Is a low price fund means higher potential gains?

To answer this question, we need to understand how a unit trust fund’s price is derived daily. For example, why a particular fund’s unit price is is RM 0.2858 in a particular day, and not RM 0.2832 or even RM 0.2953. Who determines this price, and how is this price derived?

A fund’s price is determined by the underlying asset’s closing market price divide by total number of units of that fund on that particular day. This is the equation:

Fund’s Unit Price = Underlying Asset’s Closing Market Price / Total Units in the fund.

From the above equation, the fluctuation in a Fund’s Unit Price depends on the Underlying Assets, and it doesn’t depend on the fund’s Unit Price. After all, a fund’s unit price depends on “how many slices the fund is sliced”. The more units sliced, the fund’s unit price will be lower.

In fact, if both funds have the same Assets in the same proportion, both funds will fluctuate in the exact percentage, irrespective of the number of units in the fund. Putting it in a laymen way, if Fund A with unit price of RM 0.20 per unit increased by RM 0.10, then fund B with unit price of RM 1.00 per unit will increase by RM 0.50 (and NOT RM 0.10)!, if both funds have the same underlying assets at the same proportion. Both funds will increase by the same percentage, and not by the same amount!.

How about in reality (as oppose to the above “theory”)? Let’s take a look at 2 funds from one of the unit trust companies in Malaysia.

Fund A’s unit price is RM 0.4042 on 2nd Oct 2006, while Fund B’s unit price is only RM 0.2156. If a person wants an “aggressive” fund (fund which fluctuates in prices a lot), does it mean that Fund B is better? Or does it mean that fund B have more potential for higher return simply because the fund price is lower? Let’s take a look at their month by month’s prices from 2nd Oct 2006 until 1st Oct 2009 below:

*NAV is adjusted for unit splits/ bonus issue or distributions.

Simple Analysis

Fund A (the fund that have a unit price almost double of Fund B) have (in terms of percentage):
a) Higher Return
b) Higher advancement from the lowest price to the highest.
c) Higher changes in a month

In conclusion, a fund’s unit price does not tell whether the fund is a volatile fund, better potential for higher returns or it’s an undervalued fund.

A much better way to measure a fund’s volatility (fluctuation in unit prices) is looking at:

1. Fund’s Asset Allocation (percent in Equities, Bonds, and Money Market).
   - Funds that invest mainly in Equities will fluctuate more than funds that invest mainly in Bonds.
   - Funds that invest mainly in Bonds will fluctuate more than funds that invest mainly in Money Market.
   - In fact, more than 90% of the long term return can be attributed by Asset Allocation.
2. Fund’s objective/ restrictions or sub-category of the Assets Class.
   - Funds that invest in overseas will fluctuate more than funds that invest locally (due to currency exchange fluctuation)
   - Funds that invest in high dividend paying stocks will fluctuate less than funds that invest in low dividend paying stocks (like growth stocks).
   - Funds that invest in a specific sector/ group will fluctuate more than funds that are well diversified (no particular concentration on any sector/ group).
   - Though these factors do determine the fund’s fluctuation, but it doesn’t play a big role like (1) above.

Luckily for laymen, FMUTM did a good job to make it compulsory for all unit trust funds that have 3 years track record to publish their fund’s volatily. Read their full article here: http://fmutm.com.my/doc/BrochureinvestorMay09.pdf .

Anyone still thinks Berkshire Hathaway class A at USD 100,000 per share is “expensive” when compared to a “cheap” share of USD 1 per share?

More often than not, it’s the other way round!.

Obvious Mispricing / Inefficiency of 2 stocks in Bursa Malaysia

Imagine a supermarket selling 2 packages below:

Package 2 has all the same item as Package 1 (more in size, and also more items), but selling at an even lower price! Isn’t this insane? Given the 2 package below, you might wonder why there is anyone wants to buy Package 1. Any rational buyer would not pay that price for Package 1 when they can buy Package 2 at a lower price and owns more size of the same item, and include other items as well.

This is what happens with two of the stocks in Bursa Malaysia.

Kuala Lumpur Kepong Bhd (KLK) is 46.57% owned by Batu Kawan Berhad Bhd (BKAWAN) (See Appendix (a) for the source of the information). At market price of RM 12.00 per share (at 16th July 2009), the market value of KLK is RM 12.673 Billion , based on 1,064,965,692 shares outstanding (See Appendix (b) for the source of the information).

Since BKAWAN owns 46.57% of KLK, the fractional ownership in KLK is worth RM 5.951 Billion. On top of that, BKAWAN owns RM 386.4 Million of other Tangible Equity, out of which RM 135.4 Million is Net Cash (defined as Total Cash & Cash Equivalent minus Total Debts of the company) (See Appendix (c) for the source of the information).

As at 31st March 2009, the number of shares outstanding in BKAWAN (after deducting treasury shares) is 426,487,000 (See Appendix (d) for the source of the information). Given the share price of RM 8.70 on 16th July 2009, the market value of BKAWAN is only RM 3.710 Billion !

Or putting in a table format for BKAWAN, you’ll get (based on 16th July 2009 closing price) (refer to Table 1):

Table 1 : Price vs Value of the entire company of Batu Kawan (BKAWAN)

If you see Table 1, you’ll notice that BKAWAN owns 495.902 Million shares of KLK. Since the entire company of BKAWAN is “sliced” into 426.487 Million pieces called shares, each share of BKAWAN owns 1.1628 shares of KLK indirectly!.

Stating this, each share of BKAWAN is definitely worth more than KLK share (after all, each BKAWAN shareholders owns 1.1628 shares of KLK + others assets too).

But the market priced KLK share higher than BKAWAN. Infact, BKAWAN is only priced at RM 8.70 while KLK is priced at RM 12.00!.

If you see this as madness, then look at per share basis for BKAWAN (refer to Table 2):

Table 2 : Price vs Value for 1 share of Batu Kawan (BKAWAN)

And if you compare KLK share with BKAWAN share side by side, you’ll get Table 3:

Table 3 : 1 share of KLK vs 1 share of BKAWAN

In an equation format, it’s as below:

1 BKAWAN share = 1.1628 KLK share + “Others Assets” worth roughly RM 0.90

The more obvious BKAWAN is a better value compared to KLK, the less obvious why “investors” would want to own KLK at higher price and not BKAWAN, which is selling at a lower price than KLK!. If you wonder why people would buy or own shares of KLK at RM 12.00 and not BKAWAN at RM 8.70, I can only share a line from a song by Michael Jackson, “You are not Alone – I am here with you”.

Some “investors” might say KLK have higher volume, which makes it easier for them to trade. On this, it reminds me of a quote by Warren Buffett, “Ease of divorce should not be the reason for marriage”. Infact, he also says, “If you don't feel comfortable owning something for 10 years, then don't own it for 10 minutes.”

Finally, I end with a quote by Warren Buffett on Fortune Magazine (April 3, 1995). He says, “I’d be a bum on the street with a tin cup if the markets were always efficient.” There are mispricing in stocks / securities, if we’re hard working in finding them.

Disclaimer: This article does not constitute a recommendation for buy or sell any stocks or securities. It is purely meant for educational purpose, and the author is not responsible for any loss arising from trade as a result from this article.

Appendix

a) Ownership of BKAWAN on KLK can be found in the 2008’s annual report (http://announcements.bursamalaysia.com/EDMS/subweb.nsf/7f04516f8098680348256c6f0017a6bf/bd4d7b1afc5330534825752f0018ed3f/$FILE/KLK-AnnualReport2008%20(2.8MB).pdf ) page 132 of 141 from the pdf file (or page 130 from the page number in the report).

b) Shares outstanding for KLK can be found in the 2008’s annual report (http://announcements.bursamalaysia.com/EDMS/subweb.nsf/7f04516f8098680348256c6f0017a6bf/bd4d7b1afc5330534825752f0018ed3f/$FILE/KLK-AnnualReport2008%20(2.8MB).pdf ) page 131 of 141 from the pdf file (or page 129 from the page number in the report).

c) BKAWAN’s tangible assets can be calculated by using the company’s “Equity attributable to equity holders of the company” minus “Goodwill on consolidation” from the 31st March 2009 Consolidated Balance Sheet of BKAWAN’s quarterly report. (http://announcements.bursamalaysia.com/EDMS/AnnWeb.nsf/all/482568AD00295D07482575C3003216F8/$File/BKB%20Q2%202009.pdf ) page 2 of 11 from the pdf file or from the page number in the report.

• “Equity attributable to equity holders of the company” = RM 2,707.3 Million
• “Goodwill on consolidation” = RM 18.4 Million
• “Tangible Equity” = RM 2,707.3 Million - RM 18.4 Million = RM 2,688.9 Million

Since KLK is stated as RM 2,302.5 in the book, the balance (called “Other Tangible Equity”) is RM 386.4 Million.

BKAWAN’s Net Cash can be calculated by using the company’s “Cash and Short Term Investments” minus “Total Debt” from the 31st March 2009 Consolidated Balance Sheet of BKAWAN’s quarterly report. (http://announcements.bursamalaysia.com/EDMS/AnnWeb.nsf/all/482568AD00295D07482575C3003216F8/$File/BKB%20Q2%202009.pdf ) page 2 of 11 from the pdf file or from the page number in the report.

• “Cash and Short Term Investments” = “Short Term Funds” + “Term Deposits” + “Cash and bank balances” = RM 98.4 Million + RM 70.7 Million + RM 1.9 Million = RM 171 Million
• “Total Debt” = “Term Loans” = RM 35.6 Million
• Net Cash = RM 171 Million – RM 35.6 Million = RM 135.4 Million

d) Shares outstanding for BKAWAN can be found in the 2008’s annual report (http://announcements.bursamalaysia.com/EDMS/subweb.nsf/7f04516f8098680348256c6f0017a6bf/d34a06927b8249ef482575280014e45d/$FILE/BKAWAN-AnnualReport2008%20(300KB).pdf ) page 84 of 89 from the pdf file (or page 82 from the page number in the report).

Since there are no share buybacks (from 28th November 2008 to 31st March 2009), the shares outstanding for BKAWAN remains the same.

Very good article , "Buffett advice: Buy smart...and low"

I came across this article about Buffett in CNN, written by Jason Zweig. Here's some extracts of the article:
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In response to a question from Barbara Kiviat of Time on how he and Munger control their emotions, Buffett replied: "[It] comes about from having an investment philosophy grounded in the idea that a stock is a piece of a business. If you look at it that way, there's no reason to get excited whether some analyst is recommending it or the company is splitting the shares two-for-one, or whatever. The only way to drive the extraneous thoughts out of your mind is to have a philosophy. And for us that philosophy comes from Benjamin Graham and The Intelligent Investor, especially chapters 8 and 20. It's not very complicated stuff."

You need a philosophy and the ability to think independently...It doesn't make any difference what other people think of a stock. What matters is whether you know enough to evaluate the business.

You should be able to write down on a yellow sheet of paper, 'I'm buying General Motors at $22, and GM has [566] million shares for a total market value of $13 billion, and GM is worth a lot more than $13 billion because _______________." And if you can't finish that sentence, then you don't buy the stock.

The key is not to be seduced by crazy ideas, but instead just stick to the fundamentals year after year. Academia doesn't get too interested in us -- we're too simple. What would the professors do? A great many of the formulas [they use to analyze securities and markets] are dead wrong. They exist purely to give the intellectual class something to do. We don't do anything just exercise our intellectual proclivity for mathematical formulas.

There's no reason we should become fearful if a stock goes down. If a stock goes down 50%, I'd look forward to it. In fact, I would offer you a significant sum of money if you could give me the opportunity for all of my stocks to go down 50% over the next month.

In that single sentence Buffett captured the difference between investing and speculating: An investor, like Buffett, wants the price of a stock to fall below the value of its underlying business so he can buy even more and hold for as long as possible. A speculator (like Jim Cramer) only wants the price of a stock to go up, with no regard for the value of the underlying business at all, so he can sell as fast as possible. To the investor, the market's opinions do not matter. To the speculator, they are the only thing that matters.

A Chinese reporter asked whether Berkshire will be buying more stocks in China now that its market has fallen by almost half, and what the next year will hold for Chinese investors. Buffett's answer held a lesson for investors based anywhere. "We're not in the business of forecasting what the market will do in the next year," said Buffett. "But if a market goes down, we like that. There's no way Charlie and I get upset when stocks go down. We like it, because falling prices give us the opportunity to buy more good businesses at better prices."

____________________________________________________________________

Read the full article here : http://money.cnn.com/2008/05/05/news/companies/buffet.pm.wrap/

National Savings Bond by the Malaysian Government

Referring to the newspaper article by TheStar on RM5bil National Savings Bond on sale from April 14 , i was asked whether this investment is good or not, and whether should they invest in it.

The main features of the National Savings Bond is as below:

• Investment amount - ranges from RM 1,000 to maximum of RM 50,000, and in multiples of RM 100.
• Tenure - 3 years
• Frequency of interest payment - Quarterly
• Interest - 5% Guaranteed by the Government. So, it's "safer" than keeping money in the Bank.

Details of the Bond is available in BMN's website:

• News
• FAQ
• Key Features

So, back to the question, "Is it good?". The answer to this, depends on what you're comparing with.
"Is running fast?" That depends on whether you're comparing with walking, or driving.

Since Malaysian FD rates is going at 2.5% per year, then obviously this Bond is better.

However, is that the only choice we have for our money?

At 5% return, it'll take 14.4 years for our money to double (using the simple "Rule 72"). As our money earns interest (or returns), our money is also "eaten" up by inflation. Does it take 14.4 years for our expenses to doubled? I believe it'll take less than 14.4 years for goods to double in price due to inflation. I would estimate, between 8 to 12 years for goods to double in price.

Saying this, goods would double in price (due to inflation) BEFORE our money would double at the rate of 5% per year. I don't see anything safe about this. Infact, i don't see anything fun with getting poor slowly, but SURELY.

Most people would compare which product is better without understanding and knowing their needs. Truth is, which product, tools or medicine is better depends on your needs, and not on the product itself!

If you're having a headache, it doesn't matter whether Viagra is better, or Cialis is better. Both won't help much in your headache condition. What you need is a Panadol, and not choosing between Viagra or Cialis!

So, in what situation is this National Savings Bond good for you? I believe it's good if:

1. You need the money within these 3 to 4 years, or
2. You want to find a place to make your "Emergency Fund" earns higher return.
3. You have No Dependant, have set aside emergency and medical funding, knowing that your personal inflation rate is lower than 5% yearly, and have a Net Worth that is more than your remaining lifespan multipled by your current yearly expenses.
4. You know that you don't know how to invest, and don't trust anyone with your money. (Same analogy goes to driving a car: You know that you don't know how to drive, and don't trust any "driver" to drive you to Singapore, so.... you WALK from Penang to Singapore!")
5. Can't think of any other reasons why this is good.

However, i don't and won't invest in it because:

1. My needs within the next 3 to 5 years is in Bond Fund, which i will be using almost entirely within the next 3 months. So, the difference (if any), would be insignificant.
2. I'm happy with my current emergency fund, putting it in Bond Fund. And since my income is "safe", i feel comfortable with 2 month's expenses being set aside for emergency fund.
3. I don't have enough to retire on. I don't have RM 3.5 Million currently if my annual expenses is RM 50,000 and my remaining lifespan is 70 years.
4. I believe i know what i'm doing with my investments, and i choose something something which fits my long term needs. Just as Michael Schumacher believes he knows how to drive fast and safe, it doesn't mean that driving fast is not safe!
5. I trust Warren Buffett (thru Berkshire Hathaway) with more than 30% of my Net Worth, I trust Public Mutual with 90% of my Net Worth, and I also trust some of the CEO's of Public Listed Companies with my fractional ownership these companies.
6. I don't enjoy getting poor slowly but surely. I enjoy getting rich slowly but surely!.

Most important of all, I won't choose between Walking or Running if i want to travel from Penang to Singapore. I would rather choose between Firefly, AirAsia, MAS or Singapore Airlines (though i believe it doesn't make much difference in the speed and safety between them).

I don't foresee a need for more than 90% of my assets for the next 5 years or longer, so i rather choose other financial "vehicles" to reach my financial "destination".

What financial "vehicles" is the best for a person who won't be needing the money for the next 5 years? Definitely in Ownership (of Business, or Real Estate) ! I'll write more about it next time. :-)

Introducing my Father-in-law & my Wife. They're "models" in Personal Money magazine October 2005 Issue

Yes, my father-in-law and my wife were in the front cover of Personal Money magazine. That time, she was my girl friend, and her father, well.... let's just say that I used to live in their house most of the time.

Isn't she pretty? She's getting prettier day by day. Take a look at her blog here.

Why are they in the front cover of Personal Money magazine holding money?. Well, they joined the Investment Game organised by the magazine (sponsored by Hwang DBS) together with me.

The contest lasted for 1 year, and the winner was decided based on the investor's return after deduction of all charges and transaction fees. My father-in-law was the Champion, and my wife was 4th. How about me? I got 6th position.



The top 25 is as below:

Special mention: The No. 14 winner, Tan Seok Luan is my good friend, and my 1st agent who joined me in Public Mutual. I informed her about the contest, and suggested her to join as soon as possible, and invest in a low cost Bond Fund with good past performance.
She took my advice, and she kept the winnings. :-)

A few things the 3 portfolios (my Father-in-law, my wife and mine) had in common:
1) We all lived in the same house at that time.
2) We used the same computer.
3) We ate dinner together most of the time... hehehe..
4) All the 3 portfolios were being "advised" by the same person. :-)

The position, total return, and the prize winnings of the 3 portfolios are as below:
1st - 15.26%, winning RM 80,000
4th - 10.40%, winning RM 20,000
6th - 9.23%, winning RM 3,000

Total Prize money won = RM 103,000.
Average return from the 3 portfolios : 11.63%

They interviewed the top 5 winners, and each has their own page story. I missed the Top 5 mark by 0.09%.

My Father-in-law's full page interview

My Wife's full page interview

The Winner's Circle. My name was mentioned, though i wasn't "promoted" as husband, yet.

What's interesting, is this small side article:

There were 2,326 unique participants, with 3,153 portfolios (some joined 2 or more entries). Since each person had an initial RM 100,000 virtual fund to start with, they as a group, managed RM 315 Million.

Average Losses for the 3,153 portfolio is -1.41% !!

Meaning, these 3,153 participants ended up with less than RM 315 Million after the contest ended. Mind you, that period, the KLCI went from 827.49 points on August 2nd 2004 (dropping to a low 804.89 points on August 24th 2004) to close at 937.39 on July 29th 2005, one of the highest KLCI points of the contest!

The results show:

1. These contestants will better off just by putting their money in FD. At least they won't get a -ve return.
2. In fact, they will be better off by not doing anything with the money (rather than simply buying unit trust funds). This way, the overall portfolio would be 0%, which is better than -1.41%!
3. Or it could simply mean that they took this contest for "fun", and thought that they could not possibly be among the top 25 (6th position to 25th will get RM 3,000 worth of Unit Trust by Hwang-DBS).

I know i did not take this contest for fun as there is real money at stake! Infact, all my money (then, now, and future) are serious money. I think carefully before I put my money anywhere. I always compare what I pay with what I get.

Being frugal is totally a different meaning compared to being a miser.

In one my future entries, maybe I would explain more about the 4th position portfolio 'Dynamic Asset Allocation' which I believe is supposed to shine out among the 3 portfolios.

Discrepancy in IOI Corp and IOI Properties Stock price

Today, i noticed a discrepancy in prices between those 2 shares. Since i can't take advantage of it, might as well i share it here in the hope that you'll learn a lesson or two, and take advantage of it, if the condition fits you.

Let me share some background info:

1. On 4th February 2009, IOI Corp issues a Voluntary Take-Over Offer to take over IOI Properties at:

• 0.6 shares of IOI Corp , and RM 0.33 CASH for every 1 share of IOI Properties.
  Full Details of the offer is here.

2. Then, on 30th March 2009, IOI Corp have already received (plus their own ownership in IOI Properties) in excess of 90% of the shares outstanding. Since they own more than 90%, the remaining shareholders of IOI Properties are "forced" to convert their shares to IOI Corp at above terms. Full Details of the 90% ownership of IOI Corp is here.

3. By 7th April 2009, IOI Properties would be delisted from Bursa Malaysia, and converted to IOI Corp shares at above terms.

So, the equation below must hold true.

1 IOI Properties share = 0.6 IOI Corp shares + RM 0.33 CASH

If the above equation differs by anything more than the brokerage fees involved (say, 1.5%), then arbitrage opportunity would arise.

As of this writing (4.30 pm on 31st March 2009), you can buy IOI Properties at RM 2.50 per share, and you can sell IOI Corp at RM 3.80 per share. Fitting it to the equation above:

Left Side : 1 IOI Properties share = RM 2.50

Right Side: 0.6 IOI Corp shares + RM 0.33 CASH = RM 2.61

That's a difference of 11 cents, or 4.4% !. Seeing this, I can buy 100,000 shares of IOI Properties at RM 2.50, and "sell" 60,000 shares of IOI Corp at the same time.

This way, i'm making a nearly risk free return of at least 3.4% in a week (that's the holding period for my IOI Properties shares to be converted to IOI Corp shares). After my IOI Properties shares is being converted to IOI Corp shares, i'll "return" the IOI Corp shares back to cover my short selling position.

Nice Arbitrage Opportunity? Too bad Short selling is not allowed in Malaysia since 1998. :-(.

However, if you own IOI Corp shares, you can sell those shares, and buy IOI Properties shares (with the above proportion). 1 week later, you'll have back the same number of IOI shares, and make at least 3.4% profit (assuming total brokerage fee is 1% both sides).

I know i would do that if i manage a portfolio of a few hundred Millions like a mutual fund. :-).

Would i just buy IOI Properties (without short selling IOI Corp at the same time), in the hope that i can sell IOI Corp shares at that above price 1 week later to make 3.4% profit?.
No, i won't. That involves risk, and possibly i might lose money. To me, this way is Speculation (and not Investing). Read the difference between Investing and Speculating here.

The Crisis of Credit Visualized

The best, simplest explaination of current Financial Crisis. Must Watch !


The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

Is BNM doing the right thing to reduce interest rates?

Seeing The Star newspaper today, i couldn't help but to blog on the "Your Opinions" column by one of the reader through sms. His title is "Have a heart". Below is his sms:

BANKS should not lower FD interest from 3% to 2.5%!. How do you expect retirees to survive? Heave a heart! BNM, please look into the matter. [adjusted for short form]

I do have a few comments regarding his comment:

1. Who "forced" that person to put his money in FD? Obviously, the answer is nobody, and yet, why is he blaming the Government for getting that kind of return? If he's not happy with that return, then why is he still putting it there?

2. If money is important, why didn't that person learn how to let his money work hard for him? If money is not important, then why does he send that sms in the first place?

3. When he wrote that sms, he's looking from his point of view (only, which i find it selfish), while BNM looks from the overall point of view for the benefit of the overall country! When a country is in recession/depression/ financial mess, BNM's main objective is to bring the economy back to stability, which means, to :

1. Encourage spending - so that businesses continue, which gives employment to people.
2. Encourage business growth - so that businesses will hire people, which ultimately reduces unemployment rate of the country.

Which situation would encourage spending (or discourage savings) more than the other ?
A) When interest rate is high (say, at 10% per year), or
B) When interest rate is low (say, at 2% per year)

So, to encourage spending, should the government increase interest rate, or reduce interest rate? I hope the answer is obvious to everyone.

Now, when interest rate drops, lenders (or called depositors, who lends money to the Bank) earns lower interest. On the other hand, borrowers pays lower interest! This again would encourage consumer spending, which helps businesses, who provides employment to the general public.

I believe businesses is one of the main borrowers of money. When interest rates drops, their cost of borrowing is therefore reduced. This would encourage business expansion as their risk of losing money is reduced because of lower cost (which would mean lower break-even, and higher profit). When businesses expand, they create employment to the public.

In conclusion, do not depend on the Government (or anybody to take care of you). Take responsibility, learn about Economics, Finance, Business and Investing. Then, you would know that :

1. Owning the Casino is better than gambling in the Casino.
2. Owning Tobacco companies is better than smoking Tobacco, and lastly,
3. Owning the Bank is better than keeping money in the Bank!
   (assuming you're buying a RM 1 business for RM 0.80 or lesser)
   

How We Think About Market Fluctuations - by Warren Buffett

This article was extracted from Warren Buffett's letters to Berkshire Hathaway's shareholders in 1997. It's available at : http://www.berkshirehathaway.com/letters/1997.html



____________________________________________________________________



A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.


But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the "hamburgers" they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.


For shareholders of Berkshire who do not expect to sell, the choice is even clearer. To begin with, our owners are automatically saving even if they spend every dime they personally earn: Berkshire "saves" for them by retaining all earnings, thereafter using these savings to purchase businesses and securities. Clearly, the more cheaply we make these buys, the more profitable our owners' indirect savings program will be.


Furthermore, through Berkshire you own major positions in companies that consistently repurchase their shares. The benefits that these programs supply us grow as prices fall: When stock prices are low, the funds that an investee spends on repurchases increase our ownership of that company by a greater amount than is the case when prices are higher. For example, the repurchases that Coca-Cola, The Washington Post and Wells Fargo made in past years at very low prices benefitted Berkshire far more than do today's repurchases, made at loftier prices.


At the end of every year, about 97% of Berkshire's shares are held by the same investors who owned them at the start of the year. That makes them savers. They should therefore rejoice when markets decline and allow both us and our investees to deploy funds more advantageously.


So smile when you read a headline that says "Investors lose as market falls." Edit it in your mind to "Disinvestors lose as market falls -- but investors gain." Though writers often forget this truism, there is a buyer for every seller and what hurts one necessarily helps the other. (As they say in golf matches: "Every putt makes someone happy.")


We gained enormously from the low prices placed on many equities and businesses in the 1970s and 1980s. Markets that then were hostile to investment transients were friendly to those taking up permanent residence. In recent years, the actions we took in those decades have been validated, but we have found few new opportunities. In its role as a corporate "saver," Berkshire continually looks for ways to sensibly deploy capital, but it may be some time before we find opportunities that get us truly excited.

One-on-One with Warren Buffett by Nightly Business Report

Warren Buffett sat down recently for a taped interview with Susie Gharib of Nightly Business Report to mark the PBS program's 30th anniverary on 22nd January 2009.

Video of the complete 24-minute conversation has been posted on the program's website.

Transcript of that entire interview available as a PDF download.

Some of the excerpts of the interview:

Buffett: We’ve spent a lot of money. We’ve got money left, but I love spending money. Cash makes me very unhappy. I like to always have enough and never way more than enough, but I always want to have enough. So we would never go below $10 billion of cash at Berkshire. We’re in the insurance business - we got a lot of things. We’re never going to depend on the kindness of strangers. But anything excess in that, I love the idea of buying things and the cheaper they get, the better I like it.

Buffett: I am unquestionably optimistic about the long-term. I’m more than a little pessimistic about the short-term, but that doesn’t mean I am pessimistic about the stock market. We bought stocks today. If you tell me the economy is going to be terrible for 12 months, pick a number, and then if I find something that is attractive today, I am going to buy it today. I am not going to wait and hope that it sells cheaper six months from now. Because who knows when stocks will hit a low or a high? Nobody knows that. All you know is whether you’re getting enough for your money or not.

Buffett: Well, I’ve learned my lessons before that. I read a book, what is it, almost 60 years ago, roughly, called The Intelligent Investor, and I really learned all I needed to know about investing from that book, and particularly chapters 8 and 20. So I haven’t changed anything since. I see different.

GHARIB: Graham and Dodd?

BUFFETT: Well, that was Ben Graham’s book The Intelligent Investor. Graham and Dodd goes back even before that, which was important, very important. But, you know, you don’t change your philosophy, assuming you think have a sound one. And I picked up, I didn’t figure it out myself, I learned it from Ben Graham. But I got a framework for investing which I put in place back in 1950, roughly, and that framework is the framework I use now. I see different ways to apply it from time to time, but that is the framework.

GHARIB: Can you describe what it is? I mean, what is your most important investment lesson?

BUFFETT: The most important investment lesson is to look at a stock as a piece of a business, not as some little thing that jiggles up and down, or that people recommend, or people talk about earnings being up next quarter, something like that. But to look at it as a business and evaluate it as a business. If you don’t know enough to evaluate it as a business, you don’t know enough to buy it. And if you do know enough to evaluate it as a business and it's selling cheap, you buy it and you don’t worry about what it does next week, next month, or next year.

GHARIB: So if we asked for your investment advice back in 1979, back when Nightly Business Report first got started, would it be any different than what you would say today?

BUFFETT: Not at all. If you’d ask the same questions, you’d have gotten the same answers.

Gambling or Investing is about Odds & Probability

I was watching this movie, The Best Bet in Astro Wah Lai Toi channel the other day, and the villagers are betting whether the main actor, Hor Yi ( played by Michael Tse Tin Wah) would stop gambling or not (since his whole life he have been gambling). The odds are as below:

A) If Hor Yi continues to gamble : Bet 1, Win 1
B) If Hor Yi stops gambling : Bet 1, Win 10

A Gambler might choose either one to bet, which gives him chance of winning, as well as losing. However, given this kind of "odds", there is a risk-free betting. Infact, with a simple tweaking, it becomes a sure win for your bet (regardless of the outcome).

If a person bets RM 1 on both outcome A and B, then that person can't lose. Either he break-even if Hor Yi continues to gamble, or he wins RM 9 (Win RM 10, but lose RM 1 on the other bet) if Hor Yi stops gambling.

Now, if that person changes his bet to

• Bet RM 5.5 on outcome A above, and
• Bet RM 1 on outcome B above

The person who bets the way above would 100% win RM 4.5 (from a total investment of RM 6.5) regardless of the outcome (either Hor Yi wins, or Hor Yi losses). This is no longer gambling (or speculating). But it's investing, as long as the person whom you're betting is credible to pay the claims.

My mother used to say that anything that involve winning or losing is gambling. Looking back, I've realised that her statement is very true indeed (though i'm not sure she knows the distinction between investment and speculation when she said that statement). A person who invest the right way, would only have a win, and can't lose (over the long term).

Take for example the Owner of a casino. At a particular table at a particular round, the Banker might lose. However, played over enough rounds, the Banker will almost guarantee themself to a win. Infact, i don't think Genting's Casino ever lose money in their Casino business at any single year (though i can't say the same thing when it comes to days or hours).

Similar post is in the Movie 21 here.

Why do we compare when we're in school, but not when we're adults?

I was wondering, why do we compare grades/ points/ position when we're in school, but not our Financial Statements when we're adults?

Imagine going through our school days without knowing how we stand against everyone. I believe it'll greatly reduce our chance to get good grades/ to get scholarship or get to University.

If that is so, then shouldn't comparing Financial statements be encouraged so that it'll improve our chance for Retirement? Afterall, more than 85% of the people don't have enough to retire by the time they reach retirement age.

Just some food for thought. Comments/ Reply appreciated.

My Personal Money interview in 2008.

In January 2008’s issue of Personal Money, I was asked about my investing sentiment for 2008, and my answers below might be of interest for review for the entire year of 2008.

Question 1: What is your investing sentiment for 2008. Are you optimism or more guarded? What are the main reasons for your sentiment?
My Answer : Frankly speaking, i don't have any investing sentiment for 2008. I make no attempt to predict how security markets will behave. Successfully forecasting short term price movements is something I think neither me or anyone else can do. However, it is clear that stocks cannot forever outperform their underlying businesses, as they have so dramatically done for some time.

Question 2: What will you be investing in 2008. For example, if staying in equities - will you be looking to acquire more defensive type stocks or buying property or investing outside the country?
My Answer : More than 99% of my assets are invested in these 3 categories (currently, and into the forseeable future) :
a) Bond Funds - For emergency needs, and temporary "parking" for my funds until i can deploy into equities at good price.
b) Equity Unit Trust - For long term capital growth, with minimum time needed to supervise.
c) Direct equity through shares - I consistently search for businesses that are sold below it's intrinsic value. Though it might not happen everytime, but when it does, I might invest up to 40% of my assets in a single security under conditions coupling an extremely high probability that my facts and reasoning are correct with a very low probability that anything could drastically change the underlying value of the investment. Personally, i am willing to trade the pains of substantial short term price variance in exchange for maximisation of long term performance. However, i am not willing to incur risk of substantial permanent capital loss in seeking to better long term performance.

My only foreign equity (excluding Equity Funds) is Berkshire Hathaway, a company which its' CEO and biggest shareholder is Warren Buffett.

Question 3: What other plans would you have for your investing portfolio (e.g. long term objectives or diversifications strategies)
My Answer : Besides what i shared above, i've also does a few things which helps me to achieve financial independence better, safer and faster:
a) Our family does not own any Fixed Deposits. Also, we keep our cash in Savings/ Current Account to a very minimum level. This is because every dollar there, would lose it's value after inflation.
b) At the low rate and the right terms, i'm willing to borrow to invest. But i clear off my credit card balance every month, as i know my investment limitations.
c) We don't focus on how much we earn but on how much we save every month.