Sunday, November 11, 2018

The Essence of Value Investing

Here is a good analogy on investing and the concept of margin of safety from Buffett some time back.

If you see that a man is very fat, it makes little difference that you are able to precisely calculate his exact weight to enhance your conclusion. Is he 102kg or 110kg? Does it matter? Similarly in trying to determine the intrinsic value of the company, it doesn't matter if you get it at $102 or $110. What is more important is where is the price now? If it is $98, it means that you are aiming for 4-12% upside. That's not a lot of buffer against any calculation error. It means that the stock is not cheap enough. 

Margin of Safety


If the stock is at $70, then we are talking. The margin of safety now opens up to 30%. It takes a few more mistakes for us to be wrong vs if we bought it at $98. The chart above is quite enlightening in telling the whole margin of safety story. The blue line represents the intrinsic value of a company. Over time it creeps up as most companies create value for the society and earn profits that help it to grow stronger.

But the share price rarely track its intrinsic value. It moves above or below it with the vagaries of the markets. We buy it when there is a margin of safety. Usually, this doesn't come often. Maybe once every 12 to 24 months or longer. There are more times when stocks trade above intrinsic value, esp when their sectors are very hot, like technology in 2017 and early 2018.

This is essentially the essence of value investing. Ben Graham, the father of value investing, was famous for saying, if you have to surmise value investing in three words, it is this: margin of safety.

See also
Business moats
Intrinsic Value
Value Investing

Sunday, November 04, 2018

Thoughts #11: The Capital Cycle

Capital Account by Marathon Asset Management published in 2004 gave a good analysis of how global capital moved and why alpha or value add could be generated if we invest well in the cycle.

The Capital Cycle

The capital cycle move along with investors' interests which create competition at the peaks, driving down returns. Essentially a more academic way of saying, "be fearful when others are greedy". It doesn't do justice to the book by over-summarizing it here. 

Do read the book for some good investing stories!

Monday, October 29, 2018

Minimalism, Decluttering and Portfolio Concentration

According to Wikipedia, Minimalism in art began in the 1960s and the 1970s when a group of artists decided to protray art using the "Less Is More" concept. In New York's Museum of Modern Art, we can see a section dedicated to minimalism. One of the famed artists Robert Ryman painted only with white. He is considered as one of the fathers of minimalist art today.

Robert Ryman's celebrated work

Seriously, I could paint this. My 11-year-old son probably could do better. But I guess it is about articulating the idea, being the first and being able to put in into everyone's mind that less is really more. And so, after a few decades, the minimalism in lifestyle movement took off and moved into our lives. It started with a Japanese lady - Kondo Marie. She is the Queen of Decluttering in the Land of the Rising Sun. 

Kondo's stroke of genius was understanding that most people would not understand why Robert Ryman became a celebrated artist and why minimalism would not work for most people, at first. So she introduced the concept of decluttering. Decluttering is a way to manage our relationships with our stuff. In today's world of ultra-consumerism, we have more stuff than we have space to store them. Sometimes, we don't even have time to use them. We buy tonnes of stuff we don't need and we cluttered up our homes and our minds. 

Decluttering is Kondo's way to simplify. But it is actually also a half step to minimalism.  She put forward a very simply idea: for every item in our possession, we should hold it in our hands and search our feelings thoroughly, we should know whether we actually need it. If we don't, then we say goodbye, trash it and declutter. When we are done if the hundreds or thousands of items in our homes, we should feel refreshed and reborn, ready for a new life.

Kondo Marie

And she's right. So, people started decluttering and some people took it all the way. That was the start of the minimalist lifestyle. Some people managed to reduce their entire possession down to 50-100 items. They use the same soap to wash their clothes, their dishes and themselves. This is serious and minimalism has serious implications. If the majority of people started living this way, then we can see many companies being affected. Consumer names, furniture makers, even Apple. 

But that's perhaps years down the road. Apple should be the most valuable company in the world for the foreseeable future. Even after the stock is down 20%.

The important applicable concept of minimalism to portfolio is actually portfolio concentration. This is a perennial topic that deserved more discussion since I probably last wrote about this 11 years ago in a short post: Diversification or Diworsification. After a decade or so, I guess I found my own answer. In short, the answer is to concentrate to the point where you are comfortable. So this is different for everyone. 

Warren Buffett gave his answer: imagine you only have 20 bullets, how would you invest? That's his answer and since he is the best investor the world has ever seen, maybe the answer is very close to the right answer for most people. The answer could be near having 20 stocks, or 20 investments and make sure you studied them really well and know with very high probability that they would work. 

This right answer also depends on a few things so it's important to know them. For most laypersons, investing is a part-time hobby, so it really takes a lot and a long time to learn which are the right 20 names, so maybe for them, even Buffett's ideal answer might not be for them. If that is so, then it could 20 ideas with a mixture of ETFs and low risk investments like bonds or blue chips rather than 20 individual stock names. Also it's about concentration is these names. Unless you are really, really, really sure, try not putting 50% of your entire net worth into one stock. Warren Buffett did put 30% of his net worth into Berkshire Hathaway in the 1962-1964 after the original owner went back on a promise to pay Buffett the right amount in a tender offer. But Buffett was really, really, really sure. (Of course there is also a twist to this story, which shall be revealed at the end of this post.)

Project 333

In the world of decluttering, another number came up. It's 33 from this movement called Project 333. This project came about for female minimalists. It was a challenge to wear only the same 33 items for 3 months. I looked at this and thought, "Maybe I could do it if I really tried." But I truly admired the ladies who did this and succeeded. I looked at my wife's wardrobe... She probably needs Project 999: wearing 99 items for 9 days? Still, I love her the way she is. We all do right?

Okay, so for portfolios, the right answer is probably 20-30 different ideas, stocks, names. In portfolio management, we also know that diversification is achieved with more than 30 names. This is where unsystematic risks (i.e. risks due to individual names blowing up) are fully reduced and what's left would be systemic risks which no one can avoid (i.e. like global markets falling together) as long as you want to earn market returns (and not fixed deposit returns).

As mentioned, there are some investors who believe this could be 10-15 and not 20-30 and they have actually achieved that. Some are activists, which is understandable since you cannot be active and join the boards of 30 companies trying to push them all to transform. On the other hand, there are investors who hold hundreds if not thousands of names. Peter Lynch and Ben Graham, the father of value investing, are famous for holding very diversified portfolios. I believe that on this spectrum, these gurus would still have the 10, 15, 20 or 30 names that they believe will deliver the bulk of the returns. But they keep the tail to find the 10 baggers or to hold on for other reasons (sentimental ones maybe? Like why I still hold dogs like Singtel and Keppel).

Personally, I belong to the latter. I have 60 odd names and I am actively trying to push up the best 20 names I think should deliver the bulk of the returns in my portfolio. The top names today are companies that have strong business moats and high returns according to my models because they are so beaten down. The largest positions rarely hit 10% of my portfolio and that has worked for me. It is different for everyone, just as the extent of decluttering and minimalism is different for everyone.

So to end this post, let's just spell out some answers again: have as many names as you think is correct for you but also concentrate on the top 10, 15, 20 that will make the most impact. But be careful not have 1 or 2 names becoming so large (like 50%) that it overwhelms everything else. Although Buffett did bet the house on Berkshire, he made rather interesting confession some 45 years later. Here's the explanation from Wikipedia:

In 2010, Buffett claimed that purchasing Berkshire Hathaway was the biggest investment mistake he had ever made, and claimed that it had denied him compounded investment returns of about $200 billion over the subsequent 45 years. Buffett claimed that had he invested that money directly in insurance businesses instead of buying out Berkshire Hathaway (due to what he perceived as a slight by an individual), those investments would have paid off several hundredfold.

Hope this helps! Huat ah!

Sunday, October 21, 2018

Why Do Companies IPO?

This post came from a request from Gerard who recently joined our chatgroup. I thought it was quite an interesting question and a Google search didn't really address the core of it so I thought I could a better job! Hehe! Btw, if you are interesting to join the chatgroup, do whatsapp to +65 8119 6429! Please take a moment to read about the rules also thanks!

For the un-initiated, IPO stands for initial public offering which is the first time a company sells its share to the public so that anyone who has a brokerage account and money can buy the company. In an IPO, the existing owners of the company either sell their shares or they raise new shares diluting their current ownership or both so that there are enough stocks in the market that could be traded. It is usually an important milestone for a company to IPO. It is like a musician cutting an album with a big music label or like an athlete going pro. Something like that.

Facebook's CEO ringing the bell on its 1st trading day

Okay, so why do companies IPO? I believe here are the main reasons, do note that they are by no means exhaustive.

1. To raise money for further expansion.
2. To create public awareness.
3. To ensure better corporate governance.
4. As a directive from higher authorities.
5. To reward early shareholders (usually also employees) by providing an outlet for them to sell.

True value investors usually do not participate in IPOs i.e. they don't subscribe to buying the shares bcos it represents quite a complete opposite of the value philosophy and is another example of the Greater Fool Game. Here's three reasons explaining the details:

1. IPOs create a lot of hype without fundamentals, value investing requires years of data and good analysis to figure out the intrinsic value of the company. There is simply not enough information in the IPO for that kind of analysis.

2. There is information discrepancy during the IPO. The sellers know much more than the buyers and some sellers take advantage to sell lemons to gullible buyers. In value investing parlance, the buyers have no moat vis-a-vis the sellers.

3. In an IPO, buyers are pitched against one another and the brokers and sellers work together to create a bidding situation to their advantage. Prices then move up to the detriment of buyers not unlike auctions where only the highest bidders win. Value investors do not like this.

Having said that, it is statistically possible to make money from IPO in the first few weeks because most sellers want the IPOs to be successful and would price it slightly cheaply. In most cases, there is enough hype and euphoria to make things look good, at least for few weeks. Institutional investors, high net worth individuals and retail investors clamour to get allocation, creating demand to buy and flip these shares. The chart below shows the IPO returns for US in 2017 (likely to be over 3-9 months although it's not stated clearly). 

From the chart, we can tell that average return is positive with the range being -38% to 40% across all sectors. It also shows the signs of the times with consumer staples, one of the best compounders over time, actually underperforming the rest of the sectors. The rage today is all about internet and automation and robots, hence we see them high up there on the chart. However do note that the data could be skewed by just one or two data points. A stellar IPO going up 400% would completely boost a single sector. 

Alas in sunny Singapore, it might not be easy to make money via IPOs. This is because a lot of IPOs are for owners to cash out and hence the stocks falter after IPO, sometimes never returning to IPO price. The classic example being Hutchinson Port Trust, sold by Lee Ka Shing in 2012. The share price since IPO is shown below. An investor during IPO would have lost almost everything. The 6% dividend would not have been able to make up for much. 

Never buy anything from Lee Ka Shing

Over time though (usually 3-5 years), the fundamentals of the company would show after the hype and euphoria during IPO wane. Good companies would compound and poor companies like HPHT falter. So if we can identify great companies with great moats, buying them during IPO and just letting them compound is not a bad idea. Look at Google and Visa! These are two companies with identifiable moats during IPO in recent times.

There are companies that choose not to IPO though. Vitol (oil trader), Cargill (commodities trader), Ikea, Mars, Lego, Koch and the auditors (Deloitte, KPMG). These are well-known companies that are still unlisted. Well, traders sometimes do not want that kind of scrutiny that public companies have to endure while auditors would probably never IPO for the simple reason - who's gonna audit them? Still it is said that sometimes, the money's too good, so why share by selling your company to the public. One of Singapore's largest companies, Tee Yih Jia, founded by our own popiah king Sam Goi is also unlisted.

To put on a trader's hat, the probabilities are skewed towards buying and flipping for quick returns during IPO. Using the first chart, I would postulate that 2/3 of the time we can make money by flipping IPOs i.e. subscribing and then selling out when it goes up. We just have to be mindful we are playing the Greater Fool Game and we don't want to be left without a seat when the music stops.

As a true value investor though, it probably means that most IPOs are probably not worth looking at given the reasons stated above. We definitely do not play Greater Fool Games to benefit from others. But if we can really find gems with moats, then it's worth buying and holding to these compounders for good. 

Huat Ah!

Sunday, October 14, 2018

Thoughts #10: Correction or Capitulation?

Global markets fell c.6-10% last week. The US markets finally cratered after months of strength despite markets in Hong Kong, China, Japan, Europe correcting, led by the internet names that had done so well. The question is then whether this is just a correction or is this leading to capitulation?

Well, the markets seem to be saying this is just a correction for now. Stocks started recovering slightly on Friday (12 Oct) after the dramatic fall on Thursday. But we need a few more days this week to be sure. Valuations are always good gauges, with global PEs of global stock markets are at mid to high teens, we are not seeing over-valuation in the broad sense. Of course internet names had been expensive which is why they led the downfall. 

From peak to current share price:

JD.com -51%
Twitter -40%
Tencent -37%
Facebook -35%
Alibaba -29%
Baidu -28%
Netflix -19%
Google -13%
Amazon -12%
Microsoft -4%
Apple -3%

Besides the surge that led to over-valuation in the internet names, the big reason for this sell-off is the rise in bond yields. This had been raised before when US 10 year Treasury hit 3%  earlier in the year. Now that it seemed that 10 year bonds going above 3% had been more or less established, the theory is that earnings yield should also normalize? This means stocks have to fall.

Recall that we discussed how lower risk free rate (at 0-1%) would cause everything to go up, since investors require less and less yield to compensate themselves. That was why property globally went through the roof, why 20-25x PE stocks became normal and why art, wine, watches and other assets began to appreciate in value. Now if this trend of higher yields continue, then everything should reverse. This can be really scary. 


JCNC share price Year-To-Date (YTD)

But for now, this seemed to be a correction and not a capitulation. I am not suggesting we buy anything. These are tough times. Valuations are not cheap, there aren't too many interesting stocks to look at and other asset classes don't quite seem fit the bill as well. I would think that Tencent might be interesting. In local markets, I still prefer the old economy names. Jardine Cycle and Carriage have fallen to such low levels that it's dividend hit 4% and sum of its parts are adding to more than its whole.


However, every party must come to an end, we are into the tenth or eleventh year of markets rallying. This is a very tired bull market. At some point, something gives, we have to hope it is not like another Lehman type crisis. Because the next big crash could really mean the end of the global financial system. So far, there are no signs but we must be vigilant. Meanwhile, the music is playing and so we dance!

Huat ah!




Sunday, October 07, 2018

It's the Blue Ocean, not the Blue Whale Game!

I felt very compelled to write this post as I believe this would save lives. If readers here ever feel there is a need to repost this, tell someone about this, please do so asap. Our lives are very precious and there is never, I repeat, never a good reason to end it prematurely. We are connected to everyone (and all animals and all of nature) the day we are born. Every connection is very important. You are very important. More than you know it.

The blue whale is the largest animal that has ever lived. It is a highly intelligent animal and has been able to bounce back from the brink of extinction despite humans hunting them for food. Blue whales can sing and this fact was featured beautifully in Pixar's Finding Nemo and Finding Dory. Hitherto, it is not known why they sing but I would speculate that they sing because they are happy and they want to communicate their joy, just like we do. Blue whales sing a lot! They sing when they find food and they sing to impress other blue whales. As they are connected to Mother Earth as we are, blue whales' songs are heard by other blue whales and sailors and other sea animals. Blue whales then repeat the same nice tunes, resonating across the oceans.

The blue whale, one of the world's most amazing creatures

Hence it is beyond me that a suicidal game could be named after such an amazing creature. For the un-initiated, there is a dangerous, detrimental game called the Blue Whale Game that is being downloaded all over the world causing teenagers to commit suicide. The game starts innocuously by asking the gamers to do some simple tasks like listening to music or to write an online status, it then gets crazier and crazier until the last task - to commit suicide. The gamers are held ransom as the game hacks into their phones and the curators would threaten to wipe their phones or reveal embarrassing pictures or videos if the gamers do not complete the tasks.

Do not download this game.

Here's a sample list of the crazy tasks:
  • Listen to music the “curator” sends. 
  • Write a status online about being a whale.
  • Watch scary videos all day.
  • Draw a whale on a piece of paper Write “yes” on the person’s own leg if ready to be a whale. Otherwise, they should cut themselves multiple times. 
  • Wake up at 4:20 a.m. and watch a scary video (sent by the curator.) 
  • Make lengthwise cuts on the person’s own arm.  
  • Get up at 4:20 and go to the roof. 
  • Carve a whale on the person’s own hand.  
  • Sit down on a roof with legs dangling over the edge. 

Even if you have downloaded a game, there is always a choice to quit. So what if the phone get wiped. So what if some photos or videos are revealed online? It is not the end of the world. But suicide is, for the person. Nothing can be worse when life ends. Majority of people who tried to commit suicide actually regret at the last moment bcos deep down, they knew there is always another way out. Suicidal people tend to think that the pain ends with death.

However the pain doesn't end because we are all connected. The loved ones continue to bear the pain of the person who committed suicide. Suicide family survivors bear the pain and guilt of losing someone to suicide for the rest of their lives. They will forever ask why? Why didn't they manage to stop the person? Could they have done something better? Could they be more caring? It is a like a broken link in a web. Suicide doesn't solve anything. It amplifies the problem and passes it on. 

Broken web

It is said that 90% of all suicides are actually caused by depression. Depression is a serious sickness not unlike other major illnesses such as dementia, strokes, cancers and heart problems. It requires medication and treatment. However unlike most other illnesses, it is a sickness of the mind. Depressed people cannot snap out of sadness. The negative thoughts in the minds circle around over and over again. The thoughts lead them to conclude that the only choice to make in order to escape the pain is suicide. Hence medication and therapy is needed to overcome this highly dangerous sickness.

There's an analogy here with investing. In investing, it is always a multitude of choices. However most market participants are inclined to think in very limited scenarios. This is very rudimentary and is often proven wrong. For example, when TV first came out, people believed no one would ever listen to radio again. Sorry we still do, every day, in our cars. Today, it's about disruptions. If Amazon is going into groceries, then Walmart is going downhill. If Tesla grows big, all traditional automakers will be bankrupt. Sorry, wrong. The world is never so binary. Walmart is going strong and Costco is at all time high despite Amazon's onslaught and BMW is going from strength to strength. Look at its long term chart!

Tesla or not, BMW just powers on!

The investing world is always about creativity. This is because businesses are run by smart people who adapt and change, just like our ancestors for millions of years. Hence people who think in binary terms or have tunnel vision approach will always be constrained and their investing returns mediocre, very very mediocre. Ever heard stock critics talk about how this industry is gone because of that, how margins must be so and so, using deterministic language as if they know the future? That's tunnel vision and tunnel investing. We have to break away from that. 

The Blue Whale Game is the complete opposite of creativity and coolness. It locks people in, limiting choices, using threats and peer pressure to achieve its tunnel vision mindfuck. I have to emphasize again, do not download or play this game. It is even worse for people suffering from depression. Depressed patients need help to break away from the tunnel vision that lead them to only one outcome - suicide. This game exacerbates that. It does not help.

Depression requires doctor intervention. Often times, depressed people do not know why they are depressed. It's could be trigger by anything. They then get worried, unable to sleep, cry for no reason then seek to escape reality. They also have this perpetual feeling that they are worthless or helpless even though it's not true. Everyone has value. Even a business that has already bankrupted will always be able to buyers. Depression is a serious illness. Do seek professional help if you think you are suffering from depression.

Are you depressed? Seek professional help.

The world actually needs the other type of game, a Blue Ocean Game - a positive achieving game where anything becomes possible and we become the best that we can be, helping others and saving the world. We start with simple positive tasks but grow to complete a list of wonderful projects and then make the best deal ever - never ever commit suicide. Here's a list of tasks:

  • Look in the mirror, smile and say, "I love you."
  • Hug your mum, dad, partner, spouse, sister, brother, dog, cat, kids, any other loved ones and tell them you love them.
  • Wake up at 6 am, have a good breakfast and then go out watch your city/town/neighbourhood waking up.  
  • Say sorry for wrong things you have done someone by texting him or her. If you are up to it, ask them out and say sorry in person.
  • Forgive someone who had done wrong to you in the past, text him/her and tell him/her that if necessary.
  • Try to talk with at least 5 different unknown people about something for at least 5 minutes each.
  • Meditate for 10 minutes.
  • Eat no meat for a day.
  • Exercise daily for 10 days.
  • Say,"I can see, hear, feel better and I know that I am full of love and I will make this world a better place." x 1000.
  • Make this pact with someone or with yourself - you will never take your own life and you will help make this world a better place for all sentient beings.

By completing these tasks and making meaningful pacts, we can then understand that possibilities are as limitless as the Blue Ocean and the world is our oyster. We are only limited by our own barriers and the tunnel visions that we had imposed on ourselves. We have to regularly connect with positive-minded friends and with Mother Nature to move out of tunnels and into the light. That's when we free our minds and execute the blue ocean strategies to live our lives to the fullest extent possible.



Sunday, September 30, 2018

Chart #15: Singapore's Richest

Found this a few weeks back. Putting the source of wealth here for easy reference. 1) Far East (Property) 2) Facebook 3) Nippon Paint 4) CDL (Property) 5) Stanchart and Goodwood Park 6) UOB 7) Pontiac Land (Property) 8) Chandler Group (Investing) 9) Royal Group (Property) 10) Hotel 81


Sunday, September 23, 2018

Monster Monsanto & Other Risks!

This is a continuation of the previous post on Bayer / Monsanto.

In the last post, we postulated that Bayer is a buying opportunity because it is the world's largest player in crops and seeds which is growing at mid single digit and its stable cash cow businesses in pharmaceutical and consumer drugs would provide huge free cash flow to investors. At its low, Bayer traded at EUR 68 billion market cap while generating FCF of EUR 7-8bn. Salivating right?

Bayer / Monsanto's Biggest Risk

As promised, today we discuss Bayer's risks. Bayer didn't crash and burn for no reason. It lost EUR 20bn in market cap when Monsanto's cancer causing weedkiller news broke but it had also lost another EUR 20bn before that as the market caught whiff of the bad news. To summarize here, Bayer has three key risks:

1. Monsanto could face litigations amounting to USD 5bn in costs and lose more revenue in the years ahead for one of its biggest seller - Roundup.

2. Bayer's drugs going off patent would mean that the pharma business could lose EUR 10 billion in annual sales if it doesn't come up with new replacement drugs.

3. Bayer and Monsanto's matrimony is deemed a marriage made in hell. Environmentalists, farmers and some regulators hated the deal and it would face scrutiny on many fronts.

The biggest risk on most investors' mind is Monsanto's cancer causing weedkiller called Roundup. While most of us in sunny Singapore would never have heard of Roundup, this is the revolutionary weedkiller created some 40 years ago that farmers use to increase crop yield by selectively and successfully killing weeds. However, it was recently deemed as carcinogenic because some farmers died after years of handling and using Roundup on their crops. While this is sad and there might be some truth, it is also too late to turn back the clock. The world has been using Roundup for 40 years! Without Roundup, we would never produce enough food to feed 7 billion mouths. The solution is not suing Monsanto but to create better weedkillers, which is ironically also up to Monsanto.

Financially, the negatively impact has also been factored into the share price. Bayer's market cap collapse c.$20bn since the news broke. Analysts had estimated that the maximum litigation cost is c.$4bn which means that lost revenue should translate to c.$16bn. I believe this is factoring in losing close to a decade worth of sales in related products which could be the worst case scenario. In short, a $20bn drop in market cap had essentially fully factored in the bad news with regard to Roundup.

The second risk pertains to Bayer's own pharma business. It has two blockbuster drugs that will go off-patent between 2023-2025. Bayer would lose close to 30-35% of its pharma EBITDA or 30-40% of overall EBITDA. While it has 6-7 drugs in the pipeline, none of them looked promising enough to offset the decline from the two key drugs. So this means that the pharma business should see its value collapse by a similar margin i.e. 30-40%. Well, given the additional EUR 20bn drop in market cap before Monsanto's debacle, one would argue it already has. (The pharma business has 6bn EBITDA and using 10x EV/EBITDA multiple, it is worth c.60bn which means that a 20bn drop is a 33% decline.)

In short, the bad news with its pharma business is also factored in. So any incremental positive from here should be just pure upside. This brings us to the last point - Bayer and Monsanto is a marriage made in hell and global regulators would not give their blessings. The new entity would face more hurdles, litigations and what not in the future. We cannot put a number to this. Is it another 20bn market cap decline or more? Who knows? 

Bayer share price rebounding!

Investment is never about eliminating all the risks. It is about measuring the risk reward. Can Bayer fall another $20bn in market cap, bringing the stock to EUR 48bn market cap meaning it trades at a 15% FCF yield and a 6% dividend yield? At EUR 48bn it is worth less than what it paid for Monsanto and close to what ChemChina paid for Syngenta. Another Chinese SOE would just buy this up to help secure China's future food supply.

Well, the probability of Bayer dropping a lot more is not zero, but it is not high. Meanwhile, is it more likely that the market recognizes its synergies with the merger, or the market recognizes the value in its businesses and hence bidding it up back to a more reasonable historical 4-5% FCF yield. Or Roundup's litigation costs and lost revenue see better quantification which is much less than 20bn? It is hard to say, it might take some time ie 2-3 years. This is real investing, no one knows. We measure the probabilities and bet accordingly. 

The catalyst might come when the current Chairman and CEO Werner Baumann moves on which again might take 2-3 years. He was appointed two years ago and oversaw the Monsanto deal which wasn't well like. He also has a reputation of being too smart and hence not well-liked by some. So that also partly explained why it was an easy sell for investors. They don't feel good after meeting the man. So, we might need to see some changes. 

Meanwhile, we are paid to wait with the almost 4% dividend (subjected to 20+% capital gains tax though). Bayer traded as high as EUR 130 just three years ago. If it gets close, we are talking about 70% upside!

Huat Ah! This blogger just bought Bayer!

Sunday, September 16, 2018

Funny Quote of the Day

Look up this post when you are feeling down ;)


To just type it out: if anyone is having a bad day, remember that today in 1976, Ronald Wayne sold his 10% stake in Apple (AAPL US) for $800. Today (Sep 2018) it is worth 1,081,130,640,000 dollars.

Remember: compounding is the eighth wonder of the world.

Huat Ah!

Saturday, September 08, 2018

Ready Bayer One!

Bayer was a EUR 100 billion market cap industrial conglomerate that has collapsed big time from a recent high of EUR 120 per share to EUR 73.5 today. There were two reasons. Firstly, the firm is being sued in the US for selling cancer causing fertilizers. Well, actually it's Monsanto, the world's largest GMO seed seller and pesticide and herbicide manufacturer that was selling bad products but hey, Bayer is going to buy Monsanto, so Bayer and its investors are on the hook! Next, Bayer announced disastrous results warning of lower full year sales and profit blaming higher integration cost with Monsanto.

The market sent the stock down 5% last week after it dropped 12% two weeks ago as a result of the Monsanto debacle. However, I believe this is where things are getting really interesting. Value investors like to fish in perfect storms. We are prepared to get wet while catching whales! Okay, let's first state the investment thesis - our reason for buying a stock which should be clear and concise:

Bayer will become the world's powerhouse in crops and seeds after acquiring Monsanto with close to 30% global share and together with its original stable portfolio of businesses in consumer and pharma drugs, it is poised to generate at least 10% free cashflow based on today's market cap. 

The following chart shows the pro-forma breakdown of Bayer's revenue after absorbing Monsanto.

Bayer's revenue breakdown

To put it simply, Bayer's revenue split would be 50% crop and seeds, 40% pharma and 10% consumer. Essentially, we can see it as 50% Growth - coming from crops and seeds and 50% Stable Cashflow - coming from its pharma and consumer segments. All three businesses are traditionally great businesses with strong moats, which we shall discuss in greater detail in the following paragraphs.

The crops and seeds business is dominated by Monsanto. This firm is the global leader in seeds, weedkillers and crop products. It has very high global market share (40-80%) in various products including GMO (genetically modified organisms) soy bean and corn seeds. After its combination with Bayer, it would be the world's largest player in an oligopolistic market with a few other players - Du Pont, Dow Chemical, Syngenta, BASF and Agrium. But it will be the Big Brother calling the shots (actually Monsanto was already the biggest brother in the US). The agriculture industry is also in a secular growth trajectory as the global affluent population continues to increase and we need to keep up food production.

Nobody likes Big Brother. The environmentalists had been making noises about Monsanto's GMO products, labelling them as evil and causing illnesses but the truth is a lot of people would go hungry without GMO seeds. Alas, we cannot have our cake and eat it. It's gonna be GMO or no food. Your choice. What's even more interesting is that the bulk of the seeds goes into producing food to feed cows and pigs, not humans. So before labelling Monsanto evil, perhaps we should all stop eating meat first?

Regardless, Monsanto is in a huge growth industry, we need more pigs and cows to feed humans and we need faster food production. Monsanto believed that long term topline CAGR should be in the mid single digit range. With its merger, it would also be able to extract a billion Euros of synergies and it would continue to be a price and product leader, while extending its R&D prowess and distribution network to global farmers. Is it a wonder why farmers and scholars hated the deal? It was said this could be a marriage made in hell. So better hedge by owning them as minority investors right?

Bayer's pharma business

Okay, let's talk about old German Bayer. Bayer has two interesting businesses. It has a pharmaceutical arm that had produced 2-3 hit drugs with EUR 16bn in annual sales. The current largest contribution is Xarelto, a blood thinner which was very successful but its patent would expire in a couple of years. The second drug is Eylea which is used to cure certain eye conditions. Both drugs are blockbusters but investors are concerned that there might be nothing left in Bayer's pipeline which means that this business could be worth very little going into 2025. I am no pharma expert so let's assume that might be true. The key question is should this business be valued next-to-nothing? We will go through the math later.

The last business is Bayer's consumer over the counter drug business which has long standing branded drugs such as Aspirin and Claritin generating EUR 6bn in sales and 1 plus billion EBITDA annually. Bayer has tried to beef up this business with M&A but synergies were lacking. It most recently bought Merck's consumer business but with little results. This is partly another reason why investors didn't feel comfortable about another big merger with Monsanto.

Bayer's consumer business

Now putting everything together, we have two stable cash cows generating EUR 6bn in EBITDA and c.5bn of free cashflow (FCF). In the past five years, Bayer's standalone free cashflow was EUR 2.8bn, 3.2bn, 3.8bn, 5.8bn and 5.2bn. Monsanto's FCF adds another USD 2bn which brings overall FCF to EUR 7bn if not 8bn. Bayer today trades at EUR 68bn implying more than 10% FCF yield. Dividend yield is also closing in on 4% as a result of its stock price collapsing.

Recall that Bayer bought Monsanto for USD 62.5bn or EUR 53.6bn which means that market is valuing the rest of Bayer's original businesses to be less than EUR 10bn. So is it right to value two businesses generating 2.8-5.8bn FCF at 10bn? Or looking it the other way, the market is saying that Monsanto should be worth a lot less than USD 62.5bn. But this contradicts the fact that Monsanto traded at USD 50bn market cap for years before Bayer bought it. Either way, Bayer definitely doesn't look expensive.

While there are reasons why the market thinks so negatively about Bayer and Monsanto, I believe this is an over-reaction hence a golden buying opportunity. The risk reward is very skewed here. Bayer and Monsanto's free cash flow of EUR 7-8bn is very stable and more likely to grow with the promised synergies than to collapse. Hence as a Bayer buyer today, we stand to earn a c.4% dividend and the reward that it would pop 50% far outweighs the risk that it would fall 50%.  

Next post, we talk about the risks!

Sunday, August 26, 2018

Tangible Thoughts #8: Trade War Beneficiaries

Trade wars happened before, when Japan rose to power in the late 1980s and the 1990s. The beneficiaries were the neighbouring countries that had the capacity and the education level to capture that demand. In the Japan era, it was Thailand, Korea and to some extent China itself. In the Americas, it was Canada and Mexico.

Today, if the same scenario happens, it would be the whole of ASEAN that would capture the shift of manufacturing from China. It would be Vietnam for high end manufacturing and Myanmar, Cambodia and Laos for mid to low end manufacturing. Indonesia would also benefit to some extent.

In today's global village, the beneficiaries would also be global, if US chips cannot be shipped to China, then it would be chips designed and made in other countries. Beneficiaries could be UK, Japan, Singapore, Taiwan and Germany. Global Foundries in the Middle East could also benefit.

As mentioned before, investing is never binary. It is more about creativity and there's always a different way to look at things! Huat Ah! 

Wednesday, August 15, 2018

Book Lessons #3: The Selfish Gene Part 2

This is a continuation of the Book Lessons #2: The Selfish Gene Part 1. Unfortunately, I cannot find any investment lesson in this post, only life lessons!

In the later part of the book, The Selfish Gene, the author Richard Dawkins introduced how altruism sometimes work in nature as it becomes beneficial to both the giver and the taker. The simplest example is what we had learnt in Biology 101 - symbiosis, the direct opposite of the parasitism. It was a good reminder that in struggle between good and evil, there are always examples of good triumph over evil. Though strictly speaking, the main theme of the book is to really move the argument away from good vs evil but rather to think in terms of evolutionary stable strategy or ESS.

Faces of Mother Nature I

In short, there is really no good and evil in the real world of Mother Nature. Is the cuckoo bird evil because of her parasitic way of breeding? What matters is whether evolutionary strategies would achieve stability i.e. the genes would be able to propagate into many future generations. Similarly, in our own lives, rather to think in terms of good vs evil, sometimes it is about having better strategies and think about what's the final endgame that matters for us and for future generations. Having said that, we surely must refrain from deploying too many "evil" strategies! We are here do make the world a better place, not turn it into hell!

One example that brings this out well is the story of the Tit-for-Tat strategy. This strategy became famous after in won over all other strategies in the famous Prisoner's Dilemma game when two prisoners are caught and they can choose to betray the other one or not to. As a reminder, the payoffs are as follows:

1) If A and B each betray the other, each of them serves 2 years in prison.

2) If A betrays B but B remains silent, A will be set free and B will serve 3 years in prison (and vice versa).

3) If A and B both remain silent, both of them will only serve 1 year in prison (on the lesser charge bcos there is not enough evidence).

In just one game, betrayal is always the logical outcome unless you know 100% that the other guy surely won't betray you. However when the game becomes iterative, things get very interesting. We can devise as many strategies as we like. So when competitions for multiple strategies were played via computers, it was discovered that the best strategy is actually the Tit-for-Tat strategy which means that we only betray when we were betrayed previously. In some cases, Tit-for-Two-Tats also work. 

This has found to work in nature as well with birds (again). Birds usually have ticks growing in their feathers and they can pick them off with their beaks but not those ticks on their heads. So birds rely on other birds to help and usually this works on the tit-for-tat basis. If you help me, then I will help you. A bird that keeps betraying would soon realize no one will help it get rid of ticks. Its head will get so itchy that it fails to procreate, or explode, or whatever. Just kidding. But surely they have less energy to procreate when they are always itchy.

Faces of Mother Nature II

Similarly a bird that keeps helping might find disappointment from time to time if the other bird betrays by not returning the favour. The tit-for-tat works because it helps to figure out who the betrayers are and hence avoid them. When it finds a nice guy, it would continue to cooperate as long as the other guy cooperates which works out well and both would live happily ever after, walking into the sunset.

In life, most of the time, it doesn't pay to be the good guy. Hence the phrase, "good guys finish last". Nature has also shown that evil does triumph 58% of the time as shown in the last post (in a population of hawks/aggressive and dove/docile, 7 hawks to 5 doves being evolutionary stable i.e. the ratio of hawks to doves will not change after many iterations) but there is always room for good. In fact, the moral of the story seemed to be that we should be good when it pays to be good and we should fight evil with evil when the situation calls for it.

Interestingly, the Always Betray strategy can beat Tit-for-Tat sometimes when many iterations of the game is played. There seems to be a knife edge whereby Always Betray will win and become evolutionary stable on one side and Tit-for-Tat on the other side. This knife edge depends on how the strategies evolve at the start, if the bad strategies become too populous, then Always Betray will come out winning.

However, once a population succumbs to Always Betray, it will always remain there. If we think back in terms of the jail sentences, everyone will be getting the same sentence. There is no room for "upside" anymore. The Tit-for-Tat strategy is different. Even if there is just a tiny portion of the population that continues with Tit-for-Tat, usually in a local cluster with no Always Betray strategies around, it can grow again and in time crosses the knife edge and converts the whole population to Tit-for-Tat.

The author further explains why Tit-for-Tat is so powerful. First, it is nice, it always begins by cooperating. Second, it is forgiving, it betrays only after being betrayed and it never remembers beyond the last betrayal. Third, it is not envious. It doesn't care if the other guy gets more money or a lesser sentence. Hence it is a strategy that strives to beat the system, not just the other guy. Perhaps that should be the motto how we should live our lives too! 

Faces of Mother Nature III

The truth is, Tit-for-Tat happens a lot in human societies and in nature as vividly illustrated by the author using how the British and German soldiers behaved during WWI and also in vampire bats. Not knowing when the war will end, British and German soldiers started cooperating rather than fight and die in the cold winter. They even celebrated Christmas together! On the other hand, vampire bats are known to donate blood to their kins and sometimes to stranger bats too when these poor bats did not find enough blood to fill their stomachs on unlucky nights.

To end this post, here's quoting the author,

Vampire bats rise above the bonds of kinship, forming their own lasting ties of loyal blood-brotherhood. They could form the vanguard of a comfortable new myth, a myth of sharing, mutualistic cooperation. In fact, they could herald the benignant idea that, even with selfish genes at the helm, nice guys can finish first.


Thursday, August 09, 2018

Chart #14: Live Concerts!

Happy National Day Singapore!

Here's another interesting chart. Sales of concert tickets had quadrupled since 2000. The top concerts bring in $100-200m just in North America alone. Live Nation (LYV US) is just racking it in!


This is the Experience Era. Since internet took over the world, reality now has a different meaning. We treasure what's left that cannot be done on the net more than ever. Hence concerts, live events, theme parks even going to the movies is different. 

"Welcome to the real world, Neo," - Morpheus, in the Matrix

Wednesday, August 01, 2018

Tangible Thoughts #7: Coffin Homes

Just read a disturbing article on this term while research on Hong Kong. A significant proportion of low income families or singles live in these coffin homes because rental has simply gotten too expensive.


Coffin homes are becoming a way of life in HK. The pic above shows typical single man living in his coffin home. The pic below shows a small family living in a slightly larger room.


Families living in a "bigger coffin" spend their time in confined space studying. The picture below shows another family having a meal in their coffin room.


Here's the punchline: is this also the reality Singapore is facing?

Wednesday, July 25, 2018

Value Investing Is Really Like Cave Diving

About 18 months ago, we discussed that value investing could be compared to riding a bicycle up a Finnish mountain. It was a really stretched analogy that was perhaps too difficult for most people to understand. Two weeks ago, the successful rescue of 13 Thai boys trapped in a cave caught the world's and my attention. As with many others, I followed the saga closely. I was woefully saddened when one of the rescuer died and jubilantly rejoiced when they were finally saved! It was truly a triumph for human innovation and a story worthy for Hollywood!

It also opened up my mind to the world of cave diving. This is really an extreme sport that is only suitable for the most courageous as simple mistakes could result in life-and-death situations. Cave diving rescue by extension goes beyond the realm of difficult tasks. It's crazily arduous as we had seen. To rescue the 13 boys, hundreds of people were involved. There were 90 divers, a team of pumpers to pump and drain the water out of the caves round the clock, 24 by 7. 

The logistics people numbered in the hundreds, chefs cooking, doing the laundry, ushers, volunteers and all the unsung heroes, including farmers who allowed the cave water to flood their lands, destroying their crops. They do it because lives are at stake, they needed to beat the clock and the odds to get the boys out alive.

Cave diving and rescue: treacherous operation!

The whole operation was akin to an investing firm, also usually with a few hundred people, asked to generate above average returns to beat the market. Most professional investors fail. They do well in a year or two, only to falter and then forgotten. Rarely we see an investment operation succeed for decades. Hence Warren Buffett, with his 50 odd years of track record is revered and adored not just by other investors but by everyone.

Cave diving, in my mind, is really analogous to practising value investing. It is not easy to appreciate how tough it is. We know it's not a walk in the park but most people certainly don't think it's rocket science. But the truth is, it's almost as tough as rocket science but in a different sense. Cave diving and investing requires a different mentality - taming our minds and most people fail to appreciate that. In cave diving, bad moves result in death. In investing, it's permanent loss of wealth, sometimes, a lot of wealth. The other important learning point: mediation helps in both! The boys meditated for days so that panic did not seize them while they waited for help.

As we had seen in the previous analogy about riding up a mountain, investing requires experience, technical skills and most importantly dealing with uncertainty. The CG above depicted how treacherous the path was from the cave entrance to the boys' location. To some extent, it looked like a stock price chart! Value investing by individuals is no less treacherous in a few ways. Here's the few aspects that we ought to discuss: 

1. Technical Skills: Math and Science
2. Experience and Real Training
3. Navigating in Darkness
4. Build in Contingencies

Investing usually starts with technical skills. I recall how sessions with students interested in investing always involve Excel and modelling. They are very keen to build the most sophisticated models, learn all the intricacies about Black-Scholes, the math and science behind it all. Unfortunately, the stock price wouldn't know how you modelled the firm. 99.9% of the time, the revenue forecast would not match reality. While I don't do cave diving, I believe the theory and technical skills behind would be very important. You need to know scuba diving basics. You need to understand decompression risk. You need to know geology and physics. You need to do your math well, don't get the oxygen content wrong. Because the cave would not care if you don't have enough oxygen. 

Cave Diving = University Math

It is said that scuba diving and cave diving is like primary school math vs university math. Cave diving is no child's play. You need to be proficient to be in the game. In cave diving, there are high risks of getting decompression sickness. This is caused by nitrogen bubbles going into the divers' bloodstream as a result of mismanaged pressure changes with the oxygen tanks. This requires careful calibration. Decompression sickness can result in deathInvesting is not very different, you don't need university math but you do need to know accounting, corporate finance, efficient market theory, equity and bond analysis well enough. Yes, those Excel modelling is important, but it's the building block for something more. It's also all about calibration.

Calibration requires experience. Cave diving and investing is therefore a lot about experience. It cannot be taught in classrooms. After we learnt all the technical skills, we need to apply them correctly in the field. Every cave is different. Some are more treacherous than others and you never know how the conditions will change. Most of the time, visibility is very poor. Caves are dark places. You can use torches but sometimes the water turns muddy! Imagine that!

Real investing also cannot be taught (as with riding a bicycle). You must experience it. You also cannot see the future. You will never know which way the stock would go from today's price. When someone buys his first stock, watching it fall 30% and then panic. That's the experience we are talking about! So always start small with stable names. For every 10 stocks we choose to buy, 4 to 5 would go south, or not make our desired return! That's the best hit rate for most professional investors.

Since we cannot see the future or the cave tunnels clearly in front of us. We have to move slowly and be very prudent. Know the risks well. Never bet the house. Build in contingencies. In investing, we need our margin of safety. This is the most important thing according to the grandfather of value investing - Ben Graham. It means we only buy if the gap between the stock price and the actual value is really, really huge. We want to buy something we think is worth a dollar with 60 cents.

Cave diving contingencies

Navigating the markets and navigating dark caves also share many similarities. The diagram above does look even more like a stock price chart right? If  you are going into a new cave for the first time, you will not know what lies ahead. When there is a fork, you would have no idea which route would lead you forward. You wouldn't know where the water table levels off and you get back to dry land again. You wouldn't know how much oxygen you have in the cave and how long you can take off your mask. In the same vein, when we are investing in the markets, we have no certainty about where the stock will go, where oil price will be next month, or what is the earnings or the GDP numbers next quarter. 

Talking heads are forever predicting. They talk as if they know for sure what the future would be. The truth is, like navigating new cave terrain, nobody has any idea. If people claim they knew, avoid them like the plague. It is also like the weather. Can you say whether it will rain or shine next week? For weather, we now have the technology to predict a week or two in advance, but in the markets unfortunately, there is no way to know, unless you are an insider. But we do know that quality stocks compound over time. These are great companies with strong business moats and strong track records that had proven themselves. Value investing is about identifying these companies.

Since we cannot predict the future. We have to prepare well. This means building in contingencies. In cave diving, it's about having guide ropes and extra oxygen tanks. It's about having good torches with enough batteries in them. The picture above showed how the rescue built in even more safety measures. In investing, we can do two things: always size our bets correctly and always insist on a good margin of safety. Contingencies like buying put options are also available to sophisticated investors but for most of us, they are too expensive and hence not deployable.

To sum up, value investing is about navigating well when there are a lot of uncertainties. We learnt all the skills and theories in the early years but they are barely enough. It's also about many buy and sell calls to hone our acumen and to build on our experience. To most people, it's basically just too hard and hence Warren Buffett's advice to just buy ETFs and forget about stock picking. In this analogy, buying ETFs would be like scuba diving. It's easier and you would certainly have a lot more fun (i.e. earning good returns on your capital). Most importantly, you won't die.

However, to true value investors, the world's stock markets are our caves and every detailed stock analysis, our finest dive. Huat Ah!

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's performance significantly 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!