Friday, January 24, 2014

Investing Lessons from Ngiam Tong Dow - Part II

This is a continuation from the previous post.

The second lesson from Mr Ngiam's book is something pretty well repeated in many circles but I think it's worth re-learning. It can be surmised into the following five words: there are no sacred cows.

Mr Ngiam recounted the early days when Singapore was supposed to merge with Malaysia and the economic blueprint of the day was the creation of a Common Market where domestic industries would enjoy protection from imports via tariffs and restrictions. Many countries still practise this today as this was thought of as a good way to let small local players grow without excessive global competition.

However when the merger broke down, the Common Market was gone. Dr Goh Keng Swee, our economic architect quickly realized that Singapore could not afford to remain as a closed economy. We got kicked out of Malaysia but we must continue to fight to live. Nobody owe us a living. Together with our UN advisors, one of the most important persons in Singapore history but rarely mentioned, Dr Winsemius and Mr I.F. Tang, put up an economic plan to open our markets and invited foreign large corporations to invest in Singapore.

Dr Goh then taught Mr Ngiam that there could be no sacred cows. So in one swoop, Singapore removed all import tariffs so that our economy would quickly adjusted to compete in the global arena. This greatly helped prepare Singapore for its next step: attracting MNCs to invest here. In one of the most famous stories about Dr Goh, he designated Jurong, a swamp at that time, as the key site for MNCs to build their factories. Dr Goh himself joked that this could prove to be Goh's Greatest Folly. Of course, it didn't. Jurong today is a major economic muscle powering various sectors for the country.

Time and again, seemingly sacred cows would be slaughtered if that proved to be the solution. Mr Ngiam would say that we should take the bitter medicine in one gulp. So we cut the CPF contribution during the crisis of the 1980s, we drew on the reserves during the Global Financial Crisis and currently we are taking measures after measures to cool the red hot property market.

As with politics, I think investing shares the same philosophy: there are no sacred cows. Or rather, there should not be any sacred stocks in your portfolio and you must open your mind up to all the possibilities.

After investing for some time, you would accumulate a few stocks in your portfolio, some would be making money, others showing red. If you are reasonably good, you should see slightly more blue than red. But as I have blogged before, the winning ratio is probably just 60%. For every 10 stocks you buy, 4 will show red. So the question to keep asking ourselves would be: are we keeping any sacred cows?

As humans, it's very natural to rationalize ourselves into thinking that many of our losing stocks would come back. It's just a bad patch, the business is inherently okay. Or it's the CEO's fault and he's now being forced to leave, so things should turn. We will come up with 1,001 reasons why we should not sell our losers.

Portfolio management is about finding a better stock to replacing an existing one. There is no room for sacred cows. If the stock is not performing for some time, review the thesis to see if it has changed. Sometimes we could be too early and if so, we have to continue to wait. But if the thesis has changed, then it's time to kill the sacred cow.

On the other hand, we should also adopt a "never say never" mindset. Some investors would have certain biases. Like maybe never invest in an airline, or the cash burning semiconductor sector. But if we close our minds too quickly, we might miss out interesting opportunities. The apt example here would be SIA Engineering or SATS.

So while we all know airline is a crappy industry and they burn money faster than you can blink, some of the airline-related businesses are great cashflow generators. SIA Engineering, one of the largest aircraft maintenance and repair company in Asia, operates a great business that generates high return on capital.

You see, airplanes needs maintenance all the time. When the economy is good, they fly more often and needs to be maintained. But when the economy is bad, people travel less and airlines send their idle airplanes to be maintained! It's a recurring business with a relatively strong moat as you wouldn't want any fly-by-night guy to repair your airplanes.

More interestingly, since SIA owns a big chunk of all these related businesses, it could become a sum-of-parts argument ie we are buying SIA because it owns all these subsidiaries and at the right price, we could get its main airline business for free. Of course the argument then becomes whether the main airline business is just free or should it be negative value. That's second level thinking for the seasoned investors here.

Back to Mr Ngiam, I would again highlight that the book is full of interesting anecdotes for Singaporeans to enjoy. Some of these mantras are timeless. There are no sacred cows. Nobody owes Singapore a living. Take the bitter medicine in one gulp. Hard Truths!

In the early days of the founding of modern Singapore, Mr Ngiam, led by Mr Lee Kuan Yew, together with Dr Goh Keng Swee, Mr Hon Sui Sen and the core of the civil service officers contributed immensely to the success of Singapore today. They have my full respect. Salute!

Thank you Mr Ngiam!

This video has nothing to do with the post. 
But it's a nice catchy CNY song by Super Group's subsidiary Owl International. 
Enjoy and Happy CNY to everyone!

Thursday, January 09, 2014

Investing Lessons from Ngiam Tong Dow - Part I

I just finished this interesting book that gave a good perspective on Singapore's recent history from the former head of civil service Mr Ngiam Tong Dow. It was published a few years ago but the topics are still pretty relevant: public transportation, jobs, housing etc. I think every Singaporean who has an interest in public policies should read this book.

Ngiam Tong Dow's Book

For me it was especially enjoyable reading the parts about our political leaders Mr Lee Kuan Yew, Dr Goh Keng Swee and Mr Hon Sui Sen. Mr Ngiam described how the trio formed a very formidable team that help transformed Singapore to what it is today. 

Lee Kuan Yew - the visionary leader setting the direction, convincing the public, fighting the enemies both within Singapore during the early days and the external adversaries that were just waiting to see us fail. But of course, we didn't. Mr Lee is still fighting today. He has my upmost respect.

Goh Keng Swee - the economic and overall architect, building up our various institutions and devising strategies to make sure Singapore succeed as a small nation without a hinterland. He created our armed forces from scratch, helped put in place our education system, started countless agencies down to recreational facilities such as our Bird Park, Zoo and the Chinese and Japanese Gardens. He is my idol. Really. This blog has a post dedicated to Dr Goh.

Hon Sui Sen - the implementor or "builder" in Mr Ngiam's words who helped rallied the civil service and rolled up his sleeves and did a lot of the heavy lifting. In my humble opinion (and probably Mr Ngiam's as well), he is one of the most important unsung hero in the history of Singapore. Mr Hon, who contributed so much to Singapore unfortunately passed away in 1983 due to a sudden heart attack while in office.

Mr Hon Sui Sen

The investing lesson here is about management. In a company setup, I would say that there are also three very important positions.

The Chairman - the visionary who understands the big picture and help set the direction for the company.

The CEO - the architect who devises strategies based on the firm's strengths and weaknesses to help create Blue Oceans where the super profits could be made.

The COO - the implementor who is in charged of the day-to-day operations and really doing the heavy lifting while giving instructions to the ground troops.

Of course, some of the roles are intertwined. In a lot of cases, the CEO is the visionary as well as the architect while the Chairman is more of a symbolic figure. And a lot of companies have one person holding both Chairman and CEO positions or CEO and COO positions.

As investors, we should be looking at the management team to determine whether the three roles are duly filled. Lacking one or two of the roles would be very detrimental to the long term survival of the company.

I would argue that Apple, since the demise of Steve Jobs, lost both the visionary and the architect, who were obviously filled by Steve himself. Today the company is being helmed by the implementor Tim Cook who is unable to set the direction and devise Blue Ocean Strategies for the company.

Of course, I could be wrong. Given Apple's ability to attract talent, there could be a team of architects filling in that role but the visionary leader is probably lacking and it would not be easy to find one any time soon.

Anyways, back to the investing lesson here: look out for the three important roles in the management team of companies. Do they have the visionary, the architect and the implementor? That's essential for success.

Part II is out!