Musings on cryptocurrencies, NFT and GCB

Here are some quick thoughts on something that is red hot in the market.

1. Cryptocurrency is a better form of store of value than gold. Being digital it is easily transferred, sold and stored in very small spaces (e.g. thumbdrives)

2. It is irrefutable that Bitcoin has been the asset of the decade with 200%+ compounded annual return since 2011-2020. See source by Charlie Biello below.

3. As a value investor “trained” from the learnings of Benjamin Graham, Warren Buffett and Phillip Fisher. We know that at the end of the day, value is what the product or company brings to society. Consider the following:

A. We pay for a standup comedy to laugh and be entertained.

B. We pay for transportation to fetch us from location A to location B.

C. We pay for a brand new mobile phone because it may be faster, more intuitive or have some brand new feature like a 20 megapixel camera.

Society pays for things that bring value to them, whether explicit or implicit. As investors, any asset may be classified into productive assets or non productive assets. 

Productive vs non-productive assets

An example of a productive asset is a real estate which you can lease out, provide shelter for another family.

A non-productive asset would be gold for it simply sits there till it is picked up or sold.

Cryptocurrency by itself produces no cash flow. So it falls under non-productive assets or a commodity. But based on increasing use cases, society has been evolving to value intangibles higher than that of tangibles. If this is a trend, the shift towards digital asset may only be just beginning. 

Record purchases and the new trends

Consider in Singapore 2 recent record purchases - how an NFT recently set a record of being sold for S$93m while a GCB (size 32,159 soft) was sold at S$128.80m to the wife of a recent billionaire’s wife (Ms Jin Xiao Qun from Nanofilm)

This draws parallels in a world. The buyer of the NFT - the first 5000 days believe the digital asset is worth 1 billion dollars while no one would expect the GCB to be worth a billion someday.

But if the world is to be inherited by the young. And the millennials continue the trend towards buying digital assets, being asset light or minimalistic through renting their homes and living on the gig economy. Perhaps there could be a case for the future of digital assets.

After all, a digital shopfront on Lazada may reach anywhere from 100 - 1000 customers a day as opposed to a physical shopfront in a mall.

Technology is anything that does something better. So perhaps the transfer of value and payment (currently in cash or digital cash) could be done better via crypto.

In that context, if the use cases for crypto rises with institutional adoption. It certainly will have a place in one’s portfolio in the near or distant future. As always, never invest in any asset more than what would affect your sleep should it go to 0 (the sleep number being your % of portfolio in that asset class).

Till next time, invest well.

Musings on Bill Miller

When I was in university, a gentleman in school was pitching to be a university lecturer at NTU. He spoke about two legends in investing Peter Lynch and Bill Miller.

Peter Lynch retired as a multi millionaire with an unrivalled track record for the ages. If he stayed on he would probably be like Warren Buffett. But he retired in 10 years so we would never know then.

Bill Miller beat the market for a while, 14 years to be exact. A one in 2.3 million chance.... Until he didn’t. Yet he continues to be admired in the fund industry. Here’s why.

1. He is a value investor at heart even if he buys high PE stock. Here’s a quote from Wikipedia

“Value investing means really asking what are the best values, and not assuming that because something looks expensive that it is, or assuming that because a stock is down in price and trades at low multiples that it is a bargain … Sometimes growth is cheap and value expensive. . . . The question is not growth or value, but where is the best value … We construct portfolios by using ‘factor diversification.' . . . We own a mix of companies whose fundamental valuation factors differ. We have high P/E and low P/E, high price-to-book and low-price-to-book. Most investors tend to be relatively undiversified with respect to these valuation factors, with traditional value investors clustered in low valuations, and growth investors in high valuations … It was in the mid-1990s that we began to create portfolios that had greater factor diversification, which became our strength …We own low PE and we own high PE, but we own them for the same reason: we think they are mispriced. We differ from many value investors in being willing to analyze stocks that look expensive to see if they really are. Most, in fact, are, but some are not. To the extent we get that right, we will benefit shareholders and clients.^[1]”

2. He beat the market from 1991-2005 and was an early picker of Amazon when nobody fancied it.

3. He remains relevant with his thoughts about Bitcoin. Here is a passage from his 2020 Q4 writeup.

“Finally, a few thoughts on bitcoin, the best performing asset category in 2020. At this writing, it is trading at over $31,000, up more than 50% since the middle of December. It has outperformed all major asset classes over the past 1, 3, 5, and 10 years. Its market capitalization is greater than JP Morgan and greater than Berkshire Hathaway and yet it is still very early in its adoption cycle. The Fed is pursuing a policy whose objective is to have investments in cash lose money in real terms for the foreseeable future. Companies such as Square, MassMutual, and MicroStrategy have moved cash into bitcoin rather than have guaranteed losses on cash held on their balance sheet. Paypal and Square alone are estimated to be buying on behalf of their customers all of the 900 new bitcoins mined each day. Bitcoin at this stage is best thought of as digital gold yet has many advantages over the yellow metal. If inflation picks up, or even if it doesn’t, and more companies decide to diversify some small portion of their cash balances into bitcoin instead of cash, then the current relative trickle into bitcoin would become a torrent. Warren Buffett famously called bitcoin “rat poison.” He may well be right. Bitcoin could be rat poison, and the rat could be cash.”

Read the full letter here (https://millervalue.com/bill-miller-4q-2020-market-letter/)

Till next time. Invest well.

Zero to One - Book Review

When a risk taker writes a book, read it. In the case of Peter Thiel, read it twice. Or, to be safe, three times. This is a classic.

- Nassim Nicholas Taleb

Zero to One is written by legendary venture capitalist Peter Thiel on building companies and forward looking thinking. Half this book is on business/investing and the other half is on startups. Most of the points below are from the first half of his book. I recommend this as a fine book to own and read in your investment toolkit.

Below are the top 3 takeaways I have that are useful for us to have as investors.

1. What is technology, what is zero to one?

• Technology is any new and better ways of doing things.
• 0 to 1 involves vertical progress while horizontal progress involves copying new things. An example of the former would be having a typewriter and building a word processor. The latter would be taking a typewriter and building another 100 more.

Reflection 1: As investors looking towards the future, technology is definitely a key component of what powers a startup. 

• One should consider how Apple didn’t invent the mp3 (Creative did) but they made it better and from that ecosystem of music came many other wonderful things from a platform of software distribution. Today, music is just one element on the device we call iPhone. 
• What the iPod/iTunes did was create a new and better way of hitching onto the value chain of music distribution and origination creating what is today known as a network effect / flywheel effect (suppliers coming on board with their products because of large customer base and more customers coming on board because of the wide product offering).

2. Competition is not ideal. What you want is a monopoly.

• Competition is good for the consumer but as investors, the monopoly is what generates the dollars because of pricing power and it also allows you to maintain and develop good products to maintain that edge.
• An example of this in the technology world is the battle between Microsoft and Google. Windows v Chrome OS, Bing v Google search, Explorer v Docs, Surface v Nexus etc.
• Competition is costly. The war costed Microsoft and Google their dominance as Apple came along and overtook them. By Jan 2013, Apple was worth US$500B while Microsoft and Google were US$467B combined.

Reflection 2: Focusing on the competition will not give you a great product, focusing on customers does. Additionally, avoid crowded fights (red ocean) and seek out blue oceans (W Chan Kim) to find super normal profits.

3. The moats that make a monopoly (my favourite chapter) 

Peter list 4 moats that matter

i. Proprietary Technology

Technology that nobody else has that can meet and serve the customer needs. Be it through patent protection, secret formulas or complex algorithms that are hard to replicate.

ii. Network effects

Value of a business increases as more customers are on boarded.

iii. Economies of Scale

Fixed Cost of products are spread across a higher volume allowing the company to have an advantage in cost and therefore pricing to win market share.

iv. Branding

A strong brand attracts a following and this creates a repeated consumption pattern that can be measured in lifetime customer value.

A business value of a company is the cash flows generated between now and judgement day discounted at the appropriate rate and probability (how sure are you) - paraphrased from Warren Buffett.

• Frame in this manner, a company with high cashflow but in decline is certainly not an ideal company because the cashflow gets less over time. I can think of printed newspaper advertising as an example.
• On the other hand, a business with tremendous cashflow ahead but making a little money now is what could be a very valuable company. An example quoted was LinkedIn where the cashflow was only expected 5-10 years down the road.

And the reason for this high level of cashflow growth is related to the 4 moats mentioned above. They have a differentiating value proposition to solve and meet the customer’s needs taking market share and being the best.

Reflection 3: Look for signs of pricing power by identifying if companies have 1 or more of the 4 moats of a monopoly. Take a position and be patient.

----------------

Bonus point: Attending a conference the other day and listening to GGV Capital Jenny Lee (a Singaporean who has done very well in the VC space). The management also matters. Because an entrepreneur may be able to take a company from 0 to 1. But from 1 to 10, that may require a different skillset. (And I remember the two Google founders Sergey Brin and Larry Page hiring Eric Schidmt to be CEO very early on). 

Management is after all, a good source of where future moats could come from.

Invest well.

Book review - Psychology of Money

Here is a first of many. 

As many know, I do enjoy reading books and I think writing the insights gain from each book helps distill what we learn. After all, everyone can pick up a book but not everyone picks up the same takeaways. 

This is a fine read on finance in a different lens. Highly recommended!

The Psychology of Money by Morgan Housel

An excellent book discussing fundamental concepts of life, investing and mindset. It will tickle your senses, and add the most useful tool to your toolkit, understanding the psychology of what makes us human and why we do what we do.

Here are my top 3 takeaways.

1. Finance is the greatest show on earth, how else would a JCPenny janitor known as Ronald Read accumulate US$8mil at the time of his passing at 92 while a former Merrill Lynch CEO David Komansky ended bankrupt in 2008 when a court declared him so.

Lesson 1: It is not mere education or career success that determines our end point but living within our means, avoiding outsized debt and investing for the long run that builds wealth.

2. Never enough. What is enough for you? By any standard being the CEO of McKinsey and being worth US$100m should have been enough for Raj Gupta. But he didn’t stop there, playing insider trading on news of a Goldman-Berkshire deal, he ruin his reputation went to jail for a mere additional 7% to his networth (which he probably couldn’t keep either).

Lesson 2: Don’t wage what you can’t lose for what you don’t need. The hardest thing is to get the goalpost to stop shifting and this may have a lot to do with peer pressure and culture influences, like what it looks like to be a “success and being of importance to society”. Warren Buffett is a primer of this discipline as he never moved to New York, never upgraded beyond his old Cadillac and house.

Ultimately, there are some risks that are never worth taking despite the upside.

3. Compounding is confounding. Warren Buffett’s wealth just crossed US$100b, of which US$97B of that came after his 65th birthday. A little less known fact was that once upon a time, there were 3 individuals running Berkshire Hathaway, Warren, Charlie and Rick. Rick was just as smart as the other two, but he was in a hurry. When the 1970s recession hit, he was over leveraged and forced to sell his assets. 

Lesson 3: Having an edge also means surviving. It is the one that survives over a long period of time that allows the compounding of wealth to happen. Don’t disrupt the compounding unnecessarily.

Till next time. Invest well.

Why I am skeptical of Aztech global IPO

 A short article with not too much detail.

The two good things:

1. IOT segment has grown tremendously at 30% CAGR over the last 3 years making up over 80% of revenue to date.

2. Plenty of cornerstone investors including JPM Asset management.

————

The not-so good things:

1. Track record of management is disappointing - Company previously was listed at $1.00 and delisted at S$0.42.

2. Company interests in business outside electronics is odd - purchasing of Kay Lee Roast Meat by the parent group seemed like a strange detour from electronics focus.

3. A deep dive into the company found the following:

- LED segment is falling significantly over the years making up about 15% of revenue now

- Annualized revenue for FY20 likely fell y-o-y meaning that while some parts of the company flourished in 2020, some didn't, that is not good for a manufacturing company (supposedly less impacted by COVID-19 demand fall)

- No moats. The top 4 favourite moats of mine are Proprietary Tech, Network Effects, Brand and Economies of Scale - yet I don’t see that they have any of that. I would think at best they have some EoS.

- High concentration risk, top customer makes up nearly 60% of sales (most of its growth is from the one customer) while the top 3 make up about 82%. A further dive into the top customer make it seem that it is probably Amazon's blink whom they manufacture security cameras for. There is always a possibility of losing this contract in the future damaging the company significantly.

—————

Summary: I normally don’t take the opposite side of cornerstone investors. But the business, management, lack of moats and high concentration risk makes me think the business at S$990m is not worth the money. As such, I would advice friends to avoid this.

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.

-----------------------------------------------------------------------------------------------------------------------------

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)

---------------------------------------------------------------------------------------------------------------------------

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.

----------------------------------------------------------------------------------------------------------------------------

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.