Introducing Substack

I was introduced to Substack, a platform for writing and found it very complementary to the current blogspot space. Substack also has an app and allows for podcasts, chats and can help foster the discussion better. As such I have created 8percentpa.substack.com which will have posts from the current blogspot space (free) and also discuss investment ideas and strategies (paid subscription). Please sign up for the free subscription to give it a try!

Going forward, the blog will continue to discuss investment thoughts, charts, books, financial basics while the Substack will focus on value added posts. We will also track and publish the track record of the ideas, discuss lessons learnt and invite readers to contribute as well. This is the power of Substack, which allows for deeper interactions and collaborations.

I believe that a simple successful investment process depends on:

1. Good insights and initial due diligence

2. Discussing the idea with other like minded investors to uncover plotholes in the investment thesis.

3. Buying at the right valuation

4. Monitor and sell when valuation is rich

This blog and Substack will help with all the steps but step #2 is where everyone can chime in to discuss and help refine investment ideas which will create investment returns for everyone. We hope you can continue to support us in this effort and huat together!

Here's wishing all readers happy holidays and a good 2023 ahead!

Taking Stock of the Stock Market and the World

Time files. We are coming to the end of 2022 and it is always good to take stock at such timing. How was the year? Did we have anything to celebrate? What are the lessons learnt? As of this writing, there is nothing much to celebrate. We are still not out of the COVID-19 pandemic. We have a war in Ukraine and the global stock market has corrected on average 17% since the start of the year. Nasdaq is down almost 30%. 

NASDAQ -28% 

HKSE -25% 

DAX -21% 

SPX -17% 

Nikkei -10% 

STI -1%

Source: Tigerbrokers

Surprisingly, STI is flat while most markets are down double digits.

Valuations remain high despite interest rates going up. More importantly – the risk-free rates are going up! As you may recall from those textbook studying days, risk free rate forms the basis of all valuation. If I can earn 4% risk free, which is what the Singapore government Treasury bills give today, very broadly speaking, there is no reason to buy any stock with PER > 25x i.e. earnings yield < 4%. Why should I take risk to earn 4% or less when I can buy T-bills which are risk free and giving me 4%? 

But global stock markets have not caught up with this logic. The following are the PER and EV/EBITDA ratios for the same markets:

NASDAQ PE 26x EV 15x (vs low at PE 21 EV 10x in 2012) 

SPX PE 18x EV 12x (vs low at PE 13x EV 8x in 2011) 

Nikkei PE 15x EV 9x (vs low at PE 14x in 2018 and EV 7x in 2011) 

HKSE PE 11x EV 9x (vs low at PE 9x EV 7x in 2011) 

DAX PE 11x EV 7x (vs low at PE 11x EV 5x in 2011) -> DAX looks cheap! 

STI PE 11x EV 12x (vs low at PE 9x and EV 10x in 2011) 

Source: Bloomberg

Long term investors who had looked at a few cycles may recall that T-bills was not 4% when these valuations hit their lows in 2011-12. Japan has a different story back then and today and at PER 15x, it is not screamingly cheap, even though the yen is and everyone and his dog is in Tokyo buying luxury products. Germany, Hong Kong and Singapore look like of cheap, but clearly the US markets look expensive when compared against the current interest rate environment and with other markets. It is also expensive when compared against its own history. The SPX needs to be closer to Mar 2020 bottom of 2500 for valuation to make sense, assuming earnings hold up.

The old story goes as such, if US is not cheap and US falls, then the other markets will not be spared. Remember the old adage - when US market sneezes, the world catches a cold. Hence a lot of investors are bearish. Some are saying there will be a big, big crash e.g. GMO.

https://www.gmo.com/americas/research-library/waiting-for-the-last-dance/

According to GMO, the markets should have collapsed pre-pandemic. We glimpsed that in Mar 2020 but then the huge rescue package from the various governments drove markets to new highs! At the end of 2021, the S&P hit its all-time high at c.4800 (see chart below).

Source: Google

This marked the backdrop of this crazy year. Since then, we had a war, inflation going through the roof, the shortest tenure UK prime minister and the meltdown of the GBP, the UK bond and stock markets, the assassination of a former Japanese prime minister and Donald Trump having a second go to be the world’s most powerful man after he messed it up big time last time!

Just when we think the world cannot be crazier, Koreans squeezed into a small alley to watch K-pop stars and got stuck, resulting in a stampede that killed more than 100 girls, an unthinkable accident in a developed country (my heart goes out to the families, pls pray for them). At the same time, we also realized China has become a prison and is forcing their rich and powerful (with the ways and means) to flee the country, pushing up home prices and rentals in Singapore!

So, how do you feel about 2023?

I would say this. We are not at the bottom. The war in Ukraine is escalating and inflation is here to stay. This means that global interest rates will stay high and the stock markets need to correct to lower valuations before we can say we are near the bottom.

Inflation will be a big topic in 2023. The following chart shows Singapore’s inflation for the past 25 years and we are at historical high. While the chart may seem to have peak out, anecdotal evidence tells us this is not the case. Rental cost in Singapore continues to rise, we are still seeing restaurant raising prices and importantly, as long as global issues causing inflation are not tamed, we will continue to import it due to the nature of our open economy.

Source: tradingeconomics.com

This brings us back to the STI. Recall that it corrected 1% while the rest of world has corrected double digits. Yes, we trade at lower PER (11x) but that is because of the constituents are mostly in the financial sectors which command lower multiples. Moreover, against our own history, we are not super cheap.

The only cheap market seems to be the DAX, but with the Russia-Ukraine war still looming large and the energy crisis unfolding, it is hard to bet on Europe. There might be individual stocks that might be interesting. Screening tools could come in handy. For the courageous, there is the option to buy some short ETFs but we need to be careful about the decay which can be 6-10% per year. Caveat: this is definitely not value investing and only seasoned investors should try this!

In conclusion, 2023 might be the year to just hold on tight. We shall wait for interesting names getting to interesting valuations as alluded in our first ever real investment idea on 8percentpa.substack.com. But mostly, stay vigilant and stay liquid.

Huat ah!

Value Investing Algorithm: Can We Put Warren Buffett in a Box?

I talked to a friend some time back and he asked an interesting question - can Value Investing be automated? What is the Value Investing algorithm? I thought long and hard about this. It should be possible. In fact, everything can be automated. It is just a matter of inputs, processes and output. Some processes have a lot of complexity but in theory, it is always possible. As complex as life can be, our DNA is an algorithm, determining how we eat, love, sleep, reproduce, fall sick and die. So, the answer is yes, value investing can be automated. The question is how. How can we put Warren and Charlie's wisdom into a box?

World's greatest living investors: Warren Buffett, 91 and Charlie Munger, 97

Before we answer that though, let's think about why it hasn't been done yet. Well, maybe it is too hard. There are too many inputs. Market share, number of competitors, profit per employee (including part-timers), culture, CEO's ambition, regulator's scrutiny, branding, strength of eco-system etc. For most of these inputs, you cannot put them into numbers, like how do you transform Coca Cola's brand value into a quantifiable number? Or how can we quantify Costco's business model of using peoples' homes as inventory storage thereby reducing its own cost of business? So if there are ways to quantify these attributes and put them into an algorithm, then perhaps the true essence of Value Investing can someday be digital. We can then figuratively put the world's greatest living investors into an ultimate money-making box that anyone can use to make tonnes of money.

Until we can do that, human value investors will still have the advantage.

The other problem with the markets and not just value investing is that everything affects everything else. The algorithm is not run independently and is affected by "other inputs" which we have no control over. This could be interest rates, wars, pandemics, politicians, terrorist attacks, new discoveries, blockbuster games or movies that no one expected etc. How will our algorithm be affected by these and how can we model them in? It is not easy. To add to that complexity, stock prices and stock markets are also affected by what other people do. It is a psychological game.

The case studies that come to mind are Netflix and Peleton. Peleton is Netflix combining a gym class while cycling at home. It became the ultimate pandemic start-up play. But its share price is affected by how people buy it up and down depending on the mood of the day. I couldn't say it has a solid business model but the market believed it did one day, then not so the next day. So the stock did just that. However, Netflix does have a solid business, it has hundreds of millions of subscribers paying $10-20 a month. Most readers on this blog cannot cancel Netflix even if we want to because our kids will scream at us. I am sure some hard-core value investors out there have figured out the intrinsic value of Netflix and will be looking to buy at a certain price. But can we create an algorithm so strong that we can also churn out the right intrinsic value, for Netflix, Peleton and all the 10,000 listed companies in the world?

Courtesy of Google images: Netflix's CEO Reed Hastings and Netflix's recent sub numbers

Ultimately, it comes back to valuations. If we buy something expensive, then it is inevitable that when the market mood swings towards negativity, the stock trades below our buying price, which hopefully is below its intrinsic value. Then there is still hope it will go back up someday. Recall that intrinsic value is always a range, it is not an exact number. As such, investing is not a science, which implies that creating an algorithm is inherently difficult.

In its most basic form, the intrinsic value depends on the company's earnings or income and a multiplier. The multiplier is based on the industry dynamics, the companies' earnings power which is exemplified as margins and ROEs, interest rates and investors' sentiment, amongst other things. The right multiplier gets redefined depending on the times. When I started this blog around 15 years ago, something trading above 25x price earnings is considered so expensive that I would not touch with a ten foot pole. Then I found that there is nothing to buy. I started buying stocks above 25x price earnings. Now, it looks like my original rule based on prudence may come back in vogue again.

However it is possible to use screens and quant trading based on valuations to make money. There are many quant shops that have done it. They made good money. Renaissance Technologies have gone a few steps further to perfect the quant-based money making machine. It delivered annualized c.40% returns over 40 years! Even putting Warren Buffett in a box could not have generated those kinds of returns.

What's most important for me though is that Value Investing is a journey. As we read about interesting companies and learn about their businesses, we understand the world that we live in. I become a better person as I become a better investor. If I created an algorithm just to find value stocks and buy blindly, then where is the fun in all this? 

That said, investing is not for everyone. If you do not have the time, passion and gut to stomach painful losses, it is best just to buy the index. That is the next best thing to putting Buffett in a box.

Huat Ah!

Thoughts #29: Little Men Doing Big Things

Warning: this post contains spoilers for "The Crown", please do not read on if you are keen to watch without knowing story plots.

In Season Three of "The Crown", one of the episodes featured one of humankind's greatest achievement - the moon landing and how Prince Philip asked for a session with the astronauts. He wanted to know how they felt achieving what they had achieved only to find out that the astronauts just did what they were told, ticking off checklists, following procedures and just mundanely went and came back. He was very disappointed and then decided to renew his faith in religion.

But I think this episode taught us more about life than Prince Philip's read. The great achievements are sometimes, simply doing mundane things. The success of the moon landing mission was about:

1. Following procedures and checklists

2. Teamwork

3. Safety and contingencies on top of contingencies

4. Keep practicing until everything is prefect and there is no room for mistakes

In many ways, it is very similar to investing. Warren Buffett did all the mundane things for 30 years until people found out how tough it actually was. Then lo-and-behold, he achieved 20% return over that time frame and he just kept going and is still doing it today. That's the path to greatness.

"One small step for a man, but giant leap for mankind."

To me, greatness is about taking the small step every day, being disciplined, being consistent and being kind. In investing, it is about:

1. Reading

2. Debating with friends

3. Being patient and demanding the all-important margin of safety

4. Repeat the steps above

Once in a while, you will get the homerun stock and that's the alpha. Of course, sometimes, we can innovate our way to greatness (like Renaissance Technologies) and then we have to incorporate ways to put innovation into our processes.

Keep walking!

Lessons Learnt from 4 Biggest Losses - Part 2

This is a continuation of the previous post lessons learnt from my 4 Biggest Losses. To recap they are: 

1. Overseas Education, negative c.30%, operator of one of the largest international schools in Singapore. Student enrollment and revenue fell continuously for almost 10 years. It was exacerbated by the pandemic but even if the world normalizes, it is unclear if the stock will rebound. Management are owners and exemplified small cap risks.

2. SIA Engineering, negative c.20%, aircraft maintenance arm of our national carrier. I overpaid for this and am now suffering. It is unclear if I can breakeven. Oversizing the position also caused outsized absolute losses. This is the ultimate reminder for me not to overpay and to size my bets well.

3. Under Armor, negative c.70%, this was a stock that got into the portfolio because of a structured product went wrong. I sold puts and it got exercised. After holding the stock, it continued to drop and was hit by the pandemic. While there is a chance it can go up 100% or more from here (the 40x gap between Under Armor's and Nike's market cap seemed too big), I am not betting on it. This is another lesson about valuation - never overpay!

4. Cinema related small cap name, negative c.80%, this is a Chinese cinema technology provider that was badly hit by the pandemic. It is also another small cap name which comes with it small cap risks, like Overseas Education. The lesson is therefore not to invest in too many small caps and/or if we must, demand a much higher valuation discount.

In a nutshell, the lessons learnt here are: sizing, small cap risk, understanding unknown risks and over-valuation. I have discussed about sizing and hence we shall touch upon the rest today.

Small cap: I would refer to stocks trading at lower than USD2bn market cap and this was the case with #1 and #4 above. Small caps are usually run by owners, less experienced management teams and the business revenue also tend to be more volatile and as such deserves lower valuations. But we tend to forget that and ascribe just a 10-20% valuation discount to a similar business which is much bigger. 

Courtesy of CME Group

Looking at the four names, we can also argue whether Under Armor (market cap USD3.9bn) truly has an investment case. It is small cap looking through the eyes of Nike (market cap USD147bn) and Adidas (market cap USD28bn). One is much better off buying Nike or Adidas. Why bother with the third smallish player? The chart above says it all - it shows returns between large cap and small cap are not really different yet small cap investors take on a lot more risks. As such, the lesson here is that perhaps we should just avoid small caps. 

Understanding the risks: This brings us to the second lesson. We think we have uncovered everything. We have done our homework well. But it is actually very difficult, especially with small caps and inherently volatile industries. I think there are no good advice (to myself and readers) here, it takes years of experience to understand some of these industries and I urge everyone to always have robust discussions with other smart thinkers. 

The case-in-point here is the cinema technology provider that I bought which has gone down 80%. We all go to cinemas and we think we know the industry well. But with Netflix and streaming disrupting the industry, let alone all the faster changes in China, the writings were on the wall that risks are mounting. When the pandemic hits such small cap names, it was game over. 

It was a similar story with SIA Engineering. I thought I got the investment thesis right. There will be a lot more middle income tourists in the world, Changi will build T4 and T5 and SIA Engineering will benefit. I discussed with smart friends and even though they said it is not water-tight, I refused to listen. Lo-and-behold the pandemic came and turned everything upside down. Looking back, the airline industry is just inherently volatile and it doesn't pay to put too much money into one name and let alone related names (yes, I have other related names!).

Over-paying: There are multiple mistakes with SIA Engineering. Not only did I read the industry wrongly, I overpaid for it at more than 20x PER at the time of buying. I did the same with the cinema name (25-30x PER), believing in the growth story. I also overpaid for Under Armor at more than 30x PER. So much so for proclaiming to be a value investor. But this is also portfolio-manager-wanting-action error. 

Swing you bum! - Courtesy of MyTrade PH

Sometimes, we are compelled do to things even when there is nothing that we should do. From 2016-2020, the market was overvalued and as such most stocks are over-valued. I thought I was getting bargains for getting these high growth names at 25-30x PER. After all, Amazon and Tesla did so well trading at even higher valuations right? Well, unfortunately, I didn't have those but had these! The related lesson is that not all sexy stocks are the same. So perhaps it was best to avoid high valuations, esp after triangulation, they are still high. Again it's easier said than done. The inner voice is constantly shouting "Swing you bum!"

To sum up this last lesson:

1. When everything is expensive, it pays to do nothing.

2. Don't think your growth stock is Tesla.

3. Do not overpay. 

Huat ah!

Books #18: Security Analysis - Part 2

This is one of those long awaited sequel post as we took time to discuss T bills and dividend stocks given the interesting market movements in the recent months. As mentioned in the past post, Security Analysis is this seminal book which provides good lessons for any investors but it's a bit difficult to read. But we can still learn a few lessons from it.

As promised, let's discuss the financial shenanigans and bad management which happened then (i.e. c.1920s) and will still happen as long as humans are greedy. As the gurus put in, the financial statements that will uncover financial shenanigans are usually the balance sheet and the cashflow. The P&L statement is the most straightforward and since most laymen can read it, shrewd management will not screw that up. 

The balance sheet and the cashflow statements require more financial knowledge and it is the balance sheet that is used to hide the bad stuff. As such, the authors of Security Analysis warned against bloated balance sheets. By bloated, we are referring to account receivables, other assets, other liabilities and lines in the balance sheet that is used to hide the bad stuff. 

Most of the time, it is not easy to uncover because bad management has gone all out to hide stuff. I managed to find Enron's balance sheet in year 2000 online. Without hindsight, it is not easy to say things are wrong. The lines - "asset from price risk management activities" were where most of the bad was parked under, USD21bn worth of it, but management made so much effort to explain it so well that it's difficult to fault analysts for not being able to figure things out. 

Bad management will never admit that they are bad so sometimes, in the end, it really boils down to gut feel. I have written about this on various posts in the past: Billon Dollar Whale Fraud Detection Lessons and Theranos, the fraudulent startup. To jot down a few tell-tale signs:

1. Bloated balance sheet, what we have we talking about so far

2. Keep talking about importance of secrecy, trade secret and know-how, trademark protection to mask the lack of disclosure

3. Lack of governance

4. Past issues with the law, including ongoing litigation.

As a side note, companies with litigation risks should also be avoided because the cost is simply to hard to measure. We discussed BP and Bayer in the past on this infosite. Both names did not recover past their previous peaks after the litigation mess broke out. BP was the infamous Deepwater Horizon accident and Bayer was ensued in the supposedly cancer causing Roundup fertilizer class action lawsuits.

In the next and final post, we discus other lessons learnt from Security Analysis.

Huat Ah!

Lessons Learnt from 4 Biggest Losses - Part I

Most people brag about their investment wins. It is just human nature. We need to show we are better, so we get status, pride and get to lead and enjoy the benefits that get accrued to leadership in tribes. In prehistoric times, alpha males who can hunt, have muscles, can fight well tend to get the best food, the best shelter and the women and produce more offsprings and win the natural selection competition. 

As such, bragging is biological.

Alpha male primate can even get cookies!

Today, it is about money. You can be bald and fat but if you are a billionaire, then prestige and goodies and some women will come your way. So we brag about investment wins to showcase that. We buy cars, watches, houses and NFTs to display wealth. It is imperative, biologically and socially.  But what is truly and fundamentally beneficial is to learn from our losses. That is how we get better as investors. That is what this post and the next is about. 

As I look at my portfolio, there are now four big loss-making positions which I felt compelled to write about. The losses amount almost to six digits and you can imagine how it pains to write about them. But I believe there are many lessons learnt and I hope readers can really takeaway some of these so as not to repeat them. But trust me, it will be easier said than done! Here are the losers in no particular order:

1. Overseas Education, negative c.30%, I have blogged about this stock.

2. SIA Engineering, negative c.20%, pandemic victim, I have also briefly blogged about this.

3. Under Armor, negative c.70%, hit by overvaluation and the pandemic.

4. Cinema related small cap name, negative c.80%, looks like I will never recover my capital.

As I looked at the four painful names, I see similar mistakes and recurring lessons. While all four names were somewhat impacted by Covid-19, it was not just the pandemic. It was overpaying i.e. valuations, it was ignoring small cap risks and not understanding all the issues and most importantly, it was not getting the sizing right. Actually, sizing is so crucial so let's talk about that in more detail. 

What I got from Google wrt to sizing

For me, the sizing mistake relates to all four names but it had the biggest absolute damage in the first two. As such, despite the percentage loss was only 20-30%, the outsized impact on the absolute damage was big and this is the nutshell lesson about sizing:

We must size the bet such that we can still sleep if we lose 80% of the amount invested. We must also think in terms of percentage of the portfolio. In most professionally run portfolios, there are hard limits like 10% for one position but for personal accounts, we may want to size it lower depending on our own psychological construct and the amount of absolute loss we can bear.

Let's use so numbers to illustrate the above. First we must determine how much we can afford to lose in one position. I will arbitrary put that as S$40,000 which is close to half of Singapore's median household income. (Imagine when you need to tell your better half that you lost half a year's income on one stock. This should be good pyschological threshold ;) Looking at my actual losses, since a position can go down 80%, that means the maximum bet on one stock should be c.S$50,000. Of course that also depends on your portfolio. If this is more than 10% of your portfolio, then perhaps it should be smaller. 

There is also a minimum size for a position which relates to transaction costs. When I first started, round trip (buying and selling) transaction cost can cost minimally $100 which means that any position should be c.S$10,000 otherwise it doesn't make sense as it costs 1-2% every time you do some buying and selling. Well, the world has changed and transaction costs can go to zero with some brokers, but still, sometimes it's not and it pays to know what is the optimal minimal size for you.

Going back to my mistakes, if I sized the bets correctly, I could have reduce my absolute losses by half and the pain will also be halved and I would not have to endure the wrath of my better half! When you can size correctly, losses cannot hurt your portfolio and your family peace and you can sleep better at night. There is a lot more to talk about sizing which perhaps deserve its own post but let's stop here for today and we shall discuss in the next post:

1. Valuations 

2. Small cap issues

3. Unknown risks

There are two rules in investing. First rule: don't lose money. Second rule: don't forget the first rule.

Huat Ah!

2022 Australia Dividend Post - First ever!

As mentioned previously, Poems offer a good screener that is pretty sufficient for our purposes as value investors looking for good stock ideas. Today, we look at Australia, one of the most attractive and yet under-rated markets globally. Australia is the world's 18th largest economy by PPP at c.USD1.8trn which is roughly 6x larger than Singapore's. It took the record for the longest stretch of uninterrupted GDP growth in the developed world (26 years from 1991 to 2017) driven by good policies, growth of its natural resource producers and its strong financial sector. It is also a fertile hunting ground for good value and growth compounders even if we just look at large caps above USD10bn.

Criteria used for ASX's screening

I have almost always used the same criteria for screening (partly due to the limitation of the screen) and the above shows what is being used for today's Australia screen. The criteria are simply ROE at 10%, ROA at 5% and operating margins (OPM) at 10% and we generated a pretty interesting screen. I have not used traditional valuations such as PER and PBR because it will cut out interesting names such as CSL, Cochlear and Resmed etc. 

First section of 2022 ASX's screen

Valuation has evolved over the last 20 years and the way to value growth stocks might be to use Price to sales or PEG because traditional metric like PER and PBR does not work for the super growth companies we have seen like Tesla, Amazon. We also have a few of those in Australia shown on this first section. Aristocrat is one of the largest gaming machines maker and has compounded well over the last 20 years. Australia also has some of the most interesting healthcare names in the world. Cochlear is the company that invented ear implants and cure deafness. If Helen Keller was born in this era in Australia, she would be able to listen and speak. Then she may not become Helen Keller, but that's besides the point. Cochlear has the ability to ensure that no babies will be deaf since its founding, unfortunately government policies and restriction continue to inhibit this reality even though we already have the technology.

Second section of 2022 ASX's screen

The second section has James Hardie, a homebuilder that has compounded double digits for decades and Resmed, another world class healthcare company that cures sleep apnea. But what is worth highlighting today would be Woodside Petroleum. This is one of the pure LNG listed companies that has gone from strength to strength. With today's energy prices soaring, Woodside will continue to benefit. It should have been bought out by big majors but somehow it never happened. Now that is has grown to become a USD 60bn company, it might be too big to swallow, but we never know. Energy security will be ever more important. So glad I kept my global energy names all these years. 

As usual, here's the past lists:

2022 Dividend List

2021 Dividend List - HK!

2021 Dividend List

2020 Dividend List
2019 Dividend List
2018 Dividend List - Part 4
2018 Dividend List - Part 3
2018 Dividend List - Part 2
2018 Dividend List - Part 1
2017 Oct Dividend List - Part 2
2017 Oct Dividend List - Part 1

2017 Mar Dividend List

2016 Dividend List - Part 2

2016 Dividend List - Part 1

2015 Dividend List - Part 2

2015 Dividend List - Part 1

2014 Dividend List

2013 Dividend List - Part 2

2013 Dividend List - Part 1

2012 Dividend List

2011 Dividend List

2010 Dividend List

2009 Dividend List

Huat Ah!

Charts #46: Fed's tightening

We are finally getting back to textbook's environment of risk free rate at 3% after years of QE although it remains to be seen if this can last.

Since Singapore's monetary policy imports rate from the US, do keep buying Singapore T-bills while the interest is still good!

Singapore Treasury Bills from 1987-2022: Full Analysis

Singapore Treasury bills and bonds (T bills and bonds in short) continue to intrigue me as I studied the recent movements. Things started to get interesting around March 2022 when the US Fed started talking about hiking interest rates. The following table depicts our six month T bill movement - issue date and cut off yield, which is the yield we get when we subscribe, fortnite by fortnite (no gaming pun intended).

• 20 Jan 0.48%
• 3 Feb 0.69%
• 17 Feb 0.76%
• 3 Mar 0.78%
• 17 Mar 0.95%
• 31 Mar 1.22%
• 13 Apr 1.32%
• 27 Apr 1.56%
• 11 May 1.69%
• 26 May 1.8%
• 9 Jun 2.04%
• 23 Jun 2.36%
• 7 Jul 2.66%
• 21 Jul 2.93%
• 4 Aug 2.87%
• 18 Aug 2.98%
• 1 Sep 2.99%

As of this writing, 6 month T bill pays 2.99%pa (1.49% over six months). This is risk free. Well, as long as Singapore stands, which I think she should for the next six months. I hope some of you subscribed as previewed in this post c.1 month ago! MAS also issues 1 year T bills but only on a quarterly basis and the latest cut off yields are as follow:

• 13 Apr 2%
• 21 Jul 3.1%

Singapore has one the highest home ownership in the world and as such I believe most of us reading this should have a mortgage. Given that mortgage rate is lower 2.99% (about 1.6-2.1% today), we should all draw out maximum mortgage and put into T bills, effective making free money! To illustrate this, if you can borrow at 2% and invest in this, using the 21 Jul 1 year T bill rate of 3.1%, you make 1.1% risk free with no equity. Let's use concrete no.s, say we can borrow $1m from the bank, which is not your capital since you borrowed it, then you buy the 1 year T bill and make 3.1%. After one year, you get back $1.031m, pay the bank $1.02m and voila you just made $11,000 with no capital outlay! 

Okay, you say there is duration mismatch. The mortgage can last 10, 20, 30 years, we cannot guarantee T bills will be at 3.1% for 10, 20, 30 years. The latest issue of our 10 year Gahmen bond has a cut off yield at 2.71% (see below). So technically, it is still doable. In fact, this also works if you can borrow at any kind of facility at 1-2%pa (ie lower than the cut off yield).

Now that we know this wonderful trick, the next relevant question would naturally be - so how much did our Singapore T bills yield over time? Here's the shocking conclusion. Read on. 

The MAS publishes all the data on T bills and bonds since 1987. Anyone can download all the data via the link below. The average 6 month T bill cut off yield has been 2.07% since 1987. While it has been mostly uninteresting at below 1% over the last decade or so, no thanks to QE, it did hit 3.05% in 2015 (and now 2.99%). In Jun 2000, right after the dot-com crash, it was 4.74%!  

https://eservices.mas.gov.sg/statistics/fdanet/BondTreasuryBillsCMTBsAuctions.aspx

We spent 16 years discussing on this infosite about investing, taking risk and trying to make 8%pa. We all know someone, aunties or uncles, or even our own parents rushing to banks every few months to hunt for the highest fixed deposit rate and park money there to earn 1.x%pa. But since 1987, the Singapore government provided this ultimate instrument that can make on average 2%pa and in "good times" 3-4%pa. If you can borrow at 1+%pa which most of us could, we can make free money at infinity%pa. 

So, I am shutting down this infosite, thanks for reading folks! (Young Wonder Woman saying goodbye below)

Courtesy of Martin/Getty Images

Just kidding.

Charts #45: Food inflation

 This chart from The Economist says it all.

Also, we are running out of raw material for our food. Malaysia's export ban of fresh chicken to Singapore was quite worrisome a few months back (see below).

Well, fortunately, we didn't reach this stage. But chicken rice no longer cost $3 and I think we are on our way to find hawker chicken rice cost as much Chatterbox's chicken rice (when it first came out).

Invest in Risk Free Singapore T Bills!

Treasury bills or T bills are short term bonds issued by the government for periods of less than 1 year. For the longest time, they only yield basis points due to global quantitative easing (QE) which has drove global interest rates to zero. But in recent weeks, yield on Singapore’s T bills has shot up with the Federal Reserve raising interest rates and our T bills now yield close to 3%! 

In financial textbooks, we always talked about the risk free rate. This usually referred to the country's ten year bond yield which was usually at 3-4% in the good old days and this was the basis of all investments because risky assets cannot yield less than the risk free rate. During the great QE over the last 12-13 years, risk free rate went to zero and hence anything yielding 1-2% becomes interesting. This was especially so when disruptive companies promised to grow to the moon, increase their revenue 100x and vowed to change the world. Speculators rushed in where value investors feared to tread.  

Now that risk free rate is back to the textbook level of 3%, there is a lot more downside for such stocks with minuscule earnings trading at 50x PER (this translates to earnings yield of 2% which is lower than the risk free rate now and hence makes no sense for value investors). So, if you want to buy Tesla's stock at current 100x PER, maybe you should buy Singapore T bills instead.

The only way it is justifiable to buy Tesla based on the risk free yield vs Tesla's earnings yield comparison is that Tesla grows its earnings more than 10x from here which means that the future PER is closer to 10x (ie earnings yield of 10%). Even so, current share price has already factored in this scenario, so Tesla has to do more than that for its market cap to go to USD2trn (another 110% upside from its current USD900bn market cap). This is not to say that it cannot be done, just very difficult. Having said that, this valuation math also didn't work when Tesla was USD100bn going to USD1trn in market cap. So speculators in Tesla did make a lot of money so far!  

T bills is a good way to park any excess cash that you have because it comes back soon, in 6 to 12 months. In Singapore, you can only buy through the three banks: DBS, OCBC and UOB and no relationship manager will recommend this because they earn nothing. The process is also deliberately cumbersome to discourage buying but you just have to push on. You will be asked to choose either competitive or non-competitive bids and a huge warning would pop up to say that if you choose non-competitive, you might lose money - which could be true with negative interest rates, but not today.

The last bid closed on 21 July and the details are in the table above. If you chose the non-competitive bid, you would have gotten 100% allocation at 2.93%, which is the cut-off yield. Non-competitive bid is 40% of each issuance and unless the amount of non-competitive bid exceeds 40% which is c.SGD2bn, most likely than not, you will get 100% allocation. As for competitive bid, you will dictate the yield you want, but risk getting nothing if your bid is higher than the cut-off yield.

Note: this is 2.93% for 12 months so you only get half the money (ie 1.465%) over 6 months.

Looking at this 6 month T bill at almost 3%pa, some of you might have figured this out - the Singapore yield curve is inverted with 6 month T bill and also the two year bond at higher yields vs the 10 year Singapore bond at 2.7% as of this writing. While the academic theory is not clear, inverted yield curve usually means that a recession is coming. This means that things can get ugly, you may not have income or you need to help someone close who needs money, so you do not know when you need cash. As such, don’t put everything into this one basket. Well, recession aside, inflation is looming and money in the bank is losing value. So if we can claw back 3%, we should seize the day! The next T bill auction closes 4 Aug. See you at the ATM!

Huat Ah!

Thoughts #28: Price of a Human Being

While researching for another earlier post, I found this - someone tried to calculate the price of a human being by amalgamating what each and every organ can fetch in the black market. It's USD45m according to the Medical Futurist.

We can put price tags on everything but intrinsic value is not price. The value of a human being is up to us to create and is always far greater whatever price tag whoever wants to put on.

2022 SG Dividend List

We are at a good time to look at the annual dividend list again and as market cycle goes, we are back in the doldrums and therefore see a lot more names just in our beloved little red dot. The criteria have to be added so that we can down to a manageable list.

For the first time in a long while, I used the PE cap to limit the number of names. I put a cap at 20x meaning that any stock trading at more than 20x will be cut out. Surprisingly, I still get so many names that we need have two lists below (ranked by market cap). This year, we see a lot of property names and new names which, to be honest, I have not studied and would not be able to comment.

At the top of the market cap range, we start with Thai Beverage at close to SGD18bn market cap. I have owned this name for a while and I believe this is perhaps one of the rare compounders we can find on SGX. The numbers speak for themselves, double digits margins and double digit ROEs. I would argue that at 16x price earnings, this name is not expensive. Top Glove of Malaysia is another superb company but the numbers do look strange with ROE over 100% and dividend over 20%. That said, we know its strengths and kudos to the managers who brought the company to such global success over time. Alas, both of these strong names are not home grown Singapore companies. 

The second part of the list goes down the market cap and again, there are many unfamiliar names. But one familiar one did stand out - Bukit Sembawang. This is a well-known property play currently trading below book but with ROA at 10% and ROE at 13.5%. It also offers a decent dividend yield of 6.5%. On surface, it definitely looks like a good bargain. Perhaps someone will take them out like what happened with SPH and SPH Reit.

Next up, let's see if we can find more interesting names in the other markets!

As usual, here's the past lists:

2021 Dividend List - HK!

2021 Dividend List

2020 Dividend List
2019 Dividend List
2018 Dividend List - Part 4
2018 Dividend List - Part 3
2018 Dividend List - Part 2
2018 Dividend List - Part 1
2017 Oct Dividend List - Part 2
2017 Oct Dividend List - Part 1

2017 Mar Dividend List

2016 Dividend List - Part 2

2016 Dividend List - Part 1

2015 Dividend List - Part 2

2015 Dividend List - Part 1

2014 Dividend List

2013 Dividend List - Part 2

2013 Dividend List - Part 1

2012 Dividend List

2011 Dividend List

2010 Dividend List

2009 Dividend List

Huat Ah!

SPH and SPH Reit gone!

5 July 2022 Update: Apologies for the mis-information and the anxiety that this post might have caused. While SPH is not longer around, SPH Reit is not delisted and was last traded today at $0.90. Cuscaden's chain offer would only privatize the company if it managed to buy more than 90% of outstanding shares. Since the lowball offer ($0.9372) was unattractive, it only acquired c.62%.

I have kept this post for readers who may still be interested. Will be updating on this name in the weeks ahead now that we have an actual bid at $0.9372 (which means at 15-20% discount from this price, this name will have really good margin of safety and worth taking a very close look) and there should be further developments.

Today is the last day you can trade SPH Reit. This was a stock I owned since its IPO and it is sad that I have to sell it the way I did. It was definitely not trading at my intrinsic value but I have not choice, unfortunately. In Singapore, minority shareholders continue to suffer when stocks are taken private cheaply.

For the uninitiated, the saga began around March with SPH Reit's parentco SPH embroiled in a bidding war sparked between Keppel Corp and Cuscaden Peak. Cuscaden Peak is a vehicle owned by Singapore #1 shrewd businessman Ong Beng Seng who has strong connection with Temasek. The actual shareholding is a bit complicated and I have copied the description from Shentonwire (pic below): https://shentonwire.net/2022/06/02/cuscaden-peaks-chain-offer-for-sph-reit-turns-unconditional/

To cut the story short, Cuscaden won and SPH, Singapore Press Holdings, publisher of The Straits Times, was taken private last month, ending its life as a public blue chip company on the SGX. Some shareholders took umbrage that it was taken out at SGD2.40 while most long term investors would remember this stock should be valued closer to SGD4.00, which was where it traded for donkey years.

SPH Reit was then bidded to be taken private at $0.9372 as part of a chain offer. The latest NAV of the company was $0.92 so at face value, we cannot say it was taken out at a cheap price. But, considering that rent is skyrocketing in sunny Singapore as a result of global inflation and further considering the stock's IPO price was $1 back in 2013 and the current cap rate (4.5-6%) of its five properties are pretty, which means it is not expensive (see pic below), well, I guess we have to admit Ong Beng Seng got the better bargain.

It is very difficult to have win-win transactions in life. Some people live through their lives believing it doesn't exist. Someone has to win and the other party has to lose. While that is not true, it might be so in this case. We, as minority shareholders, did not get our fair exit, with the backdrop of the current worldly state of affairs. Firstly, inflation rate is spiking and we know that properties are one of the best asset classes to own during an inflationary environment. Secondly, we all know that rents in Singapore are going through the roof, so we should see property prices soaring. 

Lastly, Paragon, the iconic Orchard property, valued at SGD2.6bn, cap rate of 4.5% seemed to be at a discount. Pre-covid, it was valued closer to SGD2.8bn. Coincidentally, the market cap of SPH Reit is also at the takeover market cap of SGD2.6bn, which means that the rest of the properties come free. Of course that is simplistic because we did not take into the account of the debt. If we do that, then we come back to the NAV of $0.92 which, gut-feel wise, also seemed cheap. 

So, are minority shareholders being short-changed?

The short answer, I would say is yes. But as a long term shareholder though, I have also benefited from collecting the c.5% dividend over the last 9 years. So this meant that I have collected 45% of my capital or c.$0.40-$0.44 which meant that I still made a decent profit selling to Ong Beng Seng at $0.9372 considering the dividend gains. It is said that more than half of long term investing gains come from dividends and in this case, that is arguably true. 

Unfortunately, for recent buyers, they might be taken out at a cheap price and there is really no good way to fight back. Perhaps Singapore needs to see its share of activist investors who can fight for minority rights and stop corporate raiders from taking listed companies out cheaply.

For interested readers, you can also read about CK Tang

Books #18: Security Analysis - Part 1

I finally finished this seminal book after reading for almost three years. It was simply too dry and too painful so I used it mostly as a sleep catalyst: i.e. I read it when I cannot sleep. Usually, I don't get pass a couple of pages which was why it took three years. 

To be honest the book was marginally helpful. It was written so many years ago that a lot of the case studies are now unrelatable and the whole section on fixed income was simply too technical. I can understand why Benjamin Graham wrote The Intelligent investor. So that his philosophy can be more easily understood by to the layperson. It was definitely a better read.

That said, the book was seminal because it introduced all the original value investing concepts. It described the original thinking about stocks, it popularized valuation methodologies, how we should look at financial records for at least 7-10 years and how we should think about management of companies. 

The biggest revelation was that most of the lessons learnt about financial shenanigans that were applicable then were applicable now. Human nature doesn't change and that is always at the crux of investing. In the end, investing is the ultimate battle of wits against a million other chess players. Here's a quote by Seth Klarman that just rings truth all over:

The real secret to investing is that there is no secret to investing. Every important aspect of value investing has been made available to the public many times over, beginning in 1934 with the first edition of Security Analysis. That so many people fail to follow this timeless and almost foolproof approach enables those who adopt it to remain successful. The foibles of human nature that result in the mass pursuit of instant wealth and effortless gain seem certain to be with us forever. So long as people succumb to this aspect of their natures, value investing will remain, as it has been for 75 years, a sound and low risk approach to successful long-term investing. 

Next up, we look at some of the original valuation methodologies and financial shenanigans!

The Stock Market and the World in 2022-2023

2022 has become one of the most extraordinary year ever. The stock market reached all-time highs as we tallied 6m deaths (condolences to all the bereaved families) and Russia decided to start a war. A further 10m people were forced out of their homes as refugees, while people in sunny Singapore happily go for overseas tours. Some even decide to visit Ukraine to proselytize! (Dear Singaporeans, please don't do that...) It is a sad year and I am sorry to say, I actually only have more bad news.

Courtesy of kuanyewism.com and Google Image search

There are three key topics in 2022-2023 which we will discuss today and they are all bad:

1. Inflation

2. Bear market and valuations

3. Regime change

We have seen inflation in recent months and we are going to see more inflation like we have never seen before. This is a new experience for most of us and it is not pleasant. Essentially, our money in the bank is losing value but it is not visible. $100,000 doesn't actually become $90,0000 but effectively, it does because prices of things we want to buy are going up. The geo-political landscape is making things worse.

Wars are inflationary because everything that is used in the war does not create value add but takes away useful resources that can propel the economy. The Russian-Ukraine war in particular is causing commodities prices to skyrocket and disrupting global manufacturing supply chain especially in autos and semiconductors. But the repercussions can go far and wide. For example, prices of eggs in Singapore also skyrocketed (for reasons unclear to me now). All this happened while the West was trying tame 7-8% inflation, which has not happened for a long time. 

This is a big deal and this is bad. We have never experienced 7-8% inflation for more than 40 years. 2-3% inflation, yes and it is manageable. Our wage growth usually beats that and everyone is happy but when inflation is that high, lower income families may not see income growth covering cost inflation. For middle and upper income households, people are also seeing their luxury comfort slipping away. Some cannot change iPhone every year now because it's literally causing a kidney for a donor (see below).

Kidney donors are paid $2,000

Air ticket prices are rising, so that means less overseas travel even as we open up. Car and COE prices are also going up. In general, it will be just more expensive to live. Corporates are also not doing great. Wage inflation is all the rage now, banks and prominent startups in the US are forking out $100,000 to get fresh grads (It's also a talent war out there). Manufacturing companies see raw material cost increasing and those who can afford to pass it on do so, further exacerbating inflation, those who cannot take a hit to the margins. That is not good for share prices which brings us to the stock market discussion.

S&P500 as of May 2022

We are probably at the start of the bear market. The S&P500 peaked at 4,766 and has dropped 15% since then. The headwinds are so strong that it is hard to see how the market can still go up. We have valuations still at very high levels but topline growth is slowing. The biggest worry though, is not that. It is the US interest rate. For those who studied this either on this infosite or in school or in finance theory, you might remember that valuations are, by and large, determined by interest rates. In textbook language, this is the risk-free rate, which usually meant the 10 year government bond yield. 

The reason why 50x PER was ok for a while was that risk free rate was below 1%. So when that happened, equity risk premium was also compressed and investors were ok with 50x PER which is roughly 2% earnings yield. The alternative was to buy US Treasury bonds at 1%, or some boring companies' bonds at 3%, which wasn't that palatable. The cherry on the cake was, of course, 50x internet companies always put in some spectacular growth story, so investors just piled up to buy.

But now, the story has changed. If the 10 year US Treasury bond yield is going to 2.5%, you can no longer justify 50x PER, cherry or not. Calculating the earnings yield again, say the equity risk premium is also 2.5%, we are talking about 5% earnings yield for the market which translates to 20x PER. So in this new regime, a sexy growth stock could trade at 25-30x but 50x is definitely, a stretch. That is one key reason why Netflix and some of the hot stocks of past 5 years collapsed.

In the stock market, every 10-20 years, we see a regime change. We all heard about the Nifty Fifties and the bear market in the late 60s of the era past. In recent times, the late 1990s were led by the internet stocks. Then they collapsed and new leaders from Asia emerged. This was the boom of China that also drove the commodities supercycle. It collapsed with the GFC and we entered the current regime around 2011-2012. The first half was driven by recovery and false starts - remember Brexit and Grexit and the shadow banks in China? The second half was driven by the FANGs. We are now at the bloody ending in this horror movie (maybe The Shining and it's not going to end well). The FANGs have all declined and Netflix, the N here, fell 80% from its peak. This is a watershed moment.

Some of the other FANGs might do well, some might not, it is hard to say. It is probably prudent to trim some holdings if you have and wait for a better entry. In the broader sense, we are in another era now(改朝换代了), we are now in a bear market and cheap valuations, which has long been forgotten as the true compass for investors will now be ever more important. 2022-23 will be turbulent and we just have to wait and see how far this decline can take us before things get settled down.

So meanwhile, keep calm, keep liquidity, stay vigilant and stay safe!

Chart #44: Taking stock of COVID-19

Two and half years ago, we could never have seen this coming. Over 500m infected and 6m deaths. 

Google screenshot

The number of deaths annualized is 3x the no. of people dying from flu (300-600k according to WHO)

May the Force be with us all!

Ray Dalio's Power Principle

I have read many things written by Ray Dalio and his thought process simply never fails to amaze me. He has published a new book which I have not read but cannot wait to. He continues to think and write despite his age (72 and going strong). The following is something he wrote recently when commenting about the Russia-Ukraine conflict.

Having power is good because power will win over arguments, rules and laws all the time. When push comes to shove, those who have the power will either enforce their interpretation of the rules and laws or overturn them to get what they want. It is important to respect power because it is not smart to fight a war that will produce more pain than reward: it is preferable to negotiate the best settlement possible (that is unless one wants to be a martyr, which is usually for stupid ego reasons rather than for sensible strategic reasons). It is also important to use power wisely. Using power wisely does not mean forcing others to give you what you want ie bullying them. It is the recognition that generosity and compromise are powerful forces for producing win-win relationships, which are fabulously more rewarding that lose-lose relationships. In other words, it is often the case that using "hard power" is not ideal and that using "soft power" is preferable.

This paragraph is so powerful that I felt compelled to write it down here so that it will be part of my infosite and I hope to be able to practice what is written here as well as to be aware who in my circle is using hard power for stupid ego reasons. 

We have all seen bosses enforcing their interpretation of the rules and we have all seen colleagues using power for stupid ego reasons. Most often, we are powerless to stop them at that moment. But we should learn from their mistakes and perhaps make records to note them down such that one day, we might be able to turn the tables against them.

For example:

1. Discretely deciding to use company's budget for meals by using power over secretaries to setup the meal with counterparty and colleagues, bypassing higher authorities.

2. Forcing the deal team to kill the deal by re-interpreting the criteria for new investment ideas which fit a pre-created framework. The deal would have passed the criteria but the re-interpretation meant that it now could not. 

3. Using power to decide the fate of interns despite the verdict still being processed by the rest of the team and feeling happy about "playing god" over interns.

Yes, power abuses.

Back to Ray Dalio, I think the quote above list out all the important tenets about how we should use power. People who play with power are up to no good. They are political, egoistic and generally do not add value. So be careful with people who abuses power and also the companies that have these people. 

Here's a few likeable timeless quotes about power:

Experience have shown that even under the best forms of government, those entrusted with power have, in time, and by slow operations, perverted it into tyranny - Thomas Jefferson

With power comes the abuse of power. And where there are bosses, there are crazy bosses. It's nothing new. - Judd Rose

Those who have true power share it, while those who hunger power abuse it - Royalton Ambrose