Can You Become A Super Investor

Can you become a super investor?

by Koon Yew Yin

Many investment psychologists do not think an adult can master all the following 7 traits if he does not have them in his genes or learned them when he was young and become a super investor, like Warren Buffet.   

       

I started serious investing in public listed shares when I retired from executive work with IJM Corporation Bhd in 1983 at the age of 50 years. I was not an accountant nor have I a MBA degree. I was just a civil engineer and I hardly knew how to read a balance sheet at that time.

I started by reading to understand the basic fundamental principles of share selection as practiced by Warren Buffet, Peter Lynch and other great investment gurus.

Trait 1: Be a contrarian investor, the ability to buy stocks while others are panicking and sell stocks while others are euphoric. In 1983 when China declared that they wanted to take back Hong Kong, the people were selling as if there was no tomorrow because the Communists were coming. The Hang Seng Index plunged to about 700. Currently it is around 18,500.

In such a situation at that time, would you buy Hong Kong Shares?

I use all the money I had and I bought H.K. Realty and Trusts at $ 3.60. Its price was $13.60 before the crash. When the former British Prime Minister Margret Thatcher went to Beijing to negotiate the sovereignty of Hong Kong, Beijing rejected the appeal and the stock market plunged further. I bought more H.K. Realty at $ 3.00 with margin finance. Most investors would not buy and they would say that I was mad to try to catch a falling knife.  This was the most agonising period when HSBC was selling below $ 7.00.   

After several months of negotiation, Beijing granted another 50 years extension of capitalist system. The market rebounded immediately and H.K. Realty & Trust went rapidly back to $13.60. As the value of my holding went up, I bought more and more shares with increasing margin. In 1986, I even bought 47% of a stock broking company, called Kaiser Stocks and Shares Ltd. How I took advantage of the rising trend is history.

Trait 2:  Obsession in playing the game and wanting to win. These people don’t just enjoy investing; they live it. They wake up in the morning and the first thing they think about, while they are still half asleep, is a stock they have been researching. They are thinking about selling, or what the greatest risk to their portfolio is and how they are going to neutralize that risk. They are obsessed in enhancing the value of their holdings and they have very few friends.

Trait 3: The willingness to learn from past mistakes. Most people would much rather just move on and ignore the dumb things they’ve done in the past. I believe the term for this is repression.” But if you ignore mistakes without fully analyzing them, you will undoubtedly make a similar mistake later in your career.

Trait 4: An inherent sense of risk based on common sense. Most people believe analysts’ reports which are often ‘a buy’ recommendation. It is very seldom they recommend ‘a sell’ because they would lose the business from the company he has recommended ‘a sell’. You must always take any analyst report with a pinch of salt. I believe the greatest risk control is common sense which is not so common sometimes.

Trait 5: Confidence: Great investors must have confidence in their own convictions and stick with them, even when facing criticism. Buffett never got into the dot-com mania though he was being criticized publicly for ignoring technology stocks. He stuck to his guns when everyone else was abandoning the value investing ship. He was proven right when the dot com bubble bust.

Trait 6: Clear thinking. When considering a share, you must try to understand the nature of the company’s business and its inherent difficulties so that you can evaluate your risk exposure. There are a lot of people who have genius IQs who cannot think clearly, though they can figure out bond or option pricing in their heads.

Trait 7: And finally the most important, and rarest, trait of all: The ability to live through volatility without changing your investment thought process. This is almost impossible for most people to do. When the market makes a severe correction, most people dare not buy more shares to average down or to put any money into stocks at all when the market is plunging. People do not like short term pain even if it would result in better long-term results. Very few investors can handle the volatility required for high portfolio returns. They equate short-term volatility with risk. This is irrational; risk means that if you are wrong about a bet you make, you lose money. A swing up or down over a relatively short time period is not a loss and therefore not risk, unless you are prone to panicking at the bottom and locking in the loss. But most people just cannot see it that way; their brains won’t let them. Their panic instinct steps in and shuts down the normal brain function.

Many investment psychologists do not think an adult can master all the above 7 traits if he does not already have them in his genes or learned them when he was young. 

By that time, your potential to be an outstanding investor later in life has already been determined. It can be improved, but not developed from scratch because it mostly has to do with the way your brain is wired and experiences you have as a child. That does not mean financial education and  investing experience are not important. Those are critical just to get into the game and keep playing. If you cannot become a super investor, you would still earn more than the average earning of most people.

3rd Jan 2012  

Dialog Looking Good For A Pick-Up

Well, how long has it been since I have written about a stock? Better off not doing anything over the last 2 months. So, even when I write about this, I know very well, probably no one will care to follow, maybe only after it has rise another 20%.





Following the slump, there are plenty of cheap(er) valuations but which to follow. The money will always follow the big money. Speculative stocks (i.e. syndicate controlled) will be hard pressed until the broader market recovers. Big money means, big funds, what would they be looking at. They will scan all available research, maybe stay away from GLCs for the time being with elections so near. Looking for a lot of comfort on the upside and downside. Plus there must be sufficient liquidity.


Dialog ticks all boxes. Target prices set by most houses are close to RM3.00 after having scan recent reports (issued over last 2 weeks). Its now at 30% discount to NAV, a pretty safe range considering its average discount was closer to 14%. great liquidity.


Key potential catalysts besides the above: additional capacity (end user) at Tanjung langsat; and EPCC contract from Petronas' RM60bn Rapid project.





Dialog Group Bhd (Dialog), an oil and gas industry player, announced that its subsidiary Dialog Engineering & Construction Sdn Bhd (DECSB) had signed an engineering, procurement, construction and commissioning (EPCC) contract and alliance agreement with Pengerang Independent Terminals Sdn Bhd (PITSB).





A research report by OSK Research Sdn Bhd (OSK Research) indicated that the job scope estimated at RM1.9 billion included provision of the EPCC on an alliancing basis for the first phase of the independent deepwater petroleum terminal at Pengerang, Johore, and was expected to be completed by 2014.


The report quoted, “PITSB is a special purpose vehicle which will be 90 per cent owned by Pengerang Terminals Sdn Bhd (PTSB) and the balance 10 per cent owned by the State Secretary of Johore. PTSB is the joint venture company between Dialog and Vopak, with 51 per cent and 49 per cent ownership respectively.


DECSB, on the other hand, had successfully built a tank terminal, including terminal facilities in Kertih, Terengganu and Tanjung Langsat, Johore,” the report added.


There would be three phases of development and the deepwater petroleum terminal would ultimately have a total capacity of five million cubic meters and six vessel berths. The entire terminal would be on contiguous onshore and seabed land between Tanjung Ayam and Tanjung Kapal, Pengerang.


There would also be a harbour port, jetty and other marine facilities with water depth of up to 26 metres, which would facilitate the handling ultra large crude carriers (ULCCs) and very large crude carriers (VLCCs).





This terminal would be used for handling, storage, processing and distribution of crude oil, petroleum, petrochemicals and other chemical products.


Dialog was in a net cash position of RM282 million as at Mar 31, 2011. Dialog had yet to determine the ratio for these two means of financing. OSK Research did not think there would be high borrowings since the RM1.9 billion cost would be spread over a period of three to four years.


Also, with the EPCC job awarded back to Dialog’s 100 per cent subsidiary, DECSB, the cash would ultimately flow back to the group. The job award was regarded as being in line with management guidance of its EPCC division securing about RM500 million worth of contracts per annum.


The research house continued to regard the company as one of the most defensive oil and gas stocks in its sector, and one that possessed a steady business model as well as being in a net cash position.


Furthermore, the analyst opined that as Dialog constructed and managed more terminals, it would be enjoying more recurring income and good cash flow as well.


Based on a sum-of-parts valuation, the research pegged fair value for the company at an unchanged at RM3.12 per share.

Charity vs Philanthropy

Giving and receiving. Some will question the underlying motives of any giver. I would say, regardless of the motive, give first, ask questions later. A person's motivations should be best left for him/her to deal with - be it themselves or their God. For us to second guess is petty.


There is a saying that there is no real charity or philanthropy, and in many ways, there isn't. Why the idealism? Real charity stems from not expecting anything in return - e.g. fame, recognition, justification for self morality purposes, redemption, karma, being able to live with oneself, etc. Or because its the right thing to do, why is it right in our capitalistic world?

Technically, we may want to banish capitalism for socialism, then there would be "more equality and less disparity". No, I am not a socialist at all. I do not believe in socialism because it goes against the human spirit of achievement, attainment, performance and diligence. I am more of a democrat, a labour political party person, believing that the disparity in income should be a lot closer. That is, if you work as a labourer, you pay should not be that much different to someone who is an executive in an office. There are many places on earth that practices capitalism but you will find a plumber probably making more money than a bank manager - absolutely nothing wrong with that.

While we all strive to make a better living for ourselves and our family, we should always bear in mind our society and where its at. To accumulate and hoard wealth for their own ends would be fruitless and futile. Our days on earth are numbered. Ask any billionaire, they would gladly halve their fortunes to get to live healthily for another 20,30 years. But things are not like that, we all leave a legacy, and we should leave it a better place than when we arrive.



Even if you do not have wealth in the tens of millions, there are plenty of more important things you could do - making sure your kids are taught and brought up properly, making sure the lives of people around you are bettered, be the better parent, father, grandparent and friend.

Charity and philanthropy are not just money, but time and planning.

Much of the contributions to disasters such as the Asian tsunamis and Katrina in US is Charity. Charity is a gift made without any expectations beyond the immediate alteration of a need (giving to a beggar).

Philanthropy takes a more strategic approach as it addresses social challenges such as poverty and inequality, education, health, environmental degradation.

Therefore the need to advance and strengthen philanthropy for social investment and social justice is urgently needed for the following reasons:

• Decline in volunteerism and giving
• Reduced role of the state as a provider of social services
• Diminishing resources for civil society
• Growing disparities in society
• Severe environmental degradation
• Poor mobilizisation of indigenous philanthropy

Worldwide philanthropic models are undergoing a sea of change. Company portfolio’s now include social investments and social audits. Consumers are purchasing products from companies that practice ethics and corporate citizenship. Contemporary philanthropy is increasingly organisational in nature.

Global challenges as well as factors like education, economic success are transforming the field of philanthropy. Donors too are concerned about making the world a safer place. Philanthropy is sharing of private wealth through vertical (Corporate) and horizontal (community giving). Strategic Philanthropy is to integrate vertical and horizontal forms of philanthropic giving.

To end, when we find ourselves trying to second guess the real intentions of a philanthropist, revert the question to yourself. To the philanthropists, it would be encouraged that all go through more self introspection when it comes to altruism - its just your soul, really.

What Now?

The Sarawak event came and went with a whimper. I told my good friend who was very long on the market that you can always buy back if it turns the other way. Trend is important if you are trading, i.e. holding stocks for less than 3 months. When you see some uncertainty in front of you, why not get out first, ask questions later. Even if I had to buy back a few cents higher, its the price you pay for certainty.



I shall not dwell on the elections too much, there was a mini wave but the machinery is still formidable. So, back to stocks, what to buy? I suppose the oil and gas counters are the way to go, again. I also still like Benalec and Landmarks.

The market opened too firm, which stunted potential buyers. It should pull back slightly and the trend up should be underway again.

Have Commodity Prices Run Ahead of Fundamentals?

Have commodity prices run ahead of fundamentals? Or is it that China has begun stock piling aggressively? Commodity prices have rallied since February on the belief that putative 'green shoots' around the world validated a V-shaped economic recovery in 2009. However, these 'green shoots' merely signal the stabilization of economic activity at low levels, rather than a return to trend growth. Even if GDP growth around the world has bottomed, growth will continue to be negative or sluggish until 2011. As such, commodity price gains are a false sign of economic recovery - like the recent spate of bear market rallies in stock markets. The strong uptrend in commodity prices has been propelled more by technicals (investment demand - arbitrage, opportunistic stockpiling at low prices) than fundamentals (real growth in physical demand and production). Commodity prices will likely snap back to reality before resuming a more moderate uptrend in line with a U-shaped global growth path:

• 2 factors to mitigate global slowdown impact on commodities: 1) Growth to continue to be strongest in EM economies whose consumption is most commodity-intensive and 2) Investment to raise production capacity takes time - investment cuts and delays due to lower prices may lead to supply crunch in the future
• Sectoral performance: Traditional sectors such as metals and energy remain fundamentally cyclical as they are more closely tied to industrial production than agriculturals. Agricultural commodities may outperform metals and energy due to less elastic demand and the increasing rarity of very good harvests

Review


• Mar 19 2009: Commodities surged the most this year, led by precious metals and energy, on speculation that the Fed's steps to revive the U.S. economy will spur demand for raw materials as a hedge against inflation. Silver jumped 13%, the most since 1979. Gold had the biggest increase since September, and crude oil topped $52 a barrel. Every commodity in the Reuters/Jefferies CRB Index of 19 prices climbed
• Worst annual performance: Reuters/Jefferies CRB Index of 19 raw materials fell 36% in 2008, the most since the gauge debuted in 1956, to 229.54. It rose to a record 473.97 on July 3, then dropped to the lowest since August 2002 on Dec 5
  
• Biggest 1-day drop since 1956: Sep 29 2008, Reuters/Jefferies CRB Index fell 21.35 points or 5.8% to 343.2 after the House voted against US bailout plan
• Steepest monthly drop since 1980: In July 2008, CRB Index fell 12%

Outlook


• Despite current correction, the secular trend remains upward due to tight supply/demand fundamentals. In the medium term though, focus will be on global slowdown, easing inflationary pressures, dollar recovery, and credit tightening - all bearish for commodities
• There is a risk that some commodity markets have decoupled from fundamentals. The fundamental outlook represented by e.g. stocks for aluminium, nickel and lead has not changed significantly in the last month. Demand for oil in the US is also still pretty weak. It seems that the commodity market has run a bit ahead of the fundamental picture. Both base metals and oil are quite vulnerable if we get a set-back in risk sentiment.
• Supply has been a big support for industrial metals. Demand destruction has led to a correction in energy prices. Agricultural prices have corrected significantly based on improved crop conditions and concerns regarding increased regulation of commodities markets in the US. Prospects for higher inflation has been muted by the correction in energy and has depressed the gold price
• There is only so much demand to accommodate price increases amid tightening in credit markets, falling asset prices and slowing nominal incomes. Maintaining the bull run in commodities in the face of sharply slowing US demand will require that decoupling theories hold

p/s photos: Fan Bing Bing

Still Have My Concerns On KNM

After having a few more hours to ponder over KNM's results, I am still uncomfortable. As nice as the figures present itself for KNM, there is still niggling doubts over the "authenticity of foreign earnings". Let's say I am not comfortable yet as the figures seem 'too well-rounded'. The majority of KNM's earnings still come from their overseas operations. If there is even a hint of impropriety it would have to come from that. For the time being, we have no inkling on the auditors working on those components. It may sound petty, but in an environment where earnings have been trashed left, right and center, it would seem prudent to want more information and verification when the majority of earnings are from overseas. I repeat, if there is one area that can be compromised, it would have to be foreign earnings component. Hence, until more clarity is presented, I would still avoid KNM.

The other niggling thing which has been weighing increasingly heavily on my mind was the lack of research coverage by foreign banks. Previously I wrote:
"On more research, I found that the company is not "open and welcoming" enough to foreign research houses. Its only local and Singapore broking research which carry the research. Only Nomura sticks out like a sore thumb. On speaking with some of the analysts, the main issue has been the company's lack of cooperation and appreciation of the need for deeper information. That is surprising considering that foreign shareholders hold a substantial amount of shares in KNM, at times in the 20%-30% range. When you are "not so willing" to be open, you may be perceived as having something to hide. As they say, the silence is deafening. In fact, this issue would trigger a big red alert to me."
Pondering more on that, I came to the conclusion that maybe why the company has not been that welcoming to foreign research houses was the fear that these houses may be able to cross-check and try verifying the foreign operations of the company. It would be "easier" for them to ask their counterparts in other global offices to solicit more information. I could be wrong, but in my view, its a big red flag. We certainly need more assurances.


p/s photo: Fan Bing Bing

The Parable Of Paternalism

"The combination of excessive paternalism and a reluctance to venture abroad has left Malaysia sticking out as the new poor man of Asean. Its listed companies are generally inward-looking with limited ambition.”

This was apparently an opinion of a foreign fund manager, not exactly positive. The quote reminded me of a story which I heard a long time ago, which now I am going to paraphrase and turn it into my own parable of paternalism, enjoy! Its a bit long, but it’s worth it.

There is good paternalism and the not so good ones; the latter abuses the right in favour of some. This parable is about the dark side of paternalism.

I once visited my uncle in the Isle of Golden Chersonese, it was a nice place, hot and humid, occasional flash floods, natural resources aplenty... in fact very much like Malaysia. He took me around the island state and we had a wonderful time, but by the second day I was feeling ill, probably from my binge on a variety of delicacies.

My uncle said, no problem, ... and took me straight to Hospital Pee-Jay, apparently a heavily subsidised government hospital. At the check in counter, my uncle chatted intimately with the head matron for a few minutes.

He came back and said, we should be able to get in and out quick.

He told me there were three types of physicians I could see, all cost the same €“ traditional medicine department, western medicine department or mental retardation department.

There were three queues, one to each of the respective departments, the longest being for western medicine. There were about 50 people.

The traditional medicine line was shorter with just 20 people, about the same for those suspicious looking types lining up for mental treatment.

Naturally I ruled out the third option, and told my uncle that I preferred traditional medicine as the line was shorter. My uncle whispered to the head matron and she held my hand leading me past the queue to traditional medicine.

I was shocked and embarrassed at the same time. I mean, I was jumping the queue of 20 people in front of me; they must have been waiting for at least 2 hours.

I was concerned that someone in the queue might jump out and curse me for jumping the line. After all, I wasn’t terribly sick, no where near to retirement age and not physically handicapped. But the people in the queue were quiet, some even nodded to me as I passed them.

The doctor treated me patiently and thoroughly, and as I walked back out past the line of people, some even smiled and waved goodbye. My shock and embarrassment turned into a power trip. I remember thinking “Hey, this is cool, I jumped queue and no one even showed me ugly faces... man, my uncle must know some important people here”. It felt good.

It felt so good that I turned to my uncle and said, “Well, since I am here, you think I could also visit the western medicine doctor as well?” Half hoping not to offend my uncle, but he said it was not a problem at all.

We did the same thing again, only this time, the queue was much longer, but the same response I got. I was feeling quite full of myself. It felt like walking on air, exaggerated self-importance is a wonderful feeling I’d say. Heck, initially I felt sorry for those in the queue, but that kinda evaporated by now.

Coming out of the western physician’s office, an outrageous thought crossed my mind €“ why don’t I visit the mental physician too, just for the fun of it. I told my uncle that, and he whispered to the head matron, and off we went, passing each weird looking person in the queue to the mental department.

I looked at each of them as I walked past them, some stared blankly towards the ceiling, another just buried his face in his hands, then there was one with his mouth wide open making squawking noises every 3 seconds. I was almost at the door of the physician when a lady in the queue stepped out, stared me down, stopping me in my tracks.

She was quite pretty too, but there was something weird about her. She was pinching her left arm non stop and drawing circles with her right foot on the floor. There was an uncomfortable silence, I couldn’t stop staring and I didn’t know where to look .... then she blurted out “Hey, who do you think you are.... don’t you need to line up like everyone else ... or are you mentally retarded?” ... and then she gave out this bone chilling laughter that I will never forget. The end.

So, who are you - are you in the queue keeping quiet, why are we in the line in the first place, .... are you the gatekeeper like the matron, are you like my uncle?? Who actually runs the hospital ... and who is the mental one in the parable?

p/s: Fan Bing Bing / plus this will be the last article for Biz Weekly for a while... till further notice... this was written like months back but was kept rescheduled till later and later ... lol... for obvious reasons... ; )