Monday, January 30, 2012

Tata Nano: An Inferior Good?

How cheap is too cheap? Apparently, the Tata Nano is too cheap. So much so that people stay away from it just because of its low price:
“A Nano is always bandied about as a poor man’s car. Nobody wants to be caught with it,” said Punnoose Tharyan, editor of India’s Motown magazine.
In economic terms, this would be considered to be an inferior good. The term inferior is somewhat misleading in the sense that it implies that the Nano is of poorer quality. Economists are not a particularly creative species. They do not come up with very good names for economic terms. Another example would be using "utility" to represent satisfaction. And the unit used to measure the amount of satisfaction is "utils".

Essentially, a good is considered "inferior" when the quantity demanded of the good decreases as its price decrease. This is opposed to a "normal" good where quantity demanded increases as its price decrease.

Sunday, January 29, 2012

Volume 4 Issue 3: Intelligent Investing

Integrity Is Hard To Come By

Ever since I was exposed to the world of investing, I have come across many people who swear by the "secrets" of Suze Orman. Suze Orman is not so much an investment guru, but more of a "savings" coach. She comes up with a bunch of ways to help people achieve financial freedom through saving and not necessarily investing. But that is not why I am writing this issue.

In recent years, Suze Orman had been launching several products that she swears by. No, they are not tricks or gimmicks. Some of these products actually add value and are pretty nifty. I will not go into that as Felix Salmon has already done that.

Since then, Orman has built a name for herself. But with great power, comes great responsibility. Of late, it appears that Orman has been shirking some of that responsibility. Here is Felix Salmon again:
Lying about being ranked by Hulbert Financial Digest is, needless to say, neither ethical nor honest. Which means, on an unsympathetic reading of Suze Orman, that she’s lying too. 
When I spoke to Orman last week, she made it very clear that her relationship with Grimaldi’s newsletter was no different than her relationship with the Approved Card — she’s an owner of both of them, thinks that both of them are very good products, and is proud of them both. (The same goes for her FICO package, too.) 
Orman also told me twice that the newsletter was rated number one — she was adamant about that. And now it turns out that it isn’t. I spoke to Orman on Tuesday; maybe Zweig hadn’t contacted her with his questions yet at that point. But at best Orman is extremely incurious about the “fabulous” newsletter that she is so keen to hawk and defend. And at worst she’s happy lying about it being ranked highly by Hulbert. 
And that’s not the end of the Grimaldi/Orman sins, either.
To get the whole context, you really need to read the full article. But in short, it appears that the way Suze Orman has been peddling her products wreaks of heavy conflicts of interest. It is always difficult to be objective when one recommends one's own products as an "investment".

I have said this time and again about "Sell-side" investment advice. Here is what I wrote back in April 2011:
Raising a flag over a corporate governance issue points towards a sketchy deal but a day later, RHB Research realized that they did not find out the appropriate facts. After Perisai clarified the matter, RHB Research realized that they had made a mistake and published a counter report on the next day, 31 March 2011, and withdrew their previous report.

This clearly shows very careless and irresponsible research on RHB Research's end. They caused a sell-down on Perisai and many people lost money on it. This brings us back to the issue of integrity. So from now on, every time one reads a research report from RHB Research, one would start questioning the quality of its research. "Could it be as bad as the Perisai case?" 
Here is another of Buffett's infamous quotes: 
     "It takes 20 years to build a reputation and five minutes to ruin it" 
To conclude, I would just like to point out that writing research reports is not easy. A lot of care and thought has to be put into it to ensure that lies and irresponsible research is not thrown around as it could have adverse effects on people's lives. This is the level of care, responsibility and integrity that we hope to aspire to at the Mainstreeter.
Good and reliable investment advice is really hard to come by. I have also written about a blooper that was made by a careless CIO. You would think that being a CIO, he would have done better homework before bringing up misleading points during a public presentation.

That is why when anyone gives investment advice, take it with a bowl of salt. A pinch just isn't enough. At the end of the day, the goal is to do your own research. Who better to trust about your money than yourself? Who is going to take care of your money better than yourself? Listen to facts and evidence.

A good technique to practice when obtaining investment advice is the "5 Whys". Simply put, it is a method for asking questions to identify the root of cause-effect relationships. To approach any given "fact", one should ask "why" at least five times. This technique was the brainchild of Sakichi Toyoda, which was used as Toyota's scientific approach which brought Toyota to such great heights (which does not seem so high right now, but that is another story for another day).

Basically, any given investment advice that does not pass the "5 Whys" test is probably not worth listening to. So next time you think of making a quick buck off some coffee shop rumour, test it against the 5 Whys test. Ask yourself if the advice makes sense. I hope that this will help keep your money safer that some of the investment advice that Suze Orman has been peddling.

Friday, January 20, 2012

Economics Majors and the 1%

Should I feel relieved that Economic majors are ranked second in terms of proportion of those who make it to the top 1% in income? Read here for more. Here is the chart:

Source: Economix

Insider Trading At Its Dirtiest?

Can't believe such things are allowed to happen:
On a separate level, the legal suit could renew debate over the SC’s handling of alleged irregular trading activities, the newspaper reported. The E&O deal has put SC chairman Tan Sri Zarinah Anwar in a tight spot as her husband, who is also the E&O chairman, raised his personal stock holdings in the company just weeks before Sime Darby announced its proposed acquisition of the 30 per cent interest in the company.

Sunday, January 15, 2012

Volume 4 Issue 2: Intelligent Investing

Joining the 1%

I think at some point in our lives, we have this dream of being a millionaire. Some of us who are a little bit bolder aimed higher, that is to join the billionaire's club.

The hype in earning more money than you can spend comes from the portrayal of a luxurious lifestyle as depicted by the Brad Pitts and Angelina Jolies on TV. Surely, one can go through life happily without driving a Maserati.

Or can we?

Many of us would even become green with envy, watching the rich and luxurious lifestyles depicted on TV and movies, especially so when some are more deserving than others. Why do we look at those who are not deserving with great disdain? Is it because we feel that we are more deserving? In fact, why do we seek out glamour and luxury so badly? Just how far are we willing to go? Just recently, I shared a story of an ex-investment banker who decided to leave his high flying lifestyle in pursuit of a better quality of life. 75,000 Pounds in his first year of work is certainly no paltry sum. Yet, he made his choice to leave the profession.

So what is so attractive about this elusive "wealth" that the 1% has that we so badly yearn after?

In any case, just the other day, I read this article about "How to join the 1%":
WE’VE all been hearing about the 1 Percent — you know, the nation’s fat cats. This small percentage of wealthy Americans has been reviled by the Occupy Wall Street movement and liberal politicians alike. 
They have been called greedy. They have been called destructive to our nation’s sense of equality and justice. They have been called a risk to our future. The rich, in angry response, have stamped the floor — threatening, in the process, to scuff their marvelously comfortable handmade leather shoes — and pointed out that they are job creators, at least for Italian shoemakers. 
Camping out in Zuccotti Park apparently didn’t beat them. They appear to be rather entrenched. But all the shouting had me thinking long and hard about the big issues that the conflict raises, and now I’m left with just this question: How do I get in on some of that sweet 1 Percent action?
The article was written by John Schwartz, who has no particular training in economics or business:
In climbing the income curve, I’ll also have to make up for my own financial handicap: I don’t actually know anything about economics. Or business. 
That means if I’m going to climb from my status of genteel poverty into the vaunted one-tenth of the 1 Percent, I’ll need some outside help. 
So I e-mailed a certified rich person: Mark Cuban. Mr. Cuban is a billionaire, having made his fortune through entrepreneurship and smart investments; he owns a bundle of companies these days, including the Dallas Mavericks of the N.B.A. When I told him that I was hoping to get rich, he quickly responded with some advice. “Easy answer,” he wrote. “Stop investing in mutual funds and depending on some kid in a gerbil cage running and trying to get ahead of his/her peers and instead pay off all of your debt, including your credit cards, and invest in yourself.”
Sounds easy enough? I think Mark Cuban has only touched on the tip of the iceberg on the matter. Doing what you love is the key necessity. This is best exemplified in the movie "The Three Idiots":
Follow Excellence, and Success Will Chase You, Pants Down
But it is far from sufficient. Not only that, excellence is not about money. I think it is a level of achievement that is meant to inspire others. In a sense, it is not unlike a world class performance, sometimes, from ordinary sources:

What does it take to be able to perform like that? I don't think that is anything short of a world class performance. Perhaps, something only the top 1% is capable of. Which is what I think it takes to be in the top 1%. The amount of hard work, dedication and most importantly, discipline to get there. Why do I say that discipline is the most important thing?

Well, among all the ingredients, I think it is the hardest to sustain. It is easy to work hard. It is easy to work long hours. But the real question is, can you do it for extended periods of time? Say, 5-10 years? Not so easy now, is it?

To be really good at something, you really need to do it over and over again. That is why they have sayings like "Practice makes perfect" and also Malcolm Gladwell's 10,000 hour rule, detailed in his book, "Outliers".

So how much exactly is 10,000 hours? Here is a rough estimate. Assuming I hope to be a world class fund manager and I put in about eight solid hours of work  into it a day, it would take exactly 1,250 days to get there. I am talking about solid work here. We spend about 12-14 hours at the office daily (at least for me), but how much of that is solid work? Some take one hour for lunch, and some take tea breaks, and to be realistic about it, it is not likely to maintain 100% focus for 10 hours throughout the day. So, to be on the conservative side, I have assumed eight solid hours of work. What about weekends and vacation? Without any break whatsoever, 1,250 hours translates into roughly 3.4 years.

What if you were to take every Sunday off? That would be equivalent to roughly 170 Sundays, which is added to the 1,250, giving you a total of 1,420 days. That is close to four years of solid work. Even then, this only gives you a chance of entering the 1%. Nothing is guaranteed. After all, the 1% is not a static measure. If every one around you puts in exactly the same effort as you do, you would be right exactly where you started.

Still interested in joining the top 1%?

Friday, January 13, 2012

Stiglitz on 2012

I always like Stiglitz's analysis. Here is what he thinks about 2012:
Even before the crisis, there was a rebalancing of economic power – in fact, a correction of a 200-year historical anomaly, in which Asia’s share of global GDP fell from nearly 50% to, at one point, below 10%. The pragmatic commitment to growth that one sees in Asia and other emerging markets today stands in contrast to the West’s misguided policies, which, driven by a combination of ideology and vested interests, almost seem to reflect a commitment not to grow. 
As a result, global economic rebalancing is likely to accelerate, almost inevitably giving rise to political tensions. With all of the problems confronting the global economy, we will be lucky if these strains do not begin to manifest themselves within the next twelve months.
Source: Project Syndicate

Being An Investment Banker

For those of you who think that investment banking is all jet-setting glamour, don't be naive. Here is an account of the life of an ex-investment banker (What life?):
"In the first year I would work from 9.30 am till 3am, every day. You keep telling yourself, this is going to get better. But it doesn't, not really. 
"Compared with my years in university I have learned so much more in the past two years, so much more. Then again, given my 18-hour work days, these were actually four years. Basically M&A teaches you to truly understand a company; to analyse it the way a doctor would with a human body. You build models of how the company operates, where it might improve in the future, and how. It's genuinely stimulating work.
Really, read through the whole article. Here is more:
"I used to be the kind of person who enjoys life, who gets up in the morning eager for another day. The past two years I found myself changing. I lost my interest in politics, in sports … I began to wonder: what's happening to me?
"My flatmate is in finance too. I've seen him coming home crying, from exhaustion, from something that happened to him. Why are we doing this to ourselves? My sense is that the majority of the people in finance have an urge to prove themselves. And banks offer a platform where they can do so. I feel there's a particular kind of insecurity to many bankers, a form of neediness and a deep desire to compensate. Love?
"Many people in banking try to project an image of perfection, and banks play to that, trying to make you look perfect and feel invulnerable. It's very easy to get hooked to that life, to become addicted to work and the money. I am sure it would have happened to me, had I done this work for too long.
"Imagine. 25 years old, and in my first year I made £45k plus a 70% bonus. So over 75k, one year out of university. That is quite something, let me tell you. But within six months you get used to it. I would spend £250 on a night out, and think nothing of it, spend £100 on dinner and genuinely think to myself: well, that was not too expensive.
"This was a lesson: it doesn't really matter how much you make, because your lifestyle and expectations move up with your income.
Source: The Guardian

Eurozone's Political Crisis (Not Economic Crisis)

After a long hiatus from the Eurozone crisis, I am back. This time, with more backing from former Spanish foreign minister and former Senior Vice President and General Counsel of the World Bank, Ana Palacio:
Europe’s current crisis is rooted in loss. Untethered from the mooring of Cold War-era bipolarity, Europe was swept off its feet and cast adrift in the currents of a globalized world, unable to find either its place or direction. Most critically, Europe’s old instincts and modus operandi persisted long after the new contours of global affairs had taken shape. 
They still do. That is why, in facing its gravest test so far, Europe seems oblivious: its leaders project confusion and indecision; its citizens exude a mixture of complacency, indifference, and self-doubt; and its institutions are locked in turf battles and remain hindered by laborious procedures and protocol. 
It is also part of the reason why markets are besieging the eurozone so incessantly. What investors sense is not weak economic fundamentals, but Europe’s weak political fundamentals – the absence of a governance structure with real power and the will to use that power to resolve problems. If Europe is to adjust to the requirements of the new “Pacific world,” it does not need fine-tuning; it needs a new design.
I had asked this question before. The Eurozone's refusal to face reality is causing a slow and painful death for its periphery. In Two-Cent Economics, Volume 3 Issue 45, I said:
Personally, observing the way things are going with the Eurozone right now, it feels a lot like watching a tragedy in slow motion. It is agonizingly painful. It would seem like you know a disaster is coming but you can't avoid it. Something like being on the Titanic as it is sinking.
And back to Ana Palacio:
Europe is plagued by three distinct problems. First, it remains incapable of adjusting to the realities of a world whose center of gravity has irrevocably shifted eastward to the Pacific, pulling with it the attention of the United States. Second, more than ever, Europeans are looking inward, as a sense of entitlement meets pervasive skepticism – a combination that permeates to the highest echelons of the Union and EU national governments.
 Source: Project Syndicate

Wednesday, January 11, 2012

It Is Like He Never Left

Maybe I am a bit late to this party, but it really feels like he never left. Thierry Henry, world class to the end.

Sunday, January 08, 2012

Volume 4 Issue 1: Intelligent Investing

The Only Thing Constant Is Change

In the past year, the Main Streeter has consistently published two issues per week for 52 weeks and I'd just like to say that it has been a huge struggle and am glad that I have pulled this off. In an evolving world, the publication must evolve with it, along with its writers. Some time in June 2011, I picked up the pace of my reading as well as the breadth of it. I read a lot more articles, which meant that I was able to share a lot more - see Chart 1. The average number of articles posted almost doubled after June. From just 26 articles published in 2010, the number of posts surged to 232 in 2011. That is a 9-fold increase!

Because of that, the format in Volume 3 of the Main Streeter is no longer practical. So the format has to be changed again in Volume 4. The number of weekly articles will be reduced back to one. Two-Cent Economics will no longer feature as a section on its own. The reason is that, since most of the articles that I share are economics-related, it doesn't make sense to have Two-Cent Economics as just a weekly publication.

In view of all the sharing of articles that I find interesting, and my own comments and thoughts as and when I see fit, the quantity of articles have surged 9-fold in the past year. While this is an achievement in its own right, it is a little bit more than that. The increase in the number of posts has also inculcated a deeper sense of commitment and discipline to maintaining this newsletter. But maintaining a self-respecting publication is more than just quantity and interesting articles. So this year, my focus will be on the quality of articles. While this may or may not hurt the quantity of the articles shared, I think it is the next logical move to improve this publication. I will channel more effort into contributing articles with original thought and analysis. This way, hopefully I will be able to provide more value-add to the Main Streeter and more importantly, to the readers.

Saturday, January 07, 2012

Quote Of The Day

"It is astonishing what foolish things one can temporarily believe if one thinks too long alone…"
John Maynard Keynes, The General Theory of Employment, Interest and Money

Thursday, January 05, 2012

The Rise Of China? (Russell Peters version)

When I read this article, I immediately thought of the following video. Excerpt of the article:
Global opinion surveys over the last three years consistently indicate that many are turning their backs on the West and – with hope, fear, or both – see China as moving to center stage. As the old joke goes, optimists are learning to speak Chinese; pessimists are learning to use a Kalashnikov. 
While a small army of experts argues that China’s rise to power should not be assumed, and that its economic, political, and demographic foundations are fragile, the conventional wisdom is that China’s power is growing. Many wonder what a global Pax Sinica might look like: How would China’s global influence manifest itself? How would Chinese hegemony differ from the American variety?

Sooner or later, we're gonna hump you.

Another Blow To China-Bears

Stephen Roach says it as it is:
Yet fears of hard landings for both economies are overblown, especially regarding China. Yes, China is paying a price for aggressive economic stimulus undertaken in the depths of the subprime crisis. The banking system funded the bulk of the additional spending, and thus is exposed to any deterioration in credit quality that may have arisen from such efforts. There are also concerns about frothy property markets and mounting inflation. 
While none of these problems should be minimized, they are unlikely to trigger a hard landing. Long fixated on stability, Chinese policymakers have been quick to take preemptive action. 
That is particularly evident in Chinese officials’ successful campaign against inflation. Administrative measures in the agricultural sector, aimed at alleviating supply bottlenecks for pork, cooking oil, fresh vegetables, and fertilizer, have pushed food-price inflation lower. This is the main reason why the headline consumer inflation rate receded from 6.5% in July 2011 to 4.2% in November. 
Meanwhile, the People’s Bank of China, which hiked benchmark one-year lending rates five times in the 12 months ending this October, to 6.5%, now has plenty of scope for monetary easing should economic conditions deteriorate. The same is true with mandatory reserves in the banking sector, where the government has already pruned 50 basis points off the record 21.5% required-reserve ratio. Relatively small fiscal deficits – only around 2% of GDP in 2010 – leave China with an added dimension of policy flexibility should circumstances dictate. 
Nor has China been passive with respect to mounting speculative excesses in residential property. In April 2010, it implemented tough new regulations, raising down-payments from 20% to 30% for a first home, to 50% for a second residence, and to 100% for purchases of three or more units. This strategy appears to be working. In November, house prices declined in 49 of the 70 cities that China monitors monthly. 
Moreover, it is a serious exaggeration to claim, as many do today, that the Chinese economy is one massive real-estate bubble. Yes, total fixed investment is approaching an unprecedented 50% of GDP, but residential and nonresidential real estate, combined, accounts for only 15-20% of that – no more than 10% of the overall economy. In terms of floor space, residential construction accounts for half of China’s real-estate investment. Identifying the share of residential real estate that goes to private developers in the dozen or so first-tier cities (which account for most of the Chinese property market’s fizz) suggests that less than 1% of GDP would be at risk in the event of a housing-market collapse – not exactly a recipe for a hard landing.
Couldn't agree more with Stephen Roach. I still believe there will be no hard landing barring any Eurozone collapse.

Source: Project Syndicate

Wednesday, January 04, 2012

The Main Streeter Portfolio

The Main Streeter Portfolio (31 December 2011) 

There has been no change in the portfolio composition. One of the main reasons is that the Eurozone debt crisis has yet to play out completely and there is still much uncertainty. This is not to say that this portfolio has been converted into a market-timing one. The trouble with such massive uncertainty is that, it does affect the intrinsic values on some of the stocks. Common sense would suggest waiting for a more favorable entry point. The period for maximum excitement is upon us.

Nonetheless, the price of Harrisons Holdings jumped up to RM3.40 from October to December. Its year-to-date earnings for three quarters ended 30 September 2011 was roughly the same as in 2010.

30 Sep 2011
Current Market Price: RM3.05
Cash Balance: RM90,048.48
NAV per share: RM1.0225

31 Dec 2011
Current Market Price: RM3.40
Cash Balance: RM90,048.48
NAV per share: RM1.0365

Disclaimer: All company analyses, including the paper portfolio that appear in this newsletter are derived from facts gathered from various sources and the contributors' personal opinions and for education purposes. 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 authors most likely have interests in the stocks that are discussed in this website.

Learning From Hungary

It may be shocking for you to know that a European country is becoming more and more like Malaysia. Read here and here. I don't think I need to add any further comments, especially when time has become an increasingly valuable commodity these days.

Source: Paul Krugman

Tuesday, January 03, 2012

Volume 3 Issue 52: Intelligent Investing

The Loser's Game

What's the Losers' Game?

The game that 99.9% of the people who talk about investing appear to be playing: Namely, following global economics and markets and investment advice and trying to make smart decisions along the way.

That pretty much describes what happens to the Main Streeters. We love talking about it, boasting about whatever inside tips that we have, and asking for whatever tips or rumors on whatever hot stocks there are in the market.

Ever wonder where these "news" come from? If these rumors and tips are news that no one has heard about, what do you think is the more likely outcome? The news is not true, or the person from whom you got the news is in the loop? Quite often, it is the former, and that is an understatement. 

Even if what you hear in the financial media occasionally proves to be "right," you should still ignore it. Because as you'll learn the hard way if you consume enough financial media, there will be no way to tell in advance which of the many things you hear will turn out to be right. And the ones that turn out to be wrong will cost you a lot more money than you will make from the ones that turn out to be right. 
The second thing you need to understand if you want to invest intelligently is that if you choose to play this global sport, you will not be playing in a special Little League or low-stakes table with the folks like you who just aren't that good at it. You will play in the same league as the best professional players in the world. And you should expect to do as well against them as you would do against the PGA Tour players at the Masters or the Green Bay Packers in the Super Bowl or the Yankees in the World Series or grand masters in chess.

Because the third thing you need to understand is that the only way for you to make money trading versus investing intelligently (owning low-cost index funds) is to out-play these top professionals.

And when you soberly assess your competition--massive global institutional investors with decades of experience and tens of billions of dollars to spend on research, traders, trading systems, information, advice, access to companies and governments, and a hundred other advantages that you've never even heard of--you will (or should) gradually come to the conclusion that this competition is pretty fierce and that your chances of winning that alpha pot instead of contributing to it with losses are small.
And if you don't begin to realize that, you should at least remember the old poker adage: 
If you don't know who the sucker is at the table it's you.
Click on the link the read the full article. And here is Carl Richards, the author of "The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money", with more:
Successful investing is hard. Not complicated, just hard. It’s hard because for the most part, we are wired to make the same mistake over and over again. We buy high and sell low because that’s what everyone else is doing. But like any problem that needs to be fixed, the first step is recognizing the problem and then coming up with a plan to prevent it.
Still interested in playing the Loser's Game?

Source: Business Insider