Thursday, May 17, 2018

Chart #11: Ikigai

Renamed Chart Of The Month to simply Chart. This one today is an important one. We are talking about ikigai.


Another way to put it - ikigai is the cross section of your values, the things you like to do and the things that you are good at.

To supplement, here's 10 ways to better stay in ikigai:

1. Stay active and don’t retire
2. Leave urgency behind and adopt a slower pace of life
3. Only eat until you are 80 per cent full
4. Surround yourself with good friends
5. Get in shape through daily, gentle exercise
6. Smile and acknowledge people around you
7. Reconnect with nature
8. Give thanks to anything that brightens our day and makes us feel alive.
9. Live in the moment
10. Follow your ikigai

Thursday, May 10, 2018

Malaysia Boleh!

"Boleh" means "can" or "able to" in Malay.

What a historic day for Malaysia! Dr Mahathir trashed Najib with a snap of his fingers gloved in his infinity gauntlet neatly decorated with the coalition of infinity stones: DAP, PKR, PNA, PPBN and Warisan Sabah. His Alliance of Hope, Pakatan Harapan and its partners convincingly defeated Najib's Barisan Nasional (BN) with 122 seats vs his nemesis' 79 seats. Mahathir's win ended one of the longest reign for a democratic ruling party and renewed hope that Malaysia can one! (i.e. Malaysia can achieve what it wants to achieve.)

Under Najib, Malaysia really suffered with the ringgit falling to a third in value relative to the SGD - one Malaysia ringgit is only worth 33 Singapore cents. The exchange rate was 1:1 in 1965. Also, the market cap of KLCI is at USD 269 billion vs Singapore's STI at USD 440 billion. Given that a lot of its listed stocks are also locked in cross-shareholdings, Khazanah and banks, Malaysia's free float is even smaller at a mere USD 84 billion. This is a tenth of a fruit and smaller than the smallest FAANG which is Netflix at USD 144bn. FAANG stands for Facebook, Amazon, Apple - the abovementioned fruit, Netflix and Google.

The last decade was truly dark for our beloved neighbour.

Ironically, it was partly Mahathir's own doing as he was the one who picked Najib to be the Prime Minister after he sent another of his prodigy, Anwar, to jail. Now he is trying to team up with Anwar by asking the King for a pardon so that Anwar can stand in elections, win a seat and then be Prime Minister. This sounds like a plot from Marvel when your past enemy, who was actually your friend, joins your hero alliance in order to defeat a bigger enemy whom you yourself created. 

Malaysia in a Marvel Plot?

With the country at its brink, real life heroes really assembled to save their Motherland. Teachers, waitresses, workers, drivers in Singapore took leave to rush home to vote. In fact, Malaysians all over the world came to the rescue, dipping their index finger in blood, swearing on their lives to save the country. We hear stories of how everyone beat all odds in order to stop Najib. Strangers car pooling to go home despite vote forms being sent out too late. Vigilantes appeared in front of voting booths to prevent random black boxes with rigged votes getting smuggled in again. It was an epic battle against evil and an amazing race against time. But Malaysians did it!

Malaysia Boleh! 

But Najib is not going down without a fight. It is rumoured that he participated in intense negotiations with other smaller partners in the coalition to coerce them to swing to his side. Candidates are being offered 20 million ringgit each to jump to BN. If he succeeds, he might still hang on to his PM role. After all, his life is at stake - he might get strapped in dynamites and then get blown to bits. Meanwhile, Mahathir declared bank holidays to prevent money being siphoned out of the country. Hopefully, in the end, the democratic process will work, Najib gets justice served and all our Malaysian friends didn't fly, rush, drive back in vain.

Back to the stock market, since Malaysia is closed, nothing much is going on. The ringgit meanwhile weakened after strengthening before the election. With talks of abolishing GST and re-introducing fuel subsidies, investors are also worried about the country's fiscal situation. But never fear, Dr Mahathir is back. Just the face of this legend supposedly made Najib and his cronies squirm like vampires in sunlight. So AirAsia painted all their planes to make sure Najib cannot escape.

A True Malaysian

As to stock ideas, many experts are pitching stocks that benefit from the weakening ringgit while some called upon investors to take advantage of any pullbacks to buy quality Malaysian names. A quick stock list include: YTL, Public Bank, Malaysia Airports, Maxis etc (all Malaysia listed names). Meanwhile, yours truly made a tongue-in-cheek list of stocks below in Singapore with Malaysian stories: 

1. Fraser and Neave: 40% sales in Malaysia
2. Top Glove: World's largest glove maker based in Malaysia
3. IHH: Hospital operator in Singapore and Malaysia
4. OCBC: Teens revenue exposure to Malaysia
5. Silverlake Axis: IT business with Malaysian banks

Malaysia Boleh!

PS: except for F&N discussed in a previous post which is investable (not on Malaysia but on its Vietnam story), the rest are really more for fun, please don't really buy without doing more research.

Sunday, May 06, 2018

May the Force be with Omaha!

It's the Omaha weekend again and this year is special as it also started on May Fourth which is also knowns as the Star Wars Day. In Singapore, someone then decided to organize a Star Wars Run charging people S$80-85 to either join the light or the dark side of the race! The annual Berkshire run, for those investors who are spending this weekend in Omaha, cost roughly S$60 and all are encouraged to invest in ourselves i.e. our bodies, which would be the best investment ever. 

Star Wars Run Singapore!

Well, unfortunately, one run would never amount to any tangible investment that would change our bodies, or our lives. As with everything about value investing, it's about time and consistency, which leads to habit formation, the most important agent of lasting change. The Berkshire Hathaway AGM (annual general meeting) embodies these concepts and this is perhaps one of the reasons why it's so appealing to so many. This year marks the 53rd AGM and a crowd of 40,000 would have descended upon Omaha from all over the world. Many travelled long distances just to listen to the Yoda equivalent of the investing universe utter a few words of wisdom, with the hope that the experience would help internalize some of this wisdom.   

Alas, all sentient beings have a lifespan and Yoda eventually become one with the Force (and became capable of influencing the weather). Warren Buffett, mindful of his own time, used this year's AGM to pass the baton to two of his lieutenants: Greg Abel and Ajit Jain. At the same time, he emphasized that Berkshire Hathaway is a corporation and hence immortal and Berkshire Hathaway's culture had been well established and the firm would continue to thrive without him and his trusted #2 Charlie Munger. So, keep calm everyone!

Keep calm!

It could be said that Warren Buffett's success also boils down to time and consistency, which is essentially habits. The time to form a habit is surprisingly short - just 21 days, according to various research. But to consistently do it for decades would take effort, determination, grit. Warren Buffett pretty much did the same things for 53 years and hence got to where he is today. His essential habits were reading and thinking hard. These are exactly the habits that true value investors must acquire early on in life. Buffett probably spent six to eight hours reading everything from newspapers to annual reports, every day for half a century. 

Thinking is a slightly different exercise. While there are times we should sit down and think alone, most thinking require discussing with like-minded friends, writing down our thoughts and ironically more reading to better understand the issue at hand. It is also important to be calm while thinking and hence many astute investors practice meditation or engage in other activities to calm down our monkey minds. 

It is not clear how Buffett calm his mind from what we know about his lifestyle. Perhaps it's bridge that he plays every night, or simply his meals which is always the same (hamburgers or steaks) and hence maybe when he eats he is really just eating with his mind spacing out. Nevertheless, it's important for serious investors to really find an activity that can help preserve or enhance the clarity of our minds.

So, we are back to running. Running is an activity at its core, very similar to meditation. The mind is focused on breathing and bringing the body forward. There is nothing else. This has a similar effect of calming the mind as meditation does. Maybe that's why we have a Berkshire 5km run and Star Wars runs. Keep calm and keep running!

May the Force be with you always!

Monday, April 30, 2018

2018 Dividend List - Part 2

This is a continuation of the first 2018 dividend post.

The second part of 2018's dividend list consists of the other two tobacco companies and some other names. This screen was done before Philip Morris collapsed 15% on bad earnings so now they are even more attractive. The big investment question for tobacco is always whether we want to associate ourselves with the largest mass murderers in the history of mankind. Warren Buffett never did although some investors including yours truly here were never that noble. This reminds me of a quote from a recent good docu-movie - The China Hustle. 

"There are no good guys in this story... including me." - Dan David, Founder of Geo Investing.

So, buy tobacco, make money and do good. Maybe that's the moral of the story today. Meanwhile, alongside mass murderers, we have tech companies that innovated a hell of goodness that are featured here, Seagate, Qualcomm, IBM and UMS, the engineering and equipment manufacturer for semiconductor firms in Singapore. Each of these has its own idiosyncratic problems and hence while they generate strong free cashflow and distribute good dividends, they are caught in some form of value trap and hence get screened out. It is hard to say when the value gets unlock. Case in point: IBM had been such a trap for donkey years that Warren Buffett himself sold out of it. Perhaps Qualcomm might be the one to get out faster, but with its failed merger with Broadcom, it might take another 2-3 years before they can sort things out. 

Dividend List Part 2 of 4

The other interesting tech name could be Seagate. Storage had undergone tremendous boom and bust over the last 20-30 years. The whole story was very well depicted in another book called "The Innovators' Dilemma" which detailed the whole history, from floppy disks to hard disks to NAND and now SSD and server storage. Server storage is the protagonist in this current arc. As a result of the shift towards cloud, video streaming and the need for more storage at the FANG (Facebook, Amazon, Netflix, Google), server needs exploded. FANG became one of largest customers for semiconductor chips and fiber optics for their server farms. This goes without saying that storage would likely see exploding demand. Yet, this had not materialize because the consumer demand continues to decline and the growth of the new demand had not offset this decline. At its peak, the world consumed 500m hard disk drives (HDD) which had collapsed as people no longer buy PCs and laptops. But we should expect server HDD demand to outstrip consumer demand soon. In fact, Seagate's share price had gone up 100% in the last 12 months, although it still looked cheap (chart below)

Seagate's share price

The other interesting name closer to home is our own beloved SGX. This stock did nothing for the past 12 to 18 months while global market rallied partly due to the relative weakness of our own STI and also partly due to its own idiosyncratic issues such as the Indian equity derivatives that would not be allowed to trade on SGX. The stock went through a roller coaster as a result of this and finally the share price settled around where it was a year ago. But look at the financials, it's becoming quite interesting. It continues to generate a stable SGD 350m of free cashflow (FCF) and holds close to SGD 800m of cash on its balance sheet against a market cap of SGD 8bn. We know that when trading volume goes up, the leverage is huge as we saw that in 2007-2008. A repeat in 2018 and 2019, if it happens mean that FCF will double from current level and SGX would be hitting its previous high of $10. Conversely, the downside is quite limited because its strong balance sheet and FCF. Over the last five years, it almost never traded below $6. So we can say that the downside is likely to be floored at $6 while upside could be $10 or $11. At $7.50, the risk reward is quite favourable.  

For full disclosure: this author owned SGX since 2005

2009 Dividend List

Happy Labour Day!

Sunday, April 22, 2018

Tangible Thoughts #4: Pitiful Pump Uncles

The saga of the week in Singapore was about pumping petrol. For readers not from Singapore, here's the story. A BMW driver drives his car into a Caltex petrol station and said, "Fill Ten" to the pump uncle. The pump uncle then proceeded to pump gasoline to full tank, because he heard "full tank". The driver, realizing his car now has a full tank, became enraged, scolded the pump uncle and refused to pay up. He single-handedly cogged up the whole Caltex station for half an hour. By then, his face, his car number are all up on social media with netizen blasting, "If you can afford a BMW, who the heck fills $10?" Subsequently he explained he was selling the car, hence there was no need to fill more then necessary. But the whole saga just sounded fishy, maybe he is really a crook, who knows. Meanwhile netizens came up with this form to be distributed at all gas stations in Singapore. Haha! 

Fill Ten or Full Tank?

As in investing, it takes a lot to prove accounting fraud, Midas did it for twelve or thirteen years and we only found out recently. At its peak, Midas' market cap reached SGD 1.2bn and it was generating close to SGD 50m in net profits. Well, as experienced value investors, we know too well that profits were too easy to manipulate, cashflow analysis required real kungfu. Indeed, Midas burnt through S$760m of FCF over 10 years and probably used some creative accounting to generate roughly SGD 40m of positive FCF in 2007 and 2017. In the end, the positive free cash accounted for 5% of the total money burnt. So be really careful when you see years and years of cash bleeding.

Back to petrol pumping hopefully we can tell some day whether it was the pump uncle who was hard of hearing or the BMW swindler who had been doing this "Fill Ten" trick for years only to be found out last week. Having said that, this saga pushed me to think about why would someone do such a thing? In the end, it could be a stupid case of trying to get even with Big Oil. Singapore's retail fuel market is an oligopoly, as with most things here. Hence pump prices had remained high despite crude oil prices being super volatile. The following chart (courtesy of TradingEconomics and SPC) showed how pump prices in Singapore trended. we can see that prices had been ranged bound between SGD 1.25 to SGD 1.8 since 2010. 

Singapore pump prices over the last 10 years or so.

The same chart for crude shows some correlation at first glance but from its high, oil fell 70% or more from $100 per barrel to $30. It stayed low for a good 18-24 months but Singapore pump prices never fall more than 50% and stayed low only around the few months in 2016. For some reason there was also this huge spike in 2015 despite global oil prices remaining low. I guess we can say that Singaporean car drivers are pretty much screwed by Big Oil.

Crude prices over the last 10 years

Actually, this is the same story all over. We are also screwed by Big Developers and also screwed by Big Car Dealers (a typical BMW would cost a low to mid five figures in Germany but is at least six figures in Singapore). What's worse, we then have BMW drivers screwing pump uncles. Poor Singaporeans and pitiful pump uncles. Is there a way out of all this? It's really hard as capitalism and economics drive so much of everything these days. We might have to learn from the Nordic countries and develop some form of graceful capitalism if there is such a term. 

Monday, April 16, 2018

2018 Dividend List - Part 1

The time of the year has come to review the annual dividend list, this year we are breaking up to list into more parts so that we can discuss more names. We have used the same criteria over the years which is free cashflow, EBIT margins, ROE and the dividend yield. The most important one would be the free cashflow. As this determines the companies' ability to pay dividends. Dividends should be a integral part of everyone's portfolio because this is where real money comes back to us. In my experience, 50% or more of an investor's monetary gains would actually come from dividends in a long term portfolio. It is also a good idea to first build a strong dividend portfolio that would supplement or even cover entire annual expenses. Then we are really free to choose the work we really want to do.

Dividend List Part 1 of 4

Ok let's go straight into this year's list. There are three Singaporean names here today but I really wouldn't recommend them. Telcos have indeed become dumb pipes since the internet giants took over the world. They have seen how voice revenue, SMS revenue and even data revenue dwindled as users shift their dollars away to in-app purchases and other avenues. While they still generate strong cashflows by squeezing users more and more for the remaining services they still have control (e.g. data roaming, caller ID etc), these last pockets of revenue would also disappear in time, as all of the economic value add get transferred to the internet firms.

Silverlake Axis, the other Singapore name used to be a darling as the "IBM of Singapore" (well that might be a stretch but it's quite a local big-time IT service player) had since derated after a short seller highlighted accounting irregularities with the firm. The share price had never recovered from the scandal which happened in 2015. While some short sellers had eventually be proven wrong, there is really no way for us to know, unless people from inside the firm share the truth. So rather than trying to determine the truth, the easy way is to really just look for another interesting name. There are 700 listed companies in Singapore and 70,000 globally, we don't have to look at Silverlake. Although they did manage to announce a few big deals with Malaysian banks recently, implying things might be turning. Being a Malaysian firm though, there is always that slightly higher risk of really doing some hanky panky stuff.

Silverlake Axis at 5 year Low

The interesting names that really stood out in this list would be Transdigm and Imperial Brands. Transdigm is an aircraft component manufacturer that had demostrated its ability to compound value over many years. Its FCF has grown from a mere USD 250m in 2011 to reach almost USD 1bn today. The industry also has very wide moats as aircraft manufacturers have very stringent procedures for its suppliers and require the same suppliers for spare parts and maintenance. This is such a lucrative industry that Warren Buffett bought out the other player called ITW. This name really deserve more research, but for now let's talk about a more familiar name.

Imperial Brands had appeared before and we see tobacco in a big way this year. Imperial is the 4th largest tobacco company in the world. The backlash on tobacco continues given that their existence caused the death of billions of people since the beginning of civilization. With global investors' focus now all on tech, internet, gaming and meaningful experiences. Tobacco stocks had derated over the last 12 to 18 months and three out of the four large tobacco firms appeared in this year's list, the other two being Philip Morris and British American Tobacco. Imperial Brands now trades at close to 10% FCF yield and pays out 7% as dividends. 

As mentioned before, a sustainable 10% FCF yield in stock markets is like almost guaranteed to make money because you don't actually need to firm to grow. It's like having this cash machine that gives you 10% every year until forever. The key thing to look out for is sustainability. In tobacco's case, it is likely to be sustainable because old smokers will just keep smoking and new smokers would be switching to the next generation tobacco products that are less harmful to health but as addictive and more expensive. The ethical question remains, but if perpetual 10% return is what you are looking for, then Imperial Brands is your stock.

Next generation tobacco, IQOS by Philip Morris

Here's the past lists:

2017 Oct Dividend List - Part 2
2017 Oct Dividend List - Part 1

Tuesday, April 10, 2018

Of Frauds and Facebook

A recent bloomberg article "How Facebook Help Shady Advertisers Pollute the Internet" discussed how fraud advertising was crazy on Facebook. These are ads selling slimming pills, money making stock tips and sure-win cryptocurrencies, miracle hair growing cream and other shady products or services via affiliates that would utilize Facebook's user data to find their victims. Most people would know that these things won't work. If they did, then they wouldn't be coming from unheard sources. Yet there are always enough gullible people to prey on. Facebook knows who they are, because everyone uploaded everything about their lives on Facebook. 

Here's how it might work, say you have been watching videos about weight loss, researching on Atkins diet and posting pictures of your 5 km runs, your meals, your weight loss last week vs this week, then when a slimming pill ad pops up on Facebook, promising results in one week, sure, why not give it a try. If someone calls you soon after you read about the fake slimming pills and markets it perfectly. Bingo! You would have spent the $100 buying some fake slimming pills.

Fraud and scam works even if 1 or 2 out of 100 tries work. By leveraging on Facebook's data, these scammers might get the success rate up to 3 out of 100 tries. That's a 100-200% increase and millions in incremental income for the fraudsters and scammers. Unfortunately, these are also people that are not too educated, usually older folks or people from with low income households. Scams prey on fear and greed and are very powerful. It is difficult for most people not to fall for these traps, but the less knowledgeable and the insecure would be especially vulnerable. 

Sex scams in Singapore

The human mind unfortunately falls prey easily to these scams time and again. It is said that internet scams are not new. The mechanics of the tricks worked in the olden days and in the pre-internet era. We had phone scams (scammers impersonating kidnapped grandkids calling grandparents to wire ransom money) and we had old school sex scams (where a sexy girl will lead  you to a room full of gangsters) before the new era Whatsapp/Alipay sex scams. It's all greed and fear, two of the most powerful emotions. Here are some common greed/fear psychological traps:

1. Fear of authority
2. Ransom
3. Near miss / loss aversion / effort for reward

1. To get rich quick
2. Greedy for sex
3. Vanity: slimming pills, hair growth

In finance and investing, we have our fair share of frauds and scams. We hear countless stories about get-rich-quick schemes or yet another guaranteed investment plan that would make money. Invest in farmlands, invest in this platinum AAA fund with 200% return, invest in bitcoins etc. I would say that 99% of all these are frauds/scams. If they were really good investments, they would have had brand names like DBS bank or AIA insurance backing them. They would be selling via unit trusts and via banks and insurance firms. Heck, even funds that got through to banks and insurance firms might be scams, let alone those that didn't pass banks and insurance firms' screening criteria.

Of all the top billionaires and millionaires that we know, how many made it there through investing? Yeah, just one, Warren Buffett. (Well, there's also George Soros and Carl Icahn but who remembers them?) Not to forget, Warren Buffett worked at it for forty donkey years before he got famous. How can we expect some promises of get-rich-quick to get us there? Investing is tough work, as with most things in life, if anyone promises quick returns, just walk away.

Having lived a few decades (signs of becoming grumpily old), I would say there aren't that many short cuts in life. We hear stories of people striking gold, had one genius insight that got them rich, made a killing in so-and-so. But, that's really a 1% or even lower probability event. 99% of the time, it's lots of hard work and strenuous effort. Edison said it himself - genius is 1% talent 99% hardwork. In my experience, doing it by the hard way yielded much better results than trying to find short cuts.

"An hour of deliberate practice or concentrated practice is worth five hours of trying to find some easy way out by cutting corners"  

- improvised Bloomberg quote

With the hard way, it's confirmed that you will get the results. To successfully lose weight, you have to change your eating habits, exercise like hell, shun all unhealthy food. Confirm plus chop will see results.  By adhering to this philosophy, we know better and hopefully never to get scammed. But just to be really safe, we need more precautions, here's three don't's to fend off fraudsters and scammers:  

1. Don't ever part with your money, especially sums more than four digits. Disregard most of what you hear when someone asks you part with more than $1,000. In fact, be careful even if it's a few hundred dollars. 

2. Don't engage. Walk away as fast as possible, this minimises the fear of loss aversion / effort for reward psychological trick. The longer we engage, the more time the scammers can work on us, trigger our loss aversion, effort for reward mindset. Don't let them have the chance. 

3. Don't keep everything to yourself, when you face a situation. Check with friends, relatives or other informed sources, even if the Police Commissioner or the President of Singapore had called and asked you not to share the information. Always double check, double confirm, look for the chop also. Need confirm plus chop first, then we talk.

Facebook's share price

Back to Facebook, so is it a buy right now? Well, as with most past valuations, my preferred metric is to use the free cashflow (FCF). Facebook generated USD 17bn of FCF last year. It is hard to say, whether this is a sustainable level given that things change too rapidly in techland. I would just triangulate that Apple generated USD 50bn and Google USD 24bn last year. The rest of the FAANGs are still not too good at FCF generation. Well Amazon has USD 9bn but Netflix still burning cash. So maybe Facebook can do USD 20bn some time in the future, given that it has Whatsapp and Instagram which it hasn't started to monetize. But, it's really a wild guess. So let's say USD 20bn. But even at USD 20bn, we are just talking about of 4% FCF yield and that's not exactly cheap. I would consider stocks trading nearer to high single digit FCF as cheap. For example, Apple is trading at 7% FCF yield with a few hundred billion dollars of cash on its balance sheet. So despite the sharp fall, Facebook is not exactly a screaming buy yet.

Saturday, March 31, 2018

Chart of the Month #10: The Great Flood

The chart above depicts very clearly the QE program by the world's major central bank since the global financial crisis of 2009. The flood of liquidity exceeds trillions of dollars. We can also see that the bulk of the liquidity was created after 2011 by the Bank of Japan and the European Central Bank.

Hence while the US is tapering, the decline in liquidity is negligible when compared to the mountains of monies created over the last nine years. This great flood of cheap money is the reason for many phenomena that we are seeing including unicorn startups and the ever-increasing dollar psf of prime properties in global cities.

Why didn't Singapore property fall back to S$1,000 psf? That's because we are thinking in nominal terms. Our minds work best in nominal terms, we like to compare psf today vs psf in 2008 vs psf in 1998 thinking it's the same. But in real terms, the $1,500 psf we see today reflected the drop in real estate pricing because asset inflation had gone through the roof. Thanks to the central banks,  money itself had gotten ridiculously cheaper after the Great Flood!