Portfolio Management for Retail Investors

Ok so much so for institutional portfolio managers. On average, they are crap. Once in a while, you find stars like Peter Lynch, Seth Klarman and Warren Buffett. But these exceptional people are far and few in between.

The interesting story about Seth Klarman is always about this book that he had written like ages ago, called “Margin of Safety”. It talks about value investing and it didn’t sell well at all. So it went out of print. But recently, some Wall Street people started to bid for it on Ebay and it was sold for US$1,000!

Well, I got a free internet copy and am reading it. Cost me like S$10 to get it printed and binded.

Anyways, today we talk a little about portfolio management for the retail investors. How can a retail guy like you and me try to do some portfolio management?

Well, first, we must have like a couple of tens of thousands to start with. If you only have $10k. Then you can basically only buy 1 or 2 stocks. There is not much portfolio management to talk about. Just buy the blue chips or maybe buy an ETF and wait for it to grow to like $50k.

The reason why $10k can only buy 1-2 stock is bcos if you divide $10k up buy 10 stocks, you will be paying $40-60 of transaction cost for each stock, which makes the cost 4-6% for each stock and this will eat too much into your return per stock (which is like 8-10%pa).

So for those who do have $50-100k, then you might want to think a bit about which 5-10 stocks you want to buy. Here are some guidelines... Well actually it’s the same guideline, which is to diversify across everything. You definitely don’t want 5 stocks all in airlines or airline related industries.

1. Diversify across industries

So first we think across industries. If you are a conservative guy like me, you may want to allocate like 50% or more of your money to defensive industries like staples, food, utilities, telcos etc. Of course there are some megatrends happening in our lifetime, so maybe put some into resources, China related, or even tech. But you must definitely understand the risks here.

2. Dividends

This is one big criteria for me. I would want to put 70-80% of the stocks into good dividend stocks. Stocks with rising dividend over time, these are the best. Actually, these stocks will usually come from staples or food. So there is no contradiction bet 1 and 2.

3. Geographical exposure

China and Asia are the darlings of the stock market for the next 10-20 yrs. It makes sense to put money with exposure to these regions. This also means that you should look for Singapore co.s with such exposure. I would put maybe 30-50% in Asia, but also provided I can find cheap and good stocks. This might be the hardest thing to do today.

4. Asset Classes

For those who need more security, you can definitely consider 10-20% of the portfolio into bonds. However, since bonds usually pay 4-5% interest only, which you can get with some stocks in Singapore. It really doesn’t make too much sense to buy them, unless you can buy them like 80c to the dollar or something.

5. Structure

So just to round things up, if you can have a 10-12 stock/bond portfolio, it may look like this:

5-6 stocks in staples/food/telco, which includes 3-4 dividend stocks
2 Asia stocks/ETFs
2 Resource/Energy stock
1-2 bonds

One last note, unless you are really good at market timing, it pays to avoid value destroying industries like most of the tech industry, airlines, container shipping, oil refining etc and industries in secular decline like newsprint, general textile etc.

Hope this helps!

How to Fail in Portfolio Management

Portfolio managers as a group has not contributed anything to the society at large. I mean a barber helps to cut people's hair, a doctor saves lives and a teacher educates our children. Lawyers, politicians, portfolio managers, as a whole, subtracted value from the society, if you ask me.

The famous stats is this, and I must state again: more than 80% of all fund managers fail to beat market indices over long periods of time. Some of them do beat the index for like 1 or 2 yrs, only to falter in the 3rd or 4th.

The market is really terribly efficient. The S&P500 has returned 10%pa on average over the last 80 years. Most other indices don't go that far back but academic studies have shown that stocks or equities, returned high single digit to low double digit per annum, on average.

Hence it is not easy to beat the market over the long run. Yes you may have a lucky trade, like buying BP at 250p and now it's close to 400p, a 60% return in 2 mths. But to replicate this for 10 years is another story.

Value investors don't fare too much better. Some studies showed that 20-40% of value funds outperform market indices. That still means that majority of so-called value investors still fail to beat their benchmark! Although they are about twice as good as the average fund manager.

I think there are several factors that explain why portfolio managers fail so spectacularly and it serves to remind us that if we can just adopt the right philosophy, we can avoid most of their mistakes.

1. Herd Mentality

Just a simple analogy. In a shopping mall, when we see crowd gathering near certain stores, bcos there is some event, we gravitate towards the crowd. If we see everyone running for the exit, bcos there is a bomb threat, we run! The market is a transparent place. Prices move every day as investors buy and sell stocks. Portfolio managers eat, breath and think prices daily. Hence when prices move up, they want to follow, and when prices move down, they avoid. Most retail investors also do the same. Maybe some kind of wiring in our heads tries to follow this flawed logic with prices but I think the analogy with the crowd sort of makes sense.

2. Short Investment Horizon

This is a very amazing trend. In the 1980s, the average holding period for a stock on NYSE was 5 yrs, as derived from the turnover volume. ie annual turnover was 20% of NYSE total stock volume or something. Today, the turnover is 200%! The average holding period is then 6 mths! As we know, institutions make up the bulk of trading volume. Hence portfolio managers are the main culprits here. Every one of them is just looking for the next BP trade. Long term investing is for the dinosaurs. But true value cannot be realized in 6 mths. Franchises take time to build. Firms take years to grow. Sadly, nobody is interested. Buy-and-hold value investors are a dying breed on Wall Street.

3. Information overload

Portfolio managers are bombarded by useless information daily. In today's world, we are talking about probably 300-500 emails from brokers, analysts, colleagues etc. Most of these are daily reports of newsflow happening in the world, analysts' upgrades or downgrades and other non-relevant stuff. But PMs, being paid to do some job, are basically salaried workers and couldn't just delete all these emails right? So they spend significant amt of time reading junk emails when they should be reading the real good stuff like articles on this blog. And seriously, when you hear a hundred opinions about a stock, you lose track and get confused.

4. Misaligned incentive

PMs are being judge by their annual performance and not long term performance. If they make money this year, they get the fat bonus. If they lose money, they eat grass. So this scheme basically drive their behaviour to find a 6 mth trade that works. Value stocks that will make you money in 3-5 yrs? Sorry, talk to my hand. Hence it's not a big surpise why the average holding period is 6 mths.

So I guess these are the major reasons why portfolio managers cannot beat their benchmark over the long run. Bcos of the strange nature of their job, some inherent human biases and perhaps most importantly, misaligned incentives that shaped their behaviour. The rest of us, we should do exactly the opposite and generate good long term return!

Portfolio Management: The Job

So basically portfolio management boils down to over or underweighting some benchmark stocks. Now that doesn't sound too difficult, why should the portfolio managers or PM be paid exorbitant salaries? And despite getting paid so much, they FAIL to deliver the results?

Well first we talk about the skills needed. The portfolio manager needs to know a lot to do his job. And I really do mean A LOT. If you think in terms of those 300 page university textbooks, it's probably 30-40 of them (CFA has 18 for 3 levels). Plus, 10-20 years worth of global news material, that is maybe volume to fill another 5-10 textbooks.

On academic subjects, first, he needs to know about security analysis, that is the basic bread and butter. Then the financial statements, ie accounting. Of course there are the relevant subjects like economics, finance, business, statistics etc. Well most these are covered in CFA, but CFA just gives a basic flavour. To be well-versed takes years more and there are also subjects outside CFA, like psychology etc.

Then on the non-academic side, there are the 6 major industry groups: Financials, Resources, Industrials, Staples, IT and Utilities. The portfolio manager needs know the dynamics/drivers/issues of all of them. Not to mention there are perhaps close to 100 different sub-industries and businesses in all. On top of that, he needs to be in tune with global current affairs.

Of course, you don't really need to learn and know everything to be a good portfolio manager or PM. Warren Buffett knows nothing about tech and the 21st century new glamour industries right? Though he reads a lot.

Well, you can get away with that when you are your own fund manager and people beg you to manage money FOR them. Alas most portfolio managers are salaried employees and they need to show senior management that they have the knowledge and experience before they get the job. But they certainly are not required put 50% of their net worth in the fund that they manages for others.

That perhaps also partly explain why they are so good at failing to meet their KPI!

Anyways, PMs need to know a lot and be capable of continuous learning in order to make better investment decisions. In most global fund management houses, their jobs go beyond just portfolio management. They need to do marketing, recruitment of analysts, monitor trades and settlements, prepare reports etc. All these perhaps partly explains their high pay. If you ask me, maybe it justifies like 20% of the total package!

Yeah, no matter what, we can never forgive them for not delivering the most basic result right?

But let's go back to over or underweighting stocks. So all the knowledge is just the preparation for the most important part of their jobs: to decide which stocks to over or underweight. This is what determines the portfolio return over the long run.

The irony of this all is that PMs don't think or act accordingly to deliver this result. Partly bcos of the institutional imperative that Buffett talks about. Partly bcos PMs are also humans, subjected to peer pressure and emotions.

Let's just have an example: Say we have PM Ah Gou managing the Singapore portfolio with STI as his benchmark. Naturally, NOL our beloved container shipping company, is in the benchmark.

Now the container shipping industry is very similar to the airline industry. Over the past 20 years, if you add up the culmulative profits of the whole industry, it is a negative number. The whole container industry has never made money for two decades, or perhaps even longer. However, in the boom years from 2005-2007, huge profits were made, NOL became a darling of the stock market. But all the profits were wiped out in just 18 mths. And NOL went from darling to dog. Yeah, the biggest underdog. The co. bled money through its hull and finally came hand in hat to investors, multiple times!

If you are even half a value investor, you would have avoided NOL at all cost. Even traders with sense know NOL is a risky trade, you could lose everything with this one. After all, Singapore is moving to value added services. We are talking about bio-tech, financial hub, education centre, casinos and more high end stuff, more service oriented industries. It was mentioned that SIA can be allowed to fail. Even Chartered got sold finally. How many times can Temasek bail out this loser in a losing industry like container shipping?

But if you are a PM Ah Gou managing singapore stocks, the story is different. After NOL lost a billion dollars and then got funding from its rights issue, analysts are shouting BUY bcos the industry has bottomed. Global trade is picking up, freight rate negotiations ended with huge price increase for the shippers. Indeed NOL rallied 80% or more from the bottom. If you did not overweight NOL, how are you going explain yourself?

So that's the dilemma for PMs, in the next post, we explore in depth about why they never beat the benchmark.

Portfolio Management

To be a portfolio manager is a much coveted goal for a lot of people struggling in the financial industry. This position is deemed as being at the top of the food chain. Everyone feeds information to the portfolio manager so that he can make the best investment decisions. The portfolio manager is THE Top Dog.

However, the way that the industry had evolved makes the top dog's job rather stupid. In fact the whole fund management industry doesn't really make a lot of sense.

Just look at the whole management fee issue. For most funds that it out there, 1% is taken out of the asset base to be paid out as management fee. Basically for every $100 of unit trust that you buy, $1 is paid to the fund manager which consist of the portfolio manager, the team of analysts and the support staff that manages the fund for you.

Now 1% may not sound big, but since average investment return is usually less than 10% per year, it means that you are paying out 10% or more to these fund managers every year.

Well, we can talk about this atrocity some other day. Let's look at the portfolio manager's job. His job is to manage the fund such that he beats some benchmark. This benchmark is usually some stock index. Say the S&500, the Hang Seng Index or the STI index etc.

Well, statistically they sucked. Less than 20% of all portfolio managers that ever existed beat their indices over a long period of time, like say 10 yrs or more.

Why is portfolio management such a difficult thing? Well to answer that might take a few more posts. But first we can talk about how the top dog goes about doing his job.

We talked about the benchmark. Basically the portfolio manager's job is to beat the benchmark. ie if the benchmark return is 10%, the PM should be delivering 11% return or more.

The most logical way to do this, according to the fund management industry, is to over or underweight stocks in the benchmark. Now what does this mean?

You see the benchmark is basically made up of stocks with different weightage. For e.g. the STI index has 30 stocks. Singtel has a weight of 8%, UOB 5%, SIA 4% etc (btw all weights are arbitrary, I dunno the real weights and they change all the time). So a portfolio manager who needs to beat the STI would consult his analysts and all other information sources and decide ultimately, what stocks to over or underweight.

Eg. after all his research, he decides that Singtel has better prospects, so he overweights Singtel, ie instead of putting 8% in Singtel, he puts 10%. And similarly he has to underweight some other stock, eg SIA, so instead of putting 4% in SIA, he puts just 2%.

If over time, Singtel does better than SIA, like say over 3 years, Singtel delivered 30% return but SIA only 20%, then he made the right decision. And since the portfolio manager has to do perhaps a couple of hundred or more of these decisions over say a 10 year time frame, he earns his existence if the net result is that his portfolio delivers a return that is higher than the benchmark.

This is, in a nutshell, the job of the portfolio manager. In the next issue, we discuss some issues with his job.

The Vilification of Leisure: Death of the TV

There are a few major consequences with the vilification of home leisure activities

1. Growth of share of mind-time for new activities

We all have only 24 hours a day, and this is the amount of time that things can occupy our minds. In the past where there are only TVs, radios and print, we spend our mind-time on these things. In fact the world probably spends 80% of home leisure time watching TV during the 2nd half of the 20th century. However as we move to the 21st century, we are spending our mind-time differently.

Internet, Facebook, iPhone, iPad, Youtube, Gaming (Xbox, Wii, PS3, DS, PSP), Blogging, Twittering etc. Some youngster completely stopped watching TV since they can watch it on the internet. No doubt TV is still big. It is still the major portion of global advertising revenue and is likely to be so for some time. But the winds of change are blowing. TV as a % of our mind-time is dropping and will continue to do so until it is just another form of media in a whole spectrum of others.

2. Ad spending to traditional media to fall

The revenue sources for most media comes from advertising, sale of content and subscription, with advertising usually making the bulk of the money. As mentioned, TV has dominated that total media ad spending for the 2nd half of the 20th century as it has the widest reach as compared to print, radio, outdoor or other forms of advertising. This makes the absolute dollar amount huge, like $100,000 to $300,000 for a 30 sec TV commercial in the US, and in tune of millions for high-profile programs like Superbowl, but the cost per 1,000 impression (CPM) is actually comparable to other forms of advertising at $10-30 CPM. This means that even though a company spends $300,000 on a TV commercial, it reaches 15mn viewers in that 30 sec, while other forms of media probably reach only 1/10 or even 1/100 of that no. of viewers.

Now the total ad spending over the long run can only grow with the global economy or perhaps slightly faster. With more and more people spending time on Facebook and other internet sites, traditional media CPM has to come down. Maybe from $10-30 to $6-20 or something. This means that ad spending on TV and other traditional media will be a smaller % of the global ad pie. While blogs, Youtube, Facebook and iTunes grow to take their places.

3. Consumer leisure dollar gets vilified

Another form of impact of the Vilification of Leisure affects the consumer leisure dollar. Before the explosion of these 21st century leisure activities (ie Facebook, apps, Youtube etc), the consumer leisure dollar for the masses is actually pretty limited. There is Hollywood, ie going to the movies. Buying CDs and DVDs, buying games for Wii, Xbox. Pay TV or cable and maybe some magazine or radio subscription. And that's about it! Well we are not going to explore leisure dollar into hobbies like photography, collecting comics, going for concerts etc though.

So with the Vilification of Leisure, the leisure dollar now gets spread over thinly to buying apps, buying items for your avatar in some online game, downloading songs, buying e-books not to mention buying newer and newer devices like iPad, Kindle, netbooks, PSP, the new DS, iPhone 4 etc.

Now the total leisure dollar that can be spent has a limit. Just a wild guess, it's perhaps $200-300 per month per person in developed countries. It is not going to double unless global GDP doubles. So this means that what was used to pay Hollywood, cable TV, games etc now needs to spread to all these new gimmicks. Of course, these new gimmicks enjoy spectacular growth since they start from zero. Like apps, it was nothing 2 years ago. Now it's a billion dollar industry. But it would be wrong to assume that it can be a $10bn industry in 3 years bcos the leisure dollar can only stretch so far. This goes for social online games, songs, online subscription whatever.

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So there you have it, Vilification of Leisure will hit us strong and we should be aware of its various impact. In short, a slow death for TV and a quick growth and plateauing for a lot of these new entrants.

Facebook and the Vilification of Leisure

Ok time for a confession: I don't have a Facebook account.

Geez what kind of dinosaur doesn't have a Facebook account these days? Even my grandma has a Facebook account. Well the rationale was that I do not need to have a Facebook account bcos I meet my friends LIVE and those that I have lost touch, I am happy that the relationship stays that way.

Well the same argument can be used for cellphones. Who needs cellphones anyways? We have letters, land lines and if we wanted to link up with an old friend, we would just call them up for dinner using fixed line phones. When we want to meet outside, we determine the exact time and place to meet, before meeting up. If they are late, we would just wait until they show up! And we write letters to our penpals, who needs phones?

Well, I am just saying it. (Borrowed from RWJ, one of the funniest on Youtube, go Google "RWJ =3")

I guess Technology cannot help you manage your life if you don't want it to. Grandma just wouldn't use Skype even if she could use it to see her adorable grand-son playing happily on the other side of the globe, every day. Dad refuses to use the cellphone with a GPS even if it means that he never needs to read the map again, Evar (yep fr RWJ too!).

Does anything change? Well actually it doesn't. Grandma and Dad are still very happy, oblivious to what they are missing out. It's ok, life goes on. What's wrong with just seeing cute little Toby once a year? Or with reading maps anyways? Technology is not everything. Yes that is true. It is also true that we had horses, hence we didn't need cars and we had letters, hence we didn't need phones. In fact, if we had continue to use horses today, maybe the big environmental issue might be avoided! And the mailmen wouldn't have lost their jobs and contributed to the 10% unemployment.

Well, I am just saying it.

Okay, in the bigger scheme of things, technology ultimately leads to better productivity. However technology does not increase productivity overnight. It needs enough time and people to embrace it before the curve takes off. Not all technology becomes truly beneficial, like Segway or even Gaming. Technology also comes with side-effects: like carbon emission. But on the whole and over the long run, it has allowed humans to progress faster than otherwise.

Back of Facebook, how does it help improve our lives? Now that we are at it, how do we define Facebook anyways?

Well, according to most, Facebook is a social networking platform where you can link up with friends, share photos or music or interesting weblinks, or you can use it to chat with friends, play games or just surf around for interesting stuff. In one sentence: it is a leisure, edu-infotainment and networking hub. There are now close to 400mn users on Facebook, (ie about the whole of US plus 20 Singapores) which also makes it a super powerful marketing machine. Facebook has recently turned profitable, I expect it to make a few billions in revenue in a few years and profits might reach a couple hundreds of millions. However, if it ever gets listed, the PE would be like 80x ie there wont be a chance to buy it at a reasonable price.

So how does one's productivity increase with Facebook? Well the most compelling argument would be Photos. The age of digital cameras means that people no longer print out as many photos as in the past. Most photos are stored in hard drives and the only time we get to see friends photos now is, well, through Facebook! Unless you are talking about wedding glamour shots or specifically going to some friends' house and ask them to show their Hawaii photos (which would be in their PCs btw and the reason you would ask is bcos they don't have a Facebook account where they could upload it).

Other than that, Facebook just becomes this viral photosharing-networking-eduinfotainment hub that sucks away time from the TV, the phone, the radio and other forms of leisure. There might be some productivity increase bcos instead of passively receiving entertainment/leisure/knowledge you actively search for it. Well the argument works both for Facebook and for the internet.

But what is happening with Facebook is actually much bigger than Facebook or Internet or Dinosaurs with no Facebook account. I call it the Vilification of Leisure.

In the past, like say 30 years ago there are only about 3 forms of home leisure activity.

1. TV
2. Radio
3. Books/Newspaper

Well there is a fourth one involving kids: either playing with them or making them, but let's just leave this one aside for now.

Then. gaming consoles came along, followed by the internet, then American Idol (needing both TV and cellphone), then Youtube, iPod, Facebook, iPhones, Wii, Skype, World of Warcraft, iPad, Natal, Twitter, PPS etc etc. The whole home leisure scene just exploded. But sadly we still only have 24 hours per day. Even sadder, we probably spend only 2-3 hours of our day doing these things. So 30 yrs ago, we spend 2-3 hours every night in front of the TV. Now it's gonna be spread over this huge maelstrom of activities. (Of course it would be more like maybe Family A goes Facebook, Family B still watches TV, Family C goes Wii or Brother of D goes Warcraft, Sister of D goes iPad etc).

In any case, the home leisure which used to be dominated by just TV now becomes a million things. This is the Vilification of Leisure.

In the next post, we discuss its impact.

PS: Well I lied, I have a Facebook account since 2008.

Economics of YouTube Musicians

I have been spending some time watching Youtube recently and was amazed by the talents of all these YouTube Musicians all over the world.

Check out Sungha Jung
http://www.youtube.com/user/jwcfree#p/u/16/JykAgIVT6-s

And Singapore's own YouTube Sensation
http://www.youtube.com/user/ling86#p/u/8/bUY8iT525yQ

The analyst in me started wondering about the business economics of these musicians. So here I will simply share some random thoughts on how things can work.

First, as pointed out by Mary Meeker and her famous Price to Eyeballs, the no. of hits should have some value. Btw this is a crazy idea in finance and still draws laughter to this day. I guess Meeker's greatest mistake is to attribute the price of a stock directly to eyeballs, which grossly overstates the true profits that millions of hits actually generates.

It is surely quite a tough job to determine the true profits from millions of hits.  But it's been 10 years now and we have a history of stuff to help us. Also, I will stop short at revenue and not profits, which  requires another few levels of analysis. For a start, let's look at some online businesses out there:

Online social games: Zygna, revenue paying users: 5-10%
2nd Life: Revenue paying users 5% or less
Facebook: Revenue paying users probably 2% or less
Blog clicks: 8percentpa, monetize clicks 1% of all page views
Less than successful targeting online: e.g. selling Amazon books on personal websites, less than 1% of all page views

So with these historical no.s, we can roughly say that maybe 1% of the eyeballs, or hits can be converted to money. Obviously the kick comes from the per user revenue, or just to throw in a technical term: the ARPU or average revenue per unit/user. The ARPU varies widely depending on the nature of the online business. For Zygna, this is pretty high, at $4-5 or even more . For Blog clicks, unfortunately, it's more like 10c or less.

Back to YouTube Musicians, so a million hits converts to perhaps 10,000 potential revenue paying users and then if we put ARPU at $1, that's $10,000. That's the theoretical value of a Youtube Channel with a million hits.

In reality, we need some form of infrastructure to realize this $10,000. Specifically for YouTube Musicians would be distribution: like iTunes to sell the music via downloads, or record labels to sign them up, make albums and sell CDs through music stores like HMV, sponsors, experienced artists to help them (like with joint live performances), capable producers, good agents etc. And depending on many other factors, the realized value can be much greater (or smaller) than the theoretical value.

Now you might be thinking, this isn't all that attractive right? Even if we scale up the value by 10x, a million hit channel can only generate $100,000. That cannot even buy the cheapest HDB flat. I guess there are two points pertaining to this.

1. In the world of internet, the scale needs to be in 10-100 million or more

Sungha Jung has over 130mn hits for all his performances, going by my simple calculations above, his channel's theoretical value is $1.3mn, and in reality he has probably monetized even more. He succeeded with help for famous guitarists all over the world, supportive parents, perhaps generous sponsors and producers etc.

When we look at some old world artists with just one hit song, like Lisa Loeb with "Stay" or Berlin with "Take My Breath Away", CD sales are formidable at just a few millions, that is bcos the no.s left out people who listen half-heartedly and decided not to buy. Whereas the internet captures all these no.s as hits. To put it another way, if "Stay" started out as an internet song, it could have generated 100mn hits.

2. Longevity issue

A channel that can generate $10,000 in revenue one off might not be any good. But a channel that can generate $10,000 annually for say 10 years is something. Singapore's GDP per capita is $40,000. One channel that can year in year out gives $10,000 is worth a lot. But needless to stay, that can only be achieved with constant maintenance and updates. This in itself is a lot of hardwork.

Most musicians, if you ask me, don't really survive 10 to 20 years. Think of all the hits in the 80s and 90s, and where are the singers? Tiffany, Debbie Gibson, NKOTB, Jewel, Boyz To Men, Michael Learns to Rock, Cranberries etc. Well one might argue they made enough, called it a day. Or they might have drifted into oblivion against their will. Actually the pace of human civilization is so fast that most careers don't last that long as well. Guess that's why a lot of people in their 40s and 50s struggle with jobs and competition from the younger generations.

Back to YouTube Musicians, longevity is an issue, there is no two way about it. It would be quite a feat to last even just 10 years.

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To sum it all up, let's try to think about how to then maximize the full value of a popular channel.

I guess one logical answer would be tremendous hardwork and then promotional work in the first two years. This would include quick updates of new videos, selling via iTunes, finding sponsors and producers etc. This would then be accompanied by live performances, appearances in media, shows etc. Hopefully, with these, the revenue scaling really does go from $10k to $100k for a million hit channel. Of course, the better leverage factor would be generating more hits ie from million channel become 5 mn channel. This would in turn translate into more revenue down the road.

As the years progress, things will definitely slow down, so the focus might be on recycling the songs for other uses: awareness videos, commercials etc. And perhaps selling distribution rights but retaining a very small revenue share.

Thus the maximum absolute dollar value extracted could probably be somewhere between $300-400k. Well good enough to get a 3-4 room HDB in the suburbs, I guess.

Farewell Dr Goh

Friday was a sad day for me.

One of the greatest minds in Singapore history passed on. The Chief Architect of Singapore, Dr Goh Keng Swee. To quote Mr Lee Kuan Yew, generations of Singaporeans benefited and will continue to benefit bcos he laid the foundations of modern Singapore. EDB, SAF, JTC, CPF, MOE, MAS, GIC, Temasek, you name it. Down to the SSO, Zoo, Bird Park, Sentosa and even the Chinese and Japanese Gardens. He started everything! And the best part, he was selfless, he was humble and he cared for the people. He put his best 25 years into making Singapore a better place.

Dr Goh was a thinker way ahead of his time. He knew that Singapore has limited chances of surviving without a hinterland after the separation with Malaysia. So he came up with an original plan with Dr Winsemius, Singapore's economic adviser from the UN during the early days, to invite foreign MNCs to setup factories in Singapore, enticing them with tax breaks and cheap labour from Singaporeans. The site would be in Jurong, which was a swamp at that time. It was his most major gamble and he said himself it could be his greatest folly. But it worked. Singaporeans were just happy they had jobs, MNCs got their competitiveness and Singapore prospered. Years later, other countries including China followed his strategy.

He started our sovereign wealth funds, Temasek and GIC, in the 70s and 80s. The term "sovereign wealth fund" did not exist until a quarter century later. He did that because he saw the need to manage such large pools of money with dedicated teams of professionals to ensure decent returns (at least market returns) on our monies. The combined size of our sovereign wealth funds exceeds our GDP multiple folds today.

Dr Goh is truly one of Singapore's finest leaders. All Singapore flags should fly half mast for a week, in my opinion. All our dollar bills should have his face on it. May 14 should become a public holiday. The parliament house should have a statue of him. And yes, Jurong Industrial Estate should be renamed Goh Keng Swee Industrial Estate.

I wish I have the dollar bill with his signature. I would frame it and put it beside my Buffett and Munger dollar bill.

Someone is doing major update on Dr Goh's wikipedia page. Information has improved tremendously over the past few days.
http://en.wikipedia.org/wiki/Goh_Keng_Swee

I guess the sad revelation that I learned from reading his life story over the past few days was that he sacrificed his personal life and his health for the sake of Singapore. Or maybe he just wasn't as lucky as MM. After 25 years of intense innovation, adding immeasurably huge contributions to our society, he was diagnosed with bladder cancer. The fortunate part was that he still lived over 20 years after with his current wife, children, grandchildren and great-grandchildren.

So, live life to the fullest, but also in moderation and take good care of our health.

Just to put down here one of Dr Goh's best quote:

"The only way not to fail, is by not doing anything at all. And that, in the final analysis, will be the ultimate failure."

This quote was passed down to me across generations, from people who worked directly with him. and now it is with me. Thus his legacy lives on in all of us, Singaporeans. And it is up to us to let our children and our children's children understand his greatness and continue to learn from him. Like how schoolchildren today in the US still adore Benjamin Franklin and Abraham Lincoln, benefit from their foresight, worship them and still learn from them. Our children and their children will also continue to benefit from Dr Goh's far-sightedness. This is the least that we should do: pass on the legacy of one of our greatest Titans.

Thank you Dr Goh, thank you for all that you have done for Singapore.

On Wikipedia and Markets

I was reading this book "The World Is Flat" and this small little story on Wikipedia caught my attention. Btw this is quite an old book and one can so obviously deduce I am so behind in my reading... I think the author has written like three updates and published at least a sequel. There wasn't much of truly good insights but lots of small interesting stories which makes it an entertaining read and perhaps that's why it's selling million copies.

Anyways the story on Wikipedia was that even though it was a free encyclopedia,  contrary to popular belief that Wikipedia has a lot of crap, things posted can actually be quite accurate. The rationale was that for every topic, there will always be those that are Pro and Against. So the Pros will write their story, but whatever is overboard gets deleted by the Against. This goes on until what is written on it presents the most valid view and nobody edits the page any further.

Of course this only works when there are many people editing the pages. At the end of the section, the author did state an example where a senator was accused of involved in killing JFK on Wikipedia, and since a lot of sites simply take what is on wiki, he was shocked to find newspapers calling him asking  whether he killed JFK. Similarly you can go and write a wiki page full of rubbish to spite your idol's rival and if not enough fans edit the pages, you achieve your aim.

Now the link here is that markets work in the same way too. Someone who thinks the stock is too cheap buys it, someone who thinks otherwise sells it. Until equilibrium is reached. Now this equilibrium is based on every market participants judgement on the stock at that point in time. So the current stock price should reflect the most efficient price to most of the participants at that time. This is the basis for the efficient market hypothesis.

Needless to say, if the stock is very thinly traded, ie not too many people have an opinion on it, the stock can be mispriced and stay mispriced for a long time. Value investors buy stocks that are  mispriced by being very cheap and wait for the market to find its true value. Or in the Singapore context, these stocks get taken out private at a cheap price. Of course, the way the human mind works, a lot of people actually don't mind overpaying for garbage, like companies with no earnings, LV bags and Mickey mouse apartments at $1000psf. So stocks can stay mispriced on the upside for a couple of years too.

Now you might be asking if the market is efficient, how does value investing fit in? If the stock is always at the right price, there is no gap between price and intrinsic value, how can value investors benefit then?

The answer is Patience. Most of the time, price trade very close to value. There won't be 50% upside. But there will always be times when things go out of whack. In the big way, it would be like 2007 financial turmoil, where great companies get whack down to very cheap levels even though nothing much has changed in their businesses. Think Coke or P&G, do people stop drinking and stop shampooing in a financial crisis? In the minor ways, some stocks trade down on temporary, one-off issues. Most market players then get emotional and judge the stock only in one direction (ie down) in the span of that few days or weeks.

E.g. bcos of bad weather, less people go out shopping, fashion clothing stocks get sold down. We all know that girls need to change their wardrobe every month, so when chances like these come by, just go buy Gap or Victoria's Secrets or Zara. (disclaimer: I have never researched these co.s, just arbitrary naming fashion stocks) Sooner or later, they go back up to their true value.

In a sense, this is how value investors can beat the market. But this is still easier said than done. Well at least now we know Wikipedia may be more accurate than your beloved local press reporting, so for those who thinks Wikipedia is unreliable, give it more credit!

The Acme of Value Investing

I have been thinking about this for a while. Some time back, Warren Buffett started buying over mum-and-pop businesses that have grown tremendously over a long span of time from its original owners. These owners have painstakingly built their empires over the years, they are now old, they want to cash out some of the future earnings of their business, so they go to Buffett. But how do they determine price? Buffett being Buffett, is not going to undercut them by paying them just 10x earnings. But he definitely will not overpay as well.

In the stock market, Mr Market determines the price, which some times go crazy and the owners of businesses (ie shareholders) have no choice but to sell at basement prices. Buffett takes this opportunity to buy from these willing sellers. Well, in the first place, some of these market participants never regarded themselves as the owners of the firms which they hold stocks. They are in for the quick gamble. So Buffett gladly profits from their fear.

However, in private transactions, Buffett knows these sellers. Some of them are his friends in Omaha. He is not going to shortchange them. So the logical conclusion is that Buffett pays a reasonable price for these businesses he buys, Maybe 18x earnings. We can think of it as the sellers get 18 years of future cashflow from their business. Thereafter, the profits will be what Berkshire shareholders stand to gain from. There is bread from everybody. Nobody gets shortchanged.

To put it graphically, value investing is often viewed as buying an asset below its intrinsic value with a margin of safety (ie buy when purple line is below green line). Since Mr Market eventually prices asset correctly (albeit after a long time and only for a short while), money is to be made when value investors buy stocks way below intrinsic value and wait for it to rise back to intrinsic value.

However what Buffett does with buying good franchises would be buying an asset at its intrinsic value, at that point in time. And since it is a good franchise, its intrinsic value rises over time and way out into the future, Berkshire shareholders benefit from the exponential growth in intrinsic value. This is perhaps why he keeps talking about buying a strong franchise at a reasonable price, rather than buying a mediocre firm at bargain prices.

In every transaction, we are taught that usually there is a buyer and a seller, and there is a winner and a loser. Yet in Buffett's position, it is possible to have a transaction and yet benefits both the buyer and the seller. In my opinion, this would qualify as the acme of value investing.