Warren Buffett Says Integrity Is the Most Important Trait to Hire For. Ask These 12 Questions to Find It

12 questions to ask when interviewing and hiring for integrity.

Practically speaking, assessing integrity is really about asking the right questions that will get to the core of a person's character (in addition to standard tests/assessments, "job auditions," and role-play exercises). But first, whomever is on the interviewer's seat must be skilled in the science of behavioral interviewing. Here are twelve questions I have used in the past:

1. Tell me about a time when you experienced a loss for doing what is right. How did you
react? 

2. Tell about a time when your trustworthiness was challenged.  How did you react/respond?

3. Tell about a specific time when you had to handle a tough problem which challenged fairness or ethnical issues. 

4. When was the last time you "broke the rules"? What was the situation and what did you do?

5. What would you do if you suspected that an employee was stealing?

6. Describe a situation where you saw an employee or co‐worker do something you thought was inappropriate. What did you do?

7. Think of a situation where you distrusted a co-worker/supervisor, resulting in tension between you. What steps did you take to improve the relationship. 

8. When working with people, in general, describe your preferred relationship with them. (this question is used to assess honesty and the capacity for open communication.)

9. What values do you appreciate the most in a team environment? [you're looking for things like honesty, fairness, openness, transparency, and inclusiveness in your answers.)

10. If we ever got into a bind with a client, would you be willing to tell a little white lie to help us out?

11. What would your current/past manager say makes you most valuable to them? (Besides intelligence, energy or technical and hard skills, listen for clues that point to integrity.)

12. What are the characteristics exhibited by the best boss you have ever had, or wished that you have had? (A person of integrity will mirror those they follow or look up to, so listen for clues.]

Remember: No integrity = no trust. Your hiring team must ensure that, no matter how talented, experienced, and smart job candidates are, they will protect your company, your employees, and your customers by hiring people every person can trust.

Integrity, intelligence, and energy = a great hire.

VOLATILITY at Work

The stock market as measured by the Dow Jones Industrial Average fell 1,175 points on Monday, 5 Feb 2018. That was the largest one-day point drop in history.

Still, the decline was relatively tame when measured in percentage terms. The Dow Jones fell 4.6% on the day, a significant loss, but far from the 22% one-day drop on Oct. 19, 1987, and the 24% two-day drop on Oct. 28-29, 1929.

Monday was a bad day for stock investors, but the market bounced back on Tuesday to some extent. It was not the end of the world.

Yet, investors should not take too much comfort from the single-digit percentage drop on Monday and the bounce-back on Tuesday. Markets came much closer to a catastrophic meltdown than many investors realize.

The reason for the near catastrophe was the same as the reason for actual catastrophic losses in 1987, 1998 and 2008 – derivatives, leverage and opaque financial structures.

While stocks were down 4.6% on Monday, the leading measure of volatility, the CBOE Volatility Index (VIX) rose 116% on the trading day. And, an even more obscure exchange traded note (ETN) called the “Daily Inverse Vix” (XIV) fell almost 80% in the two hours after trading ended.

VIX does not necessarily trade in a linear way relative to underlying stocks. While stocks fell 4.6% on Monday, VIX rose 116%. This was indicative of the fact that traders see the stock market fall as the end of an extraordinarily long period of low volatility.

The VIX was trading on an historically low baseline. The rise in VIX reflected not only Monday’s volatility, but also an expectation that higher volatility is here to stay at least for a while.

XIV is an even stranger animal. It is a note that pays the holder a return based on the inverse of VIX. If VIX drops, the XIV note holder earns a higher return. If VIX rises, the XIV note holder suffers a loss. That much is clear. What is not as clear is why a 116% rise in VIX led to an 80% drop in XIV.

Berkshire Hathaway's 13-F filing on November 14, 2017.

Holdings are as of September 30, 2017 as reported in Berkshire Hathaway's 13-F filing on November 14, 2017

1st TOTO President

Truly a great leader...

First TOTO President Kazuchika Okura
When Kazuchika Okura joined the Morimura Gumi, he discovered the amazing properties of ceramic ware in their key products. As a result, Kazuchika founded TOTO and NGK Insulators after being appointed the first President of Nippon Toki (current Noritake Co., Ltd.), which he founded together with his father, Magobe. Kazuchika built the kingdom of ceramics today by driving the founding of the specialty Japanese ceramics businesses.

Provision of high-quality products and customer satisfaction are important
Your goal should be to provide good products and satisfy the customer. Accomplish that, and profit and compensation will follow.
Many in this world chase after the shadow of profit, but to the end never capture the real thing.

What is Blockchain?

BlockchainThe technology that made bitcoin possible. It’s called “blockchain.” In simple terms, blockchain technology is a record of all transactions ever done in bitcoin. Imagine a gigantic piece of paper that lists every transaction ever completed. Then imagine that there are thousands of copies of this paper, and all of them are automatically updated when any two people agree to exchange bitcoins. Every time a transaction takes place, all these copies are checked for consistency to make sure you actually have the bitcoins you claim to have. If everything checks out, the new transaction is added to all the pieces of paper at once.

This is the heart of the genius idea that is blockchain, and what makes it possible to have certainty over a bitcoin balance someone owns, without needing any central party (such as a bank) to verify it. If all the pieces of paper agree, then the balance is correct, and trying to doctor or fake all the pieces of paper at once is impossible. The best (and worst) thing about this technology is that it has been made available for free to anyone who wants to use it.

Re-Examine Your Understanding of PE Ratio

Great post on understanding PE ratio by CS Jacky

PE ratio is arguably the most commonly used financial metric in share investment. But many investors may not truly grasp the idea of PE and how can it be applied to shares investing.

In this article, I try to explain PE ratio using simple language, and highlight how it can be used in your daily investing decisions.

PE Ratio - The Concept
Imagine this. You have a sum on hand, and is prepared to acquire a food stall in the neighbourhood as an investment. As you approach the business owner, what would be your first question to ask?

Surely, one of the first few questions you would post is 'How is your business?'. That's in layman term. Essentially, you are asking 'How much does your food stall earn?'. The owner would probably reply 'Well, last year we earned $100k per year', or  'For the past 6 months, we on average raked in $10k net monthly.'

As a potential owner, you would want to know if business would be as good near future. 'What about coming year? Will business still remain as good?', you asked. 'Well looking at how we have done past 3 years, quite confident that this year's business would maintain or even increase!', so said the owner.

You would then take back this piece of info and assess it against the quoted purchase price, to determine if the food stall is a worthy purchase.

Now let's substitute the above 'food stall' with 'share', then we should understand PE intuitively: the price we are willing to pay to acquire full or partial stake in a business, assessed against its past earnings record and future expected earnings.

Layman Understanding of PE
With the understanding above, let's look at the mathematical formula of PE ratio:

Imagine again. Assuming the business landscape, products, and costs remain and the food stall's earnings stay the same next few years. In such a scenario, dividing the price you paid by the earnings, tells you how much time is required to recoup capital spent in acquiring the business.

That's right. PE ratio intuitively means the number of years needed to recoup your money spent if earnings stay constant (ignore whether the company's earnings flow into your pocket for now). If you had a good deal with PE 5, probably 5 years is enough to take back your capital. If you over pay for something that earns little, you may need 20 years (PE 20).

This is why usually a low PE stock is favoured over a high PE stock, because vis-a-vis its earnings, the low PE stock is deemed to be cheaper. You need less time to 'make back' your capital.

Assuming all else equal, naturally we would not want to over-pay. Paying too high a price increases the risk of not able to earn a decent returns and it takes much longer to recoup one's capital. Plus, what if business suffers in near future? Too much uncertainty.

PE Quoted is Based on Last Accounting Cycle
As per most money/finance concepts, PE is calculated based on earnings generated from the last full accounting cycle of one year - full year earnings (ie. 4 quarters).

There is a problem. Depending on where we are in the accounting cycle, and considering the inherent nature of business world that is highly dynamic, standard PE may not give the true picture of how cheap/expensive the share is.

For example, if we are currently in the 3rd quarter of the year, and business performance has worsen considerably in the last 3 quarters compared to last year. At PE 10 based on last year's Earnings per Share (EPS), a company would not be cheap as its business has deteriorated much lately. And based on more recent quarters' EPS, the more realistic PE would be 18.

Hence there is an 'updated' version of PE that is based on latest 4 quarters earnings, regardless of the accounting cycle, known as the Trailing Twelve Month (TTM)/trailing/rolling  PE, that paint a more accurate picture of business performance.

PE - Opinion Aggregating Past Earnings and Projected Growth
Recall the example in first section where you, as a buyer of a business, would ask about its past earnings and future expected earnings. The PE of a share also runs by the same concept - it is the market expressing a collective view on how much the company share price should be trading at, based on its past earnings, projected earnings, and industry outlook all blended together.

Hence it is only meaningful if we study a share's PE in comparison with other contexts, instead of viewing it in silo as a stand-alone determinant of share price.

PE in Comparison
In general a company's can be compared in 3 ways:

• the company's historical PE
• industry's average PE
• broad market's PE

A company's PE over long period provide good understanding on its share price valuation range. This is because company earnings, over extended period, largely follow economic cycle. A time period that includes a complete cycle of industry downturn and boom time would provide a good indication of its top and bottom valuation range. And from here we would know whether share price is cheap or expensive historically.

We can also compare a company's PE against the industry's average PE. This stems from fact that an industry has its specific characteristics and dynamics, such that as a whole, companies within the sector should trade at roughly similar valuation. This also entails that it is only meaningful to compare a company's PE ratio against those in the same sector. We can't really place a property share alongside a technology share for comparison. Doesn't make much sense.

At a very broad level, the company can also be inspected against a diversified market's PE, usually the STI or industry index. This is more pertinent if the company is a constituent of a particular index. 

Let's look at an example: Singtel.

Singtel's PE and trailing PE compared to industry's and broad market's.
Extracted from Shareinvestor.com on 8 Jan 2018.

Singtel's PE ratio on 8 Jan, based on its full year earnings, is 15.3. However, its trailing PE is 10.3. This means that recent quarter's earnings have improved and it is valued more cheaply based on its trailing PE.

Against the Telecommunication industry, and the broad market of STI, or Large/Mid Cap Index, Singtel's PE appears to be in line. However, on trailing PE basis, Singtel is cheaper than STI and Large/Mid Cap Index.

PE Has to Be Used with Other Analysis and Indicators
PE is derived from past earnings using rear-view mirror, while investing involves a heavy dose of dealing with future that is essentially unknown and uncertain.

You can't use PE as the be-all-end-all yardstick to evaluate shares. Apart from necessary comparisons with PE in other contexts as shared above, one needs further homework on quantitative factors such as cash flow, debt level, revenue growth, and qualitative factors like industry analysis.

Risks of Investing in High PE Sector or Shares
When a company (or industry) trades at a much higher PE than its same-sector peers (or broad market), it usually means that the company/sector has shown good growth and promising prospects such that investors are willing to pay a higher price for its share.

However such optimism can sometimes gets out of hand when investors bid the share price up to an extremely rich PE level that is exorbitant and makes no sense, we can be sure that investment in these shares are quite speculative. For example, some technology stocks during the dot.com boom traded at PE of 250. Surely you would not buy a business that would return your capital in 250 years.

Ok let's leave the insane PE category aside and just talk about an expensive company with a still-plausible PE of 50 - Superb Tech Co. Investing in such a share will expose you to what I call a 'double whammy of earnings disappointment' that would have disastrous effect on the share price.

As seen from above, a single quarter of bad results could wreck the share price and cause a fall of almost 50% from $50 to $25.50. This is the potential impact of 'double whammy of earnings disappointment' - reduced earnings and PE downgrade.

Of course the above scenario is fictitious and exaggerated to illustrate my point. But for a more realistic example, refer to this post.

Low PE Sector or Shares are Less Risky
While high PE can be detrimental if the company growth does not match expectation, conversely, a low enough PE can do wonder to share price if its so bad that market does not harbour any hope of earnings growth on the company due to prolonged industry downturn or sustained bad results.

The concept and principles remain, just inversed: high PE to low PE, high expectation to low expectation, promising sector to boring sector. Scenarios such as:

• cyclical industry on the cusp of multi-year recovery
• company that has prolonged bad business and suddenly receives a huge order

Then your reward can be huge, in form of exponential jump in share price. 

Extremely Low PE Shares Have Their Pitfalls Too
Some industries are cyclical with clear boom and bust cycle. Examples of such industries include commodity, property, oil and gas. At the peak of market cycle, industry is expanding and companies enjoy high earnings. Correspondingly, PE would seem very low due to a large denominator.

But what follows could be an industry downturn where business activities shrink and earnings would drop. Share price would follow. So a very low PE in this case is deceptive because it indicates that market cycle is near its top. So an investor needs to be discerning enough to recognise such cycle, and avoid investing at cyclical top.

One example. Wilmar, the world's largest palm oil producer. Back in Jan 2017, its share price was around $3.80, with PE of around 15 based on Dec 16 full year results. Crude Palm Oil (CPO) price, according to BusinessInsider, was RM 3,250 back then.

However, due to the cyclical nature of commodity, CPO price has since been on a downward slide and dropped to around RM 2,300 Dec 2017. An investor attracted by its reasonable PE of 15 would see its share price drop from $3.80 to $3.20 now.

Top: CPO price chart Jan 17 to Jan 18. Bottom: Wilmar price chart Jan 17 to Jan 18.
Source: Businessinsider.com and Yahoo Finance

Another scenario of a deceptively low PE ratio could arise from really lousy companies that have no possibility of turnaround. Its earnings would continue to deteriorate and will turn into losses. When that happens, all is lost as there is no point investing in a loss making company.

How I Make Use of PE Ratio
Up till now, I have talked about the theory of PE. While they are not rocket science and the concepts are simple, understanding its relevance and appreciating its usefulness in real-life investment decisions still took me years.

PE is my first criteria in stock screener. Anything above 30 will be filtered out, for fear of the 'double whammy of earnings disappointment'.

As much as I try to form an informed opinion about company's prospect, industry outlook, the future is still, inherently, unpredictable. I acknowledge this fact, and take a balanced approach of not investing in high PE shares to reduce risks. Even if next earnings fall short, the not-extremely-high PE should cushion the fall to a certain extent.

Companies with borderline PE from 26 - 30, I will take a deeper look. They would need to have strong cashflow, low debts, comfortable dividend yield, and stable industry outlook, to compensate for my investment risks. And other usual due diligence applies: compare against historical figure, industry PE figure etc.

I also do not consider shares with extremely low PE such as below 5, for reasons illustrated earlier.

And I also calculate my portfolio's average PE - sum of each counter's PE apportioned by its portfolio weightage. This is then compared to that of market's and relevant sector indices, to gauge roughly how expensive or cheap my shares are.

I formulate these PE usage guidelines based on my investment experience, philosophy and belief. By nature, I am a more conservative investor so I would always ensure my downside is covered before pursuing higher returns. While this has prevented me from getting into high growth stock with exponential returns, it also shielded me from price plunge when earnings disappoint. I am willing to give up outsize returns for lower possibility of share price falling off the cliff.

You should form your own opinions about comfortable PE level for your investments, and regularly refine/enhance these rules to suit your investment style.

Conclusion

In this article, I have shared that

• PE, conceptually, is akin to a scenario of paying certain amount to buy over small business
• Relevance of viewing PE as number of years required to 'make back' your investment capital
• Conventional PE is based on last year's earnings and trailing PE can be more useful
• PE is relative and it must be examined against PE in various contexts
• Risk of investing in high PE company due to 'double whammy of earnings disappointment'
• Investing in low PE shares are in general, less risky, but not without its shortcomings too
• How I use PE as a first line screening criteria and portfolio valuation metric

I opine that PE is a critical valuation tool and use it as a first line screener, because fundamentally, investing in shares is really about making an educated and informed deduction on reasonable share price, based on past earnings and future projected earnings. It combines both history and forward-looking expectations, hence it is important.

I hope you have a better understanding of PE now, and can better apply it in your investment decisions. 

Reflection at 85 - Koon Yew Yin

Very insightful thoughts from superinvestor, Koon Yew Yin

Today is my 85^th birthday. After having lived so long, I have learned quite a lot of things which I would like to share with you tonight. I believe this article can help people to live a happy and useful life.

Even each lover has his or her own secret. But I reveal all.

1.   Our ultimate aim in life must be happiness. Even if you are poor, you can be happy if you can develop your sense of contentment. I always feel satisfied with whatever I have.

2.   Everyone is born to do some work. Most people work for a living. Even if you born from a rich family, you need to do something to while away your time, otherwise life can be boring. Always do the work which you like even for less money. Working for fun is like a hobby. 

3.   There are many obstacles and challenges to overcome in life. Don’t be afraid if you made a mistake. Learn from your mistake so that you can improve. As you go along, you can always learn new things. You are born with 2 ears and 1 mouth. You must always listen more than you talk. You can also learn something new from opposing opinion. When you are not so sure, take a small step first.  

4.   Life is not fair, but it is still good. Never give up if you want to achieve your goal in making money to give your children a good education.

5.   Satisfying your taste bud has always been a great pleasure ever since you were born. But do not over eat or drink. To be healthy, you eat to live and not live to eat. Of course, you can over indulge occasionally to be happy. 

6.   No one can win an argument all the time. You can always find reasons to justify your argument. To avoid unhappiness, you don’t have to win every argument. If you continue to argue, you will lose a friend.

7.   Besides the holy bible, the best book to read is ‘How to win friends and influence people’ by Dale Carnegie. After reading it, you will know how to win friends and influence people to cooperate with you to achieve your goal easier. The first principle in management is to find a donkey to help do your work. When in doubt, just take a small step forward.

8.   Make peace with your past so it won’t mess up the present.

9.   Don’t compare your life to others because you don’t know what they have gone through.

 

10.   Get rid of anything that is not useful so that you are free to move forward.

 

11.  We are often faced with a myriad of choices. Though we may not always recognize their presence, we are inevitably faced with the responsibility of having to make a choice. There is no escaping this responsibility - after all, not deciding what to do or how to act in a given situation is a choice in itself. But why are the choices we make so important? If you want to be happy, you have to make a choice to be happy.

 

12.  When you are in great difficulty and you cannot find a solution, remember that time heals everything. Nothing except death is permanent, for time will change everything.   

13.  You cannot be always right. Be humble to admit your mistake.

14.  Forgiveness is the key to happiness. 

15.  Envy is a negative emotion. Accept what you already have, not what your friends have.

16.  It is better not to expect anything from your children to avoid disappointment. 

17.  Always believe the best is yet to come. Hoping for better days is positive thinking.  

18.  Always be honest and sincere. Treat people with kindness and help them in whatever way you can. If you can help people to gain happiness, you will also gain happiness. 

19.  To reduce stress, I always try to be happy by counting my blessings. I try not to meet too many people. I try to avoid big wedding dinners. 

20.  Don’t suffer from an exaggerated sense of injustice. We must be concerned about politics because it affects all of us in so many ways and impacts the future of our children. But you must bear in mind that you alone cannot change the situation or the flow of current affairs. After you have done what you can, leave it to fate and don’t be unhappy. 

21.  Don’t care too much what others think of you. Normally you will not feel happy to do something without your spouse’s approval, or that of friends and family. But you must not be afraid to exercise your own judgment in certain important matters, e.g. when to buy and when to sell shares. Everyone has his own opinion but who is right and who is wrong is a constant puzzle.

22.  Investing in the stock market is the easiest way to make money if you know how to select good stocks. After more than 50 years of experience, I thought I have seen every situation and nothing can surprise me any more until I found Hengyuan. Its share price rose from Rm 2.50 in the beginning of 2017 to close at Rm17.30 yesterday, a rise of 700% within 1 year.

My share selection golden rule:

I found it by using my share selection golden rule which cannot be found in any text book. Among all the criteria such as NTA, cash flow, return on equity, healthy accounts with cash in fix deposit, the most important is profit growth prospect which is the most powerful catalyst to move share price. When I see a company with good business showing a sudden jump in profit, I will start to buy it as long as its prospective P/E is less than 10. I will continue to buy more shares if it shows increasing profit. I will not sell until I see the company starts to report a reduced profit.   

23.  How I create more and more charity workers? I will feel happy if I can make someone happy. I have given more than 300 scholarships to help needy students to complete their tertiary education. All my scholarship recipients are not required to work for me or return the money I spent on them. But they must remember that when they were poor I helped them and when they have more money than they require, they should help other poor people. In this way, hopefully, there will be more and more people doing charity.

24.  Always remember that you cannot take with you any of your possessions when you die. I have written in my will that my executers will use all my remaining wealth to help poor students.

25.  How I can prolong my life? I had a hereditary familial hypercholesterolemia which means that my body produces a lot more cholesterol than ordinary people. 3 out of my 8 siblings have the same blood disease. My elder brother died before he reached the age of 50. My younger sister who went with me to London to have the same bypass operation in 1983, died about 10 years after the operation.

Why I am still alive? Here are my secrets:

My wife’s loving care and affection are most important. Physical and mental exercises are important. I walk about 30 minute every evening. I spend about 8 hours on the computer every day to exercise my brain to keep me mentally alert.

When I wake up in the morning, I drink 2 glasses of water. I drink more water than I really required. I eat half a pineapple every morning on an empty stomach and I do not eat anything before lunch.

I have an hour’s nap after lunch. I do not overeat. I drink 1 or 2 cups of coffee. I avoid sugar.

26. Most people are afraid to die. After I have lived a useful and happy long life with no regrets, I am not afraid to die.

The surprising thing Google learned about its employees

The seven top characteristics of success at Google are all soft skills: being a good coach; communicating and listening well; possessing insights into others (including others different values and points of view); having empathy toward and being supportive of one’s colleagues; being a good critical thinker and problem solver; and being able to make connections across complex ideas.

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