Warren Buffett Starring in an Commercial

Warren Buffett has to be the coolest guy around! In this commercial for Nebraska Furniture Mart, he stars as a mattress salesman and he is really funny at that!

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Kingsmen – Let’s Be Rational

Kingsmen Creatives has been embroiled in financial abnormalities involving two subsidiaries, Kingsmen Kingsmen Beijing Co., Ltd and Kingsmen Exhibits Pte. Ltd. A statement was released by the company yesterday morning at 0725 after four days of trading halt. The case has since been reported to the Minister of Finance according to the Companies Act, by the external auditors of the company. Commercial Affairs Department has also been notified, by the Audit Committee of the company. In this post, I’m not going to have a re-hash of what had happened. You can grab hold of today’s Business Times and read the article entitled “Kingsmen caught up in allegations of financial irregularities” for an easier understanding of what had happened. This post will touch on my own thoughts surrounding this saga and also include some of what was reported in the Business Times article. Such occurrences test our fortitude as investors and I’m taking it as a positive experience for me to grow as an investor.

During the days leading up to the announcement, many were predicting that there would be a buy-out of the company by another company since Kingsmen is a company with excellent track record, fundamentals and business prospects. However, it turned out to be something on the other end of the spectrum. Something not very well-received by the market – financial irregularities. The stock price of Kingsmen plunged once trading was lifted yesterday to a low of $0.695 before closing at $0.725. This was a drop of 8.8% compared to 11th January’s close (the last trading day before the long halt).

Just like any negative news, people’s reaction will be, “Sell first, think later!”, hence the plunge in stock price. Rationality and logic are most often thrown out of the window during such instances. (That is why Efficient Market Hypothesis does not hold water!). During a mass exodus from the market, great opportunities are usually presented. Warren Buffett once said that, “Uncertainty is the friend of the buyer of long-term values.” We should ignore the cacophony and rationalize if we have an opportunity, amid this uncertainty.

Kingsmen as a whole is not fraudulent. Senior management did not know about the personal guarantees and they were not involved in the incident. The two employees who had given personal guarantees were too eager in their job. They wanted to look good themselves. No money from the company’s coffers was put into their own pockets so there was no misappropriation on their part. Kingsmen also had to make advance payment as it had lots of jobs to carry out and also in my opinion, to maintain a good working relationship with them. I think this saga happened during the initial phase of Universal Studios Singapore project where many parcels of projects were won by Kingsmen and they were huge projects. If the subcontractor stops work suddenly, Kingsmen will be affected drastically.

I’m happy that this incident was found out and reported as this incident also serves as a warning to other potential perpetrators. The internal controls of the company will be tightened further as said in the company statement – “The Board will be appointing a reputable international accounting firm to conduct a complete review of the Group’s internal controls and to develop a comprehensive Group Risk Assurance Framework to enhance and strengthen the Group’s internal controls and risk management.”. Going forward, I’m sure Kingsmen will be more prudent. No key employees were reportedly sacked and thus, does not impact Kingsmen’s provision of services in the future.

Benedict was also dejected that this has happened to Kingsmen. He said in the Business Times article, “We have to work hard and take action to repair this setback.” Those are strong words. I believe in Benedict and I’m sure he will set things right. From my interactions with him during the Annual General Meetings, he seems to be a person with integrity. He is also a major shareholder of the company and being the founder, he will not let things go down the drain so easily.

Always remember that businesses involve risk and no business is perfect. When investing, we always have to have a long-term view of the market. In a book called “Don’t Sweat the Small Stuff”, the author mentioned to see a “problem” in terms of five years into the future and think, “Will this really matter five years down the road?”. I believe the long-term prospects of Kingsmen are still intact. The company has had a strong working relationship with its clients. The order book is strong and I don’t think it will be affected by this issue.  Kingsmen is vying for many theme park projects in the region. The MICE industry in Singapore is still bustling with activities. Orchard Road revamp is still ongoing with new shopping centres coming up. More suburban malls are slated to open to transfer the crowd from Orchard Road. Clients like Robinsons, Uniqlo and H&M are expanding. If I were a client of Kingsmen, I would not be too concerned about the financial irregularities but rather be more concerned about the quality of project done by Kingsmen and whether Kingsmen upholds what it promises. More quality clients coming on board lately is a testament that Kingsmen has been doing an excellent job for its clients.

Going forward, with CAD’s investigation, more stories can unfold. Who knows, the investigation may possibly open up a Pandora’s box of more fraud that were covered up. That’s the worst case scenario. The stock price most probably will take a bigger hit if that materializes (remember the earlier axiom of “Sell first, think later”?).

At the current price of $0.725, the dividend yield is 5.5%. With a steady free cash flow so far, solid business fundamentals and rosy future prospects, I believe the dividend yield on cost will only go higher. Investors can also look for a larger margin of safety of say, 6.6% dividend yield, to provide some room for error in judgment. “A great investment opportunity occurs when a marvellous business encounters a one-time huge, but solvable, problem.” – Warren Buffett. I strongly believe this is a one-time temporary event and it’s a great opportunity to take advantage of.

In conclusion, as investors, we need to have a long-term outlook in the market. Always remember that investing is most prudent when it’s business-like. Analyse a set-back rationally and we can discover opportunities. Yes, I understand the eminent CAD investigation sounds scary. It’s unlike other one-time events like earnings misses, product launch failure, etc but I believe Kingsmen will emerge stronger from this. Mr Market has become manic-depressive, are you going to take advantage of it?

P.S. Please exercise due diligence. The above are merely my thoughts. I may be biased as I’m a shareholder.

Coffee With FFN and Ken Tan

just me!

Ken Tan was a Senior Regional Sales Consultant for one of the world’s leading strategic research company. He won “Most Dedicated Salesperson of the Year” awards in 2010 and 2011 consecutively. He takes charge of overseas client accounts spanning across Asia-Pacific such as Vietnam, Philippines, Korea, Japan, Malaysia, Thailand, India. Currently, he is an avid Investor with passion on stock markets of the world. He has particular interests in the sector of properties, retail, consumer staples and other FMCG industries.

FFN: How did you get interested in investing and who inspired you to get started? 

Ken: It started off with my former colleague in the education industry about five years back.  He hinted to me that the opportunity had arrived as there was widespread negativity in the worldwide markets.

When I queried further, he strongly encouraged me to take the year-end bonus and buy into shares of companies. At that time, I have almost zero knowledge about investment and thought that the stock market was a risky game of money.

I was a salaried worker and the point of purchasing something that can’t be touched and felt was not attractive to me.  Few days later, his words of wisdom struck me when I self-reflect. Something came upon me. I researched online and discovered that my perception was one-sided.  Slowly, my interest and knowledge developed when I continuously studied about the dynamics over the past two years.  I bought into property stocks as I figure the time to buy is at the trough of the cycle – the trend is shaped by foreclosures and debt overruns.

Ironically, I met my same colleague two years back and he did not put his words into action, thus missing out the chance of cheap valuation during the global financial crisis!

FFN: What was your life like before investing and how is it now?

Ken: My belief was to work hard like any normal employee while getting my pay cheque every month.  However, I found that my life was no different than a rat on a wheel.  When the motion stopped, my income drastically dried up.  And how would the rat survive?

Now, I am delighted to create multiple streams of income via dividend from my shares, my full-time job and other ad-hoc tasks.  I do not need to solely depend on a single source and worry strongly about the financial lid.  The key is to ensure that you are managing your investment like a holding company where the firm, like yourself seeks opportunities to grow her bottom line – for example enter new markets (new source of income such as buying assets to create more assets).

FFN: Where and how do you look for companies to invest in?

Ken: The world is full of information. However not many is able to extract the essence and develop into an investment thesis. You do not need to be a qualified analyst.  Look around you and notice that we live in a marketing zone.  The various products and services offered would paint a trend as demand increases for specific goods. For example, luxury timepieces and jewellery are well sought after, not just the wealthy but the growing middle class segments as their wages rise across Asia.

Therefore, prior observation may help.  Another possible way is to pick out top five reading sources to grasp investment ideas. These are your daily newspapers, online journals to short business articles. Pick up an interesting commentary from your top five, write it down, reflect and find out the growth drivers behind it. Do you understand about the story and where this leads to?

This would help to start off a topic of your interest (if you know what’s going on) and probably the next potential story to reap future returns while Mr. Market has not taken any notice yet.

FFN: You are well-known for your brand of qualitative analysis. What are the things you look out for when researching into companies?

Ken: To put it short on qualitative basis, I would ask the basic questions first such as how does this business operates, the origin of their revenue, how majority of the company funds are spent, the company track record and in what way does the management plan to take the company forward (forecast).

Most importantly, what’s special about the firm’s capabilities such that the drawing power to generate revenue is great?  For instance, it could be cost leadership to product differentiation.

Combine with the state of the industry to future trends expected, so that you will gain a wider perspective.  Lastly, if you can, don’t be an armchair researcher only.

Talk to professionals in the particular field, invite them for coffee or link up with them via social media, so that you can ask questions (give something in return like a barter trade).  Cross-regulate the details with your primarily observation and secondary research.

The truth is – if I do not understand the dynamics of the above, I will not be able to comprehend their business model.  I will invest through my circle of competence and key areas that I know well.  At least, I will sleep comfortably and focus my energies on other worthwhile things in life!

FFN: What are the mistakes you have done pertaining to investing and what are the lessons learnt?

Ken: When I first started, I bought into shares of companies based on the recommendation of brokers.  I did not realize the true nature of certain businesses such as soy-based businesses.  What made it worse was I did not exit early and that the advice by analysts changed fast.  When I reflected back, I realized that my knowledge in this field was minimal.  Furthermore, I did not stick to my principle but was lured to the promising returns by looking at the depressed share price only.  The price went lower and lower and I sold it at a loss. Eventually, the company was suspended from the stock exchange due to corporate governance lapses. I believe the fundamentals of the company to the business model remains essential in the first step towards sound investment.

FFN: What psychology do people need to succeed in investing?

Ken: Be confident of your own abilities in investment and avoid the market noise. If you have a sound plan and did prior research, stick by it as you know your strengths well.

Wealth comes at a price, not a gift.

FFN: How has the investor in you evolved over the years? 

Ken: I have learnt to invest based on my strengths, not to overly diversify and to void out the unnecessary destructive market noises.  You just need a few “ultimate winners” in your portfolio

FFN: What advice would you give for beginners who want to start investing?

Ken: Set aside a small fund to buy up the common shares of the companies.  The objective is not to make a profit but to put your strategy into real-time action.  Through the experiences and mistakes made, you can find out the type of investor profile while polishing your investment skills.  Then, you can cater the relevant asset class to your goals and expectations.  You can have a wonderful reference figure to learn and replicate but your investment style is uniquely YOU.

FFN: What do you thing is the biggest misconception people have about money?

Ken: To be rich is to take shortcuts and this explains why money scams exist always!

FFN: What is the one thing, in your opinion, do people need to succeed in investing?

Ken: EDP– Effort, Patience, Discipline

FFN: A parting shot for the readers?

Ken: Have fun while investing because true interest breeds success

Ken pens his thoughts at his own investment blog at http://www.ktwealth.blogspot.sg. Do visit it! 

Early 2013 Update of “2008/2009 Bottom Fishing” Portfolio

This post is an update of the previous post made in mid-2012.

Below is the latest portfolio as of 11th Jan 2013:

2013 market bottom

Cerebos (ticker: C20) has since been delisted at $6.60. The “buying” price was at $2.30. Returns on this company alone was 187%. Overall portfolio returns, with Cerebos included, was 301.66% instead of 312.54% as shown. As seen from the screenshot above, the overall percentage of profit is even higher than in mid-2012, which was at 204% then.

One obvious trend I have noticed over the past years as an investor is that whenever there is a correction in the stock market due to negative news, the market always bounces much higher than the previous peak almost immediately, to give higher much returns. Thus, the bottom line is always to stay invested and buy more on dips (caveat emptor: only if your company is fundamentally strong!).

Many have commented that my portfolio is doing very well and asked when I bought those stocks. Do note that the above portfolio is a hypothetical one and it is not my personal portfolio.I would be more than happy to trade this portfolio for my personal portfolio!

Happy fishing!

Information Rules

“Information Rules” is a competitive strategy framework articulated by economists Carl Shapiro and Hal Varian in their book of the same title released in 1999. The framework concerns companies in the knowledge industry that produce information products like software, recorded music and proprietary networks. The following aspects help to evaluate a knowledge company’s competitive advantage:

  1. High up-front, low incremental costs
  2. Network effects
  3. Customer lock-in
  4. Giveaways
  5. Link-and-leverage

High up-front, low incremental costs

Many knowledge products are costly to come up with for the first time but once in digital form, they are rather inexpensive to replicate and distribute. For example, Microsoft’s costs to create a new Windows disk is high but replicating and distributing that disk is extremely cheap. Windows 2000 cost Microsoft $2 billion to create but subsequently, mass reproducing them was actually inexpensive. Therefore, knowledge-based companies enjoy increasing, and not diminishing, returns.

Network effects

Network effects occur when the value of a product or services increases as more members use that product or service. Think of eBay. More sellers there are, more buyers there will be and vice versa. It’s a self-fulfilling cycle.

Customer lock-in

Once customers develop user skills with a certain product, they often hesitate to switch to a competing offering. Customers are “locked in” and they will be more open to purchasing highly profitable product upgrades than purchasing products from other sources. Lock-in includes brand-specific training and loyalty programs. Examples of lock-in are Adobe and Microsoft.

Giveaways

Giving away products (or heavily discounting them) in the short-term is often the best way for a company to build a long-term value. Established users will be valuable to the company as a source of future revenues through product upgrades.

Link-and-leverage

Once customers are used to a certain interface or technology, link-and-leverage becomes a great way to create value. An example is Microsoft’s product evolution from operating systems to applications to internet access.

Thus, there are five ways to evaluate the competitive advantage of knowledge companies as shown above.

Book Review – “Financial Shenanigans”

I just completed reading a book called “Financial Shenanigans” written by Howard M. Schilit and Jeremy Perler. It teaches readers how to uncover financial fraud in the financial statements – Income Statement, Balance Sheet and Statement of Cash Flows.

The book has three main parts. They are:

  • Earnings Manipulation Shenanigans 
  • Cash Flow Shenanigans
  • Key Metrics Shenanigans

It is a highly recommended book for those who want to take analysis of financial statements one step further. Learning to detect financial chicanery can arm an investor and prevent him from investing in fraudulent companies. The book uses case studies of various fraudulent companies that faced the music and teaches investors how not to fall for their trap.