Worth over a hundred millions, and get paid in tens of millions a year

1. Is it possible to be millionaires from employment?

2. How about getting paid in millions a year from employment?

3. How about getting paid in millions a year before 40 years old and worth at least 100 millions in Net Worth purely from employment, and that company doesn't belong to your parents (or relatives) ?

Take a look at Value Partners Group. In the year 2007, the executive directors of the company (with their age) is as below:

- Cheah Cheng Hye, aged 54

- Law Ka Kin, aged 47

- Ho Man Kei, aged 41

- Choi Nga Chung, aged 36

- Ngan Wai Wah, aged 34

- Renee Hung Yeuk Yan, aged 33

- Louis So Chun Ki, aged 32

Below is their total compensation for the year 2006 and 2007.

Compensation and Benefits of Executive Directors for the year ending 31st Dec 2006

Compensation and Benefits of Executive Directors for the year ending 31st Dec 2007

Their annual salary is slightly above HK$ 1 million (about RM 440k) , but look at their bonus (for year 2006 and year 2007)!

In 2007, 5 of the Directors were paid about HK$ 40 Million plus (about RM 18 Million), while Cheah Cheng Hye was paid HK$ 234 Million (about RM 103 Million) !

How are they paid so high? There's a quote that says, "The best way to get what you want, is to deserve it."

Do they deserve to get paid so high?
Value Partners manage Value Partners Classic Fund, which have gained 2,173.0% from 1st April 1993 up to 29th October 2010, an annualized return of 19.4% over 17+ years! They manage USD 4.5 Billion and USD 7.3 Billion for the year ending 2006 and 2007 while earning 41.8% and 41.1% for their Classic Fund investors (A Units) for the year 2006 and 2007.

Since they add value to their fund investors, i believe they deserve such high pay (they're paid 1.25% management fee + 15% performance fee).

And how much are they worth in Assets?



At the end of 2007, the each share is priced at HK$ 7.63 (about RM 3.3572), while as of this posting (12th Nov 2010), the share is priced at HK$ 7.27 (about RM 2.908). So, they're worth above RM 100 Million each (except for Mr. Law, who joins the company only in the December 2004).

Cheah Cheng Hye is a Billionaire in HK$ as well as in RM. And he's a Malaysian (Penangite, and an old frees, not to mention he's also one of the top chess player in Penang Free School back then.)

Source of the information: 2007 Annual Report of Value Partners Group
Value Partners Group's Website
Value Partners Classic Fund
Value Partners Investment Philosophies

Some Questions (Q) and Answers (A) about investing

Q: Calculation of Intrinsic value depends on how accurate is business evaluation on projected income growth
A: I don't use that, because i don't forecast/ project. I don't see any difference in forecast vs speculate, which to me, both are gambling. Ask any person who does business/ in the sales line, and ask them to project their income growth "accurately" (some so-called analyst even project to 2 decimal point), which i find it amusing.

Q: What is the Risk free Rate for Malaysian stocks
A: There is no such thing as "risk-free rate for stocks". All stocks have Risk (and depending your definition of "risk", all financial instruments have risk, including FD which have one of the highest risk of inflation "depreciating" your money).

Academicians and Statisticians defines risk as "volatility (or fluctuation) of its price around their return". Based on such definition, Risk Free Rate in Malaysia (if you're asking that) is the FD rate. Depending on your definition again, it could be 1 month FD, 1 year FD, or even the FD rate that you're getting.


Q: Identify good companies
A: A good company is one which consistently generates high Return on Equity on its normalised earnings. A good company might not mean a good investment (if you're paying a high price for it), though it's a good place to start.

What Warren Buffett says about Diversification

This is one of the question asked by one of the student about Diversification to Warren Buffett. The entire video is available here : http://video.google.com/videoplay?docid=-6231308980849895261 . I strongly recommended to see the video!.

Says Buffett, "If you are not a professional investor, if your goal is not to manage money in such a way that you get a significantly better return than world, then I believe in extreme diversification. I believe that 98 or 99 percent — maybe more than 99 percent — of people who invest should extensively diversify and not trade. That leads them to an index fund with very low costs. All they’re going to do is own a part of America. They’ve made a decision that owning a part of America is worthwhile. I don’t quarrel with that at all — that is the way they should approach it."

Consistently good companies

From The Edge's 2007 Shareholder Value Creation Award pullout, there is a page which found useful. It's the page where it shows companies that are consistently appearing every year in the KPMG Shareholder Value Creation award since the past 6 years. Here's the page:

Below is the companies in alphabetical order:

I believe these companies are classified as "Good Companies". However, are they also a good stock (or a good investment) ?

Let's take for example British American Tobacco Malaysia Bhd (BAT), who is the No 1 in Shareholder Value Creation for 6 consecutive years. Looking at the table above, a person might wrongly conclude that BAT would be the best performing stock for its shareholders. But the truth is far from it. This is because a good company would only be a good stock (or a good investment) if the purchase price is a good price.

Continuing with BAT, in the year 2007, the company makes an Operating Profit of RM 1.049 Billion (before tax). If we adjust it for 27% tax, we'll get Net Operating Profit After Tax (NOPAT) of RM 766 Million.

To generate the profit above, the company uses its assets, which is called "Invested Capital". Invested Capital comes from 3 sources:
1) Total Interest bearing Debt, and
2) Deferred tax liabilities (some might exclude this, but KPMG includes it to calculate Invested Capital), and
3) Total Equity.

For the KPMG Shareholder Value Award, KPMG uses Average of beginning and end of the year's number for the 3 numbers above.

In year 2007, the Average for the sources of Invested Capital for BAT is as below:
(1) Total Interest bearing Debt = RM 725 Million,
(2) Deferred tax liabilities = RM 57 Million,
(3) Total Equity = RM 449 Million

Thus, the total Invested Capital for BAT in year 2oo7 is RM 1.231 Billion.

For a company to generate a NOPAT of RM 766 Million from Invested Capital of RM 1.231 Billion would mean the company earns 62.2% Return on Invested Capital (ROIC). This is anexcellent figure, especially when BAT has been able to maintain at ROIC at that high level for so many years.

Since BAT have 285.53 Million shares outstanding, the Average Equity per share would be RM 1.57 (derived from (3) Total Equity of RM 449 Million divide by 285.53 Million shares outstanding).

Now, are you buying BAT at RM 1.57 per share? If you do, then the return from the business would reflects a good return on your money as well. However, BAT's stock price is traded around RM 40 per share, which is 25.4 times the book value.

I believe at current price of BAT, the market have already fully valued BAT's performance to the stock price, and thus, a person who invested in BAT (which is a good company) might not be obtaining good results.

Summary: A good company might not be a good investment if the price paid is too high!


p/s: Some people argues that we should use the market's Equity price rather than the book value's Equity for the (3) Total Equity. Had we use the market's Equity price of RM 40 per share, the (3) Total Equity would be RM 11.4212 Billion (instead of just RM 449 Million). Then, the total Invested Capital would be RM 12,203.2 Billion, and the ROIC would just be 6.3% (which is just a moderate number).

Comments?

Top 100 Listed Companies In Terms Of Shareholder Value Creation

On 18th August 2008, The Edge published special report of the top 100 listed companies in terms of shareholder value creation / awards (I'll use SVA as short form).

That's the first time and the reason that i bought The Edge, after thinking about it for quite some time to decide to purchase that magazine (which cost RM 4.90). Talking about being careful with my money!.

Anyway, I've found a list of "candidates" for me to research further on some good stocks. It might worth my money after all!. Here's a list of the top 100 companies that appear in SVA 2007.

The companies listed here appears because these companies earn a return in excess of what the company's capital should earn. For the analytical person, the methodology is as below:

SVA = Return on Invested Capital (ROIC) - Weighted Average Cost of Capital (WACC)
(The edge's calculation formula is different from stated above, but the results are the same. I wonder why do they make the formula so complex, when they can "phrase" it like what i've phrased above.)

Here's the pullout page from The Edge on the methodologies used:

See the links below to learn more about ROIC, WACC, or both:
Return on Invested Capital by Wikipedia : http://en.wikipedia.org/wiki/Return_on_Invested_Capital
Return on Invested Capital by Fools.com : http://www.fool.com/investing/small-cap/2005/12/30/foolish-fundamentals-return-on-invested-capital.aspx
Spot Quality with ROIC : http://www.investopedia.com/articles/fundamental/03/050603.asp