Sunday, November 19, 2017

Chart of the Week #5: Total Business Person!

This came from a book on restructuring businesses with an interesting analogy on how one should improve ourselves as a good business person simply by harnessing our bodies and senses better.

How to improve ourselves as human beings?

(1) Use our senses to first receive all the different inputs well
(2) Use our brains to analyze, strategize, think
(3) Use our heart, elevate our EQ and be able to empathize others deeply
(4) Use our gut, have the courage to make the tough decisions
(5) Use our composure, exhibit strength, character, lead by example
(6) Use our mouth, to communicate
(7) Use our arms and hands, these refer to skills we have learnt
(8) Move! Get into action, stop procrastination

It's quite deep if we want to think throroughly about this. For (1), oftentimes we miss the subtle cues like body languages, the meaning between the lines and hence fail to close the deal. It is about polishing our sensory inputs to the level where we capture good signals. For some this might come as natural but for others, it would take years.

(2), (3) would be pretty straightforward. The ability to use both our left and right brains is key to be a successful business person, or rather, a decent human being. Perhaps EQ is slightly more important than IQ today.

(4), (8) seem to go together as well. Human beings are cowards and sloths by nature. We need to overcome huge inertia to just have guts and to get things started. It is overcoming the daily grind that leads to greatness.

(6) has become very important today because speaking well gives the impression of being more capable of getting things done. That is why ang-mohs always get promoted. This is a skillset our education system should really focus on.

Besides talking, there are other skillsets that would be relevant in different fields such as being able to code, or being able to use special software or hardware. This is (7). In the world of finance, it is accounting, corporate finance, stock analysis etc.

Finally, we get to (5), I would put this as "aura". When we are quite accomplished, we somehow exhibit the composure or aura to be able to lead. For some, it is harder but it is almost a pre-requisite to success. Some people are born leaders, but for most of us, we need to develop all the other seven points to be able to get better at this. I think this is the essence of it all.

So, that's the theory of total business person, corny but deep, I would say. Japan didn't become the third largest economy by chance.

Monday, November 13, 2017

Chart of the Week #4: Singles Day

11.11 has taken a new meaning since it was started in China by Alibaba a few years ago. It's Singles Day! A day where everyone should buy bargain sales online. Somewhat akin to the Great Singapore Sale (which last one whole month in June) but it's just one day.

The same tradition in the US is the Cyber Monday for buying tech stuff and the infamous Black Friday. Here's a chart comparing Singles Day and Black Friday.

In the second year that it was launched, Singles Day sales exceeded both Cyber Monday and Black Friday combined. The sales online has been making new highs every year ever since. In 2016 it was c.USD 18bn and this year it was a crazy USD 25bn! That's more than twice the annual sales of Singtel, Singapore's largest company. It is also larger than the GDP of Iceland.

It remains to be seen if this craziness could continue If Singles Day grows at the average of 30% YoY for the next five years,  it would be bigger than the GDP of Ukraine. One day sales matching the GDP of a country of 45m people. 

Meanwhile, a very belated Happy Singles Day.

Sunday, November 05, 2017

2017 Oct High Dividend List - Part 2

This is a continuation of the previous post.

We are at the second post of this October's dividend stock list. This is the first year that we are doing a bi-annual list. This list has 54 names and we gone through half of those names already. Due to the configuration of Bloomberg, I was only able to capture 15 stocks each, which results in the list being divided into four parts. In the last post, we have Part 1 and 2. Now we shall discuss Part 3 and 4. This is not to be confused with the Part 1 and Part 2 of the posts. So, if each part of the list can contain only 15 names, how many names would there be in Part 2 of the posts? Confusing?

Yeah, that's also how Singapore set exam questions to confuse primary school kids.

The next two lists truly reflect one of the key ideas being talked about in 2017 - the Death of Retail. In the next 20 or so names, we see various retail names like Kohl's, Macy's, Foot Locker and Next PLC just to name a few. As these names get sold down, their dividend yield gets higher but meanwhile they are still generating strong cashflows and margins, well at least that was still true in the last three years, hence they show up easily on these screens. It is hard to say whether they will survive. But what's becoming clearer is that some retail formats are better. Convenient stores and supermarkets will still be around. Innovative concepts (Muji stores, Ikea stores) will still be around. But department stores, hypermarts, undifferentiated malls and shopping centres, these are tough. In short I would avoid these retail names.

Part 3 of 2017 Oct Dividend List

Perhaps the name to highlight in Part 3 would be Harley Davidson. This is a unique brand that has strong appeal to all bikers and its brand image, I would argue, goes beyond motorcycles and is attractive in a few ways. Harley Davidson stands at the pinnacle of motorbikes much like Rolls Royce is known as the most prestigious car every built. It is also analogous to Johnnie Walker Blue Label for whiskey and Patek Philippe for watches. Every biker's dream is to ride or own a Harley Davidson someday. But unfortunately, the draconian traffic regulations and hot weather makes that very much less appealing in sunny Singapore.

Nevertheless, Harley sells 250,000 bikes globally and has a target to reach 50% non-US sales by 2027 (currently at 37%). It has 50-60% market share in the luxury bike segment and generates a significant portion of its earnings from merchandise, customization and financing. These are recurring revenue streams. Harley riders are a unique bunch that won't mind spending a lot on their bikes even when they need to borrow money to achieve that. But there is a limit to such behaviour. Bike unit sales had dropped for the last few years as a result of the collapse of the oil and gas industry (which somehow has a disproportionately high number of Harley riders in the US) and the general weakness of the global economy had squeezed this segment of the population - the disenfranchised workers that would want to own or already owning Harleys. However with such a strong brand name, Harley should bounce back with a vengeance. Having said that, I am adopting a wait-and-see for this stock since there are more interesting names to buy globally. (To be revealed below)

Part 4 of 2017 Oct Dividend List

In the last part of this list, we see a few Singapore names, SATS, M1, UMS, Silverlake, KSH, Cogent and Zhongmin Baihui. Some of these names were discussed briefly in the past but given their small market caps, it would be always be high risk and high return. Much higher than we like it to be. Today, we shall talk a bit more about SATS which had been on this list on and off for many years. There was also a previous discussion in 2016. I had the opportunity to study more about this stock recently and had also visited the newly open T4! Hence it might be timely to give a quick update.

SATS' business is about delivering prepared food in Singapore. It had done a tremendous job in Changi and had expanded quite aggressively to other peripheral markets. It also has some business in Japan and most importantly, it delivers food to the Singapore Armed Forces. There are some issues with the quality of food as every male who had been through army would know, but hey, that's good for investors because recruits can never complain! But the biggest issue facing SATS is always labour cost. It is highly labour intensive and had been squeezed by the clampdown on foreign labour.

The company spins a good story with regard to how it has automated its processes, insofar mitigated the cost of higher labour. In the new Terminal 4, it's all about automated baggage check-in functionality and robot deliveries. These are visuals that sticks and investors appreciate the story better. A good PR and investor relations team is able to add 1-2x multiple premium to a stock! SATS would be in the top quartile in Singapore when in comes to investor relations.

In terms of fundamentals, the firm had also delivered. CEO Alex Hungate had done a great job and we have seen operating margins maintained at 10-13% for the last few years. The company had also delivered revenue and profit growth, which explained the stark contrast between SIA Engineering which had not seen revenue and profit growth for many years. However both stands to benefit from Singapore becoming an aerospace hub with more flights in and out of the country.

Given the strong share price performance over the last 18 months, I would advise buying if only it corrects a good 15-20% from here. SIA Engineering or ST Engineering with a c.5% dividend yields  look like better bets! So that's all for this year's October list!

Here's the past lists:

Monday, October 30, 2017

2017 Oct High Dividend List - Part 1

As promised, this is the first bi-annual dividend list (started only in 2017!) with the first list out earlier this year. As usual, the criteria have not changed over the years and we have used three year average ROE, 4 year average free cashflow and EBIT margin. The dividend yield is cut at 3% and we have 54 interesting names.

They are ranked by market cap. With the largest being P&G at c.USD 220bn. This is the world's largest consumer staples company. While huge in absolute size, it pales in comparison with the internet giants at USD 600-800bn market cap. Apple, the world's largest company today stands at $842bn while Amazon and Alibaba is about $500bn market cap each. Both Amazon and Alibaba has never manufactured anything.

Part 1 of 2017 October Dividend List

The first part of this list also featured some drugs and tobacco companies. The defensive sectors like consumer staples, pharma and tobacco had done very well from 2014 to 2016 and as market goes, this reversal hit them hard. Not in absolute terms but in relative terms. While they did not fall 30-40%, most of these stocks had done nothing in the last 12 to 18 months while their peers charged ahead. The internet names had so far led the way, but the whole rage now is with anything remotely related to tech. Stocks from semiconductors to IT services to IT patent companies had done really well. The only two laggards seemed to be IBM and Qualcomm featured here. 

The current market thinking is that we might see a tech revival not unlike the dotcom era. For the first time in 18 years, we are running out of computer chips. In the past, every IT cycle had a physical demand limit. A few cycles ago, the highest possible number of chips sold would be dependent on the number of  PCs sold, then it was dependent on the number of laptops sold, then the number of mobile phones sold. But this round, there is no physical limit. This cycle would be led by demand for computing power. This is computing power for A.I. or artificial intelligence. Part of the demand would also be for Big Data, which then requires storage, lots of it. Then we have internet of things ie chips in everything from shoes to fridges and also chips for the 900m cars in the world.

Part 2 of 2017 October Dividend List

Speaking about storage, Seagate surprisingly got onto the second part of the list. Perhaps there is a buying opportunity here? Servers today still needs hard disks despite that notion that NAND flash would take over and make HDD obsolete. This was touted more than ten years ago, unfortunately, as prediction goes, it did not happen. We might see a revival for HDD if the storage boom does happen. And the good news is, there are only two companies making HDD nowadays.

The ad agencies like WPP and Omnicom deserves a bit of mention as well. These companies lie in the intersection between the consumer giants like P&G and Unilever and tech. The understanding was the large consumer companies require these agencies to help market their products. They make us think that we need the best shavers and shampoos to groom ourselves. But as internet took over, people are happy to use just any shavers or shampoos. These large consumer firms also failed to engage new users on Facebook and Google. Worst still for the ad agencies, Facebook and Google replaced TV and also became their competitors for ad fees. So, there they are now, looking cheap and looked as if they might be decimated in the new economy. 

The verdict is not out yet. Are they a screaming buy or sitting ducks? We do not know. I have a gut feel they might be sitting ducks. Facebook and Google had simply become too powerful. These old traditional firms might not have a chance. But everything has a price. If they get too cheap, maybe it's worth a last cigar butt puff.

Sadly, I struggle to recommend a good idea from these two parts. If I have to choose, it might be one of the pharmaceutical names. Drug companies in aggregate had done good for the society. Yes, they had their fair share of damages, such as opioid, overcharging and other issues. But they are slowly winning the war against cancer and cured many other diseases that had plagued humans for centuries. Not to mention, Pfizer improved the sex lives of many, many couples. While many readers here are in no need of Viagra and its generic cousins, but hey, we all grow old! Some day, we would all hail Pfizer and thank the great firm for inventing the blue pill!

The miracle blue pill!

Again, they have devalued because they are not part of the new economy. I would say that paying teens PE and receiving a 4% dividend yield for some of these firms are bargains. It might be worthwhile to start researching on some these great drug companies: Pfizer, Merck, GSK and AstraZeneca. Though not on the list, Roche, the world's leader in cancer drugs might be a good candidate to start with. It also has another diagnostics business that is stable and steady.

Next post, we look at Part 3 and Part 4 of this October's list where more Singapore names appear!

Here's the past lists:
2017 Mar Dividend List
2016 Dividend List - Part 2
2016 Dividend List - Part 1
2015 Dividend List - Part 2
2015 Dividend List - Part 1
2014 Dividend List
2013 Dividend List - Part 2
2013 Dividend List - Part 1
2012 Dividend List
2011 Dividend List
2010 Dividend List
2009 Dividend List

Tuesday, October 24, 2017

Chart of the Week #3: Life Cycle of Bubbles

The following are famous charts created by McKinsey (I believe), depicting the life cycle of bubbles as we have seen. This chart had gave a good explanation of at least three bubbles in recent history. The dotcom bubble, the Japan bubble and the 1929 stock market boom and bust that led to the Great Depression.

The chart above shows the phases of development staring with R&D and then moving to first generation products and how early adopters will join first. This pretty much described how the internet and the dotcom bubble had evolved from the late 1990s till today.

This second chart (above) tries to plot various technologies today into the same bubble life cycle. I think this was probably done a few years ago but some of the data points are probably still relevant. It is also worth noting that it takes decades after the initial hype for the stock markets to return to previous highs. 

For the 1929 boom and crash, the US stock market only exceeded the previous peak in 1955 and good 26 years later. For the dotcom bubble, it took 17 years. Japan hasn't surpass the peak of 1990 after 27 years. So never get caught in a bubble!

Hope this helps!

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