Richard Thaler is the author of the book "Nudge" and a professor of behavior economic at Chicago. This conversation is a pretty good outline of key thoughts in behavior economics and its potential application in many social issues. As Charlie Munger said: "If economics is not behavior, then what is it?", real life can only be properly understood by multiple models...
Monday, November 22, 2010
Saturday, November 20, 2010
Pretty Good for Government Work
Following is the open letter from Oracle of Omaha published at The New York Times.
DEAR Uncle Sam,
My mother told me to send thank-you notes promptly. I’ve been remiss.
Let me remind you why I’m writing. Just over two years ago, in September 2008, our country faced an economic meltdown. Fannie Mae and Freddie Mac, the pillars that supported our mortgage system, had been forced into conservatorship. Several of our largest commercial banks were teetering. One of Wall Street’s giant investment banks had gone bankrupt, and the remaining three were poised to follow. A.I.G., the world’s most famous insurer, was at death’s door.
Many of our largest industrial companies, dependent on commercial paper financing that had disappeared, were weeks away from exhausting their cash resources. Indeed, all of corporate America’s dominoes were lined up, ready to topple at lightning speed. My own company, Berkshire Hathaway, might have been the last to fall, but that distinction provided little solace.
Nor was it just business that was in peril: 300 million Americans were in the domino line as well. Just days before, the jobs, income, 401(k)’s and money-market funds of these citizens had seemed secure. Then, virtually overnight, everything began to turn into pumpkins and mice. There was no hiding place. A destructive economic force unlike any seen for generations had been unleashed.
Only one counterforce was available, and that was you, Uncle Sam. Yes, you are often clumsy, even inept. But when businesses and people worldwide race to get liquid, you are the only party with the resources to take the other side of the transaction. And when our citizens are losing trust by the hour in institutions they once revered, only you can restore calm.
When the crisis struck, I felt you would understand the role you had to play. But you’ve never been known for speed, and in a meltdown minutes matter. I worried whether the barrage of shattering surprises would disorient you. You would have to improvise solutions on the run, stretch legal boundaries and avoid slowdowns, like Congressional hearings and studies. You would also need to get turf-conscious departments to work together in mounting your counterattack. The challenge was huge, and many people thought you were not up to it.
Well, Uncle Sam, you delivered. People will second-guess your specific decisions; you can always count on that. But just as there is a fog of war, there is a fog of panic — and, overall, your actions were remarkably effective.
I don’t know precisely how you orchestrated these. But I did have a pretty good seat as events unfolded, and I would like to commend a few of your troops. In the darkest of days, Ben Bernanke, Hank Paulson, Tim Geithner and Sheila Bair grasped the gravity of the situation and acted with courage and dispatch. And though I never voted for George W. Bush, I give him great credit for leading, even as Congress postured and squabbled.
You have been criticized, Uncle Sam, for some of the earlier decisions that got us in this mess — most prominently, for not battling the rot building up in the housing market. But then few of your critics saw matters clearly either. In truth, almost all of the country became possessed by the idea that home prices could never fall significantly.
That was a mass delusion, reinforced by rapidly rising prices that discredited the few skeptics who warned of trouble. Delusions, whether about tulips or Internet stocks, produce bubbles. And when bubbles pop, they can generate waves of trouble that hit shores far from their origin. This bubble was a doozy and its pop was felt around the world.
So, again, Uncle Sam, thanks to you and your aides. Often you are wasteful, and sometimes you are bullying. On occasion, you are downright maddening. But in this extraordinary emergency, you came through — and the world would look far different now if you had not.
Your grateful nephew,
Warren
Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.
DEAR Uncle Sam,
My mother told me to send thank-you notes promptly. I’ve been remiss.
Let me remind you why I’m writing. Just over two years ago, in September 2008, our country faced an economic meltdown. Fannie Mae and Freddie Mac, the pillars that supported our mortgage system, had been forced into conservatorship. Several of our largest commercial banks were teetering. One of Wall Street’s giant investment banks had gone bankrupt, and the remaining three were poised to follow. A.I.G., the world’s most famous insurer, was at death’s door.
Many of our largest industrial companies, dependent on commercial paper financing that had disappeared, were weeks away from exhausting their cash resources. Indeed, all of corporate America’s dominoes were lined up, ready to topple at lightning speed. My own company, Berkshire Hathaway, might have been the last to fall, but that distinction provided little solace.
Nor was it just business that was in peril: 300 million Americans were in the domino line as well. Just days before, the jobs, income, 401(k)’s and money-market funds of these citizens had seemed secure. Then, virtually overnight, everything began to turn into pumpkins and mice. There was no hiding place. A destructive economic force unlike any seen for generations had been unleashed.
Only one counterforce was available, and that was you, Uncle Sam. Yes, you are often clumsy, even inept. But when businesses and people worldwide race to get liquid, you are the only party with the resources to take the other side of the transaction. And when our citizens are losing trust by the hour in institutions they once revered, only you can restore calm.
When the crisis struck, I felt you would understand the role you had to play. But you’ve never been known for speed, and in a meltdown minutes matter. I worried whether the barrage of shattering surprises would disorient you. You would have to improvise solutions on the run, stretch legal boundaries and avoid slowdowns, like Congressional hearings and studies. You would also need to get turf-conscious departments to work together in mounting your counterattack. The challenge was huge, and many people thought you were not up to it.
Well, Uncle Sam, you delivered. People will second-guess your specific decisions; you can always count on that. But just as there is a fog of war, there is a fog of panic — and, overall, your actions were remarkably effective.
I don’t know precisely how you orchestrated these. But I did have a pretty good seat as events unfolded, and I would like to commend a few of your troops. In the darkest of days, Ben Bernanke, Hank Paulson, Tim Geithner and Sheila Bair grasped the gravity of the situation and acted with courage and dispatch. And though I never voted for George W. Bush, I give him great credit for leading, even as Congress postured and squabbled.
You have been criticized, Uncle Sam, for some of the earlier decisions that got us in this mess — most prominently, for not battling the rot building up in the housing market. But then few of your critics saw matters clearly either. In truth, almost all of the country became possessed by the idea that home prices could never fall significantly.
That was a mass delusion, reinforced by rapidly rising prices that discredited the few skeptics who warned of trouble. Delusions, whether about tulips or Internet stocks, produce bubbles. And when bubbles pop, they can generate waves of trouble that hit shores far from their origin. This bubble was a doozy and its pop was felt around the world.
So, again, Uncle Sam, thanks to you and your aides. Often you are wasteful, and sometimes you are bullying. On occasion, you are downright maddening. But in this extraordinary emergency, you came through — and the world would look far different now if you had not.
Your grateful nephew,
Warren
Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.
Saturday, October 16, 2010
Jeff Bezos Princeton Speech
"Sometimes it is harder to be kind than be clever..." another inspiring speech from the founder of Amazon.com.
Sunday, October 10, 2010
Mike Novogratz Interview
This is an excellent interview with one of the leading global macro traders.
1. There is a tremendous amount of instint in trading - pattern recognition, learn to trust your intuition, put multiple piece of information together (both fundamental and technical).
2. Create your own version of trading rules that you will abide by and that is the discipline part of the game.
3. Great traders buy when he is bullish and sell when he is bearing. But 9 out of 10 people in the business can't do that.
4. Primary focus is on risk - in the same vein and also different from fundamental, stock investor.
1. There is a tremendous amount of instint in trading - pattern recognition, learn to trust your intuition, put multiple piece of information together (both fundamental and technical).
2. Create your own version of trading rules that you will abide by and that is the discipline part of the game.
3. Great traders buy when he is bullish and sell when he is bearing. But 9 out of 10 people in the business can't do that.
4. Primary focus is on risk - in the same vein and also different from fundamental, stock investor.
Friday, October 8, 2010
Saturday, September 25, 2010
A conversation with Charlie Munger at University of Michigan
A recent two-hour long dialogue with Charlie Munger includes many gems of the wisdom and advice of the 87 year old investment guru.
1. Ability can get you to the top. But it is the character that can keep you there.
2. The safest way to get what you want is to deserve what you want.
3. Don't worry too much about macroeconomic issues. Focus on what you can do everyday. In a long life, you will have your fair share of good tide and bad tide.
4. Many human systems have perverse incentives: short-termism, CEO culture, failure of accounting (reporting misleading earnings) etc.
5. Believe energy is the single most important issue and strong advocate solar power.
6. Cynical about philanthropy - Costco contributes more to human civilisation than Rockefeller foundation.
1. Ability can get you to the top. But it is the character that can keep you there.
2. The safest way to get what you want is to deserve what you want.
3. Don't worry too much about macroeconomic issues. Focus on what you can do everyday. In a long life, you will have your fair share of good tide and bad tide.
4. Many human systems have perverse incentives: short-termism, CEO culture, failure of accounting (reporting misleading earnings) etc.
5. Believe energy is the single most important issue and strong advocate solar power.
6. Cynical about philanthropy - Costco contributes more to human civilisation than Rockefeller foundation.
Jack Ma speaks about entrepreneurship
Jack Ma is the founder and CEO of China's largest ecommerce business Alibaba group. The company, listed on the HK stock exchange with market cap over US$10bn, owns the leading B2B and C2C websites in China.
Jack's one hour talk is very inspirational and demonstrates the quality of a true entrepreneur and business leader.
1. Priority of business stakeholders: Customer first, employee second, shareholder last.
2. Persistence and common sense: Today is tough, tomorrow will be more difficult, but the day after tomorrow will be good. The catch is not to die tomorrow.
3. Quality he values in employee: Humility and hard working.
4. Corporate social responsibility: Keep and expanding employment.
http://asiasociety.org/video/business-economics/jack-ma-complete
Jack's one hour talk is very inspirational and demonstrates the quality of a true entrepreneur and business leader.
1. Priority of business stakeholders: Customer first, employee second, shareholder last.
2. Persistence and common sense: Today is tough, tomorrow will be more difficult, but the day after tomorrow will be good. The catch is not to die tomorrow.
3. Quality he values in employee: Humility and hard working.
4. Corporate social responsibility: Keep and expanding employment.
http://asiasociety.org/video/business-economics/jack-ma-complete
Saturday, September 4, 2010
Thursday, September 2, 2010
US large-cap stocks are bargains of a lifetime
By Bill Miller
Published at FT: August 31 2010 17:25
The common view seems to be that the weak stock market reflects a weakening economy.
But we think the converse is more likely: the weak stock market is causing the economy to weaken. It is not a surprise that the recent US consumer confidence numbers were so poor; with the stock market having fallen so sharply since late April, they could hardly be otherwise.
Using the outlook for the economy to predict the direction of the stock market, which most appear to do, is to look at things the wrong way round. The stock market’s behaviour will predict the economy’s future behaviour. The market’s decline since late April foreshadowed the soft economic numbers now being reported, just as the market’s rally beginning in the spring of 2009 foretold the beginning of the recovery now under way.
Markets are all about expectations and the critical question for investors is always, what is discounted? Are the expectations reflected in market prices too high, or too low? One clue is to look at financial stocks. Financials tend to lead the market, both on the upside and the downside.
They have been market leaders off the bottom in March 2009, and they peaked in 2007 well before the market. They peaked about two weeks before the market in April and have led it down in this correction.
If financials begin to act better, the market should follow; and if they languish, then the market is likely to do no better.
Financials in particular and the market in general, have been plagued with a variety of worries since April, when concerns about the Greek financial situation led to a more generalised worry about sovereign debt. The BP oil spill, Goldman Sachs coming under fire from the Securities and Exchange Commission, gold’s relentless rise, the shape of the financial reform bill, the spectre of higher taxes as the Bush tax cuts expire, all weighed on the market during this swoon.
To say that they caused the market drop, though, is a stretch. “What will the stock market do, Mr Morgan?” someone asked JPMorgan over a hundred years ago. “Fluctuate,” he is said to have replied. That’s what markets do, and in late April after eight straight weeks higher, the string was broken. The news is always a mix of positive and negative. When markets decline, people point to the negative news; and when it increases, the positive news is emphasised.
This decline has led to elevated levels of bearish sentiment, and bearish activities, such as rising put call ratios, which is probably setting the stage for a rally. I hope so. But hope is not a strategy, as the saying goes.
Having a long-term strategy may seem quaint in a market dominated by high frequency trading, the 24-hour news cycle, the ubiquitous and shrill blogosphere, flash crashes, and where it is repeated as if divinely given that buy and hold is dead.
The summer of 2010, though, when most global markets are down, pessimism about the future is high, and macro concerns predominate, is one of those rare periods where one can reliably adopt a long-term strategy that promises (but of course cannot guarantee) returns superior to what just about everybody else is now doing.
The public’s distaste for equities is palpable and understandable. Negative returns for 10 years in stocks while “riskless” Treasuries have soared, and right after one of the best six months Treasuries have had in the decade, is more than enough to convince folks that stocks are not good long-term investments.
Then there is the really long term. Long-term Treasuries, as measured by the Barclays Capital Long Term Treasury Bond total return index, have beaten equities as measured by the S&P 500 in the year to date, and in the 3-, 5-, 10-, 15-, and 20-year time frames. It’s a tie at 25 years. More than 20 years of superior returns over stocks in an asset guaranteed by the US government seems to be sufficient to drive a stake through the heart of the idea that you want stocks for the long term.
It’s a truism in capital markets that the best investments are those that have previously done worst, where expectations are low, demand is down, and prospects appear at best highly uncertain. In 1980, bonds had been through a 30-year bear market relative to stocks, inflation was soaring, yields were at historic highs, yet expected to go higher, and a long bull market in bonds was at hand.
The idea that US interest rates would be near all-time lows 30 years later would have been dismissed as ludicrous. The situation is now reversed, with stocks having underperformed bonds for decades.
The point here is simple: US large capitalisation stocks represent a once-in-a- lifetime opportunity in my opinion to buy the best quality companies in the world at bargain prices. The last time they were this cheap relative to bonds was 1951. I was one year old then, but did not have sufficient sentience to invest. I do now, and if you are reading this, so do you.
Bill Miller is chairman and chief investment officer at Legg Mason Capital Management
Published at FT: August 31 2010 17:25
The common view seems to be that the weak stock market reflects a weakening economy.
But we think the converse is more likely: the weak stock market is causing the economy to weaken. It is not a surprise that the recent US consumer confidence numbers were so poor; with the stock market having fallen so sharply since late April, they could hardly be otherwise.
Using the outlook for the economy to predict the direction of the stock market, which most appear to do, is to look at things the wrong way round. The stock market’s behaviour will predict the economy’s future behaviour. The market’s decline since late April foreshadowed the soft economic numbers now being reported, just as the market’s rally beginning in the spring of 2009 foretold the beginning of the recovery now under way.
Markets are all about expectations and the critical question for investors is always, what is discounted? Are the expectations reflected in market prices too high, or too low? One clue is to look at financial stocks. Financials tend to lead the market, both on the upside and the downside.
They have been market leaders off the bottom in March 2009, and they peaked in 2007 well before the market. They peaked about two weeks before the market in April and have led it down in this correction.
If financials begin to act better, the market should follow; and if they languish, then the market is likely to do no better.
Financials in particular and the market in general, have been plagued with a variety of worries since April, when concerns about the Greek financial situation led to a more generalised worry about sovereign debt. The BP oil spill, Goldman Sachs coming under fire from the Securities and Exchange Commission, gold’s relentless rise, the shape of the financial reform bill, the spectre of higher taxes as the Bush tax cuts expire, all weighed on the market during this swoon.
To say that they caused the market drop, though, is a stretch. “What will the stock market do, Mr Morgan?” someone asked JPMorgan over a hundred years ago. “Fluctuate,” he is said to have replied. That’s what markets do, and in late April after eight straight weeks higher, the string was broken. The news is always a mix of positive and negative. When markets decline, people point to the negative news; and when it increases, the positive news is emphasised.
This decline has led to elevated levels of bearish sentiment, and bearish activities, such as rising put call ratios, which is probably setting the stage for a rally. I hope so. But hope is not a strategy, as the saying goes.
Having a long-term strategy may seem quaint in a market dominated by high frequency trading, the 24-hour news cycle, the ubiquitous and shrill blogosphere, flash crashes, and where it is repeated as if divinely given that buy and hold is dead.
The summer of 2010, though, when most global markets are down, pessimism about the future is high, and macro concerns predominate, is one of those rare periods where one can reliably adopt a long-term strategy that promises (but of course cannot guarantee) returns superior to what just about everybody else is now doing.
The public’s distaste for equities is palpable and understandable. Negative returns for 10 years in stocks while “riskless” Treasuries have soared, and right after one of the best six months Treasuries have had in the decade, is more than enough to convince folks that stocks are not good long-term investments.
Then there is the really long term. Long-term Treasuries, as measured by the Barclays Capital Long Term Treasury Bond total return index, have beaten equities as measured by the S&P 500 in the year to date, and in the 3-, 5-, 10-, 15-, and 20-year time frames. It’s a tie at 25 years. More than 20 years of superior returns over stocks in an asset guaranteed by the US government seems to be sufficient to drive a stake through the heart of the idea that you want stocks for the long term.
It’s a truism in capital markets that the best investments are those that have previously done worst, where expectations are low, demand is down, and prospects appear at best highly uncertain. In 1980, bonds had been through a 30-year bear market relative to stocks, inflation was soaring, yields were at historic highs, yet expected to go higher, and a long bull market in bonds was at hand.
The idea that US interest rates would be near all-time lows 30 years later would have been dismissed as ludicrous. The situation is now reversed, with stocks having underperformed bonds for decades.
The point here is simple: US large capitalisation stocks represent a once-in-a- lifetime opportunity in my opinion to buy the best quality companies in the world at bargain prices. The last time they were this cheap relative to bonds was 1951. I was one year old then, but did not have sufficient sentience to invest. I do now, and if you are reading this, so do you.
Bill Miller is chairman and chief investment officer at Legg Mason Capital Management
Sunday, August 1, 2010
Hersh Cohen Interview
The later part the interview where Hersh Cohen summarised his investment rules is very educational.
1. Always keep a record of your investment mistakes. That reminds me of another great comment on investment: "Investing is not an art, it is a trial and error."
2. Only buy what you can understand. The company must pass the "smell test".
3. Appreciate the expectation factered in the price. Be contrarian. The time to sell is when you feel good at yourself and the time to buy is when you are scared to death. Learn to manage the emotions. I think Hersh's degree in psychology certainly helps him greatly in this respect.
4. Emphasis on Fundamental analysis and only buy high quality business.
1. Always keep a record of your investment mistakes. That reminds me of another great comment on investment: "Investing is not an art, it is a trial and error."
2. Only buy what you can understand. The company must pass the "smell test".
3. Appreciate the expectation factered in the price. Be contrarian. The time to sell is when you feel good at yourself and the time to buy is when you are scared to death. Learn to manage the emotions. I think Hersh's degree in psychology certainly helps him greatly in this respect.
4. Emphasis on Fundamental analysis and only buy high quality business.
Sunday, July 11, 2010
TED Talk - Chip Conley: Measuring what makes life worthwhile
Inspiring talk about the value of intangibles and the new application of Maslow's motivation theory!
Wednesday, June 30, 2010
Li Lu talk in Columbia
Li Lu is one of the candidates to succeed Warren Buffett as CIO of Berkshire. He is also a friend of Charlie Munger and reviewed the first Chinese edition of Charlie's Almanack. His experience as value investor is very illuminating and educational.
Saturday, May 22, 2010
Clive Peeters
Clive Peeters recently fell victim to the soft consumer demand for big-ticket electrical appliances and called in voluntary administration. In the spirit of learning from vicarious experience, I prepared a quick post-mortem analysis in the following.
The company was floated in Sep 2005 issuing 40million shares at $1. The underwriter was Austock. Initial market cap was $127million. Raised capital was used to acquire Rick Hart Group in WA and the Michael King Store in Melbourne (total $10m), retiring existing debt and pay a dividend to existing shareholders (total $11m); remaining funds was used for further expansion. The company expected to make around $13million in FY2006 and had earning per share of 10cents.
Before listing, the business enjoyed 25.5% compound sales growth from 1993 to 2005 through expansion in Victoria. The business had only one store in 1993, located in Ringwood, Victoria.
As in the nature of things, the failure of a once successful enterprise is generally attributed to multiple factors:
1. Aggressive acquisition based growth results in poor operational integration and additional leverage. The number of stores grew from 23 in 2005 to 48 in 2008 (doubled in less than three years). The company reported a trading loss in 2009 and started to shut down stores.
2. The business’s expansion in a new geographic territory (NSW) failed to turn a profit. It is hard and takes time to build a national brand name. The NSW operation generated a trading loss of $6.5million in FY2007; $4.4million in FY2008. Turnaround of retail operation is extremely hard, as noticed by many investors.
3. A $20million embezzlement occurred by a senior accountant.
4. Loss of sales in high growth, high margin home entertainment and technology category, probably due to the expansion of category killer JB HiFi. The company’s traditional mix of sales (58% whitegoods and cooking, 42% home entertainment and technology in FY08) shifted to 64% and 36% in FY09.
5. Tough retail environment and global financial turmoil.
The share price of Clive Peeters had a fantastic run since listing and touched $3.50 in early 2007 (more than three-fold increase) after the company kicked start the acquisition program. After the problem of the NSW operation occurred, the share price dropped sharply then rebounded briefly (dead cat’s rebound) in late 2007 and resumed the relentless decline. The market basically priced in the bankruptcy after the share price dropped below 50c.
In my opinion, two key lessons can be learned from Clive Peeters’ five-years public market history:
1. Be aware of aggressive growth strategy of newly listed small cap companies. There are many cased of small businesses listed with the intention to consolidate and most is doomed to fail. Only a tiny number can grow big and dominate their respective industries. It is important to monitor closely and make a careful judgment whether the inflextion point has been reached.
2. Retail is a tough business and debt should only be used sparingly.
The company was floated in Sep 2005 issuing 40million shares at $1. The underwriter was Austock. Initial market cap was $127million. Raised capital was used to acquire Rick Hart Group in WA and the Michael King Store in Melbourne (total $10m), retiring existing debt and pay a dividend to existing shareholders (total $11m); remaining funds was used for further expansion. The company expected to make around $13million in FY2006 and had earning per share of 10cents.
Before listing, the business enjoyed 25.5% compound sales growth from 1993 to 2005 through expansion in Victoria. The business had only one store in 1993, located in Ringwood, Victoria.
As in the nature of things, the failure of a once successful enterprise is generally attributed to multiple factors:
1. Aggressive acquisition based growth results in poor operational integration and additional leverage. The number of stores grew from 23 in 2005 to 48 in 2008 (doubled in less than three years). The company reported a trading loss in 2009 and started to shut down stores.
2. The business’s expansion in a new geographic territory (NSW) failed to turn a profit. It is hard and takes time to build a national brand name. The NSW operation generated a trading loss of $6.5million in FY2007; $4.4million in FY2008. Turnaround of retail operation is extremely hard, as noticed by many investors.
3. A $20million embezzlement occurred by a senior accountant.
4. Loss of sales in high growth, high margin home entertainment and technology category, probably due to the expansion of category killer JB HiFi. The company’s traditional mix of sales (58% whitegoods and cooking, 42% home entertainment and technology in FY08) shifted to 64% and 36% in FY09.
5. Tough retail environment and global financial turmoil.
The share price of Clive Peeters had a fantastic run since listing and touched $3.50 in early 2007 (more than three-fold increase) after the company kicked start the acquisition program. After the problem of the NSW operation occurred, the share price dropped sharply then rebounded briefly (dead cat’s rebound) in late 2007 and resumed the relentless decline. The market basically priced in the bankruptcy after the share price dropped below 50c.
In my opinion, two key lessons can be learned from Clive Peeters’ five-years public market history:
1. Be aware of aggressive growth strategy of newly listed small cap companies. There are many cased of small businesses listed with the intention to consolidate and most is doomed to fail. Only a tiny number can grow big and dominate their respective industries. It is important to monitor closely and make a careful judgment whether the inflextion point has been reached.
2. Retail is a tough business and debt should only be used sparingly.
Friday, May 14, 2010
Wednesday, May 12, 2010
Tuesday, April 27, 2010
Advice from Brian G. Dyson
Imagine life as a game in which you are juggling some five balls in the air. You name them – work, family, health, friends and spirit … and you’re keeping all of these in the air.
You will soon understand that work is a rubber ball. If you drop it, it will bounce back. But the other four balls – family, health, friends and spirit – are made of glass. If you drop one of these, they will be irrevocably scuffed, marked, nicked, damaged or evenshattered. They will never be the same. You must understand that and strive for Balance in your life.
How?
Don’t undermine your worth by comparing yourself with others. It is because we are different that each of us is special.
Don’t set your goals by what other people deem important. Only you know what is best for you.
Don’t take for granted the things closest to your heart. Cling to them as you would your life, for without them, life is meaningless.
Don’t let your life slip through your fingers by living in the past or for the future. By living your life one day at a time, you live all the days of your life.
Don’t give up when you still have something to give. Nothing is really over until the moment you stop trying.
Don’t be afraid to admit that you are less than perfect. It is this fragile thread that binds us to each together.
Don’t be afraid to encounter risks. It is by taking chances that we learn how to be pave.
Don’t shut love out of your life by saying it’s impossible to find time. The quickest way to receive love is to give; the fastest way to lose love is to hold it too tightly; and the best way to keep love is to give it wings!
Don’t run through life so fast that you forget not only where you’ve been, but also where you are going.
Don’t forget, a person’s greatest emotional need is to feel appreciated.
Don’t be afraid to learn. Knowledge is weightless, a treasure you can always carry easily.
Don’t use time or words carelessly. Neither can be retrieved. Life is not a race, but a journey to be savoured each step of the way…
–Brian G. Dyson
President and CEO, Coca-Cola Enterprises during his speech at the Georgia Tech 172nd Commencement Address Sept. 6, 1996
You will soon understand that work is a rubber ball. If you drop it, it will bounce back. But the other four balls – family, health, friends and spirit – are made of glass. If you drop one of these, they will be irrevocably scuffed, marked, nicked, damaged or evenshattered. They will never be the same. You must understand that and strive for Balance in your life.
How?
Don’t undermine your worth by comparing yourself with others. It is because we are different that each of us is special.
Don’t set your goals by what other people deem important. Only you know what is best for you.
Don’t take for granted the things closest to your heart. Cling to them as you would your life, for without them, life is meaningless.
Don’t let your life slip through your fingers by living in the past or for the future. By living your life one day at a time, you live all the days of your life.
Don’t give up when you still have something to give. Nothing is really over until the moment you stop trying.
Don’t be afraid to admit that you are less than perfect. It is this fragile thread that binds us to each together.
Don’t be afraid to encounter risks. It is by taking chances that we learn how to be pave.
Don’t shut love out of your life by saying it’s impossible to find time. The quickest way to receive love is to give; the fastest way to lose love is to hold it too tightly; and the best way to keep love is to give it wings!
Don’t run through life so fast that you forget not only where you’ve been, but also where you are going.
Don’t forget, a person’s greatest emotional need is to feel appreciated.
Don’t be afraid to learn. Knowledge is weightless, a treasure you can always carry easily.
Don’t use time or words carelessly. Neither can be retrieved. Life is not a race, but a journey to be savoured each step of the way…
–Brian G. Dyson
President and CEO, Coca-Cola Enterprises during his speech at the Georgia Tech 172nd Commencement Address Sept. 6, 1996
Friday, April 23, 2010
How I Trade and Invest in Stocks and Bonds
“How I Trade and Invest in Stocks and Bonds” was originally published in 1924 and is a crystallisation of Richard Wyckoff’s thirty-three years Wall Street experience. The quote on the book cover highlights the key of Richard’s approach: “We succeed in proportion to the amount of energy and enterprise we use in going after results.”
Followings are Richard Wyckoff’s conclusions with regard to the business of trading and investing:
1. Both my primary and my ultimate object is the safe and profitable investment of my funds. It is best to use only a small part of the total available capital for trading. Trading profits should be used to increase the principal sum which is invested in income-bearing securities, preferably those which will grow in market value. Income from such investments should be made to compound itself by re-investing it as received.
2. If one is not adapted to trading he should prove it to his own satisfaction and then abandon the business. He should then attempt to become an intelligent and successful investor.
3. One’s capital should be made to do the greatest service in the shortest length of time. The question which one should ask himself with relation to all of the securities which he holds, is this: Are there any other issues which will work for me more profitably and in a shorter time than these?
4. The cultivation of foresight is most essential. It is the man with the greatest amount of foresight who is most successful in the security market. Foresight is the very essence of speculation. Without the use of it a person is not speculating at all – he is merely taking chances – gambling.
5. It is better to depend on your own judgment than on that of any other person. The kind of money which does you the most good is that which you make through your own efforts.
6. The longer your experience, the better background you have for comparison, and the greater your ability to judge and forecast correctly. You cannot go into any phase of endeavor and make money or become prominent “just like that”- you must serve your apprenticeship.
Richard Wyckoff also summarised his trading principles as follows:
1. The main factor is the trend.
2. Risk should almost invariably be limited.
3. Anticipated profits should be at least three or four times the amount of the risk.
4. One should be able to deal freely on both sides of the market.
5. Dealings should be in the active stocks.
6. You should either make a business of trading or else not try to be a trader.
Sunday, April 18, 2010
Review of Richard Wyckoff’s “The Day Trader’s Bible”
Richard Wyckoff (November 2, 1883 – March 19, 1934) was a trader and educator in financial market. I happened to get hold of two books written by him: “The Day Trader’s Bible” and “How I trade in stocks and bonds”. Both books are well worth the reading time and deserve their places in investment classics. The following are general reflections on the first book “The Day Trader’s Bible”.
You may be wondering that Day Trading and Value Investing are two completely difference approach to investment. Day Trading is short term and concentrates on market movement or tape reading. Value Investing is long term and focuses on fundamental value of underlying investment. However I found that there are masters in both trades and more importantly two disciplines share some common principles, in other words, the importance of the human element in the game. I still believe you have to choose (or naturally fall into) one discipline based on how your brain is wired. However it is always beneficial to be able to appreciate the approach of another school of investors.
Day Trading is a Profession
Richard first asserted that day trading “… is a pursuit that is profitable… but it’s not for the slow minded or weak hearted. You must be resolute… strength of will is an absolute requirement as is discipline, concentration, study and a calm disposition.” Like many other things in life, success in trading is only for the few who really enjoy the work and not just want the glory.
Rebutting a common criticism of day trading that the average man or woman can never makes a success of day trading by reading moment by moment transactions of the market, Richard emphatically pointed out that “…The average man or woman seldom makes a success of anything! That is true of trading stocks, business endeavours or even hobbies! Success in day trading usually results from years of painstaking effort and absolute concentration upon the subject…”
Richard clearly differentiated day trading from mechanistic chart reading, where investors trade the market based on chart analysis alone. As factors influencing the market are infinite in their number and character, trading can never be an exact science where successful formulas exist. The author confidently offered the following bet:
“Let anyone, who thinks he can make money following any kind of a chart have a friend prepare it, keeping secret the name of the stock and the period covered. Then put down on paper a positive set of rules which are to be strictly adhered to, so that there can be no guesswork. Each situation will then call for a certain play and no deviation is to be allowed. Cover up with a sheet of paper all but the beginning of the chart, gradually sliding the paper to the right as you progress. Record each order and execution just as if actually trading… Put my name down as covering the opposite side of every trade and when done send me a check for what you have lost.”
Successful day traders have a broad knowledge base accumulated through years of intense study. Richard quoted the advice from a professional singer to a young aspirant: “One must become a ‘personality” – that is, an intelligence developed by the study of many things besides music”.
Comparison between Day Trading and Value Investing
Day trading is largely driven by momentum or the change of supply and demand. Hence day traders always play the market with a close stop so as to avoid any large loss. Day traders only increase the bet if the initial positions are confirmed to be right.
Value investors focus on the “intrinsic value” of the business and buy when the price is significantly lower then the value and sell when the price is close to the value. It is common practice for value investors to double down because if a stock is good value at $10, it should be more attractive at $5. As value investors generally don’t use stops, large losses can occur if the investment thesis is wrong.
There are a few common themes for success in both day trading and value investing:
1. Proper mental attitude is the key. Practitioners in both fields should train their mind and aim to develop themselves into a “objective trading or investing machine” which takes note of a situation, weights it, decides upon a course and gives an order. There is no acceleration of the pulse, no nervousness, no hopes or fears concerning his actions. The result produces neither elation nor depression.
2. Every player need to work out his own way of investing or trading as it is very likely what is one man’s meat is another’s poison. There is no secret of trading, as everyone has to pay his/her dues to become the expert.
3. It is important to know what kind of situation to avoid. Value investing guru Warren Buffett prefers to wait for the fat pitch. Successful day traders wait for the defined sign of a big market movement to justify the cost of trading (brokerage, tax etc).
You may be wondering that Day Trading and Value Investing are two completely difference approach to investment. Day Trading is short term and concentrates on market movement or tape reading. Value Investing is long term and focuses on fundamental value of underlying investment. However I found that there are masters in both trades and more importantly two disciplines share some common principles, in other words, the importance of the human element in the game. I still believe you have to choose (or naturally fall into) one discipline based on how your brain is wired. However it is always beneficial to be able to appreciate the approach of another school of investors.
Day Trading is a Profession
Richard first asserted that day trading “… is a pursuit that is profitable… but it’s not for the slow minded or weak hearted. You must be resolute… strength of will is an absolute requirement as is discipline, concentration, study and a calm disposition.” Like many other things in life, success in trading is only for the few who really enjoy the work and not just want the glory.
Rebutting a common criticism of day trading that the average man or woman can never makes a success of day trading by reading moment by moment transactions of the market, Richard emphatically pointed out that “…The average man or woman seldom makes a success of anything! That is true of trading stocks, business endeavours or even hobbies! Success in day trading usually results from years of painstaking effort and absolute concentration upon the subject…”
Richard clearly differentiated day trading from mechanistic chart reading, where investors trade the market based on chart analysis alone. As factors influencing the market are infinite in their number and character, trading can never be an exact science where successful formulas exist. The author confidently offered the following bet:
“Let anyone, who thinks he can make money following any kind of a chart have a friend prepare it, keeping secret the name of the stock and the period covered. Then put down on paper a positive set of rules which are to be strictly adhered to, so that there can be no guesswork. Each situation will then call for a certain play and no deviation is to be allowed. Cover up with a sheet of paper all but the beginning of the chart, gradually sliding the paper to the right as you progress. Record each order and execution just as if actually trading… Put my name down as covering the opposite side of every trade and when done send me a check for what you have lost.”
Successful day traders have a broad knowledge base accumulated through years of intense study. Richard quoted the advice from a professional singer to a young aspirant: “One must become a ‘personality” – that is, an intelligence developed by the study of many things besides music”.
Comparison between Day Trading and Value Investing
Day trading is largely driven by momentum or the change of supply and demand. Hence day traders always play the market with a close stop so as to avoid any large loss. Day traders only increase the bet if the initial positions are confirmed to be right.
Value investors focus on the “intrinsic value” of the business and buy when the price is significantly lower then the value and sell when the price is close to the value. It is common practice for value investors to double down because if a stock is good value at $10, it should be more attractive at $5. As value investors generally don’t use stops, large losses can occur if the investment thesis is wrong.
There are a few common themes for success in both day trading and value investing:
1. Proper mental attitude is the key. Practitioners in both fields should train their mind and aim to develop themselves into a “objective trading or investing machine” which takes note of a situation, weights it, decides upon a course and gives an order. There is no acceleration of the pulse, no nervousness, no hopes or fears concerning his actions. The result produces neither elation nor depression.
2. Every player need to work out his own way of investing or trading as it is very likely what is one man’s meat is another’s poison. There is no secret of trading, as everyone has to pay his/her dues to become the expert.
3. It is important to know what kind of situation to avoid. Value investing guru Warren Buffett prefers to wait for the fat pitch. Successful day traders wait for the defined sign of a big market movement to justify the cost of trading (brokerage, tax etc).
Tuesday, March 23, 2010
Warren Buffett MBA Talk
This is my favorite speech from Warren Buffett. I can memorise most of it...
Following is part one. You can go to Youtube to watch the other parts.
Following is part one. You can go to Youtube to watch the other parts.
Case Study - QBE
Key points
1. Large international insurance operation with diverse geographic and product spread – scale and diversification is essential to produce consistent operating result in insurance business.
2. Strong track record in underwriting result – 2009 is the fifth year in succession QBE have reported combined operating ratio (COR) of less than 90%. Based on A.M. Best company result, the industry average COR from 05-09 was close to 100%.
3. Strong stable management team with long tenure – top 13 executives have been with QBE for an average of 16.5 years.
4. Track record in business acquisition and integration – opportunity to grow in both domestic and international markets.
5. Valuation is low with P/E at 11 and dividend yield at 6%.
QBE versus Warren Buffett’s Berkshire
Both Warren Buffett and Charlie Munger think highly of Berkshire’s insurance operation. Warren wrote in the recent 2009 Berkshire annual report: “Berkshire has the best large insurance operation in the world.”
However QBE’s underwriting result is much better than Berkshire’s, which was 95% in 2008 and 98% in 2009.
Why Warren likes his insurance operation so much? The answer lies in how the investment portfolio within the insurance operation is managed. Berkshire’s insurance investment portfolio allocated nearly half to equities, which tends to have higher return and play with the strength of Oracle of Omaha. In contrast, QBE is not confident in the equity space and only allocated 6.6% of its $23.4 billion investment portfolio to equities.
| Dec 09 | Berkshire Insurance | QBE | Total Investments | U$118billion | A$23.4billion | Equity Portion | U$56.5billion | A$1.55billion | Equity% | 47.9% | 6.6% |
If QBE’s underwriting result can be combined with Warren Buffett’s investment expertise, that will be a dream insurance business!!
Key Risks
QBE is a high quality insurance operation as demonstrated by the excellent technical result. The company is confident to produce a COR less than 89% in 2010.
The key risk for the A$ denominated share price will be the currency movement. Generally the currency contribution to the company valuation tends to be negligible in the long term. However the short-term fluctuation can be very significant. QBE has over ¾ gross premium in foreign currencies. Hence the volatile A$ can heavily influence its reported result. The company is considering to use US$ as representing currency in future financial reports.
Thursday, March 18, 2010
Advice from Bruce Berkowitz
1. Follow your passion;
2. Find a good mentor;
3. Marry well!
Bruce Berkowitz is the manager of the Fairholme fund, a well known value investor. I recently read an article in Graham and Doddsville newsletter with Bruce and I found the following career/life advice from Bruce particularly insightful.
"The world is so competitive; you have to do what you like. There is no way you can go out for eight to 10 hours a day, five to seven days a week otherwise. It is impossible. You’d just kill yourself. It is also important to find a decent, successful person to mentor you. If you work with the right people and do what you like to do, the you’ve got it made. The work has to be in the category of a hobby. You would want to do it even if you weren’t getting paid for it. If you are lucky enough to find something, whatever it is, you should do it, because you will eventually achieve what you want to do. The best plumber in the world probably ends up owning the largest plumbing company in the world after just being a good plumber for a while. Those are the only two points I have been able to figure out so far. Also, it is important whom you marry. The right person will be beyond-words helpful and the wrong person will destroy everything in your life."
2. Find a good mentor;
3. Marry well!
Bruce Berkowitz is the manager of the Fairholme fund, a well known value investor. I recently read an article in Graham and Doddsville newsletter with Bruce and I found the following career/life advice from Bruce particularly insightful.
"The world is so competitive; you have to do what you like. There is no way you can go out for eight to 10 hours a day, five to seven days a week otherwise. It is impossible. You’d just kill yourself. It is also important to find a decent, successful person to mentor you. If you work with the right people and do what you like to do, the you’ve got it made. The work has to be in the category of a hobby. You would want to do it even if you weren’t getting paid for it. If you are lucky enough to find something, whatever it is, you should do it, because you will eventually achieve what you want to do. The best plumber in the world probably ends up owning the largest plumbing company in the world after just being a good plumber for a while. Those are the only two points I have been able to figure out so far. Also, it is important whom you marry. The right person will be beyond-words helpful and the wrong person will destroy everything in your life."
Wednesday, March 17, 2010
Bull and Bear on China
19 Century belongs to UK;
20 Century belongs to US;
21 Century belongs to China?!
It is generally a consensus among most economic and political obeservers that China will become the dominant force in the 21st Century. China's 8-10 percent economic growth is widely expected to continue in the foreseeable future. However the rise of China is not without sceptics. Main point argued is the inherent inefficiency and instability of central command economy. Below are two excellent pieces from Vitaliy Katsenelson and James Chanos highlighting the bubble nature of Chinese economy. Both are well-articulated and well-researched. My humble view is that there is no crystal ball to tell how China' story will evolve. It is something Buffett categorized "important but unknowable".
China - The Mother of All Black Swans - By Vitaliy Katsenelson
James Chanos See "Overheating and Overindulgence" in China
20 Century belongs to US;
21 Century belongs to China?!
It is generally a consensus among most economic and political obeservers that China will become the dominant force in the 21st Century. China's 8-10 percent economic growth is widely expected to continue in the foreseeable future. However the rise of China is not without sceptics. Main point argued is the inherent inefficiency and instability of central command economy. Below are two excellent pieces from Vitaliy Katsenelson and James Chanos highlighting the bubble nature of Chinese economy. Both are well-articulated and well-researched. My humble view is that there is no crystal ball to tell how China' story will evolve. It is something Buffett categorized "important but unknowable".
China - The Mother of All Black Swans - By Vitaliy Katsenelson
James Chanos See "Overheating and Overindulgence" in China
Tuesday, March 16, 2010
Case Study - Harvey Norman
Key Points:
- Market leader in the electrical and furniture retailing in Australia & NZ with total sale over 5bn (excluding overseas sale $1bn).
- Strong brand awareness.
- Unique integrated property, franchising and retailing system, which has proved track record.
- Gerry Harvey is the founder and the charismatic leader with nearly 30% shareholding. All directors of the company holds nearly 50%.
- Forecast FY10 EBIT yield around 10% with underlying operating profit near $300m.
- Potential upside from Ireland business turnaround and further international expansion (test of reinvestment opportunity)
- Underrepresented by institutions. Only Ausbil Dexia has 6% holding.
Valuation/Financials
1. EBIT/Enterprise Value
FY09 underlying operating profit was $250million. Assuming 30% tax rate and $34million annual interest expense, the underlying EBIT was 250*1.4+34 = 384m.
Net debt = interesting bearing loan 575m – cash 150m = 525m.
At $4 share price, the market cap of HVN is $4.24b and enterprise value is $4.76 and this translates into EBIT yield of 8%.
The company achieved 40% profit increase in the first half. This will increase the EBIT yield to 11% if the business maintain the momentum.
2. Retail + Property sum of parts valuation
Franchise operating margin (before tax) is around 6%, similar to JBH’s margin. $300m franchise operating result in FY09 capitalised at 10% means the business is worth at least $3bn.
NZ generate 650m sales and 44m before tax result (6.7% margin). The business should worth at least $440m.
Property value is $1.8bn (net $1.3bn after subtracting the debt). Therefore the market basically values NZ/Asia and Irish business at zero.
Key Risks
- Further hiccup in Ireland and other offshore businesses. The risk of reinvestment (mainly offshore market is high). If the management bite the bullet and withdraw, the stock will ex-growth and become a purely yield play albeit with a very good yield.
- Protracted economic recovery phase and possiblity of double-dip recession – global economy is in the early phase of recovery.
- Succession. Gerry Harvey aged 70 should still has 10 years to be at the helm.
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