Friday, October 10, 2014

What is Your Legacy?

"Seize the day. Gather ye rosebuds while ye may, because... we are food for worms."  - Robin Williams  as John Keating from Dead Poets Society.

We are all food for worms. From the moment we were born, the clock started ticking. We will spend no longer than a dozen decades in this universe. For most of us, it's about 7-8 decades. The first 2 decades we spent learning just to get by. The next two we enjoyed a bit, but then we needed to raise the next generation. Then we realized almost half the time is gone. At some point, our time ends, and we become food for worms, or organic fuel for the cremation ceremony. That is the destiny that awaits all men.

There are so many questions! Why are we born so as to die? What is our purpose in life? What legacy do we want to leave behind? Big questions. Since the human race evolved to possess thinking minds, we have not stop asking. But there are also no good answers. Some believe science cannot provide the answers. But perhaps religion can. Not everyone can accept that because religion introduces the concept of an Almighty, which could be a case of Occam's Razor - it calls for the ultimate additional assumption, ie the Almighty. For some of us with our stubborn engineering trained minds, this just doesn't gel. 

I recently attended a seminar called Life Academy. It was started by some Taiwanese which had gotten quite popular over the years with more than 100,000 attendees globally. It was a seminar that would provoke some thinking about the answers to life's biggest questions. I must say it's pretty profound. Of course, not all the answers would be satisfactory but I believe everyone who attended would have at least one or two takeaways.

For me, it gave a glimpse of how to view our existence in this world, this reality and this one time that we will live and experience all there is. Here's how I would frame it. Imagine that we are going to attend a party. It's an 8 hour party. Every hour for a decade roughly. Well for some lucky folks, it could stretch to 12 hours but for most of us, probably 8 hours. So how should we spend our time?

First, we must make sure we last 8 hours right? Don't get knock out at the fourth or fifth hour. That's health. Eat right, drink right and walk around or dance! (ie exercise). Just keep our bodies and minds strong. Then we must decide, what we really want. Most people realized this party won't last forever only at the fourth or fifth hour or even later. Well, it's never too late, but wouldn't it better to know what to focus earlier on? For readers in their first or second hour, good luck! Do focus and keep walking!

So what is it that we should want out of this party? I would say I would want the following:

1. Experience
2. Love
3. Legacy

Well first, I guess it's about experiencing the party. Try to experience all there is. Well don't do the bad stuff that affects health or the other two on the list: love and legacy, like smoking, or betraying trust, or spread hatred. But for the rest of the experience, by all means, try all the fun!

In a party it would mean talking to a lot more people, do stuff like taking a dip in the pool, playing all the games, exploring the venue in and out. On Earth, I guess it means expanding along the same thought horizon, meet people (of all races and places), do stuff (rafting, backpacking, skiing) and see our world (a lot to see: Machu Pichu, Niagara Falls, Great Wall, Aurora, Great Barrier Reef, Angkor Wat, African Safari, Easter Island etc). Well this in itself would probably take a lifetime. But we must not forget the other stuff. The next on the list being love, which could be the most important.

Humans are social animals. We don't live alone and we yearn to be accepted. Sometimes in bizarre ways. Like buying a flashy car, a mechanical watch or a Berkin bag, just to show people we are "somebody". It's a bit like a young pugilist in those swordfighting novels who had not mastered any skills but needed to hold a jade sword just to impress others. Yeah, like Zhang Ziyi in Crouching Tiger. Ironically, there will be those that we hold dearly in our hearts, with no need for any of the gimmicks above. Our significant other, our kids, our family, our friends. We love them just the way they are. And they, vice versa.

The simple thing about love is to simply just to give it out, and it comes back multiple folds. So give love to our family, friends, colleagues, mates and if we are ready, to strangers too. All too often, we simply give almost everything to our work, to make more money, thinking it's more important. But the clock is ticking, our kids will turn to teenagers then adults in a flash. Our parents will leave this party earlier. Some of our friends too. Is it really about work and money? Do you go to the party to do work and make money in the prime 3rd, 4th and 5th hour? Tick tock tick tock, remember this party only lasts 8 hours.

Cheers by Mayday, echoing the views in this post

Make time for those who meant the most to us, who had helped us, and those who had walked this unique journey with us. Share the love, the friendship. Cherish those moments together.   

And finally, what is your legacy?

Most people never got this far. The toils really got to them. They were working and making money all the way to to 6th, 7th and 8th hour. They would ask how do you spell legacy? To them, life was about making ends meet. It wasn't a party. It was about food, shelter, security. For those of us in a better position, sometimes we think like that too, we need to buy that condo, that lifestyle when there is no need to. We should be helping others instead. Bill Gates and Warren Buffett, the world's richest two men pledged to distribute their wealth for this purpose. Noble souls.

For most of the readers here, we are the fortunate ones who have the luxury to think about our legacy. What do we want to leave behind? Maslov had pretty much summed this up. This is self-actualization. Our calling. Well, it's not easy to figure out. But do think hard. The clock is ticking, the party will end.

For Steve Jobs, it was putting a dink in the universe with an aluminium case that is now in the hands of hundreds of millions of people. For Jack Ma, it was creating an internet firm to help millions of small business owners sell their wares. For most parents, it's about raising our kids. For most others, it's art forms: poetry, photos, music, paintings, movies or creating something, like building a company, a charity foundation or simply becoming an entrepreneur. It is not about whether it was the first of its kind, or whether people liked it. How many units sold or whether it was a success. It is about whether we actually took the step to do it. To execute. Please, do it. Just do it. You don't want to leave the party knowing you did not try.

For me, one of the legacies to leave behind would be a stock portfolio. Amongst other legacies that I thought about: taking beautiful photos, creating a music platform, having a real farm growing my own food, start my own fund and needless to say, raise my kids well. I hope to achieve all of them, although the odds are definitely against me. Well since this is an investment website, let's just focus on the portfolio. 

The goal is to create one portfolio that can hopefully generate good returns for a few decades. It would consist of 50 or so stocks. The best of the best globally. Strong global businesses with huge economic moats. Companies that would continue to pay dividend for years to come and the dividend cheque will get bigger and bigger over time. Companies like Diageo, Disney, Singtel, Jardine Cycle and Carriage, Swatch, Adidas. Companies that produced products that I adored. Johnnie Walker, Omega, Star Wars merchandise. Companies that had made Singapore proud. You get the idea. This portfolio would also provide for my family. The goal is to make the dividends bigger than my annual expenses. It would fund my kids education and my retirement in time. 

It would also represent the fruits of my lifetime of picking stocks. I hope to discuss the stocks with my kids when they grow up. Let them understand why each stock is there and how collectively they contributed to our well beings. Part of this website and investment eco-system contributes to this as well. I hope it would be an interesting legacy. One with meaning, love, abundance and admiration for the people who made great products and businesses.

At the crux of it all, it's always about people. We want to be touched and we want to touch other people's lives. Be it through a product, an art form or simply, acts of love. Experience, love and legacy also revolve around people. Experience is about the people we met, love is about giving it to our friends and family and legacy is about providing for our future generations. By putting others before self is one of the ways to live a meaningful life, perhaps the way. Because, at the end, we are not going to take anything away. Not the flashy car, nor the mechanical watch, and definitely not the Berkin bag. We are here to make a difference to others. It's time to seize the day before we become food for worms. 

Start doing what is really important. Start your legacy, today

Wednesday, October 01, 2014

The Efficient Market Hypothesis

Investing, as with life, is a paradox. We have to learn to live with it and hopefully, sometimes, we find the way out. It is not rocket science. It's just about understanding the world and human behaviour. The world is ever changing yet human behaviour rarely changes. That is why it is so difficult for smokers to quit smoking even when we know that smoking is no longer as cool as when they shot Breakfast at Tiffany's. Yes, paradox. And it is equally difficult for diets to succeed and for value investors to dominate the investing world and for any investor to beat the market. Although that doesn't mean we shouldn't try :)

While this whole website and eco-system is built around value investing and trying to educate investors to understand value philosophy and to beat the market, we must be cognizant that the market is efficient. It is very hard to actually beat the market over the long run. Just as it is very hard for smokers to quit smoking or to successfully lose weight. Statistics showed that less than 10% of smokers can actually quit smoking without the help of medication and 95% of all fat people gained back their weight after some diet regime. In investing, about 10-20% of all investors will actually beat market return ie earn more than 8-10%pa over time.

In an era when smoking was still cool, Audrey would be asking, 
"Are you the 10% or are you just like Cat, a no name slob?"

The Efficient Market Hypothesis or EMH came about in the 1950s and 1960s when a bunch of professors in the University of Chicago and MIT did detailed research on the markets and came to the conclusion that most investors had never beaten the market ie the returns they generated were less than the average market returns of 8-10%. Over the years, the EMH has been debated to the death. Behavioural  finance "sort of" proved that humans are not rational when it comes to investing and hence EMH couldn't hold since one of EMH's core assumptions was that investors are always rational.

Also if the markets were truly efficient, how do we explain bubbles and how Warren Buffett and his group of Superinvestors beat the market for years and years? So is the EMH a fluke or is the market really efficient? Again, paradox.

I believe, as with all things in life, things are never binary. Everything must be explained in percentages (ie analogue basis, not digital). Type A people will never understand this. Let's hope more readers here are Type B.

The market is largely efficient. Maybe 95% of the time efficient. Bubbles and Warren Buffetts exist, but they do not refute the EMH. As investors, we must learn to respect that markets are, by and large, very efficient. To be better than the market, we must think better and see further and that ain't easy.

Why is the market necessarily efficient? 

As a simple analogy to illustrate this point, imagine that we stuff the National Library with $100 bills and get 10,000 people to go look for them. How long would it take before 95% the bills are taken? Not too long perhaps? A day or two? Yes, after that, there could be a few that are stuffed in between books like Security Analysis or War and Peace that might take some time for people to find them - that's where value investors look at.

The stock market is, by and large, like that. It is not easy to make money because everyone is looking for those dollar bills. Here's another paradox, the market did not start being efficient from Day 1. It became efficient as each and every investor took pain to extract the inefficiencies one by one.

The National Library analogy has its limits, so we need another one to better explain the structure of the stock market. The way that most investors (or shall we say speculators) play the stock market is hope to buy something and flip it fast, ie sell it to another buyer at a higher price. Now playing the market this way might make you money. But it is very tiring and you are far more unlikely to make it big. If the success rate for an average investor to beat the market is just 10-20%. Then playing this buy-and-sell-it-to-another-greater-fool game would likely have a lower success rate. Friend, don't make the game harder, already very pai(2) tan(3) liao(3), ho(2) sei(3) boh(2) ie already not easy to make money, pls wake up your idea.

So how?

Let's imagine now that there is a comic book store selling all sorts of comics from Marvel and DC Comics to Japanese manga to Hong Kong's Wind & Cloud or Lao(3) Fu(1) Zi(3). For a moment, also imagine that there is only one store in town and one copy for each comic. Some others might still be playing the previous game here, buy some comic in hope to sell to a Greater Fool. But a better way to play this is to: 

1) Buy a comic that is not expensive to start with
2) But also a comic that is interesting which you can rent out to others
3) Finally it is also evergreen such that the comic's rent price will actually rise over time

There are a few prices here. One is the price of the comic (ie the stock price) and there is the rent price (ie the dividend). The intrinsic value of the comic is determined by how much rent price it can fetch over its lifetime. The future price is determined by whoever willing to pay the highest. If you buy the issue #1 for Superman for $5 and you can rent it out for 5c every month, essentially you earn back the $5 in 100 months or 9 years (a bargain!) and you can sell that #1 of Superman for a higher price, provided the rent has then also increased to 10c per month. (Also imagine that both pirated paper and internet copies do not exist :)

#1 Issue of Superman in 1938

So you see, if you get the right comic, it will provide you an income and one that would rise over time. However you also want to buy them at the right price, because if you overpay, then it takes too long for you the reap the benefits. Say if you buy that same copy of Superman for $20, then it will take you 400 months or 35 years to earn back your cost, and you may not get to sell it at a higher price. That's poor investing.

The market is efficient here because there will be all these other comic buyers snooping for the good comics. Similarly there will be all these investors scouring the stock market for all the good stocks. Usually the buying price is at 12-18 earnings multiple ie it would take 12 to 18 years to earn back your cost. As you can imagine, it would not be easy to spot the great comics selling at a discount. You would have to be at the store every day, reading through all these comics and finding the real good ones which are undiscovered (think: reading a lot of annual reports and analysing a lot of stocks). And/or to wait patiently for some bargain sale some day and amazingly nobody is around.

Once in a while, the buyers disappear as they somehow collectively decided that nobody will read comics no more and you get the bargains. At other times, one or two comic become so superhot as to fetch prices that will take 100 years to earn back the cost (think Facebook, Alibaba). It's better to avoid the temptation to buy these hoping that you can flip and sell to a Greater Fool. Often, people find that they themselves are the Greatest Fools.

Most of the time though, the market is bloody efficient and very few outsized returns could be made. The Efficient Market Hypothesis works. While that is true, it doesn't mean that aspiring investors should just sit back and do nothing. For some, well, scouring for stocks year in year out really isn't their calling, then perhaps it would be better to buy the market (ie buy ETFs). And do other worthwhile things with our lives before we become food for worms.

For the rest of us, yes, we are here to figure out the paradox. Why are we born so that we become food for worms some day? Why try to beat the unbeatable efficient market? 

Because, we are here to seize the day and find as many gems while we can!