Wednesday, April 16, 2014

Three Key Points for Newbie Investors

This is really more of a post for me to jot down what to say in the elevator or in a casual setting where I only have a few minutes to talk to someone and I would like to give the biggest impact and let him or her take away as much as possible with regard to the world of investing.

Now, I am assuming someone with very little investing background and who may or may not know who is Warren Buffett. If he wants more info, I can always refer him to this blog. But in that span of a few minutes, I must basically let him know the most important things about investing. 

So what should I say?

Here's what I thought could be well covered in a few minutes, and understandable to the layperson.

#1. Investing is about owning the very best businesses.
#2. Identify the blue chips (in Singapore) that satisfies #1.
#3. Buy only those in #2 with a strong dividend track record and a high yield.

Owning the very best businesses

For the readers here, you would know all about good businesses. These are firms with strong economic moats such as excellent business models (eg razor and blade), oligopolistic industry structure, recurring demand, brands, high market share, strong distribution, mind share, cost leader, pricing power etc. Great businesses are just a combination of these that allows them to generate very high returns on capital invested.

One Singapore stock that is becoming very interesting is SMRT. Disregarding all its trials and tribulations over the years, passenger rail is a simple business to understand. The demand is recurring - we go to work daily. It is a monopoly - unless we take buses or drive and clog up the roads further. There is always huge opportunities in retail and property development around the stations. It is one of the best businesses around. Buffett bought one for 26 billion dollars.

Obviously, in Singapore, the risks manifested themselves too well. Regulations - prohibiting SMRT from raising fares. The firm's own mistake in investing too little in operations and maintenance, causing major breakdowns. All these, together with the popping of the property bubble caused the stock to crashed to $1. A level not seen in since 2006! But as it falls, a lot of these risks are factored in the price. I would argue that we could have seen the worst. Time to think about buying SMRT.

Passengers walking along the track when the train broke down

Buy only blue chips

Well, there are blue chips and there are blue chips. Some companies and their businesses are just not as good. They have no economic moat - bad business models, poor industry structure etc. Chartered Semiconductor was a blue chip. But it was a crazy business. Players invest in billion dollar fabs that got obsolete in 3 years. It was a race that only 1 player could survive. The biggest global player - TSMC. Airline is another treacherous business. There are over 200 airlines globally and they compete away all the economic earnings. SIA is still profitable mainly because of its subsidiaries.

A lot of blue chips in Singapore actually do not satisfy the good business criteria. I would say majority of what makes up the STI would not make the cut. Temasek just bought one out. Olamak!

Dividends

The final test of whether a company is just good or truly great is, in the end, the dividend track record. Great businesses will continuously churn out cash and these companies will have no problem paying out dividends. Some can even increase its dividends year after year. In US, the small group of companies called Dividend Aristocrats have been increasing their dividends for the past 25 years. 

Twenty five freaking years!

Well, in Singapore, our history is too short and even amongst the blue chips, there is only a handful that have a solid dividend track record. The handful that qualifies as true blue chips with strong dividend payout, in my opinion, would be Singtel, Jardine Cycle and Carriage, SIA Engineering, SATS and Keppel Corp. As of now (mid 2014), none of them look really cheap. I would think twice about buying now.

This actually brings me to the most important thing about investment: how much will you pay for it? Hence in my last statement #3 above, it has to be a high dividend yield. Like a 4-5% yield. A high yield would ensure that you bought it cheap and your capital should be well protected. In fact, today (mid 2014) it is very difficult to find true blue chips with 4-5% yield.

Ultimately, investment is an art and there are really no rules that can work at all times. As of now, these five names look like the right candidates and the only thing now is to wait for them to correct to buy them. But we also know that SMRT used to be one that looked right and crashed. Now could be the time to relook at it, but it would take some time for it to be established as a true blue chip again.

So these would be the three points that I would say, next time, in an elevator, or in a casual setting. Own good businesses. Identify the right blue chips, and only buy the Dividend Aristocrats cheaply! Huat Ah!

Saturday, April 05, 2014

There is no spoon...

This is a quote from the movie "The Matrix" almost 15 years ago. For readers who have never seen the movie, I urge you to watch it today. It is one of the best movies in the last century. No joke!

For those with no intention to watch it, I shall summarize the plot for you. 

*SPOILERS ahead*

The Matrix follows protagonist Neo (played by Keanu Reeves) as he discovered that his world was not real but a huge computer program called the Matrix designed to imprison human beings. Or rather imprison our minds. Neo has the ability to manipulate the Matrix ie free his mind while inside it, but has yet learnt the skills to do so.

He meets a boy in the Matrix who spoke to him about bending spoons. Here's the scene.

There is no spoon.

Well, in short, the boy was saying, "Do not try to bend the spoon, but to realize the truth:

There is no spoon. Seek not to bend reality, but to bend yourself." Neo understood the boy and in moments of crisis afterwards, he would murmur to himself, "there is no spoon." when performing the impossible.

In real life and in investing, ever so often, we are faced with such situations. We cannot change reality, but if we free our minds and see it from a different perspective, we can hope to bend ourselves to a better outcome. 

For instance, when faced with an uncooperative boss out to undermine our efforts, bend our minds and see what are his tactics, see through them and be better prepared in the future. We could be gathering consensus view before the meeting, or we could be influencing other colleagues first before confronting the boss. Strategize. See beyond the reality. Do the heavy-lifting.

There is no spoon.

Meanwhile, such situations also usually forces us to see other alternatives that we couldn't comprehend if we had remained comfortable. Usually it would lead to understanding the different factions within firm, see how we could deploy ourselves and/or explore opportunities outside the firm as well. 

In investing, this is also similar to Second Level Thinking. Free our minds to see what others could not. That is how outsized returns could be made. One example given by a good friend was the following. 

There were two plots of land separated by a canal. Both plots were too small to be developed into something useful hence the two plots of land sold at a significant discount to adjacent land. But if they were combined, an interesting project could be done. But most developers couldn't do it. It took a few civil engineering architects who knew how to divert the canal and perform their engineering magic to make it work. They saw what others couldn't, "bent the spoon" and made a lot of money.

Investing in stocks, or more often, private equity calls for similar mind bending strategies to make things work better. Our own Creative could have carved out a good niche in sound technology given the rise of the audiophile industry. It was a combination of technology, marketing and niche focus. But if something crap like BEATs headphones could make it so big, Creative stood a better chance to be somebody in the world of audiophile. Now China's Xiaomi is coming in to disrupt this nascent industry.

BEATs Audio Headphones

A lot our home grown brands could have been much bigger if their management could free the minds and stretch beyond the limits. Yeo's, Ya Kun, Gardenia, Charles & Keith, CYC Custom Tailor, Jack's Place, AIBI, Sakae Sushi etc. They were trying to bend the spoon using brute force. They should have known it's not about the spoon. Well, it's not easy, since Singapore is such a small country. We can free our minds, but we still cannot create markets big enough.

Btw, Type A people will never understand this spoon analogy. They are forever asking, what's the fuss about the spoon? Yes, we do not live in the Matrix, we cannot hope to bend anything made of stainless steel with mind power! But what's important is the idea, not the context. Free our minds, bend ourselves. See beyond the reality. If we can do that, we can achieve anything.

There is no spoon...

Saturday, March 22, 2014

The Impossible Trinity and the Tapering

Quick Summary:


  • The Impossible Trinity is an economic theory that states that a country can only control two of the following three levers: Exchange Rate, Free Capital Movement and Monetary Policy.
  • The recent Emerging Markets Crisis is a real world manifestation of this theory.
  • Countries in ASEAN often chose to control their exchange rate and free capital movement thereby allowing US interest rate to dictate our domestic interest rate.
  • This has created stock market and property bubbles in this part of the world and the recent tapering by the US Fed is causing these bubbles to deflate.
  • It is not easy for so-called Emerging Markets to actually emerge to become developed countries.


Economics can explain the recent events surrounding the demise of the global emerging markets where countries with weak current account deficits face fund withdrawals and see their currencies crashed and burned. This theory that has caught my fancy some time back is worth mentioning today. It goes by a fanciful name: the Impossible Trinity. The Trinity - as in the female lead in The Matrix. Well... never mind. The theory states that a country can at one time only control two out of the following three economic levers:

1. Exchange Rate
2. Free Capital Movement
3. Monetary Policy (Interest Rate)

It is a futile effort to try to control all three at the same time as dictated by another "chimmer" (more difficult) theory called the uncovered interest rate parity which I have no idea what's it really about but it doesn't really matter. Today, it's about Trinity and the Matrix. Let's go through an example to see how deep the rabbit hole goes see this clearer. We shall use Singapore, our beloved motherland.

Singapore controls exchange rate and enjoys free capital movement. Long ago it was determined that Singapore's small economy would be subjected to the global economic forces and it made more sense for us to control our exchange rate rather than our domestic interest rate. By having control of our exchange rate, we can make our exports competitive and we can also curb hot money flows and tame inflation. This meant that we then gave up control of our monetary policy ie domestic interest rate. Singapore's monetary policy is then, and still is, dictated by our trading partners which are the world's biggest economies and needless to say, the US monetary policy matters the most.

Ok let's now go into the specifics. Are you ready to take the red pill?

Say, Singapore wants to also control its monetary policy. We think that our red-hot property market is too hot. We need the final cool down bazooka measure. Raise interest rates. The impossible trinity states that this cannot be done.

When we raise the domestic interest rate, traders will want to invest in our SGD because it would be more attractive than that of our trading partners. Free capital movement means that hot money would flow into SGD, causing the SGD to appreciate. But at the same time, we want to control our exchange rate. So MAS, the Monetary Authority of Singapore, our central bank, would sell SGD to try to bring the exchange rate to where we want to be. This causes the base money supply of SGD to increase. When money supply increase, the price of borrowing goes down, thereby reducing the interest rate that we wanted to raise in the first place. Back to square one.

Conversely, say Singapore's property market has crashed and burned, led by the skyfall of Sky Habitat in Bishan. If we now want to lower interest rate to help give our property market a boost, again free capital movement allows hot money to leave the country (since lower interest rate meant that hot money should flow to other countries with higher interest rates) thereby causing the SGD to weaken. But we also wanted to maintain exchange rate remember? We want to have the cake and eat it! Not forgetting the cherry as well! So now, MAS needs to use reserves to defend currency ie buy up SGD in the forex market. This reduces the base money supply of SGD dollars which ultimately forces interest rate to go up. And this defeats the original purpose of us wanting to lower interest rate in the first place.

It's the most intriguing economic trilemma!

The origin of the recent crisis in the emerging markets has a lot to do with this. Although it was triggered by different mechanisms: namely tapering and current account deficits.

Most Asian economies have similar models as laid out by the Impossible Trinity in the sense that we allow our monetary policies to be dictated by the US. We just tried to control the other two levers: fix the exchange rate and allow free capital movement. In order to contain the Global Financial Crisis (a.k.a. the GFC), Alan Greenspan, Ben Bernanke and now Janet Yellen allowed the interest rate in the US to be lowered to zero. When that was not enough, they printed money. Lots and lots of money. It's like trillions of dollars annually, that's bigger than a lot of Asian economies - combined. 

It was like opening a tap and just let the liquidity run. The faster the better. All the money/liquidity gushing out had to go somewhere. Anywhere!

Remember that we (as in most Asian countries) fixed our exchange rate? Well we fixed it too low in order to make our economies competitive, the excuse was to allow our exports to sell in the global market. Chinese cheap goods, Thai made cars, Singapore made hard disk drives (well we used to make them before Flash memory came along), Korean gadgets etc. So all these money fled from the US, and from Europe to be parked in Asia. In our stock markets, our private properties and our banks. Yes that's how Sky Habitat soared!

This created the Asian boom from 2009 to 2013 as we saw most Asian stock markets hit highs. But as the US economy recovers, the need to maintain the liquidity tap on diminished. So US talked about tapering. It was a big thing! Tapering wasn't about turning the tap tight and off. It was just like hey let's just twist in by a little, just a little, so that the liquidity gush becomes, well, less of a gush. After all, in Singapore, we are always taught to save water. Now, most public taps don't even allow you to turn it. It's all sensor controlled!

A typical tap in Singapore's public toilets

What happened when the US hinted about tapering? Markets from India to Indonesia crashed. Now it's Argentina, Turkey and the other Fragile Five. China had its own truckload of problems. Man, Tapering became the new Agent Smith (the biggest villian)! And Asians the poor victims... Of course, not all victims are created equal.

Countries with current account deficits got hit very hard. Basically these are countries that import more than they export. So with tapering, money flows out, their currencies weaken, further exacerbating the current account deficits which could result in a vicious spiral that they cannot get out. In short, weak currencies leads to bigger deficits which leads to even weaker currencies. Crash and burn! This is not unlike the Asian Financial Crisis in 1997 when some of the currencies declined 70-90% vs the USD, never able to recover since then.

In the end, emerging countries have seldom proven if they could really emerge. Most don't. Even China is having a tough time trying to catch up with the rest of the developed world. It's still much easier to stick to investing in global names with proven track records.


Tuesday, February 25, 2014

Type A and Type B Decision Making

Quick Summary:
  • Type A decision making focuses on the few key factors.
  • Type B decision making understands that the fat tail of factors might become crucial someday.
  • Ignoring the fat tails mean failing to understand that these factors could come and bite us someday. Recognizing the fat tail is the key to Type B decision making.
  • In investing, this means looking holistically at the business and asking questions all round.
  • In real-world decision making, it also means constant reviewing of past decisions.
  • One should continuously assess the situation and challenge the assumptions.
In the previous post, we established that there are, by and large, two personality types. 

Type A: Digital, task-oriented, focused on getting things done. Excellent operators and organizers.
Type B: Analogue, multi-dimensional approach, focused on innovating to a better solution. Creative problem solvers and strategic thinkers.

In decision makings, these two Types exhibit different traits and I would like to further point out  as something that is very much related to stock analysis and the final decisions to buy, sell or hold.

As an investor, or to be specific, a stock investor, a big part of our core work involves analysing stocks ie companies and their businesses. There is no escaping that.

Now, businesses are complex and various factors come into play, in different time horizons, in different situations and market conditions. However, there should be just a few key factors that would explain 80-90% of the drivers of businesses and hence stock prices, over the mid to long term. For instance in toothpastes, it boils down to scale and distribution - how big is the manufacturing footprint and how far the products go into hypermarts, rural mom-and-pop stores and e-commerce. Secondly and perhaps more importantly, its brand which translates to pricing power. There will be a thousand other factors that might come into play. But these 2 or 3 would explain most of the business and how the stock should move over time.

A Type A investor would be able to understand up till this point. Yes, these are the two most important factors. P&G has a strong position in each of them so it's a buy. Most of the time, he would be right by just focusing on these key drivers. And most probably, he would also spend a lot of his time focusing on how these key drivers such as the economies of scale and the power of distribution changes vs competitors, neglecting the fat tail which consist of the brand loyalty, the taste, the packaging, all the little, little things.

But a Type B investor, being multi-dimensional would be able to understand that 90% of the time, these drivers explain almost everything, but at the back of his head, he is constantly asking, which of the other thousand factors might become important some day? We already mentioned taste could be one. What about a safety track record? Did the company have a good one? Or the geographical distribution of its manufacturing plants, do they have a concentration risk? What if an earthquake hits? Did they capture well some of the frontier growth markets like Africa? What is their strategy in total oral care? Do they have a mouthwash product or a floss product?

Decisions while 80-90% impacted by the few key factors, are also impacted by the fat tail of other factors.

To understand this, is the essence of Type B Decision Making. 

For every decision we make, ie to buy a stock based on the few top factors, we must know that there are a lot of other things that could come in play someday and debunk the whole thesis.  This is partly why even the best investors are only right 60% of the time.

This applies to real-world decision making as well.

Years ago, I had a debate with someone about whether we should ensure that our kids are fluent in just one language (ie English) or was it better for them to be bilingual in both English and Mandarin while perhaps less proficient than native speakers in either languages. So as a parent, a decision had to be made at some point. Expose our children to both languages or just one?

The other party was adamant that exposure to just the English language was the right answer since it's better to be fluent in one than to be mediocre in both. That was Type A decision making at its best (ie best mediocrity). It failed to take into account the fat tail. What if the kid can actually handle two if not three languages and become proficient in all of them? What if China becomes so interlinked with Singapore that Mandarin becomes a critical must? What about learning the language to understand the Chinese culture. After all, we are Chinese descendants.

A Type B decision maker, while deciding to expose their kids to both languages would again be mindful that this may not be the best for the kids. It is then about constant monitoring and fine-tuning the first decision. Does it still apply 5 years from now? 10 years from now? Decide now but review in time.

Type B thinkers will continuously assess the situation and challenge the assumptions. What if the kid cannot cope? Was the home environment bilingual in the first place? Do both parents speak good Mandarin? What about the emphasis of the school? How about the future career paths and their language requirement?

Type B decision making is about finding truths via the myriad network of logic, critical thinking and constant questioning: forever asking which fat tail risk will hit us in the face?

So strive to be a Type B thinker and decision maker.

Monday, February 10, 2014

Type A and Type B Personalities

Quick Summary:

  • There are 2 type of people: Type A and Type B.
  • Type A: Digital, Task-Oriented, Focused on One Solution.
  • Type B: Analogue, Multi-Dimensioned, Innovation is the Solution.
  • Type B makes better investors.
  • Type A vs Type B - SIA vs Singtel.
  • Are You Type A or B?

Over the course of my work and investing years I have had the chance to get to know and work with lots of people. Most of them are highly intelligent, motivated, diligent and also rational. They have all the traits of being successful and most are already very successful. But one thing struck me profoundly as I see these two "personality types" over and over again that makes it very important to help us understand how to work with them, work around them or maybe even try not work with them at all, if possible.

I must admit these are strong stereotypes and the readers here should exercise caution in labelling people as such. As with most things life, this is not a digital scenario as in no single person is 100% Type A and 0% Type B. It is usually some are 60% Type A, 40% Type B while others are Type A at work but Type B at home or even Type A when dealing with subordinates but Type B when dealing with superiors etc etc.

In any case, once I described the two Types below, it should help us better understand how to deal with such people.

Let's start with Type A.

I would label Type A investors or people as very task-oriented, focused but unilateral and one-dimensioned thinkers. They use checklists, are strong in processes and are fabulous organizers. But these people see the world in digital. Their motto is do or die and they will do because they don't want to die. To them there is always a right or wrong answer and nothing in between. They are very inflexible and they cannot accept contradictions. As a result they can come across as aggressive in order to push their self-believed "right" opinions. They are all science and very little art. Innovation is not their cup of tea and when asked to innovate, they need a roadmap.

To me, they have to try really really hard to be great investors. Not just good, but great investors. They can be good investors because by being disciplined they are always able cut loss and take profit, not unlike the best traders. Indoctrinated with some value investing philosophy, they can even stand to benefit somewhat. They can also be good contrarians as they only follow processes, not the crowd. But to be great investors calls for more than what they are inherently capable of. In short, Type A investors just need a lot more effort to bend their minds.

As managers, these people are perhaps more difficult to work with because they cannot see anything in between. Remember their world is digital. It's either their way or the highway. So there is no room for negotiation. They can be good task managers and process implementors but they are not strategic and they cannot think out of the box. In short, they make good COOs but not good CEOs.

Nevertheless, Type A managers are usually considered better workers and hence promoted faster.

Type B investors are the opposite of Type A. They are very poor at organizing themselves or their workflow. They are not task-oriented and they tend to focus on what interests them. They also dream a lot. They can think in multi-dimensions and can appreciate varying points of view, drawing a deeper understanding of the context and hence able to develop more strategic answers. They see the world in analogue and their motto is about finding the right balance. To Type B people, there is always more than one right answer and the solution is to innovate to an even better answer. They understand art and are sometimes artists themselves (as photographers, musicians, painters and entrepreneurs etc)

Of course their weaknesses would then be sitting on the fence, unable to execute or simply too poor at accomplishing important tasks at hand.

But Type B investors stand a reasonably better chance to be really great investors because of their appreciation of multi-dimensional situations. They can connect the dots, exercise strategic thinking and see beyond what Type A investors cannot and hence are better able to spot good businesses over and over again. As strategic thinkers, they are also better allocators of capital and can hence manoeuvre the portfolio better by constantly shifting capital to better performing assets. In my opinion, good CEOs are usually also good Type B investors.

As a simple example to better illustrate the two. Let's imagine a portfolio with just two stocks: Singtel and SIA. Both started out in equal proportion each but over a crisis Singtel fell by 20% and SIA fell by 40% and both becomes significantly cheaper vs their calculated intrinsic values.

A Type A value investor would say, "Let's buy more SIA, because it has fallen 40% below our entry price and is now probably 60% below its intrinsic value! It's an opportunity of a lifetime!"

But a Type B value investor would be saying, "No, we should buy Singtel because although it's only 30% below its intrinsic value, it is a better business and it generates better cashflow and pays better dividends. Over time, its value will compound much faster than SIA!"

If you have been reading this blog long enough, you would know that the Type B investor probably has the better right answer. The long term charts of Singtel and SIA say so as well.

Singtel (White) vs SIA (Red)

The long term charts of these two firms deserves further scrutiny. First, note that the starting point is different with SIA at 60+ and Singtel at 40+. So an investor in Singtel would have almost tripled his money while an SIA investor merely made 50% over this long time frame.

Now, to give it another twist, another Type B observer would actually say both are right, but buying Singtel would probably make more money over a longer time horizon while buying SIA might make a better short term return. Hence a better solution could be buying SIA now, then switch to Singtel, provided Singtel doesn't rebound.

Ironically, a Type A observer would not be able to appreciate what the Type B observer just described. Because to him, there can only be one right answer.

Again, please be reminded that people are not digital. Everyone is simply more or less Type A or B. We cannot assume people are 100% A 0% B or vice versa.

So I guess the first lesson here is to try to understand whether we ourselves are more Type A or Type B and if so, how should we compensate for our lack of positive traits of the other Type. For example, if I am Type B, it would mean that I am really bad at being disciplined to set entry and exit prices, making sure dividends are duly cashed and making sure that rights issues and other corporate actions are also taken care of. Then it's really about thinking of solutions to better manage these tasks.

More importantly, in our course of work and situations in dealing with others, it could be very helpful to identify whether the other person is Type A or Type B. If you are trying to convince a Type A manager to buy your product, then you should not appeal the strategic/multi-dimensional benefits but rather just show simple superior specs vs competitors products and be prepared to back it up with more details and more data.

To conclude, by understanding what drives other people, it would be easier to think of ways to deal with them.

So are you a Type A or Type B investor?

Friday, January 24, 2014

Investing Lessons from Ngiam Tong Dow - Part II

This is a continuation from the previous post.

The second lesson from Mr Ngiam's book is something pretty well repeated in many circles but I think it's worth re-learning. It can be surmised into the following five words: there are no sacred cows.

Mr Ngiam recounted the early days when Singapore was supposed to merge with Malaysia and the economic blueprint of the day was the creation of a Common Market where domestic industries would enjoy protection from imports via tariffs and restrictions. Many countries still practise this today as this was thought of as a good way to let small local players grow without excessive global competition.

However when the merger broke down, the Common Market was gone. Dr Goh Keng Swee, our economic architect quickly realized that Singapore could not afford to remain as a closed economy. We got kicked out of Malaysia but we must continue to fight to live. Nobody owe us a living. Together with our UN advisors, one of the most important persons in Singapore history but rarely mentioned, Dr Winsemius and Mr I.F. Tang, put up an economic plan to open our markets and invited foreign large corporations to invest in Singapore.

Dr Goh then taught Mr Ngiam that there could be no sacred cows. So in one swoop, Singapore removed all import tariffs so that our economy would quickly adjusted to compete in the global arena. This greatly helped prepare Singapore for its next step: attracting MNCs to invest here. In one of the most famous stories about Dr Goh, he designated Jurong, a swamp at that time, as the key site for MNCs to build their factories. Dr Goh himself joked that this could prove to be Goh's Greatest Folly. Of course, it didn't. Jurong today is a major economic muscle powering various sectors for the country.

Time and again, seemingly sacred cows would be slaughtered if that proved to be the solution. Mr Ngiam would say that we should take the bitter medicine in one gulp. So we cut the CPF contribution during the crisis of the 1980s, we drew on the reserves during the Global Financial Crisis and currently we are taking measures after measures to cool the red hot property market.

As with politics, I think investing shares the same philosophy: there are no sacred cows. Or rather, there should not be any sacred stocks in your portfolio and you must open your mind up to all the possibilities.

After investing for some time, you would accumulate a few stocks in your portfolio, some would be making money, others showing red. If you are reasonably good, you should see slightly more blue than red. But as I have blogged before, the winning ratio is probably just 60%. For every 10 stocks you buy, 4 will show red. So the question to keep asking ourselves would be: are we keeping any sacred cows?

As humans, it's very natural to rationalize ourselves into thinking that many of our losing stocks would come back. It's just a bad patch, the business is inherently okay. Or it's the CEO's fault and he's now being forced to leave, so things should turn. We will come up with 1,001 reasons why we should not sell our losers.

Portfolio management is about finding a better stock to replacing an existing one. There is no room for sacred cows. If the stock is not performing for some time, review the thesis to see if it has changed. Sometimes we could be too early and if so, we have to continue to wait. But if the thesis has changed, then it's time to kill the sacred cow.

On the other hand, we should also adopt a "never say never" mindset. Some investors would have certain biases. Like maybe never invest in an airline, or the cash burning semiconductor sector. But if we close our minds too quickly, we might miss out interesting opportunities. The apt example here would be SIA Engineering or SATS.

So while we all know airline is a crappy industry and they burn money faster than you can blink, some of the airline-related businesses are great cashflow generators. SIA Engineering, one of the largest aircraft maintenance and repair company in Asia, operates a great business that generates high return on capital.

You see, airplanes needs maintenance all the time. When the economy is good, they fly more often and needs to be maintained. But when the economy is bad, people travel less and airlines send their idle airplanes to be maintained! It's a recurring business with a relatively strong moat as you wouldn't want any fly-by-night guy to repair your airplanes.

More interestingly, since SIA owns a big chunk of all these related businesses, it could become a sum-of-parts argument ie we are buying SIA because it owns all these subsidiaries and at the right price, we could get its main airline business for free. Of course the argument then becomes whether the main airline business is just free or should it be negative value. That's second level thinking for the seasoned investors here.

Back to Mr Ngiam, I would again highlight that the book is full of interesting anecdotes for Singaporeans to enjoy. Some of these mantras are timeless. There are no sacred cows. Nobody owes Singapore a living. Take the bitter medicine in one gulp. Hard Truths!

In the early days of the founding of modern Singapore, Mr Ngiam, led by Mr Lee Kuan Yew, together with Dr Goh Keng Swee, Mr Hon Sui Sen and the core of the civil service officers contributed immensely to the success of Singapore today. They have my full respect. Salute!

Thank you Mr Ngiam!

This video has nothing to do with the post. 
But it's a nice catchy CNY song by Super Group's subsidiary Owl International. 
Enjoy and Happy CNY to everyone!

Thursday, January 09, 2014

Investing Lessons from Ngiam Tong Dow - Part I

I just finished this interesting book that gave a good perspective on Singapore's recent history from the former head of civil service Mr Ngiam Tong Dow. It was published a few years ago but the topics are still pretty relevant: public transportation, jobs, housing etc. I think every Singaporean who has an interest in public policies should read this book.

Ngiam Tong Dow's Book

For me it was especially enjoyable reading the parts about our political leaders Mr Lee Kuan Yew, Dr Goh Keng Swee and Mr Hon Sui Sen. Mr Ngiam described how the trio formed a very formidable team that help transformed Singapore to what it is today. 

Lee Kuan Yew - the visionary leader setting the direction, convincing the public, fighting the enemies both within Singapore during the early days and the external adversaries that were just waiting to see us fail. But of course, we didn't. Mr Lee is still fighting today. He has my upmost respect.

Goh Keng Swee - the economic and overall architect, building up our various institutions and devising strategies to make sure Singapore succeed as a small nation without a hinterland. He created our armed forces from scratch, helped put in place our education system, started countless agencies down to recreational facilities such as our Bird Park, Zoo and the Chinese and Japanese Gardens. He is my idol. Really. This blog has a post dedicated to Dr Goh.

Hon Sui Sen - the implementor or "builder" in Mr Ngiam's words who helped rallied the civil service and rolled up his sleeves and did a lot of the heavy lifting. In my humble opinion (and probably Mr Ngiam's as well), he is one of the most important unsung hero in the history of Singapore. Mr Hon, who contributed so much to Singapore unfortunately passed away in 1983 due to a sudden heart attack while in office.

Mr Hon Sui Sen


The investing lesson here is about management. In a company setup, I would say that there are also three very important positions.

The Chairman - the visionary who understands the big picture and help set the direction for the company.

The CEO - the architect who devises strategies based on the firm's strengths and weaknesses to help create Blue Oceans where the super profits could be made.

The COO - the implementor who is in charged of the day-to-day operations and really doing the heavy lifting while giving instructions to the ground troops.

Of course, some of the roles are intertwined. In a lot of cases, the CEO is the visionary as well as the architect while the Chairman is more of a symbolic figure. And a lot of companies have one person holding both Chairman and CEO positions or CEO and COO positions.

As investors, we should be looking at the management team to determine whether the three roles are duly filled. Lacking one or two of the roles would be very detrimental to the long term survival of the company.

I would argue that Apple, since the demise of Steve Jobs, lost both the visionary and the architect, who were obviously filled by Steve himself. Today the company is being helmed by the implementor Tim Cook who is unable to set the direction and devise Blue Ocean Strategies for the company.

Of course, I could be wrong. Given Apple's ability to attract talent, there could be a team of architects filling in that role but the visionary leader is probably lacking and it would not be easy to find one any time soon.

Anyways, back to the investing lesson here: look out for the three important roles in the management team of companies. Do they have the visionary, the architect and the implementor? That's essential for success.

Part II is out!

Monday, December 23, 2013

Investing is about Swaping Cashflows

If we strip down to the bare basics of investing, it is swapping today's money for tomorrow's cashflows (or future cashflows). So, you buy a stock at $100 today. What you actually want is that the stock can generate more than $100 in terms of future cashflows into perpetuity. The goal of value investing is then to determine how much all these future cashflows is worth today, and pay a lower price (at least 30% lower). So in theory, if you can accurately calculate that the value of all the future cashflows is worth $200 today and you buy the stock for $100. Then you have made a lot of money. Of course that's the hardest part - estimating all the future cashflows.

So, how do we calculate all the future cashflow? The simplest methodology is to apply a multiple. If the co. earns $10 today, give it a reasonable multiple, say 15x - there, you have it. The value of all its future cashflow is $150. Now that's crude right? But essentially that's what the whole finance industry does and that's also what the world's greatest investor, Warren Buffett does. Of course Warren Buffett perfected this art, by buying businesses that have predictable cashflow into perpetuity. Well it's still an art, so by default, it is hard to get it right most of the time. I have also discussed this in detail in the 5 Things You Need to Know about Investing.

Buffett also thinks hard about how to discount future cashflows correctly. Discounting is essentially saying that a dollar in the future should be worth less today as a result of compounding. The methodology is discussed in detail in this post: Faces of PE - DCF. But at the crux of it, the ways and means to value a stock is not different. For those readers yearning for a short cut. the easy way out is to determine a long term average earnings per share (EPS) of a company with a solid business (like Colgate or Swatch or Coke) and then multiple it by 12-18x. For a great business, you can pay up to 18x. For a so-so business, better just pay 12x or less.

That's Warren Buffett, world's greatest investor.

Many things affect whether a stock should be 12x or 15x or 18x. You can find some discussion in the Valuation label. Now once you have determined the right valuation, the right EPS and have gotten the intrinsic value of the stock, you compare it with today's stock price. If the stock price is significantly lower than its intrinsic value (like 30% or lower), then you have got a strong case to buy. That's really putting it in very elementary terms and no guarantee for you to make money. To learn more, do read the rest of the 250+ posts on this blog and you can start with this 1,500 word introduction on Value Investing :) Cheers! 

 Ok, next we talk about something more mind-boggling. If we think in terms of swapping cashflows, then we must also realize that this is a totally different ball game vs buying a stock at $100 and hoping that the price goes up and we sell and make a profit at $120 to a Greater Fool. The mind-boggling way to think about this is that there is no stock market and no daily price after you bought the stock. You are buying an asset at $100. The only return you are assured of is how much this asset will generate down the road ie how much cash will this investment eventually churn out over time, into perpetuity. There is no other buyer who will come quote you a price every day. And you cannot hope to sell at a higher price to a Greater Fool who is willing to pay for it at the higher price. 

That is the way we should invest. Warren Buffett ever so often says that the market can shutdown for 10 years, he doesn't really care. Because essentially he is buying future cashflows. And he doesn't give a damn if nobody is willing to buy his business or give him a quote tomorrow, or one year out, or 10 years out. When he paid $100 for the business he wants, he is already sure he would make money. Because the future cashflows from the business is very likely to be more than the $100 he paid today. So essentially, money is already made when we buy, not when we sell.

 I believe that's the way to invest.