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.