More On Financial Freedom

This is a continuation of a previous post on financial freedom.

So it seems that financial freedom helps to achieve the 3 important things that we want in life: Time, Money and Happiness. This is achieved by trading away 10 to 30 years of doing some job. Someone capable can do it in 10, for most of us, it's 30 years, my dear. Or to put it in percentage terms, if we lived to an average of 80 years old, the solution then is to trade 10-40% of your life to achieve financial freedom. And if considering that we start thinking about this at age 20, then the denominator is not 80 but 60, and the solution becomes to trade 20-50% of your life to achieve financial freedom.

I would think that a better solution would actually be looking at this issue more holistically. Specifically, changing the way we look at the Job part of the matrix. To most people, a Job is solely income generation, Job – brings home the Money, takes away the Time, and that’s that. People talk about work-life balance. Work is work, Life is life. Outside work is our true Life. Work and Life cannot mix.

Actually, Work is 10 hours out of 16 hours that we are awake. Work is Life!

In Maslov’s famous hierarchy, the top echelon is some big word which is also very much coveted. I will try to spell it: Self Actuallyrealizingmoneyisnonotion or something. Let’s just put it down as Purpose.

If you think about it then, the true intention of financial freedom is to actually have the Time to do our Purposes in life, without having to worry about Money.

This Purpose can be as simple as witnessing your kids growing up, or creating art, or doing charity etc. So the ultimate motive of financial freedom should then be trying to replace Job with Purpose.

Then you have a beautiful matrix where you have a Purpose in life, you have Time, Money and also Happiness.

Of course, this is ideal talk. I can hear readers yelling Get Real! Wake Up! Most Purposes need Money, not bring in Money. That is true.

Nevertheless, as a start, I think we should try to find our own Purposes in our Jobs. If you totally hate your job, cannot find a good reason to go to work everyday you wake up. Please. Change your job. Life is short. Eat dessert first.

Well it’s quite difficult to pull your Job to your Purpose in life if your job is to clean toilets or to entertain some HNWI’s dog. (HNWI: High Net Worth Idiots) I cannot imagine anybody who thinks his Purpose in life is to make toilet bowls in Singapore’s Kopitiams sparkle like a 24 carat diamond or become an idiot's dog's best friend.

Let’s put it this way. Most of us don’t know our Purpose in life. Some lucky fellow might. He woke up on his 15th birthday and decided he should be a doctor and save lives. For the rest of us, we go to school and get psycho-ed to study Engineering and ended up being a HR manager. Some find that helping people adjust to their jobs might not be too bad, and grew to embrace their jobs as HR managers. Their Jobs became their Purposes.

Well, for others, not so lucky. What they really wanted: is to be a rock star. And here they are stuck as a HR manager. Ok, for such cases, being financially free also cannot help. Pai-seh. Please go and join Singapore Idol.

I guess what I want to say is: Think about how you can embrace your Job as your Purpose, if that cannot be done no matter what, change your job and work towards what you really want. Saving enough or through shrewd investing to get passive income enough to support your lifestyle? It is a gimmick. The truth is, it usually takes more than a quarter to half a lifetime to achieve that.

All things come in packages in life. There are some things you like about your wife, and some things you don’t, but you married her anyways. So similarly, there are some things you don’t like about your job. And surely there must be some things you like about your job. From there, we can try to work to find our Purposes.

Financial freedom means you need not worry about money. But when you can have all the money, all the time in the world then what? If you don’t know your Purpose, how do you find Happiness with your abundant Time and Money?

Financial freedom is then, not about the money. It is a term cooked up to make us think we need more money but in fact, what we need is to find a Purpose that can help us balance the Time, Money and Happiness.

On Financial Freedom

Just some thoughts on this term “financial freedom” that has become a much coveted goal in life popularized by Robert Kiyosaki in Rich Dad Poor Dad. Btw apparently Kiyosaki was never as rich as he proclaimed. He got rich after selling his book. Well, some of his ideas are refreshing though.

What is the definition of financial freedom?

I guess to most people, it would be having enough money in your bank to last a lifetime living the same quality of life and thus having the freedom to choose not to work for money.

In the first ever post on this blog, we worked out this amount is probably slightly more than half a million dollars for a conservative guy and $3mn for someone more aspiring. And this amount is highly unreachable with normal jobs since annual salary is about $30,000 to $40,000 on average in developed countries. (Well actually it’s doable given enough time: like 30 years, as we shall see but that defeats the purpose I guess :)

Hence there is a need for passive income (another term from Kiyosaki) to help fund monthly expenditures. However passive income can only come from a few sources:

1. Dividends from stocks

2. Interest from fixed income instruments (bonds, T-bills etc)

3. Rental income from property

4. Pension or annuity payout

5. Cash flow from businesses (which you don’t have to run it)

6. Royalties from books, songs etc

7. Others: sponsorships, fees etc

So, in order to fund an annual expenditure of say $25,000 (roughly 80% of Singapore’s average income), well say the income yield is 5-8% (an arbitrary average yield if you invest in some or all of the 1-7 above), you need a portfolio of $300,000-500,000. So theoretically, if you save enough and put your money to work wisely, you could become financially free in about 20-30 years. Hell, it’s still gonna take a long time!

(Obviously this amount comes up to be much smaller than what was stated in the first ever post bcos one no. simply calculates lifetime expenses (including mortgage and other liabilities) while the other no. is about how to sustain a certain expenditure with returns from a portfolio.)

Of course, if your monthly household expenditure is $3,000, this works out to be $36,000 per year, it should then then take you about 40 years to save up to a portfolio that could generate $36,000 per year assuming that you save 25% of your income and your savings are invested to achieve a return of 8%. Shiok huh? 40 years to financial freedom!

Well some capable souls might be able to shorten to 10 plus years which is not bad, bcos he or she would be 40+, still young!

Let’s delve into this a bit deeper. Why do people want so much to be financially free?

Well I guess according to the definition above, so that they don’t have to worry about money and bills, and can spend their time somewhere else instead of working like having time to engage full-time in a hobby, to play with kids, do volunteer work etc.

I guess this would be the goal for most who proclaims that their goal is to attain financial freedom.

To put it in another way: the crux of this financial freedom problem seemed to be represented in this matrix

We want Time, Money and Happiness. Job gives Money but takes away Time and maybe Happiness: so how?

Most people’s solution is to trade 10+ (if possible) or 20-30 years of time, do a Job that gives Money, and after getting enough money, quit job and get Time, Money and Happiness.

At this point, we should also note that Time and Money does not generate Happiness. So even after you have achieved financial freedom. It does not guarantee Happiness - which I would think would be the ultimate goal in life. So something is missing here.

Now the question is really then: is trading 10 plus years of life, or for others 20-30 years a good solution to achieve the coveted financial freedom or rather what most people actually want?

Concerns on ETFs

I love ETFs. They allow retail investors to invest in indices with low costs, liquidity, give dividends and even have a helpline that you can call everyday to ask about the ETF you bought. What else can we ask for? However, due to time constraint and limited resources, I haven't been able to research and answer some thorny questions on them. If anybody reading this have answers, pls do comment and share the knowledge.

1. Forex risk

Most ETFs on the SGX are listed in USD and as we know, the USD is being dragged to hell as Fed prints money like there is no tomorrow to save the economy. Albeit this process will take many many years. However, if our ETF is in USD, wouldn't that mean that we are being screwed? My answer would be no. Bcos the USD is just a medium to reflect the underlying securities. What matters is the underlying intrinsic value of the securities, not the medium. Take oil for example, it is also in USD. But the underlying value of oil will continue to grow because there is not much left. So USD goes down by 20%, doesn't mean oil price will go down by 20%. Am I right?

2. Counterparty risks

What if the issuer of the ETF goes down? Like Lehman. What would happen to the ETF? My understanding is that since the ETF would be held by CDP and we do own the underlying stocks with the ETF, it can be liquidated and the money goes back to us. But is that good enough? How about if the issuer decides to close the ETF bcos it's no longer popular, or whatever other reasons they might have, are they obligated to give us money back at a fair value? Say the NAV of the ETF, of which the NAV is thoroughly calculated to reflect the real NAV of the index?

3. Swap based ETFs

Some ETFs do not actually own the underlying stocks of the index they are suppose to represent but a completely different basket of stocks and the return of that basket is swapped for the return of the index. This goes for most Lyxor ETFs. So when we buy the Lyxor China ETF, we actually own a lot of European stocks, whose returns are being swapped for the return of the Hang Seng China Index. So what are the risks involved here? One obvious one would be again counterparty risk. If the swap counterparty cannot honour the agreement, then ultimately we get screwed. Say the European stocks collapsed 20% while HSCEI was up 20%. The counterparty cannot deliver, the ETF holders might get short-changed. What about other risks? I don't have all answers though.

Here are just 3 issues, but I think there are many others that we have not thought about. If anybody has any answers, pls do share, thanks!

The 7 Levels of Market Participants

This was inspired by the 7 Levels of Photographers by Ken Rockwell, which was perhaps inspired by religion. Well, in any case, here are 7 Levels of market participants, with One being the lowest and Seven being divine. Enjoy!

Level One: The Tippee

The Tippee is someone who receives a tip or some advice and wants to make a quick buck out of greed. This level of market participants usually never had a brokerage account and decided that they should make a some money from the stock market bcos everybody else is doing it. They are inevitably tipped to enter the market by friends who give bad advice at the peak of the bull market and are inevitably burnt and vow never to return. Only to do so during the next bullish peak, again tipped by another friend. In normal times, they live their quiet lives in reality, having full-time jobs and enjoying themselves like other normal folks. This level includes grandmas opening a brokerage account for the first time in their lives, taxi drivers, housewives, first time unit trust buyers, retirees and primary school kids.

Level Two: The Amateur

The amateur is a market participant who decided that he/she should dabble in the markets and learn about the intricacies of the world of investing. They are usually bold, eager to learn but lacking in knowledge and information. The amateur spends time after school or work to read up and learn more. The amateur has the potential to reach the higher levels of market participant if he/she has the determination to pursue their goals to the fullest, devoting time to learn the tricks of the trade. This level usually includes high school students or undergrads, young working professionals, semi-retired, rational investors.

Level Three: The Tradee

The Tradee is a term that I invented meaning someone who gets traded by the market, ie being played by the market. Most tradees aspire to be hotshot traders earning $10k per month but lack the knowledge or the will to pursue their goal to the fullest. Most of them never attain the status of a trader (next level). Well if they did some rational thinking, they would realize even the hottest shottest traders don't earn $10k per month unless their capital base is like close to $1mn. And if you already have $1mn, why bother trading? Tradees also don't have a robust trading system and the emotional stronghold to withstand the markets. Amateur can become tradees quite easily hence this level also includes a lot of young working professionals, semi-retirees, undergrads, housewives etc.

Level Four: The Trader

Okay a small no. of tradees do evolve into traders. These guys make the cut by adhering to their robust trading systems and rules. They definitely have their emotions under control as well. Usually they have put in a lot of effort as tradees, learnt their lessons and have proven themselves. They quit their full-time jobs to trade, making good money (unlikely to be $10k per month maybe $4-5k). They do not blog, they don't argue in forums as to whether traders are better or value investors are better. They spend their time analyzing and thinking. This level usually includes mid career professionals, ex-army officers, ex-investment bankers, PhD students and civil servants.

Level Five: The Manipulator

Now we get to the interesting stuff. Manipulators are the big boys. Much like Gordon Gekko. Their investment philosophy is buy high, sell higher. They keep asking, where's my edge over the market. Things they do are in grey zones like buying ahead of earnings downgrade by analyst. They had lunch with the analyst and he hinted. They also engage in activist moves. Like accumulating a lot of Company ABC stock, then announcing some plan to restructure the company, to be led by a restructuring guru, who is their buddy. Technically, it is all still legal, but grey. These people would include big names like ex-remisiers, high net worth stock operators, hedge fund managers, ex-prop traders etc

Level Six: The Value Investor

Ok this is the level we are familiar with. We buy value. Stocks that trade at a margin of safety below their intrinsic value. Usually mundane companies with a history of stable earnings. We spend a lot of time reading annual reports, looking at financials and if possible talking to industry people, analysts, company management etc. These level can include a whole spectrum of people including working professionals, undergrads, old-timers, fund managers, retirees and bloggers.

Level Seven: The Legend

This is the pinnacle. This are people who have seen it all, been there and done that in the world of investing. Usually they have a knack for finding value but they also have a nose for a good trade, has good macro economics background and are very smart and very diligent. They would buy value stocks only when they see a catalyst for the value to unlock. This is unlike dumb value investors who would just wait and wait. They would also go for high probability trades - like shorting Korean Won or Thai Baht after analyzing and knowing that their central banks cannot defend the currencies. They have surpassed all levels and reached the pinnacle whereby their investment philosophy is no philosophy. Using the formless to combat form. Legends are investors with names that people from all walks of life would know of, like movie stars, famous scientists and world leaders.

A Two Iteration Monte Carlo Simulation on Trading

This is something that I have posted in a comment some time back. I thought I would just expand it for discussion and see if it makes sense.

First let’s work through some assumptions and no.s and see what’s the expected return for trading.

1. The capital base is $100,000
2. $10,000 is utilized per trade
3. 10 trades is done in 1 year
4. Take profit at 20%
5. Cut loss at -10%
6. Winning rate 60%
7. Transaction cost $20

Based on these:

a. The 6 winning trades will bring in $12,000.
b. The 4 losing trades take away $4,000.
c. Transaction cost is $400.
d. Total winnings: $3800
e. Return 3.8% - Yeah that's life for a trader, my darling. Why don't you put the money in CPF and earn the same return?

Ok, there are a lot of assumptions, some might be skewed to put traders down. After all, this is a value investing blog. :) What if we tweak them around? Say the capital base is just $20,000 – then the return becomes 20%! However the rationale would then be it won’t be possible to realize 10 trades in 1 yrs with just $20,000.

Anyways let’s do a more aggressive one

1. The capital base is $50,000
2. $10,000 is utilized per trade
3. 10 trades is done in 1 year
4. Take profit at 15% (rationale being that the time horizon is now shortened)
5. Cut loss at -10%
6. Winning rate 60%
7. Transaction cost $20

Based on these

a. 6 winning trades will bring in $9,000
b. 4 losing trades take away $4,000
c. Transaction cost $400
d. Total winnings: $4,600
e. Return 9.2%

Ok that’s better than market return, but that’s probably also a high hurdle. To do 10 trades with $50k in 1 yr, reach trade can only go for 6 mths.

I think the appropriate scientific experiment we should do is a Monte Carlo simulation of 1,000 iterations to see what’s the true expected return. But my guess is it’s actually going to be less than market return (of 8% or so). Yes, actually if you do it correctly, a trader should earn positive return, not negative ones. And in all those books, it always says academic studies show that trading cannot beat market return after factoring in transaction costs.

Well this also implicitly means, if you get your transaction costs low enough, you might beat market return and becoming a Big Swinging Dick.

Ok, daydreaming over. Trading is hard. My sense is, it is actually much harder than value investing. If you do it right, you might just make average return. Most people don't do it right in the first few years. Think about the time and effort that is needed to execute these trades during the year. Basically it’s a full time job in itself. Not forgetting that it's gonna be one helluva emotional rollercoaster ride every day!

Well, that’s why I stick with value investing.

Management compensation

Needless to say, if the management team is paying themselves too well, pls avoid the company. Most annual reports of Singapore co.s these days have a section on management payout. I make it a point to find out how much they are paid.

Just some rough no.s (since I can’t really remember all the figures), the CEO pay package is usually about $1mn for a few hundred million revenue firm. For smaller co.s, it is about $500k or so. Of course, as we all know, the record is a whopping S$20mn.

What is a good sum to pay a CEO? And how to actually determine the formula for the payout? Well I don’t have a good answer, but what I do think is wrong is to base it off revenue. Bcos a firm could have high revenue but zero profits to shareholders. It is also wrong for it to be mechanical, like based on formulas. So maybe a basic package and then bonus to be based off a comination of factors like net profit growth, impact of past decisions and qualitative appraisal by stakeholders of the firm.

Well there is also the social pay scale to consider, in our crazy world where a 23 yr old analyst could be paid S$100k a year, surely we cannot expect CEOs to be paid like S$150k a year right? So actually there is a floor for CEO’s pay. Since senior managers in big firms get around $200-300k so it is not unusual for CEOs to be getting around $500k at least.

Most of the time, when reading the annual reports, you won’t find anything strange until it gets out in the news. Usually the annual report just says that top management is being paid in a range of S$1-5mn, which is reasonable, considering what we have discussed.

Strange things happen once in a while and astute investors’ warning bells should sound and put companies that pay their CEOs or top management too well on the blacklist.

The infamous case of Sing Power comes into mind. I cannot recall the whole story but apparently the compensation package for the top management exceeded the net profits of the firm or something. This was bcos is was based on some arcane formulation and the management argued that it was ok. My foot!

Noble group made the news paying 11 directors $30+mn in 2008. Not sure if this is a lot or not. Net profit was a record $500mn or so. So maybe it’s reasonable. After all, only 5% of net profits right? But I checked out their dividend payment – it was also $30+mn. Hmmm...

Of course we always have our favourite CEO who was paid $20mn – highest paid CEO ever in the history of Singapore in a year when his firm profits was down 50%. Again the formula excuse was used to justify this absurdity.

The lowest paid CEO in a Fortune 500 firm, by the way, is our favourite hero from Omaha. He pays himself US$100k annually.

More on Dilution

Rights issue sucks! Let’s see how this works:

Imagine you are the sole owner of Company ABC. It's better to think as a sole owner, it makes things clear.

So you put in $10mn capital to start the co. You list the co. and now own 1mn shares of $10 each. ie mkt cap of your co. is $10mn. Then you appointed a CEO to help you run the business. He lost $8mn, well partly bcos of the crisis, partly bcos he was not prudent and expanded to rapidly during the heydays of 2006-07, partly bcos he paid himself and his kakis $1mn over the past few yrs.

The share price plummet to $3, ie mkt cap is now $3mn and the capital is now $2mn. So the CEO announces a rights issue of $10mn, 5mn shares to be issue at $2, that’s 33% discount to today’s price of $3. Do you:

A. Rejoice bcos now you will own 6mn shares of your co. at an average of price $2+ but the share price is $3 (btw you paid $20mn in total, but the value of your co. is now only $12mn)

B. Or you curse the manager for losing most your capital, fire him and sue him in court to try to salvage part of the lost $8mn.

Rights issue is a form of dilution: if you do not take up the issue, your stake in the co. is reduced. If you do, you just gave money to a crappy management who lost the original capital in the first place.

Some other companies do outright secondary offering where the original investors suffer if they do not participate.

Management will often say that raising capital is the prudent thing to do to keep the company as a going concern. But who jeopardized the firm as a going concern in the first place?

Of course, in the stock market, where there are a million participants, Genius Ah Beng could have waited for the shares to fall to $3, participate in the rights issue, bring down his buying price to $2+ hence making a arbitrage since today’s share price is $3.

But that does not change the fact that management screwed up in the first place.

If you are a value investor, you should not be giving money to a management who goes cap in hand whenever he gets a chance! (And it’s always a HE, not a she). The SHE gives out the money magnanimously, every time!

So pls beware of companies that to serial rights issues!

Capital Prudence

One gauge for management which is often overlooked is how they manage the firm’s capital. Do they see the firm’s equity and cash on its balance sheet as valuable resources that belong to the shareholders and think twice about doing funny things with them? Well most management will do funny things when given the chance.


We look at 4 aspects of what crappy management will do:

1. Dilution

Most management couldn’t care less about diluting shareholders’ stake bcos they get the much coveted capital to cover up their mistakes. In Singapore, dumb retail investors actually rejoice when management wants to do rights issue: bcos they can get more shares at a cheaper price! The irony!
When management comes cap in hand to shareholders for money, multiple times in a span of a few years, run for the trees! This is one of the most unforgivable management mistakes.

2. Aggressive Capex

Beware of management that always announce huge expansion projects in the name of growth. Especially, when they are done at the top of the cycle. Most of these projects will not recoup its capital fast enough ie ROI is very low, like maybe 3% (ie 33 years to recoup the investment).

A good management should always be prudent with capex, expanding slowing at a regular pace and keeping expansion cost low.

3. M&A

This is a double edge sword. Some management are very good at M&A and can actually help to grow the company through M&A, however the fact is 70% of all M&A fails (ie 1+1 less than 2). If the management is always looking to do M&A, esp in unrelated fields, beware!

4. Cash Hoarding

Some great companies have such beautiful business models that the companies just overflow with cash as time goes by. You see companies with cash to market cap of 30-50% bcos the business just keeps churning money!

The management mistake then becomes how they keep hoarding the cash and not putting it into good use: like giving back to shareholders. Most management would say that they need the cash for expansion ie doing 2 or 3 stated above. Which destroys shareholders’ value.

Buffett sometimes just buy over the whole firm and dictate that whatever cash that is generated goes to the parent co: Berkshire Hathaway. This is the ultimate trick!

On Bad Management

Basically, bad management doesn’t have the shareholders in mind. Or if the bad management is the majority shareholder, they don’t have other shareholders’ interest in mind. Their policy is about “Screw You and I Get My Bonus” or “I Win, You Lose”.

On bad management, CK Tang’s recent saga definitely comes to mind. It’s a long story that probably deserves a book trilogy starting with the great CK Tang himself, who built a solid business based on virtues like good customer service, treating employees well etc. His business approach was a very traditional, fundamental approach that sadly had lost its touch in today’s Singapore.

The poor management began shortly after his death some 10 years ago perhaps. Over the past 10-15 years, CK Tang had been able to deliver annual sales of S$160-220mn sadly without very significant growth. Singapore’s GDP has probably doubled in that span of time.

The story for profits is even worse. Net income was negative for the most part with some years losing as much as S$40-50mn. The company did not pay dividend for the most part of the past 10 years and kept throwing money into wasteful ventures, like new CK Tang outlets in KL, Vivocity etc.

If the story had ended here, we are not in a position to scold management too much. Well, admittedly, the world has changed. Department store was a good concept in the 80s and early 90s. High quality lifestyle products all under one roof and brands fight for space in the stores. But the retail scene had since evolved, with brands like LV, Nike, Jimmy Choo having their own stores. And shopping at dept stores wasn’t trendy anymore. People preferred shopping malls, specialty stores and newer stuff.

CK Tang’s management was of course unable to stop this global change. But what was unforgivable was their attempt to take the company private at ridiculously low prices (well that’s subjective, let’s see my argument first ok?). They attempted thrice. During the first two tries, the minority shareholders screwed them by refusing to let go. On the third try, the no. of shareholders that agreed to sell hit the minimum no. and the co. was taken private. Well most people gave up after 10 years I guess.

The co. was taken private at a price of roughly S$200mn. This is lower than what CK has as its equity of S$220mn. Of course CK Tang paid only S$20-40mn to buy out the remaining 10-20% of shareholders. Official valuation of the land that CK Tang has in Orchard Road was about S$340mn (last done some time back). Based on $1200psf - a value that I think represents fair value for property in Singapore, the property alone is worth S$190mn, ie CK Tang’s management thinks that its department store business is worth nothing and they are paying the minority shareholders $1200psf for their portion of the Orchard Road land. Btw, Orchard Road land is now going for $2000psf or is it $3000? Geez I can’t even keep up with the no.s.

So the land value that CK Tang has on its books could be easily more than half a billion if today’s prices were used, or if the land was redeveloped. Basically, the minority shareholders got taken out at a cheap price.

Of course, CK Tang maintains that there is no plan to redevelop its Orchard Road flagship, they think what they paid the minority shareholders is fair. It would be really interesting to see if they announce plans for redevelopment in the future. Then it would confirm that they were all-out to screw shareholders all along.

In my opinion, CK Tang is a complete dud as a shareholder entity. Even as a consumer, I would think twice shopping at CK Tang after seeing that is how management treats people. It IS a good thing that it’s gonna get delisted and hopefully never file for listing again.

If you don’t know the jewellery...

Buffett lives by a few simple rules throughout his life. He has acquired them over the years and found them to be useful rules to live by. He and his partner Charlie Munger believes in such simple logic. Charlie Munger used to say that there are really just a few big ideas in life. There are no secrets to become rich, or to be successful, or to be whatever you want to be. The so-called secrets are simply ideas/rules that we know so well but we fail to apply them. Or our emotions overrule our logic and deter us from applying them rationally. The simple rules are like these listed below:

1. Early bird catches the worm
2. Live within your means
3. Bang for your buck, value for money, go for bargain
4. Keep things simple stupid
5. Be fearful when others are greedy

So today, we look at a similar one that Buffett came up with: “If you don’t know the jewellery, at least know the jeweller”. The idea behind is really simple. You must know that the management of the company is good and trust them to do the right thing. You may not know whether you are really buying a real gem or a useless piece of rock at the jewellery store, but if you know that the jeweller is honest, wants to help you whole-heartedly, (unfortunately no such retailer exist in Singapore, ALL retailers are out to screw the customer), well then perhaps you can trust him to select a good gem for you.

Buffett doesn’t know everything about businesses. He admits that he doesn’t know nuts about technology. But the good thing is Buffett has perhaps mastered the art of sizing people up. He has been meeting people for over 50 years, for goodness. Well some times he screws up (like maybe Salomon Brothers…), but most of the time, he meets up with people in the top management, gets to know them and if they are up to the mark, he trusts them to make the right decisions for shareholders.

This is perhaps the major reason why he bought BYD, the Chinese battery maker. He probably placed two layers of trust here. Trusting Mid American Energy to know enough about BYD to buy a stake. And trusting BYD’s management as well. Apparently he flew to China to meet the CEO, now the richest man in China, and was very impressed. He definitely know nuts about batteries and technology, so it’s really about knowing the jeweller.

In stock analysis, we always like to look at financial ratios like ROE, operating cash flow, margins, balance sheet strength etc. It’s quite no a brainer once you know a thing or two about financial statement and just divided one no. by another. The insight here is actually thinking about who made those no.s? Ultimately, it’s the people in the business. The top management, middle managers in the company and the company staff.

Company ABC’s average ROE for the past 5 years is 15%, therefore we can expect it to be 15% as well when the economy recovers. Or we can expect it to grow to 20% bcos they have a new product, or perhaps the industry average is 20%, so they should make 20% in time. Well, only if the top management has the leadership, determination and drive to make that happen. People make the numbers. Superior management made the 15% ROE and have the capability to bring it higher. Crappy management cook the books. And there's a lot of crappy management around.

But as small time retail investors, how do we get to know management well enough? Yes it’s difficult. It is true that retail investors may not access management from meeting them, talking to them directly, but we can still judge by their actions, their business plans and get to meet them during AGMs. Sometimes, things get so blatant that any Tom, Dick or Harry investor would stay 500 miles away from stinky management.

It takes a while (like a few years) to gather information about managements of listed companies and also experience to determine if what the management did was good for the shareholders. This means to read beyond what our "high quality" press media reports, decipher the news in the context free of any hidden agenda.