Monday, March 31, 2008

Lemmings falling off the Cliff!

Lemmings are small rodents usually found in the Arctic. They breed very quickly and when their population reaches a certain critical mass, they are known to commit mass suicide by leaping off the cliff. (Although according to Wikipedia, it is proven that this was not the usual behaviour of lemmings but rather something propaganded by media to create sensational news.)

Anyways this strange behaviour of Lemmings excited many social scientists bcos they have found similar behaviour in people living on a small island south of Malaysia. But since there are no cliffs around, these people employ foreign maids and constantly abuse them for pleasure. Some experts believe that overcrowding and the pursue of status and material wealth leads to such inexplicable symptoms.

Ok let's move on to something related to stocks.

As you would have guess, in financial markets, participants exhibit Lemmings' strange behaviour as well by mindlessly following others' irrational actions. In most aspects of normal life, most people behave rationally when looking to buy a car, a fridge, whatever. They collect information, talk to others, get viewpoints but ultimately come up with a decision that is usually rational.

However when it comes to stocks, somehow, independent analysis becomes a taboo. People like to follow what others are doing. When the market is shouting buy, buy, BUY into the peak, they simply react like Lemmings, rushing ahead regardless and then when they see the Cliff, they happily jump over it, just like all the other Lemmings ahead of them who jumped. (Of course participants won't literally see a Cliff until they fell off it as the market tanked.)

Strange huh?

I think this has got to do with greed (and not overcrowding or pursue of status though). For the general public, they seldom come in contact with stocks, investments in their daily lives but in times of bubbles, unscrupulous bankers, brokers, agents will start calling them up and sell them dumb products at the peak of markets. And they get sucked in bcos of the dumb freebies and all. I guess it's also human nature to get easily persuaded by friends (selling insurance policies) or sweet young bankers (selling some dumb structured pdts). So it's difficult to really fault the general public.

Well I guess the lesson learnt from the Lemmings is this: always think on your feet and dont blindly follow the front Lemming (or the sweet young banker leading you) down the cliff. (Which makes me think about the condo called The Cliff, so those staying there are Lemmings of the property market?)

Sunday, March 23, 2008

Defensive stocks

In different markets, different sexy terms come into play. I guess the latest infatuation on Wall Street in recent months has been "defensive stocks". Defensive stocks usually refer to stocks that will see stable profits even during times of trouble, ie like the past few months lah. These would be stocks in industry sectors like: consumer staples ie your food, beverage, razor blades etc. The thinking is that people need to eat, drink and shave no matter what right? Stock market down means everybody goes without food? Unlikely, so these are defensive stocks.

The other sectors are like pharma (your diabetic patient needs his pills regardless of stock market woes), utilities (eh, obvious I hope, we need electricity even during bear markets) etc. So you get the idea, things that we can't do without even during an economic downturn.

So what are things that we do without during the downturn? Well it actually differs for different entities on this planets. For example, Ah Beng who made money punting property and bought himself two Ferraris will still drive his Ferraris and buy Prada bags for his Ah Lians even though his latest punt has gone wrong and he has a $4mn mortgage but his condo at Sentosa is worth probably <$1mn and his monthly salary is $5k. So to him, Ferraris and Prada bags are still things that HE cannot do without even during a slowdown. But for most people and for the stock market, consumer non-staples (like car, furniture, luxury products, massage chairs, high tech goods etc) usually see profit decline.

Also most of the darling sectors that rallied during 2003-07 bull market ie oil exploration, shipping, property etc. One reason would be bcos credit is drying up and most of these sectors require a lot of credit financing to grow their profits. Of course, some experts may beg to differ, these sectors are in a secular boom and some silly sub-prime trouble is not going to derail their "sexy" story. Well... this blog is big enough for differing biews, so share your thoughts if you have some. The other type of defensive names would be stocks that pay high dividend, has huge amts of cash on their balance sheet, or stocks that generate huge cashflow regardless of business cycles

Friday, March 07, 2008

Hurray! Buffett is World Richest!

This is a time for the world's value investors to rejoice. Our hero, Warren Buffett has become the world's richest man, overtaking Bill Gates, Founder of Unpopular Vista and Insecure Windows and Carlos Slim, Monopoly Tyrant oops Tycoon of Mexico. Of course, Lady Luck has got a lot to do with this, here are a few facts to support the thesis:

1) Microsoft has eaten full full and got nothing better to do, so decided to launch a bid for Yahoo! which aggrevated a lot of investors bcos it's quite a stupid move given that Yahoo! is like yesterday's darling (ie like Demi Moore or Alicia Silverstone, does anybody remember them anyways?). Hence Bill Gates lost like 20% of his net worth in a couple of days and got relegated to No.2. Or was it No.3?

2) Thanks to the sub-prime crisis, investors are desperately looking for safe haven to park their money to hide away from the storm, and where's a better to place than to hide with the Guru? So Berkshire stock rallied like nobody's business and our hero became No.1.

So that's that, fellow value investors buck up and follow your idol and the road to riches will be short ride.

Er, wait a minute, although this blogger believes that value investing is a good way to help you grow your wealth, there are a few things that Buffett can do while most of us cannot. So the road ahead is always not that short I'm afraid. The philosophy is important, but it may not reach the same destination depending on the execution. Here's a few tricks that Buffett can use but we cannot:

1) Buffett can buy over whole co.s and ask mgmt to pay out excess cash to Berkshire. This is a very powerful tool as we all know that mgmt simply cannot be trusted to handle shareholders' money. We have seen so many examples of good co.s generating good cashflow only to see it squandered away on useless ventures. I think the most aped example would be Microsoft. Bill Gates must be cursing Steve Ballmer to death now for doing the Yahoo? deal. Shareholders are so much better off if Microsoft just generate cash and return them to shareholders.

Well this trick is something that you and I cannot do. But it is a good philosophy to bear in mind and remember to apply this, if it is ever applicable in our lives. I guess one example would be property. If you are holding a property that can generate rental yield of 15%. I guess you should never sell this property unless it's like a super real estate bubble in which your property will fetch as much price as the whole of Bintan or something. Except for that scenario, you should never sell something that gives you 15% yield bcos in 6 yrs you get back your principal and the ppty will continue to generate 15% per yr for as long as you own the property!

2) Buffett's investment actions follow the self-fulfilling prophecy. There are websites, blogs, analysts, TV programs, cell groups following Buffett's every investment moves and hence whenever Berkshire makes a move, a lot of people will simply charge and buy with the Sage of Omaha. So is it a wonder why whatever Berkshire buys always goes up? Of course, this is also due to Berkshire's brand name. ie whenever Berkshire buys something, it is a stamp of recognition that the stock or investment is undervalued and money is to be made.

In other words, at a certain stage when a famous investor or fund manager becomes so successful, his success will simply feed onto itself bcos a lot mindless followers will simply support him and validate his investment decisions. Again this is something that we cannot do, yet. You see, this blog will become a sensation in time and start recommending stocks which will then send its own army of mindless followers to buy and the early birds here will reap the rewards. Haha fat dream right?

Well hope is a good thing, and all good things never die. (taken fr Shawshank Redemption by Stephen King) So keep hoping!