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.
Wednesday, June 30, 2010
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).
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