Monday, July 16, 2018

Tangible Thoughts #6: Contrarian Thinking

Sometimes the best opportunities come when most people don't agree with you but the one or two trusted smart friends do. Or maybe they also didn't agree but you are smart enough to figure out they were wrong.

Here's two quotes reflecting this:

John Malone: Most of the money I've made in my life has been when other people don't like what's going on. When things are cheap, that's opportunity.

Jack Ma said something to the same extent. If 10 out of 10 people agrees with you, then nothing needs to be done. If there is just one or two smart, close friends who criticize your idea but think there might be something worth pursuing that is interesting.


Monday, July 09, 2018

Book Lessons #2: The Selfish Gene Part 1

I just read the seminar work of Richard Dawkins, The Selfish Gene. I would say this is a must-read for everyone. Not just investors, but everyone. Amazingly, this book was listed as the most influential science book of all time in a poll to celebrate the 30th anniversary of the Royal Society Science Book Prize. To think that it was published in 1976 and I only read it now.

This book put forth so many concepts that it's actually quite daunting to absorb everything. Hence this post serves to really crystallize some the important ideas. Interesting, Dawkins also coined the word meme which became one of my son's most searched word on Google. We spent hours searching for funny Star Wars meme like the one below. Haha!

Star Wars Meme

The word meme came from another Greek word mimema which means imitate. Dawkins used the word to describe how ideas, music, stories can be copied like genes in the human society. This later became popularized into jokes like the one above that is copied and spread rapidly by internet users. The origins of meme is like genes, which according to the book, exist to propagate, by hook or by crook.

For years I have tend to look at the world with dualism lens i.e. good vs evil or black vs white. While I also acknowledge everthing is not binary and no one is pure good or evil. This is a very important concept in investing. A stock is never good or bad, it is about whether it is cheap enough. This book however really opened up my thinking. It argued that there isn't really good and evil. We are all just programs, like computer programs. Our code is written in our genes. Genes want to propagate and deploy strategies to do so. Some are "evil" while others are good or altruistic. The evil strategies tend to do better but when evil overwhelms the system, good comes back.

One of the most interesting examples came from an analogy with hawks and doves to represent aggressive or docile behaviour in a population. I like to think of them as people who would do anything to get what they want (hawk) and people who would to do the right things (dove). We can put different dualism here and but the lesson drawn is important. First though, we must explain how this works. So the analogy goes as follows, if a hawk fights a dove, the hawk always wins, but the doves run away with minor injuries. If a hawk fights a hawk, one would get seriously injured or even die. Finally, when a dove fights a dove, no one gets hurt. 

So in a population full of doves, a single hawk will win all the fights and hence his genes propagate until he keeps finding hawks which he has to fight. Either one of them would be seriously injured or die and thus doves would come back again. This is analogous to a single aggressive corporate climber out to get everyone, but if the whole firm are filled these people, eventually the firm collapses or it gets taken over and the real doers come back to save the day. Hence good firms that we see today likely have a good pool of doers (doves) vs aggressive people (hawks).

Here's where things get interesting. According to game theory, there would be a steady ratio of hawks and doves after many evolutions. This would be 7/12 hawks vs 5/12 doves. Now if you think about it, this tend to reflect our corporate world (or perhaps the real world as well) where aggressive people who do anything to get what they want would be somewhat more than people who are righteous. So most firms are like that and they accomplish little. But great firms would probably have more doves and they go on to achieve great things, create great products, change the world.

The other important lesson for me is also about learning to run away to fight another day. Aggressive players always fight to win until they kill off each other. So the way to beat them is to have better strategies which will be discussed. Again here, while there are good and altruistic strategies, in the world of genes, some strategies are usually quite evil and they would tend to also be more than 50% of the strategies.

Cuckoo Strategy

One of thediscussed strategy was the cuckoo bird strategy. Cuckoo birds do not build their own nests and tend to deposit their eggs in other bird's nests. They can do this because evolution had allowed them to lay eggs that are so similar to other birds' ones that the foster parents cannot tell the difference. Also when they hatch, cuckoo birds can scream louder and also has redder beaks (see pic above) such that foster parents would always feed them until they grow to become adults and go mate with other cuckoos to continue this cycle.

This despicable strategy works until it doesn't when the world run out of foster parents for young cuckoos. It is also hard to beat this strategy because to the foster parents the damage done is not big enough for them to counterattack. Foster parents might lose 1 or 2 eggs because the cuckoo mummy tend to kick out one egg to make space for her own parasite egg. The chicks also lose some food to the cuckoo chicks but that's the maximum damage. Meanwhile, before the cuckoo evolve to build their own nests, this is their only strategy to breed, so that's why they go all out to win.

Even so, nature always find a way as recent studies have shown that some birds began laying eggs that have tell-tale signature that makes them different from the cuckoo eggs. When the mothers figured out which are the cuckoo eggs, she throws them out of the nest. Other birds like the fairy-wren had taught their chicks pre-natally to chirp differently to tell their mothers they are the real deal. This is the evolutionary arms race!

As to the implications to investing, I guess it might pay to know the culture of some companies we are interested to invest in. Do they have a lot more hawks determined to kill everyone? Are their strategies sustainable? These are not easy questions and the answers won't be in annual reports. That's what make investing interesting. It's forever asking questions and trying to understand better!

Stay tuned for Part 2!



Tuesday, July 03, 2018

Chart #13: Race to a trillion

The FT published a series by the same name. The following chart really shows it best. One of them would be the first trillion dollar company in the history of mankind. The candidates are:

1. A Window (Microsoft)
2. A River (Amazon)
3. The Alphabet (Google)
4. A Fruit (Apple)


My bet is on the fruit! At 935 billion dollars just a few weeks back, it's really just a stone's throw away!



Thursday, June 28, 2018

Germany Tak Boleh!

"Tak Boleh" = "Cannot" in Malay

Last night, Germany, the champion in the last world cup was eliminated by South Korea, the worst player in its group. It is now advised that Mongoloids should not visit Germany in the next one month lest we get beaten up by soccer hooligans in Europe's strongest economy. If you really have to go, wear a T-shirt proclaiming you are not Korean. Maybe this is all planned. Both Italy and Spain were also eliminated in group stages after they won the World Cup previously (see below). So, Germany is just keeping the tradition!

Winners, move on!

I believe the lesson here is that we do perform our best when there is nothing to lose. This is especially true in the World Cup. South Korea was confirmed out of the race. It really didn't matter whether they win or lose as they would not be able to advance to the next round. So, with no stress and completely relaxed, next thing we know, they beat the crap out of the previous champion.

We all remember Roberto Baggio's spectacular penalty miss in the 1994 World Cup Final which caused the country to fall into a recession that lasted till today. Just kidding. But it was bad. He was the star and the captain of the team and the ball went way off course. Brazil won the World Cup. We also remember how England exited Europe twice in a week. Then there was Messi earlier this month, missing his penalty in his first game. It takes a lot to perform under pressure and humans are very poor at it. So, when making important decisions, especially investment decisions, please relax. Think of blue skies and beaches.

Ah.. blue skies and beaches

World Cup also brings in another related topic with regard to investing - betting. Remember Andy whose father bet Germany would win the last World Cup with all his savings? He was lucky four years ago, hopefully he didn't make the same bet this time. Actually, he shouldn't. The winnings should last until Andy goes to university. But how should we bet then? Most people probably bet on their favourite teams, Brazil, Argentina, Spain. Some more sophisticated ones try to use data to analyze and then figure out the odds and bet. Like analyzing all the past matches of Germany and South Korea, maybe bet big that Germany would win, then hedge with a smaller bet that Korea might win. Lo and behold, the hedge saved the day.

Speaking of figuring odds, there's this Singaporean guy who became a legend in soccer betting. His name is Dan Tan. Most of us probably never heard of him. I read about him in the New York Times a few years ago. His story was simply amazing. He tried to improve his odds (or rather his edge) by fixing matches. He would pay a few hundred thousand dollars to the referee, linesmen, goalkeeper to do things. Then he bet millions for the outcome he wants. When his story was leaked, that was when the whole world knew that maybe 70% of all soccer matches had some kind of fixes, including World Cup matches and this Singaporean guy fixed the bulk of them! There was once he paid the stadium to shut down the power so that the match would not have more than three goals! This guy is truly legendary.

Of course, he is now in jail. He became the most wanted man in Italy after fixing some matches and the Interpol and the Singapore police worked together to lock him up. Well, technically speaking, they didn't have enough evidence to trial him, so they just locked him up indefinitely. But I guess match fixing will continue until the day A.I. becomes the referee and linesmen and all soccer players are paid so much that it's impossible to pay them to fix matches. This could be partly why EPL is the most watched soccer league, their players are paid too much, nobody can fix the matches and hence it's real and fun to watch.

Ok back to investing, so what's the relevance?

Well. in the world of investing, the idea to improve investors' edge (legally that is) is being implemented by activists. Activist shareholders and funds are pushing companies to do things that would be good for share prices by writing open letters or joining the board of directors of companies to shake things up. Some of them have been super successful. Elliott Management's Paul Singer comes to mind. His fund performance significant beat both his peers and the market since 2007 as most of his activism caused share price to rally hard. Although one might argue that some did not sustain because once they made their money, these guys leave and sometimes, there is another mess to clean up. Check out Arconic!

Activists winning the day

As small shareholders, we really don't have the ability nor clout to do such things. There is no way we can influence the share price to move up unless we personally know the CEO and can tell him how to run his business. This is why it is always advisable to go for blue chips, or to be more specific, large cap companies (better to be in the billions, the higher the better) and firms with strong business moats. This would be your branded products businesses and market leaders. I also tend to like firms with no debt. That way, it's harder for them to go bankrupt. The balance sheet is sometimes the last line of defence, like the goalkeeper. We definitely don't want that line to be breached!

Ole! Ole! Ole! Huat Ah!

Thursday, June 21, 2018

Chart #12: Why Property Keeps Booming


Here's another chart that explains why property keeps rising, globally. Since the Global Financial Crisis of 2009, the central banks flooded the world with liquidity to prevent a Great Depression type catastrophe. But this created heaps of cheap money in the system, which had to find its way into assets.

Hence private equity, bitcoins, art, wine and needless to say, property. $7.4trn into real estate in no joke. This is larger than Japan's economy and almost as large as China's economy. It is a wonder now why Singapore property doesn't correct enough for you to buy?



URA property price index charts

The charts above are published by URA and the last few data points showed how the cycle has turned. At the peak of c.150 (top chart), prices fell less than 20% to c.135 for five long years before turning up again. Did it actually correct? Some might ask. Yes it did, but not in nominal terms. Asset inflation caused by monetary easing and global money flooding into global properties did not allow prices to collapse more than 20% in nominal terms.

See also: 
Negative Interest Rates and Property
Sky Habitat Crashing

Friday, June 15, 2018

Buy Pyongyang Property!

12th of June 2018 in Singapore would go down in history as an important day. It marked the first step for North Korea to modernize. Well, if that really happens say a decade from now. Let's hope it happens, lest our $20 million would have gone to waste and this photograph of them sunbathing in our Infinity Pool would be a joke.

Epic moment at our Infinity Pool

Well, to be honest, it was a joke. It didn't happen. Some internet smart aleck photoshop-ed this and circulated it around the internet and Whatsapp. It was a good one, for what it's worth. Now, with forty eight hours passed, it seemed more like it might just not go the way the world wanted. North Korea media just told their citizens that their Supreme Leader got the better end of the stick. They could de-nuclearize step-by-step, with each step extracting more concessions from the United States. So this de-nuclearization for dinners could go on for a long time with North Korea enjoying sumptuous dinners for decades. 

No more tree barks for dinner! 

In the end, it could well be more of the same trick used by Kim Jong Il. We have seen this before. North Korea played hardball, then soften to extract concessions, get red wine and beef into the country, maybe some watches and diamonds as well, only to renegade on their de-nuclearization promises and then continue to fire ballistic missiles again. Meanwhile their population continues to suffer in poverty, with not enough to eat but as they were all brainwashed by propaganda, they continue to believe that their country is the greatest nation on earth.

I am afraid, that's the likely scenario. The document the two leaders signed in Sentosa had really little meat in it. This is very much like the original bak kut teh served to coolies working along the Singapore River a century ago (not the ones we get today full of spare ribs and a pound of fatty meat). Here's the four points from the Financial Times (FT):

1. The United States and the DPRK commit to establish new US-DPRK relations in accordance with the desire of the peoples of the two countries for peace and prosperity. 

2. The United States and the DPRK will join their efforts to build a lasting and stable peace regime on the Korean Peninsula. 

3. Reaffirming the April 27, 2018 Panmunjom Declaration, the DPRK commits to work towards the complete denuclearisation of the Korean Peninsula. 

4. The United States and the DPRK commit to recovering POW/MIA remains including the immediate repatriation of those already identified.

And here's their signatures affirming the four points:

Signed, confirmed plus chopped!

That's $20m worth of ink.
So much trouble for so little.
Poor Singaporeans...
Poor North Koreans...
Is that really it?

Now, for a moment, let's think out of the box. Kim Jong Un knows his country is shit. His people are suffering. He doesn't even have the money to fly to Singapore. He borrowed a plane from China to come all the way here to play a practical joke for the whole world to see. Then he goes back to his old ways, so that he can enjoy Californian wine and US beef which he couldn't get because of the trade embargo that was imposed since he fired those ballistic missiles. He would then be remembered by history to squander the one chance to lift 25 million of his countrymen and women and children out of poverty, as a great idiot, like his father.

What if he was better than that? What if he took this step to secure a new future for his country? Could he had killed his uncle and his half brother to secure enough power in order to take this step? Or maybe the rumour that one of the nuclear tests failed and destroyed decades of work was true. So he had to take this step. He had to take the risk to fly a Chinese plane to foreign soil to do the inevitable deal. Whatever the case, he knows the bright future that lies ahead if he opens up the country. 

He might lose power but gain so much more in return. He would be immortalized as the leader who enriched the whole nation. Just like China, the Asian Tigers, Myanmar and most recently Vietnam before her, if North Korea opens up her economy and modernizes, she would see exponential GDP growth. This would be like those Korean Youtube sensations transforming themselves with makeup (see pic below). If we take another bold step forward bringing South Korea into the picture, we are talking about a unified Korea. This would be a strong nation with 85 million people, with technology and markets which could become the Asia's third largest economy, behind China and Japan. 

From GDP per capita of of $500 to $25,000

Here's another excerpt from the FT:

At one point in his press conference, Mr Trump provided some insight into his mindset when he asked everyone to “think of it from a real estate perspective”. He advised Mr Kim to imagine the potential of his “beautiful beaches” if he were to stop using them for artillery exercises and built condos on them instead.

If and that is really a big if with caveat lodged, North Korea just made the first baby step to become a free market, when the time comes (usually it would take decades for them to liberalize the domestic real estate sector though, Vietnam just allowed foreigners to buy two years ago), then we must really act!

Buy Pyongyang property! Huat Ah!

Here's wishing Happy Hari Raya to all Muslims!

Tuesday, June 12, 2018

2018 Dividend List - Part 4

The last portion of this year's dividend list sees a hopscotch of companies from various segments of the economy. First up we have Berkeley Group, a property name from the UK. Next, European engineering related firms such as Smiths Group Inc and the French/Italian construction company Vinci. Across the Atlantic, US industrials: Emerson Electric, Cummins and healthcare firms: Gilead Science, Amgen, Johnson and Johnson were featured. There is also a paper packaging company: Mondi, a toy company: Hasbro and even a luxury brand: Coach, which is now renamed Tapestry.

Dividend List Part 4 of 4

Given that the lists were ranked by their dividend yield, we are also seeing valuations getting more expensive in this last portion. Most firms here are trading at mid to high teens PE while a few firms are at 20-22x PE. Emerson Electric, a world class automation play, trades at a rich 22.7x PE given that robots and automation taking over millions of jobs continue to dominate investors' and also the general public's minds.

Alongside the onslaught of automation, tech, internet, we would think that Cisco could be a beneficiary but unfortunately the stock has languished for many years and appeared on this screen multiple times in the past few years. Routers and switches, which were the core bread and butter of Cisco became commoditized and the firm needed to fight competition while reinventing itself. It managed to do a bit of that and the stock had recently started to perform rallying from the twenties to $44 today. 

Cisco is now part of a mega important theme: cybersecurity. 

The cybersecurity threat is real from hacking the government databases to phishing millions of accounts off Sony and Target to ransomware to simple fraud like Facebook friends asking you to buy Apple stored value card at 7-11. Cisco is riding on this tailwind albeit security and related services could be just 5-10% of its total revenue. The better way to play cybersecurity might be to buy the ETF HACK. The official name is ETFMG Prime Cyber Security, but the ticker symbol HACK is just so much easier to remember. 

HACK ETF

The listing history is not too long as the ETF only came about in 2014 but it did show early signs of being a compounder. The list of stocks also look like compounders as they mostly deal with software services and hence capable of generating strong free cashflow (FCF) with the exception of one or two names. The top names are: CommVault (archiving database and emails), Trend Micro (antivirus), Palo Alto Network (network security leader), FireEye (cybersecurity expert) and needless to say Cisco itself. This is really an interesting ETF and I would be a buyer if it falls below $37.

The last stock worth discussing is Coach or rather Tapestry as it is now called. I bought into Coach in late 2014 when the share price languished under heavy selling as investors questioned its relevance in the new era of millennials, internet and Michael Kors and Tory Burch. "Coach was the brand that my mother relates to, not me." says the 20 year old millennial female. It didn't help that Coach would be selling its inventory on discount in outlets all over US and other parts of the world. Meanwhile the internet was filled with fake goods, or maybe real ones that were bought off US outlets and then sold in Singapore, Hong Kong and mainland China.

Its new CEO then, Victor Luis launched an overhaul campaign to restructure Coach. He brought in a new chief designer to bring in fresh ideas to supplement the monogram. He stopped the discounting at the outlets and he revamped stores globally to give them a better look and feel for the millennials. Finally, he bought Kate Spade, the millennial brand and change the company's name to Tapestry. Investors were elated and bidded the stock towards $60. I decided to sell so as to fund other US stock purchases. I still liked the story but the valuations no longer look appealing and it's really tough to say if Coach can become the LVMH of US. 

Kate Spade, adored by Singapore's 
Member of Parliament

Lo and behold, the stock crashed 15% a few days after my sale. It was especially lucky because I decided to sell the entire position rather than a half sale as I normally do. This was because the position was not too big and it would make sense not to leave a residual that needed to be dealt with in the future. So, that's really pure luck, not foresight. There is no foresight in investing because the future is simply not predictable. Perhaps the lesson learnt is that buy-and-hold only works for certain stocks, definitely not fashion or tech. With that, we end this year's dividend lists. Hope this helps!

Wednesday, June 06, 2018

Tangible Thoughts #5: Howard Marks

"The key word is calibrate." - Howard Marks

Investing is not black and white, in or out, risky or safe. The key word is calibrate. The amount that you have invested. Your allocation of capital among the various possibilities. The riskiness of the things you own. All these should be calibrated along a continuum that runs from aggressive to defensive.

Howard Marks

Coming from guru Howard Marks, the words and meanings just come alive much better. Investing is never binary. There are always lingering questions and there is always another answer, a better answer. Futures and outcomes are always a set of probabilities, how do we pick stocks with the lower probability of loss, how do we size our bets, how do we time our exits, these are the important details. 

Some quick rule of thumbs I have established over the years:

1. Size your initial bet small, so that you can scale up over time. This works for me because usually I am too early.

2. Don't bet more than 10% on any single bet unless you are really super sure.

3. If you are wrong, it is much better to find another opportunity with similar or more upside and switch to the new name.

4. If an investment worked out, like it is up 100-200%, then good to trim some and deploy the capital to other names.

5. Diversify across at least 20 names in different sectors if your capital allows.

Hope this helps! 

PS: 6th of June is also known as D-Day, the longest day in history. 73 years ago, on Tuesday, 6.6.1944, allied forces reached Normandy beaches of France and launched Operation Overload against the Nazis. Their victory marked the turn of the tide which led to the end of the WWII. Thousands died on that day. Tribute to all who had given their lives to preserve peace in our world.