the buried suit problem. In the insurance industry, due to the long tail liabilities , companies with heavy insider ownership have a greater incentive to think long term and engage only in profitable underwriting.
This and That
Managerial talent matters a lot in this industry as most firms have inherently no moat / competitive advantage. Superb underwriter combined with superb investor and low overhead promises a potential bonanza for investors.
Be ready to accept the underwriting cycle. A few years of profitability will attract new entrants ready to do business at any price, thus pushing premium to unacceptably low level. When catastrophe happens, weaker firms gets wiped out and industry goes back to profitability. The industry has generated high underwriting profit and prices have soften considerably over the past 2 years, have lower expectation in the near term.
See the following quote on an example of strict underwriting discipline.
From OdysseyRe’s 2007 Annual Report
“As the market becomes more challenging, we will respond by heightening OdysseyRe’s commitment to disciplined underwriting. Shareholders can expect us to purposefully contract our business in response to the deteriorating climate.”
Andrew A. Barnard,
President and Chief Executive Officer
OdysseyRe
Due to the fat tail, (imagine Katrina, 911 and Sichuan Earthquake happening in a same place at the same time), invest in insurer who have a good knowledge of what they are insuring (think Buffett or Ajit Jain). If not, stick with insurers that underwrites events that falls in a normal curve, auto accidents, fire accidents, property, etc (GEICO, Progressive, Chubbs).
On the previous point of importance of insider share ownership, see the recent ouster of AIG’s CEO Martin Sullivan which has lost discipline in investing and capital structure vs. previous CEO Hank Greenberg (one of AIG’s largest shareholder) who has kept debt low, kept expenses low, and generated good underwriting profit and growth for decades.
Other examples include Markel (80+% of shareholders are employees), Berkshire Hathaway (Buffett + Munger…duh), and Fairfax Financial Holdings (Canadian investor Prem Wasta).
Appendix
-Cost of float is calculated by dividing Underwriting profit / (loss) by float.
-Definition of Float (from Buffett’s 2001 letter)
To begin with, float is money we hold but don’t own. In an insurance operation, float arises because premiums are received before losses are paid, an interval that sometimes extends over many years. During that time, the insurer invests the money. This pleasant activity typically carries with it a downside: The premiums that an insurer takes in usually do not cover the losses and expenses it eventually must pay. That leaves it running an "underwriting loss," which is the cost of float. An insurance business has value if its cost of float over time is less than the cost the company would otherwise incur to obtain funds. But the business is a lemon if its cost of float is
higher than market rates for money.
…we have calculated our float..by adding net loss reserves, loss adjustment reserves, funds held under reinsurance assumed and unearned premium reserves, and then subtracting insurance related receivables, prepaid acquisition costs, prepaid taxes and deferred charges applicable to assumed reinsurance.
-------------------------------
What is P&C?
Property/casualty insurance is insurance on homes, cars, and businesses. Technically, property insurance protects a person or business with an interest in physical property against its loss or the loss of its income-producing abilities. Casualty insurance mainly protects a person or business against legal liability for losses caused by injury to other people or damage to the property of others.
Commercial Lines
-automobile
-businessowners (property and liability combined for smaller commercial customers)
-capital assets (output policy)
-crime and fidelity
-electronic commerce
-employment-related practices liability
-equipment breakdown (formerly boiler and machinery)
-farm
-financial institutions
-general liability
-inland marine (diverse commercial goods and properties)
-management protection
-market segments
-medical-professional liability
-package policies (property and liability combined)
-property
-umbrella
-workers compensation
Personal Lines
-automobile
-dwelling property
-homeowners (property and liability combined)
-inland marine (diverse personal goods)
-personal liability (including personal umbrella)
(source: http://www.iso.com/index.php?option=com_content&task=view&id=12&Itemid=399)
The Checklist
1. Combined Ratio should be low.
2. Expense Ratio should be low if they are a low cost competitor (who issnt?)
3. Loss Ratio should be low, but not artificially manufactured by under-reserving. Warren Buffett talks about the buried suit problem. If a family buried their deceased in a rented tux, the bills will arrive long after the person dies.
4. Cost of Float if positive (ie UNprofitable underwriting) should be low compared to risk free government yield. If it is negative, then people are providing capital to the firm to invest at cheaper than free rate.
5. Book value (adjusted for distributed earnings) gives a good indication of historical growth rate of intrinsic value.
6. Investment performance determines the long term prosperity of many firms
7. P&C firms NEED to have extraordinary financial strength (indicators: net debt to total capital & liquid asset to potential claims)
8. Insiders should be significant shareholders due to the buried suit problem. In the insurance industry, due to the long tail liabilities , companies with heavy insider ownership have a greater incentive to think long term and engage only in profitable underwriting.
This and That
Managerial talent matters a lot in this industry as most firms have inherently no moat / competitive advantage. Superb underwriter combined with superb investor and low overhead promises a potential bonanza for investors.
Be ready to accept the underwriting cycle. A few years of profitability will attract new entrants ready to do business at any price, thus pushing premium to unacceptably low level. When catastrophe happens, weaker firms gets wiped out and industry goes back to profitability. The industry has generated high underwriting profit and prices have soften considerably over the past 2 years, have lower expectation in the near term.
See the following quote on an example of strict underwriting discipline.
From OdysseyRe’s 2007 Annual Report
“As the market becomes more challenging, we will respond by heightening OdysseyRe’s commitment to disciplined underwriting. Shareholders can expect us to purposefully contract our business in response to the deteriorating climate.”
Andrew A. Barnard,
President and Chief Executive Officer
OdysseyRe
Due to the fat tail, (imagine Katrina, 911 and Sichuan Earthquake happening in a same place at the same time), invest in insurer who have a good knowledge of what they are insuring (think Buffett or Ajit Jain). If not, stick with insurers that underwrites events that falls in a normal curve, auto accidents, fire accidents, property, etc (GEICO, Progressive, Chubbs).
On the previous point of importance of insider share ownership, see the recent ouster of AIG’s CEO Martin Sullivan which has lost discipline in investing and capital structure vs. previous CEO Hank Greenberg (one of AIG’s largest shareholder) who has kept debt low, kept expenses low, and generated good underwriting profit and growth for decades.
Other examples include Markel (80+% of shareholders are employees), Berkshire Hathaway (Buffett + Munger…duh), and Fairfax Financial Holdings (Canadian investor Prem Wasta).
Appendix
-Cost of float is calculated by dividing Underwriting profit / (loss) by float.
-Definition of Float (from Buffett’s 2001 letter)
To begin with, float is money we hold but don’t own. In an insurance operation, float arises because premiums are received before losses are paid, an interval that sometimes extends over many years. During that time, the insurer invests the money. This pleasant activity typically carries with it a downside: The premiums that an insurer takes in usually do not cover the losses and expenses it eventually must pay. That leaves it running an "underwriting loss," which is the cost of float. An insurance business has value if its cost of float over time is less than the cost the company would otherwise incur to obtain funds. But the business is a lemon if its cost of float is
higher than market rates for money.
…we have calculated our float..by adding net loss reserves, loss adjustment reserves, funds held under reinsurance assumed and unearned premium reserves, and then subtracting insurance related receivables, prepaid acquisition costs, prepaid taxes and deferred charges applicable to assumed reinsurance.
Wednesday, June 18, 2008
Marc Andreessen / Charlie Munger
Stumbled upon the Marc Andreessen's blog. He is the founder of Netscape and numerous venture capital firm. Surprised that he's also a fan of Charlie Munger.
He has a great post on the application of Charlie's very famous "The Psychology of Human Misjudgement" talk, as applied to the business world.
If you have the time, do read his advice on career planning. It got me thinking hard about what i should do from now till i graduate.
Whitney Tilson's notes from Wesco's shareholder meetings 2008 is truly worth reading a few times over. Charlie Munger commented on Singapore's success and the relevance of our founding FATHER.
Charlie also commented on his need for "glorious independence". I think i need to achieve that too, for that the insecure child within me yearns for success...hoping to be heard one day. .. ... .... ... .. .
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