Warren Buffett on Efficient Market Theory

“I’d be a bum on the street with a tin cup if the markets were always efficient” – Warren Buffett

Warren Buffett succinctly and perfectly sums up what EMT is all about. I’m also a non-believer of this theory because if the markets were so efficient, Warren Buffett wouldn’t be the 3rd richest man on this planet! If the markets were so efficient, why do booms and busts occur?

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Company AGM

Some companies are announcing their year-end results and AGMs will be conducted for these companies one or two months after the results release. Attending the company’s AGM will prove to be a good decision as it allows the investor to meet the management face-to-face and ask them questions. Before going for an AGM, an investor should prepare before-hand the questions he wants to ask and read through the latest annual report thoroughly. You wouldn’t want to be asking a question that was already answered in the annual report. Some of the questions you can ask are:

  • What are some of the mistakes you have done over the past year and how did you rectify them?
  • Why do customers buy your products over those of your competitors?
  • What are you doing that your competitors aren’t doing yet?
  • (To ask the competitor of the company I’m interested in) Which competitor would the company want to eliminate the most and why?
  • What is the current biggest threat to the company and industry?
  • What are the future growth plans in place to increase shareholders’ value?
  • From the time an initial customer prospect is identified, how long does it take to close the sale?
  • Are there any important sectors of your market which you don’t address?
  • Are there any new entrants into the market in the last 2 years?
  • Is there any seasonality in you business other than as reflected in orders and backlog?
  • Is the marketing conducted any differently overseas?
  • What is the long-term outlook of the company? Where do you see yourself 5 to 10 years into the future?
  • What are your long-term objectives for profit margins and how do you intend to achieve those goals?
  • Over the next few years, how would you expect the components of your income statement to change in relation to each other?
  • Should one expect to see major acquisitions or divestitures as part of your plan for the short-term?
  • Do you envision any major functional additions to the senior management staff?
  • What are you plans for capital expenditures for the next few years and what specific product areas do you plan to stress?
  • What are you currently spending your money on in R&D?

You can also ask other company specific questions that bothers you. For example, if the company took on excessive debt for the year without any future growth plans in place, you can ask the company the rationale for doing so.

Have fun at the AGMs!

The ABCs of Investing

Connect The Blocks Prototype

Value investing is as simple as ABC if investors understand the fundamentals of value investing. The ABCs of value investing is: Assets, Bargain and Catalyst. In simple terms, buy companies that boast real and measurable assets, selling at a bargain price and the ability of the value of the business to increase due to a catalyst.

If an investor buys a company at a huge margin of safety (bargain), one can profit even if a catalyst does not come about. The reason is that as the market moves toward efficiency (reverts back to the mean) and stock prices come to reflect a company’s true value, the investor realizes a significant gain. The catalyst becomes an added bonus to the investor.

Thus, always keep in mind the ABCs of value investing!

Bullish on China for the long-term?

Many investors are bullish on the prospects of China’s growth going forward. I belong to this camp too. I’m extremely bullish on China as an emerging market. There are several reasons for this.

Firstly, the Shanghai SSE 50 A-Shares Index is currently trading at a P/E of 13.33. Valuations peaked at around 70 times earnings in 2007. At current levels, the Chinese equity market is extremely undervalued, considering that China is one of the fastest growing economies in the world. Also, less than 10% of the Chinese households are invested in the stock market, according to the Edge magazine. In developed countries, the percentage is between 40-60%. As China develops, the participation in the stock market will grow as well.

Secondly, the 12th five-year plan will be revealed later this year. Investments into fixed assets should be strong in the first year or two as it will beneficial for government agencies and corporations to launch new projects to secure the respective resource allocations.

Thirdly, with the US losing steam and foreign funds flowing into China, the next phase of growth will be in China. China has shown it is capable and is able to stand up to the big boys with the concluded World Expo, Olympics and Asian Games. Consumerism will boom, tourism will rise and the service sector will certainly climb up. China cannot stay as an exporter for long. They have been working hard making cheap stuff and it will be time that they taste the fruits of their labour. China may become a nation of consumers but not so soon. Also, the Chinese government has so much cash in its coffers vs the trillions of dollars of debt US owes.

On the other hand, inflation is rising and the government is battling hard to keep inflation under control. Interest rates have risen recently to battle inflation. However, the dust will settle eventually and investors will flood back into the market once everything cools down. If you have a long-term view (i.e. >10 to 20 years), this inflation scare is very minute as compared to the growth that China will see.

To capitalise on the boom of China and invest in A-Shares that only local Chinese can, one can purchase the “United SSE 50 China ETF” listed on SGX. Extracted from shareinvestor.com: “The ETF tracks the SSE 50 Index. The SSE 50 Index is an index consisting of 50 constituent stocks which are the 50 largest stocks of good liquidity listed on the SSE. The United SSE 50 China ETF is the first China A-Share ETF to be listed on the Singapore Stock Exchange. It is also the first China A-shares ETF to be denominated and traded in Singapore Dollars.”

Disclaimer: This post does not serve as a recommendation to buy the United SSE 50 China ETF. Before investing in the ETF, it is paramount to read the prospectus carefully. Risks include tracking error, counter-party risks, among others.

The Simple Life

This post is not about Paris Hilton’s “The Simple Life” show but rather on MM Lee and his simple lifestyle. I was intrigued when I saw a picture of MM Lee’s house posted on Facebook by a friend of mine. This same picture was published in the Straits Times a few days ago. What intrigued me what that his house was so spartan. There weren’t any lavish furnishings that are usually synonymous with the rich and the famous.

(Source: ST Online)

In his recently published book, “Hard Truths”, MM Lee said that he sees no reason why he should impress people by having a big car or changing his suits every now and again to keep up with the latest styles. He also considers it lavishness for the Prime Minister to wear a new shirt every year for the National Day Rally. Surprisingly, the jacket he was wearing for the interview was bought nearly two decades or 15 years ago. While reading about MM Lee’s simple lifestyle, I got reminded about how simple Warren Buffett’s life is as well. I chanced upon Warren Buffett’s austere lifestyle some years back through a chain email. In that email, it said that:

  1. Warren Buffett still lives in the same small 3-bedroom house in mid-town Omaha, that he bought after he got married 50 years ago. He says that he has everything he needs in that house. His house does not have a wall or a fence.
  2. He drives his own car everywhere and does not have a driver or security people around him.
  3. He never travels by private jet, although he owns the world’s largest private jet company.
  4. He does not socialize with the high society crowd. His past time after he gets home is to make himself some pop corn and watch television.
  5. Warren Buffet does not carry a cell phone, nor has a computer on his desk.

It makes me wonder if we really need all these extravagance and material comfort that we all long for? The world still goes on without the having the latest iphone, ipad and what-not, right?