Advertisement for my other blog and penny stocks on SGX

After 3 years and 120 posts I think I have covered more or less 80% of value investing, and 50-60% of investment and finance in general. I reckon there are about about 50-60 core concepts in value investing and I have more or less touched on all of them: margin of safety, circle of competence, value trap, economic moat/barrier to entry, stock markets' mechanism etc.

There may be a few more stuff to expand on Financial Statement Analysis. But it's very dry and I don't really enjoy writing about Financial Ratio and Cashflow. I am sure most people read those posts only when they want to get some sleep.

In the past 2 yrs, new posts have been slow at about 2 weeks per post bcos I can only write when new ideas, key concepts enter my knowledge base and well, new ideas and key concepts don't really come by the minute, hour or even days or weeks.

Meanwhile I have been working on another blog which I have simply named "Industry Knowledge and Other Information" which contains snippets of useful stuff (I think!)

The link is here http://industryk.blogspot.com/

It's in a very informal style and lots of no.s and statistics are included. More useful for myself than for pple who don't really want to think about what the statistics mean. Yes, the messages in the posts are not so clear cut. And sometimes, no message at all! :)

Well the latest post is about an interesting statistic: 84% of the stocks, or a whopping 600+ stocks listed on SGX are penny stocks (ie trading below $1). Of course, we are in a bear market, so what do you expect right? But let me share another statistic: less than 10 stocks trade more than $10 and less than 20 stocks trade more than $5. And in my short investment career, actually I can't really think of that many stocks trading at a high dollar amount. (Yes I know dollar amt doesn't mean anything, market cap is much more impt, but I am arguing from a simplistic angle).

I think all these statistics reflect a point: finding a real ten-bagger on SGX is 1 in a 100 or even less probable. Why? Bcos if the SGX has been around for more than 20 yrs and you see less than 20 counters trading at $5 or more. Assuming no stock split, and stocks IPO at $0.50 or so, it means you must be really good or damn lucky to identify that handful of $5-10 stocks.

Yes there are stocks that IPO at 20c, rally to $2 which would make it a ten-bagger. But they subsequently falter and return to their IPO price of 20c or even lower. Hence in my definition, they cannot really be considered "real" ten-bagger, right? So what does this all mean? Food for thought huh? I guess I will share my conclusions in another post. :)

Hopes and Dreams

Flipping through the newspaper everyday, I see so many dreams asking us to fork out top dollars to make them come true. Proprietary trading systems to help you trade and earn big money, ways to become millionaires, weight loss to a perfect figure, teaching methods to make your kid a genius, and many more others. Most of the time, they don't work, bcos if they did, they won't need these advertisements, people will just flock to their shops by the truckloads.

But the sad truth is, people still pay top dollars to go through these useless programs bcos they are buying a hope, hoping that somehow these programs will make their dreams come true. Humans are given the gift of hope such that in the most desperate of times, we can mentally survive bcos we know things could be better. In prehistoric times, cavemen needed hope to tide through winter, our grandparents needed hope to survive the wars. Today, this has become a marketing tool to entice people to buy hope that their dreams will come true.

Alas, you reap what you sow. How can you expect to lose weight by just paying money while you continue your 3,000 calories diet every day? How is it possible that your investment will make you money if you don't devote time to study what kind of investment you bought? We live in a world of cause and effect. One has to put in the right effort in order to get the desired results. So even if someone told you that the programs did work, it is more bcos they themselves put in the effort to cause the change. Or they may be just lucky.

To make money from investment is just about that: putting in the effort to learn, to think and then execute, ie buy the right securities. Most of it is free. The learning can be found all over the internet and needless to say, on this blog! The thinking is up to you, whether you like mental workout or just let your brain rot. Like most of us let our bodies rot by slouching in front of the TV after a hard day's work. The execution, well, competition among the brokers have brought commission down. So it's not expensive anymore. Unless of course you get some relationship managers or private bankers to service you and you actually get enticed to buy their high cost, high commission investment products. Then sorry lah, you might be paying 5% or even more of your capital for buying stocks or other securities.

The bottom line is this: don't pay top dollars for investment seminars, brokerage services, private banking services, don't pay top dollar for trading systems, learning to invest or any other programs for that matter. The great lessons in life are usually free.

Ping Pong, Patience, Psychology

After 48 years, the Singapore women table tennis team finally got through the nerve-wrecking semi-finals to end the medal drought. It was the most fascinating experience watching the semi-final game live. And hence the inspiration to draw parallels between table tennis and investing.

For those who missed the game (btw it was office hours, so most diligent, career-focused Singaporeans were actually working hard), let me just briefly summarized what happened. Feng Tianwei won the first match easily and it looked like the rest of the game should be a breeze for Singapore. But Li Jiawei lost the 2nd match after 5 tough games. Singapore came back to win the doubles, then Wang Yuegu lost the 4th despite putting up a very strong fight and it has to come to the 5th match. Of course our heroine Feng battled all out in the last match and finally broke the Koreans.

The Koreans are very defensive players, they sliced the balls all the time and simply waited for the Singaporeans to make mistakes. That was how Li Jiawei lost. She was not on form and her successful smash rate was definitely below par. But needless to say, when she succeeds, the smash was a sure killer. Feng, on the other hand, smashes with higher accuracy but seldom kills the opponent, ie they managed to defend. Feng is also definitely more patient, only smashing when she gets a good angle.

In investing, this concept is actually pretty important. Buffett used to remind us, "Imagine you only have 15 bullets in your life, do you shoot everything that pops out, or do you go for the big turkey?" Li Jiawei goes for the kill at the slimmest chance, she misses a lot but when she hits, its a grand slam. Yes, the opponent get killed spectacularly, but it's still just one point.

In investing, Jiawei's strategy can work if that grand slam is a 10 bagger, and you recover all your losses from the other 9 losing bets. This is how Venture Capital (VC) works. But my guess is you will have better luck with Feng's strategy. And this ties in with patience. Don't simply buy stuff on a spur. Cosco has dropped 50%, it is definitely a buy now! SPC dividend yield is 10%, buy! There are reasons why they dropped so much in the first place. Exercise patience, strike when your chances of success are very high, not just when it is hot.

Back to the matches, it occured to me that it should be quite unlikely whereby someone is down by 2 games and then comes back to win the next 3 games and win the match. Similarly, if you are lagging by even just 2 or 3 points and your opponent is at game/match point, it is quite difficult to win. Psychology is at work here. In order to counter this, a lot of mind training is needed. In this aspect, I would say the Singapore team was quite good, but the Koreans were better. Of course, world No.1 Zhang Yining, is probably the best at this.

In investing, your opponent is the market. Most of the time, you are down by 2 to 3 points bcos it is very hard to beat the market. 90% of all professional fund managers underperform the market. So you need to train your mind and be calm. Otherwise, emotions cloud everything and you make stupid mistakes. Trading rules some times help. E.g. stop loss levels, profit taking levels. Needless to say, right-sizing the bets is equally important. If your investment is too big and you are losing sleep, you need to scale it down.

Of course, most true blue value investors don't believe in trading rules and sizing of bets. They believe that if the stock is down, you should buy even more since it's cheaper now. And you should bet your house and car on it bcos that's how you maximize returns.

The Singapore Property Market: Personal Take II

This is a continuation of the last post.

Ok, so the bulls will say expats can pay. Now I do not know what is the average expat pay, but let's just assume the average expat gets the same salary of the top 10% of our population ie $12k per mth. If you are an expat earning $12k per mth, will you fork out 33% of your salary for rent? For me, if I were an expat, I know I am not going to be in Singapore forever, I would rather stay somewhere cheap, save the extra $1-2k on rental and spend it on touring Angkok Wat or something right? Of course that just me lah.

Btw the rule of thumb is roughly 20% of your salary on rental/mortgage. So going by this rule only expats earning $20k or above can afford this place. How many expats in Singapore earn $20k per mth, ie $240k per yr? Given that only 2,000 people earns more than $1mn in Singapore, my guess is roughly 7,000-8,000 people (including expats and Singaporeans).

How many rentalable condos in Singapore? About 300,000. So, sorry, charging $4,000 per mth for rental, it's a once in a lifetime chance, it won't last. Yes some hot locations can command this kind of rental today, but you cannot expect to charge this kind of rental for the next 20 yrs. At least not until Singapore GDP per capita further improves from here.

The other argument is that the company pays for the rent, not the expat himself. Now if you are the HR and you have your budget to work with, essentially the rental of $50k restrict your capacity to hire pple bcos you can only pay someone $50k less than what he should get. ie this expat suppose to get total package of $300k you can only give $250k bcos the other $50k goes to his rental. So this means less expats will choose to come to Singapore over time.

So the bottom line is this, $50k annual rental (which works out to be rental of $4 psf per mth) is not sustainable in Singapore today. It may be sustainable 10 yrs from now when our GDP per capita increases and our expat population increases tremendously. But not now. Our salary levels are too low compared to property prices today. Note that expat salary is also a function of our GDP per capita and our salaries, so as of now, $4 psf per mth is too expensive. That's my personal view.

So this translates to the fact that a $1000 psf for property price is to expensive. We are not even talking about those $3k psf yet... Ppty prices have to come down. FYI Singapore is now more expensive than Tokyo, New York and maybe Shanghai. We are only behind Hong Kong, London and a few whacky cities where psf is like 5 digits and above (in USD) like Moscow and Mumbai.

The time to look at property will be the time when prices are falling to $600-700psf in prime areas. ie pple who bought at $2,000-3,000 psf lose more than 70% of their property value and the whole world gets totally digusted with Singapore ppty as with in 1998. It may take some time, but now is the time for us to prepare and have to guts to buy when the time comes.

The Singapore Property Market: Personal Take I

In this post, I am going to give my two cents on the Singapore property market. As with people giving their two cents, usually it is worth about one cent, esp when people try to give their two cents in some arena where another 10,000 people already gave their answers to 6 million dollar questions. So always do your own analysis and learn to be an independent thinker. I think that should be everybody's goal and that means also you shouldn't be reading the rest of this post. Hehe.

But read lah, just for entertainment lor.

So back to the Singapore property market, I belong to the bearish camp, and the following would be my rationale:

Lets start with today's $1,000 psf, a sort of low benchmark for ppty in some prime locations. But we have to start somewhere, so let's just use $1,000 psf. This means a 1,000 sqf condo will cost $1mn. In order to justify $1mn on the property, I would say that the rental yield needs to be 5%.

Actually in the industry pple use 4% and they call this the cap rate, but I try to be conservative here. You can also think of this as assuming that the PER for the property is 20x, which will give an earnings yield of 5%.

As you can see, PER of 20x is not cheap at all, but if we use a lower PER or higher yield, in will only further prove my point: the property market has gotten too expensive. So let's just stick to this 5% yield.

With the yield at 5% it means that the property priced at $1mn should fetch you $50k rental per yr if you rent it out. This works out to be $4,000 plus per mth. The 90th percentile household salary in Singapore is $12,000, so basically only 10% of Singaporean household can afford to rent this place, assuming that they are willing to fork out 33% their household salary on rental.

Ok most pple won't, or rather couldn't, bcos they spend like 90% of their salary. Esp for Singaporeans, we hate to fork out cash for mortgage. And it is impossible to use just CPF to pay for a $1mn mortgage. Well the point here is that this property cannot be rented out easily to Singaporean households or foreign workers earning less than $12,000 per mth.

Link to Singaporean household income

Stay tuned for Part 2!

The end of Alpha

A few hundred years ago, humans were not capable of calculating the speed and acceleration of apples falling from trees, the movement of heavenly bodies and predicting simple things like whether a 2kg ball and 1kg ball will roll down a slope faster. Btw the answer is both balls will roll down the slope at the same speed.

Then came along a guy called Newton who sat down in a park some day and an apple fell on his head. (I'm guessing this guy is a nerd and has no dates!) And as they say the rest is history. Well no offense, Newton was a great guy and I admire him as much as the next value investor reading this blog.

Anyways, the analogy here is that would there be a day when humans can fully predict the prices of stocks and all other investments? And all securities would be priced fairly all the time and there would be no room for speculation and the market becomes truly, madly, deeply EFFICIENT.

Of course, even a genius like Newton failed at winning the stock market (he speculated in the stock market in England during the South Sea Bubble and lost a lot of money) so it may really take a long long time for some achievements on this front. And some may argue that this would not happen bcos stocks move on emotions and no one can predict human emotions. Esp the emotions of the woman whom you decided to spend the rest of your life with.

Well... that's true... but we have also achieved a lot of impossible feats, like going to the moon, heart transplant, calculating a 2 to power of 10mn digit prime no. etc. So let's just for argument sake postulate that some day, all securities are priced efficiently all the time.

What's gonna happen is that capital would be allocated efficiently all the time, all investors will earn the same rate of return and there will be no Greater Fool Games, no bubbles and no crashes.

The stock prices of companies will be step functions corresponding to the growth of the companies. There would be no technical analysis since it's all straight lines now. Any new developments will be instantly reflected in the stock price so you see the prices move vertically up or down. Hence the step functions.

There would be an army of arbitrageurs who would bring the stock price back to its intrinsic value if any punter tries to even move the stock price by 1/256 from its intrinsic value. Btw this value will be calculated accurately to the 10th decimal place all the time and changes accurately to a new value with new pieces of information.

Brokers would still be around but their sole purpose would be to faciliate any trades. They will earn their fair share of commission, probably at 0.0001% of the trade or whatever. There would be no need for analysts or economists babbling nonsense since everyone can simply use bloomberg to find out the intrinsic value of any securities.

Fund managers exist solely to mix and match different securities to create suitable portofolios for their clients who are too lazy to do it themselves. No investor will ever lose unnecessary money except for the case of company bankruptcies. But even so, his portfolio will be protected by insurance. How perfect!

Well, that's a dream. It may happen someday, but most probably not in my lifetime.

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.

Choosing Numbers, Beauty Contests and Stock Markets

I once attended a class where the professor asked us to play a game. It was a pretty simple game on the surface. Everyone was asked to choose a number from 1 to 100. The person who chose a number that is closest to 2/3 of the average number that everybody chose will win the game.

Now how should one choose such that it would maximize one's chances of winning?

Well, first you must determine what is the average of everyone's number choices. There were about 100 students in the class, so assuming everyone randomly chooses a number, probably the average will be close to 50. So 2/3 of 50 will be 33.

But wait a minute. If everyone thinks similarly and chooses 33 then the average will be 33 and 2/3 of the average then becomes 22.

Hey wait a second, if everyone then chooses 22, the 2/3 of the average will then become 2/3 of 22 which will be 15. And so the reasoning goes.

So in the end, I chose 1, based on the above logic. Of course, I did not win the game. The real winning number, was somewhere between 22 and 33 (I forgot the actual no.). So what went wrong? And what the hell has it got to do with Beauty Contests and the Stock Markets?

Let's talk about the Beauty Contest first. The great economist John Maynard Keynes came up with this concept to explain the stock market. So this Beauty Contest is also sometimes known as the Keynesian Beauty Contest.

Btw Keynes is a big name in economics, if you don't know him, shame on you and pls go check him up on Wikipedia.

Anyways during Keynes time, some newspaper in London publishes 100 pretty faces and asks its readers to choose which face would likely be the pretty face that most readers choose.

So there are people who would simply choose who they think are the prettiest. However that's quite unlikely to win bcos we all have different tastes right? Xiang Yun may be your favourite but I like Fann Wong. Ah Beng may like Auntie Zoe and Ah Seng likes Wong Li Lin. (Ok as you can see, I belong to a dinosaur generation and has no clue who are the new stars.)

So some smarter readers will naturally try to guess who they think the general public will choose as the prettiest face. And just like our number game, even more sophisticated readers can even go further, and choose the face that other readers will choose as who they think the general public will choose as the prettiest face. And one can further increase the order of the guessing game.

Ok if you have been reading intently this far, you would have guessed that the stock market works in a similar fashion. Well that is if you want to pick a winning stock tomorrow, or next week or even in the next 6 or 12 mths.

Basically you can throw fundamentals out the window. Technicals may help a bit but what's gonna make you big bucks is to guess what everyone else is thinking and be a step ahead. The winning stock will be one which the market participants think will have the rosiest earnings growth in the near future. It does not necessarily mean that the stock will actually deliver the rosiest earnings. Just what everybody thinks is what it counts.

Actually the market mostly likely works in the 3rd order: ie the winning stock will be one which most market participants expects most other market participants to like a lot. This is chim, right?

Today, these are your alternative energy, oil exploration, frontier stocks etc.

It does not make sense to go too high into the order bcos the market cannot be too sophisticated as there will always be some uncles, aunties and amateurs choosing their own favourite pretty face (or their own favourite stock). That's why choosing 1 in the number game will not win.

In the stock market, it means that you shouldn't be buying stocks of a company that provides the core component for a high-end analytical equipment used to detect uranium in some desert. And as you know, uranium is used for nuclear power generation - the hot, sexy story in today's environment. The market is not sophisticated enough to think so far ahead. Even though you may be right and the company may have a genuine investment thesis.

This means that you shouldn't be thinking too far ahead of the market. You should be 1 step ahead but not 5 steps ahead. Well, that is if you want to pick winners in a short time frame: ie from 1 day to 6 to 12 mths.

In summary, the stock market works like the beauty contest in the short term. It's the ultimate guessing game and chances of you getting it right is not high unless you have that flair or talent. But over the long run (ie 5 yrs and above lah), stock prices have to reflect fundamentals: earnings growth, shareholders' return and companies' true intrinsic values. And value investing ensures that you have better chances getting that part right.

Zoe, Fann, Li Lin can be Queens of Caldecott Hill but Mother Theresa, Florence Nightingale, Helen Keller are the real winners in life's beauty contest.

Don't get caught in a bubble - Part 3

The 3rd bubble that we will talk about would be Singapore's own property bubble in 1996-1997. This is the most interesting example bcos it is the only 1 in my 3 examples whereby prices have surpassed the previous peak.

However that doesn't mean that investors who invested at the peak did ok. In fact most people will still be under water. But at least, they have much better chance to recover their capital even though their compounded return will still be quite miserable.

The Singapore property bubble actually started in 93-94 when Asia experienced tremendous boom. In fact, four economies were given a very special name - Asian Tigers (or was it Dragons?) due to their spectacular double digit growth. They are of course, our beloved motherland, Korea, Hong Kong and Taiwan. Even so the rest of the region enjoyed high growth. Singapore properties were snapped up by Malaysians, Indonesians, Taiwanese and closer to 1997, of course, the Hong Kongers, who feared major upheavals following Hong Kong's return to China.

Well that's of course just part of the story. Many many factors came into play and even today we cannot say for sure what caused the spectacular rise and fall of the Little Red Dot's real estate prices.

Besides that foreign demand story, the other factor would of course be the lack of supply of property at that time. Back in the early 90s, HDB was lagging behind the curve (as usual) and cut down on building new flats even though demand for flats remained high as the economy grew. So, young couples were made to wait 4-5 yrs for their flats after they get married. And meanwhile the Govt expects more babies when young couples have to dunno-live-where for 4-5 yrs after getting married.

Also back then, private condos project developments were not built by the truckloads (probably approval wasn't that easily given that HDB's thinking was always about 3 yrs behind). So there was a general lack of supply and huge demand from both foreigners and young married couples. And as they say, the rest is history.

Property prices went through the roof. The highest end luxury stuff was like S$2,000 psf and even prices in undesirable locations like Boon Lay, Hill View also hit S$800-900psf, HDB in Bishan sold for a record $800k or so. There was no general price index that I could find but some charts indicated that if we use 1993 prices as 100, prices in 1997 were 120% or so higher.

After that, again a confluence of factors push prices down by roughly 50% (like HDB building 150,000 new flats in Seng Kang and Punggol when they realized they were wrong to stop building flats 5 yrs ago), only to rebound significantly in 1999 and 2000 and then went into a gradual decline until it bottomed at 2005. Prices at 2005 were 30% below its peak in 1997. Of course, things turned around in 2006 and 2007 with en-bloc, Integrated Resorts, Middle East investors, F1 and the other usual Ra-Ra stuff.

See Chart 1 for the whole history of our roller coaster ride!
http://www.hktdc.com/econforum/sc/sc070301.htm

And so today average prices finally exceeded the peak made in 1997 after 11 years, Well that's kinda good news when comparing to other bubbles, where usually, the previous peak was never surpassed. Nevertheless, if you have bought some of those luxury high end stuff at $2,000 psf, today you might be able to sell at $2,500 psf (that's a big assumption since your property will be 11-yr-old while some other cool stuff are just next door and brand new). So your return will be 25% after 11 yrs which is about 2%pa. Abt the same as fixed deposit today.

Well that's great right considering most other bubbles you usually don't see your capital.

So, moral of the story: Don't ever ever get caught in a bubble!

Don't get caught in a bubble - Part 2

The 2nd bubble that we will talk about is the one that is most familiar to many of us. This bubble goes by many names, the dot com bubble, tech bubble, IT bubble etc but I shall call it the TMT bubble (as some in the financial industry calls it). TMT stands for Tech, Media and Telco (I think), and it is named as such bcos these are the sectors that rallied the most during those days in 1999 and 2000.

The index representative of this bubble is, of course, the NASDAQ, where most of the tech stocks are listed. Names like Microsoft, Cisco, Oracle, Amazon, Yahoo! etc. At the peak, NASDAQ was roughly at 5,000+. Again today it trades more than 50% discount of its peak at 2,200+ (though it is a good 100% up from its bottom at 1,100) So again even if you had bought 30% below its peak, you would still be under water today.

It remains to be seen whether the tech stocks will suffer the same fate as Japan, ie never surpassing the previous high. It is now 8 yrs after the bubble bursted, and the NASDAQ has since risen 90% from its low. If it takes another 8 yrs to rise another 90%, this will bring NASDAQ close to 4,200. So perhaps those who bought at 5,000 can actually breakeven after 16 yrs.

Then again, the annual compounded rate of return will be quite bad right? In fact it will be 0% IF it breaks even at 5,000 after 16 long years. If you hold out longer, maybe the return can creep up to 2-3%pa. So in order to reach an average return of 8%pa, perhaps you will have to hold 100 yrs or so.

Moral of the story: don't get caught in a bubble!