Thursday, February 25, 2021

How to Navigate this Pandemic Bubble?

Bubbles and crises are part and parcel of investing in financial markets. Over the last 40 years, we have seen the following bubbles and crises (well that is the more famous ones):

1. The Japan property and stock market bubble (1989)
2. The Asian Financial Crisis (1997)
3. The Dotcom bubble (2000)
4. China and the Commodity Super Cycle (2005)
5. The Global Financial Crisis (2008)
6. The Pandemic Crisis and now the Pandemic Bubble (2021)

These are times when a lot of money is made and lost. Well, for most people, it's money lost. That is the nature of bubbles. It sucks up a lot of money taken from a lot of people and benefits a few. Bubbles does not create value and since that is the case, more people will lose money than make money. 

It took me a while to understand this. 

It is not easy to make money in a bubble. We think it's easy. In this internet era, we see people publishing how much money they made in a matter of days. We think we can do it too. Well, it doesn't work that way. It's mostly just luck, like winning the lottery. It is not a repeatable process. 


So this is the guy who has made more than twenty million in a matter of days because he bought and held Gamestop. He goes by many names, rollingkitty, deepfuckingvalue or DFV and also Keith Gill. He did it. We think we can be like him. Just follow him. Buy Gamestop. It is going to the moon, Mars or Jupiter. Buy the whole stock market now

This is greed at its best. Greed is the force that creates bubbles and make them bigger. They become so big they are mesmerizing. We just want to be part of it! When we see our neighbour, friend, classmate or simply a random guy on the internet get rich, we think we can do it too. This is not like Olympics, or running a marathon, we just click a button to buy right? 

Yeah right.

As an adult, I have lived through the dotcom bubble and the rise of China and the commodity super cycle. Back then, I did not have the experience nor the funds to make it big. I have been hoping that the next bubble will come and I can then make a ton of money. Well it has arrived. I made some right bets, but overall, it's nothing to shout about. The greed-at-its-best moment is upon me too!


I wished I had more of those multibaggers shown here. But as a student of value investing, their valuations just didn't make sense. This bubble is also complicated by QE Infinity. Traditional valuations no longer work. Stocks with negative earnings and cashflow can go up 700% because money is so cheap. Buyers are also powered by social media idolizing false gods. It can still go bigger, but we simply cannot buy now. We will lose our shirts!

The right thing to do is to continue to practice value investing and to look for value. Buy when price is significantly less than value. The party will come to an end and things will crash. The time to buy is when things overshoot on the downside. It will be a difficult call. Longer term, QE Infinity will cause inflation and asset prices to rise again. So we have to buy at some point. Just not now.  


The saving grace is that I do have enough of the old economy names that have done okay (some of the Dow names above). I will be looking to trim because this party will end. We are dancing near midnight at Cinderella's party but the clock has no hands. It is best to leave early before everything turns into mice and pumpkins.

Meanwhile stay safe! 

Friday, February 12, 2021

Charts #37: QE and Property

Three charts for today.

US property prices keep rising despite COVID-19.

HK property prices not falling despite umbrella riots and COVID-19. This is the power of QE. Do not fight the Fed.

Another chart to drive the point home. Apple's market cap hit 2.34 trillion dollars. We were so excited then it was closing in one trillion just 18 months ago.

Do not fight the Fed.

Happy Chinese New Year! Huat Ah!

Saturday, January 30, 2021

Gamestop War: Trolls vs Wall Street

Gamestop is a game retailer in secular decline which was made worse by the pandemic. Well, it's in decline simply because we buy consoles from Amazon and games itself are now downloaded online so there is no reason to visit Gamestop ever again. But in recent days, Gamestop found itself becoming the epicentre of an epic war. Its stock price rose 1700% as the internet generation wanted to make a statement to Wall Street. 

Gamestop's meteoric rise from $20 to over $300 in days

The statement was made on Reddit. War rallies on social media to save Gamestop from evil Wall Street hedge funds shorting the stock to bankruptcy. Gondor calls for aid. And Rohan will answer. Yes, they were answered. Millions of gamers and internet trolls bought Gamestop and drove the share price up so that short sellers will get hurt. They won the first battle, some hedge funds sold and a few even went bankrupt.

Gamestop on a rollercoaster

Two days ago, on 28 January 2021, Wall Street fought back. Various trading accounts, using share price manipulation as the reason, restricted trading on the name, driving the share price down from $469 to $132, an over 70% drop. The saga did not end, millions of Robinhood account holders complained and the restrictions were lifted. The stock proceeded to rise over 100%! So the fight continues. This is yet another manifestation that we are in this pandemic induced bubble. Irrationality overwhelms and share price volatility explodes.

Meme on reddit

We know this is not going to end well. Gamestop will not be saved (for the simple reason that Gamestop doesn't have an intrinsic value of USD22 billion) and many people will lose their shirts. 

Caveat Emptor!

Sunday, January 24, 2021

Are We In A Bubble?

Well, the answer is yes. 

A slew of reputable investors have come out to say we are in a bubble. When I say reputable, we are not even talking about David Einhorn or Dan Loeb. Here's market veteran Jeremy Grantham who has studied bubbles over 50 years and he is telling us, we are in a bubble and this may become the biggest bubble we have seen.

https://www.gmo.com/asia/research-library/waiting-for-the-last-dance/

There are a few characteristics about bubbles. First it is when valuations are inexplicable. Look at Tesla.

Tesla's share price

We discussed this before. This company has never made money for shareholders. It produces less than 500,000 cars and yet it is now bigger than almost all of the global automakers combined. In a bubble, it is easy to just look at the stock price. Nothing else really matters. Dividends, accident and safety record, resale value. Well, who's tracking anyways. People who bought Tesla look like heroes. Most would not have done thorough analysis but who cares. They made a lot of money and Elon Musk is their god. 

The second characteristic is about people. We know we are in a bubble when everyone is crazy about stock markets. In the past, it was when grandmothers ask for stock tips. This time, it is exhibited over the social media. It started a few years with bitcoin. Remember ICOs? Then Robinhood allowed account holders to buy bitcoins. Bitcoin is now back with a vengeance. 

Bitcoin's twin peaks

The other day, my friend asked over social media whether it is a good idea to invest in bitcoin. He had already bought and he was seeking confirmation whether it was the right decision. I did not have the heart to tell him he was playing with fire. Sure, there is money to be made. Who knows if bitcoin can hit $100,000? That will be more than 100% upside from here. But it is impossible to predict. The party could end in a few months and bitcoin could be back at $4,000.

In the earlier bitcoin bubble during 2017-2018 when ICOs became the craze and soon got into issues, it was a similar situation. The same hyperbolic chart (above) and the same likelihood things can go really wrong. It did crash and burn. But few would have seen it coming back in two years and becoming so much bigger. Deja vu at its best!

The last characteristic relates to compounding and hyperbolic charts. Stock markets over time follow compounding charts and not hyperbolic charts. It is very subtle but important. All investors should understand this.  The chart below shows Nasdaq. As with bitcoin, it went hyperbolic in 1999 and it is going hyperbolic now. When that happens, it has to crash. We just don't know when. It can last another year, or two or even three but it cannot go hyperbolic forever.

Nasdaq over 50 years

The next chart shows how healthy compounding looks like. Costco is the best retailer in the world. It gives customers a value proposition by selling things cheap in bulk. This discount is passed on to its customers who pay an annual membership fee. It is said that Costco is simply earning membership fees because it sells products at cost to its members. But because Costco provides such a strong value proposition, it compounds. It has done so over 40 years and will continue to compound healthily. No bubble here.

Costco since 1980s

As you can see, the difference is very subtle. The Costco chart and the Nasdaq chart differs only during 1999 and maybe today. When we stretch out the x-axis over time, the Nasdaq bubble in 1999 does not seem so bubblish. Over time, like 40-50 years, it becomes a blip. But people who rode it up in 1999 and failed to get out lost their shirts. Today feels like 1999. We don't want that to happen to us.

There is a natural order to growth. A bubble grows by sucking everyone to buy in a very short time and money eventually runs out. Costco grows its earnings slowly, providing value proposition to consumers. It will continue to grow steadily until every single household in the world becomes its member and even then, it can continue to increase its product mix, continuing to provide value.

Bubbles are not about providing value, it is feeding on people's fear and greed. The fear of missing out and the greed to make a quick buck. Hence, bubbles always burst. We may be in the biggest one ever. Let's be really careful in 2021. 

In the next post, we will explore a bit more about this pandemic bubble. 

Sunday, December 27, 2020

Books #11: The Starbucks Experience

The Starbucks Experience is an interesting quick read that served to remind us what it takes to be the best. We have to think bigger and broader than our competitors and be the best that we can be. Here's two lessons:

1. Great companies (or great individuals for that matter) are always at 100%. Everything matters and no details can be overlooked. We all have our up and down days but to be truly great, we strive to be the best all the time. Great sportsmen, great companies are constantly doing that. That is what it takes to be at the top of the game.

2. Embrace resistance. Nothing in nature grows without facing limiting forces. To work with resistane effectively, one must distinguish between good and bad criticism. We take heed of good criticism while ignoring those that are not true. It is also essential to correct misinformation swiftly. By taking these steps well, we can then grow.

There are only very few retail food chains that has grown so big and sustained for so long. After reading the book, I gained a better understanding why Starbucks is one of them, always trading at very high PER and is currently a USD 120bn company despite its business being brick-and-mortar and being hit badly by the coronavirus.

This is a stock that I would love to own someday. Happy holidays and wising everyone a huat 2021 ahead!

Sunday, December 13, 2020

The Fall and Rise of Disney

In March 2020, when the coronavirus hit the US and everyone panicked and bought all the toilet paper off supermarkets, Disney's share price was flushed into the sewers as well. Its theme parks suffered with catastrophic fall in revenue as visitors number collapsed. Its movie business was similarly hit as people stopped going to the cinemas. Share price fell from USD 150 to USD 85. This stock was labelled as the covid-hit name. Avoid it like the plague!

Fast forward to December 2020, its share price hit USD 175, an all time high. Its market cap at USD 318bn is almost 50% bigger than Netflix and also Comcast, owner of Universal Studios. It has beaten Netflix at its own game with the spectacular success of Disney Plus, its newly launch streaming service. Disney now boasts c.100m subscribers across its various streaming services (Disney, ESPN and Hulu). While this is still smaller than Netflix's 195m subs, Disney has far superior content and should catch up in time. 

The Walt Disney Company (its official name) has always been a unique company. Its larger-than-life eponymous founder/creator built the company by creating a mouse, an animated rehash of a fairy tale about a maiden and a poison apple and then dreamed about theme parks where stars are born. They became huge successes and Walt Disney captured people's hearts and minds as one of the most intriguing rag-to-riches stories in modern times.

About 15 years ago, the company made a few spectacular acquisitions under the watch of Bob Iger, a visionary CEO. In 2005, Disney bought Pixar, the hottest 3D animation studio in town from Steve Jobs. Then in 2009, it bought Marvel Studios for USD 4bn. It was lauded as a crazy move because nobody was reading comics and just a few years ago, Sony paid just USD 10m for Spiderman. Back then (and here's the punchline), the most famous superhero wore underpants on the outside and he wasn't even a Marvel character.

Well, as they say, the rest is history. On hindsight, its success was almost inevitable.

To crown it all, in 2012, Disney bought out George Lucas and acquired all the rights to the Star Wars franchise (again for c.USD 4bn). It then launched the last trilogy in the original Skywalker storyline with a disastrous ending. But fans didn't care, they just couldn't get enough of Star Wars. So Disney created all these spinoffs on the various characters (pic above). The current hit, The Mandalorian propelled the franchise back into people's mind during COVID-19 and Disney racked it all in. This is Disney's way.

As the story unfolds, COVID-19 hit its Park, Experience and Products as well as its Studio Entertainment businesses bad, but its Media Network and Direct-to-Consumer (where Disney Plus and other streaming services are housed) will be picking up the slack and bringing the company's profits back (see table below). In terms of cashflow, the company has also shown its operational prowess by diligently cutting cost and preserving cash. It managed to generated USD 3.5bn of free cashflow in the year ending Oct 2020. 


With its current all time high stock price, this is probably not the time to buy the stock. Today's valuation put Disney at 4.5x 2019 price-to-sales which is based on its pre-COVID historical high revenue and 25x 2018 PER. Again, this was the year it has its highest EPS at c.USD 7. In 2018, it also generated its highest ever annual FCF at c.USD 10bn. Off this high FCF base (who knows when it can do FCF of USD 10bn again, it could be 2022 or 2023 or beyond), it is trading at c.3% FCF yield today. It is not crazy internet valuation but it's just not cheap. We value investors need our margin of safety.

COVID-19 however did present the opportunity to better understand Disney. This is a solid compounder like 3M, Starbucks and Diageo. Compounders just bounce back much faster than mediocre, crappy firms. Disney has the best content and the best platforms: theme parks, stores and now streaming networks leveraging on its valuable first-class franchises, creating value simply by telling stories. Like the heroes in its stories, Disney is also bold, innovative and most importantly resilient. Disney doesn't need vaccine, it has immunity!

In future posts, we hope to dissect its various businesses and better understand this solid compounder. 

This is the way!

Wednesday, November 25, 2020

Charts #36: Tesla

Another day, another enigma.

Tesla, a company that hasn't made profits cumulatively over the last 10 years, makes a mere 300,000 cars, is bigger than Toyota, Volkswagen, BMW, General Motors, Ford, Fiat Chrysler and Honda combined!

The automakers listed above make more than 30 million cars annually. 100x more than Tesla. 

It also dwarf the recent inclusions into the famed S&P500 by a mile!

Well, maybe bcos it did finally generate USD1bn of FCF after burning USD10bn since its inception. Remember the market only looks forward, not backwards.

Or, we can attribute it to the Power of QE Infinity. 

To Infinity and Beyond!

Sunday, November 15, 2020

Covid, Consumerism and Diageo

2020 will go down in history as one of the craziest year ever. A microscopic organism wreaked havoc causing millions of deaths. A US President who refuse to concede defeat and handover after losing the election. Meanwhile, in the midst of all these, Chinese spend USD74bn on a single day buying stuff, almost doubling what they bought last year on the same day. That's also 10x more than what's sold in the similar event in the world's largest economy - US Black Friday sales in 2019. 

Intuitively, Covid and consumerism should not go together. We are still in the midst of a pandemic and millions of people are suffering from the loss of jobs and deaths of loved ones. But Covid has shown that we are so used to consumerism and our way of lives that we cannot help it. E-commerce sales went through the roof. Where tourism is again possible in parts of the world like China, people travel and spend. In fact, they spent more than usual. There is even a term for it - revenge tourism.

As such, a stock like Diageo is strangely, doing well despite less on-premise drinking in pubs, restaurants and events. Alongside other alcohol names like Moutai and Heineken but doing less well versus LVMH, the world's most powerful marketing machine. Diageo means day (dia) and the world (geo) in Latin, referencing to its global footprint (it operates in 180 countries) and encouraging people all over the planet to seize the day. Unsurprisingly, its company slogan is "Celebrating Lives, Every Day, Everywhere." 



There is a lot of history with this company which is fascinating and insightful but for our purposes let's stick to what is important for investors. Diageo is the world's second largest distiller after Moutai and owns a portfolio of high quality liquor brands including Johnnie Walker, Smirnoff and Guinness. Its full suite of brands are listed above.

Its investment thesis is as follows: Diageo is a global leading spirits company that has compounded growth steadily since its inception in 1997. Its strong brands, coupled with good marketing, high market share and strong global distribution has enabled the firm to generate consistent, steady free cashflow (FCF) and high ROIC. Covid presents an opportunity to be able to buy it at a slight discount. At market cap of GBP67bn and projecting a strong recovery in FCF to GBP3bn in the future, its FCF yield is c.4.5%.

Diageo is also laser focused on shareholders. In its annual report, it listed its top three financial targets: free cashflow, return on invested capital and total shareholder return (see below). Diageo has done pretty well in all three and importantly, these are the exact metrics that investors are now looking at. Price earnings ratio (PER) and Return on Equity (ROE) are still important but they no longer tell the full story as well. 


PER has been the preferred metric for decades but as companies learnt to manipulate earnings and manage this number, it became less and less reliable. As for ROE, it can be artificially inflated simply by raising debt and as such ROIC became a better return metric over time. PER and ROE has also become less meaningful with global QE. Cheap money means lower cost of equity demanded by investors and cheap debt. The former is the reason why we can no longer buy good companies at teens PER.

As we can see from Diageo's numbers above. It has consistently generated both strong FCF and high ROIC. What is impressive is that is has managed 12.4% ROIC despite Covid's negative impact. This goes back to the conundrum we presented earlier. Why are people spending and drinking during Covid? Are we just so consumed by consumerism that not even a pandemic can change our behaviors? Perhaps so. Single's Day crazy buying and Diageo's performance have validated this theory.



Diageo is a  also superb marketing company. One of the first slides on its investor presentation deck showcases its efforts during Covid to help disrupted lives. It sent out 10m bottles of hand sanitizers and spent $100m to help poorer communities. This is both noble and smart. The company is also acutely aware of global issues. Inspired by the #MeToo campaign perhaps, it launched a Jane Walker campaign in 2018 to support the fairer sex. Geez, just looking at it makes one want to buy a set of two! One for John and one for Jane.


In the following posts on Diageo, we shall delve deeper into the business, its positives and risks! Keep walking. 

Huat ah!

Monday, October 26, 2020

Thoughts #22: The Curious Impact on COVID Sectors

COVID-19 has impacted various sectors in dramatic ways and yet benefitting totally different sectors altogether. This post tries to connect the dots and to crystallize some of these thoughts. Hope this helps!

1. Business and long distance travel. This will be impacted for a long time. Some say air traffic will not return to 2019 level even in 2024. As such, airlines are in a lot of trouble. Related to that, inflight meals (SATS), aircraft servicing (ST Engineering and SIA Engineering), hotels, tourism goods, luxury products, demand for gasoline, the whole aerospace industry, in short, the better half of Singapore's listed companies and even business travel solutions - SAP is down 20% in one day!

2. Social distancing. This has impacted restaurants, cinemas, live events, spectator sports, small businesses like massage parlors, pubs and related to that on-premise beer demand, liquor sales, soft drinks and the likes. Auto sales as well bcos you cannot buy a car without touching, feeling, test driving and sitting and talking with the dealer. That said though, Tesla is flying!

3. COVID winners. Conversely, the TMT^ sectors benefited big time. ZOOM, SAAS and remote work solutions took off. Amazon and Netflix benefited from shopping at home and more binge watching. Online learning boomed, together with ZOOM (decimating Pearson, the world's largest textbook seller along the way). Gaming is another big beneficiary and needless to say, vaccine related plays are also commanding sky high valuations.

So what to bet now? I will tend to focus on the beaten down ones to find the gems. Maybe JCNC can be an interesting recovery play when things settle down. People will need to buy their cars, bikes and finance such purchases for their livelihoods post COVID-19. There will be a lot of pent up demand for sure!

Looking back in history many years from now, this would be one of the most unique crisis that people will analyze for years. Let's try can still make some money despite some indices back to all time high! Might have room for STI to chiong. Huat Ah!

^ TMT stands for telco, media and tech. This was a buzz acronym in 2000 during the tech bubble.

Friday, October 09, 2020

Charts #35: Cybersecurity

This is one big growth area for the next five years.

Breaches have increased. Old chart - only until 2017. But should have kept going up.


Spending has increased and will continue to do so.

2019 was big. Well, 2020, with COVID, should have exacerbated the need for more security.

Buy HACK US - cybersecurity ETF. But do your own due diligence. Or check for my update here when I get down to do it.

Huat Ah!