Evolution of an investor - from value to growth (Part 1)

 In 2020, this was quite a formative year for me.

My banker hat

As a banker in a large local bank, I do credit analysis for a living. In a nutshell, this means

1. Looking at the company business and deciding whether we want to be a part of it

2. Looking at the financials and seeing if its capital structure is sound and can support the loans.

3. Looking at the business risks and figuring out what mitigating factors there are.

In some way, lenders or bond holders are in the "negative art" business" being we are looking to avoid losses of any sort rather than make a huge upside which is the opposite end of that an equity holder holds. All that really matters is 2 things (Operating Cash Flow / Free Cash Flow and Shareholder Equity Cushion)

So to say I understand a balance sheet and profits is quite natural as part of my daily job.

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My value investor hat

As a lifelong learner, I have taken up many financial education (Finance Degree, CFA, FRM (in progress), Moody Corporate Credit Certification etc.). But nothing beats learning from having the skin in the game.

For years, I did not find much success fishing in the small local pond of Singapore. Imagine buying things like hyflux bonds, noble, viking offshore. I have been there and done that.

I found some success in buying value stocks looking at PE, PB and buying things like Guocoland, Keong Hong, Ho Bee, IREIT, Lendlease Reit, Mapletree NAC etc.

So imagine my shock when I checked out the company "Yihai International", a company I briefly read about and understood as a distributor of condiments of the hotpot brand Haidilao.

I saw it at 3.80 in 2017, it double to 7.60 in the same year.......and kept going - see chart below.

That is when I realized, it is not that value investing is broken but that there may be a better way. That was when the lightbulb lit up. An eureka moment for me.

Think of it - one may be quibbling about that 5% yearly dividend return or sitting on a stock for years when there are companies that have appreciated 20x.

Just 5% of your portfolio in that would double your whole pot. Let that sink in.

And that's just what is wrong with Singapore stocks where the majority of STI stocks are in the old economy (high cash input and low returns - think like a power plant)......the digital economy requires a different lens where a small investment churns out a lot of money (e.g. Developing a super app like facebook and distributing it across billions of handphones)

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My growth investing hat

So I read about the two philosophies - Value and Growth Investing and found that both had similar beginnings being born in the post depression era of 1930s of USA. 

 - Value Investing was conceptualize by Benjamin Graham and brought to much forefront by Warren Buffett who is an extremely disciplined, focus investor on core business principles.

- Growth Investing was conceptualized by T.Rowe Price. A lesser known legend but with solid groundings. He believed the best time to invest in a company was the point it was in rapid growth and sell when it is at the tail end of maturity or declining.

In other words (from the Corporate Finance Institute picture above) - buy early at the start of the growth stage as seen from the red arrow and sell at the black arrow (Decline segment).

Cigar butts with a few puff left or companies with a huge runway that can keep going....like a snowball rolling down the hill, if a runway is long enough, it could get quite big...maybe huge.

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I can hear thousands of questions ringing in your head.

1. How do I know what is a growth company?

2. How do I know when it is in decline or just a temporary bridge?

3. Growth? That's just a company with no earnings and all dreams!

4. It is just the flavor of the month/year/decade....value will return at some point!

I will answer all these questions in the next segment, but most importantly. One must be open-minded to understand how each strategy works. After all, there are more than one way to become wealthy.

- Some do it through buying Bitcoin

- Some do it through hardwork in a 9-5 job and rising in their careers

- Some just inherit it

- Some build it from scratch (entrepreneurship)

For me - it is going to be from investing. Since you are here, I assume we are heading the same direction. 

Till next time. Invest Well.

A world that has fundamentally shifted (Reflections of 2020)

2020 is a pivotal year for just about everyone, myself included.

In reflection, I take stock of the aspects of life, learning and investing. 

Of Life

Life is fleeting. A year in which I saw many people passed on. A dear friend passed on, a professor (Clayton Christensen) I often listened to and respected, an actor (Chadwick Boseman), an athelete (Kobe Bryant).

A horrible year indeed as deaths of those we esteem and hold dear ring a bell to our mortality and makes us count our blessings that every day we are breathing, we still have a fighting chance. 

Indeed, every day is a gift. That is why it is called present.

Of Learning (about virus, leadership, e-learning, meditation)

A year where disruption of work, lifestyle and every thing happened. Covid-19 started in China and spread across the entire world because of the network of airlines/shipping and human interactions. 

• It is a virus like no other, in the words of Dr Fauci - his greatest nightmare in the fact that a virus could have no symptoms. It is like pilots flying blind in a fog and having to fight an enemy.
• Even an immune system that is too strong or too weak will succumb to the virus - so it is really an ultimate enemy like no other. Its survival rate is literally the strongest and it continues to evolve.
• Nevertheless, I am grateful for being in Singapore where the government has been able to course-correct where mistakes are made and put us on the right path. To be frank, as we open up to phase 3 while the world is going down into fighting the 2nd variant (23 changes in the B117) of covid-19, that is quite a crazy thought.

But what made Asian countries able to handle the pandemic better, I would give it to decisive leadership and a more subservient population (listening and respectful of government and law). 

As John Maxwell said it right - Everything rises and falls with leadership.

In a year where I am mostly home (WFH), I started paying for online learning, I begun to see the value of investing in myself. It returns many many times.

First, I signed up for VIA Club (Value Invest Asia) where I learned a lot of quality articles from Stanley Lim and the community (ideas populating around are often a good source of investing for success.)

Second, I signed up for a lifetime of CALM - a meditation app that gives me peace and focus. It centers my inner sanctum and allows me to plan and go about the day - purposefully and focused. I daresay it helped me win my competitions at the Toastmaster Competitions this year.

After all, Asics said it best in its logo acronym - Anima Sana In Corpore Sano which translates as "A Sound Mind in a Sound Body".

Lastly, I signed up for masterclass. A billion dollar app with learnings from the likes of Bob Iger, Gordon Ramsey, Malcolm Gladwell, Howard Schultz to name a few. If you want to learn any skill on business, leadership, knowledge - why would you not learn from the best in their industry, the titans that rose to the top?

Of Investing

This was a year which I panicked. I didn't keep to a process, I was all over the place. I think human instincts tend to kick in when you begin to fear the unknown.

So very much it was a process of learning, I read and re-read books by Benjamin Graham and Pat Dorsey (The intelligent Investor, Interpretation of Financial Statement, 5 Rules of successful Investing), I followed blogs by The Good Investors / Compounder Fund (Chong Ser Jing and Jeremy), Morgan Housel, podcasts by Motley Fool (Rule Breakers) and of course the VIA club as mentioned above. I watched the entire investment valuation series by Professor Damodaran (NYU) and built a FCF model to model stock prices.

Thoughful learning, which came quite useful. These are 2020's 6 best investment lessons.

1. In investing - Growth matters more than anything else. What business is the company in? What is their TAM (Target Addressable Market)? 

- Alibaba for example has many growth opportunities across the commerce space. A bet on alibaba is a bet on china as they are so embedded in the chinese business and consumer economy.

- For REITs, look for growth in DPU, cashflows, NAV.

- For most stocks, look for growth in topline, customers, cashflows (operating and free) and if available bottomline too.

2. What is the valuation metrics you should be using? 

- I used to stick quite closely to P/E ratio but you really can't value super growth companies with P/E as you would have missed out on Amazon over 20 years. P/S ratios may be more appropriate. Other metrics like P/FCF, FCF yield helps to give a more comprehensive picture of things.

3. Volatility is a given

- Think of price fluctuations as a fee rather than an immediate loss. If your thesis remains intact, stay the course. The best time to buy is yesterday, the time to sell is (almost) never because winners can keep winning.

4. Think big and consider earnings power

- If you only keep fishing in Singapore, you are limited to a smaller opportunity set. There are many innovative companies, talented individuals and groundshifting technology that the Singapore market is not exposed to.

- When you consider an investment moat, you want to consider how wide, how deep and how sustainable is the moat that allows the company to continue earning its superb net profits.

a. If a company is able to keep competition away by widening the moats (e.g. Apple with new products, being a leader in new market - that strengthens their investment story)

b. If a company has depth, it means they are great in one competitive advantage (think a company with good products but in one segment - e.g. Garmin for navigation)

c. Sustainability - the longer a moat can be sustained (either through R&D, consumer brand recognition, patents etc.)

5. Every Crisis is different

- A pandemic crisis did not hit all industries the same. Unlike the GFC which most stocks collapsed, tech was not affected, food producers were not affected. Manufacturing actually flourished while the services sector collapsed (GFC was the opposite).

- We can't really time the market and predict the future, anyone who tells you they can is being foolish. That being said, we could pay attention to the 200 day MA as to when is a broader decline or broader rising about to come.

- And since we can't predict, we can only prepare. Holding cash at 0% interest rate is actually ok. Cash gives you optionality, it gives you the opportunity to buy quality stock at cheaper prices when the opportunity arises (think Alibaba in recent days).

6. Be Ready

- Risk is what you don't see and the truth is that we must learn to make wise bets (Annie Duke - Thinking in bets) by thinking of outcomes in probability and seek out alternative opinions that we may be wrong.

- Be anti-fragile (Nassim Taleb). In life, things are fragile, robust and anti-fragile. The anti-fragile gains from being stressed/pressured. In some sense, humans can become smarter, better and fitter as a result of the body undergoing stress - think a gym workout. That being said, too much and we will break down so it is pertinent to keep things in balance and know our limits.

When will the next crisis come? Nobody knows - my guess is that it is something that we all don't see. But the right process and the correct mentality would set apart the winning investors from the losers and the former camp is where I definitely want to be.

Blessed Christmas to one and all. Stay safe and we will overcome the pandemic together.

While the music continues to play...

When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”
- Chuck Prince, CEO of Citigroup. July 2007.

Qs 1: An often asked question of many people is that the markets are going up while economy is in shambles. How is that possible?
Answer: Simple. When there are more buyers than sellers, prices go up. Vice versa too.

Qs 2: How high can the markets go?
Answer: By logic, as long as the FED backstops the market, there would be confidence to buy. As long as more retailers continue to join the market. It would go up.

Qs 3: But doesn’t fundamentals matter?
Answer: Benjamin Graham once said the stock market acts like a voting machine in the short run, but it is very much a weighing scale in the long  run - eventually the two would meet.

Qs 4: Buy, Sell or Hold?
Answer: If you follow the buy low, sell high strategy. Consider rebalancing your portfolio as the markets go higher. This allows you to capture the gains and protect against losses in any swings. If there’s nothing attractive to buy, there’s really no harm waiting. Nobody will fault you for sitting out. 

Quote of the day - You are neither right or wrong because the crowd disagrees with you, you are right because your data is right and your reasoning is right.

After all - We all know what happened a year after Chuck Prince said his statement. History doesn’t repeat itself, but it certainly will rhyme.

The stretching (and ripping) of social fabric | Margin of Safety

In an ending scene of the academy award winning movie - Joker. A scene of anarchy and chaos plagues the city as the world sinks into chaos.

A familiar scene in America appears to be seen today. Where real life replicates reel life or perhaps the movie reel was highlighting a real serious problem of segregation of classes. If you look at history, it has shown that the human society has been separated by many things.

1. Religion: Catholic vs Protestant (IRA and the bloody sunday). Closer to home the Maria Hertogh riots
2. Race class: The American civil war of the 1960s was a result of the long-standing controversy over the enslavement of black people.
3. Ideology: In more recent times, the HK riots fundamentally is a clash of values and ideology of human rights, freedom and boils down to democracy vs autocraccy.

Further down the line, many have begun to highlight the problem of rich-poor division and the separation of social economic statuses (SES) that could potentially rip society's fabric apart.

A very valid problem for the world and more so the developed nations where so much money has been accumulated in so few people.
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Now one must be careful not to villi-anise the rich. For a poor man has never provided us a decent wage or a job. In contrast, a reasonable tax structure as well as management of tax coffers is necessary to ensure everyone is taken care of. But of course, its a competitive world and too high taxes will also drive people away (as the rich practices tax arbitrage).

And perhaps there's no better example than the city of Norway which has thoughtfully balanced all the different aspects. The transparency of the salary, the good stewardship of their wealth fund and investments as well as the pension structure that ensures nobody is left behind.

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In Seth Klarman's Margin of Safety. It must be remembered that the greatest challenge for an investor is maintaining required discipline. Standing apart from the crowd and not chasing stocks in periods of overvaluation.

1. Waiting for the right pitch

• The best analogy would be that of baseball. In figuring out how to bat a 400, Ted Williams necessitates that he doesn't swing till he knows it is in his sweet spot and the more i reflect, the more i seem to understand that this may differ from people to people.

2. Complexity and variability of business valuation

• Because of the credit cycle, the inflationary environment and the changing circumstances around a business - what worked out in the past may no longer hold true today. Remember, cars replaced horses and even in technology iPhones replaced the nokia phone, the latter whom used to control 40% of the phone market.

3. Ensuring sufficient margin of safety

• Buying at a significant discount to underlying business value and having a preference of tangible assets over intangible assets.
• Investors should pay attention not only to whether but also why current holdings are undervalued. It is critical to know why you have made an investment and to sell when the reason no longer applies.
• Look for catalysts that may assist directly in the realization of the underlying values.
• Give preference to companies having good managements with a personal financial stake in the business
• Diversify your holdings and hedge when it is financially attractive to do so.

Value investing shines in a declining market. Value investing is simple to understand but difficult to implement. For the hard part is discipline, patient and judgement.

Investors need discipline to avoid the unattractive pitches, patience to wait for the right one and the judgement to know when to swing.

And for where the world appears to be right now....does seem to be Chapter 1 of covid-19, battle for supremacy among superpowers and a fundamental shift in the world challenging the social fabric.

It pays to be patient for now.

A crisis which nobody knows

In the words of a prominent head of banking in Singapore. "Stock markets (prices) have gone to hell and back."

As I sat there listening, I pondered what exactly was happening in the markets?
Howard Marks Memo places it quite clearly - What does the U.S. see today?

• one of the greatest pandemics to reach us since the Spanish Flu of 102 years ago,
• the greatest economic contraction since the Great Depression, which ended 80 years ago,
• the greatest oil-price decline in the OPEC era (and, probably, ever), and
• the greatest central bank/government intervention of all time.

There seems some points in time when the market was literally throwing everything away, it seems that was due to:
1. Borrowed money, as margin calls were happening, private funds were selling.
2. When a crisis occurs, all assets suddenly have a correlation of 1, and all assets fell in prices.
3. Cutting the interest rate to 0, spooked markets even more.

But when the USA central bank mentioned that they would do Quantitative Easing Infinity, it brought back hope to the markets and a massive rally of 28% occurred. Under QE, they would buy treasuries. They later went on to buy junk bonds.  (Not announced yet) The last thing they could do is buy equities.

After all, the key saying is don't fight the FED (central bank of America).
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Bearish calls
As markets went further up on the rebound, many people were betting it would drop down. And as it went further up, less people thought so. Even Goldman Sachs gave up on their 2000 estimate...

But is it really over? Following prominent investors call, everyone of the following names made a bearish call.

3rd April - Howard Marks
14th April - Mark Mobius
22nd April - Paul Singer
28th April - Jefferey Gundlach
30th April - James Bianco
3rd May - Kevin Smith, CFA

James who? Kevin who? - Yes, I haven't heard of these two chaps before but when markets run out of brilliant minds to ask, they ask the younger talents hoping to make a name for themselves. But Kevin has a CFA as well so respect from one charter to another.

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Key thoughts of experts
So as we were all wondering if we should have bet the house on March 23rd...I think the following opinions are right:
1. Jeffrey Gundlach: If the markets were really that good, we would not need all this stimulus measures to begin with.
2. Howard Marks: The world is more than 15% screwed up.
3. IMF projections - first ever global recession of -3% decline in 2020 and 5.8% bounce in 2021.

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And the bull case:
TL:DR. Markets are forward looking and it would be fixed in a year (markets project 6-9 mths ahead)
https://www.marketwatch.com/story/the-stock-markets-rallying-while-the-economys-tanking-it-all-makes-perfect-sense-2020-05-02

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The Oracle of Omaha
- Warren Buffett recently had an AGM
2-men AGM: https://www.youtube.com/watch?v=69rm13iUUgE

He said a few things:
1. Don't bet against America (in the long run)
2. Our cash pile of US$138b is not much under the worse case scenario
3. The repercussions of shutting down the economy is unknown and the financial possibilities are very vast (while the health possibilities have shrunk neither worse case nor best case are in the list).
4. During 08-09, the effects of the crisis didn't happen on day 1. i.e. The effects will take a while to be understood by the market.
5. The world has changed for airlines. (And therefore he sold everything), as passenger miles traveled is unlikely to return to the same level in the next 2-3 years.
6. Warren bought nothing in March as nothing was attractive enough.

I did observe that Mr Buffett wasn't his cheery self, it does bring some concern when Warren is fearful.
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My thoughts on what to do during this period?
1. Copy the rich. Re-inventing the wheel is not only foolish, it is a waste of time. Buy when owners are buying in (and buying in big)
2. Keep learning (I bought more books, signed up for masterclass, listened to more financial articles).
3. Be patient. For opportunities will surely come by in the next 2 years (Aim for a homerun and bat for 400).

Regarding the covid-19, it is clear that
- The world is consumer driven, two-thirds of spending are consumer driven. Given that there are job losses of 10-30% of the world....this is really unprecedented for B2C and C2C companies.
- The world has changed significantly, people are working from home, digital tools are the vogue and many old industry jobs are probably forever gone while the new era has been accelerated.
- Sad but true, the rich poor divide. The challenges of society, nationalism, racism, xenophobia are all being exacerbated and brought to light. As a friend said, covid-19 has brought the best and the worst out of people.

But the one certain thing is that until a vaccine is found - there is no return to normal. And that is a very worrying thought as we all ponder how long can businesses survive under the subnormal economy of being at 80%-90% of the usual (or 0% under lockdown).

Certainly, the most important thing in this uncertain time is to Stay safe and stay healthy. 

Nevertheless, to end on a positive note - always remember the below quote by Zig. 
I suggest you read it twice for (second time slowly for the needed impact).

Musings from the market - Fed Rate cuts, Eagle H Trust, Ascendas Reit

Another rate cut
As the Fed announced their 3rd rate cuts of the year. Guidance is 1.5%-1.75%. They said they would pause for now. We all begin to worry whether if we are heading to a subzero environment. As mentioned by experts, a rate cut may be good or bad depending on your perspective.

It is good for borrowers (e.g. home loan borrowers) as this reduces the interest rate they pay. Assuming that the banks pass on the savings. Unpaid advertisement: DBS online home rate is now 1.86% fixed for 2 years. That’s a really fantastic rate to do refinancing or purchase of a new house if you are considering one.

It’s horrendous if you a saver, the deposit rates are dropping. Even the local SSB gives 1.56% for first year and 1.71% for 10 years. A better solution would be to go to specialised saving accounts like DBS Multiplier, OCBC 360, UOB One account, Bank of China to mention a few....you do need to meet certain criteria so that you qualify for the 2%++ interest rates.

It appears bad if you are a bank. But that depends if you can borrow at even lower rates and lend it at a higher spread. We need to observe the NIM or net interest margin to see how the local banks manage this. Nevertheless they are looking to alternative streams of non interest income and the market appears confident of this pivot.


The 2nd musing relates to REITs

Eagle H Trust
Everyone knows REITs are on fire because of the Low interest rate environment. Cash and bonds are heading towards 0 worldwide and so fund managers are looking at equities that provide steady recurring income.

Who knew that REITs could be burnt even in a good environment with a REIT like Eagle H Trust that appears to have loss the trust of investors as it falls to an all time low since it’s IPO. Imagine investing a dollar 5 months ago and today you take home $0.68. A total value destruction of 32% and the show isn't over yet.

I think beyond the normal physical real estate assets. Any other form of assets such as ports, ships, ships as hotels, television broadcast, golf courses can be a hard game to play because it involves very different way to value and estimate the cash flow.

Additionally, given substantial shareholders are selling out. At best, they don’t think the price will go up. At worse, they think the price will fall. Somewhere in the middle is probably paying taxes or saving on taxes through capital loss capture.

I think it is so bad that experience tells me to avoid such things as investments. My bad experience (lucking out when it matters include noble group, Hyflux perps, QAF and Sembcorp Industries). Since I am not exactly good on short term predictions, I won’t speculate either in trying to bottom fish.


Ascendas REIT 
This is a different case. The kind of manager with a track record of delivering value for its unit holders. The issuance of rights to acquire 30 US properties is an excellent opportunity for existing and new investors to join the game.

The Bankers are smart to underwrite because they can get 6%+ yield on the 2.63 price.

Certainly the 17% discount is attractive and taking a long term view would see this as a good investment.

My bugbear is the tradable rights which often have a history of dragging the mother share price down. I have seen this with Keppel REIT, OUE C REIT, Chip Eng Seng, Kep-KBS to name a few.

So I would think it may be wise to watch the market price action and be fully aware that A REIT price may fall. That being said, this still is a valuable quality portfolio of assets that are diversified across SG, AU, EU and now USA. In business parks, industrial assets, logistics and offices.

There is just one conclusion - Whoever takes part in the rights subscription will simply be better off.

And as the richest man in Babylon says - This is how you make your gold work for you by putting it to work.

The paradox of yield

In investing, people often seek a high yield. The equation of a yield generally means the annualised payout divided by the price of the asset.

The higher the yield the better. True or false?

Answer: It depends.

More accurately, it depends on the hat you are wearing. Are you a bond investor or an equity investor

If you are a bond investor or a lender and you can safely ascertain that no defaults or losses will be incurred, the higher the yield, the better. This is because you are on a fixed payout and a final bullet payment of principal at the end.

If you are an equity investor. Then it truly depends. For two key reasons. Equity investors earn by two methods, capital gain and dividend payouts.

• A high yield gives a high payout return but makes it difficult for managers to hunt for new assets to grow the pie.
• A low yield gives a low payout but makes it easier to find yield accretive assets.

And truth be told. With over 12 years of investing experience in anything from penny stocks to blue chips to indexes and bonds and foreign stocks...The secret sauce lies in this. 

Dividend growth. The best stocks are the one that grow its DPU or DPS year in and year out. Even better if they didn’t have to raise more capital for that.

So in that case. It is really a no brainer for reits that are able to grow their dpu both organically (rental reversions/ create new rental space / Govt measures to increase plot ratio etc) and inorganically through acquisitions of new assets:

For that reason. The low yield environment makes it the right time for sponsors to divest. In fact they would be foolish not to. This explains the record 2.3bln raised, highest since 1999 https://www.businesstimes.com.sg/real-estate/singapore-reits-going-on-a-record-fundraising-spree

And we are not done with the year yet. Q4 has only just begun...

Here are the perspectives:

1. It is definitely ripe time to sell assets for sponsors given the very optimal price as a result of yield compression. As markets price for a lower yield, the price of assets goes up.

2. It is definitely suboptimal to put your money in negative yield assets or zero yield assets. Investors therefore have to buy assets in the struggle for financial freedom.

Which is a fantastic thing because suddenly the good old DBS brought in so many USA based assets. Truly the right time for the right product.

Nevertheless, not all products are the same and we should continue our selections with extra vigilance.