Tuesday, August 14, 2007

Emotions!

Market participants, or rather human beings, are really suckers when it comes to investing in the markets. In almost all kinds of transaction, people look to buy cheap and sell expensive. When you buy a fridge, you look to buy it during some sale or discount. When you sell your car, you ask for S$5,000 above COE valuation.

But when it comes to the market, people look to buy when the prices are high, the higher the better, like now. And when prices nosedive for 2-3yrs, people become totally not interested, like in 2003.

This is the result of two powderful emotions at work: Fear and Greed.

Fear is a much forgotten emotion nowadays except during 1-2 weeks when the markets stumble a bit (like last week). During 2000-02, when the markets entered a full-fledged bear cycle, it was a sight for sorrow. STI made the headlines like once during the year when it broke the 10-year low. IPOs that came out almost always nosedive. Soon pple got so disappointed, nobody participated anymore, which made it worse. There was a general fear of the stock market bcos so many pple got burnt.

As the bleeding continues, none of your friends, colleagues, acquaintances talk about stocks, or investment. It simply hurt too much. If you said your job was an investment analyst, they go “Oh ok.” And move on to another topic. You can smell the fear of words like “stock” or “investment”.

Only value investors were very active. They were buying up all the cheap and good stuff, like during the Great Singapore Sale! But somehow, most pple really become suckers during those times. i.e. they fail to buy when it’s cheap.

In today’s market, Gordon Gekko’s good friend has taken over. Well, Gordon Gekko is the guy who quoted, “Greed is Good” in that hit movie and then won an Oscar! I heard he is coming back for a sequel to the 1987 blockbuster Wall Street.

So greed has taken over today’s market. The guys who got burnt in 2000? Well most of them shunned the markets until maybe yesterday, then decided to join the party bcos everybody around them is talking about it. But entrance tickets are not cheap now. What about the rest? Maybe they will join tomorrow.

Of course, there are also lots of newbies who have not seen the bloodshed the last round. And they have the all important role of Ra-Ra-ing this whole party. Haven’t we all heard how that young punk made a ton of money buying some stock and bought himself a Ferrari? So greed is all around now but maybe we have not seen it grown full blown just yet.

During these times, it’s always hard for the value investors. Some wished that they had bought more during the good old days of 2003. Some are thinking whether to sell now, but if the market keeps going up, then they lose out again. So as you can see, Greed spares no one, not even value investors. So does fear btw.

It is an art to be able to judge the greed barometer of the market and decide if the peak is reached (and to judge if the market has reached maximum fear which will mark the bottom of the bear market). If you can do this, you are on your way to great success. But most old timers would advise against that. Hence they advocate the good old buy-and-hold strategy. As they say, it is futile to try to time the market.

As for me, I suspect the market hasn’t reach maximum bullishness just yet, so there may still be some upside from here. Forward PER of the STI is still quite ok at 15-16x, but it’s hard to buy anything now. The margin of safety is not there anymore. In this game, it’s only worthwhile to buy during the Great Singapore Sale. But somehow, most pple buy AFTER the Great “GST” price hike (of 200%). GST here stands for: the Great stock market surge of 200% rally tax!

PS: STI in 2003 was 1200, it rallied 200% to 3600 today!

Global Industry

This is the 3rd installment of facts and figures around the world. (Don't we just love trilogies!) Not so useful for a lot of people, even value investors. Value investors just need to know enough about the companies they invest in order to do well. But hopefully, information here can help to widen your circle of competence.

We shall talk about a few industries and markets here: Steel, Automobile, PC, TV, Game console, Mobile phone.

The global steel industry is an estimated USD 600bn industry with global annual shipment of 1.2bn ton of steel. The No.1 leader in this industry is Mittal Steel with close to 10% market share. Interestingly, our hero, Warren Buffett has a stake in POSCO, a Korean Steel co. which is also one of the lowest cost producers of steel in the world.

To a layman looking at this 1.2bn ton for the first time, this may be just another no. and may not seem impressive at all so let’s translate this to something more powderful. 1.2bn ton of steel translates to 200kg of NEW steel being produced and used every yr for every person on Earth. This means enough steel to make 1 washing machine + 1 fridge + 1 aircon + 1 full set of stainless steel cutlery and 1 Ipod for every person on Earth EVERY YEAR! And this amt has been going up since humans walked this Earth (well it went up a lot more during the last 100 yrs as compared to the past 1000 yrs.)

Btw, consumption of all kinds of natural resources have only gone in one direction since, well, humans walked this Earth, and that is up. Environment fanatics talk about recycling and conservation but the way I see it: it’s a lost cause. Primarily bcos recycling comes at a price and it’s too high. Eg. it cost USD300-400 to produce 1 ton of steel and the truth is scrap steel (i.e. recycled steel) cost almost as much too! Anyways, that’s a topic for another day.

Ok, next. The global automobile industry is an estimated USD 2trn industry (Woah that’s huge! Remember global GDP is only 40trn!) with annual shipment of 70mn cars. Needless to say, the Japanese dominates this industry. 1 in 3 cars on global roads now are Japanese cars and Toyota now produces close to 10mn cars every year ie 1 in 7 cars is a Toyota. With China joining in the 5C’s race, we can expect even more cars and seems like the Japanese will win hands down bcos they are cheap and reliable, just what the masses want.

Fortunately or unfortunately, the rest of the industries/markets are all tech-related and most value investors hate tech bcos tech has never really created much value. No tech product ever stood the test of time, remember Polaroid? Or Walkman? Discman? SegaSaturn? So we may not see these products mention here 20yrs from now.

Anyways, the global PC market is USD 250bn market with annual shipment of 250mn units. This 250mn is an interesting no. bcos the global TV market is an estimated 220mn unit shipment. Hence it probably suggests the maximum ceiling for household products is around 200-300mn global unit shipment per year. This means that when analyzing the next killer household application, this may be a good no. to use as the maximum ceiling for unit shipment. Incidentally, the no. of households in the developed world is roughly 300mn as well.

The global game console market is a small one with a market size of USD 8bn and annual shipment of roughly 30mn units. Of course, if you include the revenue of the software (ie, the games), this market is already bigger than Hollywood. Most pple like to look at the market over its lifecycle though which is roughly cumulative shipment of 150mn units over 5-6yrs. During the last cycle, PlayStation 2 made by Sony shipped an incredible 120mn units over 5 yrs. But this time round, it’s Nintendo stealing the limelight with its Wii console. If you are not familiar with Wii, go google it up and be amazed! Sadly the PlayStation 3 has shipped only a miserable few million consoles to date.

The global mobile phone market is a USD 200bn market with annual shipment of 1bn mobile phones. If you are missing the impact of this, it’s 1,000,000,000 mobile phones! This means that 1 in 6 people globally buys a mobile phone every yr! If you take out the children and the old folks and those in not-so-privileged countries, we can even say that EVERYONE buys a mobile phone EVERY YEAR! If you think Ipod is big, think again! Ipod shipped a mere 100mn units over 4-5 yrs!

The mobile phone is definitely the most impactful killer application in the history of humankind although it may be at the tail-end of its growth. Wish you had bought a Finnish co. with a funny name some 15yrs ago huh!

So what’s the use of knowing all this? Well actually not very useful. It helps you to think about your co. (i.e. the co. you are investing in or planning to invest) in the global scheme of things. What is the market that your co. is competing in. How big is the market? Does your co. have a huge share of the market? These questions and more. With these no.s at the back of your mind, hopefully it will make the analysis easier. Doesn’t mean that you can make money though!

GDP & Population

In this post, we shall examine two macro statistics, GDP and Population.

The Global GDP is USD 41trn while Singapore’s GDP is USD 120bn i.e. we make up 0.29% of global GDP, which is quite insignificant. So actually, calling Singapore a little red dot is already a compliment. So don’t be so yah-yah okay?

US, the world’s biggest economy contributes to roughly 25% of global GDP, while Europe makes up about 20%. Japan is No.3 at 11% and China is slightly less than 5%.

However, in terms of PPP which stands for purchasing power parity, a chim term which I shall explain later, China is already No.2 at 19% of global GDP, Japan at No.3 at 9% and India is No.4 at 8%. Developing countries or the new buzz word: Emerging Countries now make up close to 50% of global GDP in terms of PPP and growing fast! Maybe Singapore should call herself an emerging country, bcos that’s the in-thing now siah!

PPP tries to measure GDP by taking away the effects of exchange rate in goods and services. In layman terms, one Big Mac in US will have the same impact on GDP as one Big Mac in China. Whereas, in the conventional method of measuring GDP, the Big Mac in US will impact GDP 3-4x more than the same Big Mac in China. So PPP actually gives a better picture of how world GDP is structured.

So that’s global GDP, btw it’s growing at roughly 4% (for the past 5yrs), developed nations are growing at 2% and Asia at 7%. Singapore has been growing at 8-10% for the past 40 yrs and we might do 11% this year. This is actually quite amazing, so maybe we can afford to be a bit yah-yah. But it always pays to be humble though. Who likes a yah-yah person even when he is in a position to be yah-yah?

The other macro statistic that you should know by hard in order to call yourself a seasoned investor is population statistic.

Well if you have no clue, better memorize this list now!

Global population 6.4bn pple
China 1.3bn pple
India 1bn pple
Europe 900mn pple (this is tricky, bcos depends on how you define Europe, this no. will change)
US 300mn pple
Indonesia 220mn pple
Brazil 180mn pple
Russia 140mn pple
Japan 130mn pple
Singapore 4mn pple

Needless to say, demographics drive long-term trends. Why did the global economy grow so strongly in the past 100 yrs? A large part of it is probably bcos the human population exploded. In 1900, there was only 1.6bn pple in the world but now we have 6.4bn pple. That’s roughly 3% annualized growth rate. And we all heard about the baby boomers. It was this generation that brought about a few big trends in the past few decades, like the rise of automobiles, the mutual fund (i.e. unit trust) boom in the US etc. So bottomline, population matters! Why do you think our Gahmen keeps talking about not enough babies? Now they know relying on Singaporean babies is not enough, so can only import more pple here.

Anyways, going forward, the world population is expected to grow only 1.1% per year and will peak out in 2050 when the global population reaches 10bn pple. Will the global GDP still grow at 4%? And more importantly, will equities give you 10% return per yr? Food for thought huh.

Interestingly, here is a forecast of top 10 populous nations in 2050
India 1.6bn pple
China 1.4bn pple
Europe 825mn pple
US 395mn pple
Pakistan 305mn pple
Indonesia 285mn pple
Nigeria 258mn pple
Brazil 253mn pple
Bangladesh 243mn pple

This is why the whole world is so bullish on China and India. Though China is now in the limelight with strong GDP growth and a large population base, India is the dark horse (no pun intended!) that will win the race. India is the fastest growing population on Earth and will become the most populous country in time.

It is fortunate that Singapore has links to both countries and can definitely find a niche to play in the world theatre of tomorrow, be it integrated resorts, a private banking hub or something else.

For those interested to play the India story, I recommend Singtel (btw this is probably my first stock recommendation on this blog, so don’t bet your house on it). Singtel’s stake in Bharti will be worth more than Singtel itself in time to come. So buy it now while it’s cheap (PER 15x).

Facts about SG Mkt

Hope this serves as a list of good-to-know for people investing in Singapore. These no.s can be used as some kind of benchmark when analyzing co.s and some are really quite interesting! Here is goes:

There are roughly 700 listed co.s in Singapore but only 50 in the STI index. In terms of market cap size, 6 co.s make up roughly 50% of the STI index.

11 co.s have more than SGD 10bn in market cap.
88 co.s have between SGD 1-10bn in market cap.
Slightly less than 300 co.s have between SGD 0.1-1bn in market cap.
The smallest listed entity had 6mn in market cap.
The co. probably paid more than 6mn to brokers, auditors and SGX. Hehe!

The whole of Singapore stock market cap is roughly SGD 600bn.
This is roughly 1% of the world’s market cap which is roughly SGD 70trn (or USD 40trn). This is also 3x our GDP which is roughly SGD 200bn. Rough, roughly, roughlier... The world is filled with uncertainty!

Only 5 co.s generate more than SGD 10bn in sales.
These 5 co.s are: 1 electronics company, 1 airline, 1 telco, 1 shipping co. and 1 distributor for cars.

Only 50 plus co.s generate more than SGD 1bn in sales.
The smallest 8 listed co.s in Singapore generate less than SGD 1mn in sales. (Pathetic right?)
Makes one wonder whether we should ask some of our ministers to list themselves on the stock exchange since they could generate more than that.

Only 5 co.s generate more than SGD 1bn in operating profits (or OP). So much so for Singapore Inc huh? Btw, 1 Integrated Resort will probably generate only SGD 150mn in OP.
Only 2 of the top 5 sales co.s are in the top 5 OP generators.
3 of these co.s are banks.

55 co.s generate SGD 100mn-1bn in OP (IR goes here!).
Slightly less than 200 co.s generate between SGD 10-100mn in OP.
Slightly more than 200 co.s generate between SGD 0-10mn in OP.
Which leaves slightly more than 100 loss-making co.s that are listed in Singapore.
This means 1 out of 7 co.s listed in Singapore are loss making!

About 150 co.s have more than 10% Return on Capital or ROA.
The average Return on Capital is 0.5%.
You have 20% chance of picking a winner, if you picked a loser, you might as well put that money under your pillow. Stock-picking is a dangerous game.

About 150 co.s have more than 5% Earnings Yield
(or a PER of less than 20x).
The average Earnings Yield is 4.2% or PER of 24x.
This means: even if you picked the winner, chances are it's already in the price. i.e. dating a chio babe at an expensive price.

About 60 co.s meet the above 2 criteria which is:
ROA greater than 10%
Earnings Yield greater than 5%.
If you buy all these 60 co.s today, you probably have a 12% chance of outperforming the STI on a 1-year investment horizon. Stock-picking is a bit better than Toto or 4D.

Other financial ratios of the Singapore stock market include:
Average Dividend Yield is 3%
Average Price to Book is 3.5x
Average Debt to Equity is 0.6x
Average ROE is 9.5%

These no.s are quite different from those listed on conventional sources probably bcos I included the a lot of kuching kurau names which have ridiculous ratios like ROE of -200% and Dividend Yield of 100% etc (no time to clean them mah, I can’t just blog whole day, can I?).

Anyways, hope these info help next time you need to analyse something. In investment, knowledge is power!

ROE Part 3

Return on Equity can be broken down into three different parts. This famous decomposition is known as the Du Pont Decomposition. Does it have to do with the chemical giant Du Pont? Probably yes, but for those interested, you can go Google and Wiki it up, now we are at the climax of the trilogy, so let’s move on. Recall that:

ROE = Net Profit / Shareholders’ Equity

This can be broken down into

ROE = Net Profit / Sales x Sales / Asset x Asset / Equity

Mathematically, this makes no sense as Sales and Asset are all cancelled out, why include them in the first place? Engineers cannot understand this. But when we break down ROE into these three elements, ROE can be re-written as

ROE = Net margin x Asset Turnover x Leverage

There are still a few twists and turns to the climax of this trilogy but to cut the story short it simply means that ROE is impacted by these 3 things

1) Net margin (which is Net Profit / Sales)
2) Asset Turnover (which is Sales / Assets)
3) Leverage (which is Asset / Equity)

In order to increase the company’s ROE, we just need to improve either one of the 3 things mentioned above.

We can reduce cost, hence even if sales remains the same, net margin goes up, ROE goes up. We can increase asset turnover, i.e. by making our existing asset work harder to generate more sales. Or we can increase debt.

Now (1) and (3) are easy. For (1) you just fire a whole bunch of people, make the rest work harder, or hire 10,000 cheap workers from emerging countries to replace those you fired. For (3), it is even easier, just borrow more. By borrowing, you increase the liabilities that your co incurs thereby increasing your asset base (usually as an increase in cash) which can translate into more sales and profits if those cash or assets are used correctly and hence ROE goes up.

To improve ROE by improving (2) i.e. increasing Asset Turnover is one hell of a job. I have got a post on that. Read this! Basically, when you see a company with high ROE, it pays to see how this high ROE came about. If it is due to high debt, then maybe it’s a Decepticon! So beware, there is more than meets the eye!

If it is due to either (1) or (2) then, probably it’s still ok. But if you see a company’s ROE improve over the years and it’s due to only (2), increase in Asset Turnover, then give the management some respect. It’s a job well done! And it is time to load the truck with stocks of this company!