Sizing

An interesting discussion with dad on position sizing. He asked why so few people around him gets rich through investing.

My immediate response was that few people are investors but speculators. But then i realize the answer has probably got to do with focus. People who gets rich (ie comfortably, not those obscenely rich kind) does it through owning and running businesses. They obsess over every aspect of their business, and invest all their time and effort into running it.

The other factor is that most of them back their total net worth into their business when they first start out. Which means that the total return on capital has a direct impact on their net worth.

Contrast this with what most people do when 'investing'. Only a small portion of net worth is committed into every good idea. So even if the idea works out spectacularly, the impact on net worth is small.

Imagine Mr Smart, who has a net worth of 100 dollars, found a really good investment and back 10% of net worth into it. The investment return 100% over a year. End of year 1, his total net worth is $110.

Then there is Mr Not-too-Smart, who also has a net worth of 100 dollars. He found a mediocre investment opportunity which he has high confidence in. He invested 50% of net worth into the idea and it return 40%. At the end of the year, his net worth is $120.

Over a lifetime of compounding, guess who will win, who will lose?

Then its time to throw in all finance students' first love, DISCOUNTING!

given that

Future value = Present value x (1+rate of return)^no. of years,

IF you want to maximise your future net worth, there's only 3 things you can do,

1. Invest a lot today

2. Maximise your return (i guess this is harder)

3. Live to a ripe old age to get ahead in compounding (this is the hardest? but darn i'll try)

The new normal

The following post is inspired by Xinhong's super short post. Here's my 'lor-soh' version.

It is interesting that many of my friends who read Bill Gross article finds it more and more technical. I have the same feeling too. So when Pimco talks about the new normal, and the DDRs - deleveraging, deglobalisation and re-regulation, it is great that we have our very own Dr Tony Tan to put it in simpler english for the rest of us.

From the speech by Dr Tan, my key takeaway is that as we enter into a world of sub-par growth and limited spending and leveraging, from a portfolio point of view, it pays to be cautious. Risk of inflation and deflation has both increased --> Probably means that if you do buy bonds, keep to those with short duration and of great credit quality. If you got housing loan, try to fix the rate now. If you pick individual stocks, do not overpay for growth, cuz the odds of high growth (in general) over the next few years are not high.


Emerging economies are likely to displace the G-7 as the world’s largest economies over the next 10-15 years, even if per capita incomes will still lag behind the developed economies. This relative outperformance will be driven by
(i) larger savings and domestic demand potential,
(ii) relatively healthy public and private sector balance
sheets,
(iii) policy flexibility, and
(iv) room for significant productivity catch-up.
The current Great Crisis has markedly accelerated such trends.

But the shift in economic power to the emerging world will also likely increase geopolitical risks. For one, the emerging economies, especially the BRICs will become key global powers and increasingly demand more say on world affairs. An awkward transition is likely to occur: In terms of military power the US is likely to be dominant for decades to come, and will be called upon to carry out most of the heavy lifting in global trouble spots. However, the US would still be heavily dependent on foreign countries including key emerging geopolitical rivals, to finance its large public debt.

< http://www.gic.com.sg/newsroom_speeches_060809.htm >

The above mentioned political risk cannot be underestimated. It scares me to think about the problems that the world would face as more and more resources demanded in industrial countries are sourced from politically unstable

The risk of de-globalisation and re-regulation are growing. In the recent "punitive tariff" imposed on Chinese tires imported into US, we may infer that economic policy will be greatly impacted by political will. Even food giant Nestle threatened to move out of Switzerland if the Swiss government imposes a salary cap. Executive compensation has always been a thorny issue. But to allow the government to dictate salary based on populist view could be catastrophic.

Haha. Here I am thinking about world issues. Haiz, gotta wrap my head around my school work and things to be done. Focus.

Obama on Education

In a prepared remark to students ranging from kindergarten through twelfth grader, Obama talked about the importance of education, his own journey as a young boy, and the inspiring life stories of people who value themself enough to give themselves a chance to shine through education.

Read the full speech here.


Every single one of you has something you’re good at. Every single one of you has something to offer. And you have a responsibility to yourself to discover what that is. That’s the opportunity an education can provide.


But at the end of the day, the circumstances of your life – what you look like, where you come from, how much money you have, what you’ve got going on at home – that’s no excuse for neglecting your homework or having a bad attitude. That’s no excuse for talking back to your teacher, or cutting class, or dropping out of school. That’s no excuse for not trying.

I know that sometimes, you get the sense from TV that you can be rich and successful without any hard work -- that your ticket to success is through rapping or basketball or being a reality TV star, when chances are, you’re not going to be any of those things.

Don’t be afraid to ask questions. Don’t be afraid to ask for help when you need it. I do that every day. Asking for help isn’t a sign of weakness, it’s a sign of strength. It shows you have the courage to admit when you don’t know something, and to learn something new.

So today, I want to ask you, what’s your contribution going to be? What problems are you going to solve? What discoveries will you make? What will a president who comes here in twenty or fifty or one hundred years say about what all of you did for this country?

My outsourced Life

My outsourced Life

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Competitive Advantage

Its been a while since the last post. School's busy, and i think i need to rev up my engine more to get back into the right gear. I wonder how i managed to go through 8 hours of sitting in a single position chewing through pages of AFA text book a year ago....

Anyway, I shouldn't be complaining so much as there is some form of synergy in my courses this year. I'm doing 'governance, risk and assurance', 'strategy', 'advanced management acct (AMA)' and 'tax planning' now. The 3 courses have a underlying theme running through them - you've got to understand your business, both at industry level, and at a process level.

The strategy course is taught in the 'case' method, which is an awesome learning experience, but super heavy in terms of course work. No pain no gain i guess.

Did an industry analysis on the airline industry last week and another on the carbonated soft drink industry this week. Its amazing how clearly Porter 5 shows us where does the profit flows to. I was inspired by my case study of Apple to understand IBM better. Read the book "Who say elephant can't dance" and must say that when we see what we learn in the class room applied by someone who did it so well, learning becomes a lot more interesting.

Anyway, during AMA class, our prof told us to apply different strategic analysis tool to ourselves and analyse what we should do with our self.

The SWOT framework works great on individuals too. Listing down my strengths and weakness, i think that i'm not exactly good for nothing, but also not great at anything. Hopefully being good in a few things would one day lead a great thing. Is this a true sustainable competitive advantage? NO, cuz anyone can emulate you with enough hard work. So the key is to constantly improve, learn and grow.

Applying the hedgehog concept, i think we can define what we want to do better.

I hope my self assessment is not too off. But honestly, the best analysis is sometimes futile. Part luck part hard work. Hopefully, it will all payoff one day.

By the way, of the 11 companies that was profiled in Good to Great, Fannie mae has gone under govermental ownership, and Circuit city has gone into liquidation.

We should feel happy when every thing kinda crashes around us, cuz life cannot get much worse after this. The converse is true. It is time to be truly worried when one is riding on a high, cuz mean reversion is ultimately one of the strongest forces.

Don’t Do What Others Do

Job hunting season is starting soon. After my internship at the private equity firm last summer, i'm more convinced than ever that doing what you like is an important search criteria for me. Quote from a friend who had lunch with me during my internship, "Why do you look so radiant?" - how can i not look radiant if i'm having so much fun at work? haha. Deciding to work for free (for internship) was my best idea in 1H09.

Looking through a bunch of websites to look for asset management company that would probably be a good fit with my personal belief that investment decision should be bottom up, research and valuation driven, and long term in nature. I hope I'll thrive in a company where all employees share the same fundamental ideas and approach.

One of the fund house that i was looking at has an investment process that i think can truly provide excess return over the long run. I enjoyed the annual report which detailed the purchase and sell decision for certain stock also the interview by the chief investment officer on how best to invest. In summary, Don’t Do What Others Do, read the article here.

My take on being contrarian does not mean simply buying whatever is falling in price. Averaging down only works when you are RIGHT. If not, it simply means you are throwing good money after bad. It does not mean buying low PE stocks and shorting high PE stocks, the low PE stocks maybe may deserve its PE due to its poor return on capital or low growth potential.

Investment success comes when the investment public fails to recognise the potential of a company and there is mispricing going on.

My dad asked me why after reading so many annual reports, i only buy a few stocks for his portfolio which i told him to expect a return averaging 5-7%. I told him cuz if i venture far away from what i think i know (enough about), i run the risk of seriously impairing his retirement savings.

Why risk something you have for something you don't need?

A Crude Awakening

National library allows all ordinary member (those not paying special membership fee) to borrow up to 2 audio visual materials for 2 weeks. Go make use of this facility and borrow great materials from the library!

Just watched the documentary A Crude Awakening, and this documentary discussed about (i) why we are probably near or has passed peak oil production. (ii) What are the probable political, enviromental and social impact of world with no cheap oil. (iii) Possible solutions to the problems and why without the political will to do so, we are simply living on borrowed times.

You can view the complete show free online on google video, it might just change the way you think about all the talk about alternatives energy and if there's anything you'd need to do to prepare for the day of reckoning.

The film interviews top experts who presented a balanced view of what should be done but why is not done. And the sad reality that even if we are to start tackling our problems today, there are still painful prices to be paid.

You'll get a glimpse of why exploiting ethanol fuel could be a pretty stupid idea as the tradeoff between world hunger vs. fuel depletion does not allow such transfer of land use. An interesting hypothesis was also presented - If the growth of financial market and wealth over the last century is due to efficient exploitation of fuel by mankind, then a fall in available fuel will cause global wealth to decrease or at lease slow to a rate absent any cheap alternative.