Thank you Adampak. (Or am I counting my chickens before they hatch?)

One of my favourite holdings, Adampak received a privatisation offer at 0.42 cents which senior management has also accepted. Looks like it’ll be difficult for the General Offer (GO) not to go through. =(
I actually stupidly sold some last September based on a too haste decision that Ultrabooks, being the way forward would be detrimental to Adampak’s business which was heavily reliant on the HDD business. Little did I know that they made labels for SSDs too. Thanks to that, I still haven’t got my first 1-bagger.

Thank you Adampak. It was a great run while it lasted.

Wonkish working of returns below:

Cost- 13,395

Dividends collected- 3,052.50

Price sold- (0.245 x 24,000) + (0.42 x 33,000) = 19,740

Total Return: 9,397.50 or 70% over approx. 4 years.

Buffett on why stocks beat bonds and gold in the long run

This is classic Warren Buffett. Anyone who wants to know how and investor thinks should read this.

Snippets:

At Berkshire Hathaway (BRKA) we take a more demanding approach, defining investing as the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power – after taxes have been paid on nominal gains – in the future. More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date.

The riskiness of an investment is not measured by beta (a Wall Street term encompassing volatility and often used in measuring risk) but rather by the probability — the reasoned probability — of that investment causing its owner a loss of purchasing power over his contemplated holding period.

Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce — gold’s price as I write this — its value would be about $9.6 trillion. Call this cube pile A.

Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?

My own preference — and you knew this was coming — is our third category: investment in productive assets, whether businesses, farms, or real estate. Ideally, these assets should have the ability in inflationary times to deliver output that will retain its purchasing-power value while requiring a minimum of new capital investment. Farms, real estate, and many businesses such as Coca-Cola (KO), IBM (IBM), and our own See’s Candy meet that double-barreled test. Certain other companies — think of our regulated utilities, for example — fail it because inflation places heavy capital requirements on them. To earn more, their owners must invest more. Even so, these investments will remain superior to nonproductive or currency-based assets.

Farewell to one of Singapore’s best investment blogs

It’s a pity that Musicwhiz has decided to stop blogging.

Although too wordy sometimes, his was one of the best blogs on value investing and fundamental analysis in the Singapore context. I’ve met the guy once and he’s a great guy too- very intelligent and detailed but I suppose if you’ve been reading his blog, you’ll realise that from his posts.

Thankfully, MW is keeping the blog alive so that  one may trawl through the invaluable gems that’s he’s written over the years. It’s an amazing blog because of how he documents his investment thought processes, mistakes made and lessons learnt along the way. For those that will miss MW’s contributions, he’ll still be contributing (albeit in a less detail. Hopefully not less frequently though) over at ValueBuddies, possibly the best forum for investors in Singapore.

Importance of dividends and a long time frame. Revisited.

I blogged about this some time back.

In case anyone’s wondering if it works in the local scene, it does. Drizzt, as usual, has come up with a solid post (Noble Group: What the charts don’t tell you about Noble’s total return). Do check out the rest of the companies he studied in his spreadsheet.

In other local investment blogging news, MusicWhiz is about to retire from the blogging world. Hopefully he doesn’t stop contributing over at Valuebuddies.

Teh Hooi Ling busts the Reit myth

(h/tip Investment Moats, BT article here)

Teh Hooi Ling from the Business Times (BT) busts the Reit myth that Reits are stable, income-generating assets to hold thus making Reits the ideal investment vehicle of choice for folks looking for an asset-class that won’t be so volatile (actually they worry more about downside volatility. go ahead, ask anyone if they mind volatilty towards the upside).

Main reasons being that the way Reit managers are incentivised (as a function of NAV of the reit) and to manage the reit creates an inherent conflict of interest a.k.a a Principal-Agent problem plus the fact that most reits that have a sponsor that would of course want to offload the asset into the Reit at at the highest possible price.

Honestly, this isn’t a new thing and I’m surprised that the issue is only gaining attention because of the hoo-ha surrounding K-reit asia and their acquisition (from their sponsor) of Ocean Financial Centre.

Let me just say that not all reits are bad (obviously from a cursory look at the returns column) and when you buy the reit matters too. Signs of a shitty manager? Those that acquire assets from their sponsor when the property market is obviously high (if the property is acquired from an independent 3rd-party in an arms-length transaction when the market is high, you must question the manager’s intelligence or integrity) and make cash-calls when the economy/markets are in a doldrum.

The most useful part of the article- the damning table of shitty reit managers compiled by Ms/Mrs (?) Teh.:

The Damning Table

Disclosure: I am not a licensed financial advisor. I own units of First Reit.

Jim Chanos on Value Stocks, Value Traps and some

Jim Chanos, more famous for being a China bear nowadays, gave a presentation at the Value Investing Congress. Notable points on true Value Stocks are:

1. Predictable, consistent cashflow
2. Defensive and/or defensible business
3. Not dependent on superior management
4. Low/Reasonable valuation
5. Margin of safety using many metrics
6. Reliable, transparent financial statements

Chanos makes many good points on Value traps in general and some investments he thinks may qualify. Of course, he gives his take on China too. Read more here.

 

A look at Europe’s banks (Europe: Just Getting Warmed Up, Hussman Funds)

For those who believe the recent rally in the markets signal the slaying of the bear, I present to you (and for my own reference too) a post from John. P Hussman of Hussman Funds (h/t The Big Picture), tasty bits only (my comments in italics, full article here):

Dexia had little more than 1% in tangible equity behind its assets, “Dexia nonetheless managed to show a capital ratio of 12.1 percent. Dexia got that ratio mainly by excluding the bulk of its assets — a process speciously referred to as risk-weighting –along with billions of euros of pent-up losses on soured holdings such as Greek government bonds. The denominator in the ratio got smaller, the numerator got bigger, and Dexia wound up looking like one of Europe’s safest banks… The takeaway here is you can’t believe anything about regulatory capital benchmarks, in Europe or elsewhere, stressed or not. It’s a lesson the world should have learned long ago, yet keeps relearning.”

It would be funny, if not so distressing, that the day before Dexia failed, the Italian bank Intesa Sanpaolo presented a chart showing that it ranked among the top 4 in the European stress tests, versus 20 of its peers. The top bank on the list? Dexia.

Stress tests worth shit (not like this is anything new)

As we entered 2008, I put together a spreadsheet to track financial institutions that were of particular concern based on their gross leverage (the ratio of total assets to the institution’s own capital), and the ratio of tangible equity to total assets. The most leveraged institutions at the time were Fannie Mae, Freddie Mac, Bear Stearns, Merrill Lynch, and Lehman Brothers. That spreadsheet turned out to be a fairly good predictor of the institutions that would either fail, go into receivership, or require bailouts as a result of insolvency.

Ok, they’re dead (at least in their previous incarnation) already, so what?

The corresponding calculations for several major European Banks are below.

oh shit.

Spindex Industries: FY2011 Results

First, my comments on the Valuebuddies Spindex thread on the 1H11 results:

I think the following points are worth considering when reviewing Spindex’s 1H11 results:

- Is there a likely reversal of the USD vs. the SGD
- Is the decline in Net Profit temporary (i.e. just for this 6-12 months)?

My personal assessment is that:

1) Spindex’s fall is due to a decline in general economic conditions.
- Yes, Net and Operating margins have fallen. But look at the details.
- Sales have increased, albeit very slightly.
- The loss was mainly due to the USD depreciating against other Asian Currencies.
- Their customers have finished with inventory restocking (taken from FY2010 commentary). This suggests that results this half would have been less than spectacular. It could be a bad year for Spindex if the economy starts to slow further.
- Spindex, as already pointed, has increased capex a fair bit so that when demand picks up, they will be there to capitalise on that.
- Trade receivables have come down quite a bit (~20%) suggesting that the company has been prudent in making collections.

2) Spindex still has very strong balance sheets.
- Net cash position.
- Debt greatly reduced.
- At 35cents, it is still below it’s Net Tangible Asset of 48.1 cents.

3) Things going against it
- I think in the long-run, the USD will only depreciate further. The only way that’s not going to happen is we have China’s economy tank. However, that’s going to be worse for everyone else.

I’m not advocating to buy or sell Spindex but I think that there’s no need to go Chicken Little about Spindex’s results. The company seems to be run by capable people and I don’t think the business that they are in is in danger of becoming obsolete in the near-term future.

However, the market dis-agrees with me. Spindex is down 5 cents to $0.30 at point in writing. Margin of Safety is becoming wider.

So as it turned out, Spindex indeed had a very bad year.

Income Statement

- Net profit (NP) down from $6.096mil to $3.723mil (-38.9%). Accounting for Foreign Currency translation, this was even more pronouced (from $5.913mil to $0.630mil, or a hefty -89.4%). The disappointment in NP was due to mainly two items- an increase in taxes payable and the afore-mentioned loss from foreign currency translation.

- As pointed out in the Valuebuddies thread, Spindex is operating in a highly commoditized business. Razor-thin margins fell from an already low 7.2% to 0.77%.

 Balance Sheet

This is where Spindex remains strong.

- Receivables went down $2.5mil and Inventories rose $1.3mil.

- Spindex still firmly in a nett cash position.

Cashflow

- Free Cashflow turned negative (-$1.43mil) on increased Capex, which is something Chairman Tan Choo Pie mentioned in his statement. Their investment in increased production capacity means that when the economy recovers, expect revenues and profits to rebound.

Overall

Dividend has been cut to 0.9cents per share. You’ll see that this is roughly what happened in 2005 as well, where FCF turned negative and their dividend got cut. I think this is the prudent thing to do and the selldown since 1H11 reflects those that bought into Spindex extrapolating results to infinity and looking for quick returns.

I’ve learnt my lesson. Spindex, despite being a company with long operating history (since 1981), is operating in a very difficult environment. They basically have no moat to speak of with the exception of Chairman and founder, Tan’s relations with various actors in the industry that have been established over a long time.

As stated in the commentary of their 4Q/FY11 results annoucement, sales have slowed down towards the end of the financial year. Therefore, expect 1H12 results to be ugly given the slowdown in the  global economy thus far. If most of the developed world officially falls into a recession before end of the year, expect things to get much uglier before they get better.

Spindex’s management needs to be commended for doing a decent job in a difficult environment and I won’t take that away from them. I’ve pared down my position on Spindex some time back even though Spindex is one of the few stocks that look cheap as cheap can get cheaper.

At this time, cheap is still not cheap enough.

History doesn’t repeat itself but it often rhymes: take note Gold Bugs

I found this passage in Panic by Michael Lewis:

The world of money was in upheaval. Funds were rushing out of the stock market and into safe havens. The conventional safe haven for money is gold, but this was not a conventional moment. The price of gold was falling fast. Two creative theories made their happy way around the trading floor, both explaining the fall in gold. The first was that investors were being forced to sell their gold to meet margin calls in the stock market. The second was that in the depression that followed the crash, investors would have no need to fear inflation, and since for many gold was protection against inflation, it was less in demand. Whatever the case, money was pouring not into gold but into money markets- i.e. short-term deposits.

The above sounds like an uncanny description following Gold’s fall last week. Guess what, this was a description of Black Monday, 19 Oct 1987.

The chorus for Greece to default grows ever larger

This from the NYT (via The Reformed Broker):

As concerns grow that Greece may default on its government debt, economists are starting to map out possible outcomes. While no one knows for certain what will happen, it’s a given that financial crises always have unexpected consequences, and many predict there will be collateral damage.

Because of these fears, Greece is working frantically in concert with other European nations to avoid default, by embracing further austerity measures it has promised in return for more European bailout money to help pay its debts.

But some economists believe default may be inevitable — and that it may actually be better for Greece and, despite a short-term shock to the system, perhaps eventually for Europe as well. They are beginning to wonder whether the consequences of a default or a more radical debt restructuring, dire as they may be, would be no worse for Greece than the miserable path it is currently on.

Read on for the full story. Meanwhile, Dr Doom, Nouriel Roubini is calling for Greece to even leave the Eurozone:

“Greece is stuck in a vicious cycle of insolvency, low competitiveness and ever-deepening depression,” wrote the famous Roubini in an op-ed piece for the FT.

Roubini is among those that think Greece should indeed exit the Eurozone.  Dr. Doom explains that without a return to growth, Greece’s debt situation will remain unsustainable.  Further draconian fiscal austerity, along with insolvency and low competitiveness, will do nothing more than prolong a deepening recession-cum-deflationary depression for five to ten years.

Greece’s main problem, then, is one of competitiveness, and the only way to solve this, according to Roubini, as by reinstating the drachma.  There are other ways for Greece to regain competitiveness, for example, the euro could be weakened substantially in order to provide relief to Greece and its fellow PIIGS, which appears “unlikely while the US is economically weak and Germany uber-competitive.”

Other options to restore competitiveness are equally untenable.  Structural reforms that would bring down unit labor costs can take up to ten years, as the German experience has shown, while “rapid deflation in prices and wages, known as an ‘internal devaluation’ […] would lead to five years of ever-deepening depression, while making public debts more unsustainable,” wrote Roubini.

The only other option, then, is for Greece to leave the Eurozone in an orderly default, renegotiating the recent debt swap deal (which Roubini calls a “rip-off” because it actually provides near to no debt-relief given sweeteners offered to creditors), and an exit from the European Monetary Union.

As I see it, getting Greece to honour its debt is a no-go: The enforced austerity measures will only curtail growth, their cost of debt is now untenable, kicking the can down the road and hoping for the best isn’t going to help given the bleak growth outlook in the rest of the Eurozone and the world.

So, the big question is, if the Greeks haven’t defaulted yet, is it because default isn’t the path of least resistance yet? Or is it because they’re being supported by the rest of the Eurozone who don’t want to see their banks go down too. My money’s on the latter and also because they don’t want to set a precedence- imagine Italy defaulting.

Mirror, mirror on the wall, who's the fairest of them all?