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.

Tangible Thoughts #4: Pitiful Pump Uncles

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

Fill Ten or Full Tank?

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

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

Singapore pump prices over the last 10 years or so.

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

Crude prices over the last 10 years

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