Growth Investing - part 1

Read an interesting article by David Gardner from The Motley Fools: "The Highest Possible Returns. Period." He is one of those investors that like to go after high growth companies. For those who like young and exciting companies, he is one to refer to. Below are an excerpt from the article about his experience of coming across the then so-called-overvalued AOL (America Online):
"In 1992, I was 26 and already spending my fair share of time online. For several years, I'd been a satisfied customer of America Online. Although I liked the service, I decided not to buy shares of the company at the initial public offering that year. I thought I'd wait a while. Idiot.
I kicked myself for two years while the stock quadrupled (means, up by 4 times). In the spring of '94, I followed my instincts and became an AOL shareholder -- in spite of an article in a major financial publication that declared AOL grossly overvalued and predicted that the stock would decline by 35%. (these sort of pessimism sound familiar?)
The following year, the stock dropped 25% or more three times. (oh wow!! it did fall!!) And then in 1996, shares absorbed a drop of 65%! (oh my God! jump ship! jump ship! cut lose! cut lose!) Despite these setbacks, the company went on to wreak havoc on the business and journalistic establishments en route to putting up some of the best returns available during a decade of great investment returns. Even with all of the temporary downturns, and even though the stock is today down from its all-time high, my initial investment has still increased about 37 times overall -- $10,000 in stock at that time would now be worth $372,156, which amounts to an annualized return of 31%." (er...)

Seriously, we might have heard of these kind of stories many times. Some examples from our own soil include Public Bank, IOI Corp, Genting and etc, have all gone through those kind of growth phase and returned as much. Congratulations to those who have hold on to them for such long time! I personally knew a few who does. Who said investing for long term is boring? I have some painful experiences myself (I kicked myself too hard!). Some close friends of mine can proved that I am not lying. One example is when Parkson was listed in China 2 years back. I remember the IPO price was around HK9 something, when I-Capital started to recommend this stock. Although actual feedbacks from friends in China are that the Parkson Stores there are doing very well, I hesitated because I thought the price is slightly high. So I bought the holding company Lion Diversified instead (Thank you, I-Captial!) Well then, fast forward to today, how much do you think Parkson Retail is selling? Reminder, HK9 just 2 years ago. As at last friday, it hit an intraday high of HK85! (Although the mother did almost as well, I swear I have sold all my holdings earlier. So, I haven't made all the gains myself. Told you who did. I-Capital! They are still holding big chunks of its shares.)

Anyway, back to the article, David Gardner did point out 6 signs of identifying these sort of Rule Breakers (as he called these high growth market leaders):

1) Top dog and first mover in an important, emerging industry.
2) Sustainable advantage gained through business momentum, patent protection, visionary leadership, or inept competitors.
3) Strong past price appreciation.
4) Good management and smart backing.
5) Strong consumer appeal.
6) You must find documented proof that it is overvalued according to the financial media.

More details discussion on these 6 signs later.

The Black Monday Deja Vu

The Dow Jones stumbled by 366 points or around 2.6% on last Friday, 19th October. People tried to find the causes and among them: concerns on crude oil prices at all time high, which in turn will eat into corporate profits for the months to come; concerns on the aftermath of the Sub-prime melt-down and its impact that can pull down earnings of big financial institutions; super high inflation and etc. (Remember when I said human fear of the unknown? People have to find excuses to get rid of that fear). But what I find most interesting is the saying that it was the effect of the 20th Anniversary of the Black Monday that happened on the 19th October 1987. Some history: on that day, the Dow Jones was down by 22.61% in a single day, wiping USD 500 Billion off the market back then. How big is 500 Billion? To give a simple comparison, as at last count on end June 07, the Bursa Malaysia has a total market capitalisation of USD387 billion (should be higher by now), that means, the USD500 Billion lost during that Black Monday alone could have bought up ALL the listed company on Bursa Malaysia today, with a fat 20+% premium. Mind you, that was way back when the Dow Jones was still at 1739 points (compared to around 14,000 points today), which means those super huge corporations like Exxon Mobil, Citibank, McDonalds and etc were still at their teenage years. Today, Exxon Mobil alone have a market capitalization of over USD 500 Billion. Sorry, got swayed off topic. This post isn't suppose to whine about how tiny our market is. Anyway, that Black Monday was the single largest decline in the history of the American stock market in percentage term.

So, what caused the Black Monday back then? There were a few potential causes, among them: overvaluation, illiquidity and market psychology. Sounds familiar? Yup, we tend to hear these terms almost every other day for the last few months now. Anything new? well, the credits should go to the market commentators and economy experts for their creativity. They start to think of something new like the oil crisis, carry trade, trade deficits, external debts, weakening of the Dollars and etc as excuses. These have already been there for like many months now, what happened since then? The market continues to rise into unseen territory. And today, you see the Black Monday thingy. *applause*

Anyway, I didn't say that the market will not Correct or the year-long Bull-Market-party won't end. It will, sooner or later. It's the economical cycle we all have to go through every few years. So? do we go out and sell everything we have? Before that, please have a look at the following graph:

This is a 100 years record of the Dow Jones Industrial Average. Where the arrows are pointing are some major events in the history of the US stock market. The first one to the left, around year 1914, it was when the First World War broke out and the market have to be closed for four months. The second one at around 1929, was the beginning of the Great Depression, where the American stock market went into a slump that it never recovered until almost 20+ years later, this was also regarded as the longest bear market in known history. The third one around year 1987 was the Black Monday mentioned above. And the last one, which only happened not too long ago, was the burst of the IT bubble, which brought the whole market down. Have you noticed the panics that happened after the September 11 terrorist attack? The Iraq war? The murder of JFK? You might need a microscope to find those.

So, what's the implication of all these histories? Would you noticed all those major events or market crashes (except for the last one) if I didn't point them out? I doubt so. Why? because they are so insignificant. When we look back into history, these setbacks are like nothing. The market will continue to grow, people will learn new ways to do business more efficiently and more profitably (like using computer and internet), and find new ways to solve problems (like using Biodiesel to substitute oil) and etc. Most importantly, good companies will continue to grow and bring more profits to shareholders, in turn, increasing their market value. Remember when I mentioned above that the total market value lost during the biggest one day stock market crash in history is only equivalent to the market value of one Exxon Mobil today? That's the nature of human beings. We grow. We evolve.

So, does it matters if we see another Black Monday or Bloody Red Tuesday next week? Yes, of course. You might want to see if there are bargain discounts. By the way, I haven't mentioned that the largest one day percentage gain of the Dow Jones, actually happened just 2 days after the Black Monday, have I? Don't worry about the market crash. We can't predict them anyway.

Conclusions. I know I have mentioned this far too many times, oh well, no harm mentioning it again then. There are only 2 important things that matters when it comes to long term value investing: THE RIGHT COMPANY TO BUY and THE RIGHT PRICE TO PAY.

You've got to find what you love - Steve Jobs

Below is a link to the commencement speech given by Steve Jobs 2 years back in Stanford. Steve Jobs is the CEO of Apple Computer, founder of Pixar Animation Studio and is currently on the Board of a few big listed companies in the US. He is worth around USD5.5 billion as of this writing. Many of you might have heard it or even read it, but I am posting here again for those who haven't and for my future reference. It is a wonderful piece of speech and should be read by those who are hesitating with what to do with their life now. Really, it will be a 10 minutes very well spent:

http://news-service.stanford.edu/news/2005/june15/jobs-061505.html

Mistake 3 - The most unlucky stock picker

Ever had any of the following experiences?

Found a stock that meet all the criterias you were looking for, nice valuation, good business prospects and etc.. but, you were not sure when to call your broker to make the Buy order... you waited and waited for the "feeling" to call on you as you watched the stock kept its upward push, slow and steady.. and one fine morning, you suddenly saw one hell of a good news about this particular stock in the newspaper and the projections is that its profit is going to double (for whatever reasons..) in the next financial year (or whatever good news you can imagine).. "oh my god.. this thing is gonna shoot up today.. I am gonna miss the boat!!" you told yourself.. as the market opened, the stock suddenly gaped up for like 5% and it never look back since then.. you can wait no more and you know that you just NEED to call the broker RIGHT AWAY!! ...

"Hey, Tom, buy me 5 lots of SOB Holding Limited, whatever price it is selling, quick quick, don't let it runs away.." (you might even called the wrong name, whatever, who cares!!) all you know is that you need to buy that SOB or else you will be kicking yourself if it hits limit up.. as you waited for ages to get the order confirmation from your broker, your mind were thinking, "what the hell!! does he even know how to use a computer? My grandma could have keyed in the order faster than he does! if he don't get it done in the next minute, I swear I am going to change a remisier"... "bloody hell, is he done yet?"... "ok, Done!!" as Tom (or Harry, whatever) confirmed the execution of the order, you heaved s sigh of relief *phew*, "oh yeah! I am on the boat now.. c'mon, let's ride, show papa what you can do"..

eh? suddenly, you saw the buying discontinued, and all the sell orders started to pile up.. 1 cents lower, 2 cents lower.. 5 cents lower.. and as the buy orders disappeared, the fall started to gather momentum.. 10 cents lower, 15 cents, and in just a few minutes, 20 cents off the peak which you've just bought.. "what the hell?".. and without long, it was back to where it closed yesterday, and stayed there for the whole day.. you were shocked, you were disappointed.. but yet, things didn't improve over the next few days.. 1 cent up, 2 cents down, 3 cents up, 4 cents down.. as it went side-ways for the next few weeks, you suddenly let your anger took control of you and you've decided to cut loses and sold it off at whatever price it was.. you thought that's the end of the story eh? heh.. the nice part had just begun.. the stock started to climb... (I leave the rest for your imagination..)

Does this all or any part of it sounds familiar? And you thought that you are the most unlucky stock picker in the world? and you are born to be a loser?

Don't be. Honestly, I have been through that too.. made some hasty decision when my emotions took control of me. I've learnt some painful lessons, luckily I didn't have much capital to invest in back then, or else I would have hurt myself even worse. And, I realised there are many others who have had the similar experiences.

What triggered me to write out this blog? I read something interesting from a book called "Hedgehogging", written by Barton Biggs (finally, something else away from Warren Buffett eh?). The book is about his life being a fund manager, worth your time if you are thinking of becoming one.. Anyway, since you've been reading until here, I don't mind to share with you here.. below is an ad, printed in the "Bawl Street Journal" in 1980 which Biggs had shared in the book, and it goes like this:

PROFIT FROM OUR MISTAKES!!
Investing money is a zero sum game. For every winner, there is a loser. We've been losers! If you had sold what we bought, and if you had bought what we sold, you would be rich!

In 1968, we went heavily into stocks and by 1974, we're down almost 50%! In 1973-1975, we invested over $150 million in real estate, and not just any real estate -- we concentrated in Atlanta; We lost our ass! In 1978, we hired a bright theoretical consultant from Harvard who had a "yield tilt" model which told us that energy stocks were overpriced and auto stocks cheap. This seemed to make sense, so we sold Texas Oil and Gas at $8 and bought General Motors at $60. We lost 33% of our money. If you had gone the other way, you'd be up 430%!
All investors make some bad decisions. But we make a lot -- and with consistency. Now for the first time, you can profit from our mistakes. For $10,000 a year, you can receive copies of the minutes of our quarterly Finance Committee meetings in which we establish our investment philosophy. For an additional $25,000 a year, we will give you a monthly update over the telephone of our current market outlook. And for only $100,000 a year you will receive copies of our trade confirmations so you will know on a daily basis what not to do. It's part of our Contrarian Theory.
This may seem like a very unusual offer, but look at it this way: we can't seem to get on the right side of markets, so if we let you pay to profit from our mistakes, we will have finally found a way to profit from our mistakes as well.
Subscribe now. Time is limited. We are about to undertake a major restructuring of the portfolio, and we'd hate to see you get caught going the SAME way.

- THE FORD FOUNDATION

Feel better? See, I am (or, we are) not alone. Even the professionals and experts did have their bad times. So? should we blame it on luck? or should we just give up investing totally? Well, I have chosen my path long ago. I have chosen to stick to Value Investing. If there are already so many successful investors out there, there must be a way that works! Learn from them! Learn from Mistakes! Have a little Faith and move on!

Mistake 2: The Wrong Management Team

(With addendum in red)

One of the costly mistakes I have made during my not-so-long investing career is to entrust my hard earned money onto companies with not-so-good management team.

There are numerous examples that happened on our own soil here in Malaysia recently that proved that I am not the only one that have to learn from this mistake. Transmile, Megan Media, Wimems, F-Tec.. just to name a few, have seen their share prices hammered badly due to questionings by SC on suspicions of wrong-doings within the companies. I am pretty sure there are still many similar cases out there, and it's going to be up to us as an investor, to be extra cautious when picking stocks.

But the questions is, how do we know if the company is managed by trustworthy people? Here are some of my humble thoughts:

a) Most importantly, refer to the financial statements and compare them across a few years. Good management should exhibit capability to grow revenue while cutting down costs, widening the profit margin, continually generating high returns on capitals over the years and etc. All in all, making more money for the shareholders. For the sake of this topic, let's just keep to these simple stuff.

b) Another more entertaining way compared to reading those boring numbers is to read the Chairman and MD's statements in the annual reports. Trust me, these statements tell alot about the person in charge. Ever read/heard about the world famous "Letter to Shareholders" written by Warren Buffett himself in the annual report of Berkshire Hathaway? In these letters, Buffett explains the performance of the company for the year, and some major decisions made by himself and some of his thoughts that he wanted to share with his shareholders (or usually referred to as Partners). These letters are treated like Bible by the investment community and there are people who try really hard to study the philosophies and principles of the legendary investor, as well as to find clues about his next move from these letters.

Besides, I especially like to read those statements by Chairman where the companies are in the red. It is usually interesting to see how they tried to cover the holes and give unreasonable excuses to us shareholders (when he thinks that we are suckers). These are usually followed by some very optimistic projections about the future and promising ways to improve the condition. Hmm.. if they already know what need to be done, why haven't they start doing them? Worse, sometimes I feel like they didn't even write those statements themselves..

c) Take a look at the Directors' Salaries and Remuneration package. I prefer those below 5% relative to the Net Profit. You can have your own threshold, depends on your generosity.

d) Read the newspaper and Internet. They might give some clues on what the person in charge is working on at the moment, and sometimes, their characters. I've heard jokes (or real cases, I don't know) where some "people" fly first class to meet their girl friends in London, bought a penthouse for them as "investment in strategic properties" with the companies' fund, buy a multi million dollars paintings as "furniture and fittings" for the office and etc, all in the company's expenses. I didn't say these are all wrong, my point is: Rich people have different hobbies from us ordinary people... Well, some of them might be really beneficial to the shareholders, hell knows. Why bother with these stuff? Mr Buffett once said something like: if the CEO of the company is someone you are comfortable to marry your daughter to, then it is the right business to invest in (well, of course with the assumption you don't hate your daughter). So, don't you want to know a little more about your potential son-in-law?

e) Lastly, this might need you to put in some effort to master the skill. Ever heard of a type of Asian fortune telling skill called "Face reading"? This is defined in Wikipedia as ".. the interpretation of facial features of the nose, eyes, mouth and other criteria within one's face and the conversion of those criteria into predictions for the future... usually covers one phase of the client's life, and reveals the type of luck associated with a certain age range". Once you master the skill, go look at all the pictures/portraits of the directors in the annual reports. Believe it or not, it might even be more accurate and effective than all those other methods mentioned above.

(Seriously, ignore the last one, I am merely writing to make up the numbers)

Addendum on 10/10/07: One big mistake I have made was that I overlooked the impact of management can have on a business/stock. I used to pick "undervalued" stocks by looking only at the numbers in the financial statements and totally ignored the intergrity of the management at the helm. From my experience, there are more homework need to be done. No matter how good the business prospect is; or how dominating it is in its market; or how "cheaply valued" the stock is, as long as you have someone stupid/dishonest/incapable/selfish/greedy (or whatever bad characteristics you can think of) up there, you won't see the stock performing well in long term. Period.

Arsene Wenger and his investments

I have been a fan of the Arsenal football club since Arsene Wenger took over the helm as its manager. Before him, under George Graham, Arsenal was playing a more defensive game. After Mr Wenger arrived at the club around 10 years ago, he changed their games into faster pace, attacking minded, more direct passing. And in my opinion, they have been playing the most attractive football in the English Premier League since he took over. Until today, Arsenal still holds the longest unbeaten records in the League. Unlike other rich clubs like Manchester United, Chelsea, Liverpool, Real Madrid, Barcelona, Bayern Munich, AC Milan and etc, who prefer to splash out some crazy monies to buy super star players, and in turn, hoping to buy successes and trophies, Mr Wenger prefers to buy young players with potential and develop them into world class players. These players include Thierry Henry, Anelka, Emmanuel Petit, Patrick Vieira, Cesr Fabregas, van Persie and etc. The prices which he paid for them were so much cheaper compared to what they've achieved for the club. (No offence to those fans of other clubs, but please do not argue on the facts above) (For those who do not follow English soccer, and want to start following a team, watch Arsenal!!)

The 3 pictures above shows: Warren Buffett at the top, Arsene Wenger in the middle and Tan Teng Boo (from Icapital, also a very good investor, refer to my other blog at here for more of his details) at the bottom. Sense anything OBVIOUS they share in common?

The answer is after this paragraph. But first, if one were to compare Arsene's success with the other master investors in the world, it's not hard to noticed that he has the eyes for "undervalued assets", like what he saw in those undervalued young players he had bought. Just like any other successful investors, he unearthed raw gems, and wait for them to shine. Those football stars are his successful investments. Just like how Mr Buffett bought Berkshire Hathaway when it was a textile manufacturer who nearly went out of business, and transformed it into one of the largest conglomerates in the world today. And how Mr Tan Teng Boo unearthed Lion Diversified when it was trading below RM1.00 in his I-Capital newsletter. Now, LionD is traded at RM11.00+, within 3~4 years (I was lucky enough to have read his recommendation back then). That's why all three of them earned my full respects!

Answer to their similarities: Of course it's the white hair!! (That's obvious!)

Lastly, please refer to the stock chart below:

It's the stock chart of Arsenal Holding PLC, the holding company of the Arsenal football club, for the last 5 years. See how it soared from 125k Pounds per share to over 1mil Pounds per share? See how a good management can bring good returns to a stock and its investors? There are many other such examples which I would like to share at later dates. Moral of the story: Good investment picks are all around us. And a reminder to those who are not yet a football fans, remember to watch Arsenal this weekend!!

Crisis? What Crisis?

It has been more than 1 month since the Sub-prime crisis broke out. Back then, most if not all of the global markets faced a heavy sell down and many investors rushed for the exits and have been staying on the sidelines. Many things had happened since then: global mutual funds faced liquidation problems, some even stop quoting their redemption prices; banks have to disclose how much they are affected, to calm the nerves of investors and depositors, and of course, further panics and sell downs; the phrase "subprime crisis" has been on the front pages of newspapers almost everyday and many were screaming that the global stock market bubble is going to burst and the world economy is heading into recessions, multi years' recessions; the governments have to take various measures to calm the panics, including bailing out failing banks, pumping liquidity into the market; and most significantly, cutting its discount rates.. all in all, most were preparing for the doomsday and were all gloomy about the stock market back then.. just 1 month ago.. (However, not all things are bad, to fans of Arsenal Football Club, "We are back on top of the Premier League, yes!!")

One month later, today's front page stories? "Asian Stocks, rise to record"; "Hang Seng seeks 7th straight record high"; "Australian shares at fresh record highs"; "Singapore Straits Times Index hits record high"; "Indian Stock market hits record level"; "Dow Jones near all time high" and etc and etc.. I didn't made these up, try Google those indices and all these headlines will pop up in the search results page.. (hmm.. what about KLCI? "Malaysian shares slightly higher on Wall St gain.." er... nothing mentioned about "record highs" like the others.. oh well, at least we are not the only down market")

See how fast the mood swings? Call it funny or ironic, facts are, there are many that are hurt from such wild fluctuations, or at least, miss out on the run up that started few weeks ago. So, where is the market heading? Come to think about it, does it actually matters anymore? There are a few quotes from Mr Buffett himself that I would like to share (well, for my own records too),

"The market is there only as a reference point to see if anybody is offering to do anything foolish. When we invest in stocks, we invest in businesses."

"Charlie (his partner in Berkshire Hathaway) and I never have an opinion on the market because it wouldn't be any good and it might interfere with the opinions we have that are good."

"If we find a company we like, the level of the market will not really impact our decisions. We will decide company by company. We spend essentially no time thinking about macroeconomic factors. In other words, if somebody handed us a prediction by the most revered intellectual on the subject, with figures for unemployment or interest rates, or whatever it might be for the next two years, we would not pay any attention to it. We simply try to focus on businesses that we think we understand and where we like the price and management. If we see anything that relates to what's going to happen in Congress, we don't even read it. We just don't think it's helpful to have a view on these matters."

"For some reasons, people take their cues from price action rather that from values. What doesn't work is when you start doing things that you don't understand or because they worked last week for somebody else. The dumbest reason in the world to buy a stock is because it's going up."

"The future is never clear; you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values."

He didn't say these yesterday, nor one month back. These are all quoted at least a decade ago. Moral of the story? Do not try to predict the market, nobody will be successful doing that (unless one think that he/she could be smarter than the 2nd richest man on earth). Do your homework and stick to value investing and do what you understand. Believe it or not, that's what the most successful/wealthiest investor of all time has been doing since decades ago.

Tips From the Hong Kong Buffett

I came across a recent interviews made with Hong Kong's Billionaire Lee Shau Kee.

A brief introductions, Lee Shau Kee is the 2nd richest man in Hong Kong (sometimes 3rd, depends on price fluctuations of the shares he is holding. For me, I wouldn't bother of the standings if I have a net worth of USD17Bil!!) and 22nd in the world ranking. He made his fortune through property and share investments. He currently controls one of the biggest property developers and conglomerates in Hong Kong, Henderson Land Development, with interests ranging from town gas, properties, hotels, internet services and etc. He has increased his net worth very significantly since 2006 after betting big on China's stock market. And hence, he was dubbed the "Hong Kong's Buffett" and "Asian Master of Stocks".

Mr Lee was recently interviewed and asked on his views about the future directions of the stock market and tips on investments. Here's the summary of what he said:

Firstly, one should pick the right country to invest. At this juncture, China offers the best opportunity and US the worst. US has too much problems to worry about, including its trade deficits and National debts which are close to USD10 trillion, the interests on such debts alone would have put a heavy burden on its economy.
(side note: the implication of such high debts? that would be another long but interesting discussions. From my point of views, debts might not necessarily mean bad things for the stock market. The national debt of America has been on the rise for the past few years, see where the Dow's heading? Breaking into new highs few times this year alone. Anyway, for the sake of this blog, I am merely translating what Mr Lee said)

Secondly, pick the right industries to invest. He personally recommended insurance, utilities and properties.

Thirdly, pick the right companies. It is recommended to pick the industry leaders, and after these leaders have risen substantially, only then one should switch to other laggards in the same industry. He continue to recommend some industry leaders like China Life (2628-HK), Ping An Insurance(2318-HK), PetroChina (0857-HK), CNOOC (0883-HK), China ShenHua(1088-HK), China Coal(1898-HK), Country Garden (2007-HK), China Oversea (0688-HK) and R&F Properties (2777-HK)
(Side Note: I haven't looked into these companies in details for some time now, the last time I checked, some of them are already very highly priced. I wouldn't be surprised if they are currently selling at 30~50 times PE.)

Fourthly, as the US start lowering its interest rates, USD devalues, dragging a few other currencies along. If one were to invest overseas, this is one factor to be considered carefully. He further pointed out that the Australian Currencies are one of the strongest currencies and offering some good interest returns.

Fifth point is a trading strategy. Buy a stock with good prospect and sell short another with bleak futures, either in another country or industry. It works something like a hedge. As an example, he recommended buying China Life and Ping An Insurance and short selling some American property stocks or Japanese Banking stocks, at the same time. The idea is, you will receive the proceeds from short selling and utilise it on buying those with good prospects. Zero capital (well, excluding some negligible transaction costs), and if you are right, you're gonna gained from both transactions. The downside risk is of course, if both of them go the opposite ways (ie. if the China stocks crashed and the US stocks prosper). However, Mr Lee himself was saying that the chances for this scenario to happen as "highly unlikely".
(side note: most if not all Malaysian trading houses do not provide much flexibility and facilities for such transactions. But such services are very common in Singapore and Hong Kong. However, personally I do not recommend short selling, unless one is very familiar with the risks involved and understand its consequences. I do agree that the global financial market is very wide-opened nowadays and is providing huge investment opportunities. In fact, that's where my personal career is heading into. More about the opportunities and potential of global investing on another blog..)

Just before the interview ended, Mr Lee predicted that the Hang Seng Index will be quiet for the month of October, however it should reach 28,000 points by year end and touch 30,000 points by the Lunar New Year (around February) next year
(side note: as of this writing, Hang Seng broke through 26,000 point. It had rebounded nicely from its 20,000+ points low when the Subprime crisis broke out. The Shanghai Index had also almost doubled since beginning of the year. Scarry eh?)
(side note for reading pleasure: Mr Lee Shau Kee had spent around HK100mil for his son's wedding in Sydney last year and all his staffs who attended the wedding received a HK10k spending money. I believe this spending pattern is something the original Buffett won't be doing even with a knife pointed at his throat.)
(HKD1 = USD0 .128560).

New Blog

Dear Readers,

I have started a new blog called "Searching for Values" at http://www.search4values.blogspot.com/. My intention is to share my views on some interesting companies that I have found. Please drop by occassionally for update.

Cheers.

This is my story - The beginning of a new chapter

(This blog has nothing to do with investment. It's just another piece of My Story.)

It has been a week since I quit my job. The destination is still very far away, but hell, I am one step closer to it by any counts. I wanted to write down the feelings I have right now because it is something I don't have for some time, and I am sure, I won't be having it again anytime soon. Most people are shocked by my decision to quit my confortable job. It is a job any employee would have hoped for. A fat paycheque (compared to other employees with my kind of experience and qualification, and trust me, most people will live quite well with such pay, and the nice part is, the annual salary increments have been quite satisfactory over the years), nice superior (he is a very nice guy, to be honest, except for some bad temper, occassionally), very nice colleagues who support me in many ways, very relax schedule (very "flexible" working hours), good employee benefits, not much responsibility except to do some very routine "overseeing" and "supervising" jobs in the plant (pretty much like a 30 minutes walk in the morning to greet my fellow colleagues "Good Morning"), and lastly, attending meetings which has usually been taken care of by highly qualified personnel and my job is merely to listen to what they've got to say, not much deicion makings are required. All in all, little input required, but high pay kind of job. So, what the hell am I thinking when I decide to tender my resignation back then? Simple, because there are some other things I need to achieve in my life.

Life is so unpredictable, and you would never know what's going to happen until it happens. And when something terrible actually happens, it's usually too late to say "if I know this would've happened, I would have..." or "Oh God, if I could have another chance, I would have... " worse still, sometimes you might not even get the chances to say these..

So, do what you have to, when you have to. Time and Opportunity are 2 things that never wait. I know, my decision might not have been made at the right time or might not be the RIGHT one after all, but I certainly want to give it a shot and even if I failed, I can look back and tell myself, "I've tried".

Here are 2 nice quotes:
“Why do people persist in a dissatisfying relationship, unwilling either to work toward solutions or end it and move on? It's because they know changing will lead to the unknown, and most people believe that the unknown will be much more painful than what they're already experiencing.” - Anthony Robbins

“It is only through labor and painful effort, by grim energy and resolute courage, that we move on to better things” - Theodore Roosevelt, the 26th President of US

Dear Reader, it's a great pleasure having you reading until this part. I owed you a "Thank You", for listening to my mumblings. One final piece I would like to share in choosing a carear path: Choose a carear that you have great interest and passion in, and you will definitely do it better than the others.

“If there is no passion in your life, then have you really lived? Find your passion, whatever it may be. Become it, and let it become you and you will find great things happen FOR you, TO you and BECAUSE of you.” - T. Alan Armstrong

Inspiration from Ratatouille

(Please do not continue reading if you intend to watch the movie before knowing the plot)

Ratatouille is the latest animated cartoon by Pixar. Remy is a young rat who grew up in the French countryside with a dream of becoming a cook. Later, he arrived in Paris, the city that was said to have the best cuisine in the world. Remy has to overcome various obstacles to become a great cook, despite Remy's family's skepticism and the rat-hating world of humans.

Someone might say "hey, c'mon, this is just a cartoon, which means everything is created from human imagination and is utterly unrealistics. The ending can go either way, based on the decision of its director." Oh well, unrealistics it might be, but I did learn something from this little mouse:

Remy, (the rat's name, in case you've forgotten) grew up in a rat colony which believes that the destiny of being a rat is to eat from what's leftover at the garbage, also known as, junk. But this particular young rat has a strong belief on the motto of his cooking idol, Chef Gasteau, that "Everyone can cook" and "Food always come to those who loves to cook". It is this belief that gave him the courage to go against the will of his father and the destiny of a rat, and to prove to the world that he too, can become a great cook.

Below are some quotes in the movie which I have copied from the IMDB website (http://www.imdb.com/) to be shared with those who understand what I am talking about:

Remy: ...I think it's apparent that I need to rethink my life a little bit. I can't help myself. I... I like good food, ok? And... good food is... hard for a rat to find!
Django: It wouldn't be so hard to find, if you weren't so picky!
Remy: I don't wanna eat garbage dad!

Remy: [observing what Emile is eating] What is that?
Emile: [pause] I don't really know.
Remy: You dunno... and you're eating it?
Emile: You know, once you muscle your way past the gag reflex, all kinds of possibilities open up.
Remy: This is what I'm talking about.
(Aren't we getting used to things that are given to us and never think whether if we like or dislike, and whether we can get something better?)

Django: [showing the exterminator shop to Remy with the dead rats in the window] The world we live in belongs to the enemy, we must live carefully. We look out for our own kind, Remy. When all is said and done, we're all we've got.
Remy: No. Dad, I don't believe it. You're telling me that the future is - can only be - more of this?
Django: This is the way things are; you can't change nature.
Remy: Change is nature, Dad. The part that we can influence. And it starts when we decide.
Django: [Remy turns to leave] Where are you going?
Remy: With luck, forward.

Similarity to our real life? Aren't we grown up in a society that keep telling us that we should always study hard in school, get a good grade so that we can get into good universities? From there, study even harder, get even better results because ultimately, these results are going to go with our resume when we apply for jobs. So, after striving for 20+ years (if you're good enough, maybe 1 or 2 years earlier than the rest) to do well in studies, some of us might be lucky (well, or unlucky) enough to get a nice and confortable job, high salary (compared to our fellow friends and students) in a big company. Although started at a low level, we are being told to work (sometimes called learn) hard, because one day, with fingers crossed, those above us will retire, resign, die or whatever, and that's our chance to climb up the corporate ladder to fill the gap. Well, work hard for another 20+ years (again, someone might be luckier with fewer years than the others), one day, we might get a higher position and a fatter salary (also fingers crossed). We will then become the star of the family, the talk at every reunions, the role model for the younger generations and etc. Big Deal!!

If you find it thrilling climbing the corporate ladder, so be it! And if you are not able to get good grades, it doesn't mean that's the end of the world, many rich people you see today have not even graduated from colleges. Get a good job isn't the only way to financial freedom, neither is getting a good grade in school. I have not done extremely well in school and have no talent in anything. However, I believe, everyone of us have the chance to achieve what we want in life, if we try hard enough! For my case, I like investing. I like to look at interesting businesses, reading financial reports and the chance to share a piece of the cakes. I get really excited when I see companies selling at discounted valuation. I believe if I learn hard and follow the right path in investing, it will ultimately lead me to what I want in life. Remember "everyone can cook"? I would like to say "everyone can invest" and "everyone can get what they want".

Fear of the Unknown

I was so amazed by the heavy sell down in the market for the past few days. Not only by the economic effects, but more towards the human reaction. I think I've read some statistics somewhere that the total market capitalisation that have been wiped out from the global capital market is more than USD4.5trillion (as at 15th Aug 2007). This figure is at last count, must be at least a few percent higher by today (note: market capitalisation is total number of shares times market price per share. So, in this context, the total value of all listed entities around the world have lost more than USD4.5trillion within days.) (2nd note: 1 trillion is 1,000,000,000,000). This amount can buy out a few times of the total sub-prime loans of the market. So? How to explain this down fall? I would rather call it the "Human Fear of the Unknown".

I have heard many people around me kept selling their holdings over the past few days. Ask them the reason? well, some are selling to limit their loses, others, because fear of the unknown future. They are afraid because they can't see the bottom of this and don't know how bad this may become. The fear to lose more.

Anyway, dear readers, let me share with you some very nice quotes:

"Humans always have fear of an unknown situation -- this is normal. The important thing is what we do about it. If fear is permitted to become a paralyzing thing that interferes with proper action, then it is harmful. The best antidote to fear is to know all we can about a situation." -- John Herschel Glenn, Jr.

Fear makes the wolf bigger than he is. -- German proverb

Nothing in life is to be feared. It is only to be understood. ~Marie Curie

The oldest and strongest emotion of mankind is fear, and the oldest and strongest kind of fear is fear of the unknown.’ — H. P. Lovecraft

Fear is one very interesting human behavior. It leads people to make decision that they will not do during normal circumstances. This might be another interesting topic that worth further studies. Anyway, in my humble opinion, the current situation might get worse and take time to recover, but am quite confident that it will NOT go into a heavy recession from this sub prime crisis. So, it is certainly an exciting time to start accumulating undervalued stocks that have undergone some major sell-offs. Good thing is, even our great Warren Buffett has been reported to have start accumulating stocks in some Banking and Insurance stocks lately. Imagine, it's like a major discounts promotion at the shopping mall out there. Funny thing is, the stock market presents a totally opposite scenario, where people actually run away from discounts promotions. Fear, can be friends.

Happy shopping!!

Subprime Mortgage, Financial Crisis ? - Part 2

Today, 15th August 2007, marked another day of heavy downfalls for the KLCI and major stock market around the globe, except the Chinese Stock Market, which seem to have stood up quite well against the tide. This is something that have fascinated me. For the past few months, I have been imagining the next financial crisis could have been triggered from the burst of the Chinese Stock Market bubble. Ironically, my prediction had turned out to be all wrong whereby she has been one of the few survivors during the recent bloodbath, and in fact, she has turned out to be a winner!! while others have been whiner!!

So, winner or whinner, life moves on. There are people that have been stuck with handfull of investments and saw their "market" value vaporised within days and don't know what to do; there are also those that have been observing at the sideline all these while and wondering whether is it time to bargain hunt (I think these are the lucky few); and there are of course those that have decided to cut their loses and swear not to call their stock broker ever again and etc. Whichever category one is in, I think most people would like to know one thing, "How will it be going forward?", including those that have sworn and cursed. No?

There have been alots of write ups from professional analysts about how would it be going forward. You could have read lots of articles where people have been screaming that the sky is falling, and in fact, there are also a minor few that still think that this sell-off is over-reacted. I am a bit bias to the latter and would like to share some of my views (again, please be reminded that I haven't done well in economics):

Data from Moody's claimed that the subprime market is about USD600 billion (Yes, billion, I've spelled it correctly). It is a huge amount at first look. However, another source of data shows that the total U.S. household debt, including mortgage loan and consumer debt, was $11,400 billion in 2005 (roughly 5% being sub-prime). By comparison, total U.S. household assets, including real estate, equipment, and financial instruments such as mutual funds, was $62,500 billion in 2005. So, assuming ALL borrowers of Sub-prime (I mean, every single person who borrowed money from the subprime market) were to default at once, it can still be well-absorbed by the whole financial market. And secondly, as all these high risk subprime loans have already been securitised and partially sold out to other financial institutions, funds, monetary bodies around the globe like those European's and Asian's. Hence, the losses have already been well-contained and spread out. This is also the reason why we see so many European funds and banks suffered heavy losses from this.

Secondly, as one of the points being brought up times and again by Icapital, one of the leading market analysts that I like, the global economic growth we are currently experiencing is mainly contributed by China, India and the recovery of some of the European countries. The US is having a lesser influence on the global market nowadays. Of course the current jitters might stay for a while, but the effect should not be as heavy as we have gone through. Imagine, the stock market has easily wiped off Trillions worth of market capitalisation from around the globe. This is a few times heavier than the sub-prime loans, even assuming that ALL loans are defaulted at once. What I am arguing here is that the sell-offs have been over-reacted.

Thirdly, the world economy has gone through many expansions and contractions over the years. We have learnt way too many lessons than we have actually needed. The system is mature enough to handle the situation. Just look at the ways banks and government bodies pumping liquidity into the system immediately after the outbreak. Even financial institutions have taken measures to limit their loses and to cool down the selling pressures. Moreover, as mentioned before, the slow down of the housing market has already been observed since year 2005. I suspect that most of them have already preparing for these to happen.

So, back to the question "are we seeing a recession?" In my humble opinion, not at this stage. Of course, the market will need time to heal itself in a few weeks' time. Investors will also need time to lick their wounds. However, to those that have been on the sidelines, this is definitely a better (might not be the best yet, though) time to pick up some bargains compared to months ago. For myself, this is certainly an exciting opportunity.

The "Subprime Mortgage Financial Crisis" - Part 1

I like economics. But I've never done well in this subject. Hell, I haven't done well in any subjects, anyway. Probably I don't put much faith in what I was taught. Well, these are all out of topics...

Many people have blamed that the recent market meltdown across the globe was caused by this evil little thing called "subprime mortgage financial crisis" in the America. As I am somehow illiterate in econs, I have decided to find out more on what the hell is this all about. So, keyed in the phrase in wikipedia and there were a few long articles of this. For the sake of my dear readers, I have somehow summarized it into the followings, as per my understandings (words of caution though: please bear in mind that I've nearly flunk my econ test. I swear I really did):

People borrow money to buy houses. These loan from banks are called mortgages. As the credit controls in the United States are very strict, many individuals that do not fulfill certain requirements will not have access to the mortgage facilities in primary mortgage market, usually from those big and reputable banks. So, one of the alternate routes for these individuals with bad credit history is to seek out the sub-prime mortgage. These usually come with higher interest rates because of the higher risks incurred. From 2001-2005, the housing market in the US was booming, and slowed down in 2005. Coupled with rising interest rates and falling house prices, the subprime market crashed. Many borrowers defaulted and the subprime lenders were suddenly faced with huge amounts of bad loans. And the chain effects quickly spread across the banking industries and had even spilled over to investment funds across the globe. The seriousness? Below is an extract from the Wikipedia that would somehow give you an idea:

"Wall Street Investment Banks and other financial institutions around the world have also been affected. On June 20, 2007, Merrill Lynch seized $800 million in assets from two Bear Stearns hedge funds that were involved in securities backed by subprime loans... on August 9, French bank BNP Paribas stopped valuing three of its funds and suspended all withdrawals by investors after United States subprime mortgage woes had caused "a complete evaporation of liquidity". Goldman Sachs' $8 billion Global Alpha hedge fund, its largest, reportedly lost 26% in 2007. Also, Citigroup has reported taking $700 million in losses in its credit business in July and August 2007... The European Central Bank (ECB) injected €61 billion, and the Federal Reserve injected $68 billion into their respective banking systems on Friday, August 10, 2007 in order to calm their markets, on top of the €95 billion the ECB had injected on Thursday, August 9, 2007. The following day, August 10th, saw widespread volatility resulting from fears about tightening credit conditions... While U.S. stock markets ended the day relatively unchanged after extreme volatility, other indexes fell. London's FTSE 100 index fell 3.7% in its worst day in four years, while Paris' CAC 40 index lost 3.1%, and Germany's DAX index fell 1.4%. The jitters followed in Asian markets: Tokyo's Nikkei share index fell 2.4%, while Hong Kong's Hang Seng Index fell 2.8%. The Federal Reserve further injected $24 billion into the US financial system that day."

Scary eh? It's like a replay of the Asian Financial Crisis all over again, but this time it was started from the West. So, shall we be concerned with this issue? will the regional markets in our part of the world be affected? Is this the beginning of a long bear run? we shall see..

Bloody market @ August 2007

Yesterday marked one of the heaviest market correction in year 2007, AGAIN!

The earlier correction back in February was even scarier (marked by the arrow), but it rebounded quite well back then and rose into new high without looking back. Anyone who have bought in during the panic selling would have made some profits, theoritically.

Anyway, what we are more concerned now is whether the road ahead is going downhill, or is this merely a minor setbacks on a long and strong upward walk?

I had a funny thinking, I would like to make a prediction on the market and tell you what to do with your money RIGHT NOW. Listen carefully: "Sell whatever you have, this is the beginning of a big disaster! The global market is going to bust and will go into recession for years to come! DO NOT LEAVE ANYTHING BEHIND! JUST SELL!"
(wait, don't pick up the phone to call your broker, before finish reading this article or I will not be responsible for whatever action you might have taken).

Come back and thank me when it happens. And I would appreciate if you could show a journalist what I have written here as a clever prediction of what would happen before it actually does. That's going to make me famous and making me the "Golden Boy" or "Prophet" of the Stock Market, isn't it?

You want to know why I make this call?
It has been my secret weapon, but, I don't mind sharing with you since you have the patience to read until here.

Look, the chance of the market going up or down is 50-50. Of course, there are many other factors that might affect it as a whole, but they will sort of "neutralise" each other out, feel good factors will be covered by negative factors and vice versa. Of course, the probability is not exactly 50-50, but should not be far from it (pardon me, for I haven't scored well in maths). So, making a call is merely like making a head or tail call. Best thing is, if I am right, I am going to be famous, and if I am wrong (in this instance, let's say the market rebounded), I would have lose nothing anyway. Worse come to worst, I will just abandon this blogsite and start a new one elsewhere. Why bother? Why am I saying all this BS? Because I am very not happy with some articles I have read recently on market call. I agree that some of them staged some very strong claims and I totally respect the facts that being brought up. But, many of the so-called experts are merely making calls like what I have done earlier, with the "head I win, tail you lose" kind of thinking. I would prefer them to keep quiet and their crystal ball reading skill to themselves. I do ignore many of them but do like to read some occassionally for a good laugh.

So, after all these BSs, what's the right thing to do RIGHT NOW? As repeated time and again, if we are holding to good and strong companies, we should ignore what the others are doing. The panic sellings are nothing but good chance for us to buy more. Don't you like to go shopping when the market is on sale? But take note though, I am not asking you to buy everything that's on sale, only choose what you like and confortable buying. You don't want to buy a broken 40inch plasma TV, even if it is selling for RM1000, do you? Or, put it another way, you don't want to sell the Toyota Vios you have just bought for half its price, merely because your neighbour has just sold his for the same amount, do you? Same concept.

Conclusion:
Buy what you think is undervalued and sell what you think is overvalued. &

Be Fearful when others are Greedy and be Greedy when others are Fearful - Buffett

This is my story - A decision made

It was like 3 weeks since I last posted something here. It's not that I have run out of things to write, but it's because I am too busy with my things on hand. I have recently made a very big decision on my life. I quit my job!! This could be for the better or worse. Anyway, the decision has been made, and there is no turning back now, for me.. I really wanted to share this feeling with someone, but dunno who to talk to.. so well, what's a blog for if it's not something for you to release your feelings within ?

Suddenly realised that I haven't talk much about myself here. To cut the story short, I am a degree holder in Accounting and Finance. Most people thought that I would have gone into a big accounting firm or bank or stock broking firm or something like that when I graduated, back in year 2001. But I didn't. I thought those are boring jobs, so I opted for a job as a sales executive in a chemical plant. Sounds more exciting and interesting as the incomes were based on commissions, so the potential of making it big time is higher, and there were more things to learn, I so thought back then, when I was much more naive than I am now. Anyway, as the years go by, I was transferred from the sales department to project management, to build a new plant and operation head to start up a new plant and so on. Basically, I have involved from A to Z of starting a business. And without noticed, I am already getting a pay which is few times higher compared to when I first joined the company, and I will have an easy and confortable life if I stick to what I am doing, at least for another few more years. I should be happy by now. But I am not! I felt like I have to move on and away from this comfort zone in order to grow. And hence, I have tendered my resignation and I will officially unemployed from the 31st August 2007, coincided with the Independence Day of Malaysia.

Well, life's gonna be different when I am all alone out there, I think. And I also have to figure out how to make a living going forward. But I have a rough idea in mind and an ambition which I so wish to accomplish in my life. I wanted to be one great investor like Warren Buffett. So, I might want to start off my dream by setting up an investment vehicle like what Mr Buffett did back then with his Buffett Partnership. I wanted to make those people around me, who have trust in me, millionaires, like what Mr Buffett had done to his investors.. This is my target, my dream and I am going to make it happen!!

How to invest in the right business

I came across a good article in the Star today, "How to invest in the right business" by Ooi Kok Hwa. I have extracted some good points, with my comments:

Warren Buffett, in his address as chairman to Berkshire Hathaway shareholders, said he uses four main criteria to select the right business: (1) a business that he understands, (2) one with favourable long-term prospects, (3) one that is operated by honest and competent people; and (4) is available at a very attractive price.

(1) a business that we buy must be simple and have stable and predictable future cashflow. Understanding a business will allow you to make better judgement on the profitability of the business; major opportunities or threat ahead and etc. That is the reason why, most of Warren Buffett's holdings are very easily understandable businesses, like fast food, theme park, razor blades, newspaper, insurance and etc., which most, if not all of us will come across everyday. He doesn't want to touch those high tech companies that he doesn't understand. That's also why, he was not hurt during the high tech meltdown in year 2000. So, very simply, just ask yourself "will this business make money in the coming years" before you buy any stock. If you can answer it confidently, you certainly have met the first criteria.

(2) For a company to have favourable long-term prospects, it needs to have a good economic franchise (good brand name), strong long-term pricing power, and high entry barrier (difficult for a competitor to set up another similar kind of business). A company that has strong pricing power and purchasing power will enjoy handsome profit margins. One example of this kind of business is Coca Cola, one of Buffett's long term favorite. Other famous holdings of Buffett also include McDonalds, Walt Disney, Washington Post and many more. These are companies that have dominant control in their market respectively and are very difficult for someone else to enter the market overnight.

(3) Investors must choose a company with a management of unquestionable integrity. This is one criteria that Warren Buffett put alot of emphasis on. There are many cruel examples out there on the streets which have washed away hundreds of millions of hard earned money from investors. Hence, investors should always check on the integrity of these managers. Investors need to be careful when investing in companies with high expansion, high trade receivables and poor internal controls. I agree this is one field that is very difficult to justify. One of my ways is by looking into a longer past trends of the company's history. I also like to look at the Director's remuneration package compared to the company's performance. Besides, do your homework in reading more business related news from the paper or internet, where you might be able to find out a thing or two about the company's directors.

(4) Lastly, we will only buy a business if it provides a "margin of safety" These are described by Warren Buffett as the 3 most important words in Finance. According to Benjamin Graham, if a company is selling at a 33% discount to its intrinsic value, the investment is said to provide a margin of safety. One mistake that most investors made, including myself, is overpaying for a business. There are companies that meet all the 3 criterias mentioned earlier, but these do not justified them to sell at super-high valuation. This is one of my main concerns on the China's market. It is undeniable that many China's listed companies have huge potential and are growing rapidly, but, most of them are selling at "mind-blowing" valuation. These are all so similar to the IT boom few years back in the Nasdaq market, where people were chasing high the high profile internet stocks like Amazon, Yahoo and etc, not to mention those that no longer exist today. These are called "over-hyped" valuations.

Share valuation, I did it my way - Part 1

Back to the basics
When a company starts up, it needs capital to commence its business. It issues certificates known as "shares" to those people who are willing to fork out the money to start the business. In exchange, the people who paid for the shares will be known as "shareholders" of the company and they will be entitled to a portion of any profits or assets of the business, according to the percentage of shares he/she holds, or known as "part ownership". These shares will also give the owners voting rights during shareholders' meetings, as per the percentage of shares held. Fair and square.

So, as the business grows, the business will need more money to expand, like buying new machines, employing more manpower, carrying more inventory and etc. It has a few ways in getting the new fund and one of it is by issuing more shares in the company (hence, increasing the share capital). The company can either sell the new shares to existing shareholders (right issues), to new shareholders (placement) or by converting reserves fund, such as retained profit (bonus issues) into equity. Until a certain stage, when the company fulfill a certain requirement, it can opt for listing, which we call Initial Public Offering (IPO). This is by offering the shares of the company to the public. Ahhh..... this is when small timers like us have a chance to have a share on the good and bad times of the company. Well, practically, as most of our holdings are too small, what we can share are really limited. For example, as a minority shareholder, we can't use the company's car, we can't use the company's private jet, we can't fly in first class in the company's expense, we can't stay in big hotel suits with girl friends in the company's expense, we can't spend tens of thousands ringgit per night to entertain customers in the company's expense, we can't go shopping for a million ringgit paintings in the company's expense and the list goes on.. sounds familiar? you know I am not so creative in making these up, don't you?

Anyway, as a shareholder, one is entitled to a portion of assets and profits of the company, and of course, liability and losses as well. If one were to be given a choice, would he/she opts for profits or losses? assets or liabilities? Profits and assets of course, you say? nah.. certainly not everyone is as rationale thinking as you are. Haven't you seen someone chasing after companies that made heavy losses for a few consecutive years and are on the verge of bankruptcy before? How would you explain that?

Well, as a investor, logically, I prefer companies that I have a share in to be profitable, to have good management, to continually grow its business and good stuff like that, which will ultimately increase the value of my investment. Don't you? Well, naive I may be, but please tell me, if you don't analyse a share or a part ownership of a company based on its value, what the heck should your analysis based on?

Is Longer Better? (don't say "of course" just yet..)

It is a difficult task in convincing a speculator or a day trader to convert into a long term investor. Even if they tell you statements like, "Yes, I am a natural born long term investor, I can feel it from the blood in my vein.." and "of course I am a long term investor, if not, how to win money?" and such, go one step further and ask them, "How long is the average holding period of your investment?" From my past experience, their answers range from: 1 week, 1 month, 3 months, and longest 6 months. Well, if you ask me, 6 months cannot be considered as a long term investment anyway. Remember Mr Warren Buffett used to say something like, "the most ideal holding period for a stock is.. Forever" (this is not a direct quote)

But, have you heard of people still holding counters they've bought more than 10 years ago and are worth less than 10% of its cost now? Do you think these counters will go back to how much it costs 10 years ago? The holders do think so, don't they? or else, why are they still holding them?
Likewise, have you heard of statements like "it's already so low, how much lower can it goes?" of course, the worst is still zero, but isn't it better to sell something worth 10 cents for 50 cents?
Another case, "If I sell now, I am making a loss. Anyway, I am a long term investor, I will wait, I believe it will go up later.." So this is a case where short term trader become long term investor. Will the wait be worthwhile after all?
There are times when things do change for the better. So, when should we decide to cut the losses? when should we wait? How about: should we start accumulating on weaknesses, as these sell down might be an oppotunity? just like the old saying "the dawn is usually the darkest". so, how? That would be another topic later.

So, is longer better (I am referring to the holding period of shares)? My answer is: it depends.
If it is a good company, which has high quality management, good earnings and cash flow, strong growth, competitive advantage over the others and etc., hold it forever, like suggested by Mr Buffett.
But if it is a bad company, hold it for one week is still considered too long.

China again? where else?

The market is kindda stuck at the moment. Main attention is still at China. Even the almighty Superman Lee has voiced his concern on the China's market (Superman Lee is another investor that I respect beside Warren Buffett). The China market is currently trading at a PE (Price/Earnings, the ratio that compares the market price relative to earnings) that is close to 40 times, and is considered one of the highest in past histories, including those of other countries. For comparison, our own Malaysian market is currently trading below 20 times PE. This implies, the market as a whole, you have to pay over 30 dollars to earn 1 dollar annually, if everything else stays constant. Alternatively, it can be stated as an earning yield of 1/40 or around 2.5% per year. Well, lower than the FD rate in Malaysia today. So, why are there still so many people rushing to jump onto the bandwagon? (why no people rushing to the bank to earn the same yield?) Ahhh.. the key difference is the potential of "growth" of the China's market.

In fundamental analysis, it refers to the growth in market size, revenue, earnings and etc. Let's say this company Huat Chai Sdn Bhd is earning RM1 million per year for year 2005. And if the company is selling at a PE of 40 times, its market cap (total price x total number of shares) shall be worth RM40 mil. As a owner, your investment need 40 years to break even. That's an annual yield of 2.5% per year (let's forget about the compounding effect for simpler calculation). And let's say this Huat Chai is doing good business and it earns RM1.5million in year 2006. With an earnings growth of 50%, if the PE still stays, the market cap shall worth RM45mil by the end of 2006. Assuming all else remain constant, the price of the company shall already worth 50% more. Now does it sounds attractive? of course it is. Warren Buffett has become so rich by only achieving returns of 20+% per year on average. You will be twice richer than Buffett at his age if you are able to maintain that kind of returns, with his kind of initial investment. And, most probably, you will already be the richest man on earth by then.

So, again, my point is, everyone is seeing the growth potential in Chinese companies, due to its booming economy and its big population (although there are some who only buy because they believe in "the greater fool theory", a theory that believe whatever you buy today, another greater fool will come to buy from you at a higher price some time later). So are there bubble? I personally think so. I think, a correction is on its way, by then, most investors, traders, speculators or any other market players will be burnt, some very badly. And some will have to sell off most of their holdings to cover their loses, some due to panic, whatever the reason, it's going to be a bloodbath.

Some might argue that there are certainly value buys out there. Of course there are. Values are everywhere. But I believe, if we have enough patience, we will be able to buy them cheaper and at a deeper discounts later. Borrowing from Warren Buffett's wisdom, "we shall be fearful when others are greedy, and be greedy when others are fearful".. Why shouldn't we?

Another quote I like very much, by Leonidas in the movie 300: "enjoy your breakfast, for tonight we dine in hell"... Like the feelings of "be prepared for the worst to come, and embrace it".

Opportunities lie ahead..

Fundamental Analysis, I trust - Part 3

Valuation of Asset
As mentioned in my previous post, Fundamental Analysis ("FA") helps us to determine a VALUE for a particular company. Every participants of the market knows that the market is fluctuating over time. And there will be times when a particular stock will sell at very low price and sometimes, high. In fact, I think the stock market is one hell of a emotional animal. It can be extremely nice to you one day, and hurt you extremely bad the next. Let me show you an example:

Ah-Ha... Iris (0010) from the Mesdaq, one of the darling stocks, or someone even called it one of the legends (during it's top performing weeks) of our own stock market. This is the graph from its past 3 months, if I were to post the 1 year graph, it might remind many people of their sleepless nights... Anyway, see the price movement? down from 41 cents to 26 cents (36%) within weeks and recovered from it again, within weeks.. make any sense? except for the greed and fear factors?
"Buy low, sell high" has always been the ultimate and never-changing rule in order to make a profit from any transaction. The question here is, how low is low and how high is high? How do we know it won't go lower after low and not higher after high? Well, I guess nobody knows. Although there might be a slight possibility that there are some prophets or crystal ball reading psychic somewhere in the world who are able to predict future stock movement. But if they really exist, they would have been one of the richest people in the world. I haven't seen anyone in the Forbes Richest list with occupation of "prophet or fortune telling" before.

So, what can ordinary people who doesn't possess supernatural power like us do? We need to know the underlying VALUE. When the price is selling below the value, we buy; and when the price is selling above the value, we sell. With the value in mind, you can ignore all the noices in the market, like street talk, brokers' calls, whipers from the other table when you are having lunch and etc. That's why our greatest Warren Buffett has opted to make all his investment calls from his home in a small town called Omaha rather than from Wall Street (That's why he is sometimes called The Oracle of Omaha). That's because his only concern is the fundamental and business prospect of those companies. He is not worried even if those companies are suspended from trading in the stock market for 5 years.

Back to value vs price. My believe is to buy when the price is selling below the value that I have calculated for the company and to sell when the price is higher than the value. Now, this is my system. Make sense? Please feel free to use it, not a million dollar secret, and I am not going to trademark it anyway. However, the most challenging part is yet to come. And this part is what differentiate a small time investors like us (yup, including myself, for sure) from those legendary investment gurus like Warren Buffett, Charlie Munger, Benjamin Graham, Peter Lynch and etc and etc:
How to value a company?
There are a couple of methods that most analysts use, including earnings yield, growth, profitability, effective use of capital by management, asset value relative to price, discounting model, instrinsic valuation and many many more. Honestly, I am also still looking for the answers. I would like to share some of my opinion in my future blogs. Stay tuned..

P.S. the score now? 2-1..
2 points here:
1) FA let us estimate the VALUE of a share and help us make buy and sell decision
2) The richest man on earth, Bill Gates is also a follower of Buffett's investment philosophy. So we have the World 1st and 2nd richest (and many more from the Forbes List, including a few more from Asian) to support FA here. Shouldn't we, as well?

Mistakes, alot I have made - Act 1

I must confess, I have made alot of mistakes in my life as an investor. I would like to share some of them every now and then, hoping someone who read my blog might learn them the easier and cheaper way. I would also try to share my experience on how to deal with them and not to remake the mistakes.

The most important lesson that I have learnt from my past mistakes is "buying shares based on rumours without checking further into its fundamental". I have been repeating this mistake again and again without noticing it. There are instances that look so true that those who told me the news are willing to bet their head or sworn in the name of whoever they can think of. I didn't say that all news are fake, but it has to make sense, at least. Some common news are like "this company will be securing a contract or have signed an MOU with a super billionaire in China"; "someone has offered to take over the company, buy now before the price shot up.."; "this company is going to declare capital repayment of a few ringgits, the price will shoot up..", "some syndicates have signed agreement with the owner to push up the price.." and many more.

Any one of them sound familiar? Well, you are so lucky if you haven't heard any of them. yup, lucky. I've heard a couple dozens of them even though my main carear is not in the finance industry. I admit there are news that really came true, u know, once a while, but the chances of it NOT coming true are much more higher. Allow me to use another examples from gambling: How often have you heard people winning from the casinos? I do, occassionally. But the losers far outnumbered the winners. Even the winners will usually lose after a few successful runs, and usually, the losses are much more than those he had won in the past.

However, it is sometimes very hard to ignore rumours, isn't it? aren't you afraid that the rumours might turn out to be true and you are the only one left behind as the share price sky rocketed? Your uncles, aunties, brothers, sisters, neighbours, mother in law, daughter of your third grand auntie and etc are all singing praises for the syndicate while you hide at the corner kicking yourself? I kindda get use to this thinking myself.

However, if you really have to jump on the bandwagon regardless where it is heading, there are 2 questions you should ask yourself in advance.
1) What's the probability the rumours will come true?
This will require your rationale and sometimes a little logic thinking. One simple example: a company is going to have a capital repayment exercise. The easiest way is to find out whether the company have sufficient fund to do so. And, who is going to benefit from this? If the company is already in deep financial difficulties, how can they afford to do so?

Question 2, might require some homework to be done, ask yourself: What if the news doesn't come true?
It's back to fundamental analysis. There shall be a "margin of safety" or worst case scenario, if you were to hold on to the share. Let's say, a company is quoted at RM1/share and there is rumours that another company will take over them for RM1.50 per share. Your valuation told you that it shall at least worth RM1.20/share. So, in case the deal hasn't materialised, you will still be holding a share bought at a discount anyway.

Conclusion, avoid rumours and concentrate on Fundamental Analysis, if you can; else, don't forget the latter.

Fundamental Analysis, I trust - part 2

I am a strong believer that buying shares of a company is akin to buying a PORTION of OWNERSHIP of that listed company and its underlying businesses and assets. And being a value investor, there shall only be 1 reason to do so, which is when the share PRICE of a company is selling BELOW its underlying VALUE. Different people will have different ways of valuing a company and as far as I know, there is no one sure-fire strategy to guarantee profit and obtain above average returns. And, that's the reason why I always agree on the saying that "investing is an ART", not science.

Let me start off my series on "Fundamental Analysis" ("FA") with its own shortcomings first (I usually prefer to taste the bitter parts before the sweet ones). One major argument against FA is that the analysis is based on numbers, prepared by accountants, whom are believed to be one of the most talented and sometimes, creative bunch of people in the world. Don't agree? allow me to share a story, which my accounting lecturer used to share with me:
There once was a business owner who was interviewing people for a division manager position. He decided to select the individual that could answer the question "how much is 2+2?"
The engineer pulled out his slide rule and shuffled it back and forth, and finally announced, "It lies between 3.98 and 4.02".
The mathematician said, "In two hours I can demonstrate it equals 4 with the following short proof."
The attorney stated, "In the case of Svenson vs. the State, 2+2 was declared to be 4."
The accountant looked at the business owner, then got out of his chair, went to see if anyone was listening at the door and pulled the drapes. Then he returned to the business owner, leaned across the desk and said in a low voice, "What would you like it to be?"

In other words, "numbers can lie"... This point of argument against FA certainly stands strong, or else, aren't the collapse of Enron, WorldCom and some other major corporate scandals living proofs? These companies have dozens if not hundreds of professionals monitoring their accounting reports closely, if FA works, many ignorant investors would not have been burnt so badly.. and not to mention the recent case of Transmile on our own Malaysian soil, which had caused its own shares to plummet more than 30% within a week. Reason? according to filings, auditors could not finalize accounts within stipulated period in absence of "relevant supporting documentation from management on certain transactions relating to trade receivables and related sales and additions to property, plant and equipment." and people starts to question the genuine of their past reports and etc.
Well, to defense against these, I would say...er... "u got me there, haha!!"
Seriously, cases like these do happen every now and then. We have to put in some extra efforts like closer monitoring; be extra careful while crunching the numbers; observe a few more years of its past records to look for consistence, and be very sceptical when there are extraordinarily good or bad years; and etc. The rest, we can only put our faith on the integrity of its management and auditors.
(By the way, if you want to see some good examples on number crunching, a good place will be at one of my favorite blogs, created by Moolah @ http://whereiszemoola.blogspot.com/. Do check it out!! He's good!!)

Ok. the score? 0 - 1 ..
to be continued..

KLCI breaking into new heights

The KLCI has retraced from its all time high achieved 3 days ago, so does a couple other market index around the globe, including the HSI, STI, Nikkei and etc.. except for the Shanghai and Dow, of course. This neighbour of ours called the Middle Kingdom is really doing one hell of a GREAT JOB in building itself into a world economic powerhouse. Today, when it sneezes, i think half the world will catch a cold (i am not referring to the SARS years ago). I am referring to a more servere economic meltdown if its bubble bursts. One can only use imagination to predict how far it can goes. Can anyone imagine the Shangahai Index reaching this level 2 years ago (the SSE index has just breached through 4000 points as of this writing, from a low of 1000+ points in mid 2005)? Just look at the graph below. It's an index, mind you, not an individual stocks.

Well, to be realistic, that's gonna be least of our concern, as long as our own market is performing accordingly. After much strugglings and hiccups along the way, our own KLCI has FINALLY broke through its historical high and is now in a whole new territory. I don't think this is much to celebrate about as many others have already done this months ago. We are merely playing catch up. Anyway, late is better than never, right?

So, what's next? where do we go from here? Is this sustainable? Or is this the peak we are going to tell our kids years later that, "hey, u know, your dad used to be watching the KLCI reached its all time high at 1365 (or something like that, i don't remember)" in year 2007? These are all answers we are going to know only few years later. Who knows, it might instead reached 1500 or 2000 points as predicted by some of those hard-core analysts after all. It's a choice between being conservative and lock in the profits made so far or take the risk of venturing forward with the rest, most if not all, i would say. (kicking yourself at the corner while others are celebrating usually left a bad taste in the mouth, isn't it?). I believe that some of those that have liquidated during the 1200 points have jumped back into the market. agree?

I don't have a crystal ball that is working properly, I have to based my decision on some sort of plan. As a value investor, whenever I cannot decide on "when to buy", I will look for "what to buy". There are certainly a few stocks out there that are still selling at attractive price, relative to its underlying value. As for my technical analysts friends, I don't know what you think, but I guess you do have a whole tables of graphs that help you make your decisions. This is the beauty of having a system to follow.. see? or else, you will be indifference from those that are betting blindly on the black jack tables and keep shouting "pictures! pictures!" every now and then (ask a gambler friends if you haven't been to a casino before. I beleive this wonderful scene is more seen in Asians casinos)..