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.


Monday, May 28, 2018

2018 Dividend List - Part 3

The third part of this year's list consist of consumer names that we know really well. P&G, Harley Davidson, Unilever, Kellogg, Pepsico, Campbell Soup and our very own Thai Beverage. These are truly global household names and we should really have some in our portfolios. It is very rare for them to be featured here, all in the same year. Again, this is a reflection of the market's one sided view that internet, gaming and FAANGs will conquer the world and become Masters of the Universe!

Dividend List Part 3 of 4

On the flipside, non-tech stocks are now deemed next to worthless and hence we see all these great names all being screened out - a rare phenomenon. Some of these names might have issues, for example, Kellogg and P&G had been mismanaged for years and hence seeing very slow growth. But they are still compounders, both stocks had compounded at low single digits for a few years and if and when they find the impetus to improve, usually with a maverick CEO at the helm again and pushing for change, the stock would again become high single digit compounders.

In our own beloved Singapore market, we have Thai Beverage. This is one powerhouse that has compounded seriously. In 2010, Thai Beverage had a S$5bn revenue and S$450m in net profit. Its market cap was S$7bn and it was ranked somewhere in the teens or even in the twenties in terms of market cap. In 2018, it is forecasted to generate S$9bn in revenue and S$1.2bn in net profit, a 3x increase since 2010. Its market cap hit S$24bn at its peak and it became the largest foreign stock listed on the SGX. With restructuring of its group including F&N and its businesses in IndoChina, there could be further upside, The stock trades at c.5% FCF yield today with FCF at S$1bn and market cap at $21bn.

The stock worth highlighting today though is Campbell Soup. The slide below taken from Campbell's investor presentation deck tells the story well. Campbell today is not just a soup company. While that business segment (American Simple Meals and Beverages) contributes the bulk of operating earnings and has the highest margins, the actual Campbell soup business is pretty small. The segment itself includes sauces and dips with brands like Prego and Pace. It also has organic drinks, energy beverages and other brands acquired over the years. With its portfolio of brands, Campbell dominates the American simple meal and soup market which explains its 26% operating margin.

Campbell Soup Businesses

The two other segments are the future growth engines. Campbell has done extensive survey and research showing that the US consumer (and likely global consumers) are going for more organic and more fresh meals but at the same time, they are also snacking more, albeit with "healthier" snacks like better-for-you biscuits and potato chips. Hence the two segments: Global Biscuit and Snacks as well as Campbell Fresh are seeing strong growth that would provide the compounding effect for Campbell. The market thinks that this would take a lot of time, given that these segments are smaller and also lower margins. But that is exactly where a value investor comes in, when others are fearful!

As this post was in the writing, the stock crashed more than 10% as its CEO Denise Morrison resigned, taking responsibility for failed M&As that she conducted in the past few years, including paying almost $5bn for Synder's Lance. She was also criticized for pursuing contradictory strategies of growing fresh and healthy food while buying more snacks companies. Well, we all love to eat healthy but we just can't give up on potato chips and doritos right? So, Denise was right. But I guess she got played out by politics or was just plain unlucky. Meanwhile, the new CEO Keith McLoughlin and new COO Luca Mignini announced a new restructuring to overhaul the company, focusing on new growth segments (which likely include snacks too!). To this end, the company will form an "accelerator unit" to target selling healthy food (and snacks) via e-commerce.

Restructure, overhaul and upgrade are some of the best investment stories around. The next few months would provide important data points to see if Campbell's plan is really working. The downside is that it fails, but because the stock is so cheap, it would likely just stay flat, although it could be a value trap for a few years. But if the restructuring works, this stock would be up 50-100%! Huat Ah!

This author does not own Campbell yet!

Thursday, May 17, 2018

Chart #11: Ikigai

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

Ikigai

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

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

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

Thursday, May 10, 2018

Malaysia Boleh!

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

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

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

The last decade was truly dark for our beloved neighbour.

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

Malaysia in a Marvel Plot?

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

Malaysia Boleh! 

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

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

A True Malaysian

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

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

Malaysia Boleh!

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

Sunday, May 06, 2018

May the Force be with Omaha!

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

Star Wars Run Singapore!

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

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

Keep calm!

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

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

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

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

May the Force be with you always!

Monday, April 30, 2018

2018 Dividend List - Part 2

This is a continuation of the first 2018 dividend post.

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

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

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

Dividend List Part 2 of 4

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

Seagate's share price

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

For full disclosure: this author owned SGX since 2005

2009 Dividend List

Happy Labour Day!

Sunday, April 22, 2018

Tangible Thoughts #4: Pitiful Pump Uncles

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

Fill Ten or Full Tank?

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

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

Singapore pump prices over the last 10 years or so.

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

Crude prices over the last 10 years

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

Monday, April 16, 2018

2018 Dividend List - Part 1

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

Dividend List Part 1 of 4

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

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

Silverlake Axis at 5 year Low

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

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

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

Next generation tobacco, IQOS by Philip Morris

Here's the past lists:

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


Tuesday, April 10, 2018

Of Frauds and Facebook

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

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

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

Sex scams in Singapore

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

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

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

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

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

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

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

- improvised Bloomberg quote

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

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

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

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

Facebook's share price

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