Competition experience

Recently represented my school in a business case competition, was held in one of the universities in New Zealand. I was required to analyse the situation of a company based on several articles and extracts from its annual report, then subsequently provide recommendations to improve on their business operations. I had the chance to compete with many seasoned competitors, and this was definitely an eye-opener for a freshman like me.

The best experience for me however, was the opportunity to present in front of the management team of the company that I was analysing. My team was lucky to have had the CEOs of all the companies as our panel of judges in all 3 rounds we participated in. The idea of having to analyse a business in 5 hours, something that the CEOs had done for the past 20 years, was indeed scary but I relished the challenge at the same time.

In one particular round, the CEO of a certain listed logistics company was particularly defensive about his business. A quick analysis showed that the cash conversion cycle was low and that a huge portion of its current assets lay in accounts receivables. In such a climate, bad debt expenses are likely to increase substantially and the company could face a cash flow problem. Although operating cash flow was positive for now, the company could soon run into some cash flow problems, especially if it kept up with the acquisition strategy.

The problem with our team was our candidness in providing a solution. We decided to come forth with the problems that the company faced, and the CEO started to become defensive about it, claiming that gearing was still low for them, and that they could continue acquiring. Which leads you to think, is gearing up really the best way to obtain cash? It seemed to us that he was fairly unreceptive to comments. In the end, the university which claimed that the company was doing well and only suggested fine-tuning the business won that round. What about us? No kudos for guessing what happened. We came in last for that round.

We paid the heavy price for that; our subsequent performances were pretty good, eventually missing out on the finals by a single point. Lesson? sometimes, do look at the other party you are addressing, and be careful with what you say. The CEO obviously did not enjoy having somebody talk about his business in a negative way, and did not seem to accept that viewpoint. We subsequently changed our strategy to something more pleasing for the CEOs and came out fairly well, winning one round and coming in 2nd in the other, although our better performance might not necessarily be attributed to "bootlicking".

Ultimately, the experience of presenting in front of the CEOs was definitely very enjoyable, and their approach to looking at businesses taught me a lot about how to analyse business models and the real-life issues that companies face. I would definitely be able to impart this knowledge to investing in future.

Anyhow, happy Valentine's Day to all out there.:)

News update

Been so busy with my competition that I've had barely any breathing space. Nonetheless, still managed to take out little time to read, and found this piece of news that caught my eye.

Singapore state investor Temasek Holdings said on Friday its chief executive Ho Ching will step down and be replaced by former BHP Billiton CEO Chip Goodyear on Oct. 1.


CNBC.com
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Ho Ching, wife of Prime Minister Lee Hsien Loong, joined Temasek as a director in January 2002 and has been CEO since January 2004.

"The team has already embarked on a different stance since mid-2007, and has begun to review its long-term plans under different scenarios prompted by the economic downturn," Chairman S. Dhanabalan said at a media briefing.

"If we are to bring in new leadership, it would be just as good a time as any to involve a new leader in this review."

Goodyear, 51, stepped down as CEO of BHP Billiton in January 2007. He joined Temasek's board on Sunday.


Will probably talk about the competition I went to, and what I've learnt from it.

The End of a Tumultuous Year

The year's been long, with ups and downs, but what a good year it has been. Looking back, I must say that I have learnt a lot about the markets and investing, and how to handle emotions. Let's take a quick flashback on the year that is just about to pass.

2008 ushered in one of the worst performances of the markets to date. The markets were hit by bad news one after another. We started off with Bear Stearns, the quickfire sale to JP Morgan and the U.S government's involvement in it. The 4th largest bank, a century old bank, brought to its knees, once worth $180/share, and the idea of selling it at $2/share was mooted at one point of time.

Now, nobody's gonna forget the mortgage lenders as well, Fannie and Freddie. There used to be an air of invincibility about the 2 lenders, that government support would render them infallible. And then, the markets actually started to doubt the sustainability of the 2 lenders, and the selldown ensued.

Lehmann Brothers was the next victim to have its scalp claimed. Another century old bank, suffering a run, and it went down within a short period. This is bad, the market claimed, and we saw fresh new lows being set and risk aversion at its highest.

Then, around the same period of time, the famous bull of Merrill Lynch, the world's largest brokerage, was sold to Bank of America. Morgan Stanley and Goldman were "converted" to commercial banks for purpose of raising of equity, and this marked the demise of the investment banking business model that had been the success story of the decade where all excesses of the financial world had gathered.

Many high profile corporations were victims of the crisis. Bill Miller, proud record holder of beating the S&P for 15 straight years, has been brought down to his knees, now currently amongst the top 3 for the worst performing fund in 1-yr,3-yr and 5-yr. Washington Mutual, the nice resident bank, with the highly-rated WaMu business model, also went kaput. Many scandals plagued the financial world as well, we had the Madoff scandal, and closer to home, the controversial Lehmann Minibonds saga.

So many incidents, so much turmoil. Consider ourselves lucky to have the chance to look back, years from now, upon this year where presidential elections and terrorist attacks were not the ones that screamed across headlines, but rather, a whole slew of events that threatened to cripple the grand 'ol America.

Even if some of us might emerge from this crisis bruised financially, however, whatever doesn't kill us only makes us stronger. The crisis would almost definitely make us mentally stronger, and emerge as a far better investor by training us to handle our emotions better.

On a personal level, my investing journey has started from the time when the STI was around 3400+ to today's 1700+. That's a close to 50% drop, a very scary period indeed for a novice investor. Nonetheless, coupled with dividends, some nimbleness, a little trading plus lots of luck, I have managed to stay pretty decent. A quick look at my holdings, and the lessons I have learnt from my trading so far.

Let's look back at some lessons that I have learnt.

1) Do nothing when I've nothing to do.

My first foray into the markets was the STI ETF. I lost about $100 on it. The purchase was bought on impulse, I did not think about whether the ETF would be a better alternative to the other companies trading on the SGX at that point of time. I decided to cash out at about the same price that I bought it at, but minus the trading fees.

2) Really understand the businesses that you own, and if u're unsure, stay clear.

I didn't really learn this lesson the hard way, though I looked back and realised that things could have been much grim-mer. I did my research on both companies, but it was very insufficient and I did not have a clear mind as to how the company's operations would be hit and it's competitive strengths. I bought NOL and Sembmar and sold them at around 15% and <10%>

3) Don't take profits for the sake of taking them.

I took profits for NOL and Sembmar because I felt the market's were starting to become a bit optimistic. Pretty silly looking back, because I did not exactly determine, through calculations, why the market was optimistic. It brought me some cash in, and the decision "paid off", but problem is that this is definitely not a method I would be able to employ successfully for my entire investing journey. Pure luck I would say.

I have learnt to not take profits and hold on to them, and even if the profits turn into losses, it's perfectly fine. Do the homework, be sure to handle the price levels and reasons behind them, and we're probably on the way.

4) Build in expectations to ur calculations, and have a handle on why the prices are reflected at this particular level.

I did this for some of the property companies that I held. I incorporated the mark-to-market writedowns into the assets valuations, and found that some of the companies were trading at reasonable levels. It is NOT OUR JOB to predict how much write-downs there will be, but rather, to find out if the market is pricing in earning drops at reasonable levels. If you think so, pick them up. E.g. the markets priced in about 75% write-down in assets, but do note that Kepland's assets are backed by 25% of cash, and you can;t really write down cash can you? Thus I picked them up. Even if prices were to become even more depressed, I am comfortable with a 75% write-down level for Kepland.

5) Do your homework and have confidence in yourself.

I must admit that I have done some homework but still felt a dearth of confidence, which resulted in me previously taking profits. I have since ceased to do so a few months ago. Do your homework, estimate some downside risks. Try not to use relative valuations from previous crises, I believe, because companies that have survived the crises are probably more resilient and valuations will be different. Refer to operational performance instead.

Since then, I have still done a little trading, but very very minimal, and the last done was a few months ago for Parkway where I was "forced" to sell my shares as the markets were being overly optimistic, I figured, pricing in a 10% growth over the next few years when obviously the Group had been hit in the previous few crises( I took a look at the reports during those times). I booked some pretty decent profits of around 40+% before I bought it back at a lower price.

Shall probably talk soon about my individual holdings, the size of my portfolio, and other lessons I have learnt so far, other than the abovementioned 5.

Ciao 2008. Let's usher in the New Year.

A good company = good business?

After looking at Qianhu's financials, I've decided not to become vested. Why so? I've taken away some valuable lessons from this.

1) A good company might not be a good business.

From my business overview so far, seems that Qianhu is a well-run company, led by able management. It might turn out to be a great ornamental fish company, I do not have too much doubts about it. But the problem lies in that a well-run ornamental fish company is at most, a great ornamental fish company. It might not necessarily be a good business. As someone once said, "A horse which can count from one to ten is a remarkable horse, not a remarkable mathematician., or at lest something in the realms of this. There are restrictions in the industry, one the more prominent being the small worldwide industry size of $14 billion (even though it has been growing very impressively).

2) Good management does not necessarily = good outcome

Few will disagree with me on the management capabilities of the Yap family. Rarely do you see someone who has contributed so substantially to not only the company itself, but to the industry as a whole with various product and innovations. Nonetheless, a fantastic manager managing a chicken rice stall can ultimately, only see his chicken rice stall grow larger in size and open a few more stalls, but nothing more than that. Similarly, Mr Yap and family have chosen to continue their family business and venture into the ornamental fish industry. Nonetheless, the industry seems to have relatively muted prospects at this moment. A growing industry, but not huge enough for me to want to own this business for years to come.

However, I might be wrong and rue my missed opportunity for years to come. I shall continue to monitor events within this company though, and hopefully my judgement will be proved wrong in the years to come.