Zhuge Liang on Opportunity

"There are three avenues of opportunity: events, trends, and conditions. When opportunities occur through events but you are unable to respond, you are not smart. When opportunities become active through a trend and yet you cannot make plans, you are not wise. When opportunities emerge through conditions but you cannot act on them, you are not bold. Those skilled in generalship always achieve their victories by taking advantage of opportunities."

Zhuge Liang (circa 200 AD, The Way of the General)

More INTJ Insanity

Just taking a quick break from my long hiatus. I swear that I have a perfectly good explanation for the long break. This post is an extension of an earlier post about my personality type. You can take the test HERE. I swear this is not some mambo-jumbo link that you get in forwarded emails or facebook status updates. This is the real deal Myers-Briggs personality test.

While the previous description sounds  a little too braggy, I think this description sounds a bit more objective. For those of you who think (or know) that I am way too complicated, perhaps this explanation can shed some light on the reasons why:

Top Ten Words That Describe Most INTJs:

Tenacious ... Private ... Deep ... Intellectual ... Future-focused

Independent ... Driven ... Intense ... Reserved ... Direct

 

BIG PICTURE PROBLEM SOLVERS

There are two phases of most projects or meetings: 1) the vision and strategy setting stage; and 2) the execution stage. INTJs tend to gravitate towards the former. Highly future focused, out-of-the-box, logic-driven thinkers, few can match the INTJ’s capacity when it comes to doing what they love - developing long-term strategies and solving complex problems that involve a lot of moving pieces. An INTJ’s mind is unconventional and unrestricted by previous approaches or traditional thinking.

 

PERFECTIONISTIC, FOCUSED

“Good enough” is not typically part of the vocabulary of an INTJ. They haveextremely high standards for both themselves and others, and a tremendous stamina for hard work. They constantly push themselves to achieve excellence in all of their endeavors, which often translates into long hours with more focus and fewer breaks in concentration than most other personality types.

 

INTELLECTUALLY CURIOUS

Of all the 16 types, INTJs have perhaps the highest need for continuous learning, and to constantly challenge themselves intellectually. INTJs thrive when they are progressively working towards higher and higher levels of competency and excellence, and are easily bored by assignments or tasks that they have mastered before - or have a straightforward execution.

 

INDEPENDENT, DIRECT

Rather impervious to criticism and highly intrinsically motivated, INTJs are among the most independent of all the types, and thrive working productively alone for long periods of time. They tend to hold themselves to their own high standards, not looking to others for frequent validation. As a type, INTJs are often uncomfortable giving compliments and regular positive feedback. Finesse is also not a natural gift for INTJs, and if not careful, they can be direct to the point of being blunt - and come across as intimidating or offensive.

 

PERCOLATORS

INTJs are often well known for their insightful, thoughtful, and unique perspective. Their best ideas and solutions to complex problems usually come after they’ve mulled the topic over for a while. This “percolating” process can take a couple of days, is not always conscious, and more often than not, leads to a solution that just “pops” into their heads out of nowhere when they are alone, relaxed, and are engaged in or thinking about a completely different topic.

 

DEEP INNER WORLD

Underneath that calm, cool exterior is one of the most rich and well-developed inner worlds of any of the 16 types. The brain of an INTJ is always “on,” processing the complex issues and strategies that INTJs love to tackle (even while they are watching TV). At times, they can be so lost in their thoughts that they walk past people who are saying “hi” in the hallway - and have a hard time quickly switching gears when interrupted at their desk.

 

Top ten: INTJs are the type MOST likely to . . . 

1. Miss what is going on around them because they are lost in thought

2. Push themselves harder than any other type

3. Work for LONG stretches of time without a break

4. Talk over others’ heads without realizing it

5. Do exceptionally well on standardized tests; achieve excellent academic grades

6. Under-compliment and over-criticize

7. Have a top-notch vocabulary and be an avid reader

8. Catch on to a new idea, concept or approach quickly

9. Need significant time alone each day to feel optimally recharged

10. Have solutions just pop into their head out of nowhere

Elementary

Found a new source of fuel for my Sherlock obsession. Elementary, the TV series. While die hard fans may find it strange to see Lucy Liu as Joan Watson (as opposed to John Watson, perhaps more famously portrayed by Jude Law), I think it is a somewhat refreshing introduction to ordinarily sausage-filled Holmesian adventures.

And here is one of my favorite quotes from the series: 

It has its costs... Learning to see the puzzle in everything. They're everywhere. Once you start looking, it is impossible to stop. It just so happens that people, in all the deceits and delusions that inform everything they do, tend to be the most fascinating puzzles of all. Of course, they don't always appreciate being seen as such.

Sherlock Holmes
in "Elementary Season 1 Episode 5"

Being An Analyst At Capital Dynamics - Part 12

Volume 4 Issue 40: Intelligent Investing

In the previous part, I mentioned that Capital Dynamics has two businesses: the fund management business and the investment advisory business. And one of the most controversial issues about Capital Dynamics is the public perception about them.

Let me first say that whatever I wrote in the previous part will probably get me a stink eye from the management of Capital Dynamics. Nonetheless, in line with the virtues and values that Capital Dynamics strongly professes as well as cultivated in all its staff, I not only feel obligated but also deem it necessary to voice my concerns if I see potential issues with regard to the company. It is the least I can do, given how much I have gained from being a part of that establishment. I am quite certain that Teng Boo will be the last person in Capital Dynamics to fill his company with a bunch of yes-men (and women).

4. Perception

That said, I will continue this issue with a discussion on the perception about the investment advisory business, which publishes a weekly newsletter called i Capital. 
 
b) Views on the Investment Advisory Business

One of the most common perceptions about the investment advisory business (and less so, the fund management business) is that it is run like a China-man company. In order to prevent misunderstanding and to continue on a productive discussion, we must first define what it means to be a China-man company.

Used in the most derogatory manner (I have to assume the worst here), it means that the company is a cheapskate company (which pays its employees peanuts) and treats its employees poorly. I believe it is reasonable to assume that the perception is that Capital Dynamics overworks its staff while not paying them a corresponding wage. This can be seen from the forum that I mentioned all the way back in Part 1.

I will tackle the issue of employee compensation separately from this issue of perception later. But looking at it from only the employees' point of view seems a bit narrow. I would even extend the "China-man" label to how the company is run in totality. I am fully aware that this is a stereotype, but let me add a few attributes to what I think the China-man label encompasses.

Capital Dynamics has an extremely stringent cost-management attitude. Everything from the office decor to the electricity bill to the mileage claims for petrol is strictly monitored to ensure that costs are not excessive. My take on this is that, this is one of the key characteristics that is necessary in a successful business.

Why is it so necessary to maintain costs? Business expenses pretty much works like inflation. It is sticky downwards and very hard to get under control once unleashed. It is extremely difficult to cut budgets only after costs have spiraled out of control. Just think of the Greece and US budget deficits. You get the idea.

Imagine a company that lavishes its employees with first class air tickets during business trips and golf club memberships. Once the employees get accustomed to that kind of lifestyle, what do you think will happen when the company decides it needs to cut cost and get rid of those benefits?

On top of that, what would the customers think? If the employees of the company are enjoying being made rich and getting to live the high flying lifestyle, why don't the customers get to do that too? Is the company making its clients rich along with them? I believe many of you are familiar with the analogy of the customers' yachts. Even though the company may be able to afford it, exercizing prudence is only logical from the business' perspective.

Another trait that is typically attributed to a China-man company is that the boss is the boss. What this means is that whatever the boss says is the law. I think this is probably attributed to the China-man style because of its emperor style leadership. Consequently, it is widely believed that all the decision-making is done by Teng Boo himself, which means that it feels a lot like a one-man show.

To a certain extent, many subscribers of the newsletter believe that every single piece of advice published in i Capital is written by Teng Boo. This is very far from the truth. If you have visited any of the events organized by Capital Dynamics, I am sure you would have at least met some of the analysts that assist him with not only research, but also with the articles in the newsletter. After all, I am one of those people. What I would like to point out is that, as a contributing analyst, I was given a lot of free reign on my research writing and methodology.

While Teng Boo typically suggests some general idea or issue to look into, there was very limited editing and censorship on my writing. Pretty much everything that I write goes into the publication. Of course, Teng Boo occasionally refines the work with his nuggets of insight that stems from his vast experience and knowledge. I believe this enhances the work of all analysts in general and is highly contrary to the perception that it constricts the viewpoints of the analysts. Nonetheless, a possible drawback that is inherent in such a method is that if an analyst is incompetent, the views have a tendency to be inadequately researched.

Another common misconception about the investment advisory business is that its only source of income is through the subscription fees from i Capital. Whether intentionally or otherwise, I have heard the management of the company insinuate the above assertion. I believe that is a misdirection.

I don't have to violate any private information to demonstrate why subscription fees is not the only source of income for the investment advisory business. Just take a look at page 24 of ICAP's 2012 Annual Report (pdf).

Capital Dynamics Sdn Bhd is the investment advisor of ICAP and charges an annual advisory fee of 0.75% of ICAP's NAV. In 2012, their investment advisory fee was RM2.9 million. Contrary to popular belief, the fee of 1.5% of NAV that is charged is not solely attributable to management fees. It is divided equally into management fees and investment advisory fees and are paid to Capital Dynamics Asset Management Sdn Bhd (the fund management business) and Capital Dynamics Sdn Bhd (the investment advisory business) respectively.

To put this in perspective, with an annual subscription fee of RM720 per person, how many subscriptions does Capital Dynamics Sdn Bhd need to generate RM2.9 million? This comes up to over 4,000 subscribers in order to generate an income equivalent to that of the advisory fees that it charges ICAP.

c) Views on the Capital Dynamics group as a whole

While many people "condemn" Capital Dynamics for being a China-man company in a derogatory nature, I find it somewhat puzzling because from a historical perspective, China-men are one of the shrewdest bunch of business-people. I believe that Teng Boo is fully aware of the title and will proudly wear it across his forehead.

They may be criticized for their overly tight pockets but from a bigger perspective, no one can deny that the group is progressive enough to grow internationally and currently has offices in four countries. I think that in order to harshly criticize Teng Boo and Capital Dynamics for its failures and shortcomings, we must also be fair in recognizing its achievements.

Teng Boo has grown a business that started from nothing into a multi-million dollar business that spans across the continent. No company in the world is perfect. In fact, I may have highlighted many of the company's shortcomings simply because they are easier to spot. What we must keep in mind is that to have achieved the kind of success that Capital Dynamics has, it must have also done something right.

However, it is my personal belief that being in four countries is less impressive than it sounds. I will quote one of my favorite business icons, Mark Cuban, who is the billionaire owner of the Dallas Mavericks. Here is an extract from his book, "How to Win at the Sport of Business". If you are budding entrepreneur, I suggest you buy the ebook. It only costs USD2.99 (and please use the link provided).

The whole message is so important that I am going to repeat the whole passage from that particular topic (emphasis mine):

2. Win the battles you are in before you take on new battles

Every one of my businesses has a make-or-break battle going on, and so does yours. There is one battle in your business that you are not winning, or are battling to stay in front.

In our film business, it’s the battle to bring in more box office than we spend getting people to theaters in the first place. With the Mavs, it’s the battle to make our game experience in the arena and on TV so compelling that it’s strong enough entertainment on its own to draw an audience and make our advertisers happy. I can’t control how a game on the court goes, but I can make sure that if you come to a game or watch one on the tube, you have a great time. At HDNet, it’s how to keep on raising the bar and find or create programming that our subscribers feel committed to and take ownership of. I can spend as much money on a show as a big network, but those big networks are wrong 95 percent of the time. It’s not a model I want to copy. It’s the ultimate challenge to find a new way to get results.

These literally are the three problems that I focus on. They aren’t issues that just popped up. They have been challenges in these businesses for years and present moving targets that require my ongoing focus, today and most likely for years to come. It’s an intellectual challenge I really love. It’s truly the sport of business. Sure, I deal with operational issues, but pretty much every other strategic element of my businesses I have learned to delegate—that’s not easy for an entrepreneur to do. In the past, I would have taken on anything and everything that I thought I could add value to. I had to be in the middle of everything.  No longer. I’ve learned to hire people in whom I can build trust, and let them take the ball and run with it.

Of course, not every business has bench strength. Some entrepreneurs won’t hire people who have complementary skill sets. Others are just small businesses that can’t afford it yet. For those businesses, this rule is all the more important. If you are the main engine behind your company, taking on new challenges will only dilute your ability to win the wars you are in and increase the risk of injuring your primary business or core competencies.

In fact, this is the biggest issue I have with the NBA and our international efforts. It’s not that I think there is no opportunity internationally—there is. The problem is that the “CEO” of the NBA is at the front and in the middle of every effort. His efforts are diluted on both domestic and international fronts, and we risk losing multiple important battles. If the metrics for the lines of our business that drive 75 percent or more of our business were skyrocketing, that would be one thing. But we aren’t winning the battles we are in. We aren’t losing, we aren’t winning, we’re just treading water.

International isn’t going anywhere. China, for example, has great potential and it always will. If we were dominating in our core revenue lines, I could easily be the biggest proponent of an international NBA effort (short of contributing our players to competitive enterprises). The NBA needs to find someone who can lead and win each of the battles. Trying to use one person as the leader for both is a huge mistake that is not worth the risk it exposes us to.

I have used the same logic with HDNet. HDTV is taking hold all over the world. In many areas it’s booming. We sell content to those flourishing markets via salespeople, but I have said “no” to offers to bring HDNet to the rest of the world as a linear or online network. Why?

Because dealing with the rest of the world takes a lot of time and focus. It takes going out and hiring people to run it, and training them and then being available to help support their efforts on an ongoing basis. Every minute that I or our top people spend dealing with the rest of the world is a minute not spent fighting the battle to make HDNet and HDNet Movies the best networks they can be here in the U.S. We are not a business that has maximized our growth here; we are just starting to accelerate.

Taking any resources away from that battle would be a huge mistake.

It’s the same with Landmark Theaters. We could go international, but winning the battles here is far more important and, again, every minute our leadership spends on the rest of the world is time and focus lost on Landmark in the U.S.

It’s a huge lesson for entrepreneurs. Win the battles you are in first, then worry about expansion internationally or into new businesses. You do not have unlimited time and/or attention. You may work 24 hours a day, but those 24 hours spent winning your core business will pay off far more. It might cost you some longer-term upside, but it will allow you to be the best business you can be. To use a sports metaphor, get the fundamentals right and then add to your base skills before you try to take on the trick shots.

3. You can drown in opportunity

Few businesses only have one opportunity. Every entrepreneur’s mind goes crazy with the new and exciting things she can do beyond the new and exciting things she is already doing.

The risk is that you can drown in all these opportunities. Far too often when an entrepreneur hits a rough patch or competitive challenge, the temptation is to “turn on the thinking cap” and find something new for the company to do. Don’t fall prey to the temptation. As an entrepreneur you have to know what the core competencies of your business are and make sure that your company focuses on being the absolute best it can be at executing them.

Bottom line is this: If you are adding new things when your core businesses are struggling rather than facing the challenge, you are either running away or giving up. Rarely is either good for a business. In fact, by chasing these opportunities, you may be assuring that you drown in them.

These rules are things I check off against before I undertake new elements of a business.

I think that is mighty sound advice coming from a billionaire businessman. There are still a myriad of core problems that Capital Dynamics has yet to iron out in its three "old" offices. While Teng Boo is a proud self-declared 24/7 type of worker, the fact remains that he only does have 24 hours in a day. And every hour spent elsewhere is an hour not spent on the core issues of the business.

That concludes the fourth issue out of ten. In the next part, I will start talking about the issues surrounding the working environment and the company culture.

Being An Analyst At Capital Dynamics - Part 11

Volume 4 Issue 39: Intelligent Investing

I am going to just cut to the chase for this part with issue number four.

4. Perception

One of the most controversial issues at Capital Dynamics is the general perception towards the company. Well, I guess when we talk about the general perception, we have to first define the area in which we are talking about. There are several key perspectives when it comes to looking at Capital Dynamics. Capital Dynamics has two businesses, which are investment advisory and fund management. I will not delve into detailed information that is readily available on the company's website.

Instead, I will go through what I think the general opinion of the public is of their two businesses and of the group as a whole, and try to provide an interpretation from an insider's perspective of what is actually going on.

a) Views on the Fund Management Business

Let me first talk about the perception towards the fund management business. Capital Dynamics Asset Management (CDAM) is the fund management arm of the Capital Dynamics group in KL. At present, they manage personal investment accounts and also icapital.biz Bhd, which is a listed closed-end fund in Bursa Malaysia. Its two other offices in Singapore and Sydney also provide similar services.

In my opinion, the investment public typically perceives Capital Dynamics and icapital.biz Bhd (ICAP) to be synonymous. Some even use both names interchangably to refer to Capital Dynamics. One of the reasons for this is that, quite simply, ICAP is the more famous of the two names. The name of the fund typically precedes the name of the fund manager.

Moreover, ICAP has a history of relatively good performance when it comes to investment returns. At pixel time, its NAV reflects an annual compound return of about 16.0% (since its inception in October 2005). In comparison, the KLCI recorded an average annual gain of 8.3% over the same period.

In fact, ICAP's NAV managed to record annual compound returns of over 20% prior to 2011. But it has fallen to a much lower level since then. Nonetheless, because of this strong performance in the past, ICAP has developed a very strong fan-base. If one looked hard enough over the internet, one can still find blogs that are dedicated to the performances of Teng Boo. It suffices to say that, Teng Boo is more than well-known as a fund manager in Malaysia.

You may be surprised at my choice of the word "fan-base", but that is what it really is. This was evidenced by the strong support for Teng Boo's recommendations during ICAP's 2012 AGM. I will leave this AGM issue for later. What I would like to point out here is that the public opinion of Teng Boo and Capital Dynamics as a fund manager is generally positive, particularly among the investors of ICAP. This is usually supported by the investors' experience when it comes to the amount of effort that Capital Dynamics puts into its roadshows, seminars and presentations for the benefit of investors.

I have the benefit of being able to observe Capital Dynamics as an insider and an outsider. I believe that it is hard to argue against the fact that Teng Boo does take investors' interests to heart. This is evidenced not only by the amount of effort that Teng Boo himself puts in, but also the amount of effort that is expected from all the staff who work there.

From an outsider's perspective, the amount of work that is done on behalf of investors are usually not entirely apparent.  But I think that more often than not, every one at Capital Dynamics has performed significantly beyond their duties to benefit the interests of investors. Because of its past performance and this investor-centric attitude, Capital Dynamics has developed a very strong supporter base. So much so that pretty much anyone among the fan base is willing to take every word that Teng Boo says as gospel. 

Nonetheless, the events surrounding the 2012 AGM of ICAP has shed light into more cynical views about Capital Dynamics and Teng Boo. For example, you can see this if you visit this particular post on Capital Dynamics' facebook page. I may not be paraphrasing at 100% accuracy here, but basically, Capital Dynamics was alleged to have "unfairly" charged management and advisory fees towards ICAP. I say "unfairly" because the company has done nothing against the law. However, certain parties were disatisfied with the fact that CDAM and CDSB have been collecting a total of 1.5% of the NAV as fees for its services despite having below average performances in the past year. Moreover, the company was also accused of not doing its job to narrow the discount (over 20%) of ICAP's price from its NAV. To some extent, it was even claimed that ICAP is worth more dead than alive.

One of the most commonly proposed methods to narrow the discount to NAV is a share buyback program. While this is not the time or place for me to go into the pros and cons of a share buyback, I think that such a suggestion warrants a closer look. While this issue has been addressed before at previous general meetings, I personally don't think that it has adequately appeased some disgruntled shareowners.

One of the reasons given by Capital Dynamics against a share buyback is that it will not work in a Malaysian context. They cited evidence that the discount did not narrow despite strong purchasing by two large institutional investors from London. Because of this, Capital Dynamics has proposed an alternative method that they are still not allowed to disclose. On top of that, Capital Dynamics has also claimed that a closed-end fund is greatly different from a company like Berkshire Hathaway and other businesses (that typically do share buybacks) because businesses generally have regular cash inflows while ICAP does not. As a consequence, using up ICAP's cash for a buyback will reduce its available cash for other investments.

Nonetheless, I feel that there are still obvious counterarguments against either reason provided by Capital Dynamics. For starters, by announcing a buyback program (as opposed to a one-off buyback), ICAP will generate a signalling effect to the investment public that ICAP will not allow its discount to go above a certain range. A signalling effect works via an expectations mechanism where buyers and sellers of ICAP in the market expect the discount to be no more than 10% (for example), and hence will trade accordingly, even without ICAP going into the market to purchase its own stock. As a consequence, ICAP may end up using up less cash than it would to fully narrow the discount.

In addition, ICAP has been holding on to its cashpile for more than a year. It is difficult to believe that there have been no suitable opportunities in Bursa Malaysia for the past year or so. While the investment decision is entirely up to the discretion of the fund manager, a claim that there are no suitable opportunities throughout an entire year is highly suspect.

Nonetheless, let us assume that the claim is true. Given that ICAP trumpets the fact that it expects its shares to trade at a premium in the future, it makes even more sense for ICAP to do share buybacks at a 20-30% discount and subsequently re-sell them when ICAP trades at a premium. This will restore its cash level to invest in other opportunities. In fact, this raises more cash than ICAP had previously used to do the buyback due to the premium. This can benefit shareowners who hold on to their ICAP shares throughout the buyback program all the way until the shares trade at a premium. 

This is not the first time that Capital Dynamics has been accused of not taking its investors' interests to heart. Ah Yap, a prominent stock market blogger, also highlighted an issue with the performance fee structure charged by Capital Dynamics before. It is a pretty long post, but I think it is worth your while if you want a more complete picture of what is going on. Essentially, Ah Yap argues that the i Capital Global Fund and the i Capital International Value Fund double-charges its investors for its performance as it does not have a high watermark in its performance fee structure.

-----------------------------------------

(Wonkish Warning: Read this part only if you already know about the performance fee structure of ICGF and ICIVF)

Teng Boo has time and again provided hypothetical evidence by claiming that a 6% compound return per annum is in fact a tough hurdle to beat. I find this a little hard to swallow when Teng Boo claims to be one of the best fund managers in Malaysia. With this proclaimation, and given his track record, generating 15% compound growth per annum should not be a problem for Teng Boo. What his explanation typically sidesteps is the fact that the difference between 15% and 6% compound rates of return after 30 years is huge. In fact, it would make the hurdle completely meaningless. Let us look at figure 1.

Figure 1

I think the picture depicts very clearly how miniscule the 6% annual compound rate of return (ACROR) is compared to the 15% ACROR. At the end of Year 30, the NAV would be about RM58.

Now, assume that in Year 31, the NAV of the fund drops by 20% to RM48, but returns to RM58 in year 32. A performance fee of 20% is charged on the amount in excess of a 6% annual rate of return (AROR). This means that from RM48, a 6% gain would equal RM51.

Hence, the excess return would be RM7 (RM58-RM51). The performance fee will be 20% of RM7, which is RM1.40. This means that although at the end of Year 32, the NAV is exactly the same as that in Year 30, the investor would be required to pay a performance fee of RM1.40 (or 2.4% of NAV). This seems rather exorbitant considering the investor did not become richer from Year 30 to Year 32.

Why did I painstakingly go through the above calculation? To cement my point, let us now consider an extreme scenario where the NAV zigzags for the next 30 years - see figure 2.

Figure 2

Now, you can see that the 6% ACROR hurdle rate is barely halfway to where the NAV is even after 30 years of absolutely no performance. The NAV in Year 60 is exactly where it was in Year 30. However, the fund would have charged a performance fee of RM1.40 on alternate years (when the NAV jumps from RM48 to RM58). So, while the investor does not get any richer from Year 30 to Year 60 (in fact, he/she would get poorer due to inflation), a grand total of RM21 (RM1.40 x 15 years) in performance fees would have been charged.

This would be a whopping 36% of the NAV in Year 60. I think the above example clearly illustrates that when we go out far enough after many years of strong performance, the performance fee structure no longer incentivizes the fund manager to continue performing in the best interests of the investors. In fact, the fund manager is incentivized to take exceptionally high risks by purchasing high volatility stocks as up and down movements will generate high performance fees for the fund manager, even though it does not create any wealth for the investors.

(End of wonkish portion)

-----------------------------------------

The above illustration would make it seem like Capital Dynamics is out to get you in 30 years time. Let me humanize the above picture and put things into a more realistic context. Do I honestly think that Capital Dynamics is out to get you? After working my butt off for three years in the company, I can confidently say that the answer is a resounding "NO".

Capital Dynamics has in more ways than one gone above and beyond its call of duty to serve its investors' interests. It is not the intention of Capital Dynamics to cheat its investors. I would probably attribute this to an oversight and perhaps lack of urgency in fixing the mistake.

In this regard, I strongly believe that Capital Dynamics has not done nearly enough to appease its investors. The performance fee structure is clearly not ideal. It is not because the company is unaware of such a problem. I am sure that they are aware. Honestly, I don't know why such a problem is allowed to fester. While this issue will not create huge problems in the near future, the scenario I highlighted above clearly demonstrates that it is a serious problem if allowed to continue. Since we are already aware of such a serious issue, it is imperative that it is tackled before the company moves on to other projects.

Otherwise, its reputation for maintaining its integrity would be in danger. As Warren Buffett says:

It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.

I will continue with my discussion in Part 12 on the outside views of the investment advisory business as well as about the group as a whole.

Being An Analyst At Capital Dynamics - Part 10

Volume 4 Issue 38: Intelligent Investing

Perhaps one of the greatest mentors of all time

This really turned out to be a much longer hiatus than I had initially intended. After having delayed several posts, I think it wouldn't be too long before I start gaining a reputation for being a procrastinator. As we all know, it takes many years to build a reputation and only five minutes to destroy it. I pride myself in being a diligent blogger and will attempt to salvage whatever remainder of that good name by completing this series before the Chinese New Year.

Without further ado, I would like to expand a little bit more on the second issue that I wrote in the previous part.

3. Mentorship

As I mentioned in Issue No.2 in the previous part, the training program at Capital Dynamics is very much akin to a swimming analogy. I will repeat it here:

New analysts are metaphorically thrown into the deep end of the pool to learn how to swim. As long as the "coach" believes that the analysts are able to float and not drown, he will leave the analysts to fend for themselves. However, when the analysts are perceived to be drowning, the coach will then reach into the water to pull the analyst up.

What this means is that, there is no structured training program for analysts, and there really shouldn't be. I think what a lot of analysts expect is to be given financial models and pre-formatted Excel spreadsheets (or at least, taught how to make them) so that they can crunch out the standard ratios by inserting several key variables.

For those of you who are more astute in reading investment reports, some of the ratios would include P/E, P/B, ROE, ROA, ROCE, etc. Then, by observing the trend and forming a predicted picture of what is going to happen in the next 12 to 24 months, the analysts will subsequently try to value the company and put a call on whether a particular stock is good for investment.

I think the obvious question now is, is that what it takes to be a good analyst? I will not pretend to know what it takes to be a good analyst. After all, all of the above techniques are part of the CFA syllabus and that is what most analysts are taught. My personal opinion is that those are great tools to help analysts cover their asses. Now, every one in the world knows that we cannot be right 100% of the time. But those acronyms that are computed and churned out by analysts are great ways to cover the butts of analysts whenever their predictions are wrong. Of course, this is a cynical way of putting things, but this is in general true.

The only way (that I can think of) to align the interests of the analysts with the investors is for the analysts to put their money where their mouth is. That is to say, the analysts should have a significant stake in what they claim to be good investments. While this may not be the case in reality, and very often raises other issues, some of the world's best investors have a significant portion of their wealth invested alongside their clients. Some of the names of these "funds" need no introduction: Berkshire Hathaway, Tweedy Browne and Value Partners. The managers of these asset management companies are all majority shareholders of their respective funds. To paraphrase Warren Buffett, we want our cooks to eat their own cooking. But I digress.

Back to the issue of the "mentorship" in Capital Dynamics. Continuing from the analogy above, swimming in the deep end without fully knowing how to swim can be a bit scary. As I mentioned in Part 9, one of the main goals of such a training program is to force analysts to learn how to overcome adversity.

The consequence of this is that it can be a bit unsettling in the beginning because you may find that there is no specific feedback or direction given to you. Of course you will be assigned topics or areas to cover as an analyst. But the extent and depth of your research will be left to you and there will be very little hand-holding in terms of advice and what you should be writing about. To a great extent, what you can write about and how deep you can go is greatly determined by your own abilities and the amount of effort you are willing to put into it. This is very similar to a startup. You will tend to have this unsure feeling of whether you have done a good job or not. Because let's be honest, even if your boss says your research is good, it is just one person's opinion.

If you look at it this way, I think the bar that is set for you will be much higher than what is set by your boss. You will have to constantly do better than your best in order to satisfy yourself, and to truly know that you have done a good job, and more importantly, to improve yourself. I think that is one of the mindsets that one should bring in to Capital Dynamics to help you survive. This is by all standards a very tough hurdle and that is why working at Capital Dynamics is most certainly not for everyone.

Nonetheless, what I found to be a bit lacking or missing from the analogy are two very crucial elements. For starters, as I mentioned in Issue No.2, the analysts who fail to meet the requirements of the company are very often left stranded and are "gently coerced" to leave the company on their own accord. Technically, Capital Dynamics does not issue any formal request for the non-performing staff's departure. But that is what he/she would feel like when there is no feedback on their work. I would equate such a scenario with the coach having allowed the swimmer to drown. The analogy given at the beginning of this part is told to all analysts and interview candidates and I believe that the least the company should do is fulfill their end of the bargain in not allowing the analysts to drown.

The second and perhaps more crucial element to the swimming analogy is that, while throwing someone into the deep end may seem like a great way to teach the basics of swimming, but who among us has ever heard of a world class swimmer that does not have a coach?

I do agree that at the entry level, analysts should be trained with a broad base of skills to cultivate their resourcefulness. As a fresh graduate, we tend to be easily influenced by our mentors and once we get used to a particular way of doing things, it is much harder to step out of our comfort zone. That is one of the drawbacks of  over-relying on a mentor. As a consequence, more often than not, it would become very difficult to become better than our mentor. This is one of the things that Capital Dynamics is trying to avoid.

In contrast, having a broad-based training without constant supervision allows an analyst to develop in areas that he/she is the most attuned to. Moreover, the analyst is encouraged figure out the right questions to ask and to try new ways of finding answers. This is often not possible when you have a boss who thinks his way is the right way and all other ways are inferior. In some sense, Capital Dynamics gives a fair amount of freedom when it comes to research methods but employs a very strict framework. It is my belief that the benefits outweigh the costs when analysts are given a lot of freedom to develop in their initial years.

Nonetheless, the real battle begins right after the initial stages. It is not easy to determine when this truly happens, but I generally feel safe sticking with Malcolm Gladwell's guideline of 10,000 hours. This means 10,000 hours of solid analysis work. Beyond this period, I think an analyst requires more specialized training and direct mentorship to bring the analyst to the next level.

As I mentioned before, Teng Boo expects world class performances from all of Capital Dynamics' staff. However, like I mentioned earlier, all world class swimmers have coaches. I see the role of the coach as being a jungle guide. While training to be a ranger or trekker, it is perhaps more beneficial when a rookie learns the ways of the jungle on his own to hone his survival instincts. However, the role of the jungle guide is to ensure that the rookie doesnt get "too lost". The jungle guide ensures that the rookie is kept roughly on the right track. Otherwise, he might just never find his way back.

This is what I found to be particularly lacking in Capital Dynamics. My opinion is that Capital Dynamics is in great need of a jungle guide. Not someone who is there to teach the analysts technical skills, but someone to ensure that the analysts do not veer too far off from their destination.

We have once again arrived at another natural stopping point. I will continue to work on this series in order to complete it before the Chinese New Year. Stay tuned for more!

Being An Analyst At Capital Dynamics - Part 9

Volume 4 Issue 37: Intelligent Investing

Seeing how long Part 8 was, I had decided to take a little sabbatical of my own from blogging. On top of that, I had some medical matters that I needed to settle before all is right again. It took me about two weeks to achieve 99% recovery and it would seem that all is well.

Now, as promised, this will be the second section of my journey as an analyst at Capital Dynamics, where I will look at some of the more important issues about the company. I foresee that this will be a really long and juicy post. Which is why I have decided to do a Top 10 post ala Guy Kawasaki. Instead of underscoring every single thing under the sun, I will highlight and provide insights into the top 10 core issues about Capital Dynamics to prevent myself from being overly long-winded (more so than usual).

1.  Startup-ness

I suppose it is only apt that I begin with what I had promised all the way back in Part 4 and raised it again in Part 8:

Moreover, Teng Boo has time and again emphasized that Capital Dynamics practices a very startup-like culture. Essentially, what this entails is that occasionally, staff will be called upon to perform ad hoc job functions or whatever that needs to be done (again, big or small) to ensure that events or projects run smoothly.

Why do I think that working in Capital Dynamics is very similar to working in a startup? First, the structure is very flat (i.e. there is no middle management), and that means that everyone has to be very independent. You will not have several senior managers hovering over your shoulders to check if you have finished the work that they assigned you. You will not be encumbered by the office politics that are prevalent in a corporate culture that is filled with middle-management.

Nonetheless, as you probably know, to work in a startup, there is very little structure and the job scope is usually not predetermined. You just play as a team and do whatever needs to be done to make sure that the company works out. There will be times when you will be called upon to perform tasks that are outside of your assigned job scope. The hours will be long, but as long as you love what you do, it won't be a drag. That is more or less the mentality and attitude that is expected at Capital Dynamics.

A very good example of this startup-ness was described in Part 8:

"...Capital Dynamics also organizes other events, such as seminars, road shows and annual investor gatherings. These events typically call upon most of the staff to participate in the preparation. In the run up to the events, staff are assigned ad hoc tasks that can appear menial and mind-numbing. For example, we may be required to help out in folding flyers and inserting them into envelopes to be sent out for investors, or given a list of investors to call up to confirm their attendance to the events, or asked to help out with packing the souvenir bags that are prepared for the investors and attendees."

That is why, as I said, your motivation has to come from your genuine interest in the work. This does not just include the tasks that you are assigned. My personal belief is that how well you do your job should reflect how much you care about the investors/subscribers, which are the clients of the business. If the first thing that comes to your mind is "I am not being paid enough to do this, I will not gain anything from this", then you should probably not work at Capital Dynamics (or any startup for that matter).

2. High turnover

Because of the working environment and culture that I mentioned above, Capital Dynamics suffers from an unusually high workforce turnover. Based on very rough and conservative estimates, I would put the number of people who have joined and left Capital Dynamics since I was there to be more than 100. To put this in better perspective, this would be around three people per month out of a company with a total of around 50 staff (this number varies).

I think what everyone wants to know is, "What does this say about Capital Dynamics? ". As I mentioned right from the beginning, working for Capital Dynamics is simply not for everyone. This is especially so due to Factor No.1. On the surface, one of the main reasons that a lot of the staff resign is due to the high expectations that Capital Dynamics has on its staff.

Essentially, what this means is that the company demands a great deal of effort and sacrifice from its employees and very often, arguably without the commensurate compensation. Generally, Capital Dynamics expects its staff to take pride and job in providing top quality service to all its investors and subscribers, even at their own expense. This brings us back to the start-up mentality. In a start-up, most workers would be working without appropriate compensation out of a garage and being forced to eat leftover pizza/pasta day in and day out to ensure that they churn out a product that meets, if not exceeds, the needs of the consumer.

Naturally, a start-up culture provides tremendous amounts of adversity to the employees. There will be countless challenges and sacrifices. You will most likely have to work seven days a week, at least 15 hours a day (often more) and your social life will be non-existent. Fortunately (or unfortunately), this is not what it is actually like in Capital Dynamics. After all, Capital Dynamics is technically not a start-up. Nonetheless, it expects such spirit and mentality from its staff. Because of the demanding nature of such a culture, people who cherish work-life balance, and those who choose not to sacrifice the social aspects of their lives are unlikely to stay at Capital Dynamics for more than a year.

However, it would be absurd to place the entire blame on the staffs' inability to cope with the high demands of the company. Granted, the working culture at Capital Dynamics attracts a very niche group of employees, especially those who are driven and come from high-achieving backgrounds. But evidence shows that even high achievers leave the company, which begs the question, "Why?". Now, I can only postulate a reason, which may not be the entire cause of all staff turnover, but I think it is one of the major contributors to the departure of high-achievers.

I am operating under the assumption that most fresh graduates who are highly motivated seek employment because they are in search of a good mentor. The working environment at Capital Dynamics is such that the learning process is best described in the following analogy:

New analysts are metaphorically thrown into the deep end of the pool to learn how to swim. As long as the "coach" believes that the analysts are able to float and not drown, he will leave the analysts to fend for themselves. However, when the analysts are perceived to be drowning, the coach will then reach into the water to pull the analyst up.

This is what is shared with most candidates about the kind of training that is provided to them if they join Capital Dynamics. Because of this, there is no direct mentoring, which can make learning a struggle in the short term. New analysts have to first learn how to learn, and this is especially difficult given that the culture of learning in Malaysia is predominantly enshrined in the ways of being spoon-fed.

While many would argue that many of the staff leave the company due to the long hours and poor working environment, I think that is merely a symptom of the disease (so to speak). I believe that most motivated employees would be willing to sacrifice their "demands" for work-life balance if they have a meaningful learning opportunity at the workplace. Below is the result of a survey of 1,145 people done by Jobstreet on the main factors influencing the unhappiness of employees at the workplace.

You will notice that only 9% deem working hours as the reason for their unhappiness. On the other hand, the biggest factor contributing to unhappiness in the workplace is the scope of work. What this means is that most employees want to have job scopes that challenge and engage them. They want to know that they are applying themselves meaningfully. Or at least, they want to know that they are learning something important in order to build a meaningful career.

The next obvious question is, "How do we know that our work is important?" One of the best indicators of importance of your work is your boss' appreciation for it. One can typically conclude that if the boss does not appreciate our work, it probably means that the job is a useless one. Is this really true?

At Capital Dynamics, this is not necessarily the case. Because of the "swimming in the deep end" style of training, there is very little feedback on each and every staff's work. This can be commonly misunderstood as a lack of appreciation for what you do. If no one says anything good or bad about your work, common sense would probably lead you to believe that no one really cares. And to a high achiever, being "forced" to do work that "no one really cares about" is simply unacceptable.

On one hand, it is easy to attribute the blame on the mindsets and attitudes of the candidates that the company hires. But in adhering to the mantra of self-criticism that Capital Dyanmics often expounds, I believe that Capital Dynamics should examine the possible role that it can play in reducing the staff turnover. It would be an extreme waste if so much effort was channeled into recruiting the best talents from all over the world if it did not channel the corresponding amount of energy and time in actually keeping those talents.

The company puts in a lot of effort in hiring high quality candidates who have demonstrated strong self-motivation in academics. Yet, along the way, when they work at Capital Dynamics, most of that motivation either dissipates or is no longer apparent. I believe that this often stems from mismatched expectations. While the targets and goals are made clear to all analysts, one of the main concerns is that many of them don’t know how well they have been performing. It is particularly more destructive when we have analysts who come from backgrounds of high achievements. They are more often than not their harshest critics. By not knowing how well they are doing, their thoughts can easily spiral towards the belief that they are performing much worse than they actually are. It also does not help when some of the confirmed staffs are unable to meet the set targets. This creates a lot of unnecessary self-doubt. Because of this, many analysts lose a lot of self-confidence, and with that, their self-motivation as well.

Teng Boo expects all staff to consistently perform better than their best. This required amount of self-motivation only exists innately in a handful of people and takes nurturing to develop. It would seem counter-productive to keep “encouraging” those that do not make the cut to leave, or to drive them away. It is also easy to dismiss these analysts as “unqualified”. But I think that Capital Dynamics can and should channel more effort into harnessing more out of those who are almost there but just not quite there yet. Sometimes, a little boost can go a long way in helping them break the glass ceiling. This would be akin to a gentle breath of air to reignite a dying ember (I can be poetic too). This will not only ensure that the time and effort put into recruiting and training our staff would go on to serve the company well, but could also boost the overall morale of all other analysts.

As an aside, I was recently informed that Capital Dynamics has taken some further measures to improve its staff retention rate. I see this as a positive sign that they intend to take this issue more seriously but I personally think that there is a lot of work to be done. As I mentioned before, in order for us to improve in anything, we must put in the extra effort in monitoring its progress and this remains to be seen.

Seeing as it has been a long time since I posted anything, I decided to post this first while leaving the other eight issues for later parts. Furthermore, it appears to have been a pretty long but interesting read and it would serve all of us well if we take this as a natural stopping point. Stay tuned for more issues in the next part!

Dedication, Work, Commitment - Thierry Henry

Thierry Henry is perhaps one of my favorite personalities of all time. I even dedicated a post to him some time ago. Here, he speaks about what it means to be world class.

Truly a world class personality. And this is in case you forgot why: