Books #14: Daniel Pink's When

I have read two books written by Daniel Pink. Both were simple and good. The recent book was simply title When. This is a book telling us to be mindful of time and think a bit more how we should use it when. There were many gold nuggets. I shall list a few that were quite meaningful to me.

1. Every day, every project and every venture has a peak, trough and a rebound. We should be mindful of our own cycles and try not to make important decisions during the trough.

2. In the context of a venture or a project, the middle is a crucial moment where teams break or breakthrough. It is important to know this and garner all resources to make sure we handle the middle trough well. Daniel has the following four strategies to help us move towards breakthrough:

i) Go for small wins - if the task is too big and overwhelming, break it down and go for small wins.

ii) Moving beats stationery - walk around, exercise, do something. Not doing anything will mean falling down the slippery slope.

iii) Social beats solo - as retail investors, we tend to think alone, it is important to ask friends, seek help and advice. The wisdom of crowds beat solo thinking. This works in life, not just for investing.

iv) Outside beats inside - Daniel advocates that we should always connect with nature. It could be as simple as having plants around us. But nothing beats going to the park for a stroll to clear the mind.

3.  Here's the last bit about timing. There are times when we should go first and times we should not. We should go first when there are few competitors and we can make strong impressions. We should not go first when we are the default choice, or when there are too many competitors and when we are in an unknown environment.

Overall, I really like his style of writing. Simple and clear and hence worth the effort to jot this down for future reference. 

Thoughts #25: Lai Xiaomin

News on Lai Xiaomin and Huarong happened some time back but I have been so busy that it took me a few months to finally pay attention.

This guy was the head of Huarong Asset Management, one of China's bad banks whose purpose was to clean up bad debts in the system. He abused his position and did sorts of financial crime including accepting bribes, collusion and invested bad money into bad projects. 

He embezzled USD258m, the highest amount since the founding of People's Republic of China, enough money to fund the lifestyles of 100 mistresses, bought 100 properties and involved over 100 related persons.

As such, he was sentenced to death and executed 24 days after the sentence was passed. The first instance of someone getting capital punishment for financial crime, as the magnitude is big enough to cause societal problems. I guess Lai qualified, as he might also be partially responsible for the downfall of Huarong (happening now).

The lesson learnt for me here is that managing other people's money is not something trivial. Warren Buffett took it so seriously that he sacrificed his family time, partially his health to make things work. Alas, it usually is trivial, for many who are in for a quick buck. As such they are destined to manage small amounts, and to create negative goodwill because they think it is no big deal losing other people's money.

To truly be a good money manager, we must understand from the bottom of our hearts that this is a sacred job. It is more than just accepting the fiduciary duties of managing money. This is the secret of Warren Buffett's success. 

Charts #39: Cybersecurity

 The threats from cyberattack looms large. Cost of cyberattacks is going into the trillions.

Here's an older chart stating the no.s of attacks per year. We should be much higher today.

Cybersecurity will be one big theme in our lives. Buy HACK ETF listed in the US!

PS: just to complete the picture, Singtel, our beloved telco made a push into cybersecurity some years ago. Here's an old article from ST (5 Dec 2018).

SINGAPORE - The Singtel Group has consolidated its cyber security assets and resources under the Trustwave brand, it said on Wednesday (Dec 5), in a move that brings together resources from other arms such as Australia's Optus, and information and communications technology unit NCS. 

With the consolidation, Chicago-based Trustwave now numbers among its headcount the group's 2,000 cyber security employees worldwide. The resource-pooling also brings into the fold the Singtel Cyber Security Institute, a 10,000 square foot facility that opened in Singapore in 2016. The revamp comes with a new logo and a new corporate website for Trustwave. 

Mr Arthur Wong - Singtel's chief executive for global cyber security and also the chief executive officer of Trustwave - said in a media statement that the group will be "uniting the security assets and deep expertise of Singtel, Optus, Trustwave and NCS under one brand and single vision - what we call the new Trustwave". 

Singtel bought 98 per cent of Trustwave in 2015 for US$770 million (S$1.1 billion), excluding net debt, after working capital and other adjustments. It picked up the rest for US$12 million in May this year. Singtel most recently grew its cyber security portfolio with an A$23.3 million (S$23.3 million) deal for Australian consultancy Hivint in October. 

It said at the time that Hivint's services would be integrated with Trustwave's offerings in Australia and the Asia-Pacific. Singapore's larger telcos have been bolstering their expansion into cyber security, especially as their consumer businesses come under pressure from increasing competition. 

StarHub made the news in September when it set up a joint venture (JV) with Singapore investment company Temasek to set up the pure-play Ensign InfoSecurity. StarHub, which has a 40 per cent stake in the JV, merged its Accel Systems & Technologies subsidiary with Quann, which Temasek owned through security services provider Certis. 

 It agreed to buy Accel in several phases in 2017, with a price tag that could go up to $45.6 million. Later that year, StarHub went on to beef up its cyber security business with a deal to buy homegrown cryptography firm D'Crypt for as much as $122 million. Join ST's Telegram channel here and get the latest breaking

Lesson Learnt on Capitulation

At the height of the pandemic in early 2020, my portfolio was bleeding red ink (as with everybody else's portfolios) and I thought I should take measures to stabilize the portfolio. I looked across the stocks I owned and assess if there were any names that would have bankruptcy risks. I did own pandemic related names such as SIA Engineering and SATS. Some of which are still being affected today. 

STI's collapse and rebound, as per global stock markets

I took the opportunity to restructure the portfolio, sell out some names in the same sectors and deployed new money into interesting names which I always hoped to own. By and large, I believed I made good decisions and the portfolio has since rebounded. There was one name which I took a major loss because it did have bankruptcy risk. It has debt to equity ratio of more than 300% and net-debt-to-EBITDA almost doubling from 4x to 7x. 

I bit the bullet and sold it, taking losses only to see it rebound 50% from where I sold. Well, that's investing. You cannot predict the future. But this post is not about lamenting how I got whipsaw-ed. On hindsight, it is still the right decision to sell because if it did go belly-up like Hyflux, then I would have lost not 50% of my capital but 100%. This was the second biggest realized loss in my portfolio after Hyflux, which I did lose 100% and with these two painful memories, I hope to write down the lessons learnt on capitulation. Here's the process:

1. Reassess the situation.

2. Cut loss if the situation is bad.

3. Redeploy to a better name playing the same theme.

Reassessing the situation means looking closely at the business and the balance sheet. Has the business environment changed so much or is the business being disrupted such that there is no chance for the business to come back? Do they have the strong balance sheet to weather the storm? In Hyflux's case, it didn't have the balance sheet strength. It was obvious since the day I invested, yet I held hope that maybe the Singapore Government will lend a helping hand to save Olivia. It did not happen. Hope is a dangerous thing in investing.

So the related lesson is also never to hope. When things are looking bad, don't procrastinate. For this second name, which is a small resource company listed in Europe, I did not have the determination to cut fast enough. Thing started to unravel in early 2020 and the share price fell from EUR15 to EUR10. I should have cut then but again, I procrastinated. It fell all the way to EUR6.8 and I decided enough was enough. Remembering my experience in Hyflux, I figured that if I don't cut, it might go to zero.

For a while, the decision looks right, it continued to fall to EUR5 and I felt good. But has the stock market started to rebound, it rally past EUR 6.8 and is now back at teens. So, looking at it now, the outcome is such that even more procrastination would mean earning back a bit of money (it is still below my buying price though). However the business situation has not changed. It is still laden in debt, its position is further weakened by the pandemic. At this moment, my decision to cut was not great, but it could still turn out to be right in a few years. 

But more importantly, was my decision to redeploy the money.

The resource name was invested years ago with an investment thesis that certain niche commodities would be vital as the world develops and China was leading the boom at that time. There are actually bigger names to play the same theme. So while I cut losses and completely sold out of this name, I redeployed the capital into similar stocks. It turned out the be a great decision as these higher quality stocks also recovered as global stock markets recovered. 

As such, reassess, cut loss and redeploy would be a good strategy the next time you made a mistake and would like to move on. Do not let loss aversion cloud your mind. That said, it is much easier to invest a smaller amount to make sure your losses are never too big to begin with.

One final note on resource companies and high debt companies. Perhaps it is just much easier to avoid them. If you have to buy resource, commodities and energy names, then just go for the biggest fish or use an ETF. Hope this helps!

Huat Ah!

Books #13: Chris Voss' Never Split the Difference

Chris Voss was a FBI hostage negotiator turned consultant and I chanced upon his book on Kindle. It took quite a while to finish as I was busy with other stuff. Overall, it was a somewhat satisfying read although I probably need a lot of practice to become a better negotiator. Here's his lessons for winning negotiations.

1. Listen, mirror and label. Chris first lesson was simply these three words. We should listen to what the other party wants. Then mirror and label their emotions. Once they feel that they are heard, we can then negotiate. He encouraged to use phrases like, "it seems like..." and "I hear that you are feeling...". These are labeling techniques to confirm what has been said. It validates the other party and allows for the conversation to progresss.

2. Accommodator, Assertive and Analyst. The next three words are as stated. They should all be read as nouns to describe people. Once we understand their style, it is easier to negotiate with them. Accommodators are people who likes to agree. They tend to be silent when they are actually angry. Assertive people needs to be heard before they can hear anything and analysts can be won by numbers and facts. Most people are multi-facet so it is important to know when they change from say assertive to analytical.

3. Ackerman model. The best part of the book is probably the introduction of the Ackerman model and other tactics to negotiate salaries or when buying cars. There are a few interesting rules like let others go first and then when you state your price, be prepared to raise it just a little each time. The final number should also be an odd number like $35,505 to give the impression you are being squeezed to the last dollar.

It was just a somewhat satisfying book because I felt that it did not capture everyday negotiations. We do not negotiate for the release of hostages in our daily lives. We are negotiating with family members, bosses, colleagues and it takes a slightly different attitude because in the end we want win-win solutions. That said, hopefully the three lessons above are useful enough and can be applied at work or at home successfully. 

Huat ah!

Thoughts #24: Buy luxury!

The pandemic bubble is upon us all. QE Infinity flooded the world with liquidity with the bulk of the benefit going to the haves rather than the have-nots. Let's look at the following few charts.

LVMH share price

This is the 5 year chart for LVMH, the world's largest luxury company and it traded up swiftly after Covid19. LVMH represents the first class haves of the world. Their luxury portfolio includes, well, LVMH itself (the ubiquitous bag), Moet Hennessy (champagne), Mont Blanc (pen), Tag Heuer (watches), Tiffany (jewellery). The really aspirational coveted stuff. There are even more atas stuff like Hermes and Patek Philippe out there but they cater to super uber rich. Too niche. So, LVMH represents the haves. Hence I believe the chart above might be similar to how the wealth of the top 5-10% income earners would look like.

Tapestry share price

This is the 5 year chart for Tapestry. Tapestry used to be known as Coach. The mass luxury brand with a wider reach. It now has Kate Spade and hence the name change. Tapestry is luxury for middle income people. It did well in normal times, during 2015-2018, its share price was close to $60. Then it got hit terribly by the pandemic and the share price collapsed. Well, as things normalized, it came back. In my mind, this chart represents the middle income. We got hit but it's not so bad.

AMC share price

This third chart is the 5 year chart for AMC, the world's largest cinema chain. It wasn't really doing great because everyone is binge watching stuff on Netflix so the footfall to cinemas was already declining. Then the pandemic hit and literally nobody went any cinemas. Well they were closed anyways. So AMC fell like a rock. At rock bottom with share price $1.98, the reddit warriors who bought Gamestop decided they should support AMC too. So they cooked up a storm to squeeze short sellers (hedge funds who represented the haves and the uber rich and famous we talked about). Share price went up to $13 at its peak. Some short sellers did got hurt. But eventually, it collapsed because it's another mini bubble in the bigger scheme of bubbles from Tesla to Bitcoin. To me, this chart represents the have-nots. It is really tough. It's a one way street of dwindling wealth. It could be the biggest issue in our lifetimes - social class warfare.

Glux ETF

The stock idea here though is to buy a luxury ETF - GLUX. It has some of the top luxury traded names and it has done almost as well as LVMH (yes LVMH is also in it). The time is not right to buy now given that it is at all time high. But it is important to monitor this ticker because luxury stuff will get even more luxurious. Reddit warriors buying Gamestop and AMC would have done better buying this since their god - Elon Musk is also represented. Tesla is the largest component of GLUX. That is one risk though and the reason I haven't bought.

Let's keep monitoring and hopefully can huat on this ticker!

 

Don't rage, don't take umbrage, pls behave on stage!

Rage and umbrage has become unacceptable as society progresses. Today, social media picks up everything. So, when you want to say something inappropriate, well, better think well!

Two days ago (7 May 2021), SPH CEO Ng Yat Chung took umbrage at a reporter asking a difficult question and the whole thing went viral on internet. This was a classic case of shooting the messenger since the reporter was just asking a question sent to her mobile phone. She obviously didn't ask it for herself and would be wondering why she was getting shouted at.

Don't anyhow take umbrage

Actually, the CEO maintained his composure at the start, introducing to us a new word to enhance our English vocabulary. But his response grew more and more belligerent as he spoke. He denounced himself as a gentleman and then shouted almost savagely. This was the bit that caught the social media's attention. Now, we have umbrage T-shirts, advertisements and what not.

But the real people who really had to take umbrage were SPH's shareholders. SPH's share price had simply rolled downhill all these years. The chart below shows how SPH had always hovered at $4+ only to accelerate its decline after the current CEO took over. Then it got hit by the pandemic and collapsed even further. In the last few weeks, share price started to recover, perhaps because Singapore is vaccinating its population so well, but alas, the umbrage saga took it down by 15%! (Or may it was selling a profitable business at a negative price).

Umbrage strikes back!

It is not entirely the CEO's fault. Running a declining business franchise is a tough job. Newspapers are distributed for free Today (pun intended: for non-Singaporean readers, ironically, this free newspaper is called Today) and I am not sure who still subscribes to the Straits Times. Maybe corporates and rich people who just want it to wrap their breakable stuff after those daily papers pile up. In this day and age, the way people consume news had also completely changed since the days newspapers were invented.

Newspapers were a huge thing in the past. Their economics were so good. They had both subscription and ad revenue and both were raking it in while they simply pay reporters peanuts to write stuff that everyone had no choice but to read. But the internet and social media changed everything because now everyone can be his or her own reporter and they wrote things people really wanted to read. 

When the tide changed like this, it is hard for management in that business to adapt. Newspaper was a profitable business that will generate money even if you put a monkey to run it. Now, it has to fight  declining subscription, declining ad revenue and the social media. Warren Buffett puts it best:

When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.

To paraphrase, if the business is tough, then even brilliant management cannot win. I am not sure how brilliant our current SPH management team is. I hope they don't take umbrage :) But I am sure shareholders have taken umpteen umbrage seeing how their investment has declined c.70% over just a couple of years, not to the fault of anyone though. It's just business.

I don't think there is any easy way out for SPH. It is now a tough business. For the longest time, it was supported by its property business. Maybe there is an angle here by spinning off the tough media business and become a property company. It will take courage, not umbrage, to bring the share price back to its previous glorious days.

Books #12: Daniel Pink's Drive

I read this book a while back and has forgotten the bulk of it. It's good that we are in the internet era. So many people wrote good summaries and made it easier to simply recall the main messages and even come out with new ones that are relevant to me now.

Autonomy and mastery: Daniel believes that people has the innate drive to achieve autonomy and mastery. Rewards and nagging rarely get us anyway. For those of us with parental experience, gosh, how true! Goals that we set for others seldom work if there is no buy in. 

Goals people set for themselves, when we get there, we enter a state of flow. This is very blissful and this is the state that helps musicians create music. This is the state Michael Jordan is constantly in when he is on the basketball court. We all have experienced flow. We should strive to achieve flow in our work and life. 

In office work, positive feedback, useful information and meaningful information can be more powerful that monetary reward. Positive feedback can be given and reminded. Useful information from bosses will be able to help subordinates complete their tasks. Meaningful information will propel innate drives!

Lastly, two quotable quotes from Drive:

“At the end of each day, ask yourself whether you were better today than you were yesterday.” 

“One of the best ways to know whether you’ve mastered something is to try to teach it.”

The CPF Conundrum Explained - Part 2

This is a continuation of the previous post on CPF

In the last post, we spoke about topping up 7k to get tax relief and also earn 4%pa. From an investment perspective, this 7k top up will earn 6-7% guaranteed IRR over time. This is damn good return which why it is capped at only 7k per year. There are also other things that we should do. Here's a recap of the three top ups.

1. We should top up $7,000 in our Special Account every year.
2. We should top up whatever we had withdrawn from our CPF (usually for mortgage) asap.
3. We should top up CPF for our loved ones to the extent possible.

We also explained CPF Life. For the benefit of new readers, let's just recap also. CPF Life is a scheme to make sure that everyone will have enough to draw out because some Singaporeans, unfortunately, actually don't have enough in their CPFs. We do not actually know how many percent, some blogs out there says like 75% of Singaporeans don't have enough while the Government says more than 50% have enough. Maybe the truth is somewhere in between but the impt angle is that whatever money that had been put away in the CPF, do not just disappear, the contributors or their nominees would eventually get them back. It won't be eaten up by the Govt. People go to legal courts to get this back from mistresses or illegitimate sons/daughters or domestic helpers. So no, the Singapore Gahmen, despite the many flaws, does not usurp our CPFs. 

Hence we are not discussing if the Gahmen would give us this money or not. It is a given that it would come back. For our purpose today, we would determine that the returns on the three types CPF top up are actually very lucrative. We have already done that for the first one in the last post.

Back to CPF Life, this is a scheme structured as an annuity that will pay out a fixed amount, usually three or four digits payout per month, until death. The amount that we have contributed will definitely come back to us, just not in one lump sum but over our remaining years. The interest earned does not belong us and this goes into the pool to benefit others. If we outlive our contributions, we benefit and take from the pool. If we do not, the remainder less interest earned goes to our kids, or our nominees. In short, CPF Life is a very sustainable scheme. It is not a way for the government to usurp our monies. 

The whole issue is being made complex bcos CPF is almost always used to buy properties. Trading real estate is a national pastime and huge fortunes had been made and lost. It gets even more complicated bcos whatever that we used from the CPF to buy properties had to be put back, with interest. This rule, while logical, really creates one problem which is also the crux of some of the arguments out there. Hence:

2. We should top up whatever we had withdrawn from our CPF (usually for mortgage) asap.

To put simply, when money is in our CPF, we earn interest on it, this is around 2.5-4% in 2021. But when we use this to buy property, we lose this interest and we have to top it up some day, supposedly. In reality, almost nobody tops this up bcos over time, due to the nature of compound interest, this amount explodes! Just a simple illustration, say we took out $100k to buy a property from CPF. If we have to top it up after 20 years, based on a compound interest of 2.5%, the full amount is $100k principal + $63k in interest! This is $163k. If we took out $200k, it would be around $326k to put back in CPF. These are no small sums. By taking this $100-200k in the first place, we "lost" the opportunity to earn $63-126k of interest. Shit right?

Again, in reality, we might not need to ever "pay" this. Since property bought using CPF can be pledged for many things, including the minimum sum that we talked about and when we hit 55, the government would also not dictate that we pay back this lost interest, since we are legally allowed to withdraw money out of CPF by that age.

So why the fuss of topping up?

Let's review from an investment angle here. When we draw money out of CPF to buy property, we are actually choosing between two alternatives: CPF or mortgage from the bank. The mortgage from the bank will actually cost us interest. Currently (2021), SIBOR is at 20-40bps plus spread of 60-80bps which means we pay 0.8-1.2% to the banks. This is quite low by historical standards but still it's money out of our pockets. CPF, in contrast, is 0%, since it's our money. And when we do need to "top up" back to CPF, it's still our money, so in essence it is a 0% borrow. So between borrowing at 0% or 1.4%. It is then logical to borrow at 0% right? Taking this one step further, since if money is left in CPF, it would earn 2.5% which is more than the 1.2% borrowing cost, in fact, we should borrow more and keep the CPF money and earn that 1.3% spread! Alas, the banks are not stupid and there is a limit as to how much we can borrow.

This banker and others won't let you borrow w/o emptying your CPF!

So this is the first part. Strike a balance, although somewhat up to the bank discretion, between CPF and mortgage. Then assuming everything goes well. At some point we need to decide between prepaying the mortgage or top up CPF or having cash in our hands. So here's the new decision tree:

i. Prepay mortgage

ii. Top up CPF

iii. Hold cash

To make it more obvious:

i. Prepay mortgage - save 1.2%

ii. Top up CPF - earn 2.5%

iii. Hold cash - earn 0%

Between saving and earning, it's actually the same, so the first option could also be read as "earn" 1.2%. The answer then becomes obvious right? We should top up our CPF! Again, this decision might be frown upon by the banks, so we need to tread carefully. And when the day comes that we are done with our mortgages, then between holding cash and topping up CPF, we should top up CPF. The caveat is of course we always want to have enough cash (around 12 months of expenses) to meet emergency needs. Of course if we have good opportunities to earn more than 2.5%, then we should go for it. But bear in mind that CPF's 2.5% interest is money from the government, we shouldn't waste this opportunity to earn it! In the last post, we also talked about Special Account, which gives 4%, hence all the more we should top up!

As alluded to above, these decisions should also be viewed against other means of allocating money i.e. buying stocks or bonds, but we must understand that investing while almost definitely means more return, usually 5-8% or even more, comes with risks and also less liquidity. We might lose 20% while trying to earn 8%. And once we are invested, like CPF, we cannot take this money out easily. So depending on our age, CPF could be more liquid! Esp for those already in their 40s and 50s.

Having said that, I would give more priority to first clear the mortgage and topping back up CPF as it gives a peace of mind. Sometimes in life, we need to clear some of these literally mind boggling issues to be able to think better and make better decisions. Although that doesn't mean totally not investing. If a good opportunity comes about, money has to be put to work!

3. We should top up CPF for our loved ones to the extent possible.

Finally, on to the last point. Yes we should also top up CPF for our loved ones, usually our parents. This is also limited to $7k per year and also tax-deductible but only to retirees or with some other conditions. Hence the same rules for the previous post applies. The good, or perhaps better thing is that we can also receive the money back in cash from our loved ones if they have enough to spare. 

As mentioned, the risk of doing all this is really regime change, which is a low probability event. The PAP should stay in power for the decade at least given the vote of confidence in 2015 winning almost 70% of the popular vote. Changes to the CPF system while possible would also be gradual and hence the 4% should stay high even if it is changed (maybe 3+%).

So, that's the moral of the story, do think about topping up CPF, especially for 1 and especially for those in the high income tax bracket. For 2 and 3, it should be done for those with spare cash. It will definitely make life easier in the future!

Huat ah!

Charts #38: We are winning this war!

 

18 months. We are finally seeing light at the end of the tunnel.