Monday, June 30, 2008

In Investing, ultimately the good business would drive up the share price

One of the most quoted investment advice from Warren Buffett is

“Investment is most intelligent when it is most businesslike.”

"We select our marketable equity securities in much the way we would evaluate a business for acquisition in its entirety. We want the business to be one

  1. 1. that we can understand;
  2. 2. with favorable long-term prospects;
  3. 3. operated by honest and competent people;
  4. 4. and available at a very attractive price."

Do note that all 4 must exist and that there are simply no exemptions.

A couple of years ago, there was very interesting article, it's the business that counts , posted on the Singapore Business Times. It's written by Teh Hooi Ling. Her column's name is very special for me for it's called Show Me The Money. Here is a snapshot of the column.

In that article, there are many valuable advice given for the investor.

Regarding cash per share.

  • 'Of course, if the company has no intention to return the cash to shareholders and its operations are bleeding cash, then the share price may well have reason to be trading below the cash net of liabilities per share,' I wrote. 'Unless there is a turnaround in the business, the cash will eventually be depleted.
Hmm.. the intention to return the cash!

Very important issue, eh?

What can the minority shareholder or speculator do if the management has NO INTENTION to return cash or unlock its assets?

Think about it. I have seen it way too often that the cash per share is rather meaningless if the management has no itention to share their wealth with the minority shareholders.

There is this one lesson from legendary investor, Philip Fisher.
  • The management of a company is always for closer to its assets than its shareholders. And without even breaking any laws, there are number of ways that the management can benefit themselves and their families at the expense of the minority shareholders, for example employing their relatives, buy-and-selling of properties between relatives at above market rates or the issuing common stock options.

Look at the issue with Lion Diversified Acquisition of Subsidiary at RM61.55 million!

This company BOLDY announced their acquisition of their subsidiary at a whopper rm61.55 million without even attempting to provide their minority shareholders without any detailed information on why should their subsidiary is worth so much.

Continuing on the article.

  • 'But if a company's share price is significantly lower than its cash net of liabilities, and there is no shareholder with a more than 50 per cent stake, then there is a possibility that a corporate raider may come in to scoop up the bulk of the shares, gain control, strip the assets and take hold of the cash.

    'Yet another possibility is for the controlling shareholder to take the company private, paying a premium to the market price.

    'Even if none of these corporate manoeuvres takes place, a company flush with cash and with operations that are profitable and generating cash will have no reason to trade below its net cash value per share for long. Thus a look at a company's cash position, coupled with an analysis of its operations, is a rather clear-cut way to ascertain the extent of under-valuation of a stock.'
A corporate takeover or the company being taken private. Interesting. For me,
I would add two more issues for consideration.

  1. 1. The time-frame - how long does one have to wait before an offer materialise?
  2. 2/ Will the offer price being a fair and just offer to the minority investor/speculator?
She also mentions the issue of management trust and integrity. (see past blog posting on Philip Fisher On Management Integrity )

  • 'So if you decide to buy into its shares now, you are, in fact, putting your trust in the management to invest the money wisely and in projects that will yield attractive returns.
  • But again, it boils down to one's assessment of the management, whether one believes it will make a wise choice of business to buy into, and at a reasonable price, and subsequently how it can add value to the business.
    At the moment, all of this is unknown. And it seems the market currently prefers the certainty of an existing thriving business to the uncertainty of an unknown one.

She then elaborates on what happened to the three Singapore stock examples she gave back in 2003 and she concludes from her examples by saying...

  • The above examples underscore the fact that ultimately it is the business that drives the share price. That conclusion is further reinforced by the price movements of a few companies that have sold their operations for cash.

Friday, June 27, 2008

Key West Global Proposal to list on Toronto Stock Exchange (TSX)

The following news article caught my attention: h7-06-2008: Key West to list subsidiary in Canada

  • 27-06-2008: Key West to list subsidiary in Canada

    PETALING JAYA: Mesdaq-listed Key West Global Telecommunications Bhd has proposed to list its wholly owned subsidiary, Times Telecom Inc (TTI), on the Toronto Stock Exchange (TSX) Venture Exchange, a public venture-capital market tailored for emerging companies.

    The listing will be done via the demerger of the Times Telecom Group, whose principal activity is the retailing of long-distance telecommunications services in Canada. The Edge weekly had reported a few weeks ago on the listing of a subsidiary of Key West Global.

    Under the exercise, TTI shares will be distributed to existing Key West shareholders. The allotment of a total of 90 million TTI shares will be on a basis of two TTI shares for every five Key West shares held. Pursuant to the capital distribution exercise, 90 million shares in Key West will be cancelled, ultimately resulting in existing shareholders of Key West who hold five shares ending up with two TTI shares and three Key West shares.

    Under the listing exercise, there will not be any issuance of new shares nor offer for sale of existing shares. All TTI shares will be granted listing and quotation on the TSX Venture Exchange. The exercise is expected to be completed by the fourth quarter of this year.

Now Key West Global was listed only in 2005.

This was the Q4 earnings reported on March 2006. Quarterly rpt on consolidated results for the financial period ended 31/1/2006

It made 980 thousand for the year.

A year later, Quarterly rpt on consolidated results for the financial period ended 31/1/2007, it reported losses of 664 thousand.

Couple of months later, I made a posting on this stock. Key West's ESOS issue

I gave a strange feeling. It was one of the first local companies to start expensing their ESOS. Which was good. However, the expenses of the ESOS caused Key West to lose money! Yes it did. Which made me baffled.

Should a company reward their employees with so much money that it causes the company to lose money?

And what about the minority shareholders?

Shouldn't the company justify themselves and its employees to their minority shareholders?

This is my simple issue.

If they want ESOS, fine.

Expense it and most important, they have got to JUSTIFY it.

On March 2008, their fiscal earnings was much better. Quarterly rpt on consolidated results for the financial period ended 31/1/2008. It earned some 1.8 million for the fiscal year.

This got me thinking about today's news article. Key West Global wants to list its subsidiary. I am baffled. As it is, Key West Global isn't making a lot of money. It only made 1.8 million and now it wants to list its subsidiary.

I am just so curious about the potential of this subsidiary that Key West Global wants to list it in Canada.

And accordingly, The Edge weekly had reported a few weeks ago on the listing of a subsidiary of Key West Global.

Here is that article: 27-06-2008: Key West to list subsidiary in Canada

  • 26 May 2008: Corporate: Key West likely to spin off unit in Canada
    By Joyce Goh

    Telecommunication services provider Key West Global Telecommunications Bhd is mulling the idea of splitting its businesses to list one of them in the Canadian stock exchange, say sources. (Damn! The sources strikes again! Look just about anyone can be a source! The coffee Auntie can even be considered the source, yes? So if you don't state who the source is, where is the credibility of such financial news?)

    "The company is looking at splitting its retail and wholesale businesses and listing its retail business on the Canadian TSX venture exchange," says a source.

    It is unclear how much the company is planning to raise from its Canadian listing and how the structure of the group will look like post-corporate exercise. But this exercise could pave the way for Key West's shareholders to have direct exposure in the company that is to be listed on the Canadian stock exchange. (Huh? It is unclear... ?)

    "The company is looking to take out the retail business of the group to list on the stock exchange in Canada. The details have yet to be finalised," points out the source. (Why don't you point out who is the source?)

    But, why list in Canada? (Yeah, why Canada?)

    It is believed that the nature of Key West retail business will receive better valuations in Canada. "The business is better understood in Canada and the listed company will be able to command a price earnings (PE) ratio of as high as nearly 20 times," says the source.

    According to the data in Bloomberg, Key West's PE as at Jan 31, 2008, stood at 10.5 times. (Hello, why didn't the article states clearly how much Key West actually earned?? Talking PE without stating the actual earnings is so outright fuzzy! It just doesn't make any sense!)

    Key West through its subsidiaries provides wholesale network products and services to telecommunications companies (telcos) and caters to retail clients comprising corporations and individuals. The company offers a host of telecommunications services such as Internet Protocol voice, data and network services for carriers.

    Key West has subsidiaries operating in Malaysia, British Virgin Islands, Canada, US, Hong Kong, Australia and Brunei. Based on its FY2007 annual report, the bulk of its retail business is in its wholly-owned subsidiary Times Telecom Inc Canada. Although it is unclear how the structure would look like post-corporate exercise, this could mean that Times Telecom might be demerged from the group.

    Since being listed on the Mesdaq in 2005, the company has not seen heavy activity with a market capitalisation of RM19.13 million. The stock hit its 52-week high of 18.5 sen on Oct 30 last year but dropped its 52-week low of seven sen at end of April. The stock closed at 8.5 sen last Friday. (Perhaps if one had look at Key West Global earnings track record, then one could understand why no one was interested in such a stock in the first place!)

    The telecommunication services industry is indeed a competitive one. However Key West's vast network gives it strong global exposure and it has good ties with global telcos in major markets.

    For its FY2008 ended Jan 31, Key West returned to the black, registering a RM1.8 million net profit compared to a RM643,000 net loss for the year before. This turnaround was achieved despite its revenue dropping 20% to RM175.9 million compared to its revenue in FY2007 of RM219.6 million. The group had slipped into the red in FY2007. (Nice to see the article stating some actual facts here)

    Out of the RM175.9 million revenue achieved in its FY2008 (unaudited), about 72% of it was derived from the wholesale telco sector while 28% was from the retail sector. With the retail sector still contributing to the top line, will spinning it off significantly affect Key West's fundamentals?

    According to an industry observer, it should not be a problem for the listed Key West component in Malaysia to maintain its business and achieve further growth.

    "Quite a large part of Key West's wholesale business is in VoIP business and that segment of the business is one of the key drivers of growth for the industry. Also, the listed company in Canada would probably be related to the Key West group here in Malaysia so an arrangement between the two is likely," points out the industry observer.

    Additionally, according to Key West's announcement to Bursa Malaysia, its wholesale business has new services to offer such as iCall shop and Prepaid PC-to-Phone which it plans to launch this year.

    For its FY2008 (unaudited), Key West's cash increased 20% to RM10 million while its borrowings stood at RM4.4 million as at Jan 31, 2008.

    Moving forward, Key West expects better days ahead. According to the company's recent research report on Bursa, it expects the telecommunications industry to improve this year. "From the vantage point of 2008, the global telecommunications industry appears to have returned to a firmer footing and looks set to experience better times," notes the research report.

    "According to a December 2007 report by Telegeography on the international voice market outlook, international traffic growth slowed sharply in 2006 to 10%, the lowest level in more than 20 years. However, the market outlook appears to be improving, and worldwide revenues are predicted to grow from under US$1.7 trillion (about RM5.4 trillion) in 2008 to over US$2.7 trillion in 2013," it adds.

    No doubt the competition in the telecommunications industry is stiff. But given Key West's vast network and an impending corporate exercise, it should give reason enough for a second look at the Mesdaq stock.

*** Edit: Just realised that Key West Global just announced its Q1 Earnings. It made 10 thousand only! ***

Key West Global Telecommunications Bhd (0095.KU) - Malaysia
1st quarter ended April 30:
Figures are in Ringgit (MYR).

2008 2007
Revenue 35,033,000 52,718,000
Pretax Profit (8,000) 1,138,000
Net Profit 10,000 720,000
Earnings Per Share Omitted 0.32 Sen
Dividend Omitted Omitted

Thursday, June 26, 2008

Yet Another Reason Why Many Don't Like Jim Cramer


His Buy, Buy, Buy thingee... who does it reminds us of?

Lion Diversified Acquisition of Subsidiary at RM61.55 million!

Lion Diversified announced last night it was acquiring a subsidiary. In local lingo, it's a Kaki-Lang type of corporate exercise. Here is the temporary link to the announcement. ACQUISITION OF A SUBSIDIARY

  • The Board of Directors of Lion Diversified Holdings Berhad ("LDHB" or the "Company") wishes to announce that LDH Trading Sdn Bhd, a wholly-owned subsidiary of the Company, had on 25 June 2008 completed the acquisition of the entire issued and paid-up capital comprising 3,000,000 ordinary shares of RM1.00 each in Banting Resources Sdn Bhd ("Banting Resources"), a company incorporated in Malaysia, for a total consideration of RM61.55 million ("Acquisition of Subsidiary"). Hence, Banting Resources became a wholly-owned subsidiary of the Company.

    Banting Resources, a company incorporated under the Companies Act, 1965 on 26 September 2006, is a property investment company with an authorised capital of RM10,000,000.00 comprising 10,000,000 ordinary shares of RM1.00 each and an issued and paid-up capital of RM3,000,000.00 comprising 3,000,000 ordinary shares of RM1.00 each.

    The Acquisition of Subsidiary is not expected to have a material impact on the earnings of the LDHB Group for the financial year ending 30 June 2008 and, on a proforma basis, is not expected to have a material impact on the audited consolidated balance sheet of LDHB as at 30 June 2007.

Here are some of my comments.

1. This is an acquisition which has been completed. It's not a proposal.

2. It's wholly owned subsidiary, LDH Trading Sdn Bhd bought the entire stake in, Banting Resources Sdn Bhd for a total consideration of RM61.55 million.

3. Rm61.55 million and this company doesn't even have the decency to show detailed information of this acquisition. Questions that I can think of.

  • a. Is the purchase price fair or is it the purchase price exorbitantly high?
  • b. What it the track record of Banting Resources?
  • c. What kind of Balance Sheet does Banting Resources have? Is it highly in debt?
  • d. What does Banting Resources do?
  • e. Who are the exact shareholders in Banting Resources?

4. If you look at Lion Diversified historical announcements, why are they constant acquisition of subsidiary? I mean seriously, is Lion Diversified in the business of buying its own companies?

5. Here is the link to Lion Diversified last reported quarterly earnings. Quarterly rpt on consolidated results for the financial period ended 31/3/2008 (You will note some drastic increase in trade receivables - and did you see that LionD has investment in quoted securities totalling a massive 237 million?? Wonder what securities man!). In the Balance Sheet, Lion Diversified is noted to have 199.547 million in its piggy bank and with debts totalling 480.681 million. As it is, based on this purchase would cause Lion Diversified to be even more in debt.

Ah, but that's not all.

Let me highlight just a couple the many, many proposals that I saw in its historical announcements. Well there is one proposal where Lion Diversified is purchasing land in China for some 151 million.

And then there is their massive BLAST FURNACE IRON-MAKING FACILITY which is valued at 1.62 Billion!

Wasn't Lion Group a group of company which almost sank a decade ago due to overly aggressive expansion and massive borrowings?

5. Try google the exact phrase "Banting Resources" and see if you can get more info on this company.

How now brown cow?

Do you like what you see or are you simply disgusted?

Warren Buffett Says Growth Is Slowing And Inflation Is Really Heating Up!

Did you catch the clip on Warren Buffett on CNBC's lunchtime? I found it to be extremely interesting and I have marked down the interesting points from that interview transcript from CNBC below.


This is a transcript of Warren Buffett's live interview with Becky Quick on CNBC's Power Lunch, Wednesday, June 25, 2008 at 12p ET. Buffett tells Becky U.S. inflation is "exploding" and warns that the Federal Reserve must signal controlling prices is not a secondary concern.

Becky Quick: We are standing by at Smith and Wollensky in New York City for an annual gathering, something that's been happening for years now. This is to benefit the Glide Foundation. That's an organization Warren Buffett has been very closely allied with. And Mr Buffett, we want to thank you very much for joining us today.

Warren Buffett: Thank you.

Becky: The first question, we just want to talk about why we're here today. The Glide Foundation is an organization you've been workign with for many years at this point. For people who aren't familiar with it, why Glide and why this lunch where you're going to be meeting with people today who have paid over 600-thousand dollars for this chance to break bread with you?

Buffett: Well, Glide is an organization in San Francisco. It's run by a remarkable man named Cecil Williams, who, more than 40 years ago, went out there as a young black pastor to a dying inner-city church. And they turned it into a marvelous, marvelous, really social organization. he takes people that the world has given up on, and sometimes have given up on themselves, and he brings them back.. He gives them hope. They feed 750-thousand meals a year. They train people. They have child care. They have health clinics. They have 52 rooms where people who don't have shelter can come... As the years have gone by, the people in San Francisco have come to appreciate it and I learned about them some years ago and I just decided that money couldn't go to a better cause.

Becky: Well today, over 600-thousand dollars will be going for this lunch. Let's talk a little bit more about the poeple who are going to be eating lunch with today, but while we have you here, let's cover some of the news of the day, because people have been waiting to hear about some of those things. The Fed is going to be coming out with it's announcement (on interest rates) in little over two hours time. And there's been a huge debate about whether the Fed should be more concerned about higher inflation or slowing growth. In your mind, what's the most important factor?

Buffett: Well, they should be concerned about both, because both are going on. Growth is slowing, in fact, I'm not even sure it's growth anymore. And inflation is really heating up. So, it's not an easy job to have, serving two masters in effect. That's why I'm glad that Ben Bernanke has the job and I don't. (Laughs.)

Becky: Pretend you are in his shoes for the moment. What would you do?

Buffett: I'd probably offer my resignation. (Laughts.)

Becky: Would you keep rates steady, though, if it was your job to decide this right now, you're faced with both those headlines?

Buffett: I think inflation is really picking up, so I think the Fed has to be very careful to do anything that signals that they consider inflation to be a secondary goal and something that they'll worry about later. Because it's huge right now. I mean, whether it's steel or it's oil, you name it. The pressure, you've seen it in chemical prices recently. Dow has announced. We see it everyplace. It's exploding.

Becky: That's almost an argument for raising rates today, but there's still an awful lot of weakness with consumers, with the house prices they've been watching. Would that be too much of a shock, if the Fed came out with a surprise interest rate increase today?

Buffett: I think it probably would be, but the economy is weakening. All the data I see, and I see a fair amount on a real-time basis, indicates that the weakening, if anything, is getting worse.

Becky: You mean from the consumer's perspective?

Buffett: Right, from the consumer's perspective. But the things that fall out from the weaker consumer buying, and the credit card losses and that sort of thing.

Becky: Where do you see that weakness, because you have such a broad array of businesses, everything from the bricks business to the insurance business to actual retail businesses. Where do you see the biggest weakness?

Buffett: Everything connected with construction and with consumer, I see weakness. And if anything, it's accentuating a little bit.

Becky: Along with the concerns about inflation, a lot of people have been screaming the Fed has to do something to save the dollar. It's seen so much weakness recently. Do you have any currency bets right now?

Buffett: Just, I've got the tail end of the Brazilian real. But, over time, if we keep doing what we're doing, and it isn't the Fed, it starts with policy makers in Congress. If we keep doing what we're doing, we're going to keep getting the same result, which is a weakening dollar.

Becky: What do you mean, keep doing what we're doing? In terms of running a budget deficit?

Buffett: In terms of running huge current account deficits. And part of that stems from oil. I mean, there are a lot of things that go into that. But the truth is we can't send two billion dollars a day out to the rest of the world and not expect the dollar to get weaker over time. That's not a short-term forecast, but that's going to happen over time.

Becky: You mentioned oil prices, and there's been a huge debate we've been having on our show, and throughout the day, where people are trying to figure out, is this supply and demand picture or to the idea that there's speculation going on in these markets. That there's a lot more money in these markets than there used to be, say three years ago.

Buffett: It's supply and demand. I mean, if somebody buys a thousand forward oil contracts and somebody sells a thousand forward oil contracts, somebody's speculating on the downside and somebody's speculating on the upside. The only way you could have speculators having a big impact is if you had a huge amount of storage where they started actually withdrawing actual, physical oil from the system. But it's not speculation, it's supply and demand and the situation is that in my adult lifetime, up until the last year or two, there's always been a huge amount of excess supply available. There's been reserve capacity. And that goes back 30 years ago, in this country we produced way more oil than we needed here and we had something called the Texas Railroad Commission that shut down wells. And a matter of fact, we got down to where they would only let wells operate in Texas for eight days, we had so much extra capacity. We don't have excess capacity in the world anymore, and that's what you're seeing in oil prices.

Becky: Except we had a series of people who came to Capitol Hill, to Congress on Monday, who said, the analysts, if you tamp down on speculation, you could cut 50 percent, as much as 50 percent, out of oil prices immediately. Do you think that's just hogwash?

Buffett: (Laughs.) I think if they closed the oil futures trading, I don't think it would make much difference. Incidentally, the five-year oil price, you can buy oil for delivery in 2012 now, or 2013, that price is very close to this price. Now if anyone thinks that short-term speculation is entering into oil prices, where are they paying 130 dollars a barrel for delivery in 2013.

Becky: Mr. Buffett, you are the (second) largest shareholder in Anheuser-Busch. InBev has made a bid for Budweiser, for Anheuser-Busch, for Bud, and there are a lot of people trying to figure out if you think that's a good offer. What do you think about it?

Buffett: (Laughs.) When we get through with this interview, there will still be a lot of people wondering what I think about it. I haven't talked about it to anybody. I've been reported, all these things have been reported, I have not talked to anybody about it. I've been reported to have been seen in St. Louis. There's obviously some double of me that's running around out there. (Laughs). I can't imagine any guy wanting to look like me, but if he's out there, he's apparently in St. Louis and he's apparently over talking to InBev and all these people.

Becky: So you haven't talked to Anheuser-Bush management? You haven't talked to InBev?

Buffett: I have not talked to anybody.

Becky: What do you think about the deal?

Buffett: (Laughs.) I think it's an interesting spectator sport at the moment.

Becky: So you're not going to weigh in on either side of this?

Buffett: (Laughs.) I certainly haven't so far.

Becky: And you don't want to right now?

Buffett: (Laughs.) If we didn't have all these people around I could tell you about it.

Becky: If we didn't have all these people around. Let's talk a little bit about politics, too.

Buffett: Sure.

Becky: Barack Obama has been the person that you're supporting. This is the first time you've really had a chance to talk since Hillary Clinton dropped out of the campaign, but you're holding a fund-raiser for him next week.

Buffett: July second.

Becky: July second. We watched some of the numbers coming in in May and Barack Obama's fund-raising ability slowed down significantly in May. McCain has picked up. Do you think that's a temporary, one-time blip, or are these two candiadtes going to be running neck-and-neck when it comes to fund-raising.

Buffett: Well, I think Barack is going to have plenty of money. I mean, he gave up on federal financing. So I don't think money is going to be a problem for either candidate. The American public, when they go to the voting booth in November is going to have a very good fix on both candidates and the shortage of money will not impair them having that fix. So I think money is going to be a non-issue in the campaign.

Becky: Barack Obama did give up on public financing after saying he would accept it. What did you think of that move?

Buffett: I wouldn't have, I don't agree with that.

Becky: You don't agree with him changing his position?

Buffett: I don't think he should have, yeah.

Becky: What about the idea of supporting windfall taxes against the oil companies? He's the candidate you support, but if you start talking about taking windfall taxes out on the oil companies, is that something you would agree with?

Buffett: I think it's very hard to have windfall taxes. Steel has doubled in price. Is that a windfall for the steel producers? Sure. Corn is, you know, $7 a bushel. Soybeans are at $15 a bushel. I don't think any candidate in his right mind who is standing for election in farm states would say you ought to tax farmers especially because they're getting a windfall. But they are getting a windfall from commodity prices. Maybe they deserve it because commodities have been underpriced. But to pick out one commodity, with copper at $3.60 a pound you could say that the copper producers are getting a windfall. You know, the networks are getting a windfall because the Olympics are being held. So I don't think that taking anybody that's had a commodity that increased in price a lot and saying there ought to be a special tax because of that really makes a lot of sense. I do think the tax code should be changed in major ways, but I don't think that's the way to do it.

Becky: How do you think the tax code should be changed?

Buffett: I think the super-rich should pay more and people in the middle class and lower should pay less.

Becky: If you start looking at the proposal that's been put forth with social security taxes which includes stopping, still, at 102,000 for social security, but then picking up that payroll tax at $250,000. Is that your idea of a good change?

Buffett: The payroll tax is a third of all taxes raised. Over 900 billion dollars out of 2.6 trillion. So the payroll tax is terribly important. It quits at $100,000 for a guy like me. So I pay practically no payroll tax in relation to my income. Most of the people that are going to be -- people are going to be serving us the steak in this restaurant today are paying a very, very high, they're paying 15.3% or so in payroll taxes. I am paying a tiny fraction of 1% of payroll taxes. I think there should be a major overhaul of the payroll tax. I think guys like me should pay more.

Becky: Although there are people who have said, under this new proposal that's been put out, it would end up meaning that someone like an entrepreneur goes back to a tax rate of 50%. And that is even before you include some of the state and local taxes. Do you worry that if entrepreneurs and other people are taxed at 50% to 60%, depending on where they live and how much they make, that it will stop innovation? That it will harm some of the innovation?

Buffett: I worry about my cleaning lady paying 15.3% on payroll tax when I pay on my total income tax, capital gains and dividends, 15. So, she is paying a higher tax rate than I am, but she doesn't have the lobbyists talking for her. The United States government raises about -- spends about 20% of the GDP. Nobody wants to pay their share. That's human nature. But the Congress has the job of saying we're going to get 20% of GDP from the American government because the American people demand these services and so on. And the question is, they get it from anybody that pays it, they're not going to like it. You have to figure out on a basis of your own idea of social justice and making sure that the golden goose keeps laying golden eggs. What is the best system? I think the answer is to tax the super-rich more.

Becky: You are going to be having lunch today with two people that paid more than $600,000 for the opportunity to sit down with you. These two gentlemen, have you spoken to them at this point?

Buffett: No, I've had some correspondence with them. I'm looking forward to speaking with them.

Becky: What do you think you'll be talking about? I know they brought their children and wives along. What's your plan for this lunch?

Buffett: We'll be talking about anything they're interested in. We'll talk as long as they want to talk, and we'll talk about the subjects they want to talk about. If you want to pay $660,000, we'll talk about anything you want to talk about, Becky. Maybe even the Anheuser deal. (Laughs).

Becky: Great. One more question for you. There have been people who have been saying just taking a look at politics and some of the things out there that maybe you would be interested in getting on a ticket at some point. Is there any truth to that?

Buffett: No. I will go Sherman one better, whatever he said.

Becky: Okay. Mr. Buffet, thank you very much for your time. We appreciate it.

Buffett: Thank you.


And last night, the Fed as expected, made their hawkish remarks on inflation but did nothing. ( See Fed Worried About Inflation But No Hint of Rate Hike )

And of course the Oil recovered back some of its early day losses and the markets gave up most of their day gains after Fed announcement.

Wednesday, June 25, 2008

The Day The Dead Duck Soared for Warren Buffett

The following was taken from Bud Labitan's "The Warren Buffett Business Factors".

The true investor welcomes volatility. Ben Graham explained why in Chapter 8 of "The Intelligent Investor"

There he introduced "Mr.Market," an obliging fellow who shows up every day to either buy from you or sell to you, whichever you wish.

The more manic-depressive this chap is, the greater the opportunities available to the investor. That's true because a wildly fluctuating market means that irrationally low prices will periodically be attached to solid businesses. It is impossible to see how the availability of such prices can be thought of as increasing the hazards for an investor who is totally free to either ignore the market or exploit its folly.

In assessing risk, a beta purist will disdain examining what a company produces, what its competitors are doing, or how much borrowed money the business employs. What he treasures is the price history of its stock. In contrast, we'll happily forgo knowing the price history and instead will seek whatever information will further our understanding of the company's business. After we buy a stock we would not be disturbed if markets closed for a year or two. We don't need a daily quote on our 100% position in See's or H. H. Brown to validate our well-being. Why, then, should we need a quote on our 7% interest in Coke?


There's this great example told by Andrew Kilpatrick, Of Permanent Value ( pg 631) on how Warren exploited the folly of the Mr.Market.

Here's a summary from me based on what Mr.Kilpatrick wrote.

Wells Fargo - "A Dead Duck" Soars Like An Eagle

In 1990, Buffett's original investment into Wells fargo came when there was a stigma surrounding the purchase, because it was a terrible time for banks. His purchase was deemed outrageous for at that time 'bank' meant layoffs, real estate write-offs, slashed dividends. Some had even suggested that the rapidly declining real estate prices could bring down the banking system.

On the day Buffett bought, the price earnings ratio of Wells Fargo was a minuscule 3.7! Mr.Market was really in a crummy mood. The stock had traded as high of $86 a share and a low os $41.25 in 1990. Buffett's initial average cost was about $58 a share.

And all this was admist negative nay-sayers and some big time short sellers, who betted that the stock would drop.

Some called it a dead duck. Whilst admitting that it would not be a bankruptcy candidate, they predicted the stock to fall to the low teens.

At first, the short sellers seemed right. For very soon, the dividends were slashed and reserves for real estate loans increased dramaticallyy.

George Salem, an analyst with Prudential Securities, was quoted : "He picked the management that underwrites real estate the best. But one thing he didn't realise that even Mark Spitx (the former Olympic Star then) can't swim in a hurricane in the middle of the ocean".

So how was Wells Fargo's earnings per share at that time? Doing quite nicely. The bank would wind up earnings of $712 million or $13.39 per share.

But then commercial real estates continued to decline.

And so Wells Fargo set aside for potential loan losses a little over $1.3 billion, or approximately $25 a share of the $55 a share in net worth. When a bank sets aside funds for potential losses, it is merely designating part of its net worth as a reserve for potential future losses. It doesn't mean those losses have happen, nor does it mean they will happen. It just means, if it does happen, the bank is prepared. (how did Wells Fargo actually do? The losses evetually did happen but it wasn't as bad as what Wells Fargo prepared for. Its loan loss figure in 1990 was a stunning $700 million but it still reported a profit of $21 million or $0.04 a share)

And of course the Mr. Market did not liked it. And the stock fell again. In which, it presented Buffett with his scond purchase in Aug 1992. He bought at prices ranging from $66 to $68 a share. And in late 1992, Buffett invested another $37 million - at prices ranging from $66 to $69.

And Prudential's Salem kept his sell pitch in late 1992, saying what a terrible stock Wells Fargo was: "When Warren Buffett runs out of money, the stock will plummett" adding that Buffett might as well make donations to a good cause. "He's supporting the stock; otherwise it would be much lower". He said the stock would make a perfect short, that only Buffett was holding the shorts back from a real onslought. In early January 1993, Buffett bought another 66,800 shares, bringing his shares total to 6,358,418. (To Buffett, WF was one of the best-managed and most profitable money-center banks in the country, selling in the stock market for a price that was considerably less than considerable banks were selling for in a private market)

Salem continued a month later: "We reiterate our sell rating of WF.. eventual downside risks appear considerable - perhaps to $60 or below.. The price more than reflects a nearly complete recovery which we don't see'...

In which it did not happen. The stock crossed $100 a share!!!!!!!!!!!!!

In 1993, the Atlanta Journal wrote this...

Calling it the 'strangest stock I have ever covered', Prudential's Salem dropped coverage of Wells Fargo. A vociferous critic of the San Fransico based bank, Mr.Salem has been bedeviled for years by Wells Fargo.

The analysys has carried a sell recommendation on the stock since Dec 1989 when it was trading at about $60. The stock closed Thursday at $105.37 1/2.

Mr. Salem, an often quoted 25-year industry veteran, insists he isn't giving up on a bad call. "This is not a surrender of any kind,.... It was a business decision based on where i thought I could spend my time more profitably. Wells Fargo is overpriced, volatile and unpredictable and not many from investment-land care about it".

Four years later in 1997...

If Mr. Salem had wanted to purchase Wells Fargo, he would have to pay approximately $270 a share!!!!!!!!!!

As for Warren, he ended up with a pretax annual compunding rate of return of approximately 24.6% on his 1990 investment!!!


So, what's the point?

The point is this; if you had identified the companies that have excellent management or a great consumer monopoly or both, it is easy to predict they will most certainly survive a recession more than likely come out of it in a better position than before. Recessions are hard on the weak, but they clean the field for the strong to take an even larger share when things improve.

On the other hand, stories like this, is often very nice to read. And in this story, it depicted how Warren 'bet' against Mr.Market and won big. Warren used his advantage, his attitude, he knew he is right because his reasoning his right and that sometimes the manic Mr.Market might not agree with him.

Oh before I go looking for MY very own Wells Fargo success story, let me pour cold water all over myself and remind myself what I wrote in the other blog entry, Our Investing Advantage

And this is a great example that if one is really dead sure of one's own reasoning, then one should never be affraid if Mr.Market reacts against one's stock investment. Remember, you are right because your own reasoning is right!

But... but... but...

And again, investing is never all that easy. It does get complicated at times.

And the main issue is simply,
how dead sure is one's own reasonings?

Think about it.

We are never anywhere close to be the super investor that Warren Buffett is!

And also the quality and the durable competitive advantage of our listed stocks is simply not as comparable to what Warren Buffett had invested in!!

Put it this way, the Washington Posts, the great Coca-cola's, the Gilletes, the H&R Blocks are not listed in our stock exchange.

Here, we are very much subjected to stuff like earning cycles and even changes in the fortune cycle in which so-called good companies turning bad for one reason or another.

Hence, we are quite likely to make occassional mistakes in our stock investments, in regardless if whether the fault lies in our own stock selection method or not.

So forget this not.

This 'right reasoning to stay invested' thingy is pretty darn complex and could be a deadly value destructor in our stock investments if we fail to accept that perhaps our own judgement could be faulty at times!!

So sometimes, if and when the market go against us, we just have to ask ourselves this question: "What if we are simply wrong?"

Err... let me remind what my Granny told me (in my local complicated lingo! (err..Chinese-English!)):

  • "Little bugger.. you are you, you are not going to be A Warren Buffett cos if you are, you are not here sitting down and playing mahjong with Ah Poh. Sooooo little bugger,you dun simply-simply priy-priy and try to be who you cannot be! You can learn and want to be no.1 but your no.1 and other people's no.1 is like how the sky is different than the land!... so little bugger... ni ming-pei mah? :P

Oh.... and did I not mention the number of times I got my head whacked hard by Granny as she kept reminding me that there's a very fine line between right and being stubbornly wrong?!!

Tuesday, June 24, 2008

Cristiano Ronaldo Leaves Manchester United!!

Warning: The following clip is NOT for the faint hearted!

Monday, June 23, 2008

Dr. Marc Faber Reckons World Economy Will Slow Due To Inflation.

Here's another extremely interesting interview on Dr. Marc Faber.

  • Excerpts from CNBC-TV18’s exclusive interview with Marc Faber:

    Q: Do you see more pain for global equity markets in 2008 even from here?

    A: Over the last twelve months financial stocks are breaking down in the US. But the rest of the market has held up very well. Material, energy and some capital good stocks went up. So gradually the market place is beginning to realize that the financial crisis is not going to resolve in ten minutes and it will take a lot of time. Many more banks will go bankrupt and it will spill over into what I call the real economy. The world will slowdown very because of the inflationary pressures. The consumer has two major categories of expenditure, the non-discretionary like food, energy, healthcare etc and the discretionary, which are typical consumer goods, appliances, cars, motorcycles, television sets and so forth.
    When the price of necessities go up substantially, as is the case for energy and foods now, we have less money to spend on discretionary items that then will have a spillover effect on the economy.

    Q: What about something like an India? We have been one of the worst performing equity markets. Do you see more pain for the Indian stock markets even from these levels?

    A. When the market had hit 21,000, I had expected it to drop to12,000. On March 18, it dropped to 14,800 and then we had a typical bear market rally. That’s when all the Indian investors turned bullish again and the Sensex went to almost 18,000 levels on May 5. Now we have been drifting again and I still maintain that the Indian markets will go lower. The only people in the whole world who don’t understand that the economy and the equities are moving in different directions are Indian investors, they say the economy is strong and is growing rapidly. The economy growing strong and growing rapidly has nothing to do with the performance of the equity markets.

    Q: What about the role that the crude prices have played in it up until now for many markets both developed and developing and where do you see that market headed?

    A: Crude is at USD 135 per barrel we have gone up 12-times since 1998. I personally would not buy oil here because I think a correction is overdue. But in the long run I cannot see the demand declining too much. Although some countries have alternate sources of energy, the demand in some countries like India and China will continue to increase. OPEC and other oil producers cannot increase their production significantly. So I think in our lifetime we will never again see oil.

    Q: If crude was to stay at the levels it is at right now. Do you expect a prolonged phase of high inflation and high inflationary fears for most emerging markets?

    A: I think inflation is a very funny phenomenon. First of all I define inflation as an increase in the quantity of money and of credit. In the last twenty-five years we have had a huge expansion of money and credit in the United States, especially after 2001, which then led to trade and current account deficit. The current account deficit grew from 2% of GDP to close to 8% of GDP. USD 800 billion was flowing into the world annually from the United States. This essentially is the money that is being made available by the Fed and the treasury, and that of course is inflationary per se. Inflation is occasionally in asset prices, in equities and in real estate, in commodities and at times it will shift to consumer prices. In the 70s we had a very high consumer price inflation and then starting form 1981, inflation then shifted into asset prices. I believe that period between 1999 to 2003 essentially marks the thrust in the consumer price inflation. From here onwards, the world will live with higher inflation rates on the consumer price level for the next 10-20 years.

    Q: Where do you see the Dow and the S&P bottoming out? Do you see that happening in 2008 at all?

    It is very difficult to tell. If you really print money, you can probably support asset markets to some extent. But I believe that the Fed is now in a very difficult position for the following reasons. The Fed can print money and make money available and the treasury can send cheques to the household sectors in order to spend money. That can support the economy to some extent. If you increase the fiscal deficit and if you print money, the interest rates will start to go up significantly. The interesting thing is, since September 18, when the Fed started to cut the Fed’s fund rate from 5.25% down to 2%. The only bonds that are still at a lower yield than they were before the Fed fund rate cut are the treasury bonds. All the other bonds, whether it is AAAs or BBBs or mortgage rates are higher than at that time. So if the Fed can print money, the bond market may actually not like it and go may down, which can result in higher interest rates.

Source of article:

Soros says Superbubble is now Collapsing!

Many thanks to The Wanderer for the heads up on the following article/interview on George Soros. ( Link: )

  • In his latest book, "The New Paradigm for Financial Markets," he argues a "superbubble" has developed in the past 25 years and it is now collapsing.

And like The Wanderer, I liked the following part very much.

  • WSJ: How is that you are rich despite your world view having been wrong so far?

    Mr. Soros: I'm only rich because I know when I'm wrong.

Warren Buffett's Bet And RBS Bold Prediction.

Warren Buffett's bet against Protégé Partners LLC was highlighted by Carol Loomis on Fortune Weekly, Buffett's big bet

  • Fees: Big hurdle for Protégé
    As for the fees that investors pay in the hedge fund world - and that, of course, is the crux of Buffett's argument - they are both complicated and costly.

    A fund of funds normally charges a 1% annual management fee. The hedge funds it puts that money into charge an annual management fee of their own, which for funds of funds is typically 1.5%. (The fees are paid quarterly by an investor and are figured on the value of his account at the time.)

    So that's 2.5% of an investor's capital that continually goes for these fees, regardless of the returns earned during a year. In contrast, Vanguard's S&P 500 index fund had an expense ratio last year of 15 basis points (0.15%) for ordinary shares and only seven basis points for Admiral shares, which are available to large investors. Admiral shares are the ones "bought" by Buffett in the bet.

    On top of the management fee, the hedge funds typically collect 20% of any gains they make. That leaves 80% for the investors. The fund of funds takes 5% (or more) of that 80% as its share of the gains. The upshot is that only 76% (at most) of the annual return made on an investor's money accrues to him, with the rest going to the "helpers" that Buffett has written about. Meanwhile, the investor is paying his inexorable management fee of 2.5% on capital.

    The summation is pretty obvious. For Protégé to win this bet, the five funds of funds it has picked must do much, much better than the S&P.

    And maybe they will. Buffett himself assesses his chances of winning at only 60%, which he grants is less of an edge than he usually likes to have.

    Protégé figures its own probabilities of winning at a heady 85%. Some people will say, of course, that just by making this bet, Protégé has acquired some priceless publicity.

This week, John Mauldin has featured Buffett's bet in his weekly write-up, Warren Makes a Bet

Do give it a read!

And last week, on Thursday, Royal Bank of Scotland analyst had made a very bold prediction.

  • The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.

    "A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist.

    A report by the bank's research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as "all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets.

    "Cash is the key safe haven. This is about not losing your money, and not losing your job," said Mr Janjuah, who became a City star after his grim warnings last year about the credit crisis proved all too accurate.

Do give the rest of the article a good read and note all the comments posted! ( )

Many thanks to The Wanderer for the heads up on that article.

Saturday, June 21, 2008

Jim Rogers Blasts The Insanity Of the Feds while remains bullish on Oil & Commodities

Here are some latest comments from Jim Rogers.

  • Jim Rogers: Oil Bull Market Has Years to Go

    Thursday, June 12, 2008 5:18 PM

    The bull market for oil has many years to go before it peters out, says billionaire Jim Rogers, chairman of Rogers Holdings.

    There are several factors for this view, but the primary one is that "known sources of petroleum are dwindling," Rogers told Bloomberg in an interview.

    Global oil supplies could fall far short of need and expectations in the next 20 years, reported the International Energy Agency in mid-May. The agency long expected supply to rise to meet demand of 116 million barrels a day by 2030.

    It now expects oil output to struggle to reach 100 million barrels in that time frame.

    These market conditions will make life difficult for airlines — and airline stocks — well past 2010 and will also impact Federal Reserve policy in the coming months, Rogers said.

    Rogers has proved astoundingly prescient since suggesting that investors buy into the older, industrial economy back in 1999 when gold and oil were coming off 25-year lows and when the Internet stock market was soaring.

    Now in his mid-60s, Rogers retired from full-time work when he was 37, and invests for fun. ( source of article: here )

And fresh on Forbes.

  • "We think the bull market in commodities still have a long way to go, especially when you look at growth rates in China, India, the Middle East, North Africa and throughout most of the developing world, where demand for just about every commodity is rising at unprecedented rates," Rogers said. ( Taken from Forbes article here )

Do note that Jim Rogers made them comments when he announced he is teaming up with S-Network Global Indexes to launch The Rogers Van Eck Hard Assets Producers Index. Unlike the Rogers International Commodity Index, the new index tracks the performance of companies that deal in commodities--rather than performance of the commodities themselves.

And in another article on MoneyNews, Rogers blasts the insanity of the US Fed

  • Jim Rogers: Helicopter Ben Bernanke 'Insane'

    Friday, June 20, 2008 2:40 PM

    The Fed, explains commodities bull Jim Rogers, has made things worse by printing huge amounts of money, causing huge inflation, and driving the dollar down.

    Plus, American taxpayers will have to pay off the $400 billion spent on Bear Stearns.

    "If the system is so fragile that the collapse of the fifth-largest investment bank in America could bring the whole thing down, what’s going to happen in a few years when the No. 2 or No. 1 banks go bad?" Rogers asks.

    "What’s Bernanke going to do, get in his helicopter and fly around the country repossessing cars and houses? This is insane."

    So, Rogers say he's buying airlines.

    It's counterintuitive: Twenty-four airlines went bankrupt last year, and five of the seven largest U.S. air carriers went bankrupt during the past decade.

    "That’s great news," Rogers says. "Bankruptcies are signs of bottoms, not signs of tops."

    "I fly a lot and planes are full," Rogers notes. "You read every day that the airlines are cutting capacity and raising fares. How much more bullish can you get?"

    Rogers' current investment picks also include Swiss francs, Japanese yen, agriculture and oil — but no financials right now.

    "I'm short on the investment bank ETF, which means I’m short on all of them," Rogers observes.

    "Some of these companies have horrendous balance sheets."

    Financials go for unbelievably low prices in bear markets, he points out, but this bear hasn’t hit bottom yet.

    Rogers — who is also short Citibank and Fannie Mae — says the excesses in financial markets have been far too great.

    "You don't see any 29-year-old cotton farmers driving Maseratis," Rogers says.

    "But a lot of 29-year-olds on Wall Street are driving them. This is not the way the world is supposed to work."

    However, the oil bull market has years to run, Rogers says, even though big market reactions can still occur.

    He points out that the price of oil has dropped by 50 percent twice since 1999.

    "Unless someone discovers a lot of oil very quickly in accessible areas, we’re running out of known oil reserves," Rogers says.

    "If the price of oil goes high enough, they’ll be drilling on the White House lawn and Buckingham Palace."

    And because food reserves are at their lowest level in 50 years, unless someone starts bringing on a lot more capacity soon, Rogers believes the agricultural bull market has got a ways to go, too.

    Meanwhile, prices for nickel, zinc and silver are down 50 percent to 80 percent from their historic highs, yet Rogers is waiting to add more of these commodities to his portfolio.

    "It looks like Congress is about to do something that will drive commodity prices down, and that will create a fantastic buying opportunity," he says.

    Rogers advises investors, however, not to panic in bear markets.

    "Bear markets perform a necessary service by cleaning out the system," he says.

Friday, June 20, 2008

Warren Buffett: In Business World Ugly Ducklings Stays Ugly!

Blast from the past.

(Continuing on the wonderful compilation of Warren Buffett's sayings done by Bud Labitan called "The Warren Buffett Business Factors" but unfortunately the link I had recorded is broken.)

For an understanding of how the to-invest-or-not-to-invest dilemma plays out in a commodity business, it is instructive to look at Burlington Industries. In 1964 Burlington had sales of $1.2 billion against our $50 million. It had strengths in both distribution and production that we could never hope to match. Also, it had an earnings record far superior to ours. Its stock sold at 60 at the end of 1964; ours was 13.

Burlington made a decision to stick to the textile business, and in 1985 had sales of about $2.8 billion. During the 1964-85 period, the company made capital expenditures of about $3 billion, far more than any other U.S. textile company and more than $200-per-share on that $60 stock. A very large part of the expenditures, I am sure, was devoted to cost improvement and expansion. Given Burlington’s basic commitment to stay in textiles, I would also surmise that the company’s capital decisions were quite rational.

Nevertheless, Burlington has lost sales volume in real dollars and has far lower returns on sales and equity now than 20 years ago. Split 2-for-1 in 1965, the stock now sells at 34 -- on an adjusted basis, just a little over its $60 price in 1964. Meanwhile, the CPI has more than tripled. Therefore, each share commands about one-third the purchasing power it did at the end of 1964. Regular dividends have been paid, but they too have shrunk significantly in purchasing power.

This devastating outcome for the shareholders indicates what can happen when much brainpower and energy are applied to a faulty premise. The situation is suggestive of Samuel Johnson’s horse: “A horse that can count to ten is a remarkable horse - not a remarkable mathematician.” Likewise, a textile company that allocates capital brilliantly within its industry is a remarkable textile company - but not a remarkable business.

My conclusion from my own experiences and from much observation of other businesses is that a good managerial record (measured by economic returns) is far more a function of what business boat you get into than it is of how effectively you row (though intelligence and effort help considerably, in any business, good or bad). Some years ago I wrote: “When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.” Nothing has since changed my point of view on that matter. Should you find yourself in a chronically-leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.

Taken from The New Buffettology :

Investing in Burlington in a market downturn or on bad news isn't a great move if the long-term growth is the goal. It is the kind of investment that Warren steers away from because it lacks the durable competitive advantage other companies can offer.

Warren is fond of saying that when management with an excellent reputation meets a business with a poor reputation, it is usually the business's reputation, it is usually the business's reputation that remains intact. In other words no matter who is running the show, there is no way to turn an inherently poor business into an excellent one. Ugly ducklings only grow up to be beautiful swans in fairy tales. In the business world they stay ugly ducklings no matter what managerial prince kisses them!


Ugly ducklings only grow up to be beautiful swans in fairy tales. In the business world they stay ugly ducklings no matter what managerial prince kisses them!

How true isn't it?

Take the toughest industry... for example the airline industry in the US. Here is my favourite comment on it from Charlie Munger (The Art of Stock Picking)

If it's a pure commodity like airline seats, you can understand why no o­ne makes any money. As we sit here, just think of what airlines have given to the world safe travel, greater experience, time with your loved o­nes, you name it. Yet, the net amount of money that's been made by the shareholders of airlines since Kitty Hawk, is now a negative figure ‑ a substantial negative figure. Competition was so intense that, o­nce it was unleashed by deregulation, it ravaged shareholder wealth in the airline business.

Now you can the smartest and most innovative management running the airline, but no matter how good and how dedicated they are, a terrible business remains a terrible business.

And here is more comments from Mary Buffett's book.

In 2000, it was reported that United Airlines, one of the best-run airlines in the United States, carried a net debt of USD$5 billion versus USD$4 billion in net income the last 10 years. Unions and high fixed costs ensured that any airline flying the friendly skies will never allow their shareholders' riches to soar for very long.

And what about the terrible automobile business?

In 2000, GM carried approximately USD$136 billion in long term debt, a sum greater than the USD$34 billion it earned from 1990 to 2000. Imagine, if you took every dollar that GM made for the last 10 years down to the bank, you still couldn't pay off the loan. Doesn't sound like a great business, does it?

For the car industry, they have to spend tons and tons of money designing and researching on new models. Then they have to spend tons of money to market the product (the car). And after all the moola spend, when the car hits the street, their nearest competitor comes out with a similar competing design. How? Does it matter who is managing the business? A lousy business will most likely remain a lousy business because the economics structure of the business industry does not allow the business to be good!

Anyway, the GM example also highlights the issue on why it is so risky owning business which carries such a huge debt. Just imagine if we own such a company which carries this sort debt. Now if and when the boom time is over, what will happen? Well, when the boom is over, sales and profit will most likely decline. And the decline might turn into losses due to financial interests incurred by the company carrying those huge long term debts.

So let me remind myself again...

Ugly ducklings only grow up to be beautiful swans in fairy tales. In the business world they stay ugly ducklings no matter what managerial prince kisses them!

Thursday, June 19, 2008

Recent Stock Market Crashes

Firstly I am not INSINUATING anything.

So do not ass-u-me anything for it will make an ass out of you an me. This posting merely looks at past stock market crashes and it does not attempt to say when and where the stock market crash will happen.

However, if you reckon that such a posting is taboo and it will be a jinx to your investments then do please not read. Ok?

There's this old little book by Neoh Soon Kean called Stock Market Investment in Malaysia and Singapore. It's published under Berita Publishing Sdn Bhd.

Here are some collection of comments from the book which I find to be very interesting.

from pg 14...

It is always difficult to determine exactly when a bull run starts, certainly much more difficult than pin-pointing the time a crash starts. Typically, a bull run always starts gently. The prices tend to bump along the bottom for a while before starting up and even after it has started, there may be a few false starts when the rate of rise would falter. With that caveat in mind, it is my opinion that the bull run started in Jan 1971 and the big marker break (that is the start of the crash) occured on 13 Feb 1973, an up-cycle period of about two years.....

The amazing fact is that in 1971 and 1972 could be regarded as bad years economically for Malaysia while 1973 and 1974 were, in fact very good years for both Msia and Singapore. Yet the latter two years coincided with the sharpest fall in the history of Msian/S'porean stock market. STi fell by 41% in 1973 and 42% in 1974.

Until after June 1973, the Malaysian stock market and the Singapore stock market were joint. The whole market was therefore affected by the economic well being of Malaysia. In the early 1970's Msia/S'pore was still very much an export-oriented region. The prosperity of many quoted co's in the stock market was much dependent on the export of primary commodities.

What were some of the factors which caused the big boom?

(1) Early profit was made

after May 13th incident of 1969, investors' confidence sank to an extremely low ebb. there was a very considerable amount of panic selling and the Straits Time Industrial Index dropped to a low of 130 in late 1970 from 170 in April 1969. Many shares were being sold at an extremely low level. The few investors who had the courage to buy then were to make hefty gains later on.

... even after another more than 40% rise in the overall price level by 31 Dec 1971, many of the stocks, were still very reasonable, especially the second tier stocks.

The early profits attracted a lot of investors into the market and again, the prices rose and by June 1972, ST had increased by another 20%. However from this point onwards, the people entering the markets were no longer governed by economic considerations.

The prices were to be increased by yet another 81% in the next six months (WAAAHHH), after which the end of the boom was in sight. By that time, the market had caught the speculative fever and price rises were no longer rational. The market was to rise another 41% in the final six weeks before collapsing. It is notable that the increase every six months got steeper and steeper. In the final three months or so, the increase of the index exceeded that of the previous 2 years! This rate of increase obviously cannot be sustained and the speculative mania ran out of steam and had nowhere to go but down.

... When a market is rising, everyone who goes in makes some profit and he is therefor encouraged to make further purchases. However, the continuous price increase cannot go on forever. At some point of time, the amount of money tied up is so high (at the highs, one lot of OCBC costs 50,000, a sum which was more than the selling price of two terrace houses at that point of time) (Fiyoh!!!! Now that's what u call BULL, eh?) that the buyer who buys in anticipation of a further rise will be forced to sell soon if the market is not going up. Once the market sees that a shares has stopped rising, the opposite goes into effect. The intending buyer will delay buying hoping that the price will fall further. This causes the weak intending seller to lower his price yet again. A spiral of forced selling at low prices is thus started and it tends to continue at ever increasing speed until eventually much, if not all, of the earlier rise is completely increased.

(2) Many were First Time Investors

For much of the 1960s, investment in the local share market was very much limited to the institutions, large corporation and a few well-off private individuals. The middle class was of a small number and wielded little economic power. However, with the Independence in M'sia and Singapore, the social spending of the governments were vastly increased and slowly a large body of middle class consisting of civil servants, doctors, teachers and other professionals were established.

Like the US of the 1920's investment opportunities in the late 1960's were the limited. Three months of fixed deposit was then paying 5% (Wahh... 5% now banyak lo). Naturally the stock market market attracted some of the money in circulation. As explained before, those who made profit early, attracted many others into the fold. The commentators of the time also pointed out an additional fact which caused a large number of first timers into the market. In late 1972, all teachers in msia received a considerable amount of back pay. The sudden receipt of an unexpected sum of money and the booming stock market at that time was all that needed to push many teachers into the market. Indeed in 1972, teachers' common room conversation was largely limited to the stock market. (LOL!!!! Wahh... so much happening inside ze teacher's in common room!!!... hohoho... playing shares when they are free??? )

These first timers had little idea of the economic principles upon which stock purchases should be made. Instead they relied on market talks, brokers' advice and self-proclaimed experts. (hehe... they become Sayur lor or some prefers to call it as Hong Kong Kai Lan) As a well-known Wall Street saying goes: 'Genius is a rising market'. the rapidly increasing prices gave all involved a vision of boundless prosperity and wealth ( hmmm... Grandiosity lo ). By the end of 1972, price rose to a level which could not be justified by any known economic standard.

... the price increase obtained were totally out of bounds of rationality. A PER of three digits is absurd by any standard but to the newcomers, PER was a meaningless measure. All they believed was that: 'If the prices had doubled in the past 6 months, they must be capable of doubling yet again in the next six months'. (ho ho ho... they believed that the stocks could really fly up, up and awayyyyyyyy hor!!... and today's high is tomorrow's low eh?)

(3) Rapidly Rising Foreign markets

(4) Trust in 'Blue Chips'

(hmmm.... is this where the common advise to buy blue chips come from?)

In the Crash of 1973, the top tier company was made much of finance, properties and a few old line companies such as Sime Darby and Haw Par. The enthusiasm for these top tier stocks was such that most others were largely ignored. The PER of the favoured stocks would rise to an astronomical level while for the less favoured, their PER would remain at a reasonable level even at the height of the speculative mania. The over-concentration of interest in a specific class of stocks naturally meant that the price rise would be even more phenomenal. Unfortunately, when the crash came, all stocks, favourites or otherwise, were brought down. Stock market crashes knew no favourites.

The higher the stocks rose, the worse they fell. Many ex-market favourites lost over 90% of their peak price. Local newspapers reported many cases of bankruptcies and several cases of suicides directly attributed to the stock market collapse.

But stop it did as it must in all slumps. The severe losses that took place traumatised the speculators for many years. When the overseas market picked up in 1975, the Msian/Sporean market failed to do so decisively. The prices bumped along the bottom for many years until 1979.
At the time, once again the lessons of history appeared to have been forgotten and Msian/Sporeans indulged in yet another speculative orgy......

The Crash of 1981

In magnitude, it is almost as severe as the first Crash.

First, it would appear that there were sound economic reasons behind the rise of share prices this time. M'sian/Sporeans had learnt sufficiently to depend on their own feelings on how the economy was doing rather than rely on foreign indices. (Ahhh... the problem of de-coupling our own market from others... be independant lo) At the time of the beginning of the bull run (approx Jan 1979), both Dow Jones and Financial Time Indices were in the doldrums. The local economic environment at the beginning of 1979 was vastly better than that of 1970.

(the tables in the book.... showed that price of rubber went from 1.99 to 3.25, price of tin went from 18,736 per ton to 35,710 and CPO went from 882 to 1177)

.... commodity prices were approaching or just below their respective all time high. Most of the companies directly or indirectly involved in the commodities business were doing extremely well and were flush with cash.

... per capital GNP had been rising most steadily for five years at an average of about 15 per cent. More than that, the private sector was very liquid with cash. In 1979, the money supply of Msia was standing at a figure that was five times higher than in 1971!

With profit increasing at a rapid rate, a PER of 20 or more seemed fully justifiable. (yeah... look at Cycle... price went from 2.62 to 5.25, and yet the PER only increased from 10 to 13... there is growth!!) As the memory of 1973 faded away and the mood of the country totally changed (market sentiments lo), stocks were once more respectable investments. Thus, more and more Msian/Sporeans invested and saw their investments steadily increased in value...

Secondly, the timing was right this time. In 1978-1980 the economic horizon was bright and it was natural to envisage an extended period of prosperity. Indeed the governments did promise just that. It is natural to bid up the price of stocks at the top of an economic cycle and until mid-1980, the prices of most stocks were very reasonable. Not many people, if any, could have foreseen the recession of 1982 (two years away still)

Thirdly one could detect several signs of market efficiency which was most surprising in view of what happened in 1973. Even at the height of the speculation some shares were being quoted at very reasonable prices. At the maximum level Bata, C&C, SIn Heng CHan and many others could be bought at a PER of less than 20. Given the Msian/Sporean context, the PER reached could be considered rational. Purchases even at those prices would not have been unwise investments if the region's growth rate of the late 1970's were to continue into the 1980's. Furthermore, it is noticeable that many of the plantation and tin mine stocks turned down well in advance of the general market. Many plantation stocks peaked in 1981 and most tin stocks even earlier on. This can be shown by comparing the KLSE Industrial Index with the prices of popular plantation and tin stocks. Considering that the poor corporate reports were not to be published for yet another year, this was a very creditable performance. A considerable number of investors must have taken note of the softening price trends of rubber, cocoa and tin at the point of time and started to liquidate or reduce their holdings.

It must be stressed, however, that despite these pockets of efficiency by late 1980's, the usual symptoms of a speculative mania were making their appearance. Trading on the stock market became more and more widespread among the populace. The mania was slowing taking hold in the minds of the people and soon many of them would throw rationality to the wind.

By early 1981, the mania had once again reached epic proportion. The prices again showed the accelerating rate of increase that is common to all manias.

Once again, a large number of ignorant and inexperienced people were attracted to the stock market. Remisers set up operations in every small town and did roaring business. In a typical small town like Teluk Intan, butchers, rubber merchants and small holders from the surrounding areas would crowd into town in the afternoon to take part in the rush to buy and sell shares. Even the universities were not immune to the temptation of the market. Many lecturers from each of the local universities were heavily involved. Housewives of all ages spent their days at the brokers' offices, no doubt finding it more exciting than a game of mahjong. (LMAO!!!..... hohoho.... mania!! Err.... Lecturers involved again? Soooo does this mean that these buggers are great BULL indicators???..... and kakaka.... if 2nd Auntie is so busy playing mahjong.. then u know stock market ain't too happening hor!!! )

The Conglomerate Game.

.. the value a speculator places on a stock (or a tulip) does not necessary depend on anything which is tangible. Rather, it depends on the image or fantasy the investor may have on a particular stock. A company that is continuously in the public eye ( a result of a continuous stream of announcements of bonus, rights, takeovers and profit forecasts, etc.) is that much more likely to become the object of such fantasy. ( Aha!!... got fancy CREATIVE story to sell??) In the same way, an actress who is always in the news is far more likely to become the object of a man's fantasy. Stocks of such companies are far more 'attractive' (sexy stocks?) and are more likely to be bidded up to a far higher level than the dull 'never-anything-happens' type of stocks.

... Indeed the activities of several companies during 1980 and 1981 fit the description. they are the companies that were busily engaging in takeovers and mergers ( for example, MUIB, Hong Leong Industries and PEGI). With the announcement of each new takeover, their profit forecast would become greater and their prices attain a higher level. It would be indeed be foolish for these companies not to make use of their new found strength in the form of high stock prices to seek new takeovers by an exchange of shares. More takeovers led their prices to go even higher and an upward spiral took shape. What was realised by the public did not necessary mean higher per share earnings. This is because a lot of new shares had to be created to 'pay' for the takeovers. (ze dilutions effect lo!!!... BE WARNED! ) Therefore, the per share price should not necessarily go up between overall and per share share earnings was lost in the general madness to pursue high-flyers. Most of the newly-fledged conglomerates saw their stock price increase to a level that is ridiculous by any measure.

The Property Injection Game

Owing to various government and institutional obstacles, it has become increasingly difficult for a Malaysian company to become publicly listed. (Oh my, how times have changed!) For the five years prior to 1981, only a handful of new companies each year had reached such exalted rank. This naturally resulted in a great deal of impatience among entrepreneurs who were anxious to have access to the public capital market. Over the previous four or five years, this impatience had manifested itself in the form of an increasing number of entrepreneurs buying over control of a listed company and injecting his own properties into the listed company as a way of achieving public listing. Since taking over a successful company is not cheap, these entrepreneurs naturally turned their attention to less successful companies ( yalor - the lousy ones - ones that wud stretch and bend ze rules sikit!! ) , in particular, textile companies which were going thru a poor earning stretch.

... On taking over a moribound or semi-moribound listed company, the entrepreneur would use it to takeover their existing assets by a process which is locally known as 'injection'. Most of these assets being so injected had been real properties (ie pieces of land). To the local share buying public, real estate had a magical ring to it for did we all not know that: "All real real-estate developers are rolling in money?" Given this fantasy image of real-estate development, every time the re-organisation of a moribound listed company into a real properties development company was announced, the public went wild bidding up the price of the previously moribound or semi-moribound company to incredible heights. Not only was there an enormous enthusiasm for companies actually being re-organised this way, the speculation spilled over the companies which might be taken over.

This when Taiping Textile was being reorganised the stocks of South Pacific textile, Imatex and Textile Corporation all went up in sympathy even though there were NO concrete news. As mentioned earlier, since the 'Property injectors', were only interested in moribound or semi-moribound companies, we have the most curious phenomenon whereby stocks of companies which would normally be considered as not particularly good, were bidded to an unjustifiable level even for a good company.

(The Goreng of the Chekai and Lousy stocks????)

The End is Near

Thus, if one were to refer to a list of most active stocks for the two years before the Crash of 1981, one would see that much of the activities centred around either conglomerates or re-organised companies or companies rumoured to be facing re-organisation. The day of reckoning arrived when the prices were bidded up to a ridiculously high level and when weak holders become anxious. Like in all slumps, once nervousness started to appear, confidence rapidly ebbed since it was not based on anything tangible in the first place. The market peaked on 26 june 1981, and lost rapidly almost HALF of its value within the next four months. there were a few anaemic attempts atrallying which all failed to go very high. This went on for about eight mnoths. In late July 1982, stock prices began to drop again, slowly at first and then sharply to result in a market loss of another 100 points.

( .... hmmm.... the dangers of using of year high and year low as an indicator to buy stocks lor ... cause .... if one used such indicator as a guide.... surely KENA big, big time lo .... so think it is wise to use a contrarian approach to buy a stock based on low prices?)

There is an ironical twist in the end of the story if the Crash of 1981. The market went down rapidly from a high of 823 on the KLSE to reach a low of 364 after fourteen months. This means a decline of about 58% in just over an year, a very rapid fall by any standard. One would expect it to continue falling further and stay down for a while to catch its breath as in most speculative collapses. This however, did not take place as the local speculators did not seem to have suffered enough and the market started moving up again toward the end of 1982 and was to reach a very high level of 680 by Feb 1984. Most local speculators were ecstatic over the unexpected rise and most local stock market commentators were expecting renewed climb to new heights for 1984. Once again, the unexpected happened and 1984 turned out to be another bad year for local speculators.

The Crash of 87!

At the time of writing (June 1988), it may be premature to write the history of 1987Crash as the full story of this crash has not yet been revealed. (Aisehhhh... what la.... !!.. I told you this little book is OLD what!). However, the global stock market crash of Oct 1987 has become part of the folklore of the investment world and it would be negligent if this story is left out.

In some ways, it is more difficult to get a 'handle' of this Crash than the two Crashes previously described. There were no obvious villains as in the earlier crashes. The bull market was intense and broad based, to be followed by a crash of unprecedented severity. The amazing thing to most casual observers of the market is that the crash took place just as both Msia's and Spore's economy were getting into full steam after two years of unprecedented low growth.

It is to be admitted that the economy of both countries were expected to do well in 1987/88 compared with the previous two years but the growth rate which has been achieved is low if compared with the heydays of say 1975 or 1981 when the economy grew at twice this rate or more. In spite of the mediocre economic rate, the stock market put up one of the best performances ever.

... It matched the growth rate of the bull market of 72/73 all the way.

From the start of bull market up to its peak, the SES All Shares nearly doubled while the KLSE increased by 167%. This is to be contrasted with an expected total growth in GNP of about 15% for 1987 and 1988. An examination of the earnings trend of the listed shares on both exchanges is even more telling. Apart from commodity companies and certain turnaround situations (eg Cycle & Carriage), the improvement in EPS between 1986 and 1987 is not particularly remarkable.

The increase in the EPS between 1986 and 1987 is only 18.7% for the Sporean stocks and 34.6% for the Msian stocks. Their March 1986 PER (based on 1987 EPS to allow for the expected increase in EPS) at the start of the bull run were not particularly low by usual financial standards (respectively 13.8 and 21.9). At the peak of the bull run, their PER can be said to be very high indeed and probably not sustainable.

The experience of the non-blue chips more or less mirrored that of the blue chips except the former were more extreme in their movements. In spite of the none-too-low PER level of the majority of the stocks in March 1986, the market took off in the classical manner with an ever increasing rate of increase that is so typical of a speculative stock market boom. Readers may like to compare it with the rate of increase experienced in the previous two booms described earlier.

Thus by Sept 1987, many local stocks were selling at prices which were completely out of line with the fundamentals. [ same symptoms lo - prices went totally out of whack!! ] The earlier two tables in message 33 and 34 shows the PER of a selection of stocks at the top of the market compared with the highest PER during the previous bull markets. It is safe assumption that the shares do indeed look expensive compared with previous stock market tops.

Why should the market height it did, if there are no strong fundamental reasons to account for? (LOL!! No strong fundamental reasons? Kaki-kia?)

Influence of the Foreign markets

There is little doubt that the four years up to 1986 saw one of the best periods for stock markets worldwide. It is interesting to compare the performance of the various stock markets of the world between 1982 and 1983 to that of the local market.

.. the local market was the only one which had done badly in the four years preceding 1986. Furthermore, by Jan 1986, local bear market was 26 months old, a very advanced age for a bear market. Given the very powerful psychological stimulus provided by the continuing strong advances in most major markets, it is not surprising that local investors took heart and got the bull market underway.

Local commentators also attributed foreign buying ti giving the market further impetus. There is no doubt that there was some foreign buying although the exact quantity is unknown. A figure of US$2-3 billion has been cited by various commentators. This figure us quite small relative to the overall capitalisation if the market (US$50 billion, at the peak). However, given the poor liquidity of the local market, foreign buying could give quite a boost to the local prices.

Low Local Interest Rate

Due to a combination of factors, interest rate sank to a historically low level by early 1987. In Singapore, interest rate reached a peak in 1980, declined quite sharply in 1981 and held steady from 1982 to 1984. In 1985, interest rate in Singapore started to decline again, by early 1986 the three month fixed deposit rate was down to 4.5% and by early 1987 it was down to 2.85%.

In Msia, the decline in interest rates was even more precipitous. The interest rate hit a peak in 1984 with the three month fixed deposit rate reaching 10.5%. The rate declined to 7.25% in 1985 and 6.25% by end of 1986 before diving down to 2.5% by mid 1987. ( WOW!!! that's a sure DEEP falling rates!!!... and with such low interest rates... where to put ze moola??)

In the face of interest rate being less than the average dividend yield of the stocks at the time, is not surprising that large amounts of money flowed into the stock market, thus driving up the prices.

Economic Recovery

For both countries, 1987 was an incredible turnaround year. Both countries achieved the highest growth in five years. The improving economy meant higher income for the people. Even more than that, the psychological impact of a good year after two dismal ones must have been very great. Everyone must have felt as if a great weight had been lifted off their shoulders and the general cheerfulness and good feeling may have contributed to a great deal of optimism about the market.

Lack of Other Investment Avenues.

The lack of other avenues of investment is an important factor for a stock market to boom to reach speculative proportion. In 1986/87, this condition was fully met. The only other investment alternative apart from stocks and deposits, for laymen was in houses. By 1986, the housing market in both countries was in a severe slump. What is worse, the slump did not look as if it was going to end soon. There was therefore totally no incentive for investing in homes.

Granted that there were good reasons for going into the share market, it is understandable that the market should have gone up. But what is not comprehensive is that why should the market go up so much especially for the Malaysian stocks.

I feel that once again, the local stock market players had let their emotions take over from their senses. A more charitable interpretation would be that the typical investor still did not have an understanding of investment fundamentals such as PER and DY. In this sense, they were no better than the players of the previous speculative booms. Once the market went up strongly, they would enter the market, attracted not by the value represented by the shares but by the mere fact that they have gone up so much. The market went into a self-sustaining upward spiral. (LOL!!!... kaki-kia dude!!!)

...(As we can see from the tables in the book) the PER (most of them 3 digits PER some had PER over 230!! and most had NM (not meaningful) PER cos they were companies which were losing money!) were typically so high that prices could not be sustained once the reasons for the rise in the first place disappeared.

Thus, once the collapse hit the other markets, the interest in local market largely vapourised as well and the market took a plunge of unprecedented short term severity.

The tables (in the book) shows the magnitude of the fall amongst a selection of speculative and investment grade shares. Once again, the volatility of the local market was clearly demonstrated. Even though our market started moving up much, much later than the major markets, our decline was more severe than any of these except hong Kong. Latecomers to the speculative scene once again must have suffered enormous losses. (err... buy high, sell ... ???)


These three adventures to Manialand have shown all too clearly that local investors are still far from rational in their approach to investment. Their behaviour in 1987 was not much improved from that of 1973.

If anything, what can be noted is a very disturbing development, the local market seems to have become more speculative not less. (Ahemmm... now? any changes? ) The first truly speculative boom of modern time took place in 71/72 and there was a gap of over 8 years before the next speculative boom (that of 80/81) took place. But after the boom of 80/81, there were 2 more episodes of speculation within a space of seven years.

An even more disturbing fact is that the local market has not effectively progressed since 80/81. Between 70 and 80, the local market gained about 400%. But from 80/81 to 87/88, the market hardly moved at all. What this means is that had an investor bought near the top of the market in 1973, he would have bought in at the top of the market in 1981, many would still be out of money today.


the ENd.

Stock Market Investment - Neoh Soon Kean
Berita Publishing Sdn Bhd. 1989 (ISBN 967-969-066-0)


And what about the crash of 1987?

Here is a highly recommendable reading.

Published on the US Federal Reserve Board and written by Mark Carlson.

  • The 1987 stock market crash was a major systemic shock. Not only did the prices of many financial assets tumble, but market functioning was severely impaired. This paper reviews the events surrounding the crash and discusses the response of the Federal Reserve, which responded in a number of ways to support the operation of financial markets, including the provision of liquidity, in a highly visible fashion.

Click here for the full report: Full paper (186 KB PDF) Full paper (Screen Reader Version)

ps: Hope you enjoyed it! I did!