Re-reading old post

I'm revising physics while reading Six Easy Pieces by Richard Feynman, http://www.amazon.com/Six-Easy-Pieces-Essentials-Brilliant/dp/0465023924, if only JC physics could be thought this way.

In the book, Feynman teaches very basic principle - like conservation of energy, and applied it to a wide range of phenomenon. And he also talks about how physics interact with other sciences, or even psychology, simply fascinating.

Today I was talking to an audit senior regarding accounting led incentives, e.g. book sales early if bonus tied to sales, slash much need staff cost to justify 'synergy' in acquisition, etc. Sad that the conversation didn't go anywhere, people at the table simply goes back to what the audit procedures 'should be' and no one discussed why the audit procedures was there in the first place.

Anyway, saw this MV today, very interesting

Somehow i watched this video way more times than i watch "Born this way".

I found a old post in 2008 on a friend's two favorite companies, APPLE and McDonalds.

Let's see how this two companies has performed over the last few years since the post dated Jun 2008. Chart here.

Over the last 2 year plus, Apple returned over a 100%, McDonalds over 24% and S&P a -3.84%.

Guess that buying great companies still works!

For any Buffett stalkers out there, the full transcript of his interview with CNBC is out. See here.

Berkshire Hathaway, bargain?

In the recently published annual letter and annual report, Berkshire Hathaway reported great earnings and little new news.

However, Buffett did 'help' us with the calculation of the intrinsic value of Berkshire Hathaway (BRK) stock.

In thefirst page, he said that in his estimation, the current earning power of BRK is 15 bn before tax and 12 bn after tax.

To verify this 12bn dollar figure, we can look at BRK's cashflow statement and see that operating cashflow is about 19bn and capex is about 6bn, thus 12 bn does not seem like an over-optimistic valuation.

A simple valuation would be as follow

(1) Value of operations = 12bn / 9% =133 bn

(2) Value of invested assets = 158 bn

(3) Less value of debt = 47.6 bn

Total value of Berkshire Hathaway = (1) + (2) - (3) = 243.4 bn

Number of Class A equivalent shares = 1648 k

Intrinsic value per A share = $147,694

Intrinsic value per B share = $147,694/1500 = $98.5

Current book value per A share = $95,453

Implied P/B = 1.55

Current Price per A share = $130,250

Current Price per B share = $86.7

Current BRK is trading at approximately 90% of this very conservative estimation of value.

The above calculation ignores to potential of BRK earnings substantial underwriting profit in the future, and also growth operating earnings in redeployment of it enormous cash hoard.

Thus these 'growth' would serve as further buffer against inaccuracy of the intrinsic value.

Disclosure: I'm a happy owner of Brk.B shares.

Is this the real life?
Is this just fantasy?
Caught in a landslide
No escape from reality。。。

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。

功遂身退，天之道也。

Institution Imperative

From Buffett's 1989 Letter to shareholders - on "Institution Imperative"

(1) As if governed by Newton's First Law of Motion, an institution will resist any change in its current direction;

(2) Just as work expands to fill available time, corporate projects or acquisitions will materialize to soak up available funds;

(3) Any business craving of the leader, however foolish, will be quickly supported by detailed rate-of-return and strategic studies prepared by his troops; and

(4) The behavior of peer companies, whether they are expanding, acquiring, setting executive compensation or whatever, will be mindlessly imitated. Institutional dynamics, not venality or stupidity, set businesses on these courses, which are too often misguided.”

I'm now fighting my mini battle for independence and against the institutional imperative within our firm.

Note the word "imperative"...do you recall a certain spell in Harry Potter? Yes, the Imperius Curse: "Total control. I could make it jump out the window, drown itself, throw itself down one of your throats..."—Barty Crouch Jr. as Alastor Moody on the Imperius Curse

There is great social pressure to conform, and I think a social norm created by "niceness" is even harder to break. If everyone stays late because everyone else is staying late, there is great pressure to wait and see if anyone else wants to go home. This is especially silly if we are staying just to stay, and no work waits to be done.

Also, the actions by those higher up are often governed by the unshakable Imperius Curse, while say that we need to gain efficiencies, many harp constantly on immaterial items (while some more hairy issues remains un-rectified cuz no-one wants to be the first to unravel the ball of hair..ewww this is even grossing me out).

Will risk be reduced by harping on immaterial low risk issues? Of course not. Does spending 2 days performing vouching substantially reduces risk? Hardly. Is it possible for everyone to go home at decent hours - sometimes.

Can I break social norms and not be viewed as a bastard? I'll try and see.

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.