Tuesday, April 11, 2017

Think Big and Think Sustainability

There are a few tough things in life, one of which is losing weight. It is said that 95% of diets ultimately fail and losing weight successfully is one of the hardest things to do, along with quitting tobacco, kicking off addictions and investing successfully. As such, having some mild success with both (diet and investing), I would like to share lessons which we could draw from one to the other.

I think there are two big concepts:

1. Think Big: Don't sweat the small stuff, pull the big levers!
2. Think Sustainable: If it cannot be sustained, then it won't work. Make sustainable changes!

We all know the different diets. There are now 1,001 diets out there and over the years, like many of us, I have tried my fair share. Counting calories, Atkins diet which emphasizes low carbs, intermittent fasting, less oil, less sugar and dunno what else. It didn't work! All the talk about such and such amazing diets in the end never lived up to expectations. Then I came to the realization that I have been sweating all the small stuff. I did not pull the big levers, or rather, there was not enough pain at all.

Just to go into counting calories, this is the funny one. You see, diet is about losing weight, or rather losing mass right? Calories is a unit of energy, not mass. In secondary school, we already learnt the law of conservation of mass which means that mass cannot be created or lost. So by counting and cutting calories, which is energy, how can we expect to lose mass or lose weight? Energy has nothing to do with mass except in Einstein's theory. E=mc2. Diet is not nuclear physics. It's about reducing mass (ie the food we eat), not energy. Well, counting calories did work for some people but ultimately it's bcos they have also reduced mass intake by a lot!

Now, low carbs, the most popular diet in the last 15 to 20 years, popularized by a certain Dr Atkins. Why was it so popular? That's because it didn't involve hard work. Oh, just cut carbs, eat more meat, that's very doable. We didn't like potatoes, plain rice etc anyways. But unfortunately, it won't work. Dr Atkins himself died of heart attack as he loaded up too much on meat, causing other problems.

And so it dawned upon me that all these diets were not focusing on the big picture. It was like trying to just solve part of the problem. They were futile attempts to reduce complex problems into one dimension to solve, like counting calories. Or focusing just on one food type, carbs. It was trying to fix one side of the Rubik's cube only without thinking far enough about how to solve for all sides!

Our bodies are machines that have evolved over millions of years and hence it would not yield to half-fuck diet solutions. In fact our bodies are so complex, we probably only know really little how nutrition and our digestive systems work. The Chinese in the past believed that eating tiger's penises could boost male vitality. Obviously, things didn't work that way. But hey, modern nutrition now also realized that eating high cholesterol stuff might not be the reason for accumulation of bad cholesterol which cause heart diseases, or eating good fats didn't cause obesity (it was the bad fats or trans fats, or so the experts currently think). 

Tigers being farmed for their penises

The body is so complex that what we know is really just a fraction of how it really works. Think about it, a piece of fatty meat that we eat doesn't just stick to part of the belly as we might be tempted to think. It is digested, broken down into molecules then reconstructed all over again. Similarly, it is ultimately lots and lots and lots of exercise to burn off that belly that has been there after years of eating badly. Eating less alone would not cut our waistline by 1cm. 

So when it comes to a good diet, I decided to stick to broad principles which are basically just common sense: eat natural food (ie less processed food including bread, sugar, rice, noodles etc) as much as possible, eat a huge variety of food in equal proportions and drink a lot of water (less coffee, tea, soft drinks etc). As to losing weight, it has to be big levers that could effect change. I would surmise a few key levers as follows:

1. Cut meat and cut dinner - ie eat a lot less
2. Exercise a hell lot more
3. Change enough of the bad habits!

Just a quick run through of these points. Meat besides having more mass vs plants, is the most complex of all food types (proteins and fats are long molecule chains). Hence, in my experience, eating less meat, rather than carbs, would be much more effective in losing weight. I am sure in some cases, less carbs might work, but for me, it was cutting down meat. An ideal diet, in my opinion should be like say 20% vegetables (green leaves) 20% tubers (carrots, radish), 20% fruits, 20% grains or carbs 10% nuts and other plants products and finally 10% meat and animal based products (milk and eggs).

On top of that, we have to exercise, although it is true that diet will do 80% of the work. We need the 20% exercise to complete the circle. You cannot solve just 5 sides of the Rubik's cube and leave one side out. Follow through with the tough stuff, we definitely see the waistline getting smaller. Ultimately, it is also making enough changes, like stop all snacking, drink everything sugarless, exercise three times a week. Change enough bad habits to good ones, the results will follow.

In investing, it's more or less the same philosophy at work, we need to think holistically and always look at the big picture. Some time back, I notice a criticism on one of the the stock analysis I had done. The critic was saying how my models were not accurate enough (or rather bear case scenario not drastic enough), how that's poor Excel work, that I don't understand the business etc. I didn't bother to reply. I have noticed that young and/or inexperienced investors always like to tinkle with Excel a lot. They believe that by making the Excel model perfect, they can predict the company's future, make the right bet and make a million bucks. If the stock prices or calculation of intrinsic values correlate with changes in what we do with the Excel spreadsheet, why isn't every investor rich?

It is always more important in investing to focus on the big picture. There are usually a few key factors for the company and it's important to get those right. The modelling is a small part of trying to paint part of the picture. It is about understanding the business model, the industry dynamics and getting the valuation right. The stock in question was SIA Engineering. It does aircraft maintenance and this is a recurring business. Every airplane that's flown in the air has to be maintained. Sometimes, they beat up passengers to get things done.

United passenger being "escorted" off the plane 

Just kidding, but you get the idea, airplanes need maintenance. Needless to say, the big trend of more air travel will not reverse. Even with the risk of getting beaten up by security guards on airplanes, we have no choice but to fly more. There will more planes in the air, more LCCs or low cost carriers and Singapore as a hub will grow with T4 and T5. The down cycle with new planes needing less maintenance will pass and meanwhile, we're paid to wait with an annual 4% dividend. This is the big picture for SIA Engineering.

For investing, the analogy to exercising a hell lot more and changing enough bad habits would be all the hardwork we discussed in previous posts. Investing is about doing enough major mental workouts. It's a lot of reading followed by analysing and discussion. An average investment professional (or any high level executive) needs to read 120-180 mins a day. That translates to 60 to 120 pages of reading (news, annual reports, articles, books and business magazines) per day depending on one's reading speed. Its then about changing habits to read better, analyze better. It means giving up chasing serials, sacrificing family and friend time. It is always the pain we take to be better. There is no two way about it.

To sum it up, I would say the three key levers for good stock investing would be

1. Seeing the big picture: understanding the business model, the positives and the risks
2. Doing the homework: reading, analysis, discussion, lots of it!
3. Paying less for more: only buy when there's good margin of safety

Next post, we talk about sustainability!

Monday, March 27, 2017

Buying Singapore Savings Bonds

Investing is a fascinating game in a sense that no formula ever works all the time. There is no "Bao Jia" or sure wins. There are no programmable solutions, no absolutes and we must always break the rules to win. There is also no such thing as never. Warren Buffett himself broke his own rules so many times, in order to win. He said he would never buy tech stocks, yet he bought IBM and Apple.  He concluded airlines won't make their cost of capital, yet he bought airlines! 

Airlines, the one industry that was guaranteed to lose money! How to be a millionaire? First, make a billion dollars and then buy an airline! That's the infamous running joke in investment circles for decades. To ward off that taboo, Vietnam's most famous LCC (low cost carrier) airline deployed the auspicious red color and bikini girls to market itself. So far, it had a successful IPO, but we shall see!

VietJet and its bikini girls

Singapore Savings Bonds or SSB is also an idea that is somewhat against the rules in value investing practice. Value investing targets high single digit return, not 1-2% return over 10 years. So why are we discussing SSBs here? Shouldn't we talk about Colgate and Unilever and Moutai?

Ok first let's look at what's SSB all about? 

SSB was launched in 2015 with underwhelming response but had since grown to be slightly more popular. According to a recent ST report, 32,000 people had invested S$810 million in SSBs. This is 16x more popular than the conventional government bonds which require investors to hold to maturity i.e. 30 years for the longest issues. With SSB, we can sell and get back capital plus interest any time. However, the total investment so far is way below the S$4 billion target. 

As another gauge of its popularity or rather un-popularity, we have hundreds of thousands of retail investors in the stock market (triangulated from 1.6m SGX CDP accounts with some that are likely dormant), the mere 32,000 in SSBs again pales in comparison despite the product being investable at just S$500! The lowest denomination for stocks would usually be four digits.

Why the un-popularity one might ask. I guess it's really about the lack of marketing and distribution. This is a product directly launched by MAS (Monetary Authority of Singapore) which obviously had no marketing track record and the banks, even though they are distributing the product, had no incentive to sell SSB since it sucks deposits out of their balance sheet and they don't earn anything by selling more (only S$2 per transaction!). Also, the interest rates are really not palatable to investors. The table below shows how it works.

SGS interest rates

SSB works differently from a conventional government bond as you can redeem it anytime. But because it provides this optionality, the interest rate is also slightly lower. Hence depending on how long you put in, the interest rate you get is different. Reading from the table, it says that if an investor put the money in for 1 year, he stands to earn 1.02% interest. This is similar with some of the fixed deposit schemes out there but as you can see, the interest rate creeps up the longer one holds. At 4 years, we get to 1.5% and at 10 years, we get to 2.27% (look at the average return per year not the interest in the middle row). This is actually close to where the conventional 10 year bonds are trading at.

The chart below shows that 10 year Singapore Government Bonds are trading at 2.24 to 2.32% yield. So, it's really not too different from SSB yield at 10 years. The trouble with bonds is that the global low and negative interest rate environment had really caused yield to collapse. Reading from the same table below, we see that 30 year bonds are trading at only slightly higher 2.5% yield. Holding this for 30 years gets you just 2.5% per year! Singtel gives you c.4% dividend with growth potential in India, Thailand and Indonesia! 

SGS prices

Ok, so bonds are really too boring for value investors. We are talking about 1-2.5% return over decades. So why bring it up here? The argument here is that this instrument should really be competing with cash, not compounders or value stocks. This was the original intent by MAS, and if we think about it, it's really thoroughly thought through and quite beneficial to small retail investors. We all have dormant cash lying all over the place. This cash earns 0%. What we should do is to put some of our dormant cash into this (lowest denomination starts at $500!). If and when we need the cash, we can just take it out (but we do stand to lose the additional interest for the subsequent years). Everything can be done online. It's that easy.

Ok but what about fixed deposit schemes offered by the bank that are better? Well, they are usually for only 3-6 months and we have to keep rolling to enjoy the good rates. It's really a bit too much hassle for most working people and only retired aunties and uncles can afford to do that - queuing at the different banks to roll fixed deposits and get free Fitbit or porcelain sets. The irony here is that most aunties and uncles usually roll the same pot of money just to get that additional 20-30bps, but if they had put into SSB, they stand to earn up to 2.27% over time, more than 100bps incrementally. 

As astute investors, we should also deploy some capital here bcos it's better than cash. Most investors usually have some cash, say 5-15% to have the optionality to buy great stocks if and when the opportunity comes. This cash earns nothing but if it is deployed into SSB, it stands to earn at least 1%. If it so happens that the cash is subsequently needed in a few months, we still get the accrued interest. So, it's essentially cash but earning interest.

SSB details

There is one last point to make which is listed in the details above. There is actually a cap on how much SSB one can hold. It's $50k per issue and $100k across all issues. That's like not enough to pay the ABSD for some who are thinking of buying their second properties. This is likely a precaution given that our Government is super cautious. We don't want some shady billionaire putting in one billion and then earning $20m per year out of this. Another caveat is that CPF and SRS funds cannot be used, unfortunately.

So, that's in short the idea that's against the rules. Investing and portfolio management is also about relative benefit more so often than absolute benefit. This is a lesson that some may never learn because we have been thought to think in binary terms - something is either good or bad, right or wrong. A portfolio is never like that. If this is better than cash, we should buy this over cash. We judge a stock by its relative upside vs other stocks in the portfolio. Never only looking on its own merit. By always thinking in relative terms, we can then upgrade our portfolio part by part and hopefully some day achieve optimization.

That's practical investing!

Disclaimer: this author bought the SBAPR17 GX17040N SSB tranche.

Friday, March 10, 2017

2017 High Dividend List - 1H version!

The annual high dividend list is here! This will be the first list for 2017 with a second list coming out closer to the end of the year so as to shorten the waiting time for these highly popular lists. Over the years (this is the 8th year), these lists had become an attraction of its own, drawing lots of traffic for the site. Although the rest of the stuff is actually pretty good! :)

Final Fantasy, one of the most popular game series in the 1990s and 2000s might be an analogy that some readers could relate to. The game is in its fifteen reiteration and every series features a few beautiful computer generated female leads that had captured the attention of the male game players. Somewhat like what the dividend list is trying to achieve for this site. Haha! Anyways, the female lead for the latest reiteration is captured below.

Lunafreya from FFXV

Okay. Let's move on!

It's been difficult to screen for good names in the last few years given the conditions of the markets. As interest rates declined globally into negative territories, the global hunt for yield had affected bonds, property and stocks. It has become almost impossible to find good and high quality bonds giving decent interest income, meaning at least high single digit coupons. In today's markets, only crap companies that cannot find capital come out to ask for money and pay out 6-8% interest to some gullible investors. Meanwhile, good firms can borrow at low single digit interest rates or maybe no interest at all! In fact, Nestle short term bonds pay close to zero interest and at one point traded at negative yield. So, just to reiterate, bond yields had collapsed big time. In property, we see the same phenomenon as rental yields get compressed. In Singapore, good properties are now selling at 2.5-3% rental yield when it used to be able to go to 3.5-4%. Gone are the days when we could buy good nice condos below $1,000 psf.

As for stocks, again, it's the same story. We used to be able to find great companies having dividend yields of 4-5%. Today, we would have to settle for 2.5 to 3% which would be pretty good already if the companies are world-class and strong cashflow generators. In the past, the dividend list just focused on Singapore but we would only see a handful of names which doesn't really make up a list. Hence the list had since gone global a few years ago and this current one has 55 names. Again, the criteria for selection hasn't changed much over the years. We are mostly screening for consistent free cash flows, dividends, margins and ROEs. The first part of the list is attached below.

2017 Mar Dividend List - Part 1

We see some familiar names in this first part/tranche with some international names like Symantec, Vivendi and Mattel, companies with partially outdated models trying to transition in the new economy. This happens a lot with quant screens and hence, in the end, it pays to really dig and really understand the fundamentals of businesses. As for the Singapore names, we see a few this time: UMS (which we discussed last year), M1, Mapletree Industrial Trust, Silverlake Axis, Ascendas India and Yangzijiang. I would comment that there's nothing interesting here. REITs are tricky giving the upcoming interest rate hikes in the US and shipbuilding is too treacherous. Silverlake Axis could be interesting but there might be some corporate governance issue which was flagged out by a short seller report last year. M1 - well, it's going nowhere, Singapore doesn't need four telcos...

The second part of the list (below) sees a few tobacco names which had also appeared regularly. Tobacco stocks are usually screened out because they churn out huge cashflows but yet trades at a discount because some large and reputable investors tend not to invest in these stocks given the damage tobacco had done to humans. Tobacco is the single, largest cause of human deaths in the history of humanity. However, as with all things in life, the only constant is change and we might be at the cusp of a revolutionary change in the tobacco industry.

2017 Mar Dividend List - Part 2

About 16 months ago, Phillip Morris, the world's largest tobacco company (well actually there are only four big listed ones and they are almost as big) invented a new kind of cigarette which uses a high tech device to heat tobacco leaves instead of burning them. Without burning, the smoke content with smoking is reduced to virtually zero and second hand smoke is eliminated, although there is still a bit of the smell. But the biggest value proposition is this - it reduces the toxicity of tobacco by over 90% and the firm postulates that in a few years, traditional tobacco products will be gone. If this happens, tobacco becomes more like alcohol (still a vice but much less harmful) and deaths by smoking would be reduced dramatically. Millions of lives would be saved. This is a game-changer.

Phillip Morris first launched its product called iQOS in Japan last year and it became a huge success, garnering 10% market share in one year and the rest of the big tobacco firms are scrambling to come up with competing products. If this trends continue, we really might see the end of traditional smoking and big and ethical investors can buy tobacco again. Tobacco companies would at least double just based on its valuation expansion. And this would be good valuation expansion from low teens PE to high teens (not your 40-50x PE). So, this is really major although we are probably seeing the change in terms of decades rather than years.

This second tranche also has a few good Singapore names such as Singtel, SGX and ST Engineering. We will dive into more about STE or ST Engineering today. This is an interesting name to look at in today's world given its business in defense. The world has become a more dangerous place in the last few years with the war in Syria, North Korea getting more belligerent and China exerting its military power. ST Engineering boasts 30-40% of its earnings from defense, albeit mostly for the Singapore government, and hence should stand to benefit from this trend. 

2017 Mar Dividend List - Part 3

The other part of its business is similar to SIA Engineering's aircraft maintenance which had seen a few years of poor conditions as new airplanes were introduced and maintenance requirement cut but the industry should be poised for a rebound and again ST Engineering will benefit from the recovery. This is a company that had consistently generated a few hundred million dollars of free cashflow annually over the years and trades at 4% FCF yield which it pays out 2.5-3% in dividends. Alas, the stock gapped up about a month ago and we might need to wait a while to get it at a reasonable margin of safety.

Finally, let's talk about the last portion of the list. The last tranche has quite a few good value/quality companies like Coca Cola, IBM, both Warren Buffett's holdings and Coach. This luxury bag name had been undergoing transformation in the last few years as its customers moved away to newer brands like Michael Kors. But Coach does have a strong tradition and in luxury, having that is a big, big plus. You can't get Audrey Hepburn to have breakfast at another jewellery store today or get Neil Armstrong to wear the Apple Watch to the moon. Luxury is about telling unforgettable stories. Coach had less of that super marketing legacy but with 75 years of history, it's still a force to be reckon with. In the worst case, some big boys like LVMH or Gucci would simply buy it out if it gets too cheap.

In Singapore, we also see old favourites like SATS and Boustead again as we lowered the dividend cut off to 3%. Alex Huntgate had done a great job at SATS in the last few years and needless to say, FF Wong's 20 year legacy at Boustead continues going strong! So, that's about it, we shall screen again in the later part of the year and do check back for more!

Here's the past lists:
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, February 28, 2017

Investing: Riding a Bicycle Up a Mountain in the Night

I have been thinking about yet another an apt analogy for investing and so far here's the best that I have come up with - investing is pretty much like riding a bicycle up a mountain in darkness. To further elaborate, it's also a mountain located in Finland where the signs are in Finnish and daylight won't come in a few months. Yet, we still have to climb up. The summit is waiting. How's that for encouragement huh?

Ok, let's not get too discouraged. It's tough but not that tough. First you need to learn how to ride a bicycle. Then you need to learn basic Finnish in order to navigate well to reach the summit. That's the easy part. The tough part is really about cycling uphill and riding in pitch dark, that's psychology and that's really tricky. One negative thought and one wrong turn and you are going downhill. It might be easier if life was like the Edge of Tomorrow, the sci-fi flick starring Tom Cruise and Emily Blunt.

For those not familiar, this movie was Groundhog Day with aliens. Tom Cruise gets to relive each day while trying to learn to fight aliens, get the girl and save the world. If he dies, the day is reset, and he tries to figure out how to make the right decisions. Over time, since he relived like thousands of the same day, he got really good at wearing exo-suits to fight aliens and learnt every trick to win the heart of Emily Blunt.

Emily Blunt in Edge of Tomorrow

Unfortunately, in real life, there is no reset button. If you are riding a bike to the summit of a Finnish mountain in darkness, you better think well and cycle carefully. So how should we navigate this adventure? Are there better techniques we can use? Well, this is what this post is about. But first, let's describe the analogy in better detail. There are five points to consider:

1. Learning to Ride
2. Learning Finnish
3. Riding Uphill
4. Navigation
5. Pitch Dark

First let's talk about learning to ride. I would like to invite the reader to think back to those days we first learned to ride. This is something that cannot be taught. We simply have to go through it ourselves. I can give you all the theory, but ultimately, to be able to ride smoothly requires practice and experience. Investing is really like that. Every decision to buy and sell will accumulate and over the years, we get better. The difference between bicycle riding and investing is perhaps this - riding once mastered, you can ride anywhere. But investing is a continuous improvement process and you won't know when you have actually mastered investing.

Then there is learning Finnish. This is the easy part. This is like learning the hard skills like accounting, financial analysis etc. If we put our minds to it, we can get to some level of proficiency. Reading financial statements, annual reports have been described in detail on this knowledge site around 2005-2007, interested parties do refer back to those old posts. It's not rocket science. Even for Finnish, after basic lessons, at the very least, we would be able to read road signs. Right?

Now, everyone who had ride would know, riding uphill is crazy effort. Sometimes it's better to just walk. In my opinion, investing, from another perspective, is like riding uphill. It's a lot of mental hardwork: reading newspapers, reading annual reports, analyst reports and journals and notes of other investors. A real investor spends 80% of his time reading, not sitting in front of the trading screens pressing buttons to buy or sell. We spend a long time on analysis, not action. When we do, it's like choosing which fork to take. Making the buy and sell decisions are akin to navigation: taking the right paths.

Binomial  Tree

Over a lifetime of investing, we will literally make hundreds of buy and sell decisions, like going through hundreds of fork roads on our way up the mountain. Hopefully, after rounds and rounds of decisions, we inch upwards. This is the goal, or rather the process. This is real investing. It's mostly not betting it big on one or two occasions. Okay, Warren Buffet had said that we shouldn't diversify too much. Yes, when we are confident we need to size up our bets. But he also said we need to think we have only 20 bullets in life. This is the key statement. We have 20 bullets, not 2 bullets. We never bet 100% of our wealth on one idea. We don't over diversify but we also don't put all our eggs in one basket. Hope this is clear.

In other words, we can think of all our investment decisions in the form of the binomial tree above. Over time if we make more right decisions, we inch up and we move up the curve. We will not make all the right decisions. Hence it goes up and down at each node. But if we are good, after many decisions, we will creep upwards. And the curve would compound over time, meaning it's not linear. If we plot our paths well, we get the compounding curves below.

Compounding returns

We go up faster if we can compound faster. Starting with $10,000, we can hope to get to $70,000 if we compound at 8% or $180,000 if we compound at 10% over 25 years. Alas, it is still not easy. This is the last point in our analogy. We are riding in the dark. There is no clarity and the future is not predictable. At every fork, we rely on our knowledge and insights to make a good decision. We cannot predict the outcome. This is an important point. Please try to visualize this. We are riding on our bicycle uphill, tired and thirsty and we reached a fork with signages in Finnish. We deciphered one of the direction saying, "Yellen will raise interest rate twice this year", the other sign says "Global GDP grows 1.1%". We need to make a decision. Right or left? Buy or sell? How can we predict which way will make money? Everything is based on our best guesses. We then sit down to read the wind direction, we also try to have a good feel of the slope. Doing all this in the dark. That's investing.

When some pundits come and say, markets will do this, and that. Time to buy this, sell that. Obviously he is not in the game. He is like a random guy who is chatting you up on the walkie talkie common frequency, from the base camp, drinking his hot cocoa, telling you to go left, when he has no clue where you are, nor which direction is really upwards. No one can predict markets. People who are trying to predict have no clue. 

It is always easy to claim credit. Maybe we were riding with a group of friends up this Finnish mountain in pitch dark. All were new to this mountain. One loud guy at the fork said go left and he was right. He claimed he knew, see I was right! I am good. Listen to me. Did he really have foresight? What was his reasoning then? Had he called it right over ten times? Or over twenty times? This is the reality, no one knows, those who claim they know probably don't. 

So what do we do? 

Let's think back to the analogy, it's really back to common sense. Make sure we know our hard skills well. At every fork, we muster our best efforts. Read the difficult Finnish signs. Read the wind direction, talk to the team-mates. If we make the wrong turn, follow our gut, go back and take the other fork. We won't know if the fork we took was right until later. So we move slowly. In investment terms, these would be:

1. Knowing the hard skills well: reading financials, industry analysis
2. Constant voracious reading akin to workouts i.e. mental aerobics
3. Discussion with like minded investors
4. Making incremental investment decisions and constantly checking

Just to re-emphasize on bet sizing, we don't pump our 100% into the one direction we chose. We tread carefully. When we have a high conviction idea, we can size up. In portfolio terms, I would say never bet more than 20% on something. Set a limit. Have a few bets, not one or two showdowns. There is so reset button here. A wrong move in the Edge of Tomorrow, Tom Cruise wakes up and start to try to get the girl again. Live. Die. Repeat.

For us, we lose momentum, get discouraged, our assets drop and it takes more effort to get back to where we were. Hence it pays to move carefully. Maybe it should be Think. Move. Repeat. Never give up. One day, we will reach the summit!

Tuesday, February 14, 2017

Let's talk about Money and Gold too!

A very Happy Valentine's Day to all!

This is a continuation of the previous post.

In the last post, we discussed asking some really fundamental questions about companies to see if they stood the test:

1. Does the company help improve the well-being of its customers?

2. Does the company add value fundamentally in ways that make all lives better?

3. If the company did not exist, would the world cease to functional properly in some ways?

These questions help us explore fundamental concepts that are really the basic tenets of life. These things are more fundamental than money or our notions of countries, democracy or even human rights, which are essentially concepts of the collective human consciousness. A dog or a monkey has no interest in money or where the country boundaries lie between France and Germany. But they do know kindness, reciprocity, value add and love. These are the true fundamentals in life. In my opinion, if investing is deviated too far from these, then it didn't make sense and would ultimately fail.

Minions at Genting's Universal Studios Singapore

Let's take a look at Genting, a stock which had been discussed previously as cheap and perhaps a good buy. But how does it fare against the three questions posted above? Does the company help to improve the well-being of its customers? Well, that's really tough. How does gambling help improve one's well-being. I would really scratch my head here. In fact, gambling would destroy one's well being and also affect those around him, especially his family. Especially if he suffers from gambling addiction and is forced into debt and other woes.

Does the company fundamentally add value to make all lives better? Again, it is hard to see how a gambling resort add value to all lives. Perhaps it adds value to its employees by creating jobs and its shareholders, but not all lives, and definitely not those who were addicted and driven to debt and detrimental ways. So, if the company did not exist, would the world cease to function properly? In the last example, Dairy Farm, we could argue that some neighbourhoods might face disruption, until the competitors fill the gaps. But for Genting, even if all the hotels and theme parks disappear tomorrow, does it matter?

I would argue it doesn't. Life goes on. Perhaps the tens of thousands of Genting's employees might need to find new jobs but for the rest of the world, it really didn't matter if Genting disappeared. That's the sad truth. Having said that, vice stocks have created the best value for shareholders. Hence this is a philosophical argument whether we, as responsible and astute investors, want to own vice stocks that fundamentally do not add value to the world.

Ok, food for thought but let's move on.

In the last post, we also discussed the concept of money. Money is a trust system that is established over millennia by humans to faciliate transactions using currency mediums like sea shells, gold, or in today's context electronic ones and zeroes. There is a very remote risk that the system might fail, as it did in Germany during the 1920 hyperinflation, or in Singapore after WWII when banana money issued by the Japanese became worthless when the Japanese lost the war. During the Global Financial Crisis of 2009, we were very close to the collapse of the global monetary system.

Hence as astute investors, it might make sense to put a small portion of our investable assets into something that would mitigate this risk. Some very notable investors had always advocated having some money in gold although Warren Buffett, the Oracle of Omaha himself, never approved this idea. However as a risk mitigator to the collapse of the global financial system, it really does make sense, to buy gold, as a hedge. Yes, while gold will not compound its value over time - a block of gold will be the same block after 10, 20, 50 years, it will store and retain value in the improbable event that everything breaks down and all our bank notes, all our zeros in our banks, all our electronic stock and bond certificates fail to register.

In that same vein, we should think about investing into valuable stuff in the real, physical world that would still be essential for living - hard assets like land, modes of transport - motorcycles, electric vehicles and perhaps, value creating assets like solar panels or power storage like Tesla's Powerwall. The idea is that if the global financial system does fail and we are going back into the Dark Ages, then we need stuff that would be useful in sustaining lives. Land to plant food, means of transport, energy etc. Of course, this is a very, very remote scenario. It is more likely that life goes on for the next 100 years. But the idea is that we shouldn't rule things out. It make sense just to put 1% of our assets or less into these. In the most practical terms, maybe we should just hold some physical gold.

Bollywood actress purchasing gold from a Gold ATM

Gold is an unique asset class. It represents the ultimate store of value because its status had been independently verified and had since evolved together with the collective human consciousness over time. Almost all ancient civilizations used gold as a status symbol, in decorating temples and tombs alike. In modern times, it was the standard for the global currency exchange and even when that broke down, it remained as a safe haven asset class in times of crisis. It is the universal currency for all which would transcend failures of the financial system. So, do buy some physical gold from the local jewellery store. Remember, it shouldn't be a gold ETF, but real physical gold! 500g would cost roughly S$25,000 and fits in the pocket, which could be a good start.

So rather than buying roses, maybe it's worth buying some gold accessory for your Valentine today! That would kill two birds with one stone! Investment and love does go together! Again, a very happy Valentine's Day!

Tuesday, January 31, 2017

Happy CNY! Let's talk about Money!

Wishing all readers a very happy Chinese New Year! Happy CNY, Huat Ah!

Sapiens: A Brief History of Humankind by Yuval Noah Harari was a book published in 2014 that became a New York Times Bestseller and has been translated into 30 more languages. I have read the book twice and found it intriguing enough to discuss it here as some of the concepts were not just refreshing but relevant to investing. The author Harari cited that the inspiration for his book came from Guns, Germs and Steel by Jared Diamond, which was also a New York Times Bestseller which I had also read and was also another eye-opening book for those interested in the history of the human species.

Book Cover of Sapiens

Both books talked about how humans managed to achieve what we achieved today looking back in time from the Stone Age, exploring social cooperation, the advent of verbal communication, the genesis of writing, domestication of animals and other important technologies and concepts. In this post, we shall explore one of the most important concepts that humans came up with and its implication on investing - the concept of money. According to Harari, money does not exist in the real world beyond humanity. Harari introduced this concept from an interesting angle. He implored us to think not as humans but as other species on this planet such as giraffes, rabbits, octopuses and when we think as animals, we then realize money doesn't matter. Giving $1,000 to a monkey means nothing to him. He would be happier with a banana!

Hence money is a concept that doesn't exist in the real world beyond our collective human consciousness. This is very much like imaginary country borders ie countries themselves and imaginary lines such as the Equator or the Greenwich Meridian.

Money is a concept that has been refined by humans over the ages. Cavemen started with barter trade, then used stones and sea shells, which then evolved into gold, then bank notes, then electronic ones and zeros today. It works only because it is based on a communal trust that humans created. The trust that these stones, or gold, or notes represent claim checks on the society which other humans can swap for goods and services. It works only because all humans believe in the same concept. It is a collective myth we invented to facilitate transactions. It didn't work all the time. In the Stone Age, when the currency medium didn't register, money didn't work. For instance when another tribe didn't value exotic sea shells, the transaction broke down. Similarly, when hyperinflation exploded in Germany in the 1920s, bank notes became worthless. Perhaps gold is the only universal transactable currency that could transcend time and all other currency mediums. 

During the Great Financial Crisis when Lehman went bust, we were quite close to the moment that the whole global monetary system and this whole concept of money might break down. If that happened, then all our monies, all the bank notes, all the zeroes in our bank accounts meant nothing. So, if we think deeply about this, we have to be more holistic in the way we handle our finances. As astute investors, we need to think at a more fundamental level.

Family bonding

One perspective would mean following true fundamental concepts like reciprocity, value add, being healthy and able, helping and bonding with others. These are concepts that resonate with all living things, not just homo sapiens. If we treat animals like dogs and horses well, they will reciprocate in kind. If we make ourselves useful, able, we can always extend help and bond with anyone. Bacteria can exist as they too are playing useful roles in the world, like decomposing waste. During this CNY festive season, we are also rekindling family bonds, reconnecting with people that had made a difference in our lives. Reciprocity, being useful, bonding with others, these are the true fundamentals in life.

When we start thinking at this basic level, it then make sense to link these values back to buying companies that are applying these concepts. Facebook and Tencent create huge value add by trying to bond people digitally, making connections using technologies. Tiffany provides true value when the little blue box is presented by the giver to his significant other, which will become a testimony of their love for each other - you are my only one true love. 

Tiffany's ad and slogan

Expanding on this theme, perhaps it is worth asking these few questions when we want to invest in a company that we had researched well:

1. Does the company help improve the well-being of its customers?

2. Does the company add value fundamentally in ways that make all lives better?

3. If the company did not exist, would the world cease to functional properly in some ways?

Framing the questions in such basic terms can really give us another perspective on our investments. Take the Dairy Farm Group as an example. The Group operates Cold Storage, Guardian Pharmacy (Mannings in Hong Kong), Giant, Seven Eleven, Ikea and GNC amongst others retail big brands in South and East Asia. Does the company improve the well-being of its customers. Well, more or less, yes. We buy daily necessities, medicine, even furniture from the Group. Even though online e-commerce had taken over some of its share, we still pretty much need to shop at some of the outlets of the Dairy Farm Group.

Dairy Farm Brands

Does the company add value fundamentally to make all lives better? Well, this is harder to answer. Obviously all the chicken and fish on sale in Cold Storage wouldn't agree. But for most humans, perhaps yes again. So I would half check this box. The last question would always be the most interesting: so if Dairy Farm disappears tomorrow, how is the world affected? So imagine, there's no more 7-11, Giant, Guardian tomorrow. Well, there might be some impact, some inconvenience to some people. Yes, there is still Cheers, NTUC Fairprice and Watsons but I guess some neighbourhood might find it really disrupting. Perhaps the disruption would create havoc for some people for a month or so as people scramble to do shopping at other locations until Dairy Farm's competitors come in the fill the gaps. So, yes, for some, the world do cease to function properly, at least temporarily. 

So in all, I would say that Dairy Farm scores a 2 to 2.5 out of 3 here. This is a company that fundamentally adds value. Alas, valuation is a big hurdle with PE at more than 20x and EV/EBITDA at mid to high teens. With the stock jumping a good 15+% in the last month, value investors would think twice buying now. 

Next post, we look at companies that would fail this test and also explore other concepts related to universally true fundamentals!

Next post is out!

Tuesday, January 10, 2017

Health and Wellness: A Secular Trend

Happy New Year and Welcome 2017!

As a semi follow-up to the previous post, let's expand on the health and wellness theme that was discussed. There are two key factors to health and wellness: diet and sports. Ideas for diet would be about nutrition. Stocks could be Nestle, GNC (the supplement company) or maybe Danone. But in this post we focus on the second factor: sports. Or more specifically, sportswear including sports shoes.

To illustrate an important point about sports related industries, the following two charts on bicycles tells a good tale. As we know, cycling has become really big globally with major bike events and more and more enthusiasts joining this sport. It's enjoyable while giving our bodies good workouts but most importantly it's another way to show status. The bike, which can cost five figures, the attire, the tours, all adds to the glam surrounding cycling. It has all the right ingredients and is perhaps the good showcase for most health and wellness stock ideas.

The charts below depict the trends on Taiwanese bicycle exports. Yes, Taiwanese bikes are now the best in the world. The top chart shows unit prices in dollars and the bottom shows the total export value. As we can see, average unit prices had gone from $100 to almost $500 and in value terms, the industry grew 3x in the span of 15 years. Sports cycling as with jogging or other competitive sports is an industry where manufacturers have a lot of pricing power. This is a result of good marketing, constant innovation, as well as consumer mentality in paying up for performance and value. It's good business.

Prices only go up in sports!

Sportswear and shoes is a similar secular growth sub-industry having being shaped by the two giants, Nike and Adidas, over the decades to be oligopolistic and hence all the more capable of maintaining and raising prices by providing innovation and value add to the consumers. Consumers are willing to pay because they see tangible benefits. Well, actually there's both tangible and intangible benefits. For tangible benefits, running and basketball shoes would be the most obvious examples. Almost everyone would pay up for a better pair of shoes given that poor quality ones simply dis-integrate after a few uses. Bad shoes result in pain or sometimes even injuries. So who wouldn't pay up for Air Jordan or Adidas Ultra Boost for marathons? Well, as for intangible benefits, as teenagers and twenty-somethings, shoes and sportswear became bragging rights. Air Jordan was just a must-have for all basketballers! Right?

To further prove the point, the following chart shows the long term share price of Nike stretching back to 1981 (Adidas chart looks the same as well). We can see how this phenomenal firm had just compounded value over time and should continue to do so. In fact, the no.s are too small to be read from the chart. So let's put them in words here. In 1981, adjusted for splits, the stock was trading in the cents, like 10 cents. In 2000, after the dotcom bust, it was a few dollars, like $4. Today, Nike is trading at $51 with a market cap of USD 86bn! In other words, putting $1,000 in Nike in 1981 would be worth $510,000 today! Nike, as a stock idea, is simply a no-brainer. Just buy when the stock falls. At 4% FCF yield today, it's not too bad, but if we want a bit more margin of safety, maybe we should target closer to 5% FCF yield i.e. enter closer to $42. If it ever gets there, we should just close our eyes and buy this winner.

Nike long term share price

What is more interesting might be another up and coming competitor - Under Armour or UA in short. Under Armour has taken the world by storm in the last few years as an alternative to the two giants. People like its logo, the cool apparel designs and its new challenger status. Especially for the millennials, Nike and Adidas were what my parents wore, I wear Under Armour. Then their parents also started wearing UA. The firm's revenue went from USD 100m in 2003 to close to USD 5bn today. A 50x increase though still 1/6 of Nike's whopping USD 33bn annual sales. It did all the right things, going into the different verticals like basketball, running, cross-training and trying on golf and soccer. It seeks endorsements from athletes and celebrities and now boasts a cool list from Stephen Curry to Andy Murray to Dwayne Johnson a.k.a The Rock. Essentially following the playbook that Nike and Adidas had written in the 1980s and the 1990s. 

What's more, it had also appealed to the girls with feminine designs, taking on Lululemon Athletica and winning. Lululemon is less than half of Under Armour in sales and seemed more about sexiness than sports. UA did not start with a niche like yoga and hence had a broader base and the financial power to expand rapidly across regions and categories. Not to mention that getting sponsors need money, a lot of money. Especially when UA likes to get a whole slew of femme fatale sportswomen and fashion models. 

Under Armour femme fatale spokespersons

In fact the reason why it dropped so much and gotten interesting it's bcos it spent too much money and the markets got worried. Share price collapsed from a high of $45 earlier last year to $25 today. This is yet another example of unpredictability. If analysts were asked to guess early in 2016, who could have known that the all powerful Under Armour would fall 40%?

Well in order to take on the two giants (Nike and Adidas), UA went on a crazy capex spree, spending over $800m in the last three years. Not just on new stores but also on R&D and more endorsements. Again, take a good look at the top female athletes and models in the world above that UA found to help further boost its popularity with women, something that Nike and Adidas had not been as strong. Its stable of female spokepersons include Lindsey Vonn, Gisele Bundchen and Kelley O'Hara, all eye candies, definitely didn't come cheap. That's the game. Pay up and pay more so that the competition just falls off! UA is just taking the Nike, Adidas sponsorship game to another level.

Lindsey Vonn, the beautiful skiier, is especially motivational given her trial and tribulations with injuries and sacrifices. She started training at 7 and debut in the Winter Olympics at 17 in 2002 with high hopes but did not win any medals as with Olympic debut since it's more just for experience. In 2006, she crashed during practice and was heli-evacuated but came back after just two days to compete, finishing 8th. She won a Olympic Spirit Award for her grit. In 2010, She finally got her first Olympic medal, deservedly a gold, after 18 long years. Our Joseph Schooling suddenly seemed so fortunate yah? Under Armour's commercial pitch was just about making it into awesome story-telling. Here's her poster from UA: I will not be underestimated. Damn, so cool!

Lindsey Vonn, world champion skiier
Under Armour's own story is also quite inspiring. It was founded in 1996 by its current CEO who was an American football player himself. He noticed how synthetic fiber was superior as he wore them while playing. At 23, he started his business selling sports apparel made from synthetic fiber in the trunk of his car. He first targeted performance apparel for American footballers in schools, then branched out to baseball and finally mass consumers. Today, UA makes shoes, caps, socks as well as performance apparel for athletes and laypeople from youth to professionals. 47% of its customers are female and over 36% are college graduates who like to spend and can and will spend a lot to look good and feel good.

That's Under Armour. If it continues to grow, the stock shouldn't be at $25. It's market cap is currently a mere USD 12bn vs Nike at USD 86bn. Given that the industry would continue to grow and UA should grow faster, we can expect UA to be more like half of Nike at some point in the future (say five years). Okay at least 1/3 perhaps. Regardless whether it's 1/3 or 1/2, this would mean that UA market cap should be closer to at least 33% of Nike's i.e. at c.USD 28bn  (more than 100% upside) and that's assuming Nike stops growing which won't happen. So UA would be worth even more. 

Some might argue that's too optimistic. Let's use a different lens.

Looking at its own FCF, UA had not achieved stability as yet given its huge capex needs. In good years, it managed USD 100-200m of FCF but in others, it burned cash. However if its growth materializes, revenue should hit 10bn (slightly less than 1/3 of Nike's), NP should hit 600-800m and FCF should then stabilize at a tad lower at 500-700m, which means that we are getting c.5% FCF yield at today's market cap. Again, it's not unreasonable valuations.  

Well, having said all that, a thorough analysis of UA is warranted to make the numbers more concrete. And the risk that UA falters like the rest of the tier two sports brands remains real. Some tier two brands remain tier two forever because they simply cannot compete with Nike and Adidas. In US, we have New Balance, Sketchers, in Japan we have Asics and Mizuno and China... Remember China and all its hype about Li Ning and Anda? It's definitely safer to bet with Nike or Adidas. UA is more about higher risk higher return! There would be a limit to its downside though because if UA gets too cheap, someone would just buy it out.

This author doesn't own UA yet. 

Wednesday, December 21, 2016

2016 in Review: Most Unpredictable Year Ever!

2016 has to go down in history as the worst year for forecasters ever. Who would have predicted that the China market would collapse 25% in the first month of the calendar year, after dropping 40% in 2015, then only to rebound by year end? And the Bank of Japan reducing interest rates into negative territory, pulling 20-30% of the global bond market into negative yields. And commodities! Oil from $100 skyfalling to $30 and then back to $60, bringing the rest of the resource stuff - iron ore, copper, coal up, up and away!

Then Duterte, a maverick who became President of Philippines amongst high hopes, saw his country becoming the worst performing ASEAN stock market of the year. Then Brexit happened. But then again maybe it's not possible after all due to technicalities. Or it might take a full 10 years to fully exit. Then a King died, and a Cuban dictator whose reign lasted 10 US Presidents also died. Then a best selling phone became a grenade. And the other best selling phone can't use conventional earphones to listen to music. This was the company that transformed music listening with the iPod. Then Donald Trump won, and Renzi lost, and then India decided that its notes would not be legal tender anymore - a move that caused widespread panic among small businesses and rural folks. Gosh!

Oppa Gangnam Style!

Even in the last two weeks of the year, unpredictable bad news can't seem to stop. A refugee decided to bulldoze people in a truck in Germany, the European country that had accepted the most number of refugees in Europe. This event itself might cause the downfall of the most powerful woman in the world, maybe bring about the breakup of Europe? So would it be Brexit first or Breakup first? Elsewhere a Russian ambassador got assassinated while his President enjoys onsen in Japan with his Japanese pet dog. The same President, in the presence of his gracious hosts, then tells the host country straight in the face he won't return the islands his country confiscated controversially during WWII. WTF?!?

Perhaps the only good thing that came out of the year was that a small country no more than a little red dot on the world map managed to clinch its first ever Olympic gold medal as a butterfly against the world's fastest swimmers, who all got silver. Well, this was predicted by some in the swimming inner circles (the gold though, not the three silvers). Yeah! One prediction gotten right.

It goes back to an old point made here - prediction is futile. The future is a set of probabilities. There are a few outcomes and one would become real. The point of investing, is not to predict but to achieve a good expected return. This means, know all the possible outcomes. If A becomes real, what happens. If B becomes real, what happens. Bet such that the expected return will be okay. Say if A comes true, we are neutral. If B comes true, we make a ton of money. If C comes true, we lost 20%. So it's worth a bet. It also means, reading and knowing a lot and making many, many investment decisions over our lifetimes such that in the end, our average expected return will be good enough.

For most people who are new to the game, they like to ask about the future. What would happen? Is USD going to strengthen or weaken? Is STI going to hit 3,000 or not? Then talking heads come in and fill the gap. These amateurs then love it! But the truth is, nobody knows! Who could have predicted Brexit will happen, Trump will win, China will crash and rebound, oil will crash and rebound, commodities will rally big time and the best performing Asian market in 2016 is Thailand - after their King died? 

 Thailand: 2016 best performing Asian market in rollercoaster fashion

Hence it's not about predicting, it's about preparing well. This means reading widely, discussing with like-minded friends, understanding dynamics, then looking for opportunities where expected returns might be very good. One highlighted idea last month was Vietnam (or rather Vietnam property). If the high probability future that the country becomes another Asian Tiger (like Korea, Taiwan, HK, Singapore and needless to say, China) materializes, we have huge, huge upside (like 5x). If it doesn't we lose some money (maybe 30%) in the worst case scenario. That's very good expected return.

To digress a bit, one other big trend that is beyond prediction worth mentioning is the health and wellness trend in our lifetimes. As the global population ages, more and more people think about health and wellness and are willing to spend a lot more to maintain their health. This is a huge positive trend that spans across various sectors including supplements, retail, healthcare, apparel and even IT. Fitbit is a multi-billion company and was worth USD 6bn at its peak! Alas it was overhyped and now collapsed to a smaller USD 1.6bn market cap, but still big.

The two most important aspects of health are actually just diet and sports which doesn't really cost a lot of money but our current consumerism mentality makes sure that we spend as much as possible and be as glam as possible while pursuing our pink of health! Think of the huge supplement and sports apparel industries. Today, running is not putting on our sneakers and just do it, it is about wearing nice Under Amour shirts and 2XU compression pants, equipped with Fibit, mobile phone straps, great shoes and finally posting the run on Facebook! It's a whole new ball game!

But, diet is really the more vital aspect. This author would highly recommend reading this book titled the The Enzyme Factor by Dr Shinya Hiromi. It is compact, easy to read and comes with pure simple logical diet tips that should just be followed by everyone. As a surgeon for 40 years, Dr Shinya crystallized a simple fact: cutting out cancerous body parts did not cure cancer. The "cure" is good diet, good lifestyle. Just to share one tip out of the many in the book: eat a lot more fruits and eat less meat.

The Enzyme Factor

According to this doctor, fruits are created by Mother Nature to be eaten. Hence it contains all the best nutrients and enzymes for living creatures to be absorbed into their bodies. A diet filled with variety of fruits like tomatoes, apples, oranges, bananas, avocados supplemented with other vegetables and small amount of meat would be very healthy and his patients who followed his diet never get cancer relapses. Fruits are also easily digested and hence doesn't burden our digestive systems while meat, esp red meat is very hard to digest and a lifetime of eating meat ultimately causes cancer and/or illnesses. If we look at the structure of our teeth, we have only 4 out of 32 adult teeth that are suitable for eating meat. That's our incisors. Hence our meat to all food ratio is determined by evolution, it should be just 1/8 of our diet. Literally, food for thought huh?

Back to prediction and preparation, a good life is also about preparing well. We cannot predict markets but doctors/nutritionists can surely predict how people fall sick and eventually succumb to what kind of terminal illnesses just by looking at their diet and lifestyle. Stressful lifestyle with lots of tobacco eventually leads to cancer. Alcohol leads to liver problems. Meat lovers get heart diseases or colon cancer. Maintain a lifetime healthy diet, exercise and live stress-free. That's the best preparation against cancer and other big diseases.

It's all about preparing well for a good second half, to use soccer parlance. Yes, we are all more or less hitting half-time, and the score is 0-0! Okay maybe 2-0 for some. Time to strategize! As humans, we tend not to think too far ahead, usually thinking a few years ahead would be considered a feat. No one thinks more than 10 years ahead. When we are in our twenties, all we can think about was money, fun, glam. It never crossed my mind that I would be a father in a few years, have an ass full of debt from the home mortgage and how should I prepare for it. Now that I think back, it's really a miracle that things worked out without much preparation.

To sign off, let's talk about 2017. Remember it's not prediction but preparation. It's not easy but let's try. In my view, 2017 could see the rise in animal spirits given the very bad 2016. Investment appetite especially with the US economy recovering could pull parts of the world up. Although China and Europe should remain tough with the bad debt issues still haunting the financial sectors. So what's the preparation needed? Maybe look to deploy a bit into secular sectors, like health and fitness. Meanwhile in Singapore, 2017 could be the year the property oversupply hits a peak after which the no. of new condos would drop. Hence it might mean it's the bottom for the property market. It's could be the last chance to buy Singapore property before it becomes way too expensive. So, be prepared!

Merry Christmas and a Happy New Year!