One-Time Solvable Problems

When an outstanding business is affected by a temporary one-time solvable problem, it can be a huge opportunity to invest in the company and get great gains in the process. “A great investment opportunity occurs when a marvellous business encounters a one-time huge, but solvable, problem.” – Warren Buffett. The following is an example of how Warren Buffett practiced what he preached.

In 1963, a “salad oil” scandal occurred when American Express found that $60 million lent against collateral were mostly sea water instead of salad oil. The borrower was bankrupt and American Express had to take a loss of $60 million. Buffett analysed the situation and found that the trust in American Express travellers’ check and charge cards were unaffected. The company’s intrinsic value was also higher than the share price then. He saw virtually no downside and maximum upside. He invested 40% of the net worth of the Buffett Partnership, or roughly $13 million. Buffett bought 5% of American Express stock, which had collapsed to $35 a share from a high of more than $62. In the following two years, the stock price of American Express tripled and the Buffett Partnership reportedly sold out with a $20 million profit.

On hindsight, it seems easy to buy more when a company is having a one-time solvable problem and the share price gets a huge hit. However, do we have the stomach to buy more without hindsight (when the problem is staring at your face currently)?

We should not be affected emotionally when the stock price gets a hit. We should cut out all noise from the media, fora, friends and so on. Then, we should look at the problem objectively and discern whether it is really a solvable and one-off issue or is there something larger. For example, when Kingsmen had a problem back in January, I analysed the problem rationally without any noise from a forum and decided that it was one-off. The investigation by Criminal Affairs Department is not over and I might be wrong (that is, it might not be a one-off problem). What I am driving across is that we need to have independent thought and do due diligence when a problem strikes our company and act accordingly, no matter what others may say. Warren Buffett’s quote of “You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right” rings true here.

Starting investing at a young age also gives the advantage of seeing more of such problems and learning from them. Experience is a wonderful teacher that certainly cannot be obtained by merely reading books. Since I started investing in 2009, the Kingsmen problem was the first one I faced as an investor and it really made me gain a great deal of experience. I have come across other problems with other companies like Osim, Boustead, Olam and Sakae Sushi but I wasn’t invested in them when the problem occurred. In any case, we can look into the problems that other companies face (as if we are invested in them) and analyse if they are one-off or not, gaining experience in the meantime.

Therefore, when a company is hit with a problem, we have to look at it rationally without any external noise. The ability to rationally think and buy more during a problem comes with experience as well. It is easier said than done but nothing is impossible.

Book Review – “The Value Investors”

I managed to complete reading a book called “The Value Investors: Lessons from the World’s Top Fund Managers” during my two-weeks of In-Camp Training.

It is authored by Ronald Chan and it features interviews with famous investors such as Walter Schloss, Irving Khan, Thomas Khan, William Browne, Jean-Marie Eveillard, Francisco Garcia Parames, Anthony Nutt, Mark Mobius, Teng Ngiek Lian, Shuhei Abe, V-Nee Yeh and Cheah Cheng Hye.

Basically, the book covers how the various investors started off their investing journey, what their investing style is and almost all talk about the temperament needed to invest profitably. This book served as a good refresher for me, especially the part on the mindset needed to invest successfully.

Also, something that caught my attention was during William Browne’s interview. In it, he mentioned about a Tweedy, Browne article titled “10 Ways to Beat an Index“, where one of the studies shows that 80% to 90% of investment returns have occurred in spurts that amount to only 2% to 7% of the total length of the holding period. The rest of the time, stocks’ returns have been minimal. This was an eye-opener when I related back to my own experience with stocks.

The last chapter serves as a summary to the book. If do not have time, you can read the last chapter to get a gist of the book. However, nothing beats reading the whole book in entirety. This is a highly recommended book for those who want to learn more about the lives of some of the greatest investing legends!

Coffee With FFN and Pauline

Pauline

Pauline graduated from the Nanyang Technological University with a Master of Arts (Instructional Design and Methodology). She is a certified facilitator for “The 7 Habits of Highly Effective People – Introductory for the Associates” and a certified Image Consultant by the First Impressions UK. She is currently the Director (Education & Training) with 8 Investment Pte Ltd, focusing on the design and development of Value Investing programs. In 2012, Pauline published her 1st value investing book titled “Value Investing for Women”.

FFN: At what age did you get started in investing? 

Pauline: I started investing properly when I was 32 years old. Before that, I was merely speculating.

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

Pauline: I started buying unit trust through my financial planner since 2000.  The result from my unit trust from 2000 to 2009 was -40%.  I was very upset with this result and thought enough is enough.  I felt I should take responsibility. Thus, I went to source around to see how I could improve my results as I had lost nearly half of my hard-earned savings over past 10 years.

In Jan 2010, I heard Ken Chee, Founder of 8 Investment, talk about Value Investing.  I was bought into the idea after the one hour speech by him. After hearing Ken’s speech, I signed up for his Millionaire Investor Program (MIP) in Mar 2010.

Value Investing changed my whole idea of what investing is all about.  Not only that, Ken corrected my thinking about investing in equities.  I had been brought up with the idea that those people who trade in stocks are gamblers because that was how people around me behaved. They all speculated in stocks and saw relatives losing their fortune in the stock market.

After the program, I worked hard to speed up my learning curve as I was very eager to make back my 40% losses.  The more I studied about Value Investing, the more confidence I gained and more interesting it became.

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

Pauline: My life before investing was like any other typical Singaporeans. Since young, I worked hard in school to gain myself an entry to the local university.  With a degree, I found a decent job in the public sector, got married and my life has been work and family. And since I did not have any investing knowledge, I decided to outsource this job to my financial advisor, only to realize that it was more expensive to outsource than to get myself educated.

FFN: How do you choose which stocks to invest in? What are some of your strategies?

Pauline: I practice a 3R concept: Right Business Model, Right Management and Right Valuation Price i.e. the business has an excellent business model, run by management with integrity, and the market price offers me 50% discount from the valuation price.

I have a systematic strategy for investment.  Investment strategy is not just about investment but also money management strategy.  This is the strategy I use:

  1. Allocate my income into different jars

Financial Freedom (Pay Myself First) – 30%

Education – 5%

Play – 5%

Charity – 10%

The last 50% will be used for your daily expenses such as transport, insurance, food and children’s expenses.

Expenses – 50%

  1. Cover myself with hospitality and accidental insurance
  2. Accumulate 6 months’ worth of living expenses
  3. State the criteria I want for my investment:

The company that I invest must have a 15% growth in business and minimum 5% dividend yield.

  1. Create a list of companies that meet the 3R and your criteria
  2. Create my baskets for investment

Basket 1: 30% of the Financial Freedom Account

For any companies which are undervalued regardless of market situation.

Basket 2: 30% of the Financial Freedom Account

Invest when there is a mini crisis. During this period, some of the companies that might be overvalued when the market was bullish have thus became undervalued. So this would be a good time to invest in these companies. This is also the time to allocate more funds or reinvest the dividends from those companies that you have invested in with the first 30% because the buying price is more attractive now.

Basket 3: 40% of the Financial Freedom Account

Invest when a major crisis happen, e.g., subprime. You never know when it will happen, maybe 2 years later, 5 years later or even 10 years later.

Every month, the 3 baskets will be topped up. For example, if I save $1,000 every month for financial freedom account, I will allocate $300 to basket 1, $300 to basket 2 and $400 to basket 3. The above method which I practice ensures that there will always be funds available for investment even during the crisis periods.

  1. Monitor by reading quarterly and annual reports, and attend AGM
  2. Sell when my investment criteria no longer hold for that stock

FFN: What are some of the stocks in your portfolio currently?

Pauline: As of Mar 2013, they are CapitaComm Trust, Boustead and BreadTalk.

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

Pauline: I look within my circle of competence, i.e. the business that I understand. Also, after joining MIP, there is a network of investors where we will share with one another when we unearth undervalued companies.  The network helps. I unearthed Transpac Industrial via the MIP network. I sold this stock off already as it was way overvalued in early 2013.

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

Pauline: Two major mistakes I made were:

The first major mistake was the unit trusts I bought over 10 years. The lesson I learnt was that it is important to have financial education.

The second mistake I made was in a shipping company that I invested. It was a cyclical company and I did not know the company well, bought it when the cycle was quite high.  I sold it off at a 50% loss in 2 years.  Fortunately, the rest of the 6 stocks I invested have a good percentage return. Overall, my portfolio is still very healthy. The lesson I learnt was that I needed to understand more about cyclical business and that diversification into different types of businesses is essential. Just to highlight that diversification is not about spreading all your money into 20 to 30 stocks. And this mistake was different from the first mistake.  For the first mistake, I do not know how to cut loss and was at a lost what to do.  But this time, I know what went wrong and was able to make a decision.

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

Pauline: I heard this from my other investment mentor, Clive Tan, co-founder of 8 Investment: “You are right not because others say so. You are right because the facts and reasoning are right.”  I remember my aunt, who has been trading in stock market for 20+ years, warning me not to touch the stock market during Euro Debt Crisis.  While, clearly I did not seek her advice because I was clear what I was doing and fear did not set in even though I bought during crisis.

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

Pauline: The transformation for me is great.  From a novice investor in 2009,  who knew nothing about the equity market to making value investing a hobby in 2010 to making it a full-time career, inspiring others to take charge of their financial health. And from 2011 onwards, I have touched lives through talks and a book that I’ve written, “Value Investing for Women”.

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

Pauline: Seek the right financial education or get a credible mentor to mentor you before investing.  The major loss in investment is not only the monetary loss but the time loss to compound the money.  You can make back your money but you cannot buy time back.  It is very painful to realize that I made a mistake only after 10 years.

Also, I would like to correct this thinking for beginners because I used to have this thought.  Many people thought they are investors by putting money into an instrument for long-term and praying hard that the price will go up in future.  That is speculating, not investing.

FFN: How was your experience writing a book, especially for women?

Pauline: Doing research was fun. It was then stressful to write. It was also tedious to check through my work. However, it was very rewarding when I saw women coming to my talk because they were inspired by my story.

FFN: It can be said that women are generally not interested in investing. They rather leave it to the men (their husbands or partners). What is your take on this?

Pauline: I agree with you.  Many women generally are not interested in investing.  That’s the reason why I decided to write a book “Value Investing for Women” to encourage more women to take charge of their financial health.

FFN: However, it has been said that women generally are better investors than men as women do not over trade and are not overconfident of their skills. As a person of the fairer sex, what are your thoughts?

Pauline: Yes, I think so too. I think I’m a good example.

FFN: Which female personality do you look up to and why?

Pauline: My mum.  She’s someone who will do the best for her family, including sacrificing her life.

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

Pauline: Just save and put the money in fixed deposit because the interest and principle are guaranteed. They do not know that with inflation now at about 5%, the loss is also guaranteed!

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

Pauline: Be humble to learn from a credible mentor.

FFN: How did your personal financial planning change after a big change in your life eg. marriage, having kids, buying a house, buying a car?

Pauline: I do not own a car, live in a HDB where CPF pay for it. So my financial planning only needs to make sure that I am not a financial burden to my kids in future.  I make sure I can live purely on passive income when my physical body does not allow me to work for an active income.

FFN: What are the habits one must follow to have a sound financial life?  

Pauline: Firstly, pay yourself first. Secondly, live within your means. Thirdly, learn the proper way of investment. Lastly, take action to compound money at least at a rate higher than inflation.

FFN: A parting shot for the readers?

Pauline: Seek continuous education, join credible network and take action!

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

This post is an update of the previous post made in January 2013.

Below is the latest portfolio as of 12th April 2013:

bottom fishing portfolio - 12th April 2013 (S&P hit record high after 4 years after crisis)

Cerebos (ticker: C20) and Asia Pacific Breweries or APB (ticker: A46) have since been delisted. APB was delisted at $53. The profit from this business itself was 489%.  Overall portfolio returns, with Cerebos and APB included, was 315.59% instead of 232.72% as shown. In January 2013, the overall portfolio returns was at 301.66%.

The reason why I am doing this update now is that the Dow and S&P 500 have been hitting record highs in the past few days. It has been slightly more than four years since the March 2009 lows, when people were talking about a financial apocalypse. It can be seen that buying fundamentally sound businesses during a major crisis, without any external noise affecting our decisions, really helps to grow our wealth for the long-term since we can purchase with a huge margin of safety.

Buffett’s Famous Quote Demystified!

Warren Buffett has a famous quote that goes like this:

Rule No.1: Never lose money
Rule No. 2: Never forget Rule No.1

What does Warren Buffett really mean by the above quote? Does he mean that we must not lose money at all in our investments? I suppose so. However, will there be times where we will lose money since investments are not guaranteed? Absolutely! Warren Buffett has certainly lost money during his long tenure as a money manager.  Does it mean that Warren Buffett is not practicing what he preaches since he has lost money on his investments? No, that is not how we should look at it. I believe when Warren Buffett said the quote above, there was a deeper meaning to it.

The deeper meaning behind “Never lose money” is actually to have the mindset that we should thoroughly analyse a business before buying. It’s the psychology that counts and not the action of not losing money. Behind every ticker symbol is a business. We must understand what the business does, how it makes money, does it have a clean balance sheet, does it have good cash flow and so on. Researching thoroughly gives us the confidence to buy into the business. Rushing into purchasing a business without doing proper due diligence can mean breaking Rule No. 1. Buying a stock just because it is hitting new highs can mean breaking Rule No. 1. Buying a stock due to a recommendation from your close friend can certainly mean breaking Rule No. 1. The bottom line is that we have to approach investing from a business perspective.

We must also remember that when we lose money in our investment (that is guaranteed!), we should not sweep it under the carpet. We have to analyse what went wrong to ensure that we will not do the same mistakes again the future. If we do not analyse our mistakes, we will not know how to improve upon them and our portfolio returns will not improve. Albert Einstein once said that insanity is doing the same thing over and over again and expecting different results. Insanity is making the same mistakes again and again and expecting our portfolio returns to be better.

In conclusion, I believe Warren Buffett’s famous quote has a deeper meaning to it. We need to have the proper mindset to ensure we “do not lose money”.

How to Profit from a Black Swan Event

A black swan is an unthinkable event that has a major effect in one’s life. It was coined by Nassim Nicholas Taleb. Examples of black swan events would be the Sept 2011 terrorist attack and the market crashes that has happened in the past or will happen in the future.

A market crisis happens on the average of once around every five years. The last market crash that happened was during the Great Financial Crisis of 2007-2009. With such crises happening at random and being hard to predict, how are we going to position ourselves to take advantage of such black swan events?

Firstly, we must not borrow to invest. If we were to do so, our emotions will affect us when a crisis happens and we will not be able to act decisively. During the time when we should be buying more, we will end up losing money by cutting losses due to emotional stress. The emotional stress might cause other areas of our lives to be affected as well.

Next, we have to save enough money so that there will be surplus cash that we can deploy into the market. It is prudent not to be fully invested at all times so that we can take opportunity of a market crash or even a small market correction. Socking up cash in the bank is not a bad thing after-all if we know what we are doing. The cash serves as an opportunity fund, ready to be put into work when the time arises. It is better to keep the cash in the bank earning 0.05% interest than not to have any money at all when the market throws at you a business valued at $1, selling at $0.20. I like to keep at least 20-30% in cash to take advantage of market crashes.

Lastly, be on the lookout for opportunities that are thrown up frequently. When the opportunity comes, we have to load up on it as opportunities do not knock twice. For example, during the BP oil spill (a black swan event), many oil stocks went down in price even though they were not involved in the spill. It would have been a great opportunity to grab such stocks on the cheap, provided they are fundamentally sound.

In conclusion, black swan events do not have to be dreadful. We can take advantage of them if we know what to do and in turn, do our portfolio a huge favour!