Wednesday, December 25, 2019

Charts #27: Carol Dweck's Growth Mindset

Carol Dweck's seminar work has resonated ever since I found it on Google. It links back to work, education and personal improvement. The FT chart below is a keep.

We might have seen how fixed mindset people trap themselves in their own bubble. By ignoring feedback, they are locked in their own deterministic world. The way to defeat them is then working hard on our own growth mindset. Find lessons that move us forward and widen the gap between us and them.

This could be continuously reviewing the options, working together with like minded peers and innovating much faster and better than fixed mindset people who tend to work alone. We must also be vigilant and not slip into fixed mindsets ourselves. As the Marines would say,

"The only easy day is yesterday!"

Merry Christmas! Huat Ah!

Tuesday, December 17, 2019

Negative Yielding Corporate Bonds

There are c.$13 trillion of negative yielding bonds globally. This accounts for 25% of all investment grade bonds. Please take a minute to digest this. Investors are willing pay $13 trillion for an investment that would not give them back their principal. This amount is a quarter of the bond market. This is the warped logic that the world of investing has come to accept.

It first started with sovereign bonds. When the ECB went into negative interest rates to boost the economy, the governments who could get away with negative bonds issued them ie Germany. Japan then followed suit. It was initially thought that the arrangement would be temporary, when the economy gets back in shape, we can stop. Well, we didn't.

The chart above from Bloomberg shows the magnitude and breakdown of negative yielding bonds. Today, corporates are issuing negative bonds as well. This is an excerpt from a reputable internet news source:

Siemens (SIEGY) borrowed €1.5 billion euros ($1.6 billion) over two and five years. Those bonds offered a zero coupon (interest rate) and were priced with negative yields, meaning investors are effectively paying to lend the company money if they hold the debt to maturity. The remaining €2 billion euros ($2.2 billion), borrowed over 10 and 15 years, offered tiny rates of interest. The two-year note, whose yield reached minus 0.315%, was "the most negative yielding corporate bond ever to be priced in the primary market," the source said.

As this went on, experts realized a few things about negative yields: it is like drugs or steroids. Once you are on it, it is very difficult to get off. It has certain positive impact but the side effects can be very bad. In finance, it was believed that negative interest rates would boost lending, force people to put money to work and hence bring the weak economies back to 2-3% growth. But instead, the side effects are manifesting.

Asset prices distortion: negative interest rates had brought down global returns. Recall the lessons in basic finance. Asset returns are based off risk free rate. This was the return on government bonds, usually the 10 year bond. It used to be 3%. After the Global Finance Crisis, it went down to 0-1%. Today it's negative! When the risk-free rate is negative, all the returns of the different asset classes are affected. Investors used to demand 8-10% returns on equity, maybe now they are happy with 5%. That is why we are seeing for 30-40x PE stocks that many are happy to buy. 

Real estate is the big beneficiary. Why has Singapore property market gone from S$1,000 psf to S$1,500 and S$2,000-S$2,500 psf? Did Singapore really more than double in attractiveness? Did the property developers suddenly make much higher quality condominiums with a smaller balcony and better interior? Did our government really make Singapore super attractive in with lots of greenery and better MRT, better healthcare in the last ten years? I think it is just global negative interest rate in action. Global property prices in global cities have been going up. Asian cities have reached 1+% rental yield. This means that it will take almost 100 years to recoup your capital if you don't sell. Singapore leasehold properties are only for 99 years.

Private equity markets gave us another interesting story. With negative yields, investors started hunting for returns everywhere. They found hundreds of unicorns - startups and disruptive technologies that promised to change the future. Alas, most aren't real. We saw how WeWork blew up. Uber and Lyft also saw the share prices plunged. Investors were willing to put a lot of money into dreams about rainbows and mythical horses because there was simply too much money around and nowhere to invest to earn good returns.

To sum it up, we are now in unchartered territories and we must proceed in prudence to find the optimal way forward. First, own at least one property because we don't want to get caught short. Property prices are not going to fall as long as negative interest rates continue to dominate the bond markets. Next: focus on equities because it would continue to grow with bonds becoming less attractive and private equity being too cowboy (re: Theranos). We also need to tweak how we use valuations. We can no longer work with 15-20x PE in the new negative yield regime. Maybe we have to buy good companies at 30x PE. The new cheap could be 20x PE. Hope this helps!

Huat Ah!

Saturday, December 07, 2019

People, Management and Networking - Part 2

In the last post, we talked about people and management in companies. Today we shall delve into personal networking and how it can help us become better investors. Investing is too difficult to be done alone. While there are probably some super smart, genius investors who require no mental sparring partner to come to the best conclusions about stocks and investing, most of us do.

Warren Buffett has Charlie Munger and George Soros had Stan Drunkenmiller. Most of the best investment outfit in the world are made up of small teams and the decision makers constantly challenging one another's assumptions. That is the best way to come up with the best answers. There might be heated arguments but there are no hard feelings because everyone has a bigger goal - to earn money or don't lose money. The investing team is the all important network to achieve success.

For the team to function well, all teammates have to trust one another. They must understand that it's about coming to better conclusions. It takes a lot to achieve that. Teammates need to respect one another, understand hierarchy and keep personal ego in checks. When the team gets too close, it is also about giving space to one another. Some people like to keep working relationships professional, so it's important not to force them to network during their private time. Most importantly, we never betray our teammates. No games, no politics. We should even think carefully how our words could hurt.  Don't say things that we would regret. Actually, this last point goes for every kind of relationships.

Trust takes years to build and networking takes time. Hence it is better to start young and start early. Most of us don't really realize it in school but that's probably one of our first networks. We spend two, three or sometimes six years together. We had common goals - to tackle examinations. We were too young to play politics. So it was all fun and laughter. As we age, it gets harder to build good networks. Ultimately, a network requires some bigger common goal to bind everyone together. It could be investing, it could be a common hobby or religion or volunteer work. So when we want to build a new network, we need to think clearly about the goals and whether the people are committed to the same goals.

These goals must also be clear or else politics would take over. This happens too often in the corporate world. Just think of any large MNCs, like Unilever, Singtel or General Electric. Does everyone share the common goal to make General Electric the best conglomerate or Singtel to become the #1 telco in Asia? Even in an investing outfit, does everyone think more about making money for the firm or for themselves? Is it really profits first or is it a beauty contest in many ways? What about the KPIs for back office people who are not involved in direct investment decisions?

As the network gets bigger, hierarchy naturally needs to come in. To bind people to the common goals, we need leaders. The top dog has to lead with vision and strategy. The middle managers need to lead their teams to achieve their goals for the firm to achieve bigger goals. After a while, it all tend to get messy. The best companies can keep finding good leaders and do this for a long time. Like 30-40 years, some companies can last for 100 years. That's perhaps the best outcomes. So while we say buy-and-hold, it's not forever. The best compounding happens during the phase of growth with strong leaders, good networks and great products.

Next topic, what makes a great leader?

It is said that leaders are born. We see it in kids, some kids tend to lead with ease, while others follow. There is some truth. However as we grow in life, we have to lead. We may not lead 100 people, but we must at least be able to lead our own nuclear families. With that skillset, we may expand to lead a team of 5-10 people. So, to move forward in life, everyone needs to learn to lead. To be good leader needs to nurture and find his or her own leadership style.

There are many books written about leadership. They are all important. Leadership is about vision, leading by example, action, presentation, communication and many more. When it comes to people and networking. My realization is that leadership is also about one-to-one relationship. Network of a leader is being built from one person to another. A leader needs to speak to each and every teammate one-to-one. Build that trust from person to person.

But not everyone will connect. Network needs chemistry. Sometimes we just cannot stand some type of people. We should not shy away but keep trying. A strong team needs diversity. If a leader only works with people he or she likes, the team is that much weaker. Differing personalities could be overcome either with strong vision or goals or capable teammates. Some teammates are very good at binding different people together. Leaders must learn to identify these individuals.

A strong team of 5-6 can conquer the world. Singapore's forefathers was such a team. Two capable founders can also create wonders. We have countless examples of these teams: Google, Apple, Honda, Sony, Irwin's Salted Fish Skin. Never stop finding those teammates. As a result of our evolution, it is said that the largest teams could only be 100 to 150 people. This was the magic number with tribes and villages since prehistoric times. In other words, we can only build deep relationships with that many people in our lifetimes. We cannot have 1,000 friends and be close to them all. At the very best, we can be "close" to 100-150 people in our lifetimes. That's still a very tall order.

In reality, we will only be very close to few people. Maybe 10-15. Amongst these 10-15 individuals, we should then find the best mentors and also tutor mentees. Mentors are people who will make us better. Mentees are people whom we can make better. Ideally, our better halves should also become our mentors and our kids our mentees. Fortunately or unfortunately, life doesn't work that way haha. Nevertheless, life will be that much more meaningful with these networks. Are you accountable to anyone? Who are your mentors? Have to been useful to anyone else? Answers to these questions tell us a lot about our own networks.

Do find time to thank people who made us who we are and do the same, pay it forward. Huat Ah!