Friday, December 30, 2022

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 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!

Friday, December 16, 2022

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.

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.


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 But mostly, stay vigilant and stay liquid.

Huat ah!

Thursday, December 01, 2022

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!