Author Archive

Posted on August 31, 2010 - by Jay

Valuation Expansion

On Wall Street, a lot of educated monkeys like to talk about valuation expansion. Basically valuation expansion simply means that some stock trading at 15x PE should be trading at 25x PE bcos its industry is sexy, or the company has undergone transformation of its business to become the new growth story or some other cock-and-bull story.

So say the stock price today is $15, and the stock earns an EPS of $1 ie PE is 15x. Valuation expansion simply means that the stock should be $25 bcos PE should be 25x. The basis of this argument is that since the stock is in a growth industry, or has transformed its business, or watever crap reason, the future EPS is not just $1 but much higher. Since we are not sure what that would be, just give it a higher PE to justify this growth.

The ingenuity of this crap theory is that nothing changed, but the “value” of this stock just expanded 60%. This then can be used to justify buying the stock at any price bcos we can always assuming super normal growth and increase the valuation. We can even increase the target multiple further from 25x to 50x. This would expand the original “value” by 333%.

Let’s just do a simple experiment the debunk this valuation expansion theory.
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Posted on July 31, 2010 - by Jay

Portfolio Management for Retail Investors

Ok so much so for institutional portfolio managers. On average, they are crap. Once in a while, you find stars like Peter Lynch, Seth Klarman and Warren Buffett. But these exceptional people are far and few in between.

The interesting story about Seth Klarman is always about this book that he had written like ages ago, called “Margin of Safety”. It talks about value investing and it didn’t sell well at all. So it went out of print. But recently, some Wall Street people started to bid for it on Ebay and it was sold for US$1,000!

Well, I got a free internet copy and am reading it. Cost me like S$10 to get it printed and binded.

Anyways, today we talk a little about portfolio management for the retail investors. How can a retail guy like you and me try to do some portfolio management?

Well, first, we must have like a couple of tens of thousands to start with. If you only have $10k. Then you can basically only buy 1 or 2 stocks. There is not much portfolio management to talk about. Just buy the blue chips or maybe buy an ETF and wait for it to grow to like $50k. (more…)

Posted on July 22, 2010 - by Jay

How to Fail in Portfolio Management

Portfolio managers as a group has not contributed anything to the society at large. I mean a barber helps to cut people’s hair, a doctor saves lives and a teacher educates our children. Lawyers, politicians, portfolio managers, as a whole, subtracted value from the society, if you ask me.

The famous stats is this, and I must state again: more than 80% of all fund managers fail to beat market indices over long periods of time. Some of them do beat the index for like 1 or 2 yrs, only to falter in the 3rd or 4th.

The market is really terribly efficient. The S&P500 has returned 10%pa on average over the last 80 years. Most other indices don’t go that far back but academic studies have shown that stocks or equities, returned high single digit to low double digit per annum, on average.

Hence it is not easy to beat the market over the long run. Yes you may have a lucky trade, like buying BP at 250p and now it’s close to 400p, a 60% return in 2 mths. But to replicate this for 10 years is another story. (more…)

Posted on July 9, 2010 - by Jay

Portfolio Management: The Job

So basically portfolio management boils down to over or underweighting some benchmark stocks. Now that doesn’t sound too difficult, why should they be paid exorbitant salaries? And despite getting paid so much, they FAIL to deliver the results?

Well first we talk about the skills needed. The portfolio manager needs to know a lot to do his job. And I really do mean A LOT. If you think in terms of those 300 page university textbooks, it’s probably 30-40 of them (CFA has 18 for 3 levels). Plus, 10-20 years worth of global news material, that is maybe volume to fill another 5-10 textbooks.

On academic subjects, first, he needs to know about security analysis, that is the basic bread and butter. Then the financial statements, ie accounting. Of course there are the relevant subjects like economics, finance, business, statistics etc. Well most these are covered in CFA, but CFA just gives a basic flavour. To be well-versed takes years more and there are also subjects outside CFA, like psychology etc.

Then on the non-academic side, there are the 6 major industry groups: Financials, Resources, Industrials, Staples, IT and Utilities. The portfolio manager needs know the dynamics/drivers/issues of all of them. Not to mention there are perhaps close to 100 different sub-industries and businesses in all. On top of that, he needs to be in tune with global current affairs. Read more…

Posted on July 6, 2010 - by Jay

Dividend Yield Stocks – 2010

This is a bonus post!

Generated a list of stocks with high dividend on the SGX (more than 5% dividend yield)

Sorted according to payout ratio, a high payout ratio means that there is increased likelihood that the firm cannot maintain its dividend if earnings don’t do well. Read more…

Posted on June 29, 2010 - by Jay

Portfolio Management

To be a portfolio manager is a much coveted goal for a lot of people struggling in the financial industry. This position is deemed as being at the top of the food chain. Everyone feeds information to the portfolio manager so that he can make the best investment decisions. The portfolio manager is THE Top Dog.

However, the way that the industry had evolved makes the top dog’s job rather stupid. In fact the whole fund management industry doesn’t really make a lot of sense.

Just look at the whole management fee issue. For most funds that it out there, 1% is taken out of the asset base to be paid out as management fee. Basically for every $100 of unit trust that you buy, $1 is paid to the fund manager which consist of the portfolio manager, the team of analysts and the support staff that manages the fund for you.

Now 1% may not sound big, but since average investment return is usually less than 10% per year, it means that you are paying out 10% or more to these fund managers every year.

Well, we can talk about this atrocity some other day. Let’s look at the portfolio manager’s job. His job is to manage the fund such that he beats some benchmark. This benchmark is usually some stock index. Say the S&500, the Hang Seng Index or the STI index etc. Read more…

Posted on May 14, 2010 - by Jay

On Wikipedia and Markets

I was reading this book “The World Is Flat” and this small little story on Wikipedia caught my attention. Btw this is quite an old book and one can so obviously deduce I am so behind in my reading… I think the author has written like a gazillion updates and published sequels. There wasnt much of truly good insights but lots of small interesting stories which makes it an entertaining read and perhaps that’s why it’s selling million copies.

Anyways the story on Wikipedia was that even though it was a free encyclopedia, things posted can be quite accurate. The rationale was that for every topic, there will always those that are Pro and Against. So the Pros will write their story, but whatever is overboard gets deleted by the Against. This goes on until what is written on it presents the most valid view and nobody edits the page any further.

Of course this only works when there are many people editing the pages. At the end of this wiki saga, the author did state an example where a senator was accused of involved in killing JFK on wiki, and since a lot of sites simply take what is on wiki, he was shocked to find newpapers calling him asking about JFK. Similarly you can go and write a wiki page full of rubbish to spite your idol’s rival and if not enough fans edit the pages, you achieve your aim.

Now the link here is that markets work in the same work too. Someone who thinks the stock is too cheap buys it, someone who thinks otherwise sells it. Read more…

Posted on April 22, 2010 - by Jay

The Acme of Value Investing

I have been thinking about this for a while. Some time back, Warren Buffett started buying over mum-and-pop businesses that have grown tremendously over a long span of time from its original owners. These owners have painstakingly built their empires over the years, they are now old, they want to cash out some of the future earnings of their business, so they go to Buffett. But how do they determine price? Buffett being Buffett, is not going to undercut them by paying them just 10x earnings. But he definitely will not overpay as well.

In the stock market, Mr Market determines the price, which some times go crazy and the owners of businesses (ie shareholders) have no choice but to sell at basement prices. Buffett takes this opportunity to buy from these willing sellers. Well, in the first place, some of these market participants never regarded themselves as the owners of the firms which they hold stocks. They are in for the quick gamble. So Buffett gladly profits from their fear.
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Posted on April 11, 2010 - by Jay

The Truth Shall Prevail

Value investing is based on an inherent fundamental assumption: that someday, an asset’s true value (or intrinsic value) would be realized. Hence buying a stock when it is trading significantly below intrinsic value would yield good return bcos they eventually trade back to its intrinsic value (albeit after a long time and only for a short while). But what happens if the stock never reverts to its intrinsic value? Is that likely? Well I don’t have a good answer to that, but let’s explore this topic a bit more broadly first.

Analogous to this the concept that a stock eventually reverts to its intrinsic value are similar logics like: the truth shall prevail, good will triumph over evil, hardwork eventually gets rewarded etc. I would think that these tenets should hold most of the time, if not all the time. The issue in the real world is that it can take generations for them to come true. Think Khmer Rogue, North Korea. Think about why some incompetent managers can stay in the firm for years. Or why some evil deeds never get punished (50% of murder cases are unsolved). Well the stock market is efficient, but the reality may not be as efficient.
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Posted on March 19, 2010 - by Jay

Wealth, innovation, hardwork and others

This post serves as clarifying some economics concepts for myself also. It has to do with wealth and how it links to being rich and famous and getting adored by the masses.

Imagine that the world has only 2 pple: 1 farmer and 1 fisherman. The farmer harvests some rice every day and the fisherman catches some fishes. The farmer will sell some rice to the fisherman and vice versa. So the money supply in this world has maybe like $4, $2 with the farmer which he gets from selling 2 kg of rice and $2 for the fisherman who sells 2 kg of fish.

So the question is how can either of them get richer?

This is quite easy to answer, say the farmer is the aspire-to-be-rich kind, so he contemplates to be richer than his other companion on this lonely Earth. Well, what can he do? He can raise prices.
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