Tuesday, October 17, 2017

Market Trading Tactics - Part 2

This is a continuation of the previous post.

In the last post, we discussed how lessons learnt from traders apply to investors. As market participants, we really have very little control over our destinies unlike most other activities. A tennis player can always decide whether to be aggressive or defensive, to target opponents’ weak backhand or serve to kill. A businessman, likewise, can also do a lot, such as using discount pricing or scale to squash opponents or headhunt the best talent in the market to run his business. But for investors and traders alike, we are in a game where we control only one lever. We pull it to buy, release to sell, and the length of our pull determines our bet size.

Maria, still the most beautiful tennis player.

In other words, as market participants, we can only determine our entry price, our exit price and the size of our trade. This game is really quite restrictive. Hence the lessons from the last post would hopefully serve to remind everyone that in this game, we are our own worst enemies. The crux of success boils down to superior analysis and managing our psychology. I would think that psychology is more important than superior analysis.

Previously, we discussed the first two points about control and style. Today’s final point is about our own emotions. Particularly how our emotions would create what Daryl Guppy (the author of the book Market Trading Tactics) called an emotional stop loss.

In my years of investing, I have not really thought too much about this. Luckily or unluckily, I believe I never hit this stop loss. An emotional stop loss is the amount of money that we cannot afford to lose emotionally. It could be $10,000 or it could be 10% of the portfolio. If we were hit by this magnitude of loss, we feel really bad emotionally and we start to break down. We cannot think rationally and make stupid decisions. We are very likely to just sell out everything, hence cutting loss at the worst time possible, only to see that things recover after that. Obviously, this is different for everyone but we must recognised it’s there.

To make things more vivid, let’s put in some no.s. Imagine that we have a $100k portfolio and our emotional stop loss is $20k. But we did not know this. We put $25k into a pharmaceutical stock hoping to make 20% since our analysis showed everything was great and a new drug would be launch soon. Lo and behold, the company announced the new drug failed and it goes down by 80% in a week. So we lost $20k in a week. This is 20% of the portfolio. We just lost a couple of years of overseas trips at a click of the mouse button and we needed that for the downpayment of a new car. We panicked and sell out, shared the bad news with our spouse and faced the music, only to see the stock recover in the months after.

This is the emotional stop loss.

It is very much similar to a nervous breakdown or a snap. Our psychology makeup somehow works like a rubber band, if we are over-stressed, or over-stretched, we will snap and when that happens, it's very hard to recover. We sometimes see this even in friendships. People who are good friends for years but time after time tension built up and one incident (like a friend refusing to just put a Facebook Like when requested perhaps) can ultimately bring about some kind of a crunch that could simply bring the other to conclude, the friendship bond is broken. It could be repaired but it will not be the same.

Can we accept these friends?

So to make sure this never happens, we need to size really well. We need to think in terms of both absolute dollars as well as percentage of the whole portfolio. We would also need contingencies. For me, the rule of thumb would be never putting more than 10% of the portfolio in any single name. In fact, I would try not to get close to 10%. If the stock rises that much, then it’s best to sell out a portion of it. Of course, starting a position small definitely helps. Starting a new position at 1% and then look to build up as we learn more seems like a good strategy.

Our relationship with money is unique and the way we handle it is also unique in the history of mankind. From the caveman era till modern society, humans always dealt with physical possessions and very seldom the concept of virtual wealth as we do today when trading with screens and computers. Human activities in the stock market only started recently and hence its impact is not well understood. It is famous or perhaps infamous that Sir Isaac Newton lost a fortune in the early British stock market. For a genius like him to lose a fortune, what are our chances if we don't try hard to understand what we are up against?

"I can calculate the motion of heavenly bodies, but not the madness of people." - Sir Isaac Newton

It is said that every trade should be more akin to the decision process we make when we buy houses or for some entrepreneurs, buying and selling businesses. When we are looking to buy our matrimony homes, or a future nest, we really do serious stuff. We go for multiple viewings, we study maps, understand localities, we interview neighbours, we research markets. Well, at least I believe most of us do some of these when deciding to put hundreds of thousands. Yes, while each stock position will be just a fraction of homes or businesses, the due diligence should not be proportionately less. Even for trading, we need to do a lot more work than we think for each trade. I would say that the checklist should be at least 7-8 steps as I have depicted previously. But it's not easy. It takes effort. This is why so few ever succeeded in making huge sums from the markets.

This two part series on Market Trading Tactics hopefully gives us another tool to get there. To summarize:

1. In investing, we control only three variables: the entry price, the exit price and the size. Of these sizing is the most important, followed by the entry price. We get these rights by doing deep-dive analyses, understanding the intrinsic values well and buying way below them. It also means patience. Sizing comes with experience and it's important not to size it too small that it doesn't move the needle. Or size it too big such that it hits our emotional stop loss.

2. We have to know our styles. Some of us are bulls and other bears. Bulls tend to get in too early and bears too late. We have to adjust how we then enter markets. Bulls should enter small and build up. Bears have to enter big and/or try to be a bit earlier but with a smaller stake.

3. We must never hit our emotional stop loss because we cease to function at the high mental capacity to invest or trade. We need to do better analyses and know our own psychological makeups better in order to beat the market!

Hope this helps! Huat Ah!

Happy Deepavali to all!

Monday, October 09, 2017

Market Trading Tactics - Part 1

I bought this book titled Market Trading Tactics for ten years ago and left it on the shelf. It stood there ever since, collecting dust. At the back of my mind, I didn’t want to read it. I couldn’t figure out why I bought it in the first place. I am an investor and as an investor, there was no need for trading tactics. In my mind, traders and investors were enemies. We were the Allied Powers and them, the Axis Powers. The markets were our fighting ground. So how can I read a strategy book devised by the enemies?

I was so wrong!

Recently, in order to fulfil my mission to shift all my reading onto Amazon’s Kindle, I decided I have to quickly finish the last of the few hard copy books left on my bookshelf. Market Trading Tactics begged to be unwrapped. Yes, it was still wrapped in plastic which had turned yellow. So I did unwrap it and read it at full speed. I was done in two weeks.

Market Trading Tactics by Daryl Guppy (2000)

To be honest, the bulk of it was not what I was looking for. These were about moving averages, trading indicators, chart reading etc. I maintain my view that if past prices could predict future prices, then the infamous stats would be reversed: 90% of all market participants would make money by trading stocks and a lot of professional traders would be billionaires. Billionaires not just millionaires. Past prices and trading volumes do provide some information useful to long term investors and traders alike but not to the extent that it can help anyone beat the market consistently. I still believe it is much harder to generate long term 8-10% annual return by trading.

The anecdotal evidence was provided by the author Daryl Guppy who wrote about his own trading career including how much he could make by trading. These were really interesting stats. He shared that in one year, he made $60k profits on a base of $100k, making trades every two weeks (i.e. about 30 trades for the year), while adhering to the various rules that he set for himself, including stop losses, limits on capital risked per trade etc. He also shared that his average trade size was about $30k and his win rate was 70%. Of course, if he could replicate this for 30 years, then he would have beaten Warren Buffett. Since his net worth is still much less than that of the Oracle of Omaha or for that matter, many less famous value investors (yes, I am passing judgement here :), we have to assume that this should be one of his best years.

Having said that, I did learn a lot as an investor and some of this knowledge could actually be applied well to what we do. Here’s three nuggets that I found pretty useful:

1. As a market participant, we could only control three variables, out of many, many variables that goes into generating returns.

2. We need to know our styles, are we inherently bullish or bearish and how we should correct for our biases.

3. What is our absolute emotional stop loss?

You have to cut loss! You have to!

Ok, that's Korean drama style, we are not there yet. Let's tackle them one by one.

The first one should have come as common sense but I never really gave too much thought about it until I read the book. The author described it really well. So he said that in most activities that we engage in, we usually have a lot of control. Be it playing tennis, running a business, cooking etc. In running a business, we decide how to launch products, where to launch, at what price, who to hire, where to do promotions, what to do with e-commerce etc. Successful businessmen made lots of good decisions that propelled their businesses forward and beat competition. But as an investor or trader, we can only control three things. Yes, three. Our entry price, exit price and size of the trade (relative to our portfolio). That’s it.

Yes, there are activist investors that nowadays try to influence businesses, getting great outcomes, but for most of us, that’s pretty much the only things we can control. So, how do we win given what we can do is so limited? Hence what really matters is really psychology which impacts how we control the three variables. We should never be taken for a ride by the markets, buying into euphoria and selling in panic. I would say that for long term investors, the priority of importance is probably the sizing, followed by entry price and then exit price.

Sizing is also related to the last point so let’s keep things simple for now. Every position should be big enough to matter but not too big as to jeopardise the whole portfolio. In my experience, it would usually be 2-5% of a portfolio. For really high conviction bets, it could go up to 10% but that’s really risky. If we are wrong then wipe out a lot of our net worth. Next, entry price. There is really nothing much to add. For value investors, this determines almost everything. We buy way below intrinsic value and earn the difference between price and value. If we are right, there isn’t really an exit per se, bcos the value compounds and over time, we see these become 5 or 10 baggers.

On this note, we move on to the second point which is about styles.

Most of us are predisposed to have some sort of biases. We are inherently optimistic or pessimistic, we have formed our world views earlier in life and we act according to these views. For me, I am inherently optimistic and this comes up in my investing style. I tend to bullish and hence tend to buy easily, usually catching the falling knife too early and the stock continues to fall after my purchase. But thankfully, most stocks recover afterwards as I got the long term story right. I also tend to overstay, even in stocks that I believe I should be exiting. The converse is true for bearish people.

In order to correct this, now I know I should always enter a position small. For instance if this stock should ultimately be a 5% position. I would start with 1-1.5%. Then I have 2-3 bullets to add to 4-5% over time. Usually the stock goes down after the first buy, and the second and third buys allow me to catch the bottom. As for selling, I would need to develop better selling techniques, by setting rules such as never have any positions bigger than 8% of the portfolio. Sell a third or half the position after the stock has gone up 100% etc. However, these tips are also very personal i.e. it differs from person to person. So you have to know your own style and develop techniques to better manage and control the three variables well.

In the next post, we talk about the emotional stop loss!

Sunday, October 01, 2017

Chart of the Week #2: Bitcoin Bubble vs Today's Markets

Bitcoin has been touted as the new currency. Since government legal tender notes may not mean much if they are all bankrupted and we really don't want to go back to using gold to barter trade, one revolutionary solution might be bitcoin which is based on the newest, baddest blockchain technology that ensures safe encryption, traceability and eliminating the need for intermediaries like banks, credit card companies that had creamed more than their fair share of transaction since time immemorial.


Bitcoin had done crazily well over the last four years. It is said that someone who had invested at the start for $100 would be a millionaire today. But again, it looks like this is gonna be a classic bubble where things will become real ugly.


Here is another representation of the classic bubble chart where the final stages of greed, delusion and new paradigm hits. As things turn, one would see denial, fear and capitulation. We have seen this unfold many, many times but it's hard to identify where we are in the midst of things. Bitcoin could see the crash soon but the global markets today might be at the enthusiasm phase, we ought to be careful going into 2018 and 2019.

Source: FT, Dr Jean-Paul Rodrigue, Dept of Global Studies and Geography, Hofstra University and Google

Tuesday, September 26, 2017

Chart of the Week #1

Investment is pretty much about ideas and insights. Ideas about innovation, trends, moats help investors think through their stocks and find out those that could ride the trend while keeping competition at bay. Insights help us see what others are not seeing yet.

A lot of ideas and insights come from charts and hence this series is to highlight charts, tables that bring across these clearly. In this inauguration issue, we look at the demographics of Asia.


The chart above shows that Asia is seeing peak working population in the next decade. With the exception of India, most Asian countries will see a decline in working population. Japan has already gone through this phase and with that its stock market stagnated for 20 years. Hopefully, with Japan's lessons and incorporating US's innovation and capitalism, most parts of Asia can avoid that fate.


The next chart shows the impact of the drag on the economy for the next decade if we do nothing. Singapore will see the biggest drag from demographics, followed by Thailand and China. We may need to import a lot more people than we like. 

Chart source: Nikkei Asian Review

Wednesday, September 13, 2017

Singapore's Conundrum: MOE's Compounding Mutation

Spoiler alert! If you intend to watch Akira (1988).

Once in a while, on this infosite, we discuss Singapore's education system, which, in my opinion, is mutating uncontrollably into something that is ready to implode any time. While researching for this post, it reminded me of this Japanese cult anime called Akira that depicted an apocalypse future where kids with psychic ability (like 100 times more powerful than Star Wars' Jedis) wreaked havoc and destroyed cities. In the scenes below, the kid with psychic ability was not able to control his power and mutated into a huge monster that ended in a la-nuclear explosion (if I remember correctly). The day was saved only (or partially saved) by a miracle. Again, spoilers ahead in case any reader here would ever want to watch Akira.

Scenes from Akira (1988)

In some ways, our education system is really like a monster than had been mutating and mutating all these years and looks like it would further mutate wreaking havoc for Singapore. In some ways, we are seeing some warning signs: more and more teenage suicides, the recent infamous NDP middle finger boy, Amos Yee, just to name a few. So what's happening?

In the past, we discussed these issues, poor working environment for teachers, school rankings, kiasu parents, elitist system, syllabus that was way too mature for primary school kids amongst others. I would say that over the past 20 years, these issues were simply compounded as one detrimental issue added on top of another. It's some kind of compounding mutation like what happened to the kid in Akira. He was actually a fine lad in the beginning.

To better illustrate this point, we look at another manifestation of the problem that is how parents tried to tackle the issue with creative solutions, how the system accommodated and how this got crazier and crazier. I would say that there wasn't a problem 30 years ago, when I was in primary school. Back then, we were just interested in getting kids to school, making sure we got the literacy rate up. The problem really started say some 15 years ago when parents realized they needed to upend the system to gain an advantage for their kids in our small little red dot. So these pioneer mutation experts gamed the system by preparing ahead of the syllabus and/or trying to get into good primary schools on Day One. Back then, there was no need to volunteer to get into good schools like Raffles Girls or Nanyang. It was free for all.

Then some 10 years ago, the good schools started to feel overwhelmed since everyone wanted to get in and they created the damned volunteer system. This was the beginning of the end since only privileged families can afford to do the volunteer hours. Then the hours lengthened. And lengthened. Today, it stands at 80 to 100 hours for the best schools. Other parents, thinking ahead started preparing for GEP to try to game GEP - the gifted education program that allow kids to skip PSLE and also in other ways (direct admission), secure a path to good secondary schools and higher education, even though their kids may not be gifted.

Then there was the huge tuition problem. After years of parents preparing kids ahead of the syllabus, the schools started to teach less and less, outsourcing real teaching to the billion dollar tuition industry. But as the game progressed, it's not just any tuition that would allow the kids to smooth-sail through PSLE. About 5 years ago, polarization in the tuition industry happened, with Learning Lab and lots of other star tutors and star centres paving the way for elite tuition. Only by paying up can students stand a chance to be good at PSLE.

To sum up, over the past one or two decades, our education system didn't evolve to be more robust to deal with these changes. It let the mutations grow like cancer.


Mutation gone wild

Today, the mutation had gone truly wild. In fact, the tables had turned and it might not be feasible to go into the good schools unless the parents are willing to fork out thousands of dollars every month to keep up with the system. It might be better to be in a good class in a good neighbourhood school, with young and energetic teachers. Coupled with tuition, the kid stands a better chance to do well in PSLE. This problem came about because of the lack of good teachers.

You see, MOE (Singapore's Ministry of Education) had been losing the good teachers for years, so the ratio of good teachers in the system could be just 20-30%. These teachers would be assigned to the best classes. So in good school, it is more likely that an average kid would not be in the best classes hence getting the poor teachers. While in a neighbourhood school, the reverse is true. If a kid gets a poor teacher, it takes a lot more effort and tuition to catch up. The kid is also less motivated. In school, he is not taken care of by the poor teachers, and he has to go for lots more tuition which makes him tired. All these further exacerbating the issues, making the mutation worse.

We learnt that compounding is a good thing in investing. Returns compounding at 10% makes our money double in 7 years and quadruple in 14 years, growing 8 folds in 21 years, meaning $100k can become almost a million over two decades. This similar concept works in reverse in MOE. The mutation is compounding and has intensifying the problem for all primary school kids and their parents. Now that MOE is going to preschool, it might be more cancerous compounding.

Some might argue that it's the parents fault. It might be, but we discussed this before as well, we cannot stop an arms race or much less girls wearing higher and higher heels wanting to look tall and beautiful. Similarly, we cannot stop parents from being kiasu. Some also argue this is what it takes to be really good, to win global math and science Olympiad competitions. Maybe, but why drag the whole nation into this race, not every student can be Joseph Schooling. The system cannot just be catered to produce a few Joseph Schoolings while decimating childhood and causing teenage suicides.

Some say it's about building character, building resilience. Again that's true. But we also use that reasoning for conscription. Army sucks, we still dig trenches, something important maybe a hundred years ago to escape artillery bombing during WWI, but today people are bombing with drones. So, we carry ET stick and blade for what ah? Some say, in the army, we learnt almost nothing useful for working life but we say it builds character. Army builds resilience.

Scene from Akira (1988): Nuclear explosion

In fact, the resilience excuse is pretty useful. So a messed up education system builds resilience. Army builds resilience. We got a hardship overseas job posting, it helps build resilience. When we encounter bad bosses at work, they helped build resilience in us. Surviving a nuclear explosion builds resilience. Heck, everything bad builds resilience. But shouldn't we focus on fixing the system?

Alas, the more I think about it, I believe it cannot be truly fixed. I thought we could some years back (see other posts in the Education label). But we have mutated beyond the point of no return. The partial solution could be scrapping PSLE. This could be good enough for the next decade or two. We would spare young kids going through this proverbial MOE's baptism of fire before puberty. Most countries have their students tested at university entrance exams, usually at age 18. Singapore is unique that we do it at age 12. If we scrap PSLE now, we dial back the mutation somewhat, but the trajectory is unlikely to change, we are heading towards South Korea's path.

Here's an excerpt from Wikipedia about South Korea's education system.

The system's rigid and hierarchical structure has been criticized for stifling creativity and innovation and is also described as intensely and "brutally" competitive. The system is often blamed for the high suicide rate in the country, particularly the growing rates among those aged 10–19. Various media outlets attribute the nations high suicide rate on the nationwide anxiety around the country's college entrance exams, which determine the trajectory of students entire lives and careers. Former South Korean hagwon teacher Se-Woong Koo wrote that the South Korean education system amounts to child abuse and that it should be "reformed and restructured without delay." The system has also been criticized for producing an excess supply of university graduates creating an overeducated and underemployed labor force; in the first quarter of 2013 alone, nearly 3.3 million South Korean university graduates were jobless, leading many graduates overqualified for jobs requiring less education. Further criticism has been stemmed for causing labor shortages in various skilled blue collar labor and vocational occupations, where many go unfilled as the negative social stigma associated with vocational careers and not having a university degree continues to remain deep-rooted in South Korean society.

Well again some Singaporean parents are thinking ahead, pulling the kids out of the system if they could. Already, 20-25% of every cohort now go outside the conventional route in secondary schools. They could be in international or private schools and I believe more and more parents are also sending their kids overseas at the junior high level if they could. 

The ultimate ideal model is the Nordic education system where the best teachers (all Masters and PhD holders) are put at the core of the system and they believe in the true altruistic learning philosophy making sure that learning is enjoyable, done at the child's pace and ensuring that no child is left behind. This is the direct opposite of our system that emphasizes about ranking and results, commoditizes teachers and the teaching profession and ensures everyone is left behind except the elites. To be fair this is an Asian phenomenon and no Asian nation had successful replicated the Nordic model.

In Akira, the world averted a catastrophe with great sacrifices and the ultimate reset - a Big Bang that gave birth to a new universe. Perhaps that's the miracle we can hope for in Singapore's education conundrum.

Tuesday, August 22, 2017

SGX's Biggest and Smallest

Once in a while, it's worth doing some interesting stock taking to see rankings, compare charts and tables just to take note where things stand. Today, we want to look at SGX's biggest and smallest, just for the fun of it. We did a partial exercise like this a long, long time ago. Back then there were 700+ stocks listed on SGX. Today, as things stand, we still have 700+ and as per previously, most stocks are not investable for various reasons. We shall look at them later. 


Singapore's biggest listed names

The first table looks at the best and the biggest of our beloved little red dot. Singtel, at S$65 billion market cap is the largest local company. Singtel has been the largest since forever and looks like it would remain so with #2 DBS almost S$10 billion away. Although we could argue that the Jardine Group could be bigger if we add all their companies together. At its peak, Singtel hit S$70 billion and we would likely see it exceed that as long as Singapore continues to grow and its overseas subsidiaries continue to churn out cash. 

Next we have DBS and OCBC and further down UOB making up nearly S$150bn in market cap. The banks and property companies (further down the list: Capitaland, City Development, Ascendas etc) had always been a huge part of SGX and would remain so given our status as a financial hub. What's more interesting is the Jardine Group. Amongst the top 15 names, Jardine Group occupies four slots from Jardine Matheson and Strategic in the infamous binary structure, followed by Jardine Cycle & Carriage, Hong Kong Land. In the next list we also have Dairy Farm, the retail giant and the firm behind 7-11, Guardian, Cold Storage and Ikea.

Then we have the others, a group of interesting companies from Thai Beverage, Wilmar, Genting and some State Owned Enterprises or SOEs (ST Engineering, Keppel, SIA etc). Interestingly, the SOEs provide the highest dividends as they are also being perceived as slower growing. Singapore, by and large, had become a very dividend focus market with the top names all providing decent dividend (except Jardine Strategic which is tied in the binary structure). The next set of names (below) provide even higher dividends with REITs and telcos leading the way - Starhub at 7% dividend!

The next biggest!

To me, this list looks more interesting as there should be room to grow at single digit market cap and some names here have been highlighted a few times on this infosite: Sembcorp, Dairy Farm, SATS, SIA Engineering (not here but in the next set of names ranked by market cap - truncated and not shown on this post). The REITs would also look interesting at 6-7% yield. However do also avoid some companies that had already shown to be problematic: Olam, Comfort Delgro (getting killed by Uber and Grab) and SPH.

Smallest of them all!

Finally, we have the list of the day, the smallest on SGX. The smallest stock listed apparently only have S$1m in market cap, which is very likely smaller than the net worth of some readers here (definitely so if you own a private property!). It's a mystery why some of them are still listed. A lot of names were the once infamous S-chips. Most do not pay dividends, nor have profits. I would just say, don't bother researching them, there are enough other companies to do work on. 

There is this name though that caught my eye - Luxking Group. This is also one of those S-chips and surprisingly, it had generated positive free cashflow for the past 6 years. In 2016, it churned out S$4.5m in free cash while it's market cap is $5.5m hence implying a phenomenal 80% FCF yield. Unfortunately, I know next to nothing about this firm and just by looking at its financials, it's really hard to make a call to say this is an okay business. Even if we determine it's okay, liquidity is too low and it's not really traded, so in short, it's hardly investable. Nevertheless, if anyone here knows more, do share!

Next post we shall look at education (again!) as highlighted in PM's NDP rally speech!

Tuesday, August 08, 2017

2017 First Half Review - Part 2

This is a continuation of the previous post.

The last post we talked about the revival of tech brought about by multiple rounds of quantitative easing (QE). QE flooded the world with cheap money which ultimately went into investments in these tech startups (well, at least some part of it). There is a Cambrian explosion of new ideas and business models. We saw the rise of Grab and Uber, upending taxis. We have AirBnb for room-sharing, then office sharing, then now home sharing for people who don't want to buy properties ever. We have food delivery making waves and other ideas still embryonic but with the potential to further disrupt old economy business models. Then we had gaming taking over the world by storm. 

Gaming is now a $100 billion industry, bigger than Hollywood and music combined and is poised to become a huge sporting industry as well with the advent of e-sports. Already, the number of viewers on Youtube watching e-sports is reportedly more than the number of soccer fans watching the last FIFA World Cup. We might see the day when E-sports teams are worth billions (like soccer teams) and e-sports stars make multi-millions (like soccer stars) and their merchandise and goods are highly sort after by fans worldwide. Tencent and Activision Blizzard would be the stocks to play this secular trend.

Tech brands already started world domination in 2013

However, this tech revival had only benefitted a small percentage of the global population. Tech entrepreneurs and their employees have made a lot of money but not the regular workers on Main Street. In fact. many employees of the old economy had been dis-enfranchised by tech companies. Think how Uber destroyed Comfort Delgro. or how Amazon is killing the mom and pop retail stores or even Walmart. Tech, as with many things that had happened since the Global Financial Crisis (GFC) had widen the gap between the haves and the have-nots and contributed to the rise of populism (the political trend that allowed populist like Donald Trump and Rodrigo Duterte of Philippines to be elected).

There is a polarization between the haves and the have-nots globally. This is one of the huge side effects of QE. You see, Economics 101 tell us that when we print money, we should expect inflation and we did hve lots of inflation. This happened not the normal price inflation which we shall explain why later, but asset inflation. Thanks to the global central banks coordinating global QEs, we had massive asset inflation. That is why markets are hitting all time highs, art and wine and other collectibles are getting more and more pricey and Singapore properties had not decline much despite rounds and round of cooling measures.

With money flooding the global markets, the rich or the haves are struggling to put their money into good investments. Hence they go for stocks, collectibles and properties. They are buying up prime properties in global cities. It was reported that Chinese accounted for 1/3 of all London building transactions in the last 12 to 18 months. Singapore is definitely on the priority list for the global rich to park money. Hence it might be time for Singaporeans to relook at buying condominiums or risk not being able to buy one ever again.

While asset inflation had taken over the world, price inflation had been mysteriously low. This goes against Economics 101. I believe this is linked to the tech disruption that we had discussed. Technology companies, flooded with liquidity, had been able to provide free services hitherto. Think of how Uber and Grab had subsidized taxi fares, how AirBnb made travel affordable and how Amazon made buying stuff so cheap and how much productivity had been gained with the use of technology. Robots are taking away jobs and pressing down wages. This would continue and hence price inflation might remain low for years to come. 

The Gig Economy

The gig and sharing economy had also suppressed wages for the blue collar workers globally and this is generally not good. Without wage increase, we won't get economic growth and inflation. Mild inflation is actually necessary to create a virtuous cycle of economic growth and wage growth. This is now being challenged with the over-extension of QE. Unfortunately, the workers for these gig economies are still thinking they are better off because they can work at their own time and "be their own boss". 

So, what's the solution?

Alas, there isn't a good one. This polarization between the haves and the have-nots looked like it might just continue, until the next Global Financial Crisis (GFC). It is true that the have-nots are protesting. That is how Trump won the US elections. But Trump was not going to help the have-nots. He might just make it worse for them. Hence some believed that the end game could be a mega GFC or WWIII. If that happens, then all that had been discussed on this infosite goes down the drain. Whatever we have in our banks, in custody of other banks or security houses would be worth nothing. Hence I have always advocated that as astute investors, we might want to consider having a good portion of our assets in physical gold.

Well, that's one nightmare scenario if we don't resolve our issues in the next 5 to 10 years. As for the rest of 2017 and 2018, we might see the markets getting healthier as US continues to break new highs, Europe is finally recovering from the Grexit scare and the Brexit uncertainty and China continues to maintain steady growth (despite its shadow banking problems being unresolved). As for Singapore, we should expect the STI to also do well given that 40% of the index is related to banks and properties and we should expect them to rally with the positive outlook of the global economy. 

But the trick is also to sell into strength as valuations don't look cheap and we are not sure how long this party could last. When the music stops and lights come on, we have to face the reality - we did not solve all the problems of the last crisis. 

Happy National Day!

Read from the first post.

Sunday, July 23, 2017

2017 First Half Review - Part 1

This year started with a lot of renewed hope after the disastrous 2016 where we saw markets whipsawing investors. Brexit was supposed to crash the market, but it didn't and Trump wasn't supposed to become President and he did! The markets then reacted by going up 15%, when everyone thought it should go down if Trump ever won. In retrospect, the Trump rally continued into 2017 and we saw the S&P500 hitting all time highs and most markets, following US footsteps, are up for the year.

We have passed the first half of 2017 and hence it might be timely to do a quick review for the half year. Looking at various indicators, it could be said that a large part of the positive moves in the stock markets are done. Most markets had seen positive return for consecutive 6 months which happened very rarely in the past 20 years. Our own STI index (chart below) rallied from 2900 to 3200 in the last 6 months with only 3 down counters out of the 30 components. 

STI 1 year price chart


What had caused the general euphoria in the markets?

For one, the US market is very resilient. It's almost a decade since the Lehman crisis in 2008-09 and the system had been pretty much cleaned up. Multiple rounds of quantitative easing (QE) had created enough liquidity (as well as side effects which we shall discuss) to stabilize the economy. Unemployment rate is now quite low, productivity is getting higher with tech innovation and things are looking so good that the Fed is thinking about finally stopping QE. Then they changed their mind and thought maybe the party should go on. So markets rallied even more!

Meanwhile in Europe, things are also bottoming after the Grexit scare two years ago and China seemed to be okay with the big meeting coming up in October and everyone is trying their best to keep the Goldilocks economy going. Things should be not too cold nor too hot, just right for President Xi to announce his dream team during October's plenum session. Hence, other parts of the world are following this Goldilock's story where everything will be just right until they go wrong.

The other big trend that had really taken off in 2017 was the Second Coming of Tech. 17 years ago, we had the dotcom boom and bust when the internet promised the new future but then everything failed to deliver. Back then, we were not ready but we thought we were. There wasn't enough optics fiber to deliver what the internet promised, there wasn't enough profits generated. But today, things have really changed. 

Nasdaq 17 year price chart

Now, we have more than enough optics fiber in the ground and under the sea, we have the top tech companies generate more profits than the GDP of some big countries and we have lots of money created by QE1, 2, 3 and QE Infinity. In a amazing turn of event, the Nasdaq price today exceeded the peak reached during the dotcom bubble of 2000 (chart above). Statistics show that people spend 4-6 hours online everyday, on their phones, using PCs, shopping, playing games, watching videos. We are not doing work, not watching TV, not sleeping, not going out to eat (since we have Deliveroo) and just living our lives online. 

As such, the combined profits of the global tech companies: Apple, Amazon, Facebook, Google, Netflix, Alibaba, Tencent, Baidu and the rest generated c.$40 trillion in revenue and c.$3 trillion in profits. In terms of profits, tech would rank as the 4th largest economy in the world, behind Japan. With such profits in tech, it had generated positive cash overflow into the real economy, creating more high value added jobs, startups and hence reducing unemployment (somewhat). Hence it could be said that there is this symbiosis between QE and tech. QE flooded the world with money which flowed into tech unicorns (tech startups with more than one billion dollars in market cap) and into the other parts of the tech supply chain.

One huge positive side effect was semiconductors. After the bubble burst, the semiconductor industry and its relatives all died as the huge oversupply created in the aftermath caused prices to fall year after year. NAND prices, DRAM prices, chip prices always went down, until now. The tech revival, driven by big data and A.I. today, required more powerful computing and more storage. Much more than most could imagine. All the big tech are investing in server farms and computing prowess to outdo their competitors and this caused a short squeeze in semiconductor chips. Hence these players benefitted big time as well. Samsung, TSMC, Nvidia are at or near all time high!

The other huge market was the advent of tech gaming.

This industry started in Japan when Nintendo created the first console box called Nintendo 64 back in the 1980s. It spawned a huge market that had grown to become a $100 billion industry today. Gaming including mobile gaming, computer games, Playstation and Xbox is bigger than Hollywood and music combined. Then in 2017, we have a game changer: Overwatch.

Overwatch poster

Overwatch was created by a company called Activision Blizzard which also gave us a few of the best games ever created. Most people would have heard of them even if they are not gamers. Games like Call of Duty, Warcraft, Diablo, Starcraft and now, Overwatch. For the uninitiated, Overwatch is a team-based player vs player (PvP) game where gamers band together as different characters to defeat the other teams. It was made possible in today's era again because optic fiber now have ample capacity and chip computing power can handle multiple player gameplay without lags. This was not possible just a few years ago which was why games were always single or double player only.

Overwatch redefined PvP with a few ingenious concepts such as having a "replay" moment (like soccer) where the game automatically replays the significant moments during the match and also introduce a very huge variety of different characters (currently 25) having different strengths and weaknesses so as to keep interest high amongst players as they have to study these strengths and weaknesses well to win. Since Overwatch, this concept had been used in many other gaming platforms including Minecraft (Bedwars) as well as Honour of Kings (Tencent's huge hit in China right now) and Clash Royale (which also belongs to Tencent since they own Supercell).

But what's more significant about Overwatch is the creation of Overwatch League. I believe this marks the turning point of e-sports, a new genre in sports where people go to stadiums to see professionals play computer games. Overwatch will have teams from different countries (or states in the US) fighting one another much like World Cup or Premium League. Teams train together (online) professionally to win and most believe this would be as big as soccer someday where players earn multi-millions with worldwide fan base as well as lucrative sponsorships. So, it may not be bad thing to play games and not study today! Well if your kids are so good at it.

Since the creation of Overwatch League, we have seen e-sports taking off with talks of e-sports being included in 2022 Asian Games or a creation of an Olympic style gaming franchise with the past top games from all genres: Tetris, Street Fighter, Halo, Mario Kart and needless to say Overwatch. E-sports will also spawn other industries such as goods, merchandise and gaming peripherals (mouse/mice, headsets, keyboards) where Singapore's own company is the global leader - Razer!

Okay, so much about tech, in short, QE helped the tech industry to revive and the markets are seeing new trends which got investors excited, but there's are risks that the party might just end soon. Next post we talk more about the outlook for the later half of 2017 and 2018.

Overwatch this space!

Friday, July 07, 2017

Return on Investment for 38 Oxley Road

With the whole Singapore intrigued with the 38 Oxley Road saga, it is hard to avoid the discussion, be it during lunch, on Facebook and Instagram and worst of all with international friends. This saga could be a watershed moment, marking the downfall of a little red dot, if it is not resolved amicably asap. But since this is an investment knowledge infosite, let's leave the politics to others to comment. Today we shall focus on the investment aspect.

The investment story of 38 Oxley Road is also quite intriguing for those who would be interested in investment returns. In this post, we hope to capture the no.s and paint some scenarios, some very rosy, hopefully to make people forget the disgust and disgrace of the whole situation. Oxley Road was named after a certain Thomas Oxley, a Brit who owned a nutmeg plantation in the 1890s. It was then sold to a Jewish merchant which presumably then rented the house to Mr Lee Kuan Yew's family during WWII. In his memoir, Mr Lee Kuan Yew wrote that he rented the place for $80 a month in c.1944. After the war ended he and his wife went to London to further their studies and got married. They officially moved into the house in 1950. 

38 Oxley Road: front gate and the famous basement

It was not clear when he bought the house but based on circumstantial evidence, one could conclude it could be somewhere between 1945 to 1955. For our calculation purposes later, let's put it down as 1950. The value of the house is much harder to determine. In his memoir, he did mention that back then a decent house could be bought for 12 bottles of Johnnie Walkers towards the end of the war as families ran out of things to sell, like jewellery, the motobike or car, or even family heirlooms, so finally they would sell their houses. This anecdote itself probably deserves another post as it is not with zero probability that we would not revisit those days.

Back then, paper money (which was issued as banana money by the Japanese) was worthless and the economy degenerated and people resorted to barter trade in order to survive. So what became more valuable and could be used as currencies were cigarettes, liquor and usable stuff. Of course gold was on a class of its own. While it cannot be used in daily life, its value had been determined and recognized over the centuries which is why I believe all investors should have some physical gold in their portfolios. It need not be a huge chunk, maybe just 3% but in the improbable event that the modern financial system breaks down, the only asset that will hold its value and sustain daily life is gold.

Ok let's get back 38 Oxley Road. Where were we?

Yes, we were trying to determine its value back in 1950. We have a few numbers to work with. 12 bottles of Johnnie Walkers and $80 of rent per month. Today, 12 bottles of Johnnie Walker would cost between $2,000 to $4,000 depending on which label we are talking about. The Blue Label in some kind of limited edition would cost even more. Anyways, translating these numbers back to the value in 1950, based on an inflation of 3%, we get to $300 to $600. Geez, imagine getting a bungalow at $300! That's probably not too accurate. It could be as low as $1,000 but $300 seemed like too much a stretch. Next let's work with the rent. We know today that rent in emerging markets could be a high single digit or low double digit. A quick check on the rental yield in Africa today points towards that as well.

Courtesy of Global Property Guide

So let's assume that 38 Oxley Road also had a rental yield of c.10% back then. This meant that the value of the house would be $9,600 (8x12x10=9,600). That's probably a more reasonable number to work with. But in order to triangulate better. We can pull in other no.s. Based on what was told about the old days, the first HDB built in the late 1960s cost around $8,000 which meant that extrapolating a hypothetical HDB valuation in the 1950s, we get roughly $5,000. This meant that a house like the one at 38 Oxley probably cost twice or maybe 3x more. So we might get to $15,000, nice. Not forgetting the Johnnie Walker number, perhaps we can put a range on the value of 38 Oxley Road at say between $5,000 to $15,000.

Now that we got the value of the house back then. Let's determine the value of the house today. It was reported in the Straits Times that the valuation of the house is $24m in 2015 but developers, wanting to re-develop the whole area, the house could be bought for much more, like multiples of that number. So what's the right multiple? Again we try to extrapolate/triangulate that number with other numbers.

In a recent transaction, we knew that a Chinese developer bought a piece of land in Stirling Road, paying over a billion dollars for 21,000 sqm of land. That's over $1,000 psf for Stirling Road, near Queenstown MRT. Based on just the psf and land size, we can then know that Oxley should be worth at least $50 million since it's around 1,000 sqm of land. Of course, Oxley is not Queenstown and again the right number should probably be multiples of $50m. If it is 3x, then it's $150m. So there we have it, 38 Oxley Road today could be worth $24-150m. 

So based on these numbers, the return on investment for 38 Oxley Road after compounding for 65 years (1950 to 2015) ranges from 12 to 18%. That's a very decent number. Its at least 50% more for this site namesake! It definitely beats 95% of all professional fund managers out there and almost on par with the world's greatest investor, Warren Buffett's record of 20%.

Ok so here's the kicker.

38 Oxley on Google Map

If you look at the map of Oxley Road above. The plot ratio of the whole area is very low because when one of Asia's most important person was living there, we couldn't risk a sniper in a tall building assassinating him. So it was kept incredibly low at 1.4 whereas the surrounding is at 2.8 to 4.9. So if Oxley's plot ratio is relaxed, we are talking about 2 to 4x increase in plot ratio. This meant that a developer would be happy to fork out even more to acquire the hardest-to-acquire land in that whole area. Audaciously, let's say that 38 Oxley Road could be worth 2x of that $150 million number, at $300 million. Also, since we were never quite sure exactly how much Mr Lee Kuan Yew actually paid for Oxley Road, if we assume it's really closer to 12 bottles of Johnnie Walker, say $1,000 back in 1950, we get a new ROI of 21.4%, beating Warren Buffett's record. Furthermore, it compounded for almost 15 years longer than Buffett's reign hitherto. That's never been done before. 

In conclusion, if that turned out to be the true scenario, Mr Lee Kuan Yew, is Singapore's best investor and our answer to Warren Buffett.

Saturday, June 24, 2017

Lessons from Omaha - Part 3

This is a continuation of Part 1 and Part 2.

In the last post, we discussed that ETFs should be part of every astute investor's portfolio and since tech is becoming so important, maybe tech ETFs might also make sense. Also, if 90% or more of all investors never ever beat the index, then wouldn't be buying the index i.e. buying ETFs (equity index funds) be the best option? So that's coming from the Oracle of Omaha, Warren Buffett himself.

In this post, we go back to the centuries old business of insurance.

As most students of value investing would know, Berkshire Hathaway grew tremendously after it acquired an insurance business. Insurance is very good for investing because it provides very long term patient capital. One of the greatest obstacles facing asset management is always capital withdrawal or drawdown - one of the most dreadful word in fund management. The thing is, capital or funds (both from retail or institutions) can only be as long term as markets (which is now six months!) Alas, the markets are getting more and more short term. It is now estimated that global exchanges trade all their own outstanding shares every six months. 

By evolution, humans can only think short term. Our primitive minds cannot comprehend long term (like anything longer than a few days in prehistoric times, to a few months a hundred years ago and maybe a few years in modern times). We simply cannot make good decisions when it's too far out even though we know logically it's good. For instance, quit smoking or stop eating junk food. In investing, we just cannot grasp the concept of compound interest. 

Just an example, if you were given a choice of having (A) one cent today which will double every day for the next 30 days or (B) 1 million dollars today, which one would you choose?

A or B?

1 cent today or 1 million dollars today?

Think hard!

Ok, the answer is...

*Drumrolls*

























As you can see, a single cent doubling every day gets to $5,368,709 in 30 days but we would choose a million dollars right? We simply cannot comprehend compounding. For those still lost, the answer is (A)!

That is why despite 100 years of investing in markets, we are still so short term, constantly looking at quarterly numbers, unable to think three to five years ahead. Let alone 10 to 20 years, which is the real operating span for most successful companies and their business strategies and the real power of compounding (sorry it doesn't happen in 30 days, it's more like doubling on every 7-8 years which is 8-10x over 20-25 years). Hence for fund management, we need long term capital, which insurance can provide.

Berkshire Hathaway stumbled upon this when it bought Geico. Insurance provide that long term capital that allows for compounding to happen. Without which it's just meagre returns which is what most hedge funds do today. Essentially, hedge fund managers just suck management fees without adding real value to investors.

This long term capital is called "float". Not the kind below, but close metaphorically.

"Float"


"Float" arising because insurance companies collect premium upfront to insure for some adverse events that people want to avoid, for instance death, illness, flood, or earthquake, or fire, whatever. The insurance companies take the money today but only pay out years later. Meanwhile, they get to invest this money to make more money. This is the beauty of insurance. The ability to hold the "float" is so precious that competitors will charge less and less upfront premium to get "float". In most insurance markets, the amount collected today actually cannot cover the expenses that needed to be paid out because of competition. That's the cost of getting the "float".

But in some cases, it is possible to make a profit as Berkshire found out. Buffett likes to point out that it's because of under-writing discipline, or being able to assess risk properly and hence charge the right premium. If competition becomes irrational, then Berkshire get out and move on. So Berkshire had managed to get the "float" at a profit! When this happens, then the insurer is being paid twice! First of making a profit by under-writing insurance, then again by making money by investing the "float". Buffett says that it's better than free. Something like enjoy a good ONS and then being paid for it? Haha! Okay, that's R21, young investors please just ignore the last sentence.

So, here's my postulation. 

When Berkshire Hathaway started out in 1965, some types of insurance were not well understood, especially auto insurance, which surprisingly only became nationwide in US around the 1960s. Also some types of property and casualty insurance, re-insurance and other specialty insurance only came about later. That is why Berkshire was able to get under-writing profits as a first mover in some of these markets. (Of course, underwriting discipline and good management helped.) Note that it never got into life insurance which is just cut-throat competition, since that's been around for ages. As Berkshire got bigger via M&A, it's easier then to maintain under-writing profits, which helped Berkshire grew its float from $39 million in the 1970s to $91 billion today!

Today, Berkshire makes an underwriting profit of $2 billion, which we can think of it has essentially Berkshire getting paid 2 billion dollars to borrow 91 billion to invest! That means Buffett had been enjoying almost 50 years of negative interest rates! Now, finally the world caught up. 

This is the power of insurance. 

We talked about Markel in the previous posts. This is often touted as the next Berkshire because the firm is essentially operating the same model. But since auto insurance and the other fields that Berkshire dominated are now pretty competitive, Markel ventured into other types of insurance. I had the time to read part of its annual report and was surprised to find all the types of niche insurance. It started as an insurance firm covering bus and truck fleets but had since branched out to shipping, industrial equipment, re-insurance to even insurance for board directors to cover the risk that the companies which they sit on are involved in fraud. 

Markel Insurance

You see, independent board directors are personally liable to be sued if their companies are involved in fraud. But since they are independent directors, they would have no knowledge of the hanky panky that their companies had been doing day-to-day. So why not create insurance for that? Board directors are paid five or six figures and they would be happy to portion out a sum to cover such risks! That's what Markel did. 

So with that model, Markel grew the way Berkshire did. But this is probably it's 17th year or so. If it follows Berkshire's trajectory, we should see Markel go like 20x in 35 years. It's not too late to buy now! Markel is led by a strong team comprising of strong operating people as well as members of its founding family. There is no succession issues since the main guy, Mr Tom Gayner is only in his early 50s. Having said that, Markel is not cheap, is used to trade at teens but had since re-rated to 20x and recently been trading at 30-40x! It just shows how difficult it is to beat the markets! Find a good idea and it gets traded up in no time!

Anyhow, insurance has been one of the most difficult sectors to understand but having gained this perspective, hopefully we can find some ideas closer to home as well!

Here's wishing a very Happy Hari Raya Puasa to all Muslims!

Sunday, June 04, 2017

Lessons from Omaha - Part 2

This is a continuation of the previous post.

Okay, as promised, here's the investing lessons that we can learn from this year's Berkshire Hathaway's AGM (Annual General Meeting for Shareholders). The first lesson came as a big surprise for many. It came about when Warren Buffett was asked why did he advise his heiress (second wife) to buy S&P500 rather than continuing to put her money in Berkshire Hathaway after he is no longer around. He was dumbfounded for about a second which afterwards he recovered and gave a succinct answer:

The S&P500 represents the best of the best 500 companies of corporate America. These company will continue to thrive and it makes perfect sense to buy them. Berkshire will continue to do well. But 30 years from now, or 50 years from now, it will depend on who is running Berkshire at that time. I just thought it would be wise for her to put her money with America's best 500 companies rather than worry and worst listen to unqualified advisors about what to do. (I am para-phrasing him, these are not his exact words)

Meanwhile, Charlie, in his usual style, munching See's Candies, would bet on Berkshire and ask his heir to do the same. I guess both of them are right. Warren is right because the S&P had a century of track record of generating 10% return per annum over time. Berkshire would be dependent on the manager. In some sense, Warren believed that the managers after him would not be able to beat him. Not the current handpicked ones, but the next one and the next one. Who dare says Berkshire would continue to do well indefinitely without Warren and Charlie. 

They are just so unique! Look at them! 

Warren Buffett and Charlie Munger

Charlie is also right because it's the right thing to say. The next line of managers are in the same stadium and to say that it would be best to investing S&P after both of them are gone is akin to slapping their faces. Or admitting that they would not be as good as their predecessors. Also, Berkshire has built this portfolio of strong solid businesses over these years, surely they would continue to do well for at least a decade or two. No matter who's running the show.

Berkshire Hathaway was founded in 1965, the same year that our beloved country gained independence. The first generation of leaders worked their asses off to make sure that they worked. They have built such strong foundations that we now take for granted. Singapore today enjoys the first world infrastructure, standard of living and status and it is inconceivable that this would crumble in a decade or two. But in 50 years, who knows? No small country ever survived more than 200 years. Even the mighty Sparta. Sparta fell into a long period of slow death decline shortly after they made the legendary last stand against the Persians, depicted in the movie 300 and its sequel.

Parody of a scene from 300, movie about Sparta

Similarly Berkshire had benefitted from Charlie's and Warren's continuously learning for 50 years and become the portfolio of first class companies. It took them a lifetime to amalgamate the these businesses to make Berkshire Hathaway today. In fact, the top few companies, according to Warren, makes up 9.5 Fortune 500 companies. These great firms - Burlington North, Coca Cola, American Express, Geico insurance, Wells Fargo, See's Candies will continue to do well for the next decade or two. But in 50 years, who knows? Very few companies last for such long time span. There are some family owned businesses that lasted centuries, but most companies don't. The only company surviving today in the original 30 Dow Jones started in 1896 is General Electric. 

Original Dow Jones

Hence to think that Berkshire will do even better than the S&P500 over the very long term is wishful thinking. Which brings me to the investing lessons today - maybe astute investors like all the readers here should always consider some ETFs in our portfolios. Long time readers of this site would be familiar with some thoughts on ETFs, which are labelled under ETF. In short, initially I thought that we should have some ETFs, but then realized not all ETFs are created equal so maybe not and now I am gravitating towards having at least 2 or 3 ETFs to be a substantial portion of the portfolio. Needless to say, the basket should include the S&P500. Having said that, I haven't bought any. I have ETFs but mostly legacy ones from the early days which are not doing well.

Anyhow, we should definitely reconsider ETFs!

For the world's greatest investor (and stock picker) to come out to say that he wants his heiress to buy ETFs and to thank John Bogle, the father of ETFs at his AGM, to me, means something. Hence my change of heart with respect to ETFs. Well, I don't think it's good to buy the S&P500 now at all time high, but someday, we should put some money and dollar cost average that over time. However I don't think our own STI falls in the basket of right ETFs to own and I would prefer to pick the few winners in Singapore - Singtel, SIA Engineering, Jardine Cycle and Carriage etc.

The next big lesson was the technological disruption that had dawned upon us. Warren Buffett and Charlie Munger never touched technology because it was too far from their circle of competence. They preferred brick and mortar businesses. They like old economy, solid, tangible businesses. In 2000, they completely missed the tech bubble and they were right then. They were ridiculed then revered bcos as the bubble collapsed, their wealth compounded! Fast forward 17 years, we are seeing the same story. Old economy dying but tech thriving. Today the top 10 largest companies in the world are dominated by tech firms.

World's largest companies

Heck! There only 3 non-tech firms: Berkshire Hathaway, Johnson and Johnson and Exxon Mobil. Talk about deja vu! But there are some differences. Today, unlike the 2000 techies, these firms have earnings. Apple makes US$50-60 bn net profit! Together these companies are generating hundreds of billions in profits. This is bigger than the GDP of some countries. Besides making tonnes of money, these firms have also created huge moats around their businesses. It's their eco-systems. They managed use their eco-system and arm-twist their ways to cannibalize the real economies. Google is eating the old media and advertising companies' lunch, Amazon is eating Walmart's lunch and Uber (still unlisted) is eating Comfort Delgro's lunch. 

In fact, we are so tied to some of these system it's hard to unplugged. Just imagine if we are not allowed to use Google today for some reason, how inconvenient would our lives become? We can't even drive properly since we rely on Google Map so much these days. Or if we can't Grab or Uber. Or if Apple disappears today. A huge part of the world would be dis-advantaged as they find an alternative for their iPhones. That's why Buffett bought Apple!

So I guess the message is that we better have some exposure to these tech names. Again a good way to do that would be to buy some tech ETFs that would have all these names. Preferably it should also be global in nature so as to capture all the non-US names as well. After doing like 15 min of Google search, I believe the few candidates would be:

1. QQQ - Nasdaq ETF
2. EMQQ - Global tech ETF
3. HACK - Cybersecurity ETF

Again, I haven't done the deep dive research on these and I don't own any of these at the moment. The history for EMQQ and HACK is also quite short (only 2 years or so). Hence it would also be homework for me to study further and look at better entry if any. Although given that all of them are near all time high, it would be at the backburner in terms of research priority. In fact, these days, there's more selling than buying.

Ok, so that's the lesson for today. Next post we talk about insurance!

Thursday, May 11, 2017

Lessons from Omaha - Part 1

A trip to Omaha, Nebraska, USA is like a pilgrimage. Muslims hope to visit Mecca once in a lifetime. In the olden days, Christians went to Jerusalem on crusades. As value investors, well, we should pay homage to the world's greatest investor - Warren Buffett aka the Oracle of Omaha, by going to Berkshire Hathaway's Annual General Meeting (AGM) for shareholders, maybe as many times as possible before things change.

For the uninitiated - Berkshire Hathaway is Warren Buffett's investment vehicle which was a textile company that he bought 52 years ago. It went bankrupt but he used it to invest in other companies which then became the world's largest conglomerate (4th largest company by market cap). Some people ask is it worth making the 30-hour flight just to see him? What's the value add of doing that? What would he say that would be different from what he had said all these years? Isn't the whole AGM already broadcasted live on the Internet? 

Well, we can always listen to Coldplay on YouTube right? Why do we go to Coldplay's concerts? Why do some die-hard fans fly all over the world to every concert venue to listen to them sing the same songs? It is for the experience. To share the atmosphere with like-minded fans. In a way, the trip to Omaha is like going to a live concert. Actually it's more a pilgrimage. It is very difficult for non-investors to understand despite our best effort to explain. But having really made the trip, I have this to say: the trip is worth every effort and I urge every serious investor reading this to try to go while both of them are still alive. Warren Buffett is 86 and Charlie Munger, his Number Two, is 93.

What's there to do in Omaha besides attending the AGM? Before the trip, I was also quite dumbfounded, would it be just attending the AGM and visit Buffett’s house? I was so wrong. There's so much to do! I would say that it might be worthwhile to stay in Omaha for 5 days or so to fully enjoy the experience. The usual affairs would be just 3 days from Friday to Sunday but in order to fully cover everything, we certainly need more days!

Here's a list of Must-Dos:

1. Shareholders' Shopping Day before Berkshire's AGM
2. Eat at Gorat's Steakhouse (Buffett's favourite restaurant)

Gorat's Steakhouse

3. Visit Nebraska Furniture Mart and Borsheim's (both Berkshire companies)
4. Visit Warren Buffett's house and office
5. Go to Markel's AGM (usually the day after Berkshire's AGM)
6. Visiting Nebraska Crossing Outlets (factory outlet with Coach, Kate Spade, Adidas, Nike, Under Armour, North Face etc)
7. Eat at the various other restaurants (Sullivan's, Red Lobster, Five Guys Burger, 11-Worth Cafe, Orsi's Italian Bakery and Pizzeria etc)
8. Shop at the key US retail shops (Walmart, Target, Best Buy etc)
9. Attend other events surrounding the AGM (there are many, some with high entry fees - the key one being the Value Investing Conference which is a few hundred dollars for a dinner but there are also others which are quite affordable)
10. Last but not least, do the 5km Berkshire Run!

Invest in Yourself!

Ok so what are the lessons we can learn from such a pilgrimage? I would put the investing lessons in the next posts, which are some of their thoughts on technology disruptions, good businesses, the state of the economy etc. In this post, I would like to share some life lessons that he and the other speakers talked about. My favourite quote of the week was actually from Charlie Munger. Charlie is pretty much the all-important Number Two without which Berkshire would never achieve what it had achieved. Much like the trusted advisor and architect like Zhuge Liang of the Three Kingdom, Goh Keng Swee of Singapore and Steve Wozniak of Apple. 

When asked what he admired about Warren Buffett most, he said this (I'm paraphrasing him): "Buffett is very much capable of continuous life long learning. He is a learning machine. Years ago he would never have bought Apple. Yet after learning about its products from his grandchildren, he bought it!” You see, in the past, Warren Buffett never invested in tech stocks because he believed he couldn't read them well enough but he had since bought IBM (and sold some stocks after it languished) and Apple. This proved that Buffett is capable of learning new things and changing his mind and admitting mistakes, learn from them and be a better investor, despite being 86 years old. Now he is saying he regretted never buying Amazon. Maybe he might just buy in 2017?

Anyways, after talking about this point, Charlie added the most wonderful quote in the week, 

"I think that a life properly lived is just learn, learn and learn all the time. And I think Berkshire has gained enormously from these investment decisions by learning through a long, long period. That's continuous learning. If we had not kept learning, you wouldn't even be here. You'd be alive probably, but not here (in Omaha, at this AGM)."

At 86 and 93, these guys are still learning. Here's them telling us, never stop learning, certainly not at our age. The joy of learning is the impetus to wake up every morning, to read more and gain new knowledge. Then eat steak and continue to enjoy life! It reminds me how important it is to be able to enjoy learning, all the way, throughout our lives. Is the Singapore education system inculcating the joy of learning in our kids? That's a big question mark.

Never stop learning!

Anyways, that's Buffett's standing poster at Gorat's. The pins represent people coming from all over the world to eat and learn from him! Unfortunately, he wasn't at the restaurant when we were there and we missed him at the newspaper toss the day before! Hopefully that's a good enough reason to go again, provided the exit permit from OC of the house gets approved. Haha!

So that's the first message. Keep learning all the way! The second message came from the Markel AGM. Markel has been touted as the next Berkshire. It started as an insurance company for buses and trucking industries by the Markel family. It then branched out to other specialty insurance and as it grew, it used its "float" - or excess insurance premium earned by underwriting lots of insurance, to invest. This was pretty much how Berkshire grew in the early days. It had since invested outside of insurance and grew its investment portfolio substantially. Its current CEO, Thomas Gayner, is a remarkable guy and pretty much being compared to Warren Buffett. I attended his 2 hour AGM and learnt so much.

The next takeaway was from him. It was a simple message that came about as he addressed the audience. He speaks fast and most of it quickly lost amongst his words but this phrase was so strong and it just stuck. Again I am para-phrasing him:

"The folks at Berkshire had pretty much said the same things all their lives. That's consistency. I think that's what make them unique. Keep saying the same things because that's really the essence of good communication. There is no ambiguity. It's all about consistency, keep saying the same things, keep the communication simple and most importantly, really do what you say."

In short, be consistent - say what you do and do what you say.

It's easy to just state but how many people can actually do it? And do it for over 50 years? In our current culture of ADHD (attention deficit hyperactivity disorder) demanding instant gratification, we are drawn to our phones every other minute when we get bored. We soon then get tired of the phone itself, and change them every year. In fact, we are changing everything every other year. Most people are changing jobs every three years, changing cars every five years, some are changing houses and even life partners sooner than ever! We are always searching for that something new, but never quite get it right. We want to choose to change but yet cannot accept change if it was pushed onto us. How ironic?

We cannot say what we do and do what we say because we lost the ability to focus, to really grit our teeth and do that hard things to get it right. To sweat it out, push and persevere. It's just too difficult and we are giving up too easily. What I realized is that such a kind of trip is good because it reminds us that it can be done. It is possible to keep saying the same things and to keep doing the same things and live in the same house for 50 years. That's how long term effort can be exhibited with the power of compounding and snowballing.

Warren Buffett's house since 1957

Next post, we will discuss the investing lessons. Stay tuned and wishing all Buddhists a very Happy Vesak Day!

Part 2 is out!