Monday, February 25, 2019

Lessons from Bohemian Rhapsody - Part 1

I have this habit of viewing everything with investors’ lens and again this was what happened when I watched Bohemian Rhapsody recently. This top grossing movie of 2018-19 was about Queen and its lead singer: Freddie Mercury. Friends and acquaintances raved all about it and seeing it as the top movie on the inflight entertainment, I put on my headphones and started watching before the plane left the tarmac.

It was good but not as good as my expectations. Expectations - the markets are also all about expectations. When expectations are too high, then the stock will likely fall. There you go, everything in investor’s lens. Bohemian did tell a good story, but the director Bryan Singer always gave enough clues about what to expect, which makes it too expectable. That’s my complaint. Otherwise, it’s good and deserves its SGD1bn box office worldwide.

Queen, the band behind Bohemian Rhapsody

Nevertheless, watching Freddie’s life story drew so many important lessons that I felt compelled to take notes while I watched in the plane so that I could write this for all the readers here. They are both life lessons and investment lessons, expectedly. Since most things that are important enough are usually universal right? So without further ado, here’s the four lesson from Bohemian Rhapsody:

1. Never betray your cadre
2. Identify bad advisors
3. Four heads are better than one
4. 祸从口出 (disasters come from the mouth)

Ok, before we go into details, I must warn that if you haven’t watched the movie, there are spoilers ahead. I have tried to make it as generic as possible but if you prefer to know nothing about the movie when watching then you should read this after you watched it.

First lesson: never betray your cadre.

This is something we all know but yet forget so often. By cadre, I mean people who we treasure most, be it friends, spouses, parents, teammates, siblings etc. In the story, it showed up again and again that artists are born free and hence they feel that they have to right to live way they wanted it. So Freddie betrayed almost everyone in his life, not just friends, but his parents, his band, his lovers. He did it in all ways imaginable too, like an artist. He spout words that one should never say (we will visit this in a later post). He makes unilateral decisions that were good for himself but bad for his band. In short, he was an asshole.

Unfortunately in life, we are bounded by rules. School rules, company rules and most importantly social rules. For example: we don’t get into a love relationship with more than one person (well at least in current times, in current Singapore and most OECD* countries). In the past, we could, if all parties accepted it. Sorry guys, doesn’t happen today.

By betraying our cadre, we break the primordial social contract that makes us humans. In fact, this is almost biological in mammals. Monkeys who betray the clan are casted out. However the follow-up lesson here is that your best friends and family members would forgive you if you sincerely repent and never do it again. Some squander these second chances. Then, you truly are the asshole and deserve to rot in hell.

What is the relevant investor lesson here?

Integrity before everything else

In investing, this boils down to the integrity of those driving the companies. Would they betray their capital providers? It’s usually too easy to betray shareholders. After all it's more a legal obligation than a social obligation. Sometimes, you can still betray shareholders legally. So what’s there to lose?

Normally, the lack of integrity comes in two forms: financial / accounting integrity and management integrity. Accounting integrity is the pre-requisite of any fundamental analysis. If the accounts are faked, then there’s nothing to analyse right? Most people don’t think to deeply about this because we “assume” the accounting has integrity. After all, it’s all listed companies, vetted by the stock exchange and audited by auditors. Unfortunately, it still happens. It’s illegal but people do it. Look at Midas, Informatics, Enron, Toshiba. So when there is a reasonable doubt that the firm lacks financial or accounting integrity, don’t bother to analyse anymore.

As for management integrity, it is also linked to the first point - how some had ulterior intentions to cook numbers. But it is also about having the “betraying-shareholders” mindset . Management has the onus to work for shareholders and other stakeholders but this doesn’t happen all the time. When the management is working for themselves (without breaking any rules), then shareholders will not see their money. This usually happens when the company culture devolved to be all about management themselves. Old case in point: CK Tang screwed shareholders by taking the firm private below book value. Valuing its Orchard flagship property at c.SGD1,000 psf. Everything was legal. It’s just business, nothing personal. But where’s the integrity?

Privatized below book value at c.SGD1,000 psf

As shareholders, we must always be vigilant. Caveat Emptor.

Next post, we talk about our life cadres and advisors!

*OECD stands for Organization for Economic Cooperation and Development. Today it consist of 34 countries including most European countries, Japan, Korea, Australia, New Zealand, Israel, US, Canada and Mexico.

Thursday, February 14, 2019

Charts #19: Global Alcohol Consumption

Courtesy from Our World In Data

Global Alcohol Consumption Peaked in 1980s!

Happy Valentines' Day!

Monday, February 04, 2019

Happy CNY 2019! Huat Ah! Bcos We Are Singaporeans!

Is it because I'm Chinese? No, sweetie, we are Singaporeans :)

The Year of the Dog is coming to an end. Tomorrow, we usher in the Earth Pig. Yes, while the media always reports that this year is the Year of the Golden Animal, it seldom is. The last real Gold animal was in 2011 - called Gojek, the Golden Jackass. Just kidding, it's the Golden Rabbit and before that the Golden Tiger in 2010.  The next one is in 2020 - the Golden Rat. As there are five elements (Earth, Fire, Water, Wood and Gold) and each element gets two years in a row, we only get to Gold every 8 years.

Meanwhile, as markets move in advance as they always do, gold prices are the move! No autolock here.

Gold prices rushed through SGD 1,680!

The recent rally might be more USD related rather than gold supply and demand. Since the Fed decided to stop tightening, gold prices shot pass SGD1,680 and moved real quick to SGD1,776 (USD1,315). The obvious reason being that the USD should weaken since the Fed is no longer raising interest rates. So all else being equal, gold prices should break loose.

In fact, since 1971, gold has only gone one way - up, up and away. It hit USD60 in 1972, almost doubling and then hit USD200 in 1975. By 1980, it was USD650 (almost 20x return in 10 years) and then ran all the way close to USD2,000 during the GFC. It then briefly collapsed to USD1,000 and we are now back to USD1,200-1,300. If one bought $10,000 worth of gold in 1971, it would be $380,000 today, enough to pay for a lifetime of ERP charges. 

Converting from USD to SGD, it's also roughly about SGD1,680. In Chinese, 168 sounds like one way street to Huat Ah! Translation: one straight way to making lots of money. Hence Chinese really like this number: 168 (一六八 Yi1 Liu4 Ba1 sounds like 一路发 Yi1 Lu4 Fa1). Well, if you are not Chinese, a big Huat to you and your family too! There is no autolock to Huat and gold prices!

All this happened because of the historic event on 15 August 1971. The Bretton Wood system which linked all monetary currencies to gold prices collapsed. Before 1971, gold prices were fixed at USD35 per ounce and all other currencies were also pegged to the USD in tight ranges. This proved to be too onerous because the central banks needed to defend their currencies to maintain the exchange rates whenever their economies come under pressure. 

As with kingdoms issuing gold coins centuries before and the German Mark before WWII and the British pound after WWII, powers that be find it too difficult not to devalue when times are stressed. Governments always devalued their currencies. Put it in another way, the central banks cannot defend their currencies when the world's speculators come together. In fact, the Bank of England lost infamously against George Soros and the British Pound got devalued the second time in 1992. Soros became famous overnight and was since known as the man who broke the Bank of England. This was why UK doesn't use the Euro today and might have to exit the European Union with no deal this March.

So, looking back at the long history with the collapse of Bretton Woods, gold prices can only go up not because gold is a good investment. Gold doesn't have a business model or produce any cashflow. But it will Gojek up because fiat currencies will continue to depreciate. It's like releasing the autolock and letting a hostage run free. Okok, let's be serious. It's because when the link between gold and USD broke in 1971, fiat currencies can move as far as human creativity allows and there is no limit to the human brain and its creativity - see below.

In all seriousness, unpegging gold and fiat currencies allowed businesses to price their products and services without any regard to any base systems and hence by extension, economies and countries would also be free to price anything as they deemed fit. With the passage of time, we lose our sensitivities to the intrinsic value of money itself. Meals go into thousands and tens of thousand of dollars - something unthinkable for our parents and grandparents. Houses in Singapore today are in the millions or tens of millions. Houses in China are 20 to 30x annual incomes. Chinese newly weds cannot afford homes without parent support, Is it because I'm Chinese? Maybe, you know... better come to Singapore.

Hence, as strongly advocated before, it makes sense to have a bit of gold in all portfolios. Gold is the origin of the global financial system built on centuries of human's collective adoration for this metal. Gold has no meaning to a monkey. But to humans, it represents wealth and the most ancient verification as the ultimate store of wealth. It has been so since the beginning of human civilization. It was used by the Egyptians, the Greeks, the Romans, the Aztecs and needless to say, the Chinese.

So buy Gold in 2019! Huat Ah!

For the uninitiated, the various allegories in this post are wrt to this incident that happened a few days ago about a cab driver and a Chinese lady passenger who felt she was cheated by the cab driver.