Saturday, May 18, 2019

Thoughts #14: Hwa Chong or Chinese High?

Are you Hwa Chong or Chinese High? This was a perplexing question for some who attended these schools in the late 1980s and early 1990s. Hwa Chong Junior College (a.k.a HCJC, a prominent high school in Singapore) was established which was a separate entity to the Chinese High School, one of the earliest boys' school in Singapore.

The story goes that Chinese High organized a 100th anniversary dinner in March 2019 and if you are a Hwa Chong student, it's technically not your dinner. So should you attend? However, HCJC was then merged with Chinese High to form Hwa Chong Institute when the through train program was introduced. In short, HCJC ceased to exist and there would be little reason to hold HCJC only dinners in the future.

But from the perspective of proud HCJC students, it's an important segregation. Partly because either they came from other reputable secondary schools (junior high schools) and would want to associate more with their alma mater of four years (since junior college was only two years) or they simply did not want to associate with Chinese High (especially ladies, since this was a boy's school).

In the end, it all boils down to time and perspective. Another 100 years from now, would anyone remember there was this segregation between Hwa Chong and Chinese High? Would anyone care? Flipping things around, would anyone of us here be around to attend the 200th anniversary dinner? If not, then should we attend this one? What would happen if we missed this dinner? It is regret or no big deal? 

Investing is also about asking the big questions. Some of the big questions that I like to ask are:

1. In 5 to 10 years, how would this bad news affect the stock? Is it a critical bankruptcy blow? What is the likelihood that the company ride through this and become stronger?

2. Does this action survive the "newspaper headline" test? (this is both an investing and life option question, when we do something questionable, think of how it would look if the media looks at it.)

3. What happens if I am wrong? What is the maximum loss? Can I sleep soundly at night holding this mistake (if it turns out to be one)? Does it mean critical financial damage? 

Another analogy worth sharing: Omaha Beach in Normandy, France was one of the bloodiest fighting spots during D-Day, 6 June 1944. Thousands of Allied soldiers sacrificed on that day to secure landing sites in order to topple Hitler. They succeeded. As Asians, we would probably shun buying any properties there in the 1950s, given the risks of haunting and what not. But, today, it's expensive beachfront properties. Who cares about D-Day. It's all time and perspective! 

Happy Vesak Day!

Friday, May 10, 2019

Lessons Learnt: Hyflux - Part 1

Eight years ago, we discussed Hyflux perpetual bonds here, putting forward the investment thesis that 6% was good dividend/interest income and how Hyflux had a so-so business model but things should be okay because the Singapore government would support Hyflux as they had done so in the past. That turned out to be a huge mistake. Not only did the government not support Hyflux, she rubbed it in, pushed the proverbial dagger into Hyflux's belly, delivering the fatal blow.

Et Tu Temasek? (Ref: Et tu Brute)

How did things come to such a dire situation? 

As described in the post eight years ago, Hyflux's business model relied on winning water projects, which meant that they had no control over the bidding price and also, in subsequent years, their own future revenue. However, as with most Singapore co.s, we are good at managing costs, which allowed us to beat many others in the global game of winning EPC (Engineering, Procurement, Construction) contracts. This was how Keppel and Sembcorp became so good in oil rigs.

But in order to grow, companies in the EPC field have to bid for bigger and bigger projects. The cost management however gets more and more complex. Once every decade also, someone would definitely screw up and one or two badly designed contract put EPC firms at risk of bankruptcy. Alas, Hyflux was not spared.

Tuaspring, Hellspring

The irony for Hyflux was that the contract turned out to be one in its home country. This was infamous Tuaspring desalination project. Tuaspring became a bomb because of its large scale and complexity. The Achilles' heel in Tuaspring is actually not desalination but power generation. For reasons unclear to me now, someone thought it's a good idea to combine the two. Maybe because desalination requires a lot of power, so hey why not generate power, then sell some power plus water to PUB as well. This definitely developed as the logical train of thought from our admin officers in the civil service and Hyflux went along.

But selling power is not the same as selling water. Cost for selling power depends on fossil fuel, the most important being crude oil, which is notoriously volatile. Meanwhile, power prices in Singapore collapsed as a result of energy deregulation. So suddenly, Hyflux found itself caught in a situation where its power generation cost exceeded its revenue. With a billion dollar debt on its balance sheet, things quickly spiralled downhill. Our admin officers don't give chance these days, just like the new Certis Cisco summon officers.

Hyflux began to run out of options as credit dries up and in an "unthinkable" scenario for investors who put in money in 2001 during its IPO to yield chasers (like me) who bidded to buy its perps in 2011 and more yield chasers who bought its perps again in 2016, Hyflux declared it might go bankrupt. A white knight from Indonesia (Salim group) appeared, willing to put money to save the firm but not the perp bondholders. Alas, that hope is now also gone as PUB decided to push the dagger some more (figuratively impaling Hyflux now), terminating Tuaspring water purchase agreement. 


As things stand, it is likely that bondholders and shareholders will get nothing in the end, barring some kind of miracle. It's neither Oliver Lum's nor PUB's fault. This is just investing. There's always risk. Perils on top of perils. Caveat Emptor.

The saving grace for those of us who invested in 2011 though was that we got a few years of 6% coupon. Not great, as the total loss of capital was still north of 60%. But almost everything is now bridge under the water. So this post serves to help us learn the lessons and move on. Well, it's mostly re-emphasizing the importance of what we already know:

1. Always limit our risk capital to any single name to an amount that we would be okay it if goes to zero. This could be an absolute amount and it could be a percentage of total net worth. What's important is that we can sleep at night. We hear stories of people who put in $200,000 or $300,000 into Hyflux perps and that's a huge chunk of their retirement nest egg or net worth. It's just so sad. So don't make this mistake.

2. Map out the scenarios and probabilities well and keep monitoring them. When we did the due diligence in 2011, we determined that the business model was flawed, one project could kill them. But we also thought that the Singapore government should come and bail them out. After all, this was Singapore's poster child. Little did we expect it would be the opposite! The project was in Singapore and the government delivered the fatal blow! Nobody could have foreseen this. But, on hindsight, we should have put in a scenario that Hyflux would go bust and ascribed a probability. In the next post, we should delve into this!

Caveat Emptor: Let the Buyer Beware!

Wednesday, May 01, 2019

Charts #21: Misery Index

While we live in sunny Singapore and watch Game of Thrones, bask in rich and affluent culture, there are parts of the world where things can be quite different and miserable. Note: Argentina is not the most miserable country, it's Venezuela which has an index reading of 1.7m, way off the chart below.


Inflation is one big cause. Singapore was once like that. During WWII and then the decades shortly after war in the 1950s and 1960s. Our forefathers pulled us through those difficult times with good economic policies, financial common sense: saving money, balancing the govt budget and lots of grit and hard work.

May Singapore continue to huat!

Happy Labour Day!

Friday, April 19, 2019

How to Be a Really Bad Portfolio Manager

Intuitively, most people would think that portfolio management should be more science than art right? After all, the two words: portfolio and management just sound so scientific! In reality, portfolio management is probably more art than science. Yet most professional fund houses like to approach portfolio management scientifically. Hence the no.s speak for themselves. 80% of all portfolio managers cannot beat an index like the Straits Times Index, or the Dow Jones.

Good portfolio managers* are a unique breed. Especially those who had been humbled by the markets time and again. They spent their entire careers learning about markets, trying to beat the index only knowing that they somewhat succeeded because they never let cocksureness get into their heads. Their faces seem to show their market war stories and they never truly smile. The pic below shows Stan Druckenmiller, #2 for George Soros and probably one of the best portfolio managers of our time. He never had a down year for 30 years and compounded returns north of 25%pa. His recent interview with Kiril Sokoloff is a must-see for every reader here.

Stan Druckenmiller

Portfolio managers are artists, but also much more. They tend to possess the ability to synthesize a lot of information and come up with a Big Picture of the investing world. But this Big Picture in their mind is never completed. It is constantly adjusted to better reflect newly discovered truths and bets are taken to express views to make money when these truths are found out later by the markets. This requires rigor. It's backbreaking hard work. Portfolio managers do mental aerobics ten hours a day and then sleep and dream about markets. When they wake up, they eat and breathe stocks, bonds, rates. 

So, how to be bad at all this? Just slack. Relax in your comfort zone and focus on your own little bubble. Come up with your Small Picture of your world and think you will always be right. Then go watch Netflix and spend time mindlessly. Eat, sleep and breathe Korean drama. That's the first step. That's also perhaps the only step most professional fund managers take. To most, portfolio management is a job, not a passion. When it's not a passion, it's difficult to be engaged all the time. That's why most fail. They were just not passionate nor rigorous enough.

But it takes more than passion and rigor while seeing the Big Picture. The last trait of strong managers is the flexibility of their minds. They are never stubborn. During the abovementioned interview, Stan Druckenmiller, the best portfolio manager of our time, just kept admitting his mistakes. He also shared how he always tried to reconfirm his views and if they are off, readjust the way he invests to continuously make money. After 30 years, he saw it time to call it quits as algo trading disrupted the way he used market signals to make money. He decided it's time to move on.

This is flexibility. 

Portfolio management is an art, but it does not mean that artists are good portfolio managers. Artists are usually strong characters and can be very stubborn. This is their Achille's Heels. Portfolio managers need to think laterally, think at a higher level and even invert their thinking when necessary. They need to admit mistakes fast and be flexible to changes. This can be inherently difficult for some people.

We all know these people.

They talk by negating everything that is said. I believe most of us met these folks time and again. They cannot seem to agree with anything. One gets tired just taking to them. Every discussion is a debate, or an argument and they have to win. Every request is rejected. Let's get coffee at Starbucks, no, too expensive. How about Yakun? I prefer gourmet coffee. How about Coffee Bean? No coffee there is bad. Nespresso at my place then? I prefer cafe. Fuck.

Yakun Toast Set - Singapore's Default Breakfast

It's hard even to get them just to give a Facebook Like to your new venture that needed some support. They ask a thousand questions, give a thousand reasons and then say no, they are not going to like your venture's FB page. But then they expect you to like their Hokkaido tour pics. So these people can really make the baddest portfolio managers look good.

They can never see stock ideas or investment themes holistically. They will always be blindsided because when they like something, they cannot see the downside. When they hate something, they cannot flip their minds to buy when the stock rallies. Because that's admitting that they were wrong. They are binary people - people who think only in ones and zeroes. You are either friend or foe. This idea is good or bad. This stock is either in or out. There is no such thing as a 50bps position. This stock is either 50% of the portfolio or nothing. Hence they are always missing out or they hold on to their losers for too long.

Yet portfolio management is never binary. It is always analogue, with gradients and shades because we are never sure how things will pan out. So we have 50bps, 1%, 2% and our highest conviction bets 4-5% positions. And the 5% positions can become a 1% position when the stock rallies and the upside is no longer attractive. It's always incremental moves, never cocksure, always ready to admit mistakes and never believing one's right and the markets are wrong. Portfolio management is more an art than a science and hence there's always more right perspectives than wrong answers

How to be a really bad portfolio manager? To summarize, here's the three ways to really suck at portfolio management:

1. Try not to see the Big Picture
2. Don't be Rigorous
3. Be as inflexible as possible

Happy Good Friday and Huat Ah!

*Investors are essentially portfolio managers. We kept to the terms "portfolio managers" and "portfolio management" in line with the title and theme of this post.

Thursday, April 11, 2019

Books #5: Best Selling Books

Did a quick google check on most books ever sold. Interesting list - no non-fiction and the best selling book was not written in English. 


Fortunately for 2018, we do have some non-fiction. In fact mostly non-fiction. 2018 was definitely Year of #MeToo and Girl Power!


Haven't read Michelle Obama's autobiography, should be good! Meanwhile, just finished Shoe Dog by Phil Knights, founder of Nike. Amazing story, must read for investors!

Monday, April 01, 2019

Lesson from Bohemian Rhapsody - Part 3

This is a continuation of the previous two posts about lessons learnt after watching Bohemian Rhapsody, a movie about the famous rock band Queen and its lead singer Freddie Mercury. Freddie was a free spirited artist who lived recklessly. He brought joy to millions while bringing sorrow to those closest to him. Hence, he have the many life lessons that we can learn here. In this last post, we shall talk about a Chinese idiom - 祸从口出 (huo4 cong2 kou3 chu1).

In Chinese, the famous saying above states that disasters come out from one’s mouth. This is another lesson since time immemorial. Spiteful words are hurtful and could break friendships, bonds and even kinships. Words once spoken cannot be taken back and hence we should always be very mindful of how we speak and choose our words wisely.

Disaster comes from the mouth

It might be worth remembering that we should never say something evil or hurtful even if we meant it. We might mean it at the moment but we are bound to regret it later. Since words once spoken cannot be taken back, the person who hears it remembers it for life. Not for that moment only. So phrases like, “I wished I never had a father like you.” or “You are the most disgraceful child.” Should never, I repeat, never be said.

In one sentence, one’s life could change for the worst. So, never say things with hurtful or bad intent. For Freddie, partly as a result of his free spirited nature, he said things as it comes to his mind and his words pierced like katanas into those closest to him and those who cared about him. He sometimes meant it as joke or he just blurted it out at the spur of the moment. But it was painful to the listener (even for me, as the movie audience). He was mean to everyone, insulting reporters who were just doing their jobs. But for those closest to him, his poison tongue ossified friends, kins, partners. it was a miracle most of them forgave him.

In investing, this is manifested in stock price volatility.

Today, CEOs and leaders do not just say things. They can tweet, they can write and send company emails, they can speak rubbish at quarterly earnings conference calls and all that would be scrutinized by the world. One wrong tweet could bring down billions of dollars in market cap. Surely, Elon Musk comes to mind. His one tweet got him into serious trouble. (The one alluding to the Saudis taking Tesla private.) To upend that, he attended an analyst conference call and addressed it condescendingly which caused his stock to collapse further.

Elon Musk attacks!

Well, if we invest in stocks that had CEOs who are not careful how they speak, or write, then we need to be able to stomach that kind of volatility. Nothing against Elon Musk. He is a genius and a visionary. He just needs to learn the same lesson from Freddie Mercury. Fortunately, most CEOs and Chairmans are polished and learnt not to speak or write like that while climbing the corporate ladder. As investors, we actually have to look out for speakers who are too polished and are hiding things. The good news is: after years of interviewing managers, sometimes we can sense trouble. These skills do come in handy both in investing and in life.

Nectaring our tongues is perhaps more relevant in our family and social lives. We take those closest to us for granted and we simply blurt out hurtful remarks time and again. While some families, close friends and some teams can take lot of hurt and insult, I believe everyone has a limit. Yes, when we are very close, a lot of insults just becomes jokes after time. But I believe this should not be used to gauge that we are close enough. Even as close friends or families, we must remain vigilant. Never say things with evil or hurtful intent.

This is perhaps the most important lesson to me. So, that’s it. To summarise the four lessons from Bohemian Rhapsody:

1. Never betray those closest to you, parents, spouses, cadre friends. Although they will forgive you once or twice, but only so many times. Don’t live like a jerk. In investing, always look out for firms with financial and management integrity. If there is doubt, then move on, there’s not point in further analysing.

2. Never listen to just one advisor, identify the good advisors and listen to them wisely. In investing, beware of CEOs who doesn’t have the right advisors. Lookout for telltale signs like revolving doors of CFO and the other key managers.

3. Four heads are better than one. Teamwork works in creating music, in investing and in life. Don't always think you are right. We all need sparring partners who can make us better.

4. 祸从口出 (huo4 cong2 kou3 chu1)- disasters come from the mouth. Always think carefully before speaking. Words once spoken can never be taken back. Never say things with evil or hurtful intent.

Thanks Freddie Mercury. You are an inspiration but we never want to live like you.

Wednesday, March 20, 2019

Thoughts #13 - Trump Lies

Michael Cohen, fixer for Donald Trump, gave the biggest exposé on Donald Trump recently. Yet Trump supporters continued to believe in him and he would still be the US President and might win the second term. 

Why did Americans support Trump despite overwhelming evidence that he lied profusely? Why do we believe in half truths? The article below shed some light:

https://greatergood.berkeley.edu/article/item/can_the_science_of_lying_explain_trumps_support

We forgive lies if they were told for some greater good. This is a bit like white lies. Trump supporters believed he told the lies for the greater good - to make America great again. 

Sometimes, we do not believe in truths even when the evidence shown cannot be disputed. For example, some people continue to believe that vaccination is harmful despite decades of research and evidence of safety. Similarly, lying to distract the enemy is condoned as Donald Trump showed.

There is something interesting about the human mind - we only want to believe what we want to believe, be it truths or lies. 

Sunday, March 10, 2019

Lesson from Bohemian Rhapsody - Part 2

*This post contains spoilers about Bohemian Rhapsody - the 2018 Hollywood movie about Freddie Mercury, pls stop reading if you intend to watch the movie. 

In the last post, we talked about never ever betraying your cadre and how if you did, your most trusted friends and family will forgive you once or twice. But, there is only a few times you can do this. There are people who keep betraying and in the end, they have no one to turn to. Sometimes we hear stories about lonely old men living in temples with no one to turn to. Wonder what they did to those who care about them? Did they turn everyone away? So in short, don’t betray the trust of the people who cared about you most. 

By never betraying our cadre, we stand to risk supporting the wrong people though. Warren Buffett made this mistake a couple of times. He supported John Gutfreund who subsequently brought down Salomon Brothers and he was stuck in supporting Coca Cola even when the firm’s culture had changed to one that is all about bonuses and incentives to company’s management and employees.

Right: John Gutfreund, King of Wall Street who brought down Salomon Brothers. 
Left: Warren Buffett testifying before Congress because he trusted John.
 
Having seen how some of these episodes played out, I think probably this is unavoidable especially when the ties are very close. For example, how far would you support your sons and daughters, even if they are wrong. The answer is - almost all the way. The father or mother of an alcoholic or drug abuser can never give up support. They must hope that the child will one day change his ways short of disowning him or her. But disowning is just a psychological choice. Kinship is a biological link that cannot be broken. 

However, for friends, teammates and colleagues, we can exercise our judgement call and support high integrity people. Although, we never know and people change. Unfortunately, sometimes, good people do support the wrong partners that they cannot betray only until public opinion turns bad enough such that it becomes reasonable for betrayal. This was probably what happened with Warren Buffett and John Gutfreund. 

So, coming back to investing, it sometimes pay to learn some of these dynamics that could happen in executive management. How close is the management cadre and can they work to create value for shareholders? Is the Chairman or the Board tied into supporting a poor performing CEO and shareholders are taken for a ride together? We must be mindful of these even though it’s not easy to learn such intricate details as retail investors. 

Next, we shall discuss the 2nd lesson: identify the right advisors and listen to them.

Freddie Mercury, Queen and Mary Austin - Freddie's wife

In Bohemian Rhapsody, Freddie Mercury had a great band, his wife and his friends but he turned all of them away and listened to one adviser who turned out to be an asshole. This person blocked everyone else off and tried to dominate Freddie’s life and he didn’t realise it. This is sad and we have to be careful that this could happen in both our lives and also in companies. 

 As an investor, I had also witnessed episodes as such. The CEO of the company had a weak cadre of advisors and was listening to the wrong advice. The company made missteps after missteps until the market cap between itself and its closest competitor became miles apart. It could happen to countries too. Prime Ministers listening to the wrong advisors. Emperors in past eons losing their dynasties because of a single eunuch or concubine giving bad advice. 

So, we need to be mindful about such things while we do our due diligence on companies. It can be hard to get such information via annual report and public sources. Sometimes we can get vibes or snippets if we pay close attention. In Singapore, we can get to hear stories if we dig enough. But, by and large, we have to assume that good companies that created good financials had strong CEOs and teams behind them. Then check around and look out for signs of bad advisors. 

On the topic of cadres and teams, we also come the the 3rd lesson from the movie: four heads are better than one. 

Queen was made up of four members, Freddie Mercury, an astrophysicist, a dentist and a mechanical engineer. They were so different and so not-artistically-inclined based on their choice of academic training. Yet they came together to create some of the most memorial music of the 1970s and the 1980s. This is the power of teams. 

In one memorial scene, Freddie lamented that he failed with his new venture because there was no one to tell him his rendition of a certain piano section was crap or his lyrics were uninspiring or simply this part of his music sucked. The team and the debate was what created epic music. 

Bill Gross - The Bond King

This is exactly the same as investing. One person’s view is never enough. In the recent weeks, various financial newspapers updated us the latest sad chapter in the story of Bill Gross, the Bond King of PIMCO. Bill Gross was the legendary investor in the world of bonds or fixed income. He was so good that his name became synonymous with PIMCO, the world’s largest bond fund. For decades, Bill Gross = PIMCO = good performance in fixed income world. A few years ago, he had a fallout with his team at PIMCO and went to Janus Henderson. But without his team, performance suffered and now he was retiring from his new firm as well. The mighty Bill Gross, the Bond King, can only be as good with his team. 

To be sharper investors, we will always need someone to debate stocks. Warren Buffett debated with Charlie Munger. Yes, two men is a team. Although the best investment teams usually had 3-4 core members who constantly debated and tear down one another’s investment ideas. This is the crux of good investing. The teammates also need to trust one another. It is not about ego. It is not about not being friends enough. Tearing down a stock idea is just about the stock. It is not personal. But being humans, we often think it’s personal. It takes years and chemistry to build enough trust in a team to bring out and crystalize the best ideas. 

Four heads are better than one. 

Next post, we discuss the last lesson! Huat Ah!

Saturday, March 02, 2019

Charts #20: House Prices

This chart says it all. Property prices moved way up vis-a-vis GDP and income.

1986-c.2017

The chart is for Australia but it's probably the global trend over the last 30 odd years.

Monday, February 25, 2019

Lessons from Bohemian Rhapsody - Part 1

I have this habit of viewing everything with investors’ lens and again this was what happened when I watched Bohemian Rhapsody recently. This top grossing movie of 2018-19 was about Queen and its lead singer: Freddie Mercury. Friends and acquaintances raved all about it and seeing it as the top movie on the inflight entertainment, I put on my headphones and started watching before the plane left the tarmac.

It was good but not as good as my expectations. Expectations - the markets are also all about expectations. When expectations are too high, then the stock will likely fall. There you go, everything in investor’s lens. Bohemian did tell a good story, but the director Bryan Singer always gave enough clues about what to expect, which makes it too expectable. That’s my complaint. Otherwise, it’s good and deserves its SGD1bn box office worldwide.

Queen, the band behind Bohemian Rhapsody

Nevertheless, watching Freddie’s life story drew so many important lessons that I felt compelled to take notes while I watched in the plane so that I could write this for all the readers here. They are both life lessons and investment lessons, expectedly. Since most things that are important enough are usually universal right? So without further ado, here’s the four lesson from Bohemian Rhapsody:

1. Never betray your cadre
2. Identify bad advisors
3. Four heads are better than one
4. 祸从口出 (disasters come from the mouth)

Ok, before we go into details, I must warn that if you haven’t watched the movie, there are spoilers ahead. I have tried to make it as generic as possible but if you prefer to know nothing about the movie when watching then you should read this after you watched it.

First lesson: never betray your cadre.

This is something we all know but yet forget so often. By cadre, I mean people who we treasure most, be it friends, spouses, parents, teammates, siblings etc. In the story, it showed up again and again that artists are born free and hence they feel that they have to right to live way they wanted it. So Freddie betrayed almost everyone in his life, not just friends, but his parents, his band, his lovers. He did it in all ways imaginable too, like an artist. He spout words that one should never say (we will visit this in a later post). He makes unilateral decisions that were good for himself but bad for his band. In short, he was an asshole.

Unfortunately in life, we are bounded by rules. School rules, company rules and most importantly social rules. For example: we don’t get into a love relationship with more than one person (well at least in current times, in current Singapore and most OECD* countries). In the past, we could, if all parties accepted it. Sorry guys, doesn’t happen today.

By betraying our cadre, we break the primordial social contract that makes us humans. In fact, this is almost biological in mammals. Monkeys who betray the clan are casted out. However the follow-up lesson here is that your best friends and family members would forgive you if you sincerely repent and never do it again. Some squander these second chances. Then, you truly are the asshole and deserve to rot in hell.

What is the relevant investor lesson here?

Integrity before everything else

In investing, this boils down to the integrity of those driving the companies. Would they betray their capital providers? It’s usually too easy to betray shareholders. After all it's more a legal obligation than a social obligation. Sometimes, you can still betray shareholders legally. So what’s there to lose?

Normally, the lack of integrity comes in two forms: financial / accounting integrity and management integrity. Accounting integrity is the pre-requisite of any fundamental analysis. If the accounts are faked, then there’s nothing to analyse right? Most people don’t think to deeply about this because we “assume” the accounting has integrity. After all, it’s all listed companies, vetted by the stock exchange and audited by auditors. Unfortunately, it still happens. It’s illegal but people do it. Look at Midas, Informatics, Enron, Toshiba. So when there is a reasonable doubt that the firm lacks financial or accounting integrity, don’t bother to analyse anymore.

As for management integrity, it is also linked to the first point - how some had ulterior intentions to cook numbers. But it is also about having the “betraying-shareholders” mindset . Management has the onus to work for shareholders and other stakeholders but this doesn’t happen all the time. When the management is working for themselves (without breaking any rules), then shareholders will not see their money. This usually happens when the company culture devolved to be all about management themselves. Old case in point: CK Tang screwed shareholders by taking the firm private below book value. Valuing its Orchard flagship property at c.SGD1,000 psf. Everything was legal. It’s just business, nothing personal. But where’s the integrity?

Privatized below book value at c.SGD1,000 psf

As shareholders, we must always be vigilant. Caveat Emptor.

Next post, we talk about our life cadres and advisors!

*OECD stands for Organization for Economic Cooperation and Development. Today it consist of 34 countries including most European countries, Japan, Korea, Australia, New Zealand, Israel, US, Canada and Mexico.

Thursday, February 14, 2019

Charts #19: Global Alcohol Consumption

Courtesy from Our World In Data
https://ourworldindata.org/alcohol-consumption

Global Alcohol Consumption Peaked in 1980s!

Happy Valentines' Day!

Monday, February 04, 2019

Happy CNY 2019! Huat Ah! Bcos We Are Singaporeans!

Is it because I'm Chinese? No, sweetie, we are Singaporeans :)

The Year of the Dog is coming to an end. Tomorrow, we usher in the Earth Pig. Yes, while the media always reports that this year is the Year of the Golden Animal, it seldom is. The last real Gold animal was in 2011 - called Gojek, the Golden Jackass. Just kidding, it's the Golden Rabbit and before that the Golden Tiger in 2010.  The next one is in 2020 - the Golden Rat. As there are five elements (Earth, Fire, Water, Wood and Gold) and each element gets two years in a row, we only get to Gold every 8 years.

Meanwhile, as markets move in advance as they always do, gold prices are the move! No autolock here.

Gold prices rushed through SGD 1,680!

The recent rally might be more USD related rather than gold supply and demand. Since the Fed decided to stop tightening, gold prices shot pass SGD1,680 and moved real quick to SGD1,776 (USD1,315). The obvious reason being that the USD should weaken since the Fed is no longer raising interest rates. So all else being equal, gold prices should break loose.

In fact, since 1971, gold has only gone one way - up, up and away. It hit USD60 in 1972, almost doubling and then hit USD200 in 1975. By 1980, it was USD650 (almost 20x return in 10 years) and then ran all the way close to USD2,000 during the GFC. It then briefly collapsed to USD1,000 and we are now back to USD1,200-1,300. If one bought $10,000 worth of gold in 1971, it would be $380,000 today, enough to pay for a lifetime of ERP charges. 

Converting from USD to SGD, it's also roughly about SGD1,680. In Chinese, 168 sounds like one way street to Huat Ah! Translation: one straight way to making lots of money. Hence Chinese really like this number: 168 (一六八 Yi1 Liu4 Ba1 sounds like 一路发 Yi1 Lu4 Fa1). Well, if you are not Chinese, a big Huat to you and your family too! There is no autolock to Huat and gold prices!


All this happened because of the historic event on 15 August 1971. The Bretton Wood system which linked all monetary currencies to gold prices collapsed. Before 1971, gold prices were fixed at USD35 per ounce and all other currencies were also pegged to the USD in tight ranges. This proved to be too onerous because the central banks needed to defend their currencies to maintain the exchange rates whenever their economies come under pressure. 

As with kingdoms issuing gold coins centuries before and the German Mark before WWII and the British pound after WWII, powers that be find it too difficult not to devalue when times are stressed. Governments always devalued their currencies. Put it in another way, the central banks cannot defend their currencies when the world's speculators come together. In fact, the Bank of England lost infamously against George Soros and the British Pound got devalued the second time in 1992. Soros became famous overnight and was since known as the man who broke the Bank of England. This was why UK doesn't use the Euro today and might have to exit the European Union with no deal this March.

So, looking back at the long history with the collapse of Bretton Woods, gold prices can only go up not because gold is a good investment. Gold doesn't have a business model or produce any cashflow. But it will Gojek up because fiat currencies will continue to depreciate. It's like releasing the autolock and letting a hostage run free. Okok, let's be serious. It's because when the link between gold and USD broke in 1971, fiat currencies can move as far as human creativity allows and there is no limit to the human brain and its creativity - see below.


In all seriousness, unpegging gold and fiat currencies allowed businesses to price their products and services without any regard to any base systems and hence by extension, economies and countries would also be free to price anything as they deemed fit. With the passage of time, we lose our sensitivities to the intrinsic value of money itself. Meals go into thousands and tens of thousand of dollars - something unthinkable for our parents and grandparents. Houses in Singapore today are in the millions or tens of millions. Houses in China are 20 to 30x annual incomes. Chinese newly weds cannot afford homes without parent support, Is it because I'm Chinese? Maybe, you know... better come to Singapore.

Hence, as strongly advocated before, it makes sense to have a bit of gold in all portfolios. Gold is the origin of the global financial system built on centuries of human's collective adoration for this metal. Gold has no meaning to a monkey. But to humans, it represents wealth and the most ancient verification as the ultimate store of wealth. It has been so since the beginning of human civilization. It was used by the Egyptians, the Greeks, the Romans, the Aztecs and needless to say, the Chinese.

So buy Gold in 2019! Huat Ah!

For the uninitiated, the various allegories in this post are wrt to this incident that happened a few days ago about a cab driver and a Chinese lady passenger who felt she was cheated by the cab driver.

https://www.asiaone.com/singapore/it-because-im-chinese-go-jek-passenger-gets-doxxed-wake-viral-video

Monday, January 21, 2019

Charts #18: Gaming

Spotted a good chart on FT detailing the rise and rise of gaming.


Pretty amazing how the gaming console had been around for almost 50 years!

Saturday, January 12, 2019

Thoughts #12: Is the World a Better Place?

WSJ published an interesting article titled "The World is Getting Quietly, Relentlessly Better" sometime back arguing that the number of people living under extreme poverty conditions had decreased. The global middle income group is now nearly 50% and many diseases no longer posed threats to lives.



On many counts that is true, but living in Singapore we tend to feel that life didn't get better, don't we? Maybe we started out in Middle Class (defined as earning $10-100 per day) and not enough of us are in the Rich category (only 2.7% of world's population). But even if we are in Rich, we not are necessarily happier.

Singapore passed the generation when children would do better than their parents and progress brought about happiness. This is a developed world problem. Now that we have enough food, good shelter, basic education, healthcare and most of us have some money, what is that makes life fulfilling? It's a tough question.

One possible answer could be sharing and giving. Giving.sg might be a good place to start. When we huat, we should also help others huat too! Huat Ah!

Thursday, January 03, 2019

Goodbye 2018! Hello 2019!

Yesterday was the first trading day of calendar 2019 and we witnessed how the markets "lao sai" (had a diarrhoea) all the way on its first trading day (slightly better today though). It is believed that the first trading day of the year determines the direction for the year. So if that's the case, we can only go south in 2019...

Of course, all these old traders' tales aren't necessarily all true as with most things that concern the markets. The markets are forever unpredictable and no rules of thumb or any other finger ever works. It's different every time although sometimes we can see how it rhymes. 

Let's take a look at what transpired in 2018 and hopefully we can learn some lessons for 2019.

1. Trade war

This was the biggest thing in 2018 that brought the decade long bull market to its end. US decided to impose tariffs on USD200bn worth of goods traded and China retaliated with tariffs on USD60bn worth of goods. But since China exported much more to the US, she was the natural loser here. Her stock market collapsed 25% and the US markets declined in sympathy, so they decided to patch up. The two countries set a truce until 1 March 2019 when hopefully some good news would be announced.

China's PMI

Meanwhile, China's economy continue to slow as the PMI above showed how things had really rolled over. The US is not doing that great as well with Fed's tightening impact reverberating across the system. Global bank stocks fell a good 15-20%. So with the two largest economies in the world slowing down, how can we expect a good 2019? Well, we better get ready for a roller coaster downride!  

2. Tech melting down

Last year this time we talked about a tech melt-up. It didn't melt-up, it melted down. FAANG and BAT * collapsed after their stellar performances from 2015-2017. Apple cracked another 9% last night after iPhone sales disappointed. Google collapsed 30% over the last few months and now looks really interesting as it generates USD33bn in Free Cashflow (FCF) on an Enterprise Value of c.USD600bn. In China, Alibaba and Tencent also underperformed massively. But I am not a big fan as valuations are still not cheap despite falling 30-40%. 

Not forgetting the mega-proxy for new gen tech - Bitcoin. It peaked at USD19,650 around Dec 2017 and fell all the way to USD3,875 as of yesterday. 95% of all initial coin offerings went underwater and many investors lost their shirts. While blockchain technology will change the future, it's decades before we see things coming to fruition. This is very analogous to how Google and Amazon came about in the early 2000s only to make an impact today. Who knows, maybe at some stage, we should own some Bitcoin. It might become the new gold standard.  

3. Forgotten stocks

As the rage went on and then off in the internet and new gen tech space, a large list of brick-and-mortar forgotten stocks got really cheap. Again this is just like what happened during the first dotcom bubble. Automakers are trading at single digit PE and some over 10% FCF yield. Consumer staples are now back to mid teens, some are even at single digit PE. In Singapore, stocks like Overseas Education (discussed previously in 2016) is trading at 13% FCF and giving out 8% dividend annually. Albeit it's micro-cap and hence there's always inherent idiosyncractic risks.

Audrey Tautou in Amelie (2001)

Forgotten stocks are like forgotten actresses (one of my favourite being Audrey Tautou in Amelie featured above). They continue to do their work but after the limelight shone away, they grow out of sight and out of mind. Some do make spectacular comeback but most find a rich husband and get married much like cheap stocks getting taken out at a premium.

There is money to be made buying forgotten stocks, but it also requires a different approach i.e. having a diversified portfolio capable of capturing some of these gains but also capable of waiting things out (Overseas Education had done nothing over the last three years). Buying some of these forgotten names do require a stringent long term buy-and-hold strategy to make money. 

However, if we scrutinize the 5 year performance of the top 50 names by mkt cap in Singapore (list below courtesy of Business Times), we would come to the conclusion that buy-and-hold didn't work. The largest company in Singapore (Singtel) fell c.18% last year and is now overtaken by two banks and a trading conglomerate. Across the board, most Singapore co.s did badly over 1, 3 and 5 years as our economy matured.

Top 50 largest co.s in Singapore

4. Ride the Wave

In fact, buy-and-hold had not worked for most Asian markets starting with Japan in 1989. So again, we come back to the notion that no one rule ever works all the time. Buy-and-hold might make sense for some stocks, usually in the US or the European markets with very diversified investor base. Even so, as internet businesses grow and economies change, it is increasing difficult to hold many of the same stocks for 10 years expecting them to compound. Some would, but most wouldn't. 

This is also reflective of today's disruptive cycles where new businesses make old ones irrelevant quicker than before. A few decades ago, a successful retail model like Walmart had a good 10, 15, 20 year runway to conquer US and then the world. But today, Whole Foods would be taken out by Amazon, Ford had its lunch eaten by Tesla and Zynga Games and Angry Birds disrupted Electronic Arts only to see itself getting disrupted by Supercell and Fortnite in a short span of a few years. 

Hence, I think the value investors of our age would need to rethink buy-and-hold. We have to use valuations to guide us to ride the wave. When we find good businesses at reasonable valuations, we should ride on and exit when valuations are exorbitant. One example that comes to mind is Intuitive Surgical (ISRG) - the company behind the surgical robot now commonly used for prostate removal.

ISRG's Surgical Robot

In 2016, ISRG was trading at a reasonable 4% FCF yield (FCF USD1bn over market cap of USD25bn). It surged to 1.5% FCF in mid 2018 (when buy and hold didn't make sense anymore) and now corrected c.20% from its peak. At some point, it might become interesting again, say FCF USD2bn at market cap of USD45bn or c.16% from today's price. Hopefully that gives a flavour of how value investing would be going forward.

5. Hello 2019!

So, in the new era, buy-and-hold no longer means buying and holding the same stock for 10 years. We constantly have to keep a lookout for disruptions. When valuations doesn't make sense, we also have to trade. As for 2019, the bull run is over and we need to be vigilant. There shouldn't be a 2009 Lehman type of meltdown but things should get uglier before it gets better. Meanwhile, we keep our gunpowder dry and look for those high single digit FCF stocks to buy. Maybe some forgotten stocks and forgotten actresses will come back in vogue. My picks are as discussed: Google, Intuitive Surgical and Overseas Education (which I already owned).

Happy New Year and Huat Ah!

* FAANG and BAT are acronyms for US and China's internet giants
FAANG = Facebook, Amazon, Apple, Netflix and Google
BAT = Baidu, Alibaba and Tencent