Wednesday, April 16, 2014

Three Key Points for Newbie Investors

This is really more of a post for me to jot down what to say in the elevator or in a casual setting where I only have a few minutes to talk to someone and I would like to give the biggest impact and let him or her take away as much as possible with regard to the world of investing.

Now, I am assuming someone with very little investing background and who may or may not know who is Warren Buffett. If he wants more info, I can always refer him to this blog. But in that span of a few minutes, I must basically let him know the most important things about investing. 

So what should I say?

Here's what I thought could be well covered in a few minutes, and understandable to the layperson.

#1. Investing is about owning the very best businesses.
#2. Identify the blue chips (in Singapore) that satisfies #1.
#3. Buy only those in #2 with a strong dividend track record and a high yield.

Owning the very best businesses

For the readers here, you would know all about good businesses. These are firms with strong economic moats such as excellent business models (eg razor and blade), oligopolistic industry structure, recurring demand, brands, high market share, strong distribution, mind share, cost leader, pricing power etc. Great businesses are just a combination of these that allows them to generate very high returns on capital invested.

One Singapore stock that is becoming very interesting is SMRT. Disregarding all its trials and tribulations over the years, passenger rail is a simple business to understand. The demand is recurring - we go to work daily. It is a monopoly - unless we take buses or drive and clog up the roads further. There is always huge opportunities in retail and property development around the stations. It is one of the best businesses around. Buffett bought one for 26 billion dollars.

Obviously, in Singapore, the risks manifested themselves too well. Regulations - prohibiting SMRT from raising fares. The firm's own mistake in investing too little in operations and maintenance, causing major breakdowns. All these, together with the popping of the property bubble caused the stock to crashed to $1. A level not seen in since 2006! But as it falls, a lot of these risks are factored in the price. I would argue that we could have seen the worst. Time to think about buying SMRT.

Passengers walking along the track when the train broke down

Buy only blue chips

Well, there are blue chips and there are blue chips. Some companies and their businesses are just not as good. They have no economic moat - bad business models, poor industry structure etc. Chartered Semiconductor was a blue chip. But it was a crazy business. Players invest in billion dollar fabs that got obsolete in 3 years. It was a race that only 1 player could survive. The biggest global player - TSMC. Airline is another treacherous business. There are over 200 airlines globally and they compete away all the economic earnings. SIA is still profitable mainly because of its subsidiaries.

A lot of blue chips in Singapore actually do not satisfy the good business criteria. I would say majority of what makes up the STI would not make the cut. Temasek just bought one out. Olamak!


The final test of whether a company is just good or truly great is, in the end, the dividend track record. Great businesses will continuously churn out cash and these companies will have no problem paying out dividends. Some can even increase its dividends year after year. In US, the small group of companies called Dividend Aristocrats have been increasing their dividends for the past 25 years. 

Twenty five freaking years!

Well, in Singapore, our history is too short and even amongst the blue chips, there is only a handful that have a solid dividend track record. The handful that qualifies as true blue chips with strong dividend payout, in my opinion, would be Singtel, Jardine Cycle and Carriage, SIA Engineering, SATS and Keppel Corp. As of now (mid 2014), none of them look really cheap. I would think twice about buying now.

This actually brings me to the most important thing about investment: how much will you pay for it? Hence in my last statement #3 above, it has to be a high dividend yield. Like a 4-5% yield. A high yield would ensure that you bought it cheap and your capital should be well protected. In fact, today (mid 2014) it is very difficult to find true blue chips with 4-5% yield.

Ultimately, investment is an art and there are really no rules that can work at all times. As of now, these five names look like the right candidates and the only thing now is to wait for them to correct to buy them. But we also know that SMRT used to be one that looked right and crashed. Now could be the time to relook at it, but it would take some time for it to be established as a true blue chip again.

So these would be the three points that I would say, next time, in an elevator, or in a casual setting. Own good businesses. Identify the right blue chips, and only buy the Dividend Aristocrats cheaply! Huat Ah!

Saturday, April 05, 2014

There is no spoon...

This is a quote from the movie "The Matrix" almost 15 years ago. For readers who have never seen the movie, I urge you to watch it today. It is one of the best movies in the last century. No joke!

For those with no intention to watch it, I shall summarize the plot for you. 

*SPOILERS ahead*

The Matrix follows protagonist Neo (played by Keanu Reeves) as he discovered that his world was not real but a huge computer program called the Matrix designed to imprison human beings. Or rather imprison our minds. Neo has the ability to manipulate the Matrix ie free his mind while inside it, but has yet learnt the skills to do so.

He meets a boy in the Matrix who spoke to him about bending spoons. Here's the scene.

There is no spoon.

Well, in short, the boy was saying, "Do not try to bend the spoon, but to realize the truth:

There is no spoon. Seek not to bend reality, but to bend yourself." Neo understood the boy and in moments of crisis afterwards, he would murmur to himself, "there is no spoon." when performing the impossible.

In real life and in investing, ever so often, we are faced with such situations. We cannot change reality, but if we free our minds and see it from a different perspective, we can hope to bend ourselves to a better outcome. 

For instance, when faced with an uncooperative boss out to undermine our efforts, bend our minds and see what are his tactics, see through them and be better prepared in the future. We could be gathering consensus view before the meeting, or we could be influencing other colleagues first before confronting the boss. Strategize. See beyond the reality. Do the heavy-lifting.

There is no spoon.

Meanwhile, such situations also usually forces us to see other alternatives that we couldn't comprehend if we had remained comfortable. Usually it would lead to understanding the different factions within firm, see how we could deploy ourselves and/or explore opportunities outside the firm as well. 

In investing, this is also similar to Second Level Thinking. Free our minds to see what others could not. That is how outsized returns could be made. One example given by a good friend was the following. 

There were two plots of land separated by a canal. Both plots were too small to be developed into something useful hence the two plots of land sold at a significant discount to adjacent land. But if they were combined, an interesting project could be done. But most developers couldn't do it. It took a few civil engineering architects who knew how to divert the canal and perform their engineering magic to make it work. They saw what others couldn't, "bent the spoon" and made a lot of money.

Investing in stocks, or more often, private equity calls for similar mind bending strategies to make things work better. Our own Creative could have carved out a good niche in sound technology given the rise of the audiophile industry. It was a combination of technology, marketing and niche focus. But if something crap like BEATs headphones could make it so big, Creative stood a better chance to be somebody in the world of audiophile. Now China's Xiaomi is coming in to disrupt this nascent industry.

BEATs Audio Headphones

A lot our home grown brands could have been much bigger if their management could free the minds and stretch beyond the limits. Yeo's, Ya Kun, Gardenia, Charles & Keith, CYC Custom Tailor, Jack's Place, AIBI, Sakae Sushi etc. They were trying to bend the spoon using brute force. They should have known it's not about the spoon. Well, it's not easy, since Singapore is such a small country. We can free our minds, but we still cannot create markets big enough.

Btw, Type A people will never understand this spoon analogy. They are forever asking, what's the fuss about the spoon? Yes, we do not live in the Matrix, we cannot hope to bend anything made of stainless steel with mind power! But what's important is the idea, not the context. Free our minds, bend ourselves. See beyond the reality. If we can do that, we can achieve anything.

There is no spoon...