Volume 3 Issue 5: Two-Cent Economics

Finding Inelastic Demand to Fight Inflation

In the previous issue of the Mainstreeter, we brought up how companies that produce goods with price inelastic demand could raise prices to pass on the effect of higher costs to its customers. This would in effect, pass on inflation to their customers, and thus buffering their profits.

While we can go into great detail about what price elasticity means and talk about its mathematical derivation for the sake of precision, we should keep in mind the goal of using this concept as a tool to help us look for good companies to invest in.

Because of that, we would only venture as far as the intuitive definition of price elasticity. In the broad sense, as the term elasticity suggests, price elasticity of a good measures the sensitivity of its quantity demanded to a change in price.

In all our explanation, we shall assume that the goods we are discussing face normal demand curves, in that when the price of that good increases, the quantity demanded will fall. Now for the formal definitions.

A good that is price elastic is one which would have a more than proportionate decrease in quantity demanded for an increase in price. Conversely, the quantity demanded for a price inelastic good would decrease by less than the proportionate price increase. 

Here is a better illustration. For example, if the quantity demanded for cheesecakes fell by 15% (more than 10%) when the price of cheesecakes increased by 10% during the Chinese New Year, then the demand for cheesecakes would be classified as price elastic.

In the case of vegetables, the 10% increase in price during the same season caused the quantity demanded for  vegetables to drop by 5% (less than 10%). This means that the demand for vegetables are price inelastic.

While it may need a bit more justification, I would just like to point out that when the demand for a particular good is price inelastic, an increase in price would raise the total revenue received for selling the good. This is because the rise in prices more than offset the decrease in quantity demanded. Also, a relatively price inelastic demand curve would allow the producer to pass on rising costs to consumers by raising prices. Bear in mind that it is in this context that we are looking at price elasticity.

Now that we have the definitions out of the way, what causes the demand for goods to be price inelastic? That is what we want to look for when we are analyzing the products of the companies that we are researching.

1. Availability of substitutes

This is intuitive. If the good that the company we are looking at produces has many substitutes, it would be less able to raise prices because its customers could easily switch to buying from the company's competitors. Hence, we want to invest in companies that produce goods which not many other companies can produce. For example, aeroplane engines. Not many companies in the world can produce aeroplane engines apart from Rolls-Royce. In addition, the quality of the engines also play a huge role because of the safety requirements needed in the aeroplane industry and not many people can match that.

2. Price as percentage of income

When a good costs very little as a proportion of our income, we tend to pay less attention to its price increases. Hence, the good would be relatively price inelastic. If we are talking about say, a car, then any amount of price increase would create a bigger deterrence to purchase as the car comprises a large portion of  our income.

3. Degree of necessity

This ties in with the vegetable example. Goods that are perceived as necessities tend to be price inelastic. Another example would be banking services. Most of us need to use banks for savings, loans, credit card purposes.

4. Brand loyalty

Well, this is pretty self-explanatory. Some of the more famous brands I can think of are probably Coke, Apple, and Intel. Barring anything that would give these names bad reputation like what Toyota is facing, it would be difficult to disrupt the brand loyalties that these companies have. Hence, an increase in prices would unlikely change the preferences of their customers.

That said, it would be rather difficult to find companies that produce goods that have all of the above factors. Nonetheless, we can look for goods that have as many of the above-mentioned qualities as possible. Bear in mind that there are a few other minor factors that I left out, but these should be a good enough guideline to get you started.

Of course, price elasticity may not have to be applied to only consumer goods. It can be applied to intermediate goods as well. So, when you try to think of goods that are price inelastic, do not limit yourself to end-products. Think of the ingredients and parts as well. These will help you find companies that can maintain robust earnings through inflationary periods. This is particularly important as we are possibly experiencing a period of high inflation right now. Firms that are not flexible enough to pass on the rise in raw material costs will take a hit in their profit margins and could even suffer losses in the coming quarters.

That could be a good excuse for the stock market to cool off even more and provide some buying opportunities.

Volume 3 Issue 4: Intelligent Investing

Investing in Inflation - Part 2

In Part 1, we established how inflation is one of any investor's worst enemy. In this issue of the Mainstreeter, we will take a look at some of the possible ways to invest, and will venture into explaining why investing in equities can possibly counter inflation better than all the other investment vehicles.

In Economics @ Home Volume 1 Issue 11, we discussed other possible means to invest because of the fact that placing your money in fixed deposits is a slow but sure way of becoming poorer. Here is an extract from that issue:

"Although more and more people are becoming aware of investing their money in the stock market, many are still wary of its risks. People are afraid of the unknown and are even more lazy to learn about the stock market. I am not here to allay your fear of the stock market, but merely to explore some alternatives that might actually generate some real positive returns. I will tackle these investment vehicles in the order of least practical to the most practical in my own point of view. I take no responsibility for the performance of these investments because most of them require some amount of knowledge and skill as well as a lot of hard work. After all, there is no such thing as a free lunch. I cannot and will not advise anyone to just dump your money in any of these vehicles and hope that they generate luxurious returns because that is not possible and it is also illegal for me to induce purchases in some of these investments because I do not have an investment advisor license.

1. Fixed Deposits

I cannot mention enough how useless these instruments are in terms of growing your funds. The era of high interest rates are gone. With expected inflation to be low in the coming years, there is very little chance for interest rates to be scaled upwards. Even so, on average, fixed deposit interest rates merely track inflation over the long run. In fact, the yield spread could even be used as a predictor of expected inflation. That exemplifies how strong the correlation is. So, there is no way of beating inflation if you place your funds in fixed deposits. However, it is important to note that these investments are basically risk-free.

2. Amanah Saham Bonds (and other Amanah Saham stuff)

I feel these funds are more for entertainment value than for anything else. Even, the ones that guarantee 5% returns for the next however many years still have very little potential to beat inflation. Nonetheless, these instruments are slightly better than fixed deposits, which is why many people are willing to spend hours waiting in line at the banks to subscribe to these funds. An even funnier fund is the one that invests in equities. It promises to track the KLCI. There is almost no skill in that because any person with a trading account can basically allocate his funds equally throughout the KLCI counters and you would basically get the same performance, but without incurring management fees.

3. Property Investments

This one is pretty debatable. While it may generate potentially high returns, I feel it is not practical for beginner investors like you and me because of three reasons. First, its initial capital outlay is extremely high. The down payment to purchase property is very high, which may tie up our funds to invest in other opportunities as and when they emerge. Second, property investment is extremely illiquid. This ties in closely to the first reason because it is extremely difficult to dispose off these investments when we want to realize our gains or purchase other opportunities that we deem to be better. Third, in most cases, we have to incur guaranteed costs while our incoming cash flow is unpredictable. That is to say, we have to pay monthly instalments on our loan while we may have difficulty renting out the property, assuming that the property is already completed.

4. Unit Trusts (Equity funds, to be specific)

This category is huge. There are tons of different types of unit trusts. However, I will focus mainly on equity funds because the rest are just a combination of 1, 2 and equities. First of all, let me explain what a unit trust is. Basically, it is a collection of funds from investors with a particular set of investment objectives placed in the hands of a fund manager to invest according to those objectives. Equity funds is a unit trust fund that invests predominantly in equities (stocks, if you're unfamiliar with the term equities). One of the main attractions of equity funds is that the potential returns tend to be higher. Nonetheless, this is debatable because the performance of the fund greatly depends on the abilities of the fund manager. So, due diligence is still needed when selecting a fund to invest in. Like I have preached before, there's no such thing as a free lunch.

Why do I feel that this is more practical than the previous three investment vehicles? First, the concept of unit trust allows one to invest with very small capital. Minimum initial investments are around RM1,000. Second, if we can find an able fund manager, we can ride on the "expertise" of the fund manager to obtain better than average returns. Typically, decent performing unit trusts average about 8% per annum in the long run. That is far higher than your long run FD rate. As to why the returns are so high, it is because the funds are invested in equities, which are companies listed in the stock market, which (hopefully) run a good business to churn a good profit that allows high returns on investments.

The drawback of unit trusts is, however, the management fees that you have to pay the fund manager. While this is not a fee that you have to fork out money and pay regularly, but it will be deducted from the fund based on the performance of the fund manager. Usually, this fee tends to be rather high. In addition to that, there is a commission that needs to be paid to the agents of unit trusts for marketing the unit trusts for the company. These fees can sometimes eat into the returns of our investments. Nonetheless, unit trusts tend to outperform plain deposits in the long run.

5. Equities

This is the most interesting and possibly the most promising investment vehicle of all. While diving into share investment without any knowledge is risky, knowing what you are doing reduces most of the riskiness involved. It is true that the risks of investments are there, but due diligence to ensure a high margin of safety minimizes the risks involved. Ben Graham, the guru of value investing said "Investing is most intelligent when it is most business-like". This sentence sums up what investing is all about.

Imagine yourself starting a business. Think of a list of criteria of how you want your business to be. These are the criteria that you should be looking for in the companies that you invest in. I do not condone speculation and will never do so. I am an advocate of value investing and the idea of value investing is simple. It is like paying RM5 for something that is worth RM10. If this does not attract you, then it will never attract you at all.

While the idea is simple, the work is hard. Most people would preach the risk-return trade-off in investing by saying that in search of higher returns, we must take more risks. This is totally untrue. What I know to be definitely true is that in search of higher returns, we must do more work. The key phrase of this issue is "due diligence"...

...you should note that one of the most important things in investing is that there is no formula for it. There is no one true way to grow your money. There are many ways to grow your resources. Some are able to grow it at a faster rate, some at a more conservative rate. One thing for sure is that nothing comes for free. Effort is essential."

While it is obvious that I have a huge affinity towards investing in stocks, it does not mean that all other investments are inferior. As I mentioned above, there is no one true way to making huge returns. However, to return to the point of this issue, how can investing in equities beat inflation?

For starters, the potential returns are much higher than fixed deposits and the inflation rate, of course, with the caveat that you do your homework.

The second bolster to inflation is from the firms' abilities to pass on their costs to consumers. There are certain businesses which have the ability to pass on rising costs to their customers through increases in the prices of goods sold. The kind of businesses that have this ability are those that have a price inelastic demand. There are many reasons that may cause the demand for certain goods to be price inelastic. They include the degree of substitutability, degree of necessity, price as a percentage of income as well as degree of loyalty from consumers. We will discuss these factors in a later issue.

What I hope to point out is that in face of inflation, strong businesses are able to maintain their earnings because of their ability to pass on the increase in the prices of raw materials to their customers, fully or partially. This allows them to buffer their earnings. And as an investor, or rather, an owner of such a company, hearing this is good news. This is because the company's earnings would rise in tandem with inflation. In the long run, the value of our investments would rise along with inflation as well, thus protecting our investments from being eroded by inflation. We would be literally investing in inflation.

In short, this would be an extra criteria when looking for companies to invest to add on to our margin of safety.

Malaysia in 20 years?

Today, I am just going to let the picture speak for itself. The picture below compares China in 1990 with 2010. What do you think Malaysia will look like in 20 years?

Volume 3 Issue 4: Two-Cent Economics

The Entitlement Attitude - Final Part

In the past two issues of the Mainstreeter (here and here), we saw how damaging the entitlement attitude can be and hopefully, you would have noticed how appalling it can be as well. It is definitely close to the top in the list of things an employer would hate to see when recruiting. For all our sakes, I hope that when you become an employer or when you are in charge of hiring, you would not have to meet with such candidates.

In addition, we also looked at how the entitlement attitude manifests and hopefully we are all able to take a brutally honest look at ourselves and be self-aware enough to avoid making the same mistakes. In this issue of the Mainstreeter, we will take a look at some measures to avoid this attitude of entitlement.

For starters, as I mentioned in Part 1, one of the most scary things about the entitlement attitude is the fact that the world is constantly moving forward. The moment we let go of our guard and be complacent, the world takes a step forward and consequently, we slip a step backwards. We are not just competing within the Malaysian context, but with the rest of the world. In this dog eat dog world, we must always be ready to compete.

To be competitive means to be able to contribute to what is demanded by society. Or else, we become redundant. So to stay competitive, we must always stay flexible, and adapt to whatever the situation demands. We must not insist on doing only what is required by our job scopes or what is written in our contracts. To be able to meet the demands of society will ensure that we remain relevant and that allows us to stay competitive. In essence, competitiveness is all about the mindset.

To further elaborate on what I am talking about, here is an excerpt from a speech by Singapore's Prime Minister, Lee Hsien Loong, on what flexibility means:

"Being productive means creating maximum value out of limited resources. If you want to raise productivity, you can either use fewer resources to produce the same value, or deploy the same amount of resources to more productive purposes and generate more value out of that. Singapore businesses cannot expect to save costs by employing more low cost workers. Instead, you have got to utilise resources efficiently, develop new markets and innovate.

Companies have to be nimble and adaptable to respond to changing market conditions. You have got to shift your resources to where they are most needed and most productive. When growth can be negative one year and more than 10% the following year – this is happening to us now – you need enormous flexibility to anticipate changes, adapt and do well. In other words, to underpin your improvement in productivity, you need enormous flexibility. Flexibility in skill, flexibility in wages, flexibility in mindsets.

Skills flexibility means training workers to master multiple skill sets, and be able to perform many different tasks. To enable workers to do this, firms have to strongly support workers’ training, and properly recognise workers who make the effort to acquire additional skills. Then, if you have flexible workers, the firms can deploy them to different areas depending on conditions, depending on business demand, and this will give you an important edge.

Take an example from the hotel industry: Ritz-Carlton, but probably others too. During the recession last year, Ritz-Carlton’s management and staff decided to multitask to reduce costs and save jobs. Business was slow, occupancy rates were low, but the Chinese restaurant still drew in the crowds at wedding banquets and Chinese New Year. It did not make sense to hire workers just for that period, or just for those parts of the hotel. So, all the hotel employees, starting from the General Manager and administrative staff, helped out in the restaurant so as to save on temporary staff and short-term hires. Room attendants also agreed to be deployed to do laundry work, because occupancy was low. Some employees were understandably concerned about handling very different tasks from their usual jobs, but Ritz-Carlton put in place a structured training programme to enable workers to pick up new skills and better understand the other functions within the hotel. And I think it not only helped them through the crisis, but helped with their teambuilding, and helped with their sense of camaraderie and corporate loyalty.

Another aspect of flexibility is wage flexibility. We have been working on this for a long time, since the mid-1980s. After years of patient hard work, many companies now structure their wages not just with a basic wage, but with monthly and annual variable components. And it has become part of the vocabulary for wage bargaining, for collective negotiations. The unions support this as a tool which will buffer workers against economic downturns. Flexible wage systems fully demonstrated their worth during the recent downturn, when more than half the companies froze basic wages, and many reduced bonuses. Along with SPUR and Jobs Credit, this helped firms manage their costs and hold on to most of their workforce.

Let me cite one specific example – CapitaLand. Last January, when the outlook was bleak, the CapitaLand management and executives took wage cuts of up to 20%, with the deepest cuts for management, but everybody being affected some, 3% maybe, but everybody chipped in. Throughout the downturn, CapitaLand worked with its workers and its union, the Singapore Industrial and Services Employees’ Union (SISEU) to cut costs. When performance and business outlook improved towards the end of the year, it reinstated and later on it raised employee wages. This is the model of labour relations that we must aim for – sharing benefits in good times and riding out difficulties together in bad times, with management leading by example.

So to be flexible, you need to be flexible in your jobs, in your wages, but especially in your mindsets. It is the most basic and critical flexibility, because we are in a dynamic environment, you cannot tell exactly what the demands will be, we cannot tell exactly what we need to get the job done tomorrow, which will be the most urgent, the most critical task. We have to quickly hoist in situations when they change, often unexpectedly, and be able to respond. And we cannot simply go strictly by what is explicitly spelt out in collective agreements, or individual contracts, or worse, work to rule, because however we try to anticipate and spell out and be explicit, there will always be unanticipated situations, and then we will have to use our good sense."

Source: SG Press Centre

Another way to avoid the entitlement mentality is to escape from the mindset that doing our best is good enough. Many of us feel that it is OK to fail once we have tried our best. This is one of the ways complacency can develop. For one, it is very difficult to determine what exactly is our best. Very often, we stop short of our best because we stop trying when things get very difficult. We would then be short-changing ourselves on our performance.

Furthermore, if we always stop at exactly at our best, we will always only be able to do our best, never better. This means that we would never be able to improve. As mentioned, with the world advancing at a scary pace, we cannot afford to remain stagnant. So, to improve ourselves, we must not only do our best every time, but also to push further after we have hit the wall that we think is our best. I was only recently made aware of this fact by my boss. Perhaps you can forgive my ignorance, but I just felt that I should give credit where credit is due.

This wraps up the series on the Entitlement Attitude and I hope that the lessons would prove useful in your efforts to become world class. Let us not stop at just being "jaguh kampung".

Volume 3 Issue 3: Intelligent Investing

Investing in Inflation - Part 1

How is this even possible? In this two-parter, I will discuss on how one can invest in such a way that you are "protected" from inflation. Before that, let us first recap and discuss what inflation means and how it affects us.

In the most common of terms, inflation is defined to be a consistent increase in the general price level of goods and services within an economy. If this still sounds too complicated, just think about the price of a cup of Milo at your favorite coffee shop five years ago. It would probably have cost you RM1.00. Today, it is quite likely to cost closer to RM1.50 or RM2.00. That is how inflation is observed in one good. But if only the price of Milo is rising, then it is OK because we can simply switch to other beverages if we decide not to pay too much for Milo. So it is insufficient to label the increase of the price of Milo as inflation.

As I mentioned, inflation is the consistent rise in the general price level. That means that most of the commonly used goods and services are becoming more expensive year after year. It is also insufficient to label price hikes due to certain natural disasters such as floods or earthquakes under the category of inflation. Inflation is reflected in the consistent rise in prices. It does not count when prices go up for 3 months, and then fall back down to the normal level. Inflation is when prices keep going up and up.

Now that we are clear what inflation is, how does it affect us? Most people on the Main Street choose to save their money in the bank. The more careful ones would even place their money into fixed deposits to get a higher rate of return. Let us first consider the simplest of cases. Jim keeps all his savings under his pillow, where he earns zero returns. In the past 10 years, the inflation rate has averaged around 2.2%. This means that prices of goods and services have gone up at around 2.2% per year for the past 10 years. So if Jim were to have saved RM1,000 under his pillow at the start of 2001, the purchasing power of that same RM1,000 would be equivalent to that of RM815.28 today. He can buy much less with the RM1,000 than he could 10 years ago.

Clearly, from this example alone, we can see that inflation erodes the value of our money. What happens when we place our money into fixed deposits? Now, consider Sam, who placed his RM1,000 into a fixed deposit account in a Malaysian bank at the beginning of 2001, and reinvests the capital plus interest at the beginning of each year at the prevailing rate. At the end of 2010, Sam would have saved up RM1,427.99. What a difference this makes compared with Jim who did not put his money into any kind of interest-bearing vehicle.

Let us now factor in inflation. At the average of 2.2% per year inflation rate, the purchasing power of the RM1,427.99 is equivalent to that of RM1,164.21. Imagine that! After 10 long years of saving his money in fixed deposit, Sam has managed to attain a real (inflation adjusted) return of 16.4%, which translates to roughly 1.5% per  annum. I don't need to elaborate further how sad the returns of fixed deposit are.

What makes things worse is that, the only reason Sam is making a positive return is because Malaysia is a highly subsidized country. This means that a lot of the prices of goods are controlled by the government, such as fuel, electricity, water, flour, sugar, cooking oil, fertilizers, etc. Hence, in actual fact, prices of goods around the world have risen at a much faster rate to much higher levels.

Just imagine if the general price level had risen at the same rate as that of the World's Consumer Price Index. The average inflation rate of the whole world in the past 10 years is about 3.9%. This is how much the Malaysian government has distorted the prices of goods and services in Malaysia. But that is another story for another day.

Now, let us recalculate Sam's purchasing power after 10 years after adjusting for the world's inflation rate. After 10 long years of saving in fixed deposits, the purchasing power of Sam's RM1,000 in 2001 will be equivalent to RM976.18 today, which is LESS than what he started with.

How is this even possible? Well, this was made possible by the simple fact that on average, the inflation rate exceeded the interest rate offered by the banks. Given that Malaysia is trying to cut all the subsidies that it possibly can, this is going to be what saving your money in fixed deposits will look like in the next 10 years.

It has been clearly illustrated that inflation can be one of the greatest enemies of investing. It will erode your purchasing power, whether you like it or not. In the great words of one of my friends, "Putting your money in fixed deposits is a way of getting poorer slowly, but surely". This makes it even more important to learn how to invest. We will discuss our options in beating inflation in the next part.

Today You... Tomorrow Me...

I came across this story on one of the online forums about a life-altering experience of an American humbled by the actions of some folks from what most would consider a third-world country. While many of us may consider Mexico a third-world country, the story below exhibits a first-world mentality. Going out of our way to help people is just a small picture kind of view. What I hope to convey is the fact that we can all AFFORD to go out of our way to help others. The affordability is what separates a first-world mentality from a third-world mentality. Even with however limited monetary wealth that they possessed, the Mexicans in the story below showed that they possessed a lot more.

How many of us can say that we can afford to extend an extra hand to others and actually extend it? In Malaysia, not only is extending a helping hand a thankless activity, it could even be a dangerous one. How many times have we read in the news that a kind passer-by whose intention was to help the person "in need", was subsequently robbed, kidnapped, or worse, raped or murdered?

Anyhow, just food for thought. Something that is hopefully inspiring on a Monday morning.

Just about every time I see someone I stop. I kind of got out of the habit in the last couple of years, moved to a big city and all that, my girlfriend wasn't too stoked on the practice. Then some shit happened to me that changed me and I am back to offering rides habitually. If you would indulge me, it is long story and has almost nothing to do with hitch hiking other than happening on a road.

This past year I have had 3 instances of car trouble. A blow out on a freeway, a bunch of blown fuses and an out of gas situation. All of them were while driving other people's cars which, for some reason, makes it worse on an emotional level. It makes it worse on a practical level as well, what with the fact that I carry things like a jack and extra fuses in my car, and know enough not to park, facing downhill, on a steep incline with less than a gallon of fuel.

Anyway, each of these times this shit happened I was DISGUSTED with how people would not bother to help me. I spent hours on the side of the freeway waiting, watching roadside assistance vehicles blow past me, for AAA to show. The 4 gas stations I asked for a gas can at told me that they couldn't loan them out "for my safety" but I could buy a really shitty 1-gallon one with no cap for $15. It was enough, each time, to make you say shit like "this country is going to hell in a handbasket."

But you know who came to my rescue all three times? Immigrants. Mexican immigrants. None of them spoke a lick of the language. But one of those dudes had a profound affect on me.

He was the guy that stopped to help me with a blow out with his whole family of 6 in tow. I was on the side of the road for close to 4 hours. Big jeep, blown rear tire, had a spare but no jack. I had signs in the windows of the car, big signs that said NEED A JACK and offered money. No dice. Right as I am about to give up and just hitch out there a van pulls over and dude bounds out. He sizes the situation up and calls for his youngest daughter who speaks english. He conveys through her that he has a jack but it is too small for the Jeep so we will need to brace it. He produces a saw from the van and cuts a log out of a downed tree on the side of the road. We rolled it over, put his jack on top, and bam, in business. I start taking the wheel off and, if you can believe it, I broke his tire iron. It was one of those collapsible ones and I wasn't careful and I snapped the head I needed clean off. Fuck.

No worries, he runs to the van, gives it to his wife and she is gone in a flash, down the road to buy a tire iron. She is back in 15 minutes, we finish the job with a little sweat and cussing (stupid log was starting to give), and I am a very happy man. We are both filthy and sweaty. The wife produces a large water jug for us to wash our hands in. I tried to put a 20 in the man's hand but he wouldn't take it so I instead gave it to his wife as quietly as I could. I thanked them up one side and down the other. I asked the little girl where they lived, thinking maybe I could send them a gift for being so awesome. She says they live in Mexico. They are here so mommy and daddy can pick peaches for the next few weeks. After that they are going to pick cherries then go back home. She asks if I have had lunch and when I told her no she gave me a tamale from their cooler, the best fucking tamale I have ever had.

So, to clarify, a family that is undoubtedly poorer than you, me, and just about everyone else on that stretch of road, working on a seasonal basis where time is money, took an hour or two out of their day to help some strange dude on the side of the road when people in tow trucks were just passing me by. Wow...

But we aren't done yet. I thank them again and walk back to my car and open the foil on the tamale cause I am starving at this point and what do I find inside? My fucking $20 bill! I whirl around and run up to the van and the guy rolls his window down. He sees the $20 in my hand and just shaking his head no like he won't take it. All I can think to say is "Por Favor, Por Favor, Por Favor" with my hands out. Dude just smiles, shakes his head and, with what looked like great concentration, tried his hardest to speak to me in English:

"Today you.... tomorrow me."

Rolled up his window, drove away, his daughter waving to me in the rear view. I sat in my car eating the best fucking tamale of all time and I just cried. Like a little girl. It has been a rough year and nothing has broke my way. This was so out of left field I just couldn't deal.

In the 5 months since I have changed a couple of tires, given a few rides to gas stations and, once, went 50 miles out of my way to get a girl to an airport. I won't accept money. Every time I tell them the same thing when we are through:

"Today you.... tomorrow me."

Volume 3 Issue 3: Two-Cent Economics

The Entitlement Attitude - Part 2

From part 1, we saw how Malaysian fresh graduates develop their entitlement attitude. In the last issue, we discussed the high demands of fresh graduates in terms of benefits and pay before accepting a job. In this issue, we will look at some further examples of Malaysian fresh graduates with extremely poor attitude.

Another common manifestation of the entitlement attitude is in the high frequency that Malaysian fresh graduates hop jobs. Typically a lot of these fresh graduates change jobs within six months of starting work. One of the most common reasons is that they feel that they are not interested in the job. Or in other words, they find it boring.

Usually, this is not so much because the job is mundane, but because in the first six months of a job, there is only so much a newbie can do. The fresh graduates have yet to pick up all the necessary skills and knowledge to contribute meaningfully to the business. In the mean time, they are stuck with what they think are basic and menial jobs to familiarize themselves with the workplace and culture. In less than six months, there is really not much they can learn about their job, much less learn about the career that they are trying to pursue. Such is the naivete and impatience of Malaysian fresh graduates.

What makes it worse is that they typically resign from their positions before they are able to get a new one. There is so much complacency that they would rather remain jobless for weeks and months on end than stick it out with their existing job. In the face of a little discomfort, Malaysian fresh graduates react in their ever-so-big shot kind of way with their nose held high by leaving their jobs without future plans.

Then they take a several month hiatus to go on a backpacking trip in the Andes or Alps or somewhere exotic like that. All under the account of their parents. There is seriously no embarrassment in being completely dependent on their parents. In fact, they still feel like their parents owe it to them.

Another main complaint from Malaysian fresh graduates is that their job is too troublesome. Some of these fresh graduates feel that going out of their way to complete a task is not within their job scope. They even have the nerve to cite the fact that the related task was not spelled out in their offer letter, therefore it is not their responsibility to complete the task. Did they forget that whatever the task that needs to be done is most likely for the sake of the clients? Be it in sales, or in manufacturing, or in the finance industry, the clients are the ones that ultimately pay their salary. If the company does not take care of its clients, then there will be no future business. If there is no future business, the company would then have to shut down, and guess who will be out of a job?

There will be times when we are called upon to go out of our way to cater for the needs of the clients. In fact, one should even feel proud to be able to render this extra service to our customers because we have managed to make their lives better. In doing that, they may even give the company further recurring business. One must not underestimate how a little effort can go a long way. I have already shared the story about great customer service  and first world thinking here.

Needless to say, the list goes on. My goal is not just to highlight the poor attitude that is inherent Malaysian fresh graduates. In fact, the group I am referring to may not even cover ALL Malaysian fresh graduates, but it is safe to say that many (enough) are in this group that they need to be made aware of the atrocities that they are portraying. So until now, the goal was to hopefully create the self-awareness to brutally examine our own thoughts and actions to see if we were guilty of such entitlement behavior.

In the next part, we will look at some ideas on how we can overcome this entitlement attitude in a useful and realistic manner.

The Ultimate Insult

 Quoted from the Star:

Sponsored stints and cash prize await Suzuki Cup winners

PUTRAJAYA: Players of the victorious AFF Suzuki Cup team will be sponsored by the Government for attachment stints with prominent international football clubs in an effort to gear them for “bigger and greater successes”.

The attachment offer comes with a cash reward totalling RM65,000 for each of the 25 players and coaches of the Harimau Malaya football team, whose win had raised patriotism among Malaysians to a “highly extraordinary level”, said Prime Minister Datuk Seri Najib Tun Razak.

The cash reward comprises RM50,000 worth of shares in Amanah Saham Wawasan 2020, RM10,000 special incentive from the Govern­ment and another RM5,000 from the National Sports Council.

Najib also said the Youth and Sports Ministry would allocate RM500,000 to the Football Association of Malaysia (FAM) to upgrade facilities like the gymnasium and sauna room at Wisma FAM in Kelana Jaya.

“We will let the Football Association of Malaysia (FAM) decide on the players’ attachment stints, which the Government will sponsor.

“We hope the experience will be put to good use in preparing our players physically, tactically and mentally for many more successes as Malaysia aims to become the football power house in Asia. The move will also help our Road to London (Olympic) 2012 quest,” he said, adding that the country’s football development would be a “national agenda and effort”.

Najib was speaking at a luncheon to honour the national football team, which won the AFF Suzuki Cup after beating Indonesia by a 4-2 aggregate on Dec 29.

It was Malaysia’s first victory since the cup was introduced in 1996. Also present to honour the team were FAM deputy president Tengku Mahkota of Pahang Tengku Abdullah Sultan Ahmad Shah, Youth and Sports Minister Datuk Seri Ahmad Shabery Cheek and other Cabinet members.

Najib said the victory proved that the team could work together, transcending race with good tactical skills and mental strength.

Najib also confessed to having “felt like crying” when Malaysia made it to the finals after beating Vietnam, adding that he was happy to join thousands of Malaysian supporters in watching the match on a giant screen at Bukit Bintang.

“The tremendous sense of pride I felt for the team was overwhelming.”

Clearly this has been made into such a big hoo-hah. The Suzuki Cup is merely an ASEAN level tournament that not many self-respecting football pundit would bother about. Each player is being compensated RM65,000 for their achievements at the ASEAN level. To anyone on the Main Street, RM65,000 is a lot of money. Especially when the achievements of these people are comparatively insignificant compared with many others that I can think of. Let us consider the most extreme example: Nicol David (I refuse to use her honorary title for reasons that I will elaborate on below)

Let us first list down her achievements at the world level (NOT the ASEAN level):

1. FIFTY WISPA World Tour titles (The number of titles alone should impress you).

2. FIVE World Open tltles (equaling the record held by Sarah Fitz-Gerald, who has retired. Given Nicol's age, I am sure that she will set the new record and re-break it many times before she actually retires. Oh by the way, did I mention that she won the last 3 consecutively?).

3. As at time of writing, Nicol is in her 57th consecutive month as World NUMBER ONE.

4. If those are not impressive enough, Nicol's career record in World Tour events is 165-21 (as at December 2010) (This means that she has lost an average of 2.1 games PER YEAR since she turned professional in 2000)

If I go on, you would probably start wondering if I am stalking her. Now, to get to my point, what kind of recognition did Nicol get from the Malaysian government?

1. In June 2008, she was awarded the Order of Merit in conjunction with the Agong's birthday (No idea how this helps Nicol at all)

2. In July 2008, she was awarded the title of "Datuk", which essentially translates to "Grandfather" (Herein lies my point of not referring to her honorary title. It seems somewhat inappropriate to call a woman in her twenties "Datuk". In some cultures, that could even appear to be offensive)

That's about it. That's pretty much all the recognition that a 5-time World Open winner (among many others) gets from her own government. No RM65,000 incentive, no nothing. There is nothing Malaysia Boleh about this. This is all Nicol David boleh. By the way, the Kelantan government awarded a piece of land to the goalkeeper who saved the penalty in the finals. I suppose we can't ask too much from the Penang government because land is a bit too expensive there.

By rewarding the "jaguh kampung"s (village champions) handsomely sends the wrong message to the people. On one hand, you can claim that you are rewarding based on merit. But if this is really true, the amount of reward should be proportionate to the achievement. Based on a rough guestimation, if Nicol was awarded a paltry RM65,000 per tournament she won, the government owes her about RM3.25 million. I suppose she won't complain if she is not given any land.

P/S: Maybe we should even declare a Nicol David Day

Volume 3 Issue 2: Intelligent Investing

Return on Equity

First and foremost, let me address why I am not doing a stock analysis just yet. What some of you may think as wasting time, I think it is important to go through some important terms and ideas before I jump into basic stock analysis.

The second reason is that the stock market is currently at a relatively high level and even though opportunities can be found, the margins of safety are being squeezed. This is by no means suggesting that I am timing the market. I have several stocks in mind that I believe are very strong companies. However, I think in waiting, we would probably be able to see their prices fall a little bit lower, thus, increasing our value for money.

Return on equity is probably one of the most important concepts for an investor. This is especially true for those who come from the Benjamin Graham school of thought. This is because of one of Ben's most famous catchphrases, "Investing is most intelligent when it is most business-like".

How does this even relate to return on equity (ROE)? First, let us just get a brief idea about what ROE means. The typical definition takes the ROE to be the ratio of net income to shareholders' equity. The only problem with such a definition is that, it does not tell you where to get the "net income" and where to get the "shareholders' equity". So, to put it in layman's terms, the ROE is a representation of how much profits a business earns as a proportion of its net assets. To break it down further, it simply means how much money you make (net income) from what you have (net assets = assets - liabilities).

Without going too far into technicalities just yet, we return to how ROE relates to investors. Since we have established that the ROE is the amount of money you make from what you have, it is probably of utmost importance as a business owner to maximize this value. And since an investor should think like a business owner, an investor should want a company that can consistently generate a high ROE because in the long run, that will essentially translate into returns for our investments.

I would like to stress on the importance of a consistently high ROE. This means that the company can consistently give us the most bang for our buck.

Now, how do we get this supposedly elusive Return on Equity figure from the financial highlights? For starters, based on the definition, we should look for the net income in the Income Statement in year 2010, for instance. However, the net income usually would have included some non-recurring expenses or non-recurring income. Thus, to be conservative, we should subtract off the non-recurring income, as well as add back the non-recurring expenses and make the necessary tax adjustments. We would then have obtained what is called the adjusted net income.

To get the other part of the ROE, we need the shareholders' equity. To be accurate in finding out how much we earn from how much we have, we should look at the shareholders' equity from the Balance Sheet in the year 2009 (the previous year). Because this would be the beginning balance of our net assets used to generate our earnings. This would be a good time to add that the shareholders' equity is usually equal to the net assets of a company, by virtue of their definitions.

Needless to say, we need to make some adjustments to the net assets as well. What I like to do is to remove the goodwill and intangible portions from the net assets because those two are basically monetary value placed on intangible items. Pardon the recycling of terms but intangibles are exactly what they are, intangible. Now, by dividing the adjusted net income in 2010, with the net tangible assets in 2009, we will obtain the adjusted ROE in 2010. Ideally, you should do this for every year for as far back as you can. But if you are feeling lazy, the minimum number of years you should go back to is five.

Now, the ROE is basically my screening criteria. I will only look for companies with a consistently "high" ROE. I would even go as far back as 10 years just to test how consistent the company is. Of course, it would be even better if the ROE is consistently growing. The question that should be ringing in your head right now is, what does a "high" ROE mean?

Well, that is a subjective matter, but it suffices to say that if you think like a business owner, the ROE should be the amount of returns that will satisfy you for your risk-taking. For me, I like to look at companies with ROEs that are at least 15%.

Volume 3 Issue 2: Two-Cent Economics

The Entitlement Attitude - Part 1

This is easily one of the biggest problems that Malaysia is facing at the moment. Many Malaysian fresh graduates have this problem of believing that they are entitled to all sorts of privileges just because they graduated college. It is their thinking that just because they have graduated with degrees from their universities and colleges, the society owes them a high-paying, comfortable job with unlimited benefits.

What do I mean? Doesn't everyone in this world (or almost) want those things? That may be true, but wanting them and deserving them are two completely different notions.

Why do they feel this way? Why is it that just because these graduates believe that the companies that hire them need to give them a comfortable 9-5 job and pay them an exorbitant amount, while at the same time want all the benefits like free medical, free dental, 30 days of annual leave etc.?

Let us just take a step back and try to look at this from a broader perspective. Imagine for a moment that you own a business. Now, imagine that you are recruiting for your firm. Would you hire someone with the expectations that I mentioned above? Would you hire people who look for all the benefits for themselves before they are interested in contributing to the company? The questions were rhetorical. Most normal people would resoundingly reply NO!

Now, back to the question, why do Malaysian fresh graduates feel this way? Why do they feel that they are entitled to so much before they can even contribute anything meaningful? I argue that this is a sickness that the Malaysian culture has developed due to many years of uncompetitive protectionism. What do I mean?

First and foremost, because of the protection that the government grants to a particular group of people, there is very little incentive for that group to perform. Needless to say, they do not become competitive and continue to lead complacent lifestyles and blame the government when things do not go their way. This is the most uncompetitive group among Malaysians.

Secondly, because of the above-mentioned group of poor competitors, the playing in Malaysia has been made infinitely easier. To achieve something "worthy" of reward was made infinitely easier because the next best alternative to these fresh graduates is just some dude who does not hunger for the available jobs. So, because of this, these fresh graduates feel like they are on top of the world because they have no viable competition. While it may be true that there are other fresh graduates out there, the present situation shows that there is a much larger supply of skilled-jobs available compared with the number of applicants. While this plays into the hands of the applicants, it still does not mean that the fresh graduates have the right to make exorbitant demands on their employers.

In the Malaysian context, these fresh graduates may feel like they are the cream of the crop. One only needs to step across any of our borders to our neighboring countries to realize how far apart the standard of fresh graduates in Malaysia is compared with those in our neighboring countries.

Not only are they more qualified and better trained, they demand less wages and benefits! If this poor entitlement attitude does not change, it would only be a matter of time before all the multi-nationals take the job offers elsewhere. From  anecdotal evidence, a fresh graduate from Vietnam is typically paid USD200 per month. This is in contrast to the RM2,500 (USD800) that is paid to half-baked Malaysian fresh graduates. This is not including the fact that Vietnam has a population of almost 200 million. They have a much larger supply of skilled labor.

Why should any MNC remain in Malaysia? Labor is no longer cheap here. If fresh graduates continue to believe that they have the right to demand comfort and special benefits before contributing meaningfully to their employers, they should remember that it is just with a snap of fingers that their jobs could disappear.

Let me just pause here and allow all of you to ponder a little bit on what you think you deserve. The next time you complain about how your company does not take care of its employees, please take a hard, long, and brutally honest look at your own work and ask yourself, if you were the owner of the firm, what kind of benefits and wages would you pay yourself? What would you, as the owner would like to see from an employee of your firm before you give them a promotion and a raise?

In the next issue of the Main Streeter, we will explore this issue of the entitlement attitude a little bit further and see what other lessons we can draw. In the mean time, all comments and feedback are welcome.

Volume 3 Issue 1: Two-Cent Economics

Raison d'etre

While it may appear like a new year would entail new beginnings, I must say that the beginning of a new volume, a new layout, a new section, a new name for this newsletter and the new year occurring at around the same time is purely a coincidence. 

Choosing to start new volumes at the beginning of the year was intentional to ease record-keeping as well as laying down goals and milestones. In addition, The Main Streeter is a work in progress. The title has changed from Economics @ Home to The Main Streeter for good reasons.

First, I have decided to enlarge the scope of this newsletter to incorporate an educational component on investing in the stock market (and some minor mentions of other investing vehicles). Thus, continuing with the name Economics @ Home would naturally seem inappropriately narrow.

Second, this newsletter has and will always cater for laymen (and laywomen) like you and me. In an era where too much information is available, The Main Streeter strives to bring down to Earth the seemingly impossible concepts that very often so-called experts overcharge to explain to us. 

Economics and investing should be simple. In fact, they should be common sense. However, by some evil twist of fate, we are very often misled into believing that the more complicated a prediction model is, the better it is. The goal of The Main Streeter is to counteract this myth. 

Why The Main Streeter? The Main Street symbolizes the interests of the working class and small-business owners who put in their heart and soul into earning an honest living. The Main Street is very often used in contrast to Wall Street, which symbolizes the cut-throat predatory bankers who live and eat on said street. 

The Main Streeter is a newsletter that is made for common folk such as ourselves. That is why it is written in an accessible jargon with the aim of breaking down seemingly incomprehensible investing and economic concepts for the consumption of all Mainstreeters. 

That is why in the past, I have used the mission statement, "Making common sense, common". My goal is to share my thoughts and experiences, however limited they may be, in these two fields in hope that some of you find them applicable and helpful in your investing practice as well as your daily lives.

The newsletter will be posted in two sections for each issue. The first section will be entitled "Intelligent Investing", which is named in tribute to the father of intelligent investing, Benjamin Graham. In this section, we will discuss relevant investment ideas which are essential to value investing and occasionally include stock analysis for educational purposes. As a disclaimer, all company analyses that appear in this newsletter are derived from facts gathered from various sources and the contributors' personal opinions. It is NOT an invitation to deal in securities, and especially not a recommendation for buying or selling any stock. The contributor(s) do not guarantee the accuracy of the facts being presented. The accuracy of such facts are only as reliable as the sources that they are obtained from. Please consult your investment advisers before acting on any information provided by the analyses here.

The second section is entitled Two-Cent Economics, which is pretty much self-explanatory. This will be a continuation from Economics @ Home. Here, I will still try to shed some light onto everyday issues through applying economic concepts and analytical tools, very often trying to contribute two cents worth, if possible. 

So, here we are, looking forward to a great year ahead with the remade, upgraded and up-scaled version of the newsletter, now called The Main Streeter. 

Volume 3 Issue 1: Intelligent Investing

Margin of Safety

By now, I do not have to tell you that there is most definitely more than one way to make money through investing. However, what most of us know, but almost never practice, is that there is no easy way to make money through investing.

Many of us are very tempted by promises of such and such people who profess the "sure-make-money" type of investments. Very often we hear people say things like, "Next year the stock market will go up. Just buy any stock and you will make money," Or you hear recommendations of such and such stocks which will "definitely" double by next week. In fact, we are always in search of such opportunities. I am not here to burst your bubble. Such opportunities do exist, but only when fortune shines upon us. Much like when we buy the lottery.

Not going to expound on the intricacies of probability theory today. In this issue, I would like to introduce the most fundamental misconception that people have about investing. Very often, we hear the phrase, "High risks, high return, and low risks low returns". To me, this is the biggest fallacy of investing. The reality is very often, high risk and negative returns. Some people buy the lottery their whole lives and never even make a dime off it. Some people invest in the stock market based on tips and rumours and lose a huge chunk of their fortune. And then they vow to stay away from the stock market forever.

Little do they fully comprehend the definition of high risk, which in the most common of definitions, mean that there is a very high chance of losing money. It is as simple as that. In Walking Down Main Street, we will explore investing opportunities that can possibly offer high returns, yet expose you to minimal risks. How do we achieve this? In Benjamin Graham's definitions, we call these things "margin of safety".

In the stocks that we are going to look at, not only do we hope to find strong consistent earnings, but we will also emphasize on finding very high margins of safety. This margin of safety manifests in many ways and in most cases, are very specific to the stocks themselves. But you can be sure to expect Walking Down Main Street to highlight these safety measures that can help you sleep soundly at night.

Finally, there is such a thing as low risks and high returns. Don't let your mutual fund consultants fool you otherwise. The next time before you purchase any unit trust or stocks, ask yourself, what is my margin of safety?