Tuesday, August 22, 2017

SOS Does an investor need to know valuation skills?

VALUATION SKILLS

1.  It helps, but not the only factors that drives the "share price".

2.  It helps, but not able to tell you the direction of the business.

3.  It helps, but will not tell you what is the lemons in the market, that, experience will play a role.

4.  It helps, but does not teach you how to control your temperament to avoid temptations in the markets.

5.  It helps, but it never tell you when is the peak to make a sell call.

6.  It helps, but it will not tell you if the management have integrity.


WHAT IS THE VALUATION METHOD

There are many method to estimates the range of value for a stock.

Some of the important financial metrics used for valuation are:

1. ROE/ROIC
2. Profit Margin
3. Profit Growth
4. FCF, Operating CF
5. DY


SO IT HELPS, BUT NOT EVERYTHING?

1.  Of course, else, just take a Valuation course, and you don't need to work a single day in your life?

2.  It only helps you to avoid to differentiate noises and nonsenses against important factors that improve the fundamentals of a company.

3.  Never use valuation to time the market.

4.  Liquidity considerations and technical analysis should be used for timing.

5.  If we uses a confluences of approach, such as fundamental, macro trend, technical analysis and sentiment, it will improve your return probability.



LOSS AND GAIN

The avoidance of loss is the surest way to ensure a profitable outcome.


LONG TERM INVESTOR vs TRADER

Different tools are used for different type of players in the market.  Many always have different opinion when they look from different time frame perspective.

Being a long term investor, you will pay less attention on world macro changes in interest rate (not that it is not important), noises on predicting quarterly result, get the quarterly expectation wrong, and many other noises and nonsenses (short term sentiment of the market) because a long term investor focus and a trader focus is not identical.

Long term investors is concern about "the factors" that effect the quality and sustainability of the earnings as well as the integrity of the management (what they do).


OTHER IMPORTANT FACTOR THAT HELPS

To identify the mechanism that drives the bottom line for a particular company or sector.  Besides the conventional methods of good financial metrics, one must also  focus on factors that were strongly correlated to stock price movements.

So, this factor (the art side), was to anticipate changes of economic trends that are not expected by others, and therefore, not yet reflected on the stock price.


TRAITS TO HAVE

Independent, rationale, continue learning, open minded, strong convictions etc.  Use principles from gurus as a guide, not a bible, else, you will miss the NEXT tech stock.

Wednesday, August 16, 2017

SOS At least 30% upside for OCK Group from 90 sen?

WHY DO YOU BUY OCK GROUP AT PE OF 30X?


Let's cut to the chase:

1) Total shareholders fund (SF) is about RM420m @ 31 March 2017

2) Profit after tax over SF, or ROE, the denominator is RM420m. (RM200m raised in 2016 for new biz in Myanmar and Vietnam)

SPLIT BIZ INTO TWO SEGMENTS

3) In order to understand this company, we have to segregate it into TWO biz

   (a) Non-tower biz (Biz A) -  Engineering projects, maintenance of towers, contracts to build towers, projects on fiberisation, & solar energy (concession)

   (b) Tower ownership and rental biz (Biz B) -  build and lease back for long term (>20 years), and own and lease to telco operators.

SEGMENT 1 - ROE or PE Method

4)  (a) Non-tower biz share of SF is about RM220m - making about RM29m (exclude one off expenses of RM5m) in FYE2016, so ROE is 29 over 220, ROE of about 13%.  This biz is growing at about 5-15% (include solar energy).  RHB gave it a PE of 16x, because of growth.

SEGMENT 2 - EBITDA MULTIPLE or DCF Method

(b) Tower biz share of SF is about RM200m (RM132m raised in end of 2015 (Myanmar project) via rights issue & RM60m plus was raised in mid 2016 (Vietnam acquisition of SEATH project)

Total Project cost (estimates)

Myanmar (build and leaseback)  -  RM300m (built about 620 towers out of total 920 towers)

Vietnam (acquired brownfield BTS - smaller towers) - RM200m

5)  Myanmar project - deliver most of 600 towers by end of Dec, hence FYE2016, PAT contribution is negligible.  So, if we use ROE, it will be 0%. PE >100x in 2016.  Tower ownership and rental biz is unique and the industry has accepted the valuation method, using EBITDA multiple to calculate.

Vietnam project - FYE2016, PAT contribution is also zero, acquisition completed on 13 Jan 2017.

So, ROE is actually negative as they incurred corporate exercise costs & acquisition costs for FYE2016, but zero revenue or contribution.  Initial year profit will be low as they are paying back loan, tenancy ratio is growing gradually, depreciation (testing time given to customer, lower revenue during initial period).

The right method to value it is using EBITDA Multiple or while we can use DCF as a good reference.

VALUATION = SEGMENT 1 + SEGMENT 2

6)  Biz A -  ROE about 13% with 5-15% growth PE 16 X RM29m = RM464m

     Biz B - ROE is zero for FYE2016 (only investment costs in Balance Sheet).  Started contributing in 1Q (somewhere mid Jan 2017).  Long term DCF by RHB Research (10 Aug 2017) = Myanmar = RM450m and Vietnam RM110m


Segment 1 + Segment 2 = RM464m + (450 + 110) = RM1,024
No of shares = 871m

Estimated FAIR VALUE of SHARES = RM1.18 per share  

(have not include new tenancy ratio growth of MPT (Feb 17) and, Mytel (Jul17) or new towers expansions 200-400 units p.a. over 2017 and Mytel build to suit of 300 units)


CONCLUSION

EXISTING BIZ (SEGMENT 1)

Tower Maintenance, Solar, Fiber laying contract. Value about RM464m using PE 16x.  Still growing. Solar making about RM4m in 2017.  In Malaysia, we also have about 200 towers.


NEW BIZ (SEGMENT 2)

OCK Group started a NEW and SUSTAINABLE biz called INDEPENDENT TOWER (OWNERSHIP & LEASE) in 2016, raising about RM500m, of which RM200m is EQUITY and about RM300m in BANK BORROWINGS.

This building and leasing tower biz is a high growth biz especially in Myanmar and Vietnam.  EBITDA multiple is about 7-8x, but can be improved to 5-6x if tenancy ratio is improved.  This is what OCK is trying to do.  OCK EBITDA ratio should be around 10x.  (Indonesia tower is 13x, better financial metrics and size)

1.  OCK has built 620 towers and rental coming in in 1Q2017.  Will continue to build remaining 300 towers.  OCK has a build and leaseback with TELENOR for 12+5+5+5 years.  Total cost about USD70m or RM300m.

2.  MPT become second tenant of the said towers.  Approximately 90 towers.

3.  Mytel become their third tenant of the said towers.  No figures was given.

4.  Mytel also requested OCK to build and leaseback 300 NEW TOWERS value approx. RM90m

5.  OCK bought about 2,000 BTS in Vietnam for about RM200m from a private equity.  OCK will be improving the costing + also building about 200 new BTS each year using internal generated funds + also improving the tenancy ratio.

6.  RHB mentioned in their report, possible additional M&A in Indochina (market news said Telenor wish to divest some of their towers in Myanmar.  (SPECULATION ONLY).

TRADE RECEIVABLE - SEGMENT 3

Discussed in AGM 2017, apparently, OCK has a very high Trade Receivable, of as high as RM100m.   Management explained that it is a Deferred Payment arrangement client and is of the view collection is not an issue.  This segment is ignore by analysts, hence, will give a surprise when collection is done.  This will reduce gearing ratio.
 
This is a VALUE + GROWTH stock.

Monday, August 14, 2017

SOS Failures of Great Traders.

Two years ago, hall-of-fame investor Stanley Druckenmiller recounted how internet stocks seduced him into straying from his investing principles. It was February 1999. Investors went cuckoo for the internet, and tech stocks were absurdly expensive. The S&P 500 Information Technology Index traded at a trailing price-to-earnings ratio of 66. Druckenmiller spotted the madness and decided to short internet stocks.  

No one told internet stocks, however, that the party was over. A month later Druckenmiller had lost $600 million and his portfolio was down 15 percent on the year. He had never had a down year.   
Frustrated, Druckenmiller sought advice from techies. It’s a new world, they told him. Throw away the old playbook. The technology revolution demands sky-high stock prices. Druckenmiller dumped his shorts and bet big on technology.

He was quickly rewarded. The Nasdaq 100 Index gained 93 percent from March to December 1999. Druckenmiller’s portfolio ended the year up 35 percent and his internet stocks traded at a breathtaking P/E of 104.

Drunk with internet riches, Druckenmiller plowed an additional $6 billion into tech stocks in March 2000. The bubble burst just days later and he lost $3 billion.

When asked what he learned from that experience, Druckenmiller replied, “I didn’t learn anything. I already knew that I wasn’t supposed to do that. I was just an emotional basket case and couldn’t help myself.”

About the same time, another hall of famer was wearily watching internet stocks. But unlike Druckenmiller, Jeremy Grantham, co-founder and Chief Investment Strategist of Grantham Mayo Van Otterloo (GMO), stuck to his playbook.

Grantham was a vocal proponent of mean reversion -- the simple idea that what goes up must come down, and vice versa. In the late 1990s, he was convinced that internet stocks had climbed too high and were poised to fall.

Grantham paid a price for his discipline. GMO’s U.S. Equity Allocation Fund trailed the Nasdaq 100 Index by 29 percentage points annually from 1995 to 1999, which didn’t endear GMO to investors. The firm’s assets under management fell from $26 billion in 1997 to $22 billion by 2001.


Stick to It
GMO paid a price for sitting out the dot-com craze but was vindicated when the bubble burst

Undeterred, Grantham insisted that the dot-com mania would end badly. He was right, of course. In a reversal of fortune, GMO’s fund beat the Nasdaq 100 by 26 percentage points annually from 2000 to 2002. By the end of 2003, the firm’s assets under management had ballooned to $53 billion.

What do stories from the dot-com era have to do with current markets? A lot. Markets haven’t been themselves since the 2008 financial crisis, and some deeply held investment principles are once again being tested.




Value stocks, for example, are supposed to shine during recoveries. They haven’t. Low interest rates are supposed to translate into meager returns from bonds. Not this time. The average 12-month yield for the Bloomberg Barclays U.S. Aggregate Bond Index has been 2.7 percent since 2009 through June, and yet the index has returned 4 percent annually over that time. High stock valuations are meant to augur low returns, but U.S. stocks have continued to rally despite rich valuations.

MY VIEW

Stock market is a place with many lessons.  Just when you thought you got it, the game changes again.  Lately, growth stocks outperformed valued stocks.

Lately Jeremy Grantham and Shiller tone down on their "doctrine" of things will goes back to their mean.  Markets remain high, despite most financial metrics point to a significant corrections.  Each market has its peculiarity.  

Bursa also has its peculiarity.  

  • Some stocks are cornered.  
  • Some stocks are tightly controlled, i.e. little float, hence, not a favourite to financial institutions.
  • Some based on theme, move up and down together (its like flavour of the month or quarter or year)
  • Some are run by Mainland Chinese, need to be careful.
  • Some are too good to be true (PE >50 times)
  • Some are just become syndicates' favourite until it ended
  • Some are popular because it is held by some self-claimed "super-investor"
  • Some managed by "corrupted management", yet still like by investors






Sunday, August 13, 2017

SOS Lessons from a Great Trader?

He never had a single down year and only had five losing quarters out of 120 altogether! That’s absolutely unheard of. And he did all of this in size. At his peak, Druck was running more than $20 billion and he was still managing to knock it out the park.
When you study Druckenmiller you get the sense that he was built in a laboratory, deep in a jungle somewhere, where he was put together piece by piece to create the perfect trader. Every character trait that makes up a good speculator, Druck possesses in spades… things like:
  • Mental flexibility
  • Independent thinking
  • Extreme competitiveness
  • Tireless inquisitiveness
  • Deep self-awareness
Maybe he’s a freak of nature or perhaps a secret Jesse Livermore / George Soros lovechild… or maybe he’s just a relentlessly determined trader who’s been on a lifelong path of mastery. Either way, it behooves us to study the thoughts and actions of one of the game’s greatest. And with that, let’s begin.

On what moves stocks

In Jack Schwager’s book The New Market Wizards, Stanley Druckenmiller said this in response to the question of how he evaluates stocks (emphasis is mine):
When I first started out, I did very thorough papers covering every aspect of a stock or industry. Before I could make the presentation to the stock selection committee, I first had to submit the paper to the research director. I particularly remember the time I gave him my paper on the banking industry. I felt very proud of my work. However, he read through it and said, “This is useless. What makes the stock go up and down?” That comment acted as a spur. Thereafter, I focused my analysis on seeking to identify the factors that were strongly correlated to a stock’s price movement as opposed to looking at all the fundamentals. Frankly, even today, many analysts still don’t know what makes their particular stocks go up and down.
The financial world is chock full of noise and nonsense. It’s filled with smart people who don’t know a damn thing about how the world really works. The financial system’s incentive structure is set up so that as long as analysts sound smart and pretend like they know why stock xyz is going up, they get rewarded. This holds true for all the talking heads and “experts” except for those who actually trade real money. They either learn the game or get competed out.
Being one of those who compete in the arena, Stanley Druckenmiller was forced to learn early on what actually drives prices. This is what he found:
Earnings don’t move the overall market; it’s the Federal Reserve Board… focus on the central banks and focus on the movement of liquidity… most people in the market are looking for earnings and conventional measures. It’s liquidity that moves markets.
Liquidity is the expansion and contraction of money, specifically credit. It’s the biggest variable that drives demand in an economy. It’s something our team at Macro Ops follows closely.
The federal reserve has the biggest lever on liquidity. This is why a trader needs to keep a constant eye on what the Fed is doing.
This is not to say that things like sales and earning don’t matter. They are still very important at the singular stock level. Here’s Druckenmiller again (emphasis mine):
Very often the key factor is related to earnings. This is particularly true of the bank stocks. Chemical stocks, however, behave quite differently. In this industry, the key factor seems to be capacity. The ideal time to buy the chemical stocks is after a lot of capacity has left the industry and there’s a catalyst that you believe will trigger an increase in demand. Conversely, the ideal time to sell these stocks is when there are lots of announcements for new plants, not when the earnings turn down. The reason for this behavioral pattern is that expansion plans mean that earnings will go down in two to three years, and the stock market tends to anticipate such developments.
The market is a future discounting machine; meaning earnings matter for a stock, but more so in the future than in the past.
Most market participants take recent earnings and just extrapolate them into the future. They fail to really look at the mechanism that drives the bottom line for a particular company or sector. The key to being a good trader is to identify the factor(s) that will drive earnings going forward, not what drove them in the past.
Stanley Druckenmiller said in a recent interview that his “job for 30 years was to anticipate changes in the economic trends that were not expected by others, and, therefore not yet reflected in security prices.” Focus on the future, not the past
Another thing that sets Druck apart is his willingness to use anything that works; as in any style or tool to find good trades and manage them.
Another discipline I learned that helped me determine whether a stock would go up or down is technical analysis. Drelles was very technically oriented, and I was probably more receptive to technical analysis than anyone else in the department. Even though Drelles was the boss, a lot of people thought he was a kook because of all the chart books he kept. However, I found that technical analysis could be very effective. 
I never use valuation to time the market. I use liquidity considerations and technical analysis for timing. Valuation only tells me how far the market can go once a catalyst enters the picture to change the market direction.
Druckenmiller employs a confluence of approaches (fundamental, macro, technical and sentiment) to broaden his view of the battlefield. This is a practice we follow at Macro Ops. It doesn’t make sense to pigeonhole yourself into a single rigid scope of analysis… simply use what works and discard what doesn’t.

How to make outsized returns

Stanley Druckenmiller throws conventional wisdom out the window. Instead of placing a lot of small diversified bets, he practices what we call the “Big Bet” philosophy, which consists of deploying a few large concentrated bets.
Here’s Druckenmiller on using the big bet philosophy (emphasis mine):
The first thing I heard when I got in the business, not from my mentor, was bulls make money, bears make money, and pigs get slaughtered. I’m here to tell you I was a pig. And I strongly believe the only way to make long-term returns in our business that are superior is by being a pig. I think diversification and all the stuff they’re teaching at business school today is probably the most misguided concept everywhere. And if you look at all the great investors that are as different as Warren Buffett, Carl Icahn, Ken Langone, they tend to be very, very concentrated bets. They see something, they bet it, and they bet the ranch on it. And that’s kind of the way my philosophy evolved, which was if you see – only maybe one or two times a year do you see something that really, really excites you… The mistake I’d say 98% of money managers and individuals make is they feel like they got to be playing in a bunch of stuff. And if you really see it, put all your eggs in one basket and then watch the basket very carefully.
A lot of wisdom in that paragraph. To earn superior long-term returns you have to be willing to bet big when your conviction is high. And the corollary is that you need to protect your capital by not wasting it on a “bunch of stuff” you don’t have much conviction on.
Avoiding loss should be the primary goal of every investor. This does not mean that investors should never incur the risk of any loss at all. Rather “don’t lose money” means that over several years an investment portfolio should not be exposed to appreciable loss of capital. While no one wishes to incur losses, you couldn’t prove it from an examination of the behavior of most investors and speculators. The speculative urge that lies within most of us is strong; the prospect of free lunch can be compelling, especially when others have already seemingly partaken. It can be hard to concentrate on losses when others are greedily reaching for gains and your broker is on the phone offering shares in the latest “hot” initial public offering. Yet the avoidance of loss is the surest way to ensure a profitable outcome.
You need to keep your powder dry so that when the stars align you can go for the jugular and turkey neck that son of a gun.
The importance of striking when the iron is hot is something Stanley Druckenmiller learned while trading for George Soros.
I’ve learned many things from [George Soros], but perhaps the most significant is that it’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong. The few times that Soros has ever criticized me was when I was really right on a market and didn’t maximize the opportunity.
An intense focus on capital preservation coupled with a big bet approach is the barbell philosophy used by many of the greats.
Keeping your losses small and pushing your winners hard is the name of the game in profitable speculation.
The fund washout we’re seeing today is not just because of the glut of mediocrity in the money management space, but also because even decent managers are scared to take the necessary risks to have big return years. They manage too much to the benchmark and are too short-term focused. That’s a recipe for average performance. Here’s Druck on how it should be done:
Many managers, once they’re up 30 or 40 percent, will book their year [i.e., trade very cautiously for the remainder of the year so as not to jeopardize the very good return that has already been realized]. The way to attain truly superior long-term returns is to grind it out until you’re up 30 or 40 percent, and then if you have the conviction, go for a 100 percent year. If you can put together a few near-100 percent years and avoid down years, then you can achieve really outstanding long-term returns.
Once you’ve earned the right to be aggressive and can bet with the house’s money (profits), you should plunge hard when that high conviction trade arises and push for outsized returns.

The trader’s mindset and handling losses

According to Druck, to be a winning trader you need to be “decisive, open-minded, flexible and competitive”.
The day before the crash in 1987, Stanley Druckenmiller switched from net short to 130% long because he thought the selloff was done. He saw the market bumping up against significant support. But through the course of the day he realized that he made a terrible mistake. The next day he flipped his book and got short the market and actually made money. You see this type of mental flexibility in all the greatest traders. And Druckenmiller is one trader that epitomizes it perhaps better than anybody else.
The practice of having “strong opinions, weakly held” is difficult but paramount to success.
In order to attain that level of mental flexibility, you need to learn to detach ego from your immediate trade outcomes. If you allow losses to affect your judgement, you’ll inevitably make bigger mistakes. Druckenmiller learned this lesson early on from Soros.
Soros is the best loss taker I’ve ever seen. He doesn’t care whether he wins or loses on a trade. If a trade doesn’t work, he’s confident enough about his ability to win on other trades that he can easily walk away from the position. There are a lot of shoes on the shelf; wear only the ones that fit. If you’re extremely confident, taking a loss doesn’t bother you.
One of the best parts about this game is that as long as you stay alive (protect your capital) you can always make another trade. Stanley Druckenmiller said the “wonderful thing about our business is that it’s liquid, and you can wipe the slate clean on any day. As long as I’m in control of the situation — that is, as long as I can cover my positions — there’s no reason to be nervous.”
I remember watching Charlie Rose interview Druckenmiller a few years ago. Charlie asked him why, after all these years, and with all the money he’s made, does he still put in 60-hour weeks trading? Druck responded (and I’m paraphrasing here) “because I have to… I love the game and I love winning, the money isn’t even important.”
To get to Druck’s level, you have to trade because that’s just what you do. It’s what you live for.

be very, very concentrated bets. They see something, they bet it, and they bet the ranch on it. And that’s kind of the way my philosophy evolved, which was if you see – only maybe one or two times a year do you see something that really, really excites you… The mistake I’d say 98% of money managers and individuals make is they feel like they got to be playing in a bunch of stuff. And if you really see it, put all your eggs in one basket and then watch the basket very carefully.
A lot of wisdom in that paragraph. To earn superior long-term returns you have to be willing to bet big when your conviction is high. And the corollary is that you need to protect your capital by not wasting it on a “bunch of stuff” you don’t have much conviction on.
Avoiding loss should be the primary goal of every investor. This does not mean that investors should never incur the risk of any loss at all. Rather “don’t lose money” means that over several years an investment portfolio should not be exposed to appreciable loss of capital. While no one wishes to incur losses, you couldn’t prove it from an examination of the behavior of most investors and speculators. The speculative urge that lies within most of us is strong; the prospect of free lunch can be compelling, especially when others have already seemingly partaken. It can be hard to concentrate on losses when others are greedily reaching for gains and your broker is on the phone offering shares in the latest “hot” initial public offering. Yet the avoidance of loss is the surest way to ensure a profitable outcome.
You need to keep your powder dry so that when the stars align you can go for the jugular and turkey neck that son of a gun.
The importance of striking when the iron is hot is something Stanley Druckenmiller learned while trading for George Soros.
I’ve learned many things from [George Soros], but perhaps the most significant is that it’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong. The few times that Soros has ever criticized me was when I was really right on a market and didn’t maximize the opportunity.
An intense focus on capital preservation coupled with a big bet approach is the barbell philosophy used by many of the greats.
Keeping your losses small and pushing your winners hard is the name of the game in profitable speculation.
The fund washout we’re seeing today is not just because of the glut of mediocrity in the money management space, but also because even decent managers are scared to take the necessary risks to have big return years. They manage too much to the benchmark and are too short-term focused. That’s a recipe for average performance. Here’s Druck on how it should be done:
Many managers, once they’re up 30 or 40 percent, will book their year [i.e., trade very cautiously for the remainder of the year so as not to jeopardize the very good return that has already been realized]. The way to attain truly superior long-term returns is to grind it out until you’re up 30 or 40 percent, and then if you have the conviction, go for a 100 percent year. If you can put together a few near-100 percent years and avoid down years, then you can achieve really outstanding long-term returns.
Once you’ve earned the right to be aggressive and can bet with the house’s money (profits), you should plunge hard when that high conviction trade arises and push for outsized returns.

Warnings

The above article is for HEDGE FUND traders, not typical long term value investors.  However some of the principles worth noting are:

Learn the FACTORS that drive the EARNINGS of a company into the FUTURE.  VALUATION helps to determine the upside ceiling, however, for TIMING, one have to base on TECHNICAL ANALYSIS + TRENDS + LIQUIDITY that moves the market.


Saturday, August 12, 2017

SOS The 7 Sins of Investing?

For hundreds of years the Seven Deadly Sins have fascinated human beings. Today, let us throw Investing into the fray and take a look at what Seven Deadly Sins investors commit all the time. Just like how the Seven Deadly Sins will cause the downfall of mankind, engaging in these Seven Investing Sins will eventually lead to an investor’s downfall.
Sloth – the avoidance of physical or spiritual work. 
Sloth needs no further introduction. Sloth is the reason why many non-investors put off investing. Growing money is not difficult, but for someone who has never done so in his or her life, it can be especially daunting initially. It is much easier to avoid the physical work of learning about investing and the spiritual work of deciding what to invest in.
Sloth is also the reason why many investors do badly. Investing is a sport. Like any sport, it requires practice and hard work. Roger Federer hits more back hand shots in a day for practice than most recreational tennis players do in a month. Is there any wonder why he is the holder of 17 Grand Slam titles and we are not? And if we do not expect to challenge and beat Federer at the game of tennis, what makes us think we could beat the professionals at their money game
Never stop learning.  Learn and apply.  Read, read, and read. 
Wrath – uncontrolled feelings of rage and anger. 
For a real life demonstration of investor wrath, look no further than the Annual General Meeting of some listed companies in Singapore.
At a recently concluded session a couple of weeks ago, investors directed their anger, no holds barred, at the board of an investment holding company. They were angry at the board for not paying out good dividends. They were angry at the board for declaring a substantial amount of directors fees. They were angry with the board for allowing the share price to languish below what they had paid for.
It was a gathering of the angriest people in Singapore. The wrath on display was raw and real. It was almost as though shareholders have been dormant for an entire year and have been just waiting patiently for this opportunity to explode. If it hadn’t been so sad, it would have been almost comical.
Wrath is an emotion. Emotions cause us to make irrational decisions. If investors in this particular company have been bottling up their emotions the entire time it worries me to think about what unsound decisions they have made during the course of the year.
Of course some would say that at AGMs, Gluttony is often on display as well 🙂
Investing is a test of our emotion.  So, we must learn to control our emotions, then, we can invest rationally instead of emotionally.  Investing emotionally is not a good idea.
Gluttony – the desire to consume more than one desires. 
Commonly used to describe the act of buffet goers piling their plates and stuffing their faces, but in today’s context I will use it to describe the overconsumption of information.
We are absolutely overwhelmed by the information available in the marketplace today. In my inbox at the end of the day sits numerous research reports by a variety of banks and brokerage houses. On TV the talking heads continue to regale us with ‘news’ and commentary. On social media platforms facebook and twitter I am bombarded constantly by breaking news and trivial twenty four seven.
And guess what, we happily lap it all up! Just like the punter at the buffet line who pays scant regard to his calorie and cholesterol count, we too hardly spend a moment to think about the damage all this information is doing to our system. After all, just like the boh boh cha cha at the dessert bar, it is free, so why waste it?
An obese person needs less food to help him live a healthier life, what we need is less information to help us make better investing decisions.

Don't over diversify into something beyond your circle of competence.

Lust – the cravings for the pleasures of the body. 
Investors lust! A sexy member of the opposite sex stirs emotions and causes one to make irrational decisions. A sexy money story has the same effect and more.
Imagine hearing about an impending takeover bid whispered in confidence, or a chance to own a gazetted conservation heritage building in a far flung land, or the promise of a biotech company on the verge of a major drug development break through. Imagine returns up to 2% per month, 30% per annum, Guaranteed. These are the stuff investors lust after every day.
We yearn for these returns. We yearn for a piece of these deals. These are the stuff investing porn is made up of.

Insider information in the long run will make you broke.
Envy – Desire for others’ traits, status abilities or situation. 
As human beings, envy is an unavoidable emotion. We envy the neighbour with the newer house and the flashier car. We envy our classmates with the better grades. We envy the colleague with the longer title and the bigger paycheck. Envy is the basis for the entire cosmetic surgery industry. Envy in the right doses and directed towards the right goals beings about progress and improvement. Envy helps us to set targets and achieve greater things. Yet, when envy is misdirected it often ends in disaster.
Guru envy is when an investor looks towards a ‘Guru’ and sets out to be like him or her. After all, who does not want to invest like Warren Buffett, who does not want to buy into emerging markets all over the world like Jim Rogers, who does not want to be able to call the right market tops and bottoms like George Soros?
The truth is, we cannot be Buffett or Rogers or Soros. We are ourselves. Some of us can take on more risk, others are unable to. Some of us are inherently more patient, others tend to be less so. We know different things, like to do different things, we have different personalities.
Envying a guru and force fitting your own circumstances to the guru’s will not work. It will lead to ruin instead.

Many treat investments or rather speculating in stocks like a competition.  How great or bad another person perform has nothing got to do with your own investment.  As long as you met what you set out to achieve, say 20% p.a. for a long term horizon, be happy with it.
Pride – Excessive belief in one’s abilities. Sin from which all others arise. 
This sin is so prevalent that it has even got a name to call its own. Many names in fact, including the illusory superiority effect, leniency error, superiority bias, Dunning-Kruger effect, and the above average effect.
Over the years and in many different settings, researchers have asked participants to rank themselves on academic abilities, professional abilities, relationships, happiness, health, IQ, popularity and driving abilities. One indisputable theme emerged – results shows that most people rank themselves as being above average in every imaginable situation.
Don’t believe me? Take a moment to try this out. On a scale of one to ten, with one being the lowest and ten being the highest, rank yourselves. Write down how good do you think you are as a driver on the roads, as a parent to your kids, as an employee at work, as a friend to your closest and finally as an investor responsible for managing your own money.
What is your score? Are you a better than average person in all ways? Hang on a second. Can we all be better than average?
Pride makes us think we are better than what we really are. It causes us to be overconfident. This is extremely dangerous when it comes to investing.

Haven't we heard about story of "Pride before the fall?"
Greed – desire for material wealth or gain
Greed causes us to covert more and more. Greed is the reason why money is never enough. Greed is the reason why we like to pick stocks and time the market when 90% of us are better off investing in an index fund using the dollar cost averaging principle. Greed is the reason for the irrational exuberance in the stock markets. Greed is the reason why bubbles form. Greed is the reason why we invest beyond our means. Greed is the reason why we sell a stock, watch it go up, and then load up again at its peak just in time to see it all crashing down.
Greed is the reason why stock markets even exists. Enough said.

Greed is when we invest beyond our means.  And load up again at its peak just in time to see it all crashing down.
So there we have it. the Seven Sins of Investing. Are you guilty of one or more of them? Leave a comment below to tell us more!

You can see for a fact, not many unit trusts in Malaysia with 20 years history attain >20% p.a. CAGR, in fact, I cannot name you one.  So, set your financial objective realistically or you are planning to fail.  I am referring to 10 years, 20 years and 30 years, NOT 6 months to 4 years.  However, if you are here for short term, i.e. less than 5 years, then you financial goals may be different.

Sunday, August 6, 2017

SOS The Voting and Weighing Machines of Investments

TRUE OR FALSE?

The father value of investing, Benjamin Graham, explained this concept by saying that in the short run, the market is like a voting machine--tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine--assessing the substance of a company. 

The message is clear: 

What matters in the long run is a company's actual underlying business performance and not the investing public's fickle opinion about its prospects in the short run.


Bursa's example

IJM Corp - 30 years, up 81 times
Gamuda - 30 years, up xx times
Genting Plantation - 20 years, up xx times
Dialog - 20 years, up xx times


Some may be popular for a few years and eventually fazes away (many examples) but only a handful can make it to their 20-30 years with a CAGR in share price of above 15%.


IS INVESTING A COMPETITION?

It appears to be.  Look at the rankings for the mutual funds.  Everyone wanted to get the best rankings, i.e. improve their AUM and commissions charge.  However, if we really look into 20 years mutual funds, you can only find a handful that exceed 10% (CAGR).  Why, most of it used to pay for the fund managers, analysts, ranking officers, sale consultants, marketing expenses, CEOs, etc.  

Our private unit trusts has a size of about RM200b, a 1.5% management fee of RM3b a year biz.  Not a small one.  If we include some public unit trust, the total is about RM600b.  

It is a competition, a competition for NEW FUNDS.  Hence, it defeated the fundamental concepts of long term investments.  Assume the first few years your investment is lousy, that is end of the story for this unit trust, why, because when there is nothing to show on the rankings, many will pull out of that unit trust.  Any unit trust always have a lot of rules and restrictions, you will never see they hold a top 10 stocks for 30 years.  If they can hold Maybank, IJM Corp, Dialog, Genting Plantation, PBB for 20-30 years, they could have been the BEST unit trust in MALAYSIA.

Although we know that investing is not a competition, the unit trusts platform have made it into a competition.  Similarly, for individual investors as well (even though it is not governed by the rules and restrictions or commissions), it is treated as a competition.

Hence, it defeat the most fundamental principles of investment in stocks, treating it like a COMPETITION.  Perhaps, they can blame it on human nature, without competition there is no advancements.  If that is the case, why, why, many unit trusts is unable to get a return of exceeding CAGR 10% in 20 years or 30 years horizon as they claim they can do?  Mind you, they are the heaviest participants in the market and suppose to be manage by the professionals competent people and experiences enough to make a above average return.


INDIVIDUAL INVESTORS

So, individual investors, please do not fall into the TRAP and treat investing as a COMPETITION.  Have your own financial objective (a reasonable one), and be happy about your own achievements.  Don't be a voting machine, only good for the short term (unless your parameter is clear, you are here only for short term).

Because of the "competitive" nature, one always compare their own returns with others and second guess their own investments decision.  Until one become independent in their own investments, it is very difficult to achieve one's own goal.  Because, everyone has different targets or objectives.


BASIC FINANCIAL METRICS FOR VALUING A STOCK

1.  PE 
2.  PBV
3.  PEG
4.  ROE
5.  FCF

Financial metrics is not everything.  Qualitative metrics is as important, like the quality of management.  Financial metrics does not guarantee an absolute success in investing, but it helps to eliminate many "lemons" and avoid major "risk".

Knowing what you invest is primary, as ignorance itself is a risk.

Other detail metrics I like:

Incremental principle (increase in PAT over increase in SF)
Gearing ratio
ROIC
EBITDA/EV multiple
Operating CF/IC
Many others specific to their industry i.e. EV/mature palm oil in ha, occupancy ratio, etc.



Saturday, July 29, 2017

SOS Hengyuan - can all the sifus be right?

HENGYUAN (A.K.A. SHELL REFINING COMPANY)

Many sifus in i3 believe that Hengyuan is highly undervalued at the current price 29 July 2017 at RM6.90 or market cap of RM2.070 billion, due to the fact, it is trading at PE of only 2-3x.  In fact, most are saying it is easily worth RM14.00, some say as high as RM22.00.


I WISHES MANY CAN MAKE TONNES OF MONEY FROM HENGYUAN 

19 Jan 2017  Traded at about RM2.30 per share or market capitalisation RM690m (300m shares)

19 Jan 2017 AmBank Independent Circular (IAC) said Hengyuan should worth about RM4.16 to RM4.75

19 Jan 2017 wecan2088 wrote and said it is worth RM4.00


BALANCE SHEET AS AT 31 DEC 2016

1.  Total borrowings:  RM1,400 million (next to be paid within next 5 years)

2.  Going concern is based on upgrade from Euro 2 to Euro 4M (2018) and further to Euro 5 (2022), refer to Annual Report 2016, Note 3 and Key Audit Matters in page 94

3.  Shell's BOD in 2014 conducted a structured review on the viability of the upgrade of Euro 2 to Euro 4M and Euro 5, and they find it not a viable option, hence providing an impairment of assets in 2014 accounts of RM460.9million (page 27 of IAC)

4.  In order to upgrade, the following capex is estimated (from IAC):

    Euro 2 to Euro 4M         -         USD144million (2018-2020) - RM620 m

    Euro 4M to Euro 5        -          USD476 million (2022-2027) - RM2,050 m

5.  So, going forward, the commitment of Hengyuan is as follows:

Loan repayment and capex:

           Loan  
2017  150m    
2018  340m    
2019  350m    
2020  350m
2021  210m

Capex for Euro 4M upgrade
2018   310m
2019   310m

Capex for Euro 5 upgrade

2,050m (in 5 years or about RM410m p.a.)

6.  Total commitment for loan and capex is about RM4,070 million (next 9-10  years)


MY VIEW (mine friend asked about the value of this company)

I understand the 1Q 2017, it make about RM279m, a record earnings, and 2015 and 2016 PAT is about RM330m p.a.  Although the first quarter results improved from RM101m, the net borrowing remains the same at RM1.1billion (between 31.3.17 and 31.12.16), other than inventories was up about RM250m in the first quarter.  The inventories was also up RM130m from FYE2015 to 2016.

Not sure why since Dec 2015 to March 2017, inventories increased above RM380m.

A21, Qtr1 2017, Prospects, Refinery margins are expected to remain uncertain.

Am unable to make a conclusive view about the company due to limited knowledge in refining business.  However, I do know the loan repayment and commitment of about RM4 billion is REAL for the next 9-10 years.

Lets hope the company makes tonnes of cash, repay all their loans and upgrade to Euro 4M and Euro 5 without any problems.

As at 28 July 2017         RM6.90 
  
Target Price 1                RM14.00
Target Price 2                RM22.00

AmBank (IAC) report   RM4.75

Although it is tempting, as I was unable to come to the conclusion of a "considered valuation",  hence, unable to advice my friend.

A lot of participants only looking at the current annualised PE to evaluate the value of Hengyuan.  But don't forget, the useful life of Euro 2 is Sept 2018 and not perpetual (or a 20 years concessions).  And in 2018, they will be stopping for major maintenance and upgrade for 2-3 months.  

Then, they have to spend capex RM700m in 2018 to upgrade to Euro 4M, and another RM2.0 billion to upgrade to Euro 5 in 2022.  Current positive crack spread MAY bring in sufficient FCF to settle the remaining RM1.4b loan (in 5 years) or even with excess, but, there is no guarantee post Euro 4M or 5 they are guaranteed to make profit (depends on the crack spread again - no one knows).  

Even we gave this type of project a payback period say about 4-6 years is consider optimistic (normally for project that huge, easily takes 7 years).  That's why, when we see it from a FCF perspective of 5 years period, you will see a better picture.  Like the last 10 years, out of which, 5 years are making losses (or accumulated of RM158m losses).  In the long run 5-10 years, it may not be as rosy as using just PE basis.  

Just assumed crack spread is rosy for next 5 years, why Hengyuan (or directors or principal officers) is not smart enough to do a share buy back say at RM3 (they already know in Jan and Feb 2017 crack spread is positive) or RM8 knowing likely the FCF will get them to easily RM15 or RM22? 

I know, someone will say, this is another sour grape.  "The trouble we have is we rather be ruined by praise than saved by criticism" by Norman Vincent Peale  (by the way, this is not a criticism, just a view/feedback of the fundamental of Hengyuan financial position for next few years - btw, Hengyuan does not belong to anyone, the stock price does not recognise the participants) 

WB, a company intrinsic value is the "estimates" on the present value of future cash flow.  (not looking only at one year PE).  

Like any cyclical biz, dry bulk peak at 11,000 and now is only less than 1,000.  CPO peak at RM4,000 per tonne, now is about RM2,600 per tonne, Oil & Gas company when crude oil is peak at USD147 per barrel (many went bankrupt, including oil & gas related biz).  Normally we use an average of their prices spread over a cycle (say 8-10 years).  So now the "crack margin" is good, will it last next 5-10 years? Based on last 10 years, what is the average "crack margin".  (I can see 5 years profit, 5 years loss) Does it required any major CAPEX and how long will it stops for upgrade?  How can we evaluate a company just by looking at PE alone?  What about cash flow statement or balance sheet? Can it sustained? What about possible losses if crude oil price dropped say 10-15%, which is very possible.

Why did SHELL sold it about 50% of its NTA?  Don't forget, it has been taken over by Mainland Chinese company, their way of looking at things are different (Even their regulator try to fine them for keeping so much excess cash and not paying dividend for its shareholders).

Anyone "understand" financial basic will tell you, to understand a company, we have to understand not only its P&L, we also need to analyse its Cash Flow statement and Balance Sheet.  Then, at least evaluate, what the company needs to sustain such earnings, new capex, upgrades, down time, viability, market condition, etc.  

IT IS THE SHORT TERM VOTING MACHINE, AND IN THE LONG TERM, IT IS A WEIGHING MACHINE THEORY (PROVEN)

(A friend of mine asked)

"A man interrupted one of the Buddha’s lectures with a flood of abuse.
Buddha waited until he had finished and then asked him:
If a man offered a gift to another but the gift was declined, to whom would the gift belong?
To the one who offered it, said the man.
Then, said the Buddha, I decline to accept your abuse and request you to keep it for yourself.”