How the Economic Machine Works by Ray Dalio

Use fixed deposits for emergency fund and war chest.

(With a section on OCBC 360, UOB ONE and CIMB savings a/c.)

The Beginner’s Guide to Understanding The 3 Financial Statements

Very good write up of the 3 Financial Statements...!!!
The Beginner’s Guide to Understanding The 3 Financial Statements

Seven Traits of Superinvestors - Reproduced by Koon Yew Yin

Good review of what a Superinvestors is about...
Quote...
"One of the reasons why people cannot think clearly and sell stocks panicky during market crash is that they do not know the actual worth of the businesses when they bought the stocks. According to studies, most of the investors do not like to read financial reports; many of them do not even bother to understand the companies’ businesses. They buy the stocks solely based on hype and hope that the stocks will decuple in twelve months. During economic crisis, when everyone rushes to sell the stocks and analysts also give strong sell recommendations; there is no reason for them not to liquidate their positions hastily as the hope has vanished into thin air.
Another factor why people are captive to the bias is that they use emotion in their decision making process. In comparison to the systematic and logical approach, this method yields quicker results and is effortless. Instead of performing due diligence, such as analysing the underlying business performance, profit growth prospects and value of the business, this system uses some mental short-cuts based on similarity and familiarity to judge what the market will do next. For example, when the system receives some negative news of a stock, it will link the news to price falling and will trigger the fear of loss. In such case, the most natural reaction the system will take is to sell the stock without investigating further. The massive disposal of a stock will then lead to its price plunging. Likewise, the fear of loss also causes people to ignore bargain. Therefore, this group of investors tends to lose their lifetime savings in a very short cycle and is unable to capture the rare opportunity when the stock price running out of control. This is the reason why Walter Schloss advised people “Try not to let your emotions affect your judgment. Fear and greed are probably the worst emotions to have in connection with the purchase and sale of stocks.”
Unquote...
Ø   Trait 1: Ability to buy stocks while others are panicking and sell stocks while others are euphoric. Be an intelligent contrarian investor.
Ø   Trait 2: A great investor is one who is obsessive about playing the game and wanting to win. These people do not just enjoy investing; they live it.
Ø   Trait 3: A good investor is one with willingness to learn from his or her past mistakes and to analyse them.
Ø   Trait 4: An inherent sense of risk based on common sense. You must have the common sense to realize the risk of buying any share which has gone up a lot and when all the analysts are recommending buy. Always take an analyst report with a pinch of salt.
Ø   Trait 5: Great investors have confidence in their own convictions and stick with them, even when facing criticism.
Ø   Trait 6: Ability to think clearly.
Ø   Trait 7: Ability to live through volatility without changing your investment thought process.

7 WAYS TO SCALE CULTURE AS YOUR COMPANY GROWS

1. Get your company values in place
2. Culture add > Culture fit
3. Hold regular all hands meetings
4. Celebrate your employees
5. Start a buddy system
6. Hold exit interviews
7. Invest in an in-house recruiter

How Amazon founder Jeff Bezos went from the son of a teen mom to the world's richest person

..."As Bezos charged full force into the Wild West that was the Internet then, he was — and still is today — guided by a single belief: Do what is best for the customer."

..."Finally, he's obsessive about finding problems and fixing them.
"Taking real pride in operational excellence, so just doing things well, finding defects and working backwards — that is all the incremental improvement that in business, most successful companies are very good at this one. ... [Y]ou don't want to ever let defects flow downstream," Bezos says to Rose. "That is a key part of doing a good job in any business in my opinion.""

Your Simple Guide To Supplementary Retirement Scheme (Tax Savings!)

Great article on SRS (Supplementary Retirement Scheme) from DrWealth.
https://www.drwealth.com/srs-singapore/?mc_cid=4967f1554c&mc_eid=7098b84c28

3-3-5 rule now endorsed by the CPF Board

Golden rule to follow when purchasing property.

Charlies Munger – The Ultimate Investing Principles Checklist

As an investor it’s important to remember that there is no secret formula or simple blueprint for success in the stock market. However, with hard work, patience and diligent analysis you can put the odds in your favor. One of the best starting points for a successful journey in investing can be found in the book, Poor Charlie’s Almanack. In which you will find An Investing Principles Checklist that encapsulates the successful approach used by one of the world’s greatest investors, Charles Munger.

Here is an excerpt from the book:

Since human beings began investing, they have been searching for a magic formula or easy recipe for instant wealth. As you can see, Charlie’s superior performance doesn’t come from a magic formula or some business-school-inspired system. It comes from what he calls his “constant search for better methods of thought.” a willingness to “prepay” through rigorous preparation, and from the extraordinary outcomes of the multidisciplinary research model. In the end, it comes down to Charlie’s most basic guiding principles, his fundamental philosophy of life. Preparation. Discipline. Patience. Decisiveness. Each attribute is in turn lost without the other, but together they form the dynamic critical mass for a cascading of positive effects for which Munger is famous (the “lollapalooza”).

An Investing Principles Checklist:

Risk – All investment evaluations should begin by measuring risk, especially reputational
 Incorporate an appropriate margin of safety
 Avoid dealing with people of questionable character
 Insist upon proper compensation for risk assumed
 Always beware of inflation and interest rate exposures
 Avoid big mistakes; shun permanent capital loss

Independence – “Only in fairy tales are emperors told they are naked”
 Objectivity and rationality require independence of thought
 Remember that just because other people agree or disagree with you doesn’t make you right or wrong – the only thing that matters is the correctness of your analysis and judgment
 Mimicking the herd invites regression to the mean (merely average performance)

Preparation – “The only way to win is to work, work, work, work, and hope to have a few insights”
 Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day
 More important than the will to win is the will to prepare
 Develop fluency in mental models from the major academic disciplines
 If you want to get smart, the question you have to keep asking is “why, why, why?”

Intellectual humility – Acknowledging what you don’t know is the dawning of wisdom
 Stay within a well-defined circle of competence
 Identify and reconcile disconfirming evidence
 Resist the craving for false precision, false certainties, etc.
 Above all, never fool yourself, and remember that you are the easiest person to fool

Analytic rigor – Use of the scientific method and effective checklists minimizes errors and omissions
 Determine value apart from price; progress apart from activity; wealth apart from size
 It is better to remember the obvious than to grasp the esoteric
 Be a business analyst, not a market, macroeconomic, or security analyst
 Consider totality of risk and effect; look always at potential second order and higher level impacts
 Think forwards and backwards – Invert, always invert

Allocation – Proper allocation of capital is an investor’s number one job
 Remember that highest and best use is always measured by the next best use (opportunity cost)
 Good ideas are rare – when the odds are greatly in your favor, bet (allocate) heavily
 Don’t “fall in love” with an investment – be situation-dependent and opportunity-driven

Patience – Resist the natural human bias to act
 “Compound interest is the eighth wonder of the world” (Einstein); never interrupt it unnecessarily
 Avoid unnecessary transactional taxes and frictional costs; never take action for its own sake
 Be alert for the arrival of luck
 Enjoy the process along with the proceeds, because the process is where you live

Decisiveness – When proper circumstances present themselves, act with decisiveness and conviction
 Be fearful when others are greedy, and greedy when others are fearful
 Opportunity doesn’t come often, so seize it when it comes
 Opportunity meeting the prepared mind; that’s the game

Change – Live with change and accept unremovable complexity
 Recognize and adapt to the true nature of the world around you; don’t expect it to adapt to you
 Continually challenge and willingly amend your “best-loved ideas”
 Recognize reality even when you don’t like it – especially when you don’t like it

Focus – Keep things simple and remember what you set out to do
 Remember that reputation and integrity are your most valuable assets – and can be lost in a heartbeat
 Guard against the effects of hubris and boredom
 Don’t overlook the obvious by drowning in minutiae
 Be careful to exclude unneeded information or slop: “A small leak can sink a great ship”
 Face your big troubles; don’t sweep them under the rug

Price changes in consumer goods and services in USA, 1997-2017

College tuition fees is 'scary'...

WHAT MAKES YOU THINK YOU CAN WIN? THE CASE FOR THE TRUE VALUE INVESTOR – LTC CORPORATION & S I2I LIMITED

Well written...
A very good analysis of LTC CORPORATION & S I2I LIMITED

Put These Charts on Your Wall…and LOOK at them everyday

Very intriguing charts by Charlie Bilello. He is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts. He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

Love the first chart....

Did Hyflux Make Money for its Ordinary Shareholders?

Interesting post on how Hyflux ordinary Shareholder is losing money even when the company reported a Net Profit  

The perils of calling the peak of the equities bull run

Current market is a time where PE ratio is close to the Great Depression in 1929...

   http://www.multpl.com/shiller-pe/

The US fired the first shot in a trade war with China

The risk of a full-blown trade war between the US and China is rising

What are at stakes?

ASSESSING LISTED COMPANIES - THE LESS LOANS THE BETTER?

Yong Chia Win May 2, 2017

When you buy a company’s shares, do you wish that the company has made as little loans as possible?

If your answer to the above question is “yes”, you might be a conservative investor. But in actual fact, when it comes to loans, we cannot always assume that “less is more”.

Two ways that companies raise capital
Companies need funds to operate and develop their businesses, and they typically raise funds through two ways: 1) Loans (from banks or by issuing bonds), and 2) Issuing shares.
Theoretically speaking, a company may have a better credit if it takes a smaller loan. Less interest is incurred too, and that can translate to more money issued to shareholders through dividends. On top of that, keeping the debt level low also reduces the risk of the company facing financial problems.
Analysing a company’s debt situation

We will not be able to gauge if a company has a high or low debt level just by looking at its amount of loans. In order to get a better idea of a company’s financial situation, we can look at the following two ratios:

1. Debt/equity ratio
The formula for calculating debt/equity ratio is simply total liabilities/shareholders’ equity, where total liabilities = non-current liabilities + current liabilities.

This ratio indicates how much debt a company is using to finance its assets relative to the amount of value represented in shareholders’ equity.

In his book, Fu Zu Zi You Ren 2 (which translates to He who is Financially Free), investment expert Dr Chan Yan Chong also pointed out that this ratio can tell us for every dollar of shares owned by the shareholder, how much of it actually belongs to the creditor.

A higher debt/equity ratio would mean that the company has a higher amount of loans relative to capital provided by shareholders. It is not so much of a problem if the company has sustainable profit to pay off interest. But if earnings and profits were unable to meet the borrowing cost, the company would likely land in a problematic financial situation.

For instance, if we look at Hong Kong-listed China Evergrande Group, which the Wall Street Journal referred to as the “world’s most indebted developer”, has a debt to equity ratio of 3.40 as of Dec 2016, according to gurufocus.com. If not including the revaluation gains on its invested properties, the company would not have made profits last year.

Even though the share price of China Evergrande Group rose sharply last month, there was no solid basis for its gains.

2. Debt Ratio
Debt ratio also referred to as debt-to-assets ratio, is calculated by dividing total debt by total assets. Generally speaking, if a company has a debt ratio of more than 50 percent, it has a high level of debt.
However, whether a debt ratio is considered high or low may vary widely across industries. According to Investopedia, a debt ratio of 30 percent may be too high for an industry with volatile cash flows, whereas a debt level of 40 percent may be easily manageable for a company in the utility sector, where cash flows are stable and higher debt ratios are the norm.

The debt ratio is also something that investors in Real Estate Investment Trusts (REITs) are concerned about, as the Monetary Authority of Singapore (MAS) imposed a 45 percent leverage limit on REITs.

Companies with fewer loans are not necessarily better for investors.
Why is that so?
Assuming that a company chooses to raise funds through issuing shares, each investor’s stake might be diluted. If the company’s business flourishes and its earnings growth are higher than interest rates, then debt financing is a more reasonable choice, which is also more beneficial to shareholders.
Also, in an environment where the inflation rate is high but interest rates are low, the actual cost of borrowing is lowered, and in this case, companies should consider borrowing money too.

Enterprise Value from ValueWalk

Enterprise Value = Market Cap + Debt - Cash
(EV/EBIT)/ROE for PEG

China is focusing on the wrong things to fix its economy, says economist

• China's capital controls have helped avoid a crisis, but it needs to fix fundamental problems
• Property prices, meanwhile, have "a long way to fall"

China should focus on fixing fundamental problems that may trigger a financial crisis instead of witch-hunting, an economist said Friday.

Speaking to CNBC's "Squawk Box," independent economist Andy Xie said China has managed to avoid a financial crisis now by tightening capital controls, but there's more to be done.

"Any other country would've collapsed, but China had started with that big cushion (of foreign reserves). Still the government had to crack down on capital flight. Without bottling up the country, China would be in a crisis now," Xie said.

Chinese companies and individuals have been snapping up overseas assets, prompting authorities to tighten controls on outflows such as limiting offshore investments.

Recently, several of China's largest overseas asset buyers were scrutinized on instructions from the banking regulator.

"Unfortunately, China is focusing on who's going to trigger the crisis; they are not talking about the fundamental conditions for the crisis, rather they focus on the technical aspect, on who's going to trigger the crisis," said Xie.

The recent actions from Chinese authorities, he said, are more about: "The people who took the money out last year, let's check them out, maybe send some to jail."

Experts have expressed concerns over high debt levels and the frothy property market in China, which was an issue that Xie also took issue with.

"Half of the loans in China are exposed to the property sector, that's even higher than Japan in 1989," said Xie. Japan's asset price bubble in the 1980s popped in the early 1990s.

In tier-1 cities like Beijing and Shanghai, for instance, the price for 1 square meter (10.8 square feet) could cost a buyer a year of his income.

In a "normal" city like New York and Tokyo, it would cost buyers a month of income for the same area, he added.

"So if you want 100 square meters to start a family, that means 100 years of income," Xie said.

Chinese property prices have "a long way to fall," he said, likening it to Japan 25 years ago.

CNBC Explains: Why do we have the Fed?

What is Last Twelve Months (LTM) or Trailing Twelve Months (TTM)?

How do we adjust for Last Twelve Month (LTM) or Trailing Twelve Month (TTM)? Is the adjustment the same for Balance Sheet?

Check out the graphic below to understand more:

BERKSHIRE 101: An introduction to Warren Buffett's $400 billion empire

Very well written summary of how Warren Buffett and Charlie Munger grow this 'GIANT' (by Yahoo Finance)

Berkshire Hathaway (BRK-A) (BRK-B) was a struggling textile company when Warren Buffett first invested in it in 1962.

Today, it’s a $400 billion behemoth. In Buffett’s own words, it’s a “sprawling conglomerate, constantly trying to sprawl further.”

The companies in Berkshire’s portfolio vary greatly. But one thing ties them all together: Buffett says they’re about “maximizing long-term capital growth.”

Here’s a brief introduction to Berkshire Hathaway.

The insurance business is the backbone of the company

After it acquired National Indemnity in 1967, Berkshire relied on its insurance businesses to power much of its expansion.

As Berkshire has gotten bigger and diversified its businesses, its insurance operations have become a smaller contributor to earnings than in the past, currently making up 26% of total company earnings. But they remain an important part of the company’s access to a permanent capital base by generating what’s known as “float.”

“Float” is money collected up front that is not paid out until later. In Berkshire’s property & casualty (P&C) insurance businesses, premiums are collected up front, but claims are paid out often years or decades later, allowing the float to be used for investments.

Today, Berkshire’s insurance group consists of four segments: GEICO (auto insurance), General Re (reinsurance), BH Reinsurance Group (retroactive reinsurance through subsidiaries), and BH Primary (focused on commercial markets, led by National Indemnity Co).

The property and casualty insurance business has faced headwinds—including deteriorating pricing and margin compression. But 2016 posted solid performance, with GEICO in particular making a comeback. Last year, GEICO suffered from higher personal auto claims (as a result of more low gas prices and more driving), and this year it accelerated new business efforts.

Berkshire’s insurance float was only $1.6 billion in 1990, and sat at $91.6 billion as of 2016. It is now over $100 billion, including the $10 billion reinsurance deal with AIG (AIG).

Equity portfolio

Berkshire’s investment portfolio represents Buffett’s long-term conviction ideas.

At the end of 2016, about 60% of his equity portfolio was invested in five companies—Wells Fargo (WFC), Coca-Cola (KO), IBM (IBM), American Express (AXP) and Apple (AAPL), a position he initiated last year and built up even more recently

Buffett also made a big bet on airlines last year, diverging from his position in the past. He significantly increased his positions in Delta (DAL), United Airlines (UAL) and American Airlines (AAL) while adding a big stake in Southwest Air (LUV).

Shift to non-insurance businesses

Berkshire has evolved from its early years, when it was an insurance-driven company driven by outperformance on investments. It is now a large conglomerate that includes many non-insurance businesses.

The railroad business now comprises 22% of Berkshire earnings. Burlington Northern Santa Fe Railroad (BNSF), which Berkshire acquired in 2009 for $44 billion, is one of seven major railroads in North America and carries 17% of all inter-city freight. Berkshire has been investing heavily in this business.

Utilities businesses comprise 10% of Berkshire earnings. BH Energy owns four utilities servicing customers in 11 Western/Midwestern states, two electricity distribution companies in England, two interstate pipelines, a renewable energy business, and a residential real estate brokerage firm.

Berkshire’s manufacturing, service and retailing (MSR) operations, 35% of total earnings, include everything from candy to jets. Companies include food supply chain company McLane, manufacturing businesses (like specialty chemicals company Lubrizol, industrial components company Marmon, flooring company Shaw Industries, and paint and coatings company Benjamin Moore), service and retailing businesses (including NetJets, See’s Candies, Borsheim Jewelry Company, the Pampered Chef, and Oriental Trading Company), recently acquired battery maker Duracell, and aerospace components manufacturer Precision Castparts, which Berkshire bought in 2015 for $37 billion.

Its finance businesses, 8% of earnings, focus largely on the manufacturing and financing of homes and the leasing of transportation equipment. They include Clayton Homes, UTLX, XTRA, and other leasing and financing activities.

Acquisitions accounted for about 60% of Berkshire’s earnings growth in the past 20 years, according to Morgan Stanley.

As Morgan Stanley’s Kai Pan points out, Berkshire has a “managers as owners,” mentality, a decentralization that allows each unit to focus on long-term goals. Additionally, Pan highlights, each unit maintains an economic “moat” in its respective industry, separating it from competition to some degree.

More acquisitions are likely on the horizon for Berkshire, which has an estimated $60 billion in excess capital.

Valuation

Buffett’s preferred method for evaluating the attractiveness of investments and businesses is intrinsic value, which represents the sum of all of discounted cash flows that can be taken out of a business during its remaining life.  The investor Whitney Tilson sees the current intrinsic value at $300,000 per share, significantly above the recent share price of $247,520.

Book value is another approach used to value Berkshire. However, Buffett has noted that the metric has underrepresented Berkshire’s intrinsic value because of the number of operating businesses Berkshire has acquired, which are held on the books at cost.

A book value calculation does, however, provide a floor for investors. Berkshire has an open-ended share repurchase program that authorizes management to repurchase shares if the stock price drops below a price-to-book ratio of 1.2x.

Beneficiary of stimulus

As Morgan Stanley’s Kai Pan points out, Berkshire has large exposure to Industrials and Financials and thus will be a major beneficiary of the administration’s “pro-growth” policies and tax reform, if they pan out.

“Given Berkshire’s outsized exposure in Industrials and Financials, it is not surprising that BRK shares have rallied +22% post-election vs. +14% for the S&P 500,” Pan wrote on March 20. “A potentially lower US corporate tax rate would also aid earnings. A 20% tax rate could boost BRK earnings by ~14% vs. its current ~30% consolidated tax rate,” he added.

The bottom line: Berkshire’s business has transformed over the years, but remains focused on long-term return and the efficient use of capital.

REITs and rights issues: Dilutive or not?

REITs and rights issues: Dilutive or not?
A very good write up by the infamous AK71 from ASSI.

Bill Gates, Warren Buffett And Oprah All Use The 5-Hour Rule-An hour a day (or five hours a week)

https://www.evernote.com/shard/s112/sh/22e1ab14-987f-4e18-bfd8-3050d4ff7a53/168992c2b93ac789b5bede5f4155a7c9
Top business leaders often spend five hours per week doing deliberate learning.
Many of these leaders, despite being extremely busy, set aside at least an hour a day (or five hours a week) over their entire career for activities that could be classified as deliberate practice or learning.

How the best leaders follow the 5-hour rule, they often fell into three buckets: reading, reflection, and experimentation.
1. Read
2. Reflect
3. Experiment

Dow Jones Industrial Average : 1896 - 2016

Good overview over 120 years

Stocks need many years for "miracle of compounding" to work

https://www.washingtonpost.com/archive/business/1995/12/17/an-old-ladys-lesson-patience-usually-pays/ec000053-d7bf-4014-b841-546bd5847a80/?utm_term=.602ff12d94bb

Monkey Business

I came across this today and thought others here would appreciate it. A friend just shared with me this stock market story 😁 A lot of monkeys live near a village.🐒 One day a merchant came to the village to buy these monkeys!🐵 He announced that he will buy the monkeys @ $100 each. 🙊 The villagers thought that this man is mad. They thought how can somebody buy stray monkeys at $100 each? Still, some people caught some monkeys and gave it to this merchant and he gave $100 for each monkey.  This news spread like wildfire and people caught monkeys and sold it to the merchant. After a few days, the merchant announced that he will buy monkeys @ 200 each. 😉 The lazy villagers also ran around to catch the remaining monkeys!🐒 They sold the remaining monkeys @ 200 each.🐒 Then the merchant announced that he will buy monkeys @ 500 each!😮 The villagers start to lose sleep! ... They caught six or seven monkeys, which was all that was left and got 500 each.🙊 The villagers were waiting anxiously for the next announcement.😉 Then the merchant announced that he is going home for a week. And when he returns, he will buy monkeys @ 1000 each!😉 He asked his employee to take care of the monkeys he bought. He was alone taking care of all the monkeys in a cage.🐒 The merchant went home.😉 The villagers were very sad as there were no more monkeys left for them to sell at $1000 each.☹️ Then the employee told them that he will sell some monkeys @ 700 each secretly. 😉 This news spread like wild fire. Since the merchant buys monkeys @ 1000 each, there is a 300 profit for each monkey. The next day, villagers made a queue near the monkey cage.🐵 The employee sold all the monkeys at 700 each. The rich bought monkeys in big lots. The poor borrowed money from money lenders and also bought monkeys! 🙊 The villagers took care of their monkeys & waited for the merchant to return.  But nobody came! ...😳 Then they ran to the employee .. But he has already left too !😉 The villagers then realised that they have bought the useless stray monkeys @ 700 each and unable to sell them! 😩 It made a lot of people bankrupt and a few people filthy rich in this monkey business. 🐒😉😅

Pareto Principle, the 80/20 Rule

The 1 Percent Rule: Why a Few People Get Most of the Rewards
By James Clear    |    Continuous Improvement, Habits

Sometime in the late 1800s—nobody is quite sure exactly when—a man named Vilfredo Pareto was fussing about in his garden when he made a small but interesting discovery.

Pareto noticed that a tiny number of pea pods in his garden produced the majority of the peas.

Now, Pareto was a very mathematical fellow. He worked as an economist and one of his lasting legacies was turning economics into a science rooted in hard numbers and facts. Unlike many economists of the time, Pareto's papers and books were filled with equations. And the peas in his garden had set his mathematical brain in motion.

What if this unequal distribution was present in other areas of life as well?

The Pareto Principle
At the time, Pareto was studying wealth in various nations. As he was Italian, he began by analyzing the distribution of wealth in Italy. To his surprise, he discovered that approximately 80 percent of the land in Italy was owned by just 20 percent of the people. Similar to the pea pods in his garden, most of the resources were controlled by a minority of the players.

Pareto continued his analysis in other nations and a pattern began to emerge. For instance, after poring through the British income tax records, he noticed that approximately 30 percent of the population in Great Britain earned about 70 percent of the total income.

As he continued researching, Pareto found that the numbers were never quite the same, but the trend was remarkably consistent. The majority of rewards always seemed to accrue to a small percentage of people. This idea that a small number of things account for the majority of the results became known as the Pareto Principle or, more commonly, the 80/20 Rule.

Inequality, Everywhere
In the decades that followed, Pareto's work practically became gospel for economists. Once he opened the world's eyes to this idea, people started seeing it everywhere. And the 80/20 Rule is more prevalent now than ever before.

For example, through the 2015-2016 season in the National Basketball Association, 20 percent of franchises have won 75.3 percent of the championships. Furthermore, just two franchises—the Boston Celtics and the Los Angeles Lakers—have won nearly half of all the championships in NBA history. Like Pareto's pea pods, a few teams account for the majority of the rewards.

The numbers are even more extreme in soccer. While 77 different nations have competed in the World Cup, just three countries—Brazil, Germany, and Italy—have won 13 of the first 20 World Cup tournaments.

Examples of the Pareto Principle exist in everything from real estate to income inequality to tech startups. In the 1950s, three percent of Guatemalans owned 70 percent of the land in Guatemala. In 2013, 8.4 percent of the world population controlled 83.3 percent of the world's wealth. In 2015, one search engine, Google, received 64 percent of search queries.

Why does this happen? Why do a few people, teams, and organizations enjoy the bulk of the rewards in life? To answer this question, let's consider an example from nature.

The Power of Accumulative Advantage
The Amazon rainforest is one of the most diverse ecosystems on Earth. Scientists have cataloged approximately 16,000 different tree species in the Amazon. But despite this remarkable level of diversity, researchers have discovered that there are approximately 227 “hyperdominant” tree species that make up nearly half of the rainforest. Just 1.4 percent of tree species account for 50 percent of the trees in the Amazon.

But why?

Imagine two plants growing side by side. Each day they will compete for sunlight and soil. If one plant can grow just a little bit faster than the other, then it can stretch taller, catch more sunlight, and soak up more rain. The next day, this additional energy allows the plant to grow even more. This pattern continues until the stronger plant crowds the other out and takes the lion’s share of sunlight, soil, and nutrients.

From this advantageous position, the winning plant has a better ability to spread seeds and reproduce, which gives the species an even bigger footprint in the next generation. This process gets repeated again and again until the plants that are slightly better than the competition dominate the entire forest.

Scientists refer to this effect as “accumulative advantage.” What begins as a small advantage gets bigger over time. One plant only needs a slight edge in the beginning to crowd out the competition and take over the entire forest.

Winner-Take-All Effects
Something similar happens in our lives.

Like plants in the rainforest, humans are often competing for the same resources. Politicians compete for the same votes. Authors compete for the same spot at the top of the best-seller list. Athletes compete for the same gold medal. Companies compete for the same potential client. Television shows compete for the same hour of your attention.

The difference between these options can be razor thin, but the winners enjoy massively outsized rewards.

Imagine two women swimming in the Olympics. One of them might be 1/100th of a second faster than the other, but she gets all of the gold medal. Ten companies might pitch a potential client, but only one of them will win the project. You only need to be a little bit better than the competition to secure all of the reward. Or, perhaps you are applying for a new job. Two hundred candidates might compete for the same role, but being just slightly better than other candidates earns you the entire position.

Situations in which small differences in performance lead to outsized rewards are known as Winner-Take-All Effects.
These situations in which small differences in performance lead to outsized rewards are known as Winner-Take-All Effects. They typically occur in situations that involve relative comparison, where your performance relative to those around you is the determining factor in your success.

Not everything in life is a Winner-Take-All competition, but nearly every area of life is at least partially affected by limited resources. Any decision that involves using a limited resource like time or money will naturally result in a winner-take-all situation.

In situations like these, being just a little bit better than the competition can lead to outsized rewards because the winner takes all. You only win by one percent or one second or one dollar, but you capture one hundred percent of the victory. The advantage of being a little bit better is not a little bit more reward, but the entire reward. The winner gets one and the rest get zero.

Winner Take All Effects

Winner-Take-All Leads to Winner-Take-Most
Winner-Take-All Effects in individual competitions can lead to Winner-Take-Most Effects in the larger game of life.

From this advantageous position—with the gold medal in hand or with cash in the bank or from the chair of the Oval Office—the winner begins the process of accumulating advantages that make it easier for them to win the next time around. What began as a small margin is starting to trend toward the 80/20 Rule.

If one road is slightly more convenient than the other, then more people travel down it and more businesses are likely to build alongside it. As more businesses are built, people have additional reasons for using the road and so it gets even more traffic. Soon you end up with a saying like, “20 percent of the roads receive 80 percent of the traffic.”

If one business has a technology that is more innovative than another, then more people will buy their products. As the business makes more money, they can invest in additional technology, pay higher salaries, and hire better people. By the time the competition catches up, there are other reasons for customers to stick with the first business. Soon, one company dominates the industry.

If one author hits the best-seller list, then publishers will be more interested in their next book. When the second book comes out, the publisher will put more resources and marketing power behind it, which makes it easier to hit the best-seller list for a second time. Soon, you begin to understand why a few books sell millions of copies while the majority struggle to sell a few thousand copies.

The margin between good and great is narrower than it seems. What begins as a slight edge over the competition compounds with each additional contest.
The margin between good and great is narrower than it seems. What begins as a slight edge over the competition compounds with each additional contest. Winning one competition improves your odds of winning the next. Each additional cycle further cements the status of those at the top.

Over time, those that are slightly better end up with the majority of the rewards. Those that are slightly worse end up with next to nothing. This idea is sometimes referred to as The Matthew Effect, which references a passage in The Bible that says, “For all those who have, more will be given, and they will have an abundance; but from those who have nothing, even what they have will be taken away.”

Now, let's come back to the question I posed near the beginning of this article. Why do a few people, teams, and organizations enjoy the bulk of the rewards in life?

The 1 Percent Rule
Small differences in performance can lead to very unequal distributions when repeated over time. This is yet another reason why habits are so important. The people and organizations that can do the right things, more consistently are more likely to maintain a slight edge and accumulate disproportionate rewards over time.

You only need to be slightly better than your competition, but if you are able to maintain a slight edge today and tomorrow and the day after that, then you can repeat the process of winning by just a little bit over and over again. And thanks to Winner-Take-All Effects, each win delivers outsized rewards.

We can call this The 1 Percent Rule. The 1 Percent Rule states that over time the majority of the rewards in a given field will accumulate to the people, teams, and organizations that maintain a 1 percent advantage over the alternatives. You don't need to be twice as good to get twice the results. You just need to be slightly better.

The 1 Percent Rule is not merely a reference to the fact that small differences accumulate into significant advantages, but also to the idea that those who are one percent better rule their respective fields and industries. Thus, the process of accumulative advantage is the hidden engine that drives the 80/20 Rule.

Six Chinese Billionaires Spring Up With Delivery Fortunes Worth $47 Billion

Chinese parcel billionaires have amassed a total net worth of about $47 billion...

Amazing...Shuttling parcels around for Alibaba and other retailers is creating China’s latest wealth explosion, with a surge in shares of S.F. Express making Wang Wei the country’s third-richest man.

‘Becoming Warren Buffett’ Documentary - 2017

https://www.facebook.com/BillionaireInsider/videos/735675593267839/

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BENJAMIN FRANKLIN & THE TWO IMPORTANT QUESTIONS

Nice read.

Here’s what Franklin’s average day looked like:

5 a.m–8 a.m. Wake up. Get cleaned up. Say hello to the good Lord above. Figure out what’s on the                       agenda for the day. Eat breakfast.
8 a.m.–12 p.m.  Work.
12 p.m.–2 p.m. Read or overlook accounts; eat lunch.
2 p.m.–5 p.m.   Work.
5 p.m.–10 p.m. Clean up. Put things away. Have dinner. Listen to music or get entertained somehow.                        Engage in conversation. Reflect on the day.
10 p.m.–5 a.m. Sleep.

China becoming a maritime superpower ?

How China rules the waves

Beijing has spent billions expanding its ports network to secure sea lanes and establish itself as a maritime power.

Good read...How China rules the waves

What Business Models Have Float?

Most people know Warren Buffett as a stock picker but few understand his deep affinity for businesses that have float. Below, we will look at some businesses that have access to float.

Sources of float: Insurance
Berkshire Hathaway uses insurance float as one of its key sources of investable funds. It’s well known that Buffett was drawn to the business of insurance for it provided a fountain of additional investable funds. These investable funds, however, belonged to insurance policyholders, not to Buffett, as these funds are claims to be paid to policyholders. These investable funds held by Berkshire can be called float, or insurance float.

Here is some commentary that Buffett has said about insurance float from the 2014 shareholder letter:
“One reason we were attracted to the property-casualty business was its financial characteristics: P/C insurers receive premiums upfront and pay claims later. In extreme cases, such as those arising from certain workers’ compensation accidents, payments can stretch over many decades. This collect-now, pay-later model leaves P/C companies holding large sums – money we call “float” – that will eventually go to others. Meanwhile, insurers get to invest this float for their benefit. Though individual policies and claims come and go, the amount of float an insurer holds usually remains fairly stable in relation to premium volume. Consequently, as our business grows, so does our float.
— Berkshire Hathaway - 2014 Letter to Shareholders

How is insurance company float calculated? Buffett delves into the calculation for insurance float as follows in the 1994 shareholder letter as follows:
“For the table, we have compiled our float – which we generate in exceptional amounts relative to our premium volume – by adding loss reserves, loss adjustment reserves, funds held under reinsurance assumed and unearned premium reserves and then subtracting agents’ balances, prepaid acquisition costs, prepaid taxes and deferred charges applicable to assumed reinsurance.
— Berkshire Hathaway - 1994 Letter to Shareholders

So we know about insurance companies as having float, but what about other types of companies with float? By float, we mean funds belonging to others that are in transition and temporarily held by the company. There are several that come to mind.

Sources of float: Lottery
A less intuitive business with float is the lottery. Whether states know it or not, they have a source of float when millions of tickets are bought by hopeful consumers wishing to win the state-run lottery jackpot. When the state holds the proceeds until the jackpot is paid out, either in lump sum or as an annuity, the state is holding substantial funds that really don’t belong to them. This is a form of float. Given the dire financial situations of some of these states, maybe some ought to consider conservatively investing this lottery float! Alternatively, just having the money in a savings account provides a return on the float, which adds up given the millions of lottery tickets bought.

Sources of float: Gift Cards
Another form of float comes in the form of gift cards. When the retail store GAP sells its gift cards to customers, it gets paid money upfront that GAP holds until the cards are redeemed. There is an industry term called “breakage” which actually means the percentage of gift cards (value-wise) that are never redeemed. Figures of breakage of 10% are not unheard of. With 10% breakage, this means that GAP gets paid 10% to hold these funds received from the sale of their gift cards. The duration however of these gift cards, i.e. the time from the receipt of money for the gift cards until the owner of the gift cards redeems them for value can be relatively short. Such a short time period of holding this float makes it difficult for places like the GAP or Starbucks to invest these funds into securities for any meaningful period.

Sources of float: Bank
A bank has a source of float in the form of deposits from its customers that it can lend out to other customers or invest in securities to generate investment returns. Buffett liked banks so much that he owned through Berkshire a bank in Illinois until the U.S. government forced Berkshire to dispose of it – the U.S. government made Berkshire decided whether it was going to be in the insurance business or in the banking business. Buffett chose the former, disposing of the Illinois bank. This, however, did not preclude the ownership of minority positions in banks. One such minority position is Wells Fargo, which is one of the largest positions held by Berkshire’s insurance subsidiaries.

Sources of float: Loyalty Programs
Blue Chip Stamps was a company that had a varied take on gift cards and loyalty programs by selling stamps to retailers. Blue Chip Stamps would then take the proceeds from retailers and hold onto them until retailers redeemed these stamps with cash from customers. Customers would select items from a catalog and submit stamps they’ve collected from retailers to “pay” for these items. When the retailers submitted these stamps, the “float” held by Blue Chip Stamps was then returned as cash. In the meantime, while Blue Chip Stamps held this float, it was able to invest these proceeds in securities such as stocks and bonds. The stock of Blue Chip Stamps used to be a core holding of Berkshire, until Berkshire eventually acquired the company in its entirety. No doubt, Blue Chip’s access to and ability to invest the float was a key point of attraction for Buffett.

Sources of float: Traveler’s Checks
American Express, which is still a core position of Berkshire Hathaway, used to have a substantial source of float in the form of traveler’s checks. The funds from the traveler’s checks were similar to funds received in exchange for gift cards. American Express held this float until the traveler’s checks were used or redeemed by customers while travelling abroad. These days traveler’s checks are rarely used.

Sources of float: Payment Processing Business
Another business that has float, albeit in extremely short duration, is the payment processing business. You can think of companies like ADP, which temporarily hold wages and salaries for its clients before paying them out. It would be difficult to invest this float however since the holding period is so short, and it would be unethical to tell workers that they were receiving less money than they were supposed to because their wages were put into some bad investments! At the same time, ADP may still reap some return from holding these funds in its checking account.

Sources of float: Subscription Businesses & Pre-Paid Contracts
There are subscription and pre-paid contract businesses like newspapers and Netflix, while not technically receiving float belonging to customers that they have to return at some point, they are receiving payment upfront for services and products that need only be funded later down the road. In the meantime these funds could be used in flexible ways to fund buybacks, purchases of securities, etc. As long as such funds are continually coming through the door to replace old funds that are being invested, these funds can operate as a form of float by providing negative working capital. Remember, negative working capital is a form of float – if you have 90 days accounts payable while accounts receivable are one week, you, in essence, are generating excess liquidity that can be used to do all sorts of wonderful things. Perhaps this is one of the reasons why Buffett loves Coca-Cola, which he has said on more than one occasion has negative working capital.

Chua Soon Hock

Read a finance blogger post talking about this 'super-investor'... thought I penned it here to remind myself...

LESSONS FROM A SUPER INVESTOR – A PERSONAL FRIEND OF TTI

Quick Poll: Don’t google this, but who here has heard of Mr Chua Soon Hock?Yup. I thought so. Nobody.

Probably not a single one of the 1000+ or so people who will read this post, knows who this guy is. Not now anyway.
He is a personal friend of TTI, and is the most low profile and under-rated super investor I know. (He doesn’t know me as TTI, and neither does he have any knowledge of this post at the time of writing this.)

Track Record
Before I start, of course I gotta justify what I mean by “super investor”. That’s easy enough. I’ll let his track record speak for himself. If this doesn’t qualify as a super investor, I don’t know what does.
Now, I haven’t gotten permission to write this post, so everything I write here will pretty much have to come from public information. Nothing personal will be revealed.
CSH started his career in GIC, before moving to Sanwa Bank, where he rose to become the chief strategist (aka CIO). He left and eventually, in 1st March 2000, he launched his Japan Macro Fund, managed under Asia Genesis Asset Management, which today, has become his private investment vehicle.

By 2009, he closed the fund and returned all funds to investors, citing health reasons:
http://singaporehedgefund.com/?p=425

The fund’s performance?

In the 9 years of the fund’s existence, it generated a return of 18.89% annually! In fact, as the fund grew, the performance actually improved (larger fund sizes are usually a drag on performance, but not in this case). From Jan 2003 to 2009, the fund generated an annualized return of 26.02%!

http://www.opalesque.com/54076/Asia_Chua_Soon_Hock_announces_retirement076.html

Even the 2nd newer fund, Asia Genesis Equity Fund, launched in May 2009, returned net 8.92% as at end July 2009. That’s 8.92% in 3 months!

Annunalized return of 18.89% means that if you had invested $1mil at the start of the fund, it’d have grown almost 5-fold to $4.8mil by 2009 when the fund was closed. (I was told that the return would be even higher when converted into SGD terms)

Even in the midst of poor performance amongst all peers, the fund stood out for its resilience:

http://www.institutionalinvestor.com/article/2025742/Article/3255118/Banking-and-Capital-Markets-Banking/Asian-Fund-Managers-Counter-Volatility-by-Focusing-on-Long-Term.html#.WJILz_l97IU

Now, all these results obviously made CSH a well respected figure in the fund management business. He was recently sought out by TheEdge for his opinions in several opinion pieces.

On top of that, CSH recently made the news (reluctantly I’m sure) when he splashed out the cash to buy some GCBs to capitalize on a”unique situation”. The jury is still out on the success of this investment, but given time….

Come on, I’m sure anyone by now will agree that this guy is an investing monster.

http://www.straitstimes.com/business/property/fatal-row-2-houses-of-victim-sold

I’ve stated multiple times in SG TTI that Global Macro investing is something that confuses me. There are so many variables to consider and each inaccuracy in your thought process can snowball and affect your conclusions in unimaginable ways. Yet this friend of mine, does it consistently, with amazing results.

Even now, managing his vast personal fortune, his returns continue to be astounding. It’s just no longer published and the world doesn’t know what he does (Aside from the occasional news report like the GCB acquisition above)

Now, CSH doesn’t know me as TTI. He knows me as a doctor. Of course, in our social conversations, he knows this other side of me where I pit my investing skills against the world. Occasionally, (I think), he gets bemused and surprised at why this clinician knows so much about investing.

Well, we all need a hobby.

---

Alright, so there are 2 lessons that I can draw here:

Humility. When was the last time you felt like a king when you got a 20% ROI on your investment? Well, there are guys out there who get that consistently, year in, year out.

I’m constantly reminded that there are titans in this space. And this titan, doesn’t even want to let people know he’s a titan.

Each time I think my research is so water tight, and that I know everything there is to know about a company, I’m reminded that there are others who are sharper, smarter and work harder than me at this.

What do I know that they don’t?

This drives me to go on and on and on. I’ll dig deeper, work harder, think on a different level altogether and do what others won’t do or find it too tough such that they give up.

And ultimately, even if an investment turns out to be a multi bagger killer… just remember that there’s no room for arrogance. Arrogance/complacency dulls your sense of urgency and makes you settle.

(There’s another lesson about work ethic but I won’t talk about it here)

Expected Returns. The other lesson I gather, is the range of expected returns. Now, if in your personal investing journey, you consistently get sky high returns of >15% year in year out… logically, it must be 1 of 5 scenarios:

1. Your calculation methodology is wrong. Systematic error.
2. You’re trying to con yourself. Or others too.
3. Your portfolio size is puny enough. And even then, you need to add an enormous dose of luck to it.
4. You are an investing genius. Congrats.
5. You are doing illegal stuff. Transporting firearms, drugs or stuff like that.

Yup. Those are the only ways one can get to boast of sky high returns CONSISTENTLY. For most of us at least.

Which is also why I am highly skeptical when people show up with long term, multi year returns of 20+%. Or 30%. Or 40%. It just cannot happen. Everyone likes to think that they’re a Carl Icahn.

Even for CSH to achieve this level of success, his work ethic (when he was managing other people’s funds) was out of this world. The level of hard work that goes on behind the scenes is always unnoticed. Only the fancy results.

Most people are just not prepared to go to that extent… yet expect to get the same results.

I’ll divert a bit here. My personal hypothesis for this phenomenon of ever rising ROI figures, is simply that today, there is so much competition for attention. Financial coaches running courses, financial bloggers (yes, I guess that includes SG TTI), and even publications like TheEdge, occasionally show their returns.

10% used to be impressive. Not so though, if everyone else shows 15% ROI right? Then how about 20%?

And it goes on and on.

Well, take it all with a pinch of salt. Cos now we know: 18.9% annualized over 9 years, is enough to put you at the apex of the investing world. Period.

---

Anyway, in the spirit of sharing, I’ll share an article written by CSH way back in 1999 (!!!), shared with me. I think most investors would do well to read, understand, internalize and execute.

Execution, is going to be by far, the hardest part.

PLAYING THE STOCKMARKET: WHAT EVERY RETAIL INVESTOR SHOULD KNOW

The purpose of this article is to address the recurring phenomenon of retail investors losing money in the financial markets and to provide a roadmap for realistic and profitable investing for non-professional investors.

The points below are meant for non-leveraged retail investors and not for institutional and leveraged speculators. Although the general philosophy in investing is applicable to all classes of players, the strategies and methods will differ for different players. The pointers below of course are not comprehensive but are to the best of my knowledge as a market practitioner.

Before we begin, let us consider: Why do retail investors lose money?

The reasons normally fall into one or a combination of the following:

• Investors buy shares at relatively high prices and sell them at lower prices.
• Active trading results in high commissions, where costs become a big factor.
• Investors hold shares bought at high prices during euphoric, bull period with big unrealized losses and take small profits from other shares purchased.
• Investors buy ‘in-fashion funds’ promoted by financial institutions during a particular time window. This is despite the good past performance of the funds.

Underlying factors that cause the above-mentioned tendencies:

1. Not knowing who you are in relation to the marketplace
2. Not knowing what the marketplace is about
3. Not understanding the basic human weaknesses of greed, fear, impatience, pride and laziness
4. Listening to the counsel of those who do not have the skill-sets to help you make money.
5. Not applying common sense but being confused by endless emphasis on unprofitable semantics of what are blue chips and what are not, what is investing and what is speculating, what is safe and what is not.

Rule 1: Know who you are in relation to the marketplace

Successful investing starts with knowing your limitations and strengths.

The limitations which affect most retail investors are:

• Time: the limited time available to track and learn the markets without affecting other responsibilities adversely
• Resources: the limited financial resources that most can hardly afford to lose without jeopardizing the fulfillment of family responsibilities
• Knowledge: the little knowledge and ignorance of the intricacies of products and the dynamics of the markets
• Cost: the highest per unit cost of transaction among all players

The strengths of retail investors are:

• Investing is not your job, therefore you are under no compulsion to trade
• You can afford to wait
• You need not be leveraged
• Your trades will not affect market prices, therefore there is no slippage in execution

Honesty is required to arrive at this understanding and to come to accept your strengths and weaknesses. The key is to focus on minimizing the adverse effects of your limitations and exploiting your strengths to your advantage. Devising an investment strategy along this line is essential. A good fisherman must first know that he is a fisherman; his job is to catch fish and not be the fish.

But knowing this, though important, is not enough; you must also realistically know what type of successful fisherman you are or can be, and concentrate on being that type of fisherman till you attain proficiency. Practice makes perfect.

The retail investor cannot be a successful ‘Goldman Sachs’ and apply the methods of an institutional player. You should concentrate on being ‘that profitable retail investor’. With this clear self-identity you can then cut out 95% of investment literature which though at times sounds logical, realistically is not applicable to your situation. This will thus eliminate confusion and result in clear thinking and improve your ability to focus on learning what matters. The learning costs involved in perfecting the art of investing, within the science of probability can then be kept to a minimal.

Rule2: Know what the marketplace is about

The marketplace should be seen as mass human forces of buying and selling that result in various prices over a period of time on a continuous basis. At a certain point in time buying forces will dominate, while at other times selling forces will be dominant. The market trades on float and not on a total basis.

This fundamental understanding is needed to comprehend the underlying psychological behavior of extreme movements that frequently occur in markets over time. A hard look at financial markets should make one come to the conclusion that “markets are the biggest re-distribution of wealth mechanism invented by the capitalists.”

This realization should lead to two conclusions and raise the antennae of care and caution. One, that participation in markets necessarily means that if I don’t make money, I will be losing my money to someone else. And two, if I want to win then I have to learn to apply an appropriate strategy that incorporates the right philosophy, principles and methods that suit my situation, from people who have done it successfully and consistently before as retail investors.

Rule 3: Identify the basic human weaknesses

How do human weaknesses empty your pockets? If one initially makes money, greed usually makes him gradually increase his positions until his biggest holdings are always at, or near, the top of the market in the intermediate or long term. When the correction or crash comes, due to heavy exposure, there is a necessity to cut positions at dramatically low prices resulting in big losses.

Fear makes one miss investing in the market when shares are at bargain basement levels. Fear always is the major hindrance to exploiting good opportunities.

Impatience leads one to invest when good opportunities have not arrived, thus committing resources in a unproductive manner and finding oneself in a ‘no-bullet’ situation when the opportunities finally come.

Pride makes one hold to unprofitable beliefs, prejudices and behavior, cutting a person off from learning and adjusting to truth and realities. Pride is so expensive that no one can afford it.

Laziness makes one stick to shortcuts in life, but the truth is that there are none. One always reaps what one sow. If one applies sound investing philosophy, principles and methods appropriate to one’s station, he has to reap profits. There is no other way. But if one sows wrong counsel and applies unsound philosophy, principles and methods, one must surely reap the pain of an empty pocket in due time.

Identification of all these common and normal human weaknesses and their adverse effects on the pocket is essential if one aims to be a consistently profitable retail investor. One needs to prepare oneself psychologically to overcome these human weaknesses when markets move to a certain situation that puts one to the test. And in order to come out on top, there is a need to ‘dehumanize yourself’ and institute a certain systematic methodology, through the basic of ‘knowing yourself and knowing the marketplace.’ This is the basic principle of successful engagement.

Rule 4: Garbage in, garbage out: Know the quality of your counsel

Too often investors concentrate on their desire to get rich without paying detailed attention to the process and to working on the process that is suitable to him. The truth is that if you get the process right and work on it, the desired results will be the natural consequence, in due time. Therefore the quality of your counsel to help you to arrive at the process is important.

However, one of the most common mistakes among retail investors is to rely on their brokers to help them make money. But really, if they can help you make money they would most likely not be your brokers. A broker ‘brokes’. It is unrealistic and not reasonable to expect your well-intentioned brokers to have the skills to help you make money. They are there to help you execute your trades. The few exceptional brokers with some moneymaking skills will be covering the rich and powerful.

Retail investors also rely too heavily on tips. But can a good insider tip get to a small retail investor and be of relevance? This is almost impossible. Even assuming that the tip is reliable, by the time it reaches the ‘small potatoes’, in all likelihood the big “sharks” would already be waiting to take profit on this new batch of buyers.

The underlying reason for the existence of ‘rumours and tips’ in the marketplace is mainly because a player or group of players has an inherent position in the market and want to influence prices in order for them to profit from the impact of this news. This is a silly and ultimately painful way for retail investors to engage in the market.

Retail investors also tend to rely on the publications of reputed, established financial institutions to make investing decisions. However, there is no positive correlation between the profitability and reputation of a financial institution and the relevance of its research in helping retail investors making money.

An investor rely on the past good performance of a stock fund to invest without examining the following points: Firstly, did the dedicated fund have outstanding results due to the mere fact that that particular sector or country had a huge rally? Secondly, was the past good performance due to the same time window of the bull market phase?

There is a need to seek highly skilled fund managers who consistently outperform the market, and invest in these funds. However, the truth is that in most cases these seasoned veterans have already more than enough money to manage. Retail investors are therefore likely to be left with fund managers from institutions that are still in the ‘experimenting process’.

Good fund managers are individuals who are identifiable; they are not institutions. Successful investing is a personalized skill. Most institutions are profitable because they are very good at marketing.

Rule 5: Apply common sense

Between the individual and the market, one is controllable while the other is not. Therefore investors should focus on improving the controllable “self” to enhance their chance of success in the uncontrollable market. Most however focus on trying to guess the direction of the market, thus neglecting to focus on controlling weaknesses of “self” as highlighted earlier.

In my experience as a practitioner, when one focuses on time, size and price management coupled with patience the probability of success is very high. Big price fluctuations should be viewed as opportunity rather than with fear. It is exactly because of these big price fluctuations over a long period that one is able to buy at depressed prices and sell at high prices. To be truly profitable consistently one must be able to buy at low prices consistently. In the long run only those who manage to “buy low and sell high” will be the winners.

Frequently Asked Questions

Q: what is the appropriate strategy for retail investors?

A: As a general rule, there are two points to consider. Firstly, the strategy must not rely on having an edge in resources of time, knowledge and finance, as retail investors are weakest in these areas when compared to all other players. Secondly, such a strategy must necessarily be based on the patience to buy shares at basement prices on a non-leveraged basis with minimal transactions over an extended period.

Q: How can retail investors know when shares are at basement prices?

A: Shares will be at basement prices when bearish psychology is extreme and liquidity is tight in the following situations:

• The asset bubble bursts and strong economy tailspins into a recession like the recent Asian crisis
• The economy goes into a period of stagflation
• The economy in a depression with prevailing banking crisis
• The market crashes due to special events eg Gulf War, 19 Oct 87 (program trading), LTCM debacle, etc

Q: How do I improve my timing in order to buy shares at basement prices?

A: For situations where share prices are low due to a weaker economic cycle it is best to invest over a six to 12 month period. The initial investment should be 50% of capital, with 10% each subsequently over the intended period for the last 50%. The timing of the initial investment of 50% is crucial.

Based on my experience it is best to buy on the day following the national government’s admission that the economy is in a recession and gives a negative GDP forecast for the rest of the year. When this announcement is one that makes the front page of the national daily, then almost all the bad news has been discounted by the market.

For a market crash due to a special event it is normally right to commit 50% of capital on the same day of the event and the rest of the 50% within a week. Special event crash tends to be immediate and furious as institutional and retail investors all unload holdings aggressively yet simultaneously, thereby prices reach bottom very quickly.

In the case of a banking crisis, the time to buy is when the government’s plan to use public money to re-capitalize the banks, whether directly or indirectly through tax incentives aimed at the disposal of bad loans, is at the final stage.

Q: What type of shares should one buy?

A: Buy the top two of the best-managed institutions from each of the key sectors of banking, media, telecommunications, healthcare and computer software. These sectors tend to be essential and also have inherent oligopoly power.

Q: Is the investing going to be smooth sailing?

A: Absolutely not, especially at the initial phase of your buying spree. All your good friends including your dear spouse will think that you are crazy. They will say, “The market is getting lower, this is too dangerous, you can wait”. And likely, in the next few days or weeks after buying, the market may indeed go lower, and you will look like a fool.

But to want to buy at the absolute bottom is not possible. But to buy near the bottom is possible and can be made highly probable by this approach. Be prepared for some short-term psychological torture. But you need to buy. If not, you will watch and miss the opportunity altogether. Somehow in most cases, you will later look like the wisest man in town for having the courage to buy those shares. View it as short term pain, long term gain.

Q: When then should one take profits?

A: For shares bought resulting from a market crash due to special events (ie it is a one-off situation), one can take profits when profits are between 50% to 100% within a six months period.

However, for shares bought as a result of an economic crisis or economic downturn one should keep them for years. Liquidation should only begin when the bull market is so obvious and in such a great rage that it sucks in all kinds of new retail players. The greater fool theory, unfortunately, always comes into play near the end of a new bull market cycle. Shares should be disposed gradually over a 24-month period as bull markets normally last much longer than expected.

Q: After taking profits, what should the investor do with the money?

A: Stay in cash until shares are at basement prices again. This strategy implies that when not invested one must hold cash and be patient even if the waiting period is long. In fact, one of the unprofitable “myths” that is frequently encouraged and practiced is that of continued deployment of capital to enhance returns.

This approach usually means that when the opportunity comes for acquiring bargain basement shares you will not have the money. Instead you will be among those hurt by lower share prices. Rather, you should build up liquidity for deployment when market liquidity is tightest in order to make big money.

Q: How often can a retail investor reasonably be expected to participate in such an investment strategy?

A: Assuming a 35-year investment life, one can expect to participate in three to four complete economic cycles, with each cycle of about eight to 10 years, yielding returns of at least 200% over capital. With this approach, transaction costs will be at the barest minimum and any disruption to one’s job will be almost non-existent, as the investor will be doing nothing most of the time.

During this period of 35 years, one who is patient and courageous will in addition be rewarded withabout five event market crashes, which should yield at least 50% for each event. Therefore this strategy though on a day to day basis does not seem to bear anything, can be very profitable and consistent over the 35 years horizon.

Be patient and be prepared, and you will come out tops in the investment arena.