Friday, May 19, 2023

2023 Dividend List

The wait is over. Today we will talk about *drumrolls* the 2023 Dividend List. This list has consistently generated the most popular posts on this infosite over the years. I started using Poems' simple dividend screen a few years ago. It allows adjustment for only 8 factors: ROE, ROA, Operating Margin, Dividend Yield, PE, PB, Current Ratio and Debt/Equity. While crude, it worked and we discussed good ideas in the years past (the full lists at the end of this post). This year, I came up with a 8818 4D winning formula to screen and would like to share the results. 

The above shows what 8818 is about. ROE > 8%, Operating Margin > 8% and PE < 18x. Dividend is no longer used as a criteria so it has become a misnomer to say this is a dividend list. But since Poems will always show the dividend yield, we can still see it as a reference and surprisingly, all the stocks featured today pays dividends. Although it doesn't really make any sense today to buy anything for 4% dividend since we get that risk-free buying Singapore T-bills. However, if it is a name with strong growth but still gives 4-5% dividend, then it's a steal. Buy, buy, buy!

For the Singapore market, I have cut off the market cap at SGD100m and we have 77 names. The last name cuts off at market cap of SGD1.5bn and honestly, I have also avoided small caps because the risk of seeing that investment going zero is way too high for me to stomach. I have discussed this point in Lessons Learnt from My 4 Biggest Losses. As such, the screenshot shows the top 30 names, the good blue chips on SGX sorted by market cap. We see the banks, REITs, Thai Beverage, Jardine Cycle and Carriage, Yangzijiang, Property names and Venture, Singapore's answer to Foxconn, albeit in a very small way, led by its founder Wong Ngit Liong. The following shows Venture's share price.

While it does not show the usual compounding graph, we can still see that Venture has created some value in the last 10 years after a long stagnation from the early 2000s to 2016-17. Contract manufacturing is a difficult business and hats off to Mr Wong and his team for being able to reinvent themselves, bringing the share price to $30 at one point. Venture went into niche contract manufacturing for MNCs by providing Singapore's branding for quality, process and timeliness and made a killing there.

But, let's move on from Singapore. In the next screen, I used the same 8818 (i.e. >8% ROE, >8% OPM and <18x PE) for NYSE, Nasdaq and Amex with the market cap cut off at USD100bn. Unfortunately, that is the quantum difference between our Little Red Dot and the World - USD100bn vs SGD100m as the cut-off in market cap. *Sigh* Anyways, the following shows some of the biggest names in the  world today:

I would note that TSMC is the most interesting name but it also comes with the most dangerous risk: China invading Taiwan. If that happens though, everything will be falling apart, so not sure which is worse, owning a diversified portfolio with TSMC or owning a lot of stocks in general that will see 20-30% drawdown if war breaks out. I don't have a good answer and that is why I have also advocated buying physical gold. In the middle of WWIII, all your stocks and money in the bank account may not be worth much, but physical gold will get you food and petrol in your $100k COE car.

The last screen is the same 8818 criteria for LSE listed names. I would highlight that BHP and Unilever which appeared in both the London and US screens are good compounders. The chart for Unilever below shows the nice exponential curve as most compounders' long term share price chart shows. Different from the Venture one right?

Interestingly, we are also seeing many stocks trading below 1x PBR (e.g. HSBC and British American Tobacco) that has good ROEs and not necessarily basket cases. During the growth era from 2010 to 2022, this couldn't happen. Perhaps we are truly in a new value era. Long Live Value!

As usual, here's the past lists:

2020 Dividend List
2019 Dividend List
2018 Dividend List - Part 4
2018 Dividend List - Part 3
2018 Dividend List - Part 2
2018 Dividend List - Part 1
2017 Oct Dividend List - Part 2
2017 Oct Dividend List - Part 1

Huat Ah!

Friday, May 05, 2023

Thoughts #31: Investment Advice for Friends

As self-proclaimed investment gurus, friends tend to seek us out for investment advice and we tend to give freely, without contemplating the consequences. Most of the time, we share ideas that we are thinking of OR ideas that we already own and as conversations with friends go, there is no in-depth discussion and exact instructions are not provided. For example, a typical conversation will be:

Friend: "Hey, any stock lobang (good investment opportunity)"

Investor: "Yeah, check out Sembcorp Marine,  I bought already."

Friend: "Why is it good?"

Investor: "Energy is in demand, now oil price so high. Sembcorp will benefit."

Friend: "Oh yes, that is true, any risk?"

Investor: "They always need to put in a lot of capex, basically capital expenditure to build rigs and the industry is highly cyclical, so some competitors go bust. But no worries, Keppel will buy them if anything goes wrong."

Friend: "Ok, ok, I go buy tomorrow."

There are a few issues right here. There is no entry price, no target price and as such we do not know when to exit. Also, what is the size to commensurate the risk involved? These important points are all not spelt out. So when things go wrong, the investor sells at a loss and recommends that the friend do so, he or she may not follow because psychologically, loss-aversion is at work. Most people find it very hard to cut loss. Even when things go right, it is time to take profit, greed takes over and when the investor has sold, sometimes friends do not want to sell also. 

Such is the difficulty of providing investment advice on a casual basis.

Well, most friends are understanding and they know, it is always caveat emptor. You cannot fault your investor friend for providing advice just as you cannot fault your makan guru (foodie) friend for recommending you to his favorite restaurant which may not be to your liking. Of course, not all friends are like that.

To continue to hypothetical situation above:

Friend: "Hey Sembcorp died! What happened?"

Investor: "Well, it is highly cyclical, they did a lot of capex in the wrong regions, so when things go wrong, I sold and asked you to sell. Did you sell?"

Friend: "But you said Keppel will buy them."

Investor: "Well they did merge in the end. But did not go too well for Sembcorp shareholders. That is why I sold. Why didn't you sell?"

Friend: "I was hoping can rebound. But now lost so much money. Thanks bro... Guess your stock tips are not too reliable."

Investor: "Sorry... can we still be friends? Can I buy you dinner?"

Over the years, I have come to realize that the negatives of providing investment advice outweighs the positive. If he is serious, maybe he should consider subscribing to my Substack and we can have real in-depth and robust discussions on the Substack platform with other like minded subscribers.

Alas, most people just want stock tips. Not to read a 15 minute deep dive note on Substack or anywhere else. Just gimme the get-rich-quick tip bro!

Well, to each its own, we can still be friends.

Huat Ah!

Thursday, April 20, 2023

Warner Bros Discovery

This post first appeared on, as part of a new effort to share investment ideas. 

Why do humans love stories?

Ever since our brains evolved to develop language, we have been telling stories to one another. Stories activate our cognitive brains and bring us into different realities which we believe can be perfect and we escape into them to forget about our not-so-perfect lives.

But stories can also inspire us to become better versions of ourselves. We worship both ancient Greek heroes and Marvel superheroes and aspire to be like them. We empathize with our heroes when they go through their challenges and rejoice with them when they finally overcome their nemeses and live happily ever after.

In recent years, storytelling has reached a whole new level with Hollywood and Netflix throwing billions of dollars into content creation. Disney up its game with the Avenger series and we see its peers following suit. On top of that, big budget television series, reality programs, anime and a slew of alternative content now proliferate our lives and our minds.

As such, our bet today is an overlooked content company created in the midst of the pandemic.

Investment Idea: Warner Bro Discovery

Warner Bros Discovery (WBD) was created with the merger of Warner Brothers Media and Discovery Inc in 2021-22. The stock price has corrected from $24 to $10 since its inception and looks amazingly cheap at teens free cashflow yield (FCF) today.

1. Fundamentals

The company now houses some of best brands and franchises outside of Disney under one roof (see slide from 2Q2022 investor presentation below). These include DC Comic, HBO, Harry Potter, CNN and Cartoon Network, amongst many other franchises. According to CEO David Zaslav, WBD probably has 35% market share of the best content on Earth, as much as Disney does. There is so much room to extract value but the market is not appreciating WBD’s value and not valuing the company as such.

As a result of the various past mergers, including the final mega combination between Discovery and Warner, one can also expect that a lot of duplicated costs can be reduced. Cost synergies is estimated to be USD3.5bn and while sales synergies are not factored in, it should also be significant. Just think about how Harry Potter and DC can now go on HBO and Cartoon Network or how they can further milk the Game of Thrones franchise as they already did with the House of Dragons.

The following is a set of simple financials projects WBD’s financial prowess in 2023. In the base case scenario, the company can create USD4bn on free cashflow (FCF) on its market cap of USD25bn:

Simple financials (estimated for Dec 2023, USD)

Sales: 48bn

EBITDA: 11bn

Net income: 500m

FCF: 4bn (current FCF in 2022 is 3bn)

Debt: 50bn, Mkt Cap: 25bn


ROE 9% ROIC 6%


Past margins: OPM 20-30%

By comparison, Disney generated USD5-8bn of free cashflow pre-pandemic and achieved teens ROE which should be the levels that WBD can aspire to reach in the next 2-3 years. That said, the next few years does not bode well for Disney as it struggles with management succession and its streaming business. The same key risk can be said for WBD.


WBD faces the possibility of not being able to turnaround streaming losses (USD500m per quarter) and continued hiccups in execution, will mean that the abovementioned potential will continue to be unrealized. The mitigating factor is that with its lucrative content library, WBD might be taken over by another operator to achieve its potential. So by investing today, we should not lose money.

The second smaller risk is WBD’s balance sheet. With USD50bn of debt (against market cap of USD25bn) and rising interest rates, things could spiral out of hand if this debt and its interest expenses are not managed well. The mitigating factor is its strong FCF generation. At the current estimated range of USD3-6bn FCF annually, WBD could pay down its debt in c.8-16 years.

2. Technicals

WBD traded to $80 as a mime stock when it was still Discovery Inc (the deal was already announced). and it is not a stretch to imagine it can be valued as such given the strong FCF, franchise and leadership under David Zaslav, who was under the tutelage of John Malone, one of the best business leaders of our times.

David Zaslav alluded to this target in a recent podcast. He also shared that his stock options only make good money when the share price hit USD30 and beyond. We are also seeing insiders buying at current levels. These “technical” signals bodes well.

After it started trading as WBD in Apr 2022, the share price dropped from USD24 to its current USD10, a 60% drop reflecting the weakness in the markets. Its highest point was above USD30 shortly after the launch of its new ticker and it traded as low as USD8.8 recently. Thus, on many counts, the current share price presents a good risk reward profile.

3. Valuations

Warner Bros Discovery measures FCF and EBITDA closely and therefore we can use FCF yield and EV/EBITDA as the appropriate valuation metrics to triangulate its intrinsic value. Starting with FCF, WBD currently has a market cap of USD25bn and management expects free cashflow to hit USD3bn in 2022 and somewhere between USD4-6bn in the future, calculated from its EBITDA to FCF conversion ratio of 33-50%.

This implies its FCF yield is 12% using the USD3bn number and a whopping 24% if we believe WBD can make USD6bn in FCF. As a rule of thumb, an intact business (i.e. not declining business) with FCF 10% yield is what investors will kill for because we do not have to sell. We can technically hold it forever since this asset is going to give us 10% every year, perpetually.

WBD is trading way beyond this FCF 10% yield benchmark.

Similarly, we can use EV/EBITDA to value WBD. Management is guiding USD12bn in EBITDA next year but we have conservatively estimated that it will miss by a billion, achieving USD11bn. Using its current EV of USD75bn (market cap of 25bn + debt 50bn, WBD is trading at 6.8x EV/EBITDA, which is considerably cheaper than most of its peers (Disney at high teens and Netflix at over 20x).

4. Intrinsic Value

Assuming that WBD trades 8x EV/EBITDA on next year's USD11bn of EBITDA, WBD should have an EV of USD88bn and after deducting its USD50bn debt, its market cap should be closer to USD38bn (not the current USD25bn). If we use current EBITDA of USD9.5bn and similarly give it the 8x, then we get to a more conservative EV of USD76bn. After we deduct the USD50bn, we still get USD26bn of market cap, which is still 4% above today’s share price.

WBD is incredibly cheap!

Let's see how it looks like if we use FCF. Assuming FCF is at USD4bn and giving it 15x (or 6.7% FCF yield) which is again at a discount to its peers, WBD should trade at a market cap of USD60bn i.e. 140% above its current market cap. This translates WBD’s intrinsic value to USD24 per share.

If we look at its peers, Disney, Netflix, Comcast, they are trading at USD219bn, USD107bn and USD171bn respectively with EBITDA at USD12bn, USD19bn and USD36bn. The average market cap is USD166bn over an average EBITDA of 22bn. Without doing a full regression analysis, we can intrapolate the above numbers back to WBD's market cap using its current EBITDA of USD9.5bn, it implies that WBD should trade closer to USD72bn.

Taking the average of the four market caps, USD38bn, USD26bn, USD60bn and USD72bn, we get to an intrinsic value (IV) of USD49bn in market cap or USD20 per share. As such, we would put WBD's IV at 20 with over 90% upside from today’s price.

Huat Ah!

Read it at and please support by subscribing at substack, thanks!

This post does not constitute investment advice and should not be deemed to be an offer to buy or sell or a solicitation of an offer to buy or sell any securities or other financial instruments.

Thursday, April 06, 2023

When Money in the Bank is Not Safe Anymore

This post first appeared on We also provide for monthly investment ideas for paid subscribers.

The last few months saw the spectacular collapses of financial institutions across different sectors and geographies starting with FTX, the crypto-exchange that was a fraud. Sooner than we know, Silicon Valley Bank went into trouble and Credit Suisse needed to be bailed out by its arch-rival UBS. These crises are still unfolding as the repercussions are being felt worldwide. In this post, we hope to highlight the dangers involved and hopefully provide some differentiated advice for investors at the end of the post as we walk through how global financial system came to the current dire situation today based my understanding.

1. In Government We Trust

The modern global financial system today is built on trust. Before that, we used gold. Trust is not easily earned. Bank runs used to be a thing even in Singapore and my grandparents and parents did not put monies in banks until recent times but kept them under their pillows and cookie tins in their homes. My mum still do this today.

From the end of WWII to the 1970s, the financial system was pegged to gold in what was called the Bretton Woods system. The system dictated that all currencies were pegged to the USD and the USD was pegged to gold at USD35 per ounce. This was supposedly sacrosanct and built on centuries of human’s adoration for gold but it came to an end when the US government overspent on the Vietnam War and governments around the world abandoned the pegs which subsequently cumulated in Bretton Woods’ collapse in 1976.

Since then, our currencies are backed by nothing except the promises from governments of the world that the currencies they issued are worth something. Technology then connected the global financial systems via computers and later the internet in the 1980s and the 1990s. This allowed for global transactions to take pace with major banks in their respective countries as the gatekeepers. To summarize, the global financial system today stands on:

i) the trust in our governments and financial institutions

ii) the global interconnected financial web with banks as key intermediaries

2. Financial Web & Contagion

The interconnectedness of this global financial web brings about problems because the whole network is only as strong as the weakest link. Trust is easily broken (which is usually the case) and banks as well as other financial institutions can fail. In the late 1990s, it was believed that a hedge fund called LTCM would cause the collapse of the global financial system if it went bust. The Fed engineered a rescue to prevent that doomsday scenario from playing out. Then in 2008-09, the Global Financial Crisis (GFC) saw how the fall of Lehman Brothers almost brought the whole system down.

Lehman's bankruptcy in September 2008 triggered the acceleration of the GFC which led to AIG, the insurer going under, forcing the Fed to take over the firm. A few days later, money markets and credit funds saw unprecedented withdrawals which again forced the Fed to underwrite everything that people wanted to sell. US Congress authorising a USD700bn fund to buy toxic assets finally stabilized the ship. It was believed that if the Fed and the US government did not use the fund to backstop, the global financial system would collapse. Thousands of banks would fail, just like they did during the Great Depression and unemployment could hit 30%. Millions could be homeless and starve.

It was Armageddon avoided.

But the negative impact still reverberated into Europe causing the economic crisis in Greece, Italy and Iceland. Icelandic banks did go down and required IMF’s intervention. China responded by creating a CNY4trn economic stimulus package which subsequently led to other issues. Lehman’s collapse also hit Asia with the now infamous Lehman mini-bonds hurting retail investors in Hong Kong and Singapore. Retirees invested their life savings with banks that they opened their first and lifetime accounts into these financial products thinking that their monies were safe!

Breaking the weakest link can create contagion across the global system that could bring about the end of modern finance as some believed. Today, we have different pockets of failure that is threatening the system yet again.

Armed with experiences above, powers at be today know that they have to stop contagion because the whole system is built on trust and the system can collapse when the weakest link breaks and brings everything down with it. This is why the US will insure all deposits in all banks big and small and why the Swiss National Bank forced UBS to buy Credit Suisse. There can be no contagion.

3. Unintended Consequences

Despite the best of intentions, we may not be able to prevent all unintended consequences. The Fed chose to save Merrill Lynch and not Lehman Brothers back in 2008 because they believed they could handle the aftermath of Lehman going down as it was smaller. Today, we face similar issues. Credit Suisse chose to gave up on AT1 bondholders which could be disastrous (we will come back to this). FTX’s debacle indirectly led to the issues at Silicon Valley Bank which then impacted Signature and First Republic Bank. Both are in trouble now.

Most of the time, danger lurks in places no one is looking at. No one heard about Silicon Valley Bank until a few weeks ago. Who knows what can go wrong next? Back to Credit Suisse’s AT1 bonds, this is a special type of bonds that is a hybrid between equity and debt. They came about after the GFC to allow banks to issue this special type of instrument to beef up their balance sheet. They were known as co-co bonds back then. Co-co comes from contingency convertible bonds. They provide investors with higher interest (at c.6-9%) but will convert to equity when things go rough.

AT1 or coco-bonds ranked higher than equity but ranked junior to all other debt (see above). But still, they are debt. All finance students know that equity goes to zero first before debt is impacted. But in Credit Suisse’s case, the Swiss decided to write down AT1 to zero but a lifeline is provide to equity holders, turning finance rules on their heads. As such, the USD260bn global AT1 market is going down globally. AT1 is mainly held by Asian investors and banks from Stanchart, HSBC to Japanese banks are seeing their share prices collapsing.

4. How to Navigate from here?

With market valuations still high (see previous post in Dec 2022) and the current woes still ongoing, we are definitely not out of the woods, in fact, we are deep in the forest with no exit path in sight. It is not the time to buy anything. I would sell before buying. Investment ideas should be very well studied which reminds me of my mother’s nagging during school days. The best ideas should then be bought with prudence at a 2-3% or max 5% position of the portfolio each, making sure everything is diversified. But the more important diversification is about putting investments with different intermediaries (or different cookie tins if you like) i.e. different brokers and banks because you do not know if they might go down some day. No one thought Credit Suisse would fail last year.

I think this could be the important takeaway for today. It is a simple rule that has been forgotten over time as the global financial system evolved and we put so much trust into old and new entities without doubt. Back in the days when money in the bank isn’t as safe, my mum (yup her again) would diversify and split her savings into various banks and simply hold fixed deposits and no other types of financial investments. As mentioned, she would also keep some cash at home and buy gold and tangible assets of value.

Today we mindlessly buy structured products thinking they are safe (like Lehman’s mini-bonds) and invest in Bitcoin via exchanges with no proven track record. Maybe moms do know best even in investing and finance!

To end this post, here’s mom’s list of advice: 

i) Study your ideas well 

ii) Diversify your funds across banks and brokers

iii) Don’t buy structured products, just go for the simplest stuff like T-bills, stocks and fixed deposits

iv) Buy gold and tangible assets of value 

v) Cash on hand is king!

Huat Ah!

Friday, March 17, 2023

Books #19 - Elon Musk

I just finished reading Elon Musk: Tesla, SpaceX and the Quest for a Fantastic Future which was first published in 2015 but updated recently to provide readers with the most up-to-date information. The author Ashlee Vance is an amazing writer. Even though the book was few hundred pages which usually takes me a few weeks to read. I devoured it in days. 

Much of Elon Musk is well known and I struggled to see how I can add new perspectives. As such, this is more of a reflection piece for myself. Hopefully, you can find some nuggets of insights here and there.

1. Elon Musk is a Genius and a Jerk

Intuitively, we probably know he is super smart but only after reading the book then it dawned upon me that this guy is probably at a different level compared to most other guys we tend to compare him with. For one, he is running two companies as the book was written and running three now as we speak.

Well, we know that smart people have big egos and are either born jerks or become jerks. Everyone of them is divorced. Jeff Bezos, Bill Gates, Steve Jobs, Warren Buffett, Robert Kwok, Sergey Brin. 

You name it. Every single one.

So Elon is probably the biggest jerk of them all. He had an affair with his best friend's wife and resulted in Sergey's name being on top. Goodness... (pic below). Of course, what Sergey did to piss his wife to sleep with others is not known. 

Sleeping with best's friend's wife...

But jerks do push humanity forward. This post cannot be written without my iMac and no additional research could be done without Google.

2. Space business may have some economics

I never understood the space business. To me, it was just concept. How can the ROIC be great for businesses that require so much capex, R&D with no demand? I am still skeptical but SpaceX shooting up hundreds of satellites and using space technology for commercial applications might become big. 

SpaceX satellites are being used in the Ukraine-Russian war. War generates business (bad business though) and brings in money. That said, there are all kinds of commercial applications, including internet, satellite imagery etc.

3. Life is about Luck

The statement above is universal. You don't have to read this 400 page book to know. Well, Elon is tremendously lucky. Tesla could have gone bust multiple times. The same could be said for SpaceX. But he was saved, so many times. It does not mean he does not have skill. Obviously he has, more than anyone today.

But for so many things to come together, you cannot deny luck.

There are people who have enough skill but never the luck to pull off anything. There are people who has not much of any skill but become big, maybe we can put Donald Trump, Jack Ma and Masayoshi Son in that category. Feel free to disagree, you are entitled to have your opinion and so am I.

But Elon Musk just has both. 

Huat Ah!

Thursday, March 02, 2023

T Bills - Fundamentals, Strategies and Risks

This post first appeared on my substack page - and I have repackaged and reproduced it here as this idea remains very palatable and perhaps relevant for everyone since T-bills are risk free. Your grandmother should buy T-bills.

We have also discussed T bills below:

Singapore T-bills Full Analysis

Invest in Risk Free Singapore T-Bills!

Only Singaporeans and Singapore's Permanent Residents can invest in T bills. But I did some googling and surfed around at:

I believe the process is similar and most investors can similarly invest and earn c.4% annual return by buying US government T-bills. This post serves to illustrate the strategy and process to go about doing this investment optimally and how to think about your savings in a broader context. Ok, let's dive into it.

1. Fundamentals

The chart below shows the cut-off yield for Singapore Government T-bills with data going back to 1987, when Singapore was a developing country. In the past 20 years, Singapore established herself as one of the global financial hub and as such, we should pay more attention to data around the new millennium. 

We can see that the last era of high yield T-bills was around 2005-07 when yields hovered around c.3%. China was on the rise and together with her ascent, commodities boomed. At the same time, the housing bubble in the US which subsequently led to GFC started to take shape.

Thereafter, as we know all too well, the GFC broke out and brought our financial system to the brink of collapse. Global quantitative easing (QE) came to the rescue and interest rates stayed low since then. We have not seen SG T-bills anywhere near investable levels although 2018-19 saw it rising to c.2%. This was because the US Fed tried some quantitative tapering but stopped abruptly when the pandemic struck. 

In 2022, the global low yielding investment environment ended when the US Fed raised interest rates to 4% and vowed to bring it higher to tame inflation. We are still seeing higher interest rates as of this writing. We are now in a new regime. 

In the previous regime which started after the GFC, global interest rates were reduced to zero and liquidity flooded the global financial system to prevent it from collapsing. This led to cheap money chasing high returns, which exacerbated booms in private equity, startups and new speculative asset classes like crypto-currencies in the last few years. 

Those days are over. 

This is a new high interest rate regime, where the all important risk-free rate has now reverted back to the levels of 3-4% depicted in financial textbooks, where it should be. Since money is no longer cheap, it doesn’t make sense to chase high yielding dangerous instruments and growth companies with crazy valuations any more. 

This new regime will reset how markets think about yields and valuations. 5% is no longer high yield. We are seeing startups imploding, crypto has also collapsed and we have seen most high PER companies coming back down from the stratosphere. 

Pertaining to the topic today, the optionality of having cash sitting around back then was good and the negative impact was negligible. We can hold a lot of cash and do nothing without losing much. But now we are able to earn 4% on this cash. As such, cash savings with nowhere to invest needs to be put into T-bills to earn returns as much and as fast as possible. We need a good strategy and process to handle that.

2. Strategy and Process

The strategy is really simple. There is an auction every two weeks for the 6 Month T-bills in Singapore. Since the minimum size to invest is $1,000, we can technically split our full investment size into 12 tranches and bid for the T-bills every two weeks. After 6 months the money comes back and you can do everything all over again. The auction calendar is posted on the MAS website and it pays to note down all the dates so that we won’t miss them. 

There are different ways to split the tranches. You may choose to do 6 ie only do alternate auction. But you also stand the risk of not participating if the one you skipped happens to be a good tranche with a very high yield. Therefore, to me, the simplest way is to participate every round, especially since the yields are going up and should remain high in 2023. 

Competitive vs non-competitive bids 

When subscribing, we will be asked whether we want to do a competitive or a non-competitive bid. In a competitive bid, you put the yield you want (say 4%) and you will get full allocation but risk getting nothing if your bid is higher than the cut-off yield. While in a non-competitive bid, you will take what others have bidded as the final offer ie the cut-off yield. The caveat is that when the auction is hot, sometimes you do not get full allocation with a non-competitive bid. 

It is a small point and both ways work. So far, I have always chosen non-competitive. If I do not get full allocation, the money is recycled for the next tranche. This works well for my strategy for having 12 tranches. One last point to note is that the yield is annualized, but the T-bills is only for 6 months. So effectively, if the yield is 4%, you are only getting 2% of the money coming in. As such, it is important to keep the cycle going to earn the 4%. 

In the last few paragraphs below, we shall describe the risk and how this saving enhancement can work for us in the broader context.

3. Risks

We briefly talked about the risk free rate described in textbooks. By definition, T-bills are risk free. The Singapore government will not collapse in the foreseeable future. You will not lose money. So it makes sense to put as much as you can into it. Only when you find a better investment, generating twice or thrice the return you can get here, then deploy part of the money into such attractive alternatives. 

As you can see, how the world has changed since the days of zero interest rate. Unless some other investment can give 8% return or more, it doesn’t make sense to invest. All the REITs giving 5% dividend today are no longer attractive. Why should I risk losing money to get 5% when I can get T-bills for 4% with zero risk? 

But is it really risk free?

I would say that the risk lies with future optionality. You lose optionality for six months when you put money into T-bills. For example, if there is a freak auction, the cut-off yield dropped to 2% for some reason, then we are stuck at this low return for six months. Hence again, it is good to split out to small amounts such that the “damage” is not big every round. Even if we are stuck, it is a manageable quantity and only for 6 months.

More importantly, as the chart with cut-off yield from 1987 to 2023 showed (reproduced above), when we transition to a high yielding environment, it usually lasts for c.3 years. We are at the start of this cycle and this should be a good saving enhancement instrument for the next few years.

4. Savings Enhancement

This is an important point illustrated by Mr. Money Moustache years ago. The big idea was that if you have a retirement stash and your expenses are 4% of your stash / retirement portfolio, essentially you will never run out of money. This has been established in the landmark study called the Trinity Study. The full post below: 

Amalgamating with our point today, if T-bills can earn us 4%, what if we deploy all our savings into this instrument? Forget about stock ideas, bonds, innovative trades, mutual funds. Just buy this lah! Isn’t that good enough? Our stash can then last forever as long as the return stays high at 3-4%. I believe that this could be the ultimate saving enhancement strategy. 

To be more conservative, say we are spending 6% of the retirement stash, this means that by investing all the savings in T-bills, we will be only expensing away 2-3% of the retirement stash. So, originally, if we spent 6% of our savings, our stash could only last 16-17 years, this is now enhanced to 33 or 50 years! 

For the older readers here, you will understand, this is way more than enough. We are definitely not around in 50 years. The goal is not to leave a huge stash of money when we pass, so this will help with our saving enhancement. For younger readers, work hard, save a lot more than you earn today and someday the math will work out also ;) 

Huat Ah!

Sunday, February 19, 2023

Charts #47: Alphabet / Google

 This is a good chart to understand Alphabet / Google at the big picture level. The bulk of earnings still come from basic search with Youtube and Google Cloud growing well. 

Courtesy of FourWeekMBA.

Google processes 8.5bn search every day, ie almost everyone on earth use Google at least once a day and it takes a cut. From the $162bn revenue, this cut is 5c (162 / 8.5 x 365). Just very rough math.

Friday, February 03, 2023

Thoughts #30: Bitcoin and the Metaverse

This post is inspired by Ray Dalio's book, Principles for Dealing with The Changing World Order.

In page 222 of his book, Ray shared the concept of financial wealth which is different from other types of wealth. To the un-initated, this is confusing, wealth is wealth right? What is non-financial wealth anyways? But there are differences. Importantly, Ray implored us to think about financial wealth, real wealth and in the digital world in the future, digital wealth.

Today, we are wealthy mostly just in terms of financial wealth, money in the bank, stocks, bonds, insurance, fixed deposits. This is actually different from real wealth - like owning a house, car, physical gold and silver, watches, jewellery etc. Financial wealth, including cash, are just "promises" created by human beings so that we can transact more efficiently. 

Financial wealth was created around 1350 in Italy (maybe earlier in China) and for most of human civilization, people value real wealth more than financial wealth. Imagine you are a wealthy merchant in the 1500s, if you have the equivalent of a billion dollars back then, did you put in all in the bank and wear T-shirts and jeans? No, you buy a castle, employ a million slaves to serve you, own horses and what not and flaunt. Well, we still flaunt. But real wealth exists in the physical world, they are mostly real assets.  

Financial wealth is not real wealth. When big regime changes (like during wars and/or revolutions), financial wealth may not mean much because it's usually destroyed. According to Ray, over the long history of human civilization, financial wealth is nullified, confiscated and essentially disappears and rich people either become poor after losing everything or are killed.

Well that's story for another day. Today, we also need to talk about digital wealth.  

18-24 months ago, huge bubbles were formed in the Metaverse. Virtual real estate are sold for millions of dollars or more and NFTs can be worth more than auction-able physical art. It all started with Bitcoin. Then came Ethereum, tokens and big companies like Coinbase and Gemini becoming the gatekeepers of digital wealth. While FTX debacle now calls to question is digital wealth real, the alternative is that we might look back and see this as the start of the age of digital wealth. If the era of financial wealth comes to an end, we either go back to real wealth or we might shift to digital wealth. 

Real estate has a mantra: location, location, location. But in the virtual realm, there is no location, no scarcity, so essential virtual land can be created at will. Will virtual Orchard Road, Ginza or Times Square be worth anything? Food for thought. NFT has its own story as well. If you own the original Mona Lisa in the era of real wealth, it is worth something. So how does that translate for Michael Jordan's MVP moment as NFT or the Nyan Cat? 

The Nyan Cat NFT was worth $600k at its peak

I have no answers, but it might be worthwhile to start to think about owning some digital wealth, which is different from financial or real wealth and might be a good diversifier. Albeit 99% may turn out to be worthless, as FTX has shown us. My original short thesis on Bitcoin in the early days was correct, it grew into a big bubble and popped. It sucked in so much financial institutional money because there is some truth in Bitcoin replacing gold. Then, everything crashed in 2022 but it is still $17,000 today! If enough people believe in it in the next 10, 20, 30 years, it will then become the source and the origin of digital wealth. It might just be a good bet to buy a little today.

Friday, January 20, 2023

On Timing, Sizing and Sell Discipline

Today, let’s spend some time to talk about some of the important nitty gritty of investing. This is not the usual fun and games - big ideas, cheap value names or best-in-class companies. Everyone loves ideas, what to buy, deep dives. But what actually brings the dough home is good money and portfolio management. As such, we need to talk about sizing and timing and how we should construct our investment portfolio.

There are three crucial aspects: sizing, timing, capacity and a fourth all-important factor: sell discipline. A lot has been said about how an investment will make money when we buy at the right valuation, but real money only comes into our pockets after we sell. So let’s talk practical about that too. First, it is about sizing the bet.

1. Sizing

Most people do not think too much about sizing and I seldom read literature about sizing which is unclear why given its importance. Perhaps sizing reveals too much financially or maybe we assume everyone knows how to size? But here is what I have figured out over the course of my investment career. Sizing wrongly hurts a lot. It is not easy, it requires practice, everyone has different thresholds and hence we should discuss seriously about sizing.

The first question to ask is how much can you lose and not be affected psychologically? Is it $10k or $100k? Or maybe it is lower or higher. There is no shame about it. If it is $1,000. Then that is your maximum bet size. Don’t mess with your mind. If losing $1,000 makes you unable to sleep, what is the point of playing this game with higher stakes and hurting yourself emotionally and psychologically?

So start with the size that makes you comfortable.

There is a related question which would be if we only bet $1,000, how can we get rich? Well, it will take more than a few ten-baggers and home-runs, but thankfully, low commissions today can make $1,000 bets go far. Back in the days when there is a minimum commission of $20 per trade, it was not feasible to bet $1,000 because you incur 4-6% of transaction cost just by buying and selling. But today, we can do it!

For more practical numbers, let’s use something with some macro-economic basis. I would start with $50,000. That is my maximum bet (not to be confused with initial bet) and a certain delta around that number might work better for you. Why $50,000? Well, it was slightly higher than my first annual paycheck and it is also in the same ballpark as the GDP per capita of OECD countries, which is $42,000 according to the link below.

But let’s talk about first paychecks. That’s more interesting. When I started work about two decades ago and took my first paycheck home. I was so happy, I gave money to my parents. I have enough money for the first time to afford stuff. It feels good. Everyone remembers their first paycheck.

So when I lost on an investment that was bigger than this first annual paycheck. Imagine the pain. Imagine I had to tell my better half I lost that much money. I couldn’t sleep just thinking about it. So that was how I figured out, my maximum loss is $50,000. It doesn’t matter if you think you have done your homework. You know the stock or investment and you are sure it will not drop beyond 50% or 80% therefore using this way to think about a maximum bet size is wrong. No it is not because if you have invested enough, one of those wrong bets will go to zero.

So when you have determined that number. Make sure you don’t ever buy more than that in one investment. Next, we need to build that up over tranches. You don’t put all $50,000 on Day 1 because you will never know if the stock will go down more and you lose the chance to buy at a lower price.

My rule of thumb is to think in baseball batting terms. You have three swings. After that, you are strikeout. Each swing you place 1/3 of the position. Some people like to do more, some less. It depends on how well you can do this, it is a subtle art.

Some people say it means a lack of conviction. If you are sure, just go all in. They have never invested. You go all in, you can get strikeout after the first swing. How does that feel? If you are really confident, maybe you can go 1/2 instead of 1/3 with your first swing. Going all in doesn’t end well most of the time. Trust me, been there, done that. Nope. Didn’t go well.

So if the first swing turns out well, the stock runs, then unfortunately, you cannot deploy the full amount. At least we have benefited. But if it didn’t, this is when the second and third swings will count. Here we will need time diversification.

2. Timing

Timing is about time diversification. You would have done a lot of homework before the first swing. So by and large, there will be enough upside. You know the margin of safety. But to make this work better, say the first swing didn’t go as planned and the stock corrected 10%. Then it pays to wait one month and take advantage of market movements later for the second swing. Of course, you also want to pay attention to the price. If it drops between 10-15% lower, then it is good to get in by averaging down.

There is another reason to think monthly or even longer. We are all busy with our lives, if this is not your day job, maybe spending a few hours once a month to focus and think and then execute is the best option. Don’t go buying today, buy more tomorrow if it drops or sell next week after you made 5%. It takes up too much energy. So set aside a time every month to think and trade. Then move on, come back and monitor monthly.

There are exceptional times when you need to do a lot in a few days. Think March 2020. Pandemonium struck but it was also the best time to buy. It takes guts. You have be able to recognize such times and deploy money well. Most investors will not be able to do so. They have either lost too much to think straight or just scared cold and unable to move. I would say you need to think in terms of your portfolio, not individual bets. Ideally, if you can deploy 50% of your portfolio in Mar 2020, you would have created a huge positive impact. There is no second chance next month. The window will be just days. But it is so scary that it is hard to move a lot. You are figuratively catching a falling knife with your bare hands, maybe even your kids’ hands. So try your best. Test your capacity.

3. Capacity

Besides the capacity of your gut i.e. ability to take losses, capacity is also about the number of bets, stocks, investments, ideas that you want to have. Most laypeople think that a portfolio, especially an individual or retail portfolio should have just a handful of bets. Depending on the individual it could be 10 or 15 bets at the maximum. For some people, it could be just 5 or 6 concentrated bets.

But it comes back to sizing. Unless you can stomach big losses, having say 5 bets, each bigger than GDP per capita of OCED countries is not something everyone can do. Hence a lot more bets at your maximum bet size makes sense. The upper bound could be your capacity to monitor. If you don’t want to monitor more than 10 bets. Then it is 10.

However to enjoy the benefits of diversification, one of the few free lunches in investing, maybe the number of bets should be big. The CFA textbook says it should be 30. But most people may think that is too much diversification. They cannot remember yesterday’s lunch, or 3 things the last writer asked them to remember, let alone 30.

In statistics, recall that we learnt about the Law of Large Numbers. So what is the smallest number that we can to be considered a Large Number? Remember N? Our teacher Mrs Shirley would say N >= 30. So maybe it should still be closer to 30.

Some astute investors don’t subscribe to this. Except for Peter Lynch, who managed Fidelity’s Magellan Fund, became one of the most celebrated successful portfolio manager and he held over 1,000 names. Today, most good investors think that an ideal portfolio should have 10 to 15 names. Warren Buffett said it was 20 for him. So, the idea is to pick your 10-20 best ideas and rake it in. You cannot have 30 best ideas, surely some of them are not best by the time you get #29 on that list.

I do not know which school is right? I do like to stick to the textbooks, maybe it is good to try to get 30. What worked for me is to have 8-10 top ideas and another 8-10 potential top ideas and the last few tail ideas that you want to have it in case they become so big for whatever reasons. This will be the goal for this newsletter. We will aim to get to 30 ideas!

4. Sell Discipline

When we have our best ideas, we were taught to buy and hold forever. “Our holding period is forever.” so says the Oracle of Omaha. No value investors talked about sell discipline. Naturally, I was brought up to think buy and hold.

It didn’t work for me.

Selling is so important. To sell well is perhaps the hardest part of the art. Well, to be fair, Warren Buffett did say never sell the best names and if you must, only sell when:

1. you have a better opportunity

2. you need the money for more urgent matters

3. when the investment thesis has gone wrong or has changed

I am not about to refute the Oracle so the above reasons are definitely the best reasons to sell. But as alluded throughout the article, investment is about timing, sizing and the many nitty gritty important details. So, the big idea is that we don’t have to sell everything all at once. We only sell 1/3 or 2/3 and we can hold the remaining 2/3 or 1/3 forever. We can use time diversification to sell over time when the right reasons present themselves to sell. With this in mind, I have added three more reasons when we should sell.

1. We should sell when valuation is rich → sell 1/3 or 1/2 depending on how expensive the stock has become. We can then recycle that capital to better names, which is #2 below.

2. We should sell to rebalance the portfolio (for me this means keeping bets at $50k if they have grown to $100k, ie lucky me! But we need to bring the notional sum down because losing all that gains back is very bad psychologically.

3. Lastly, we should sell when markets are overall expensive (e.g. Dec 2021). Although it is difficult to do so because at that point in time, we won’t know whether it is at the peak. As such, we diversify the selling, ie selling 1/3 or 1/4 or in different proportions. It is also good to accumulate dry powder during such periods so that we can deploy back when markets turn cheap.

It is important to understand your own style as well. If you tend to be too early when buying, then buy slower with the first bets being smaller accordingly. If you tend to overstay, then start doing bigger first sells. Understand your maximum loss and size according to your most comfortable level, diversify both the number of names and buys / sells over time, figure out your best ideas and structure the portfolio accordingly. When it is time to sell, look closely at valuations and the overall markets and document everything. With these steps hopefully we can get the portfolio to grow well. Target just 2-3% of value up every month, over time it will compound crazily.

Huat Ah!

Thursday, January 05, 2023

Books #18: Security Analysis - Part 3

In this last post on Security Analysis, we would discuss some of the difficulties analyst faced when analysing stock then and now. The authors have put some thoughts out elegantly which is worth studying here. Here are a few lines from the book, including one of the most famous line in full and in bold:

The market and the future present the same kind of difficulties. Neither can be predicted or controlled by the analyst, yet his success is largely dependent upon them both. The major activities of the investment analyst may be thought to have little or no concern with market prices.

The market is not a weighing machine, on which the value of each issue is recorded by an exact and impersonal mechanism, in accordance with its specific qualities. Rather should we say that the market is a voting machine, whereon countless individuals register choices which are the product partly of reason and partly of emotion.

Alongside the famous line on the marketing being a voting machine, the authors also lay out this chart above to try to decipher what goes into determining market price. In short, there are so many things that make prices unpredictable in the short-term but yet it is the stock analyst's job to understand everything because in the long term, analysis of the business and its earnings power makes the difference.

Short term prices are also inexplicable but Wall Street wants actions and will explain for it, regardless whether the explanations are justified. This remains one of the hardest job of the day even for seasoned investors - to explain price action fo the day. Sometimes, stocks jump 5% for no reason and we only figure it out over the next few days.

Again, here are lines from the authors themselves:

The exaggerated response made by the stock market to developments that seem relatively unimportant in themselves is readily explained in terms of the psychology of the speculator. He wants action, first of all; and he is willing to contribute to this action if he can be given any pretext for bullish excitement (whether through hypocrisy or self-deception, brokerage-house customers generally refuse to admit they are merely gambling with ticker quotations and insist upon some ostensible reason for their purchases.) 

Stock dividends and other favorable developments of this character supply the desired pretexts, and they have been exploited by the professional market operators, sometimes with the connivance of the corporate officials. The whole thing would be childish if it were not so vicious. The securities analyst should understand how these absurdities of Wall Street come into being, but he would do well to avoid any form of contact with them.

As such, in order to profit from stock investment, we come back to valuation. We cannot win trying to profit from short term market movement. The only logical way to win is to determine the intrinsic value of the stock and buy with sufficient margin of safety. The following paragraph, the authors cautioned that general market conditions ie beta sometimes overwhelm everything so we need to be careful.

Investment in bargain issues needs to be carried out with some regard to general market conditions at the time. Strangely enough, this is a type of operation that fares best, relatively speaking, when price levels are neither extremely high nor extremely low. The purchase of "cheap stocks" when the market as a whole seems much higher than it should be will not work out well, because the ensuing decline is likely to bear almost as severely on these neglected or unappreciated issues as on the general list. 

On the other land, when all stocks are very cheap, there would seem to be fully as much reason to buy undervalued leading issues as to pick out less popular stocks, even though these may be selling at even lower prices by comparison.

On valuations, it was refreshing to see that the authors did lay out something concrete and also attributed the development to a certain Roger Babson (pic above), whom I didn't know who he was but apparently someone famous back then. The following is his rule of thumb:

The multipler might be equivalent to capitalizing the earnings at twice the current interest rate on the highest grade industrial bonds. The period for averaging earnings would ordinarily be seven to ten years.

In short, if the bond yields are at 3-4%, then earnings yield should be double of that at 6-8% and we should use the averaging earnings over 7-10 years. So we come back to why we should always buy stocks trading at teens price earnings, which can be difficult in today's context, so I would carefully stretch that to low twenties. 

Last but not least, here's their words on wisdom on trading. In trading, there is no margin of safety, you are either right or wrong and if you are wrong you lose money.

The cardinal rule of the trader that losses should be cut short and profit safeguarded (by selling when a decline commences) leads in the direction of active trading. This means in turn that the cost of buying and selling becomes a heavily adverse factor in aggregate results.