Showing posts with label Company Analysis. Show all posts
Showing posts with label Company Analysis. Show all posts

Wednesday, June 04, 2014

Attack on Titans: Office Politics and Corporate Suicides

Here's a well kept secret. Japanese manga and anime have managed to subtly define pop culture and Hollywood for ages. As early as the 60s, robots from the future time-travelled to alter the present in Japanese comics. In more recent times, Ghost in the Shell inspired the Matrix trilogy, Paprika inspired Christopher Nolan's Inception. And the list goes on. Today's topic is about the manga series Attack on Titans or in Japanese: Shingeki no Kyojin.

Being a student of corporate analysis, I can't help drawing a lot of analogies after watching the series. It really left me in awe and I am still pondering over some deeper messages the author could be implying. Of course the huge success of the manga and anime also meant that we could perhaps draw as many other analogies in our own lives, which perhaps better explained its overwhelming success. So for me, it was corporate analogies but for housewives it could well be family affairs, for students it was about friendship and love and for others, another level of meaning.

Manga cover for Attack on Titans

Just to give a flavour of its success. Attack on Titans, the best selling manga in 2013 which to date only has 13 volumes, sold 38 million copies worldwide or 2.9 million per volume. For comparison, Naruto, one of the best selling mangas ever, sold 135 million over 67 volumes, or just 2.0 million per volume. Of course, there's One Piece and Dragonball, which are older and have sold 4-5 million per volume given its wider reach and appeal. But Titans is on track to be on the league tables of best selling mangas.

So what's the interesting idea and what's the corporate analysis about? Why Office Politics and Corporate Suicide? First I have to give a quick synopsis, but rest assured, limited spoilers.

Attack on Titans tells a story in a world where humans lived behind layers of walls in a confined area on Earth. Human-eating Titans lived outside the walls and devour people for pleasure. With limited technologies such as cannons and blades, humans deemed themselves incapable of defeating Titans and supposedly built the layers of walls many years ago for protection. A small elite force ventures out to find ways to defeat Titans but is ridiculed by the majority of fellow human beings. The manga deals with ideas such as Prisoners' Dilemma, camaraderie and betrayal, fear and courage, beggar thy neighbour and other human/social issues. Part of this plot itself was also borrowed by Hollywood in a recent Grade B movie called Pacific Rim.

The relevant plots for this blog in the story obviously were not about Titans devouring humans or the personal struggles, although they were really quite intriguing. To me, what struck were the analogies on corporate environment and organizational structures and how office politics could bring about corporate suicides. Here's my personal take on what's the story might be about. This may or may not be what the author intended. Anyways, here's my analogy.

The whole human society represents a corporation or an organization. The Titans represents the external threats to the organization or perhaps, simply, industry competitors. The walls represents business moats or barriers protecting the organization hitherto and the humans, obviously, represents the employees of the organization. As the story progressed, the Titans managed to break into the walls and wreak havoc. The humans retreated behind the inner walls (there are three walls altogether, see pic below) and the main characters go through personal struggles as they see how some of their friends got devoured by Titans and perished. Cowards chose the easy way out by excelling in training so as to choose their career paths as security guards who get to go behind the innermost walls to protect the society elites and the monarchy (ie a worthless CEO and his cronies in my analogy perhaps).

The three layers of walls

Now in most corporations in Singapore and perhaps more so in Japan, most middle to high income salaried employees are like the main characters in the story. There are always the capable ones who will be able to lead the troops to defeat Titans. Some are ridiculed and their efforts to save humanity actually get undermined. So in a sense, the best employees out there fighting Titans are actually being backstabbed by their own colleagues!

There are also similarly capable characters but with little integrity who would choose the easy way out by hiding and further climbing up the corporate ladder, by stepping on others to save themselves, oblivious to the fact that if the all walls are penetrated, human existence would be wiped out. Well, ie, the organization gets overwhelmed by the threats or get killed by its competitors and vanquishes.

As investors who had analyzed lots of firms would probably agree, we see this time and again in lower quality companies especially those that have succeeded in eras past but are struggling now. There are prominent Japanese firms, but in reality, they are also everywhere, in the US, Europe and even Singapore.

Sony could be a case study here. Before the new CEO Hirai came on board, people who rose to the senior levels of the firm were not leaders who defeated Titans in the battlefields. (They were not managers who created successful new businesses or products or brands that defeated global competition.) They were good corporate ladder climbers who rose to the top playing office politics. 

When everything is smooth sailing, these corporate climbers attract other climbers and their numbers grow over time. People who did real work were marginalized. Climbers, in order to climb have to keep coming up with half baked strategies that alienated even more good people: innovators, researchers, engineers, product managers, marketing and branding experts etc. With no one fighting the Titans, the walls will get penetrated. Now Sony is struggling to survive, not unlike the development in the story. Yet the senior managers are not getting their act together to defeat the Titans! Real corporate Titans like Apple, Samsung and Google.

In Singapore, a lot of established agencies from government entities, listed corporations to sovereign wealth funds could be in similar situations. People are just too comfortable as peacetime passed and people who have rose in power now were not tried and tested in the battlefields. They spend time playing politics and deceiving themselves. So when the Titans penetrated the walls, things started to crumble really rapidly. Sometimes, a small minority emboldened themselves to confront the Titans but their colleagues sabo them (undermine them) in order to save their own skins. The senior management in power doesn't really know what's going on and they also care more about their own safety rather than devising good strategies to kill off the Titans.

In the last few years, some of these spilled over into media sensations. Like the Cecilia Sue saga which came about from some power struggle within the Central Narcotics Bureau. We also see how things really crumbled in listed corporations like SMRT. The Titan in this case was perhaps the unmonitored load on the train system driven by ever growing commuter traffic. As we now know, it brought down the firm, the nation's commuting network and even affected the political support for PAP. 

In the story, Titans were brainless creatures. They were just huge, fearsome in appearance and has this strange ability to regenerate themselves even if their heads got blown off. The only way to kill a Titan was to slice out a piece of flesh at the back of their neck. 

By right, Titans shouldn't stand a chance to be able to wipe out humans. The humans were very weak because of fear, because everyone just wanted to save his own skin. The scarcity of resources within the walls led to turf wars, politics and vested interest and power struggles. All these plus self interest, weak thinking and more negative attributes precipitated the imminent downfall of mankind. If all the humans put their minds and efforts together, draw courage, be fearless, think of the society before self, embolden and synergize, unite and fight, the Titans had no chance. They are the ones that should go extinct.

The best run firms understands this. Our forefathers understood this. Others before self. Teamwork works. United we stand. Divided we fall. The green pastures outside the walls, the oysters in the blue oceans are ours to take when we be the best that we can be, when we mount our culminating Attack on Titans. 

Saturday, August 01, 2009

Best Of The Best



This is an updated list of stocks screened out by some value factors, like less than 2 yrs of negative free cash flow over the past 10 years, high dividend over the past 10 years etc.

Sorry I have no clue as to how to make the image bigger, so pls click on it to see the whole damn table.

The ratios you see are also 10 year average ratios, hence they will look different from what you get in most places. This is adhering to what Ben Graham taught. Looking at the performance of the company over a long time frame to smooth out any economic cycle, boom and bust that the co. went through, and most importantly bring down the no.s especially if the company had had spectacular growth in the last 1-2 yrs.

My personal top pick is Cerebos Pacific, Brand's Chicken Essence rules man! More on this next time.

And finally, disclaimers, buying stocks listed here won't guarantee that you will make money. If really these stocks here can make anybody rich, I won't be blogging here my dear!

Anyways, do take a look and see if you agree these are the best of the best listed on SGX!

Monday, July 27, 2009

More Payback in Years

In line with the previous post, here are more scenarios how payback in years can change drastically with the vagaries of modern life

Bought a water stock – 33 yrs
The CEO got married – 99 yrs
To a scientist nominated for the Nobel Prize for water purification – 12 yrs
They divorced – 33 yrs

Bought a condom stock – 35 yrs
Satellite failure stopped the broadcasting of global sports channels for 2 weeks – 16 yrs
False alarm, satellite’s working! – 33 yrs
Korean melodrama satellite fails – 8 yrs
Global power failure caused by Al Qaeda – 2 yrs

Bought a telco stock – 18 yrs
The co. announced that an ex-CEO of a mining co. will take over as CEO – 180 yrs
The new CEO divested poor performing subsidiaries and incurred losses of USD 4bn – 625 yrs
The new CEO got fired – 18 yrs
The subsidiaries recovered – 68 yrs
The telco co. decided to invest in the subsidiaries again – 255 yrs

Here's the bonus for this week!
List of most anticipated IPOs and their relevant payback years

Twitter IPO – 50 seconds
Facebook IPO – 2 hrs
Facebook acquires MySpace – 120 yrs
Twitter acquires Facebook + Myspace – 2,718,28 1,828,4 59,045, 235,360 seconds

Iridium Satellite Phone Returns! IPO – 125 yrs
Lehman Brotherhood Restructured IPO – 214 yrs
Revenge of the Fallen: Mega-Electron General Motors IPO – 369 yrs

Shanghai Stock Exchange US$100bn IPO – 88 yrs
Bird Nest Stadium IPO at $18 – 188 yrs
Jackie Chan Franchise IPO – 288 yrs

Temasek Holdings IPO, CEO Singa the Lion – 440 yrs
Wimbledon Tennis IPO, CEO Aggassi – 1,066 yrs
Tour de France IPO, CEO Lance Armstrong – 1,789 yrs
Terracotta Army Exhibition IPO, CEO Zhang Ziyi – 6,000 yrs

Jurassic Park Ride IPO, CEO T-Rex – 65mn yrs
Google Earth IPO at $3141.59265 – 4.3bn yrs
STAR WARS Franchise IPO, CEO Chewbacca – 13.5bn yrs

Tuesday, July 21, 2009

Price Earnings and Payback in Years

Another way to think about the all powderful Price Earnings Ratio is to think of it as Payback in Years. Ok, here's the expraination:

Price Earnings = Price / Earnings

Say if a stock earns 5c per share and you are paying $1 for it, how many years would it take for you to get back your $1?

Assuming that it will earn 5c every year forever, the answer is 20 years right?

And how did we get 20 yrs? Well $1/5c gives you 20.
Which, in case you fail to notice, is the formula for Price Earnings Ratio.

So lower PE means faster payback in years.

Some people talk about it's alright to buy a stock with PE of 40x bcos it's the dream stock, spectacular growth for the next 20 years!

40x is cheap! Let's put in more no.s to this scenario and see what we get:

EPS for 2007 20c
EPS for 2008 40c
EPS for 2009 60c
EPS for 2010 80c

Price in 2009 $32

This stock is, well... trading at 40x PER for 2010 at $32. In order to get a decent payback in years (roughly 15 yrs), the stock needs an average EPS of $2.4 for the next 15 years.

This means that the EPS needs to triple in the next 3 years, grow a bit more and finally stabilize at $2.6 so that the average can hit $2.4!

Even if it somehow managed to perform this spectacular feat, what you have paid for at $32 merely justifies it. You did not get any upside or discount. There is no margin of safety in this investment. So think really hard when you are asked to buy a stock with 40x PER.

Anyways, in line with the points system found in Men are from Mars, Women are from Venus, here is a list of scenarios and the estimated payback years:

Analysed a blue chip for 3 mths & bought it in a bear market - 12 yrs
Analyzed a blue chip for 3 days & bought it in a bull market - 26 yrs
Bought a blue chip without any analysis whatsoever - 33 yrs
Bought a blue chip, heeding advise from a friend - 52 yrs
Bought a blue chip anticipating a RIGHTS ISSUE - 89 yrs

Bought the highest traded stock on SGX after it dipped 10% - 48 yrs
Bought the highest traded stock on SGX after it rose 15% - 60 yrs
Bought a stock that rallied 30% after some good news - 76 yrs
Bought a stock that rallied 30% after some good news, in a bull market - 182 yrs

Bought a stock not covered by any analysts - 27 yrs
Bought a stock rated SELL by an analyst from a broker house - 42 yrs
Bought a stock rated BUY by an analyst from a broker house - 84 yrs
Bought a stock rated Strong Conviction BUY by an analyst from a broker house - 205 yrs

Bought an S-chip at IPO - 51 yrs
Bought an S-chip at IPO, heeding advise from a friend - 90 yrs
Bought an S-chip at IPO, heeding advice from a taxi driver - 122 yrs

Bought a stock Warren Buffett bought, at a lower price - 14 yrs
Bought a stock recommended on this blog - 21 yrs
Bought a stock recommended by a value manager on CNBC - 29 yrs
Bought a stock recommended by a magazine - 48 yrs
Bought a stock recommended by a broker - 128 yrs
Bought a stock recommended by two different brokers - 199 yrs
Bought a stock recommended by a self-professed stock guru, advertising "How To Make 1 Million in 2 week" on Straits Times - 256 yrs

Cheers!

Wednesday, July 23, 2008

Mind Share

This concept should be familiar to followers of the guru and value investing as well. Essentially, we should invest in companies that have a market share of our minds. The bigger the better.

Well, basically, we are talking about branding, but Mind Share sounds so cool right! So let's just use this term indiscriminately in this post.

For the uninitiated, let's try to define what's Mind Share.

In today's world, most of us suffer from information overload, everywhere we go, we get bombarded by sexy ads, bright slogans, spam emails, fancy taglines, funny ringtones etc. We used to just ride a bus. Now we flag down buses with huge ads, watch TV on buses while surfing the net with our PDAs, talking to our gfs/bfs on our mobile and listening to Ipod at the same time!

Everything is trying to get even the slightest attention of our hearts and minds, every minute of the day. In fact, all of us are now superstars, and all the products in our lives are fans demanding attention. So if some products can just get a tiny slice of our thoughts, wouldn't that be very significant? And the fact is, some brands in some products simply dominate people's brains.

Think soft drink -> Coca Cola
Think shaver -> Gilette
Think portable music player -> Ipod
Think search engine -> Google
Think luxury handbag -> Louis Vuitton
Think fuel efficient car -> Prius (or Toyota)
Think diapers -> Pampers
Think cheese -> Kraft
You get the idea, I hope...

One important tenet of value investing is that the business must have very high barrier to entry such that profits will not get eroded by competition. And branding is one such high barrier. Once a brand becomes synonymous with its product, it will take years or even generations to change that. The same goes for bad products. There is even a Chinese proverb: bad name smells for 10,000 years, right?

When a product has significant Mind Share, or branding power, it can command any prices and people will still pay for it. Even if competitors comes up with a better product, Mind Share is so powerful that it negates the positives of the newer product and urge the consumer to stick with the old one. Remember the Pepsi Challenge? People actually like drinking Pepsi more than Coke when subjected to blind tasting, but still, they will buy Coke over Pepsi anytime.

So does it make sense that Buffett owns some of the most distinguished brand names like Coca Cola, Gilette, Kraft? Why doesn't he owns Apple or LVMH or Toyota or Google? That's gotta do with Circle of Competence, which most people don't really practise even if they understand what it's about. That's topic for another day.

Back to Mind Share. If you come across a new product that has a piece of your mind and also a share of the minds of people you talked to, then chances are it has got a significant Mind Share (and most probably market share as well) and it makes sense to think that the business should be worth investing.

Of course, do more homework and research first. The amount of research done is inversely correlated with the probability of losing money!

One final caveat:
Think Efficient Government -> Singapore!

The future is bright for this Little Red Dot. Whether the heartlanders benefit is another question though.

Wednesday, February 13, 2008

Step-By-Step Company Analysis

This is an expansion of a previous post on how to do a detailed company analysis.

Company CheatSheet

The zero-th step for company analysis is actually a quantitative stock screen. Poems have a good system to come up with a list of stocks. As for what criteria to use, the post mentioned above has a list which I would recommend pple to use. The screen should include both company specific financial ratios and valuations.

So you put in the criteria, the the system churns out a list of companies. Then you can select any co. that has a nice sounding name or maybe it is in a good industry and study it. It will probably take you 3-4 days (if you have a full-time job and can only spare limited family time to do this ECA) to read the annual report and broker's reports try to understand its business.

Ratios: when doing the screen, you would have included a few financial ratios, but the trick is to actually look at all other ratios, if something bothers you, ie this co's interest coverage ratio or asset turnover is too low. Then perhaps its not wise to invest in the stock.

Next is to focus of qualitative stuff. Some things that I would look for are:
1) Whether the company is in the right regional markets / right industry ie places where there is still a lot of growth, less competition and co. has pricing power.

2) Market share of its products, it is better to be either No.1 or No.2 in its field bcos anything else, it has no pricing power nor the competitive edge over its competitors. Of course, all industries are different, sometimes, the market is such that there is no mkt leader and can never have one.

3) Its business moat / competitive advantage / barrier to entry of its business, the company needs to have that edge where no one can ever get close to them. For Toyota the edge is its manufacturing capabilities, it can make a cheap, reliable and fuel efficient car targeting the mass affluent, and no one else can do that. But the European cars fight with another edge: branding and image. Think Porsche, Ferrari, Lamborgini.

4) Its management, their compensation scheme and their past actions. Has the mgmt been friendly towards shareholders? Have they issued options or other means to dilute shareholders' stake indiscriminately? Any directors resigned?

5) Clarity of its annual report. Sometimes, the annual report of the company can be very flashy but it does not tell you the impt things. ie. the company is trying to hide. It then pays to avoid these co.s.

Of course, the list goes on and on. And as you gain experience as an investor, you refine your thinking, and know what to look out for: the warning signs, the best practices, the business moats and whether the businesses are sustainable.

There are really so many things that you should look out for and even after that it pays to let things cool for a while, re-visit the company after some time, or after when the stock has fallen a lot. Especially in the Ra-Ra markets of 2006-2007.

So when I have decided that this is a company that I should own, I will wait for a good time to buy. When valuation gets cheap enough. Usually I only look at PER. So if the sustainable forward PER is cheap enough, I will buy. This is the most important step as a wrong entry price will decide if this stock is a 10 bagger or just a 1.5 bagger (after 10yrs).

It's not easy but it's rewarding when you get it right.

Monday, November 26, 2007

Barriers to Entry

To determine whether a company has a business moat ie whether it can defend its turf when competitors come in, we look at what is called Barriers to Entry, one of Porter's 5 Forces. I have identified a few common barriers but I must point out that the list is not exhaustive. Other barriers exist and it takes experience and knowledge to identify them. Again, investing is about life-long learning and hard-work. It is not about get-rich-quick.

Market share
This is the most basic edge a company can have over its competitors. When a company is the No.1 or No.2 in its field, it is simply much more difficult for the laggards or any newcomers to try enter their market. Esp if there are only 2 or 3 big players in the market. This is bcos standards are set and relationships have already been established, and the laggards and newcomers don't have the resources or time to beat the leaders.

Technological edge
This edge can be manifested in several ways. It can be simply authentic technological capabilities, like Toyota with its hybrid technology which it was the first to developed and remain the leader today. Or it can be superior manufacturing technology which allows the company to make stuff cheaper yet have similar or better quality. Like Samsung's LCD TVs.

High initial investment cost
Some businesses require very high start-up cost and this naturally deters competition. Oil/mineral exploration, wafer fabs, a telco network etc. It is simply not business that any Tom, Dick, Harry can start. Sometimes, it can only be started by the government. So when a business can earn a good return and its in one of these high start-up cost sectors, hmm, maybe it can be interesting.

Brand
This is one of the best barriers a company can ever build. Buffett prides his See's Candy, commenting how people will always buy See's Candy even when it keep raising prices. Great brands like Coca Cola, Louis Vuitton, Rolex and our beloved Ipod are simply immune to competition. No matter what the competitors do, people will still buy Coke to drink, LV bags, Rolex watches and the Ipod over Creative Mp3 players.

Regulations
This is the most tricky barrier. Sometimes it works very well for the company in question, but sometimes it simply screw things up. The investor has to become a political analyst to get this one right. Eg. oil fields in Indonesia and Russia. Although major co.s like Shell etc negotiated for rights to sell the oil in these fields some years ago with the respective govts, the contracts were void since oil prices shot through the roof. In the case of Russia, the rights were forced to be sold back to Russian co.s. Suck thumb right? Some value investors stay away from highly regulated sectors altogether.

So, as mentioned, there are other barriers and it takes time and experience to identify them. But when you know the company has got a good business moat, earns a good return, and reward shareholders, then go for it. In Singapore, some co.s that comes to mind would be your mass transport stocks, newspaper, telcos etc.

Monday, September 10, 2007

The Razor-and-Blade Model

In this post, I would like to introduce a familiar business model (for most value investors) that can help most investors in their analysis of companies. It is also a model that entrepreneurs should seriously adopt when they want to start their own businesses. It is a very basic model that can help generate good recurring income and is probably a sign that the company will be in the business for a long, long time and not those fly-by-night bubble tea shops where you see them today but not tomorrow.

This business model is known as the razor-and-blade model. Well for the uninitiated, this is the model where you sell the low profit margin razor at a cheap price and then earn back the money by selling the blades at a high margin.

Though mundane as it may sound, this model has proven itself time and again that it can generate stable cashflow and earn a good margin. Unfortunately, as the guru used to say, it’s hard to teach a new dog old tricks. So a lot of businesses don’t employ this model.

This model plays on the human mindset by enticing people to buy something, usually having the impression that it should be expensive at a low price. Then after “locking-in” the customer, the co. sells him consumable products at a higher margin. However, our ape-evolved minds cannot relate that instantly and we still think we are getting a good deal.

For example, we buy a mobile phone at S$199 thinking that it’s quite value-for-money given a lot of sophisticated stuff goes inside this cool piece of plastic and electronics (So the phone is the razor here). However, we then need to buy the blades (talk-time) that cost us $30-50 a month! And worse still, we are lock-in for 2 years! So is it really value-for-money if you think of the whole package? Hmmm…

Sounds like it’s a bit unscrupulous? Feel like you are being treated unfairly? But hey, that’s life, folks. Become a shareholder of the company then and screw the management during AGM! That’s why I own Singtel! Haha!

Anyways, besides the telcos, today we see various businesses employing this simple model, including our favourite Ipod (selling you the Ipod/razor, then the songs/blades), Canon printers, Playstation and Nintendo games, anti-virus softwares etc. But at the macro level, not a hell lot of businesses are doing this. Well of course, sometimes the nature of the business does not allow the adoption of the model, like the retail business. Which also implies that maybe that’s why retail businesses cannot earn a hell lot of money. Sadly when Singaporeans say they want to be entrepreneurs, most people think of retail businesses like restaurants, bubble tea (*gosh*) and clothings etc. My guess is only 1 in 20 retail shops will actually "succeed" ie earn as much as a full-time job after adjusting for time and effort put in.

The razor-and-blade model also manifests itself in different versions but the crux remains at its ability to generate recurring income stream. This is best exemplify by Dell, which recently announced that it wants to provide IT services to its clients instead of simply selling them the box (ie the PC lah). So in this case, the PC is the razor and the servicing contract is the blade. So Michael Dell really got some Liao one ok? Don’t pray pray!

Maintenance contract is actually a very good razor because it usually last for 2-3 yrs and hence securing the stable cashflow from the client for that time period, like the telcos (btw telcos is short-form for telecommunications companies like Singtel, Starhub hor). And with minimum extra capex or cash outflow, you actually get this money rolling in.

So next time when you see a business with a razor-and-blade model, remember to give it some credit bcos chances are it will still be earning money even when the crunch comes, unlike a lot of other businesses which will probably go into red. Especially those hot sectors nowadays, like RE related construction where majority of co.s involved don’t really have a business moat and are rising simply bcos it’s high tide now.

Wednesday, February 21, 2007

What is the "sexy story" about this stock?

In the world of Wall StreetCraft, people like to talk about stories. What is the sexy story for this stock? They would ask, or has this industry got an interesting story?

Translated into English, it basically means this: Tell me why you are buying this stock and make sure it's a fairy tale that everybody likes.

Peter Lynch, the star fund manager for Fidelity some years back, gave this one piece of advice that has got stuck inside my head ever since I read it. If you cannot explain the why you bought this stock into three sentences, then probably you should not buy it in the first place.

For those who have never heard of Peter Lynch, well I suggest you go look him up at Wikipedia. And don't forget to come back here and click on that Amazon link to buy his book!

So the moral of the story is this: Know why you are buying the stock. The reasons should be simple and easy to understand.

In other words, when you buy a stock, make sure that you know its "story". It should be sexy, it should make people say "wow" and make monkeys drool, as if they see truckloads of bananas. But it should also be realistic and the earnings are real.

Over the years, sell-side clerics in the World of Wall StreetCraft have mastered the art of story-telling. They can really spin an infinite amount of fairy-tales and all of them promise a happy ending.

Things like replacing all wires and connectors in the world with Photonics Technology (i.e. light or photon beams), Satellite Mobile Phones (guess most pple remember this one, and the co called Iridium went bust) and my favorite: 3D Holographic Video Phonecalls: some real life technology akin to Princess Leia sending the distress message through R2D2, which was later picked up by Luke Skywalker in the original Star Wars. Too sexy for for your money huh?

But, ultimately, I personally think there are only 3 kinds of stories around. Those that are real and can make you money and then you REALLY live happily ever after one.

1) Growth story: Simple and straight forward, the company has got growth and it is sustainable, valuation is also still reasonable (not PER of 50 or 80x, but say around 15x). Note: the stories listed above (e.g. 3D Holographic Video) sound like growth, but there is a different name for them. They are called concept stocks. There is only a concept, no earnings or sales to justify the story yet.

2) Restructuring story: Company has a good business but somehow cannot generate profits. i.e. very strong sales but no earnings. But one fine day, new management steps in and decide to do something about it. OP margin doubles. i.e. earnings also double and stock price quadruple. Shiok right?

3) Value story: This story can manifest itself in various ways but the basic idea is that you are buying something worth $100 for $40 or less. The difference between this story and the growth story is that the company usually has little visible growth but still the business is very solid and generates good cashflow.

See also Brokers cannot be trusted
and What drives stock prices?

Tuesday, December 26, 2006

Discounted Cash Flow or DCF

Discounted Cash Flow or DCF is the most complicated way to value a stock and also probably quite useless to most people. Well, not if you are good at math or if you are called Buffett or Graham or Dodd. Buffett uses very simplified DCF to try to value stocks and is probably quite good at it, given how much he has earned (umm, in case you don't know, it's about 1/3 of what the whole of Singapore earns). Too bad he doesn't blog.

Well I guess I would just try to describe the concept of DCF, bcos the math will simply freak out a lot of people. But having said that, it's probably A level or 1st year university math so if you really want to know, can google it and try to figure it out.

Ok the concept is basically adding up all the cashflow over the life of the firm and try to determine how much it is today.

Perhaps it is easier to use an example:

Firm A will generate $1 of cashflow over the next 50 yrs, what is its value (or intrinsic value) today?

Well the simple answer is simply $1 x 50 = $50 (QED).

Ok, but how can be so simple?

Now we must understand that $1 next year is not the same as $1 today. And $1 two years out is also different. The difference is due to interest.

So $1 next year is actually equal to $0.97 today bcos if we put $0.97 in the bank today, it will earn 3% interest and become $1 next year. And $1 two years out is roughly $0.93 today bcos if we put $0.93 into the bank today, it will earn 3% interest in 1 yr, and both the interest and principal after Year 1 will earn another 3% interest, which brings the total to $1 two years from now.

So once we calculated the present value of all those future $1 (50 of them), we add them all up and we get the intrinsic value of the firm. For the above example, the answer is $25.7.

If you are wondering how to get $25.7, key this "=PV(3%,50,1,0)" in Excel and it will spit out the answer. Need more help, pls email me.

Well, not so hard after all I guess. But the questions below will make you realize what makes it hard.

First, how the hell do we know if Firm A can actually earn $1 every year for the next 50 yrs? And what will the interest rate be in 50 yrs time? And why only 50 yrs, shouldn't a company exist longer than that?

So that's the hard part, for every input, there is some uncertainty. With DCF, you can have infinite no. of inputs, and that's uncertainty times infinity. How fun. Personally I prefer to stick with PER and EPS estimates.

See also Intrinsic Value Part 2
and Definition: Value Investing

Tuesday, November 21, 2006

Company cheatsheet and stuff - not to be missed!

According to Philip Fisher, one of Buffett's teachers (besides Ben Graham), you cannot never compile a cheatsheet for a company. You have to constantly sniff out info on the company, keep talking to anybody and everybody, from suppliers to customers to employees etc. So analysing a company probably takes like two gozillion years and Frodo have completed the Mt Doom trip like 15 times.

In our world of MTV and instant gratification. Nobody has time for this crap right? So yours truly here has compiled a the ultimate cheatsheet to look at when you first lay your eyes on a company.

I must stress that this cheatsheet is not exhaustive. There are probably another 1,001 things that you should look at. But it should be a good way to start. Also remember than the time you spent researching a company is inversely proportional to the risk that you will lose money. i.e. more research less risk.

But then again who has time to wait for Frodo to go Mt Doom 15x considering we don't even have time to make babies. So I have also kindly calculate the optimal time to spend research a co.

This would be roughly 30 hrs for beginners and 10 hrs for more lao jiao people. But after analysing, this does not mean that you should buy or sell the stock immediately. You should wait for a good time to enter or exit. Investing needs patience, so watch less MTV.

Anyway, to save you from more bull shit, here's the list.

Company specific factors
Mkt cap greater than S$100mn
Operating Profit greater than S$10mn
OPM greater than 10%
Dividend yield greater than 4%
D/E Ratio less than 1x
Growth greater than 5%
ROE greater than 15%
ROA greater than 5%
(Usually these factors can be put into a screening tool to screen out companies that meet these criterias, but I have not found a free screening tool yet... if anyone can find one, pls inform me ok?)

Qualitative factors
Industry climate and firm's position
Strengths and weaknesses of the firm
Major risks for the firm

Valuations
PER less than 18x
PBR less than 4x
EV/EBITDA less than 10x
(These can be put into the screening tool as well)

There are a few things to take note. Even if a firm fails to meet 1 or 2 criteria, it doesn't mean that the stock is lousy. If there are good reasons, it is still a buy. If you try to find a stock that meets everything, probably there won't be any. That's why the each criteria is actually not too strict to begin with. Also, qualitative info matters, that's why it pays to read annual reports, research reports and business news.

See also Investment Philosophy
and Investment Process

Saturday, October 07, 2006

SWOT Analysis

SWOT Analysis is a method developed to analyse an individual company through a framework. It is much loved by Wall Street and you can usually find it in the Initiation Reports of companies by Wall Street analysts. This pretty much tells you that SWOT analysis is perhaps as useful as a piano is to a monkey who is hungry for bananas. i.e. quite useless. Nevertheless, let's take a look.

SWOT stands for Strengths, Weaknesses, Opportunities and Threats which is basically four aspects of looking at a certain company and see if it is worth investing. The words are probably self-explanatory but as an example, let's see how it works.

Strengths: Usually depicts the company's plus points, like having a high market share, or a competitive edge over its rivals, or the ability to raise prices despite public outcry, with the support from the Government (yup that's the right spelling, also don't forget the capital G).

Weaknesses: The company's minuses, like high operating costs, weak product pipeline, poor branding, poor customer service, zero disclosure to shareholders and/or potential investors, labelled as an ugly duckling on Wall Street (that's pretty bad, because Wall Street doesn't like swans either) etc.

Opportunities: Events that will affect the company positively, like a new market for its products, or potential for the firm to be acquired, or the ability to acquire other smaller competitors, or Gahmen, oops sorry, Government support etc.

Threats: Things that will threaten the company's position. E.g. unfavourable regulatory changes, entry of a formidable new competitor, technological evolution that will render the co's product useless, consolidation between suppliers or clients etc.

So that's how SWOT does it. Systematically analyze four aspects and determine the company's position in each of them. Perhaps the takeaway behind SWOT is not just looking at the four aspects but more to analyse a company using a framework or system. This will help one to see the company is a better light, and hopefully make a better investment decision.

PS: Takeaway literally means "da bao" i.e. taking some good food/good babe back home or taking away an important lesson to be remembered.

See also Expectations vs Reality
and Financial Ratios