Wednesday, October 07, 2009

Companies that shouldn't exist

The market is efficient and smart, but only to the point of the average smartness of all its investors. Hence it allows companies that spectacularly generate low or even negative return on capital to exist for very long periods of time.

The No.1 ranking company that achieve this tremendous feat would probably be Chartered Semiconductors, our beloved high tech foundry.

Over the past decade, the company had lost over a billion dollars culmulatively, burnt two billon SGD of cash and generated a spectacular ROE of negative 6%. It has never paid a cash dividend in its entire existence and have asked for money countless times.

Considering that cost of capital is around 6% (see previous post), Chartered failed to even come close. In fact, Chartered helped investors LOSE 6% every year. Yet the market cap of Chartered had been around S$2bn for the good part of the past 10 yrs. (its peak was a whopping S$7bn during the IT bubble and trough a miserable S$300mn during the Lehman shock.) Why would such companies exist in a rational, efficient world?

Well the stock market is just one aspect of the economy I guess. Chartered provides tens of thousands of jobs considering all the peripheral companies that it supports, we cannot just let it go down right? So we did the next best thing, we sold it! And thank goodness, Chartered will be delisted.

Why has a company like Chartered lingered around for so long? Well market participants always had hope and greed and of course Chartered did serve some purpose for punters. Back in the IT bubble, it was so clear that Chartered would be a STAR. It made chips for goodness sake. And chips are what make IT possible. so that was the eternal hope. Even when the company started burning REAL cash for Hungry Ghost festival every year, investors held hope. It's biggest shareholder, Temasek, never gave up. Well until now, that is.

Here lies the new insight I have about efficient markets. Markets are efficient in the short run, ie 1-2 yrs where almost all market participants share similar thought horizon and are able to price stocks very efficiently within this time frame. And markets are efficient in the very long run, ie more than 10 yrs - companies that ultimately shouldn't exist would go, like GM, like some airlines, and perhaps Chartered. And of course, Great companies will rise through the ranks and become behemoths and rule the world, like Walmart, Toyota and Nestle etc.


  1. One reason why Temasek back Chartered is to hope Singapore will be able to one day compete with the likes of Taiwanese companies. Obviously, Singapore failed in this area terribly and Temasek eventually gave up after a decade.


  2. I suppose market pricing mis-match occurs everyday. That is why for every transaction, there is a seller who believe that the price is too high, and a buyer who believe the price is too low.

    How about viewing market efficiency as such - A efficient market is one where the market returns is difficult to beat even with much effort trying to do so. Eg. Suppose STI generates a return of 35% over the past year, and an active investor tries to beat it. STI will be deemed an efficient market if the investor finds it hard to generate a higher than 35% returns.

  3. Chartered has had a lot of issues. Like poor company culture, focusing on sales and not profits etc. Inability to attract and retain talent. It's really quite jialat if you talkt to those who are in the industry and in the know.

  4. Hi Retail,

    Glad that you pointed out the irony of the efficient market. Markets can only be efficient if there are people who are around to exploit the inefficiency.

    I guess the argument is that one market participant may be lucky to find 1 or 2 inefficiency, but is not able to repeat that over long periods of time, like eg. 10 yrs.