Poems and Unit Trusts

I recently explored Poems in detail and was pleasantly surprised by all the upgrades done to its internet system. I must admit Poems (as in this one www.poems.com.sg, by Phillip Securities) has one of the most powerful internet system for fundamental research. They might also have a good one for technical analysis but I am no expert here.

The current platform allows you to do screens, and access poems research database and look at past 5 year financials for all companies that you can trade on poems, which includes US, UK, ASEAN, HK/China and even Japan markets. Man, this is really powderful. I played with it for a while and concluded that this is probably one account that any serious Singapore investor should setup.

Go down to Raffles City today, they have an office at the Raffles City Tower and get the account done. Well you can actually do online, but they would need to snail mail stuff to you, get signatures and all the crap, so it might be easier to just make a quick trip down and settle stuff once and for all.

Oh and do remember to bring the relevant docs like IC, bank account book, CPF contribution history etc, do check their website for the documents required. It might also be prudent to bring your your PSLE and O Level certificate, a 300 words self-introductory essay, your Facebook photos with at least 3 friends and your next of kin or significant other, just in case. This is Singapore after all. We want to verify everything.

Ok, lets take a look at the system. I always intrigued by the stock screener. So I went in to play a bit. To access the research, all you have to do is to go to the top column, click stocks -> research. Then you can see a whole bunch of cool stuff like MyResearch, Singapore, Regional Market Focus, Dataline, News and at the right end -> Stocks Screener.

Here’s a screen shot:

Sadly I remember the old screener to be slightly better. The new one, you are given dropdown menu to choose. And to my dismay you can’t really get the dividend screen right. Bcos it only allows you to choose 0,5,10,…,50% dividend yield. Now most co. give only from 0-5% dividend yield. So how to sieve out say 3% and above? The answer is cannot… Here we have one of the most dividend hungry nation and our best brokerage house can’t get the dividend screen right. What the… But I believe they will improve this soon. Someone pls feedback.

Well you still can do PE, Debt to Equity and PB screens lor. And you can also screen overseas market.

But the coolest thing on Research is this thing called Dataline. Again to access go via Stocks->Research->Dataline.

Here once you get in, after agreeing that the info you get may not be accurate so pls use at your own risk blah blah, you can basically access the past 5 year historical financials for any companies that you can buy via poems. And you can also access analysts’ estimates and some snapshots of ratios and valuation. Well good enough for something that comes free with just signing up.

Below is a snapshot of F&N’s balance sheet. Amazing right?

So with this one account, you can do a lot of work without pouring through pdfs and paper copies of annual reports. Of course, this step is more for doing quick checks. When you do the deep dive analysis, you still need to read annual reports. Sorry bro, no shortcuts.

Besides the powerful research, I also explored Poems unit trust, or Phillip Unit Trust. For the longest time, I believed that most unit trusts take too high an upfront sales charge. In prehistoric times (ie maybe 10 or more years ago), it was like 5%! And investments only earn you 5-8% return per year… So you just gave 1 yr’s return to the distributor. But things are changing. As in the fees are coming down.

For the un-initiated, a unit trust, also known as a mutual fund, is an investment vehicle that allows retail investors to put money with a professional fund manager to help manage and grow the money. Usually the fund manager will be given a mandate, like to try to beat the S&P500 index, or the STI, or a commodities index.

Ok, for those following this blog long enough, we know that 80% of all fund managers never beat the index. Why put money with them? Just buy the index. That is true. Hence ETFs, or exchange traded funds has ballooned in recent years. ETFs charge much less management fees (usually less than 1%) and no upfront fees and you trade it like a stock. It’s so popular that the amount of money with ETFs would probably eclipse unit trusts within the next decade. Since I was at it, I estimated that the Asset Under Management (AUM) for Singapore ETF is probably around $4-5bn while that of unit trust is at $40-50bn. Yes, 10x difference now, but one is still growing fast while the other is stagnating. Btw, total AUM in Singapore is mind-boggling 1.3 trillion!

Ok, since ETF is so great, why buy unit trust then?

The answer is ETF has less offering for bonds and other asset classes (outside equities). As a normal retail investor, it is virtually impossible to build a bond portfolio by buying bonds yourself, esp in Singapore, where one bond has the face value of $200k. So unless your portfolio is like $10m, and you split $5m for stocks and $5m for bonds, then your bond portfolio can buy 25 bonds. For most of us, we struggle to buy 1 bond :)

So the alternative would be to buy a bond unit trust, which will have bonds of different companies in one offering. Yes, we then have to pay up the 1+% management fee. But in order to build a resilient investment portfolio, that might not be a bad option for now.

Next post, we discuss Phillip’s advantages and offerings of bond unit trusts.

By the way, PhillipCapital is hosting a Value Investing Conference with Mary Buffett attending. Do take a look!

PS: This is a sponsored post.

Starring: Crouching Tiger, Elephant and Giraffe

Once in a while, we have a huge corporate saga that really deserves a book. But that's gonna take years to write. So meanwhile, I write what I can. Most avid investors in Singapore would have guessed what's this about. Well, we are going to discuss F&N, APB and Tiger Beer, Thai Beverage with Chang Beer, Heineken and Kirin Holdings of Japan.

The formal introduction of the players:

Star: Heineken
Tiger: F&N and Asia Pacific Breweries
Elephant: Thai Beverage and Chang Beer
Giraffe: Kirin Holdings

The story:

Once upon a time, there was a Tiger, an Elephant, a Giraffe and a Star. The Tiger and the Star were a couple for a long time. But one fine day, the Giraffe pronounced its love for the Tiger. So did the Elephant next day! And the Star got mad!

Ok let's get serious.

In 1884, John Fraser and David Neave founded F&N. Geez, that was the era when the East India Company fought the Pirates of the Caribbean and Chinese in Singapore then had pigtails! Anyways, nothing much happen then until 1931 when F&N decided to form a JV with Heineken to make Tiger Beer. That's the beginning of Asia Pacific Breweries and over the years, Tiger grew to be the biggest brewery in this part of the world (S.E.Asia) with 120 beer brands (and we only know Tiger right?), 30 breweries in 12 countries. It usually has the No.1 or 2 position in most countries and it makes a huge amount of money for its parents.

So it's naturally that APB got listed, with 20% free float and roughly 40% stake with each of its parent: Heineken and F&N.

Meanwhile, F&N grew to become a non-alcoholic drinks maker, a publisher and a giant property developer. It's best brands are well-loved in Singapore, such as 100 Plus, Seasons Lemon Tea, Ice Mountain, Times Bookstore, Fraser Suites and Centrepoint etc. Temasek had a stake. Our banks as well.

In 2010, the giraffe from Japan came. Kirin bought over Temasek's 15% stake for SGD 1.3bn. Paid a huge price for it. Temasek was happy selling out back then. Little did they know that that stake is now worth *gasp* 2bn today! They left 700 million on the table! Ok that's not fair lah, back then it was sold at a huge premium. The Japanese like to overpay.

Kirin wanted to beef up its overseas beverage business. It had San Miguel of Philippines for beer. It had Lion Nathan in Australia for diary products. It wanted F&N to fill in the gap. But 2 years passed, nothing much was achieved. Kirin had some good products like Afternoon Tea and Fire Coffee, but it was never distributed via F&N.

Fast forward to today, the elephant charged into the room. Thai Beverage, brewer of Chang Beer and alcoholic spirites like Mekhong and Sang Som rum, stormed in and bought 22% stake from the OCBC group effectively making it the biggest shareholder of F&N. Back in Thailand, the beer market is one big Zoo with the elephant actually getting bullied by the Lion (Singha), by Tiger, even the giraffe and other smaller animals. But it has a dominant share in white and brown spirites, with some brands even having 200 year history one. That's like when Thailand was called Siam and their Kings were busy building temples to rival Angkok Wat. That's some 80 years before F&N's founding in 1884! Really once upon a time one.

Anyways, with 2 foreign entities owning 37% of the F&N, Heineken of Holland panicked. Maybe they might do something with its baby: Asia Pacific Breweries. And so the Star decided to jump in with an offer to buy out APB, the subsidiary of F&N and Heineken, at SGD 5.1bn dollars. This throws a huge spanner into the gears as F&N without APB would become a small drinks business and a property play, which both Thai Bev and Kirin wouldn't be quite interested in. So now tonnes of questions are being asked.

What will happen to our beloved Tiger Beer brand?
Will F&N breakup?
What will the elephant and giraffe do?
Did Temasek and OCBC just sold out too cheaply?
What about Chairman Lee Hsien Yang?
He just became Chairman not too long ago, if no more F&N then where can he go?
Why did Heineken pay so much? What is it that they see in Tiger?
And Jessica Alba, our Tiger Girl, will she jump ship?

So many questions! Ending the post here would be a perfect cliffhanger. But then really quite zek ark (disgusting) with not much value add to serious readers. So let me attempt some forensic analysis.

Now APB has an EBITDA of S$700m last year and probably closer to S$900m this year. Considering the synergies Heineken can extract, which should be at around 20%, we are seeing EBITDA of S$1.1bn in 1 or 2 years. Considering the growth profile of APB, it might be reasonable to pay up to 12x EBITDA for this. Well, AB Inbev, the world's largest beer co. did pay 16x for Modelo recently. So this means that Heineken will be willing to pay up to S$13.2bn for the whole APB, or S$5.3bn for F&N's 40% (APB has no debt, if it had, the calculation will need to factor that). This means that there is probably some juice left to squeeze out of Heineken, if Chairman Lee Hsien Yang agrees with the math and leads the board to arm-twist Heineken. But not much more, remember the first offer is already S$5.1bn.

Meanwhile, Heineken blinked and extended the deadline, which was supposed to be yesterday (27 July Fri).

What about the elephant and the giraffe? Well they can't complain much since they benefitted with Heineken doing this stunt and F&N just went through the roof from recent $6+ to now closer to $9. Meanwhile, it might not be unthinkable that either of them, or both of them are scrambling to buy more F&N in the open market to get to 30% stake or more such that they have a bigger say in the eventual breakup. Which explains F&N going from strength to strength.

Now, Kirin is very interested in the drinks business and the Japanese has a history of really overpaying, especially so with the current strong yen. It might bid high for the drinks part. So will Chang Beer say OK to a good price? But then they will be left holding with a property business and cash that was sput out along the way. How does that tie in with their Thailand business? Hmmm, these are questions for Part 2, more thinking is needed.

But what's the real strategy to make money here? Sadly, there isn't any great ones. Things are playing out too fast. APB is ABOVE Heineken's offer price which means the market is saying F&N will ask for more. And F&N itself is all time high driven by more buying in anticipation of more bids for its other businesses. Chang Beer didn't really do anything after the news broke but it did rally beforehand. And so did Heineken. Meanwhile Kirin is stuck in submerging Japan, so not so interesting.

Maybe the moral of the story here is to keep looking at consumer staples names. Over the long run, they have proven to be great investments most of the time. The first ever stock discussion on this blog: Colgate, is up a crazy 60% including dividends in less than 2 years!

We shall discuss the other questions and further updates as the saga unfolds.

Start With Why

Just saw a great video on TED. The speaker was Simon Sinek and he was sharing how leaders inspire by appealing to peoples' hearts and emotions. The way they do that is to "Start with Why". The leaders share with the people why they do the things they do. When people see and believe their causes, the inspiration follows.

He asked a question: "If you ask someone what his company does, he would have no trouble answering that, but few people would be able to answer WHY the company is doing what it is doing". The reason that a great company is able to keep growing sales and profits while their competition "cui" (ie falter) in the wind is because the company has a belief and that belief is what defines them and inspires people to believe in what they believe in.

He used Apple as an example as it is easy to understand. There are a dozen or more computer makers in the world but they all cui while Apple rules the globe. Why? Apple has a mission. The firm believes its mission is to create technological products that are easy to use, fun to use and help us connect better with technology and also with other human beings. The firm believes its mission is to think different and bring the best of technology to enrich peoples' lives. Apple happens to just make computers and mobile phones. And we buy their products by the truckloads. It is not WHAT you do (or make), but WHY you do it.

Take Colgate as another example. A stock which I have talked about and own. (Yes pls read the disclaimers carefully :). Colgate does not just sell toothpaste and dental stuff. The firm believes it is their fundamental mission to help everyone have better dental health. They started campaigns to teach school children to brush their teeth when they were young. Those Singaporean readers old enough would know this! They continue to innovate and create better toothpaste (try Colgate Total for its new sensation) and toothbrushes (those that massage your gum while you brush). Colgate's competition is how to give ever better dental care, not P&G. That is why it keeps growing market share. It is the firm's belief that defines it and help grow sales.

He gave an interesting quote on employing staff: "If you hire people just because they can do a job, they’ll work for your money. But if you hire people who believe what you believe, they’ll work for you with blood and sweat and tears."

So when people believe what you stand for, not just will they buy your product, they will want to work for you. And you don't need to pay them! They will also help you spread your belief. Bcos that's what they believe in as well. Humans have an innate capability to empathize and that is why we follow those who believe in their cause.

Whether they're individuals or organizations, we follow those who lead, not because we have to, but because we want to. We follow those who lead, not for them, but for ourselves. And it's those who start with "why" that have the ability to inspire those around them or find others who inspire them. Quote from Simon Sinek.

So here is what I believe.

I believe that I can help everyone identify bargains. Not in the bargains in real life during the Great Singapore Sale, whereby it's almost effortless and everyone knows that three for $10 is a good buy. And obviously, nobody needs my help there.

I believe I can help everyone make good investments and avoid bad ones. I live in the financial world and see fortunes made and lost. Sometimes unduly lost. I brushed up my expertise in identifying bargain investments such as stocks, bonds and properties and I want to help everyone understand when we should be buying; ie when things are cheap like some global stocks now. Not when the market is hot and your grandma opens a brokerage account so that she can buy Creative in 1999. Hence I also believe that I should help people avoid expensive stuff. Like Sky Habitat at $1700 psf. Or Facebook at 50x PE.

The way to achieve my goals are already spelled out nicely in value investing and what the masters have been saying. I believe that it is the purpose of this blog to apply the principles in value investing to help identify bargain investments. It will take some effort for the un-initiated to be familiarized with some concepts such as margin of safety and valuation. But I believe that is not at all difficult if you are willing to put your mind to it.

I believe that the world will be a much better place if more people understand value. We will not see Sky Habitat at $1700 psf, or COE at $90,000 bcos people understand that it simply doesn't pay. Let alone makes sense.

Well, that is my belief.

Are you buying for own stay or investment?

How many times have we heard this question being touted by real estate agents when we go for property viewing, the most important pastime for Singaporeans today.

From a layperson perspective, things cannot be more common-sensical. If you like the place, and if it is within your means, then buy that dream condo. Achieve the 5C. Property prices ALWAYS go up in Singapore. Even if it falls by a little in the next 1-2 yrs, it’s ok one, they will go up in the end.

Now, as a value investor, I have always found this logic very strange.

If it is your home and not an investment then it’s ok to pay a higher price? Why is that so?

The most important issue

You see, sellers are the worst consultants. They are always trying to divert your attention away from the most important issue at hand. Be it buying a bag, a car, or a house, what’s important is always the feeling, the image, the dream. It is never about the price.

But the problem for investors, it is only about the price.

It can be the most crappy Mickey Mouse shoebox, but if the price is low enough (ie the rental yield can go to 15%), then it’s still a buy. Of course, a family of four might not want to stay there for practical reasons.

So I guess that is why the question is asked. The assumption is: if it is for staying, hence not an investment, price becomes a non-issue.

But then, should you treat your home as an investment or as an aspirational item like a LV bag, or a luxury watch?

If the answer to the above question is investment, then things are very clear. We should apply value investing concepts that we know so well already. Buy when price is less than intrinsic value, buy when there is a margin of safety. None of these criteria are in place for Sg properties now, which is why agents will never want to get into this argument.

But buying a house, is not just about investing, there is the aspiration, hope and dream element. Here is where most people get confused.

Let’s try to debunk this argument that a house is like a LV bag or a Rolex. It’s a lifelong aspiration and hence you cannot put a price tag to it. You buy it because you have attained a certain stature in life and you can afford it.

Severe damage to purchasing power

First we must recognize that buying a house is in a vastly different quantum vs an LV bag, or a luxury watch, or even a dream car. Alas in Singapore, crazy but true, the quantum can be quite close: a Ferrari can cost more than a Mickey Mouse shoebox.

Nevertheless, for most people, if we overpay for our dream home, it severely damages our purchasing power. We are talking about being set back by a few hundred thousands, it will take years, or even decades to earn that back through normal income streams. For some buyers who bought way too high, I can even see half a million losses.

What this means is that you have to forgo a lot of LV bags and Rolexes, maybe that BMW 5 series/Audi A4 is also being pushed back by a decade. The kids might need to cut back a few enrichment classes. Maybe Machu Pichu or Eygpt, which might be a more fulfilling life goal than living in a hyped-up development, gets back to places I want to visit “someday”. Not this year. Btw “someday” is also known as the code word for “never”.

This is not the best idea for a quality lifestyle in a condo.

Priorities

We live in a world of priorities. Overpaying for the dream condo also means we prioritized buying this property so much that we are giving up on all other priorities in life. Looking at the concrete examples given above, we can now ask ourselves vividly, is this condo worth more than all the other pleasures added together? Lifetime worth of LV bags and watches and other tiny luxuries, the dream car, the dream tour, the kids’ educations and the many other dreams in life?

If the answer is no, then it means that we should always factor in pricing, even for a lifelong dream.

Ok some might argue, it is more than a dream, it is an asset that can be passed down from generations to generations. You never really owned a Patek Philippe, you merely look after it for the next generation. Hence the popularity of freehold vis-à-vis leasehold.

Is it really Freehold?

That powerful catch phrase from Patek sums it all up. So how can we put a price tag on a family heirloom. That is priceless. Obviously a lot of people buy this argument, hence they can pay a HDB for a Patek and they pay the equivalent of 3 to 5 condo units in Tokyo for a Sentosa Cove. If it is for the next generation, it’s what you can afford, not what it’s really worth.

This line of logic will make all the agents really happy. You are willing to pay anything for a freehold property bcos you believe it is for your next generation and generations to come.

Sadly, we all know that is never true. Ask the owners of beach front properties at East Coast who had their land taken away when the Govt needed to develop the ECP highway and the East Coast Park. Even for 99 yr leases, the old Gillman Heights saga drives the point home. Condition changes. Nothing is ever really yours, or in your family.

Price is what you pay, but value is what you get

We pay a price for something we want to give to the next generation, but value is actually what we want to imparted to them. The play of words here is meaningful. Value can mean the intrinsic value of the item in question or values: as in moral values, the really important stuff. If you pay a lot to impart something that has little worth/value, what is the point then?

Even a Patek, is it really a 100k watch that is being passed down? Or the memories of good times between father and son, the teachings and values, the joy and sorrow shared, the games played and all the wonderful times?

In fact, the most important values that we can impart: integrity, tenacity, humility, are free.

Anyways, let’s get back to the question: can we really ignore price if we want to buy a property for our own stay?

This confuses people because property, as the controversial asset class here, can be an investment and/or an aspiration.

When it is an investment, there are principles that we can use the value it. We know that rental will generate cashflows and with cashflows we can derive values. We might be staying in it and not renting out, but bcos there is a rental market, we can always know how much rental the property can fetch, and with that info, we can calculate the value. That is why evaluators have valuations for all properties in Singapore.

Agents want us to think of property as an aspiration bcos it will delink price from value. Price becomes what we can afford, and what we will pay to realize our dreams. Nothing to do with value. But as we have argued, if we follow this line of logic, we are giving up other things. And sometimes it is also not what we really want to pass on to our children.

Ultimately price must follow value just as the sun must rise from the east. It may deviate for a long time, or it may go so crazily high that it seems like it will never ever come down again. But in the end, life goes in a cycle and definitions oscillates with circumstances. Prices go up, prices go down, property becomes an aspiration, or a bad investment and then a huge liability. But when it’s cheap enough, it becomes an opportunity of a lifetime.

2nd Level Thinking in Real Life

2nd Level Thinking works in real life as well. We should not be thinking superficially and derive simplistic answers to some of the problems we face. Again in most cases, consensus would be right, and it's tempting to just follow the crowd. Sometimes, maybe average is good enough. But in other important issues, we might need to strive to be one level up.

Take my favourite topic: our kids' education. All the parents in Singapore are stuck in this crazy competition of getting into branded schools, tuition marathons and fighting to be one up against the rest. But the since every parent is doing that, no child stands out. To make things worse, parents waste money on tuition, waste time at volunteer work and every child actually has less free time, are more stressed and become less proficient in other non-academic areas: such as learning to iron, cook or fix a light bulb.

One solution to this issue is for authorities to step in as mentioned in previous posts. The nature of the game has evolved such that it is impossible for the participants (ie parents) to resolve the issue, even though everyone is just simply working in their own best interest. This is akin to asking all women to stop wearing high heels. (See this post if you don't get this.)

Well that's topic for another day.

The idea here today is to apply Second Level Thinking. Different but better. Needless to say, it cannot be just different. Some might say don't go for tuition lah, don't succumb to doing parent volunteer and support this elitist system. But then the kid loses out. So it has to be more innovative than that.

Again we ask questions such as:

1. What are the viable alternatives?
2. How can we invert and think out of the box?
3. Where are the kids today lacking?
4. What are other parents not doing enough?
5. Does my kid have a talent?

When we think through some of these answers we are effectively applying Second Level Thinking and some solutions might well be different and better.

Take question 3, what are kids today lacking? There are plenty! As alluded to above, they cannot do simple chores (Blame the Maids!). They speak less mother tongue (60% of homes are English speaking). They are exam smart not street smart. They don't see as well (a lot of kids are short-sighted).

A lot of the issues have no relevance in academics but still something to think about. The one key here: kids today speak much more English and are bad at their mother tongue.

20 years ago, English was a problem, bcos 60% of Chinese homes speak Mandarin at home. Today it is the opposite. Our Chinese kids are becoming bananas fast. Yellow on the outside, all white inside. Their command of the Chinese language is poor, and they and their parents either have no intention to do anything about it or are incapable of doing anything bcos the parents themselves don't speak good Mandarin. In fact, MOE wanted to lower the bar to satisfy some parents, only to get lambasted by the Chinese elites.

So the 2nd Level Thinking here would be to let our kids become proficient in at least 2 languages. In fact, we should let them be exposed to more if possible. Research have shown that kids can learn languages better than adults. So while we are at it, we can definitely throw in important languages like Malay, Japanese or even Spanish.

Of course language needs the environment, so if the parents cannot speak Spanish, it is hard for the child to pick it up out of the blue. But for some parents who are bilingual and speak dialects, or Malay or other 3rd languages, it might be useful to impart these to your kids.

Alas, as in stock market, people catch up to 2nd Level Thinking fast. What worked yesterday might not work today. Some parents prepared their children for Primary 1 when the kids were in K1, K2 many many years ago and those kids gained the one up against their peers during that time. But today, all parents do this and the bar is raised, to the detriment of those who cannot keep up.

Similarly, I won't be surprised that a lot of parents are making sure their kids are effectively trilingual and in the near future, we need to apply 3rd Level Thinking to gain that one up again.

Second Level Thinking

This is a phrase coined by Howard Marks in his book, "The Most Important Thing". This book is truly a rarity for investors, with both new and old concepts well thought out and written clearly. The best part: the concepts are even valid for institutional fund managers. Very rarely we find something useful both for professional and retail value investors.

So one of the most intriguing concept is this Second Level Thinking. What is this all about? Well to answer that, we first need to know what is first level thinking.

According to Howard Marks, most investors possess only first level thinking. First level thinking is obvious, superficial and consensus. Examples of first level thinking would be:

"Apple is launching iPad 3 in 2 weeks, let's buy."
"Oil just went up another 5%, airlines will be hit, sell SIA."
"WD is being hit by the Thai flood, buy Seagate."
"Toyota recalls 100,000 cars! Sell sell sell!"

Almost everyone can be a first level thinker. Just read the headlines and draw the obvious conclusion. Well, this doesn't mean that first level thinking investors doesn't make money. I can hear you shouting, "If this dumb blogger have bought Apple 2 years ago when the stock price was at $300, he would be so rich that he wouldn't be blogging now."

That is obviously true. Being consensus can still help you make money, but it may not help a lot over the long run. You might make money from Apple but you might jolly well be sucked into buying Yahoo! in 1999, or Li Ning at it's finest moment, holding the Olympic torch in 2008 or Singapore's Oceanus, the abalone story that went on fire a couple of years back. Btw all 3 examples would have burnt big holes in the investors' pockets.

First level thinking won't get you very far because everyone is doing it. It derives easy and average answers. That cannot help you generate good long term return. It is even less likely that you can beat the market.

2nd Level Thinking is complex and tedious. It is about mental aerobics, in-depth research and perhaps even long, difficult discussions with like-minded thinkers. The 2nd Level Thinker asks questions such as:

1) Does the market already know this?
2) What are all the scenarios?
3) How can one invert and think otherwise?
4) Are there comparison with other situations?
5) What is the probability that I am right and the market is wrong?

2nd Level Thinking is not just about non-consensus. It has to be non-consensus and yet correct. Different and better. It has to be two steps ahead.

A good illustration of 2nd Level Thinking would be about BP and its accident in the Gulf of Mexico. For the un-initiated, BP's off-shore oil rig exploded 2 years ago and caused the world's largest oil spill that impacted millions of humans, plants and animals in the vicinity.

For those who remember the drama, it was pretty excruciating. First we see footage of the explosion, then the spills, the poor ducks, the fishermen being interviewed and for days on end, they couldn't cap the well. Oil kept gushing out. Experts opinionated everything. How BP cut corners, how the ecosystem will be irreversibly damaged, the penalties and costs will run into billions. Meanwhile the CEO went sailing with his son and got lambasted further. Major media circus.

So the first level thinkers were like, BP is going bankrupt. Let's sell BP. Or even better, short the stock dead. Meanwhile BP's market cap halved. In absolute dollar terms, it fell roughly USD 100bn. A few years ago, that is the GDP of Singapore. Even today more than 100 countries still have GDPs lesser than USD 100bn.

So the 2nd Level thinkers would be going, "Wait a minute, 100 billion? Is that right?" When was the last big oil spill? What was the final tally for costs and penalties? Did the affected co. go bankrupt? What is the Gulf of Mexico's contribution to BP? Can BP simply ring-fence its US operations? Is bankrupting BP better or would the US Govt prefers BP to continue generating cashflow to pay the costs?

Well as it turns out, penalties and costs today cannot even hit USD 50bn. Even the amount that BP already paid out: 37bn or so, might not be fully utilized. A 2nd Level thinker at that time would also have found out that the whole US operations contributes only a third to BP and ring-fencing the whole US would have made sense if penalties and costs exceed a certain amount. Certainly BP would be worth much more alive than dead, why would the US Govt bankrupt BP?

So, when the market cap fell by USD 100bn, the market went crazy thinking BP would go bankrupt. It factored in more than the worst scenario that BP will lose its entire US operations. So it was time to buy BP back then, not sell.

Today BP's market cap is USD 150bn. So a 2nd Level thinking investor made 50% or more. Perhaps with more to come.

How much will you pay for Cecilia Sue?

Well, apparently to some, this woman is worth a career, a family, reputation and scrutiny of the whole of Singapore. On hindsight, it is easy to ask what is going on in the minds of those who would risk it all for a night (or a few nights) of fantasy and thrill? What the hell are those dumb and hum sup (lecherous) uncles thinking?

For those who doesn't really know what is going on, read this link first.

Well since this is after all, an investment blog, we shall leave these juicy details aside first and talk about the investment analogies here.

The analogies I see here are:

1. Due diligence process
2. Choosing the right stock/partner
3. Price and value
4. Risk taking and bet size

A company has financial statements and the ratios for analysts to pour over. Then we do more work by talking to the co. itself, its suppliers, its customers and get more info. Over time, as we look at more and more stocks, we can easily size up a firm and say: ok this is a world class firm (ie a Coca Cola), never cheap, we have to pay up. OR ok this is a bit Enron-ish, wait and see. OR this is crap (like an airline), for some value guys, it is gonna be: I will never touch it. For others, well if the price is right, I will take a punt.

Now I have alluded to that buying a stock as a value investor is like choosing a partner. Well sometimes it might be akin to choosing a prom night date. But in any case, we need to do some due diligence. Over time, most guys (hopefully) will also develop an analytical framework on girls. After looking at how she dress, how she present herself (this is the stage where analysts pour over financial statements), then after talking to her for a while (ie the talking to co./suppliers part), we can size up whether she is:

1) world class - can consider as prom date or partner
2) Enron-ish - like a Cecilia or Wendi Murdoch
3) crap - like a normal Zouk slut

The next question is how much will you pay?

In value investing, price you pay is vital, we must pay a price that is less than the intrinsic value of the firm, or else, there is no upside. For Buffett, sometimes it's ok to pay up, bcos a world-class firm's value grows over time. In fact it grows so big that even if you overpaid slightly, over time, the growth in value more than makes up. This is the power of compounding.

For cases like Enron and Crap, or the better analogy here: Cecilia and Slut, there can be no overpaying. Bcos the value of the firm declines over time. Sometimes, it might already be close to zero but the management keeps telling you there is great value in the firm. For these investments to work, we need a margin of safety. ie we only pay when the price is at a SIGNIFICANT discount to value. ie like at least a 40-50% discount if not 70-80%. Then even if we are wrong about the value, it's still ok, hopefully we won't lose too much.

So back to those hum sup lous (uncles) who paid up too much for Cecilia, what's going on? The explanation has to involve risk/reward and bet size.

In this juicy case, it's first about having a very low probability of getting found out. Most working people hear such stories from time to time, and it's probably happening often everywhere, not just in Govt and IT, but there is no way to prove in the court of law. After all, a business trip out to China, same hotel, only two parties, if all communications are non digital, there can be no trace right?

So the rationale was probably that there is some "perceived" value (her looks probably can fight Fann Wong's), and there is this risk of overbetting/overpaying a lot but the probability of failure/getting caught is quite low. Something akin to picking up pennies on the rail track in investing (buy something for an almost guaranteed 3% return but if things go wrong, -50%, half your money gone). Things are ok until the train comes and you are still catapulting your Angry bird to hit some pig on the iPad, oblivious...

Another case of Wendi Murdoch is also quite interesting. For her full story, just look up Wikipedia. In short she is like Cecilia x 100. Why did Rupert Murdoch, one of the richest men in UK marry this bitch I mean brave woman, knowing fully she spreaded her legs for every promotion up the scale of quality life?

For Murdoch, it's the bet size - he kept it inconsequential. It's something he can afford to lose (like some part of his media empire) and he doesn't care. He just wants to enjoy life while he still can. This is akin to an investor putting pocket money (like 1-2% of his whole portfolio) into some alternative products. If it doesn't work, it is not going to be a big deal. But with buying these products probably come other benefits like alternative research, network, avenue to bounce off ideas etc.

And for Murdoch, Wendi did save him from a tray of shaving cream, yeah that's return of capital already! But for Cecilia's hum sup lous, alas, the worse case black swan apocalypse just happened. Well hope they had had their fantasies come true at the hotel already!

As for lessons learnt for value investing: stick to the world class great co.s, buy them at reasonable prices, they rarely come cheap.

If you are in the mood for some Cecilia and sluts, oops, I mean some less-than-perfect co.s, my advice is don't. Ok... that's not something you will want to heed, then the 2nd best advice is this: make sure you have a good margin of safety and size the bets correctly.

Btw anyone found her pic yet?

More on Kiasu Parents

This post is updated in 2014.

In economics, competition is the best thing that can happen. Competition brings about lower cost, innovation, improvement and makes economic development possible. Competition goes on until it is limited by other factors. E.g. until all producers are loss-making and can no longer make money, or until some input resource is depleted. Which is not always bad in economics bcos it benefits the consumer or it forces innovation (by looking for a substitute).

But for kiasu parents, competing for the best schools is a completely different ball game. After reading a few examples from this book titled, "The Economic Naturalist" by Robert Frank, I could really relate to the plight that our Singapore school children and their parents are in. It's useless excessive competition that ultimately leads to a worse-off situation.

This is a phenomenon known as "tragedy of the commons", but in the book it is merely stated as "competing for self-interest that conflicts with interest of the group". I will highlight some of the interesting examples here:

High heels: One of the examples showed how ladies prefer ever higher heels in order to impress upon the opposite sex ie. us guys... Well, as we now know, there is no turning back. The current global contest of the highest heels has begun to pose safety issues and has affected ladies' feet/mobility. Yet since every woman on this planet is now wearing high heels, a girl simply couldn't stand out even if she splurges on those life-threatening 10-Inch Stilettos, but yet she cannot afford not to wear. The solution would be for all the girls in the world to agree to break all the heels, but alas that's not gonna happen, my dear.

Antlers: Nature provides the case of how antlers with bigger horns can attract more mating partners but run higher risk of getting eaten by lions since the horns will get in the way when they try to escape predators. In this case, natural selection determines the optimal size of the horns. Those with smaller horns ultimately cannot seek partners and their genes died out. Those with horns too big get eaten up. So we are left with horns just right.

Slim models: Another interesting example regarding female models showed how the Association of Fashion Designers came down to dictate the minimum weight for models as it was become a social problem. The issue: all models want to look better than others and they go on a competitive diet regime that ultimately benefits nobody and worse still, influence young girls globally to become anorexic as young girls want to look like their favourite models.

Full automatic rifles: In the US, regulations are imposed to prevent people from easily obtaining full automatic rifles like the M16 or AK47. Again without such restrictions, we can easily imagine robbers buying M16 to rob the neighbourhood stall and the owner picks up his bazooka to fend robbers off.

In the last two examples, the government/authority or entity in power steps in to correct the situation.

In Singapore, I would argue that kiasu parents and their kids are trapped in the same game of de-generative competition. Everyone goes for tuition to try to gain one-up against other students but actually nobody gains. Yet the kids have less play-time, are more stressed, parents' wallets get thinner and the Govt saves money on public education - which is kind of strange plus stupid.

As alluded to with the examples above, this situation can only be solved in 3 ways:

1. Some limiting factor comes into play: parents run out of money to fund the tuition marathons. However, with wider income disparity, this means that only the poor will run out of money and the rich continues to play the game and only the top 1% wins. Well this is happening now.

2. Parents come together and say stop this. Again, as with Kate Moss wannabies and girls going for high heels, this will not happen. This solution happens when the no. of affected parties is limited. E.g. the nuclear arms race came to an end when all the nuclear nations agreed not to increase the no. of warheads. With 2 million parents in Singapore, agreement is gonna be a real long shot.

3. Authorities need to step in with guidelines/regulations. I see this as a viable solution although it has not succeeded meaningfully anywhere in the world. South Korea outlawed tuition but the results are mixed. It went underground and tutors risked going to jail for US$10,000 a month.

Well, we cannot outlaw tuition in Singapore, but I do believe some measures (described in my previous posts as well) might be worth thinking about:

- Smaller class sizes: each child gets more attention.
- Less focus on grades, more on qualitative assessment.
- Scrutinize tuition agencies (highlight scams).
- Set guidelines for parents (on fees, no. of hours per week etc).
- Encourage good teachers to teach in public schools (better pay, environment etc).
- Publish statistics (tuition vs no tuition relative improvement, mental health of kids before/after tuition etc).

The Singapore school system has changed significantly since this blog posted about education (this post originated 2 years ago). I believe we are moving in the right direction. Our Government is not stupid, when they want to change things, they can. They just need to be more caring as well. Heart truths!

And to end this post, some food for thought about competition. While we need some of it to foster the child's urge to better himself, parents must ask when does it become unhealthy?

Insightful read:
http://www.alfiekohn.org/parenting/tcac.htm

On Ministers' Pay

This is sensitive topic that has angered many Singaporeans. Even with a 30% pay cut, people are not happy. So what if the Transport Minister gets paid $1mn instead of $2mn? The train is still breaking down and the taxi fares just went up damnit.

At the risk of getting flamed and BBQ-ed on skewers alive, I would like to chip in my two cents from an economic viewpoint.

There are perhaps 30+ Ministers and high ranking Govt officials that receive on average, say S$2mn in annual package. Let's throw in a generous bonus of another $1mn. So in total, we pay out $100mn to our Ministers plus high ranking officials like Permanent Secretaries, Head of Civil Service, etc.

But our annual Budget is over $30 Billion and our Economy is over $200 Billion. $100mn is a mere 0.3% of the Budget and 0.05% of the Economy. Does it really impact the big picture? In fact it makes perfect sense to pay the best minds to do the job well.

Of course, we can argue if they did the job well. The short conclusion is they did relatively well against most other nations, but not so well against their own track records. Also the benchmark has to be set properly, if they fail to meet - pay cut! Haha! That should satisfy the public.

Yes, our Ministers are the best paid in the world. Much more than the President of the United States, arguably the most powerful person on the planet. So it really doesn't make sense why a PM of a Little Red Dot should be paid more.

My argument here would be that most top officials globally are too lowly paid. It then also says that these people are truly noble, accepting such meagre sums to do such difficult tasks. It then also says that perhaps our leaders are not noble enough.

Of course the other argument would be that Clinton or Reagan can always publish books and give speeches after their term and earn much more. Or retire into a better paying job as advisers, spokespersons etc. And Singapore's leaders can't really do that bcos bestsellers in Singapore at best hit a few hundred thousand copies, maybe over a few years. Not really enough to buy even a cheap condo unit.

And Singapore cannot really afford to wait for noble souls to step up to the task. We need to attract the best talents to do the job. Already being a politician is such a sacrifice (no weekends, no private life, no time for family) that most smart people would shun away, let alone volunteer to step up the plate.

Not to mention, this is a thankless job. How many Singaporeans made the effort to pay their last respects to the late Dr Goh Keng Swee, one of the most important persons that built Singapore to what it is today. A mere 18,000 or so Singaporeans, out of the 3+ million. That's probably lower than the Disney on Ice @ Indoor Stadium ticket sales last year.

Perhaps a better solution would be to provide these Ministers more benefits rather than to give them an enormous paycheck at the start. Say we lower all their salaries to a few hundred thousand SGD, less than the all-important million dollar mark. But they do not need to pay taxes ever. Their healthcare and insurance are taken care of for life. Needless to say, pension would also continue, perhaps sweeten it a little as well.

It might also be useful to simply give retired politicians peace and freedom since monetary benefits wouldn't really matter much for many of them when they are out of office. The late President Dr Wee Kim Wee was happy to revert back as an ordinary citizen and travel with his wife to see the world. Perhaps that was what truly made him happy than all the benefits and huge paychecks.

2012 High Dividend Stocks in Singapore

I have cleaned up the screen in the last post and this is the newest list of co.s with more or less the same criteria:

1. Market cap more than $100mn
2. Dividend yield more than 4%
3. Past 3 yr average ROE more than 12%
4. Past 3 yr FCF yield more than 6%
5. Past 3 yr EBIT margin more than 10%

There are 2 more co.s: Silverlake Axis and Super Group which is not shown due to the screen size of Bloomberg. So this round produces 34 names in all. Well 33 to be exact bcos Singtel is counted twice.

I have tighten the EBIT margin to reflect that a strong co. should at least have 10% margin but loosen on the FCF from 7% to 6%.

To me, this tighter list will weed out some more of those bombs that usually come with generated quant screens.

Again, pls do more homework on these names bcos the qualitative analysis is always much more important than just churning out names using some value factors.

As for the four names mentioned previously, Adampak drops off from this list due to the market cap criteria change (from SGD50m to 100m) while Viz Branz, SATS and Boustead are still here.

I would add that Super Group is also in a good business (same as Viz) with different geographical exposure (ASEAN) but slightly more expensive and a lower dividend yield (4% only).

Finally here's wishing everybody a happy 2012! Hopefully a war doesn't break out in Iran or North Korea this year!