Book Review: Risk and the Smart Investor

‘Risk and the Smart Investor’ is written by David X Martin. Interestingly, the author is a former risk manager of Citibank. The book is available in NLB.

The book provides a risk management framework with anecdotes and a fictional story. It also contains some very practical advice on thinking and acting on risk. Overall, I find the book not bad.

Interesting Points:

a) Risk Management Framework:

i) Assessment

- Know where you are. Assess your current position.

- Know what you do not know. Grasp the limits of your knowledge. Question the assumptions.

ii) The Rules of the Game

- Find out your risk tolerance in relation to your goals

- Demand Transparency. Seek to fully understand the risk. Discuss the risks openly.

- Diversify

- Ensure that checks and balance are in place.

- Risk management never ends.

iii) Decision Making

- Consider all options. Always provide yourself with an exit strategy.

- Ensure that risk is managed in every step of the process

- Reputation is important. Check the reputation of everyone that you are doing business with.

- Incorporate time frames in your decision making. If your investment horizon is two years, your investing strategy should be different from the strategy for a horizon of twenty years.

iv) Re-evaluation

- Constantly review the outcomes. If you are uncertain, ask.

- Identify and learn from your mistakes.

b) Sell when the bank becomes lax on risk management process. The author sold his Citibank positions, when he learnt that Citi has discarded the use of a certain risk management program.

c) Successful risk management means that one needs not make any decision at the heat of the moment when lightning strikes.

d) For an example of risk management, Ford borrowed $23 billion before the financial crisis begun. Call it ‘defensive financing’. A year later, GM and Chrysler filed for bankruptcy and requested for government aid, while Ford remained the sole US car company standing.

Book Review: Billion-Dollar Lessons

Billion-Dollar Lessons, What you can learn from the most inexcusable Business Failures of the Last 25 years is written by Paul Carroll and Chunka Mui. The book is available at NLB.

I am a believer in learning from other people’s failures. Thus, I am happy to see this book available in NLB. The book has two portions. One is about the failure patterns and two is on how to avoid the same mistakes.

Generally, I find the first portion of the book interesting. The second portion will be a bit dry. Nonetheless, it should be a good read for investors, since the authors did have investors (besides the corporate managers) in their mind, when they wrote this book.

Interesting Points from the book:

a) These corporate failures often do not result from failure to execute. Neither are they due to luck or timing. Instead, most failures are due to bad strategies. In other words, the strategies are bound to fail from the start, unless the company change courses.

b) Half of these failures may be avoided if companies are more aware of the potential issues. Others, while not avoidable, can be made less impactful if companies have spotted the warning signals and progressed more carefully.

c) Failures are more likely, if companies adopted one of the following seven strategies:

d) Acquisition/Merger in the hope that synergies (or one plus one is more than two) occur. The obvious example is AOL Time Warner. Companies have one-in-three chance of reaching their aim of revenue increases as a result of synergy. Companies overpay. The synergy does not apply to the customers, as customers jump to competitors. The company’s internal systems may not mesh well with the other company’s. This means that the targeted cost-savings did not materialize.

e) Financial Engineering. Aggressive accounting but not fraud. For example, a company may offer a thirty-year loan for an asset with a lifespan of fifteen years. Needless to say, the company went under in the long run, as the company is taking on a long-term risk without sufficient compensating returns. As such strategies may show large gains in the short term, the company may unwittingly enter into a vicious cycle of applying more aggressive accounting and taking on more long-term risks.

f) Rollups. This strategy is to buy many local businesses and turning them into a regional or national large company. The roll-up strategy may often be too ambitious and thus resulting in diseconomies of scale (rather than economies of scale). Rollups may need an unsustainable fast rate of acquisitions to maintain the earnings growth. The company didn’t know that it has to choose between integration or decentralization. Companies may also not cater to the possibility of tough times (e.g. company takes up a lot of debt and find itself unable to pay the interest during troubled times.).

g) Staying the course, when there is a clear threat to the business. The notable example is Kodak. Company executives may not be able to appreciate or imagine the kind of threat that may wipe out their market. Companies may find that the economics may favor the old practices and not the new technology. For example, why should we forgo a 40% gross margin business and set up a 20% margin business? The favorable economics may blind them to the possibility that the new technology may wipe off their existing business. The company may also not consider all alternatives e.g. selling off the business or cut back existing business.

h) Adjacencies. That is to move into adjacent market. The move may be less driven by the great growth in the adjacent market. Rather, the move is more driven by problems in existing business. The company may not have the required expertise for the adjacent market or under-estimate the difficulties in the adjacent market. The company over-estimates the benefits of being able to cross-sell to consumers.

i) Riding the wrong technology. The decision was made without the context of constantly improving alternative technologies. Companies may find false security in having the presence of competitors, thinking that it implies the soundness of their strategy. The company does an improper market research, which provides biased analysis of the market potential. The company did not built in possibilities for amendments in the strategy, and thus limiting their option to stop the strategy.

j) Consolidation in a mature industry. The company is pursuing this strategy to gain cost-savings and pricing power as the number of competitor is reduced. The company may acquire companies with unexpected teething problems. This may lead to diseconomies of scale. Customers of the acquired company may not stay with the new, larger company. The company may not be considering all the options like allowing itself to be acquired instead.

k) Often, companies pursuing acquisition-like strategies may take on a lot of debt. These debt will endanger the survivability of the business during troubled times.

l) While Seagate benefits from the reduced competition when it acquires Maxtor, Western Digital gains more, as it need not pay for the acquisition.

m) Porter’s guide on declining business:

i. Does the industry offer profits while revenue declines?

ii. Can the business compete successfully for the demand?

Sell the business if (i) and (ii) are ‘no’.

Sell parts of the business and increase cashflow by reducing investments/maintenance/research if (i) is ‘yes’ and (ii) is ‘no’.

Seek niche markets with high returns and the markets that are declining at a slower pace if (i) is ‘no’ and (ii) is ‘yes’. Move aggressively into these niches and exit the rest of the market.

If (i) and (ii) are ‘yes’, establish cost leadership while avoiding price wars.

n) To minimize bad strategies, create incentives to learn from failure. Create devil’s advocate. Create mechanisms to allow employee’s feedback to float to the top. Hold second meetings to pore through the earlier decision made. This will mitigate the impact of making decisions while in a ‘hot’ (or less rational) state. Lastly, have independent devil’s advocate review.

Afterthoughts about recent selling decisions

I shall record some afterthoughts of my selling decisions in the last two months.

First, I dispose my Bright World stake at around 35 cents, which is much lower than the 50+ cents now. What interests me is not the 'gains' lost. Rather, my interest is piqued by the thought that my lack of knowledge (or failure to predict) the quick rise in stock price is the cause for the gains lost. As I do not know any story that may lead to further large gains in the price of Bright World, it becomes logical for me to sell Bright World and switch to other more attractive stocks.

In short, I find it interesting that the 'gains' lost is somewhat deserved, since I do not know any reasons for further large price increases in Bright World.

Second, I dispose my Valutronics stake, after reading in a book that entering into adjacent markets may not be profitable at times. Perhaps I become more risk-averse after reading the book. Or probably, my selling decision is due to the availability bias that I suffered after reading the book.

Availability bias is a bias that I suffered from time to time. For example, I tend to buy stocks after good earnings announcement, or after some positive research report. Thankfully, this bias has not caused great grief to me.

Finally, I have also disposed my Ziwo stake, since I dislike secondary listings in Taiwan. The Taiwan listing may not provide significant increase in Ziwo's share price, since I guess that stocks listed in SGX cannot be sold in Taiex. Furthermore, the secondary listing is a dilution of shareholder's stake in the company. I dislike dilution.

Well, it seems that my selling decisions can be emotional. Conversely, my buying decisions are also emotional (i.e. anticipation of large gains).

Thoughts about earlier thoughts

In an earlier post, I expressed my regrets about not buying Best World:

"I have another reason for selling Best World -- Q1 results are below my expectations. I did somewhat regret refusing to buy Best World back at higher price (compared to my selling price), as Best World seems fundamentally more solid relative to my other positions."

My regrets arose because I felt that Best World's problems will be resolved quickly. Probably by 3Q 2010, Best World will have shown substantial recovery in profits. Given Best World's historical profit records and the probable recovery in profits, I concluded that Best Word seemed fundamentally better relative to my other positions.

Now, after Best World reported losses for its 3Q 2010 results, my earlier thoughts look incorrect. Best World may not be recovering as fast as I have thought. Rather, Best World's problems may turn out to be less temporary than I thought. Its Indonesia sales may not recover as fast as I anticipated. In addition, Best World may have lost some momentum in revenue and profit growth. I guess that I will not venture into Best World until its P&L shows more definite signs of recovery.

In conclusion, I am lucky in this episode. And, this episode shows that my thinking may turn out to be too optimistic sometimes. Lastly, it also shows that buying recovery stocks is not a simple matter.

Portfolio as at end Sep 2010

This is a post on my portfolio holdings as at end Sept 2010.

My portfolio, as at end Jun 2010, contains the following stocks:
Bright World; China Gaoxian; Eratat; Heeton; Hiap Hoe

Roxy; Techcomp; Valutronics; Ziwo

In the quarter end Sept 2010, my portfolio has experienced some turnover, as I sold off the construction stocks and technology stocks; and bought more S-chips.

Sold: HockLianSeng (HLS), Ryobi, Viz branz, Broadway

I have sold off the construction stocks HLS and Ryobi, as I find myself unable to make proper value assessments since the construction revenues tend to be of uncertain nature.

Viz Branz is sold before the share split, as I think the upside may be limited. From the present price, I may be wrong in my earlier assessment.

Broadway was sold as I feel pretty uncertain about Seagate's HDD sales in the coming quarters. Hence, I decide to be more conservative and sell first. However, I am not sure if this decision may turn out to be a wise one.

Bought and Sold: Koh Brothers

Koh Brothers was bought as a property development play. However, as Hiap Hoe and Heeton seem to have a higher margin of safety compared to Koh Brothers, I have sold my stake in Koh Brothers later.

Bought: Ziwo, Hiap Hoe, Valutronics, Bright World

Ziwo and Valutronics were bought after their good results. In addition, I have further added to the Valutronics position after the recent OCBC report on the good reception to Valutronics air purifier in the US.

Bought Hiap Hoe after some forumer has noted that Hiap Hoe is valued at around 1/3 price to future book value. My own basic calculations concur with the forumer.

Bought Bright World as a play on China's continued increase in manufacturing capacity.

Added: Eratat

Added to the Eratat position, as the price of Eratat falls during July. In addition, I have also added to Eratat after reading some articles on Eratat.

Portfolio Composition

Heeton remains my largest holding in this quarter, while Eratat has become my second largest holding after its price rises. China Gaoxian is my third largest holding.

Conclusion

While STI has risen to a new high, my portfolio did not surpass its previous high in April. Presently, I am pretty neutral towards the market. In addition, I suspect that there may be further re-rating of the S-chips in the medium/long-term future.

Portfolio as at end Jun 2010

This is a post on my portfolio holdings as at end Jun 2010.

My portfolio, as at end Jun 2010, contains the following stocks:
Broadway;
China Gaoxian; China Eratat; Heeton;
HockLianSeng (HLS); Roxy; Ryobi; Techcomp;
Viz branz

In the last quarter, my portfolio has experienced larger turnover, as I pared my positions during the downturn in May 2010 and increased my positions in June.

Sold: Best World, China Zaino, Metro, Fujian Zhenyun (FJZY), UOA
Metro and Zaino was sold to raise cash to buy other stocks. FJZY was sold when it announces that its auditors cannot close the accounting books within the stipulated timeline. Best World and UOA were sold so as to increase cash position during the downturn in May.

I have another reason for selling Best World -- Q1 results are below my expectations. I did somewaht regret refusing to buy Best World back at higher price (compared to my selling price), as Best World seems fundamentally more solid relative to my other positions. Nonetheless, I will not be buying Best World now, since the right issue is over.

Bought and Sold: AVI-Tech, Frencken and Saizen
All the above stocks are pruchased before and sold during the May downturn. In addition, these stocks are sold due to its relatively lower margin of safety (from my viewpoint). Hence, on average, I have made minor losses in these positions.

Insofar, I have not regretted not buying Frencken back despite its recent price increases. I attribute this incident as bad luck, rather than a mistake.

Reduced: Boardway, Techcomp
Have reduced my positions in Boardway (slightly) and Techcomp (by more than half) during the May downturn.

Bought: China Gaoxian, China Eratat, HLS, Ryobi, Roxy
HLS and Ryobi are bought in anticipation of possible strong construction demand in the next few years. Roxy is bought as an undervalued asset play. Gaoxian and Eratat are bought due to their low PERs.

Increased: Heeton
Increased my position in Heeton as it seems more undervalued than I originally thought.

Conclusion
Presently I am fully invested, as the current market valuations seem attractive. However, I am not certain if a fully invested position is wise, since the chance of double dip occurrence is not negligible.

Book Review: The Holy Grail of Macroeconomics

The Holy Grail of MacroEconomics: Lessons From Japan's Great Recession, by Richard Koo, talks aboun the macroeconomic lessons that can be learnt from Japan Recession and applied to the US Great Depression.

Interesting Points:
1) Japan's Recession is due to balance sheet recession. A balance sheet recession is one whereby the private firms seek to pay down debt and stops investment. These scenario arises out from the huge debt owned by the firms due to the huge decline in asset prices and the large leverage the firms have used to purchased the assets at a high price during the bubble stage.

2) In a balance sheet recession, monetary policy become ineffective as firms will not borrow regardless how low the interest rate becomes.

3) Only expansionary fiscal policy is effective in balance sheet recession. Given the fall in investment, it is up to the government to increase spending and prop up the GDP.

4) If the government choose to cut its government spending (due to the wish to reduce fiscal debt), it may result in a more than proportionate fall in tax revenues and thus futher enlarge the fiscal deficit. This was what happened to Japan in 1997 and in 2001.

5) Balance sheet recession is hard-to-detect, as no firms would wish to disclose that its net assets are negative and that given sufficient time, its positve cashflow will pay down the debt and turn its net assets to postive.

6) The Great Depression was similarly a balance sheet recession. And, it was probably due to the large fiscal expenditure in the late 1930s that end the Great Depression. The Great Depression was not due to the lack of money supply as the author presents evidence showing lack of demand for loanable funds.

7) The author splits the macroeconomic situations into yin and yang. Yang is the normal scenario whereby firms are willing to borrow and monetary policy is effective. Yin is the scenario whereby firms refuse to borrow and thus monetary policies are not very effective. In the Yin situation, savings are a vice, deflation is likely and there are weak demand for funds. And, economic growth is likely to be below its potential. The US Great Depression, Japan's long-drawn recession and Germany's underperforming economy in the early 2000s belong to the yin situations.

8) The author also notes that monetary policy has become more difficult as the global economy becomes more integrated. Monetary policy effects may have unintended consequences. For example, when countries like New Zealand raises interest rates to dampen prices or investment, it may experience a countervailing effect as international investors attracted to the higher interest rates may place more money in New Zealand and thus making more money available for loan.

9) Finally, the author suggests different ways to deal with 4 different banking crisis:
a) Yang and ordinary crisis: quick NPL disposal and pursue accountability
b) Yang and systemic crisis: slow NPL disposal and fat spread
c) Yin and ordinary crisis: Normal NPL disposal and pursue accountabililty
d) Yin and systematic crisis: Slow NPL disposal and inject capital.

Book Review: Trade-Off

Trade-Off , by Kevin Maney, discuss his idea on the trade-off between high fidelity and high convenience. He defines fidelity as the total experience of something (e.g. concert).

Interesting points:

a) Fidelity vs convenience. Products/service must either position themselves as high fidelity or high convenience. Customers will always trade fidelity for convenience or convenience for fidelity (e.g. consider eating out at a further high-class restaurant or a near-by fast-food restaurant.)

b) Tech effect. Technology always improves both fidelity and convenience. In other words, if a product is of the highest convenience/fidelity today, technology will ensure that a higher convenience/fidelity will be created in future.

c) Fidelity belly. Product that is not of high/sufficient fidelity or convenience resides in the fidelity belly. An example is music CD.

d) Fidelity Mirage. Companies who choose to position their products as both high fidelity and high convenience will fail.

e) Super Fidelity / Super-convenience. This is the winning group of products that either has extreme fidelity or extreme convenience. An example is I-phone, a product with extremely high fidelity when it first comes out in the market.

f) Social dimension. The social aspects of a product will affect the fidelity of a product. For example, one is willing to pay a few dollars for a ringtone and not a few dollars for a digital song, because a ringtone performs the function of signalling your taste of music to others. A song, on the other hand, is only bought for own entertainment.

g) Wrecking-ball moments. Every now and then, there will be a very innovative product/service that drastically change the market landscape. For example, the entrance of digital camera drastically changes the camera market and marks the end of analog camera.

h) Different groups of consumers make different fidelity/convenience trade-offs. For example, techies may prefer technological advanced/cool products, while normal users will prefer easy-to-use products.

i) Starting on a small scale will allow a company to adjust its product to the tech effect, its competitors and the idelity/convenience trade-offs. Starting on a big scale may make it difficult to adjust their product positioning.

j) Finally, products that require long development time are gambles, because a better technology/product may emerge and overtake the developing product. New technologies/products always start in the fidelity belly, as companies need time to figure out how to make the technologies/products more suitable to customers' needs. The technologies/products that go out of the fidelity belly are the those that aim for either high convenience or high fidelity. Aiming at both convenience and fidelity is bad.

Investing and IQ

Success in investing doesn't correlate with I.Q. once you're above the level of 125. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.

-- Warren Buffett

Lots of people have used the above statement to illustrate that intelligence does not matter in investing. Well, they are wrong, if Buffet really meant IQ above 125.

If you refer to Wikipedia, an IQ of 125 is the 95th percentile of the population. A IQ above 125 will put you the top 5% of the population! Hence, if Buffett really meant IQ above 125, success in investing would correlate with intelligence. It is just that success in investing would not correlate with high intelligence.

Either Mr Buffett has gotten the IQ score wrong, or his definition of ordinary intelligence does not mean average intelligence. Well, to each his own.

P.S. Personally, I find it strange if intelligence does not matter in investing. To some extent, intelligence will matter in investing.

Memories of My Psychology

Today, I have thought about the behavioral traps that I have fallen during the last few years, which include a stock market boom and a stock market burst.

Trap #1: Anchoring

When the market was trending downwards, I thought that the market was quite undervalued, compared to the valuations seen in the earlier stock market boom. It turns out that for some stocks, what was cheap turned to be cheaper. And for other stocks, what was cheap turned to be very expensive, as their earnings also trend downwards. I have fallen into the trap of anchoring to the valuation seen during the stock market boom.

Trap #2: Over-confidence

Similarly, while I felt uncertain about the market in late 2007, I was confident that I would not suffer large losses if the stock market tanked. Needless to say, I was proven wrong. I have fallen into the trap of over-confidence. I find myself still susceptible to over-confidence every now and then.

Trap #3: Over-enthusiastic

Every now and then, I would find myself over-enthusiastic over some new stocks that I found to be undervalued. And, I will always place an buy order for the new stock. However, after a few days, when my mind becomes calmer and start to worry about the new stock, I would invariably find unexpected faults with the new stock. I have fallen into the trap of being too enthusiastic on new stocks and letting the over-enthusiasm taking control over my normal cautiousness.

Trap #4: Once bitten, twice shy.

Once one is bitten, it is always good that one learns from the bite. However, we may over-learn and develop an unnecessary phobia. I have been bitten by China textile stocks and hence I am staying miles away from them even though these China textile stocks seem cheap. Rationally, I should try to see if I should buy some. However, I have fallen into the trap and developed a phobia for China Textile stocks. It may take me a long time to recover from this phobia.

Portfolio as at end Mar 2010

This is a post on my portfolio holdings as at end Dec 2009.

My portfolio, as at end Dec 2009, contains the following stocks:
Best World
Broadway

China Zaino
Fujian Zhenyun (FZ) Plastics

Heeton
Metro
Techcomp
UOA

Viz Branz

Sold: Fabchem, Tuan Sing, Guocoleisure,

Fabchem is sold due to its results not meeting my expectations. Tuan Sing and Guocoleisure were sold not only for cash raising purpose but also due to my impatience with their stock movements. I wonder whether their share price will prove my impatience wrong a few years later.

Partial Sold: Metro and Fujian Zhenyun.

They were also partially sold not only for cash raising purpose but also due to my impatience with their stock movements.

Bought and Sold: Saizen

Bought Saizen on the premise that it is very undervalued. However, after further reading, I find that the under-valuation may not be much. I presume that it will start giving an annualised yield of 9-10% starting July and a 9-10% yield does not provide me with sufficient margin to safety after taking into account of the exchange rate risk. Also, I dislike the princely price at which Saizen is IPOed to Singapore investors. Hence, I decide to sell Saizen very soon after buying.

Added: Techcomp

I have increased my Techcomp holdings slightly after the release of its good results.

Bought: Best World, China Ziano, Viz Branz and Heeton.

Best World was bought after the release of an better than expected results. Unfortunately, the rapid price rise prevent me from acquiring more shares.

I have bought a small portion of Viz Branz due to insider purchase and the prospect of increased earnings. Given Viz's recovered profit margin (ratio), the economic recovery may lead to increased sales and hence increased profits/earnings.

I have also bought a small portion of Heeton as a property play, after the Westcomb report that states its RNAV at $1.15. However I am wary of Heeton's high debt to equity ratio and Westcomb's high RNAV value (I did not see how Westcomb compute the RNAV). Hence, I did not purchase a large stake.

China Zaino was bought as a long-term (3-4 years) play. The stake is not large. Ziano may suffer from lower-than-expected earnings in the next 2 years, as it pays the rents and renovation of the 500 new stores. I may be able to purchase a larger stake in future at lower price, if it reports lower earnings.

Others: UOA

While UOA may be a laggard in my portfolio, I have not reduced my UOA stake. This is because UOA has earnings visibility, as it has the insight to purchase large parcels of land in KL during 2005/6 which should enable it to develop one-two properties per year at least until 2015. Furthermore, UOA has very little debt. Hence, UOA has the stability (i.e. little debt), earnings visibility and the possibility of more upside if KL property price rises. I find myself agreeing with a Channelnewsasia Forumer who has described UOA as a possible 'Wheelock' if given sufficient time.

Turnover

My portfolio turnover has been rather high this quarter, as a result of my impatience and the purchase of four new stocks. Going forward, I may continue to have high portfolio turnover, if I can find more undervalued stocks. I will need to sell existing stocks to purchase the more undervalued stocks.

As the market rise further, it will harder for me to find more undervalued stocks.

Do not blindly follow Winners' Common Traits

Recently I've been reading the book "Hard Facts, Dangerous Half-Truths & Total Nonsense". The book has pointed out an very useful but easily overlooked idea.

That is, we tend to look for common traits in Winners and think that we can be winners if we follow these common traits too. But sadly, focusing on the common Winners' traits is insufficient.

One also has to compare these Winners' traits against the Average (group). If a trait can be found in the both Average and Winner, then this trait may not be differentiating factor between Winner and Average.

In addition, even if a trait is only present in the Winners, we have only observed a correlation. For people who know statistics, correlation does not imply causation. Similarly, a trait that is only found in Winners does not necessarily mean that such a trait is important in being a Winner.

How can we apply this idea? In my previous book review on "The Greatest Trade Ever", I have noted a lot of interesting points.

Now, these points are only gathered from the book which only focus on a few winners. We do not know whether these points are found in most winners. Neither do we know whether the average will have these points.

Hence, we should not blindly accept that having these points will definitely lead/help one to become a better investor. Who knows! Some of these points may turn out hindering you from becoming a great investor.

Now, there are many books that only focus on either the winners' traits or the losers' traits. Most of these books did not compare these traits against the average (or a sufficiently large average population). And you know what this means.

Book Review: The Greatest Trade Ever

The Greatest Trade Ever, by Gregory Zuckerman, is a very good and captivating read. In fact, I will recommend this book to any aspiring investor or trader.

Interesting points that I have learnt from the book:

1) Search for a sound idea. A good start may be 'Which market can I find mispricing?'

2) Look at the odds and probabilities. Little Downside, Huge Upside, and High Probability of occurence.
Structure your bets so that the downside is small.

3) Test and re-test your investment idea. Think contrary and see if your idea is correct.

4) Reverse track when you found that you are wrong

5) Be steadfast to your convictions, even if most peaple disagree.

6) It is extremmely difficult to get people to invest in your idea, when you are against the concensus. Most people will agree that betting against the concensus is a great profit-making method, but few will be able to put the method into practice.

7) Know when to strike (i.e. buy/short) is important. Sometimes, you may be hurt if you are too early.

8) People are psychologically inclined not to let the winners run.

9) Let the winners run, until winners overshoot.

10) Know what's acceptable to the investors

11) Keep the cards close to your chest.

12) Be less emotional.

13) Find new ideas relentlessly. New ideas are likely to come from new people, wide reading and new investment products

Difference between Investor and Journalist/Blogger

Ultimi Barbarorum has a great post on differentiating between investor and journalist/blogger:

http://ultimibarbarorum.com/2010/03/28/no-stock-recommendations-here-move-along/

It's a topic that I would not have thought about, and yet it is one that I should have thought about, especially since I am a avid reader of blogs and news.

And, I can't find myself re-reading and agreeing with this paragraph found in the post:

Much more than philosophy, investing should be a solitary activity. A group of people or colleagues you can check your ideas with is a good thing, but you must take responsibility for your investments yourself. You will receive conflicting advice, all of which will sound plausible but most of which is wrong. Consider that 98% of the people you encounter who claim to know what they are talking about simply don’t, and have as much chance of being right about these things as you do. You will find out about things you need to know much much later than the professionals. You will need to make most of your mistakes yourself, and it will take a long time and much capital to gain the context to be able to properly learn from them. Being in the market is the only way to get its benefits, the positive black swans that occur all the time and which rarely get written about, but know also that professionals as a rule consider retail investors to be the patsy in the market. In their minds they are the sheep, and the sheep get shorn. The greater level of sophistication you are likely to get out of watching Mad Money or subscribing to some websites may help, but it is a drop in the ocean compared to what you will need to succeed.

Book Review: How The Wise Decide

How the Wise Decide is authored by Byrn Z and Aaron S.

It is an interesting book as it profiles the good CEOs on how decision are made. Nevertheless, the book commit a common scientific error: the lack of control group.

Interesting points:

1) Go to the source. Check with the source of the raw information before making the decision.

- Make this approach routine.

- Cultivate long-lasting contacts with the sources

- Know which source is more important, and which source is less important

2) Meet people who tend to disagree or tend to state their independent stand.

- Get all people to say their viewpoint at least once.

- People may quarrel over their viewpoints. Do not allow people to carry any bad feelings beyond the meeting.

- Seek differing opinions. Different opinions help to light up the blind spots.

- Ask for formal commitment to the decision, if you think that the person is likely to disagree with the decision silently.

3) Do not be afraid of the risk behind the decision.

- Check thoroughly what is the risk.

- Reward people who have taken the intelligent risk.

- Experiment the risky idea (i.e. setting up a small scale operation to test the idea)

- Create a risk-tolerant culture.

4) Align the decision with the vision

- Create the correct vision

5) Listen with Purpose

- Ask the correct questions

- Question the assumptions

- Listen to the people who have to carry out the decision

6) Be Transparent

- Be consistent

- Over-emphasize the important decisions, so that people will place it on higher order and implement it.

- Do postmortems on the decisions taken.

Book Review : How We Decide

How We Decide is written by Jonah Lehrer, an editor/writer.

It is a good book, especially for people who wish to learn how to make better decisions.

I will attempt to list some interesting points that I read from the book. Read the book if you wish to make better decisions.

Some interesting points:

1) We have two parallel brains: the emotional brain and the rational brain.

2) The emotional brain makes decisions very fast but its accuracy depends on experience. Situations that require fast decisions would need the emotional brain. Emotional brain is better than rational brain for repetitive situations, as emotional brain recognizes patterns faster than the rational brain.

3) The rational brain is useful in new situations or situations where time is not a factor.

4) Also, always run a rational check on emotional decisions if time permits. This will help to reduce errors.

5) To make the decisions more accurate, one has to spend time to evaluate the decisions, aka spot mistakes in previous decisions.

6) Don't forget that we have blind spots.

7) It will be good to list down the knowns and the unknowns before coming to the decision.

8) Whenever you make a decision, be aware of the type of decision you are making and the kind of thought process it requires.

Secret to Investing Success!?

It's interesting to see a thread on secrets to investing success in Next Insight. And in that thread, you'll see people advocating value investing, quoting Buffet, asking for high dividend stocks etc.

It's interesting because I disagree.

I disagree because I feel that there is no one secret to investing success.

I think that each starting investor has to find their own path, and that path will be their own secret to investment success.

First, the investor should find the suitable investment philosophy i.e. whether technical or fundamentals, short-term or long-term, diversified or concentrated etc. A suitable investment philosophy should fit his own psychological traits.

Next, the investor has to consistently refine or expand his strategy. For a value investor, it may be starting with low P/E stocks and then moving to low P/B stocks. Or starting with quantitative ratios and moving on to qualitative measures.

In between, the investor also has to learn his own psychological traits, and either change the investment methods to fit his psyche or change his psyche to fit the investment methods. Personally, I think the former is easier, since Jesse Livermore chose the latter and died a pauper.

And when does an investor know that this investing philosophy is suitable? When the investor feels that he needs not search for another philosophy.

And when does an investor know that this investing strategy is right for him? Through his experiences and investing results over a full market cycle.

And what is one essential trait that most successful investors share? Obsession. He must be, to some extent, obsessed about investing. I do not mean about being crazy about the money. I mean being crazy about the philosophy, the strategy. For example, if you read Buffett's biography, when Buffett and Gates meet each other, you will know that they will talk about what makes a successful business. They do not talk about money.

For more information on finding an investing path, you may find Mark Tier's book "The Winning Investment Habits of Warren Buffett & George Soros" extremely useful.

And what if one does not wish to pay the price to become a successful investor. There are a few alternatives here. One, buy index funds or exchange-traded fund on stock indices. Two, find a good financial advisor. Three, earn very high pay.

Ex-post answers

Here, I shall provide answers to two issues I have raised two years ago.

First, in my Dec 2007 book review, I have asked given the similarity of subprime crisis to the 1907 bank crisis, would the subprime crisis lead to liquidity crisis?

The answer, as we all know, is yes. And to add, I do not know the answer at Dec 2007, and I did not expect that the subprime crisis will lead to a global economic contraction.

I suppose that the lesson here is that one should not be fully invested if one is suspecting an incoming crisis.

Next, in my Mar 2008 post, I have mentioned about investing the first 20K of CPFOA in 3 possible stocks: Orchard Parade, Singapore Land and Hotel Grand Central

And, I have done what I have written at that time. I have bought Orchard Parade at around $1.05 using CPFOA funds. Well, if you look at the price Orchard Parade on Friday, you can derive my returns (around 13%).

This return is higher than CPFOA two years' return. However, on hindsight, I have invested at the worst possible time, such that I have to endured a capital loss of 50% during this two years. (This incident is an example of higher returns in exchange for higher risks)

Even though I have to suffer the temporary capital loss of 50%, I always felt that I will beat CPFOA returns in the long run (i.e. 5-10 years). To me, as I have bought Orchard Parade at 0.5 P/B, my margin of safety was a pretty high margin of around 50%, assuming that fair value was at 1x book.

While it may be debatable whether my investment in Orchard Parade in 2008 is correct in process, I believe that I am likely to make the same investment if the same circumstances happen in future.

This is because I do not know the future (or whether there will be a severe stock market contraction), and given the margin of safety, this investment is most likely to beat CPFOA in 5 - 10 years' time.

PS This post is written for personal preference only.

Portfolio as at end Dec 2009

This is a post on my portfolio holdings as at end Dec 2009.

My portfolio, as at end Dec 2009, contains the following stocks:

Broadway
Fabchem
Fujian Zhenyun (FZ) Plastics
Guocoleisure
Metro
Techcomp
Tuan Sing
UOA

Sold: China Eratat, Valutronics, UOA (sell a little proportion of my total holdings)

China Eratat is sold to realise the declining profit, as price is falling from a mini-peak. In addition, China Eratat is bought as a short-term play in the first place.

Valutronics and UOA are sold to raise cash so as to buy other stocks.

Bought and sold: Hongfok

Bought Hong Fok. After some evaluation, I sold Hong Fok to raise cash for other stock (i.e. Tuan Sing and Broadway)

Bought: Tuan Sing, Broadway, Guocoleisure, Techcomp, Metro

Tuan Sing is bought at a P/NTA of around 0.5, with the additional consideration that its debt will be significantly reduced after its Katong mall sale.

Broadway is bought at slightly lower price when I sold it earlier. Broadway is cheap at 4.x PER and it is in a near-oligopoly industry. There isn't many HDD makers (e.g. Seagate, Hitachi etc) left. Broadway owns Compart which is a big supplier of HDD parts. Hence, this may be a low-risk stock with some upside. The upside, however, is capped if Broadway is unable to increase earnings significantly in 2010/11.

Guocoleisure is bought at slightly lower price when I sold it earlier. I just buy back a tiny proportion of what I own earlier, so as to diversify risk. In addition, I think that Guocoleisure is another low risk stock (with low price-book ratio) that has capped upside.

Bought more of Techcomp. This purchase increase my stake in the bet that Techcomp will recover from the 2008's falling yen incident, and that 2009 2H will be much better than 2007 2H. It is a risky and potentially more rewarding idea.

Bought more of Meto. Metro is another low risk stock (with low price-book ratio) with capped upside.

Returns. Using Excel's IRR (internal rate of return), my average annual returns is 20.5% from 2005-9. The real return should be somewhat higher, as IRR assumes that I puts into the new cash in my portfolio on 1 Jan every year and this is not the case.

IRR also does not display the volatility of portfolio returns. My returns are very volatile:
2007: +46%
2008: -70%
2009: +147%

Nonetheless, my portfolio returns seems to be better than STI. This means that I should probablly continue to practice self-investing (a self-flattering statement).

My returns for 2010 is likely to be lower. And hopefully my future portfolio returns will be much less volatile.