Archives for category: Investing

July’s almost over! Here are some reads to make your week better.

 

Canada’s Secret to Escaping the ‘Liberal Doom Loop’ (The Atlantic)

Ah, Canada. We visited the Niagara Falls area, Toronto, Montreal and Quebec on our honeymoon and I have very good memories of the country.

The article provides a commentary on Canada’s much greater propensity to accept migrants. A nice overview of Canadian history as well as their approach towards multi-culturalism.

Singapore is also supposed to be a melting pot of cultures but I’m too sure about whether we’ve become more or less accepting of immigrants over time. I suspect we’ve become less welcoming towards migrants over time.

Maybe we need to take a leaf from Canada’s playbook on this.

 

Understanding The Yield Curve: A Prescient Economic Predictor (Financial Samurai)

The Flattening (The Irrelevant Investor)

These ones are for the economics/investing crowd.

Of late, the yield curve has been brought up a lot. This was one of those things that I struggled to understand in university but now that you know it, it’s so trivial.

Read Financial Samurai’s piece for a primer on what an inverted yield curve shows us and read Michael Batnick’s piece for some analysis done on yield curves. What’s particularly instructive is the chart from oddstats about how the S&P500 was up anywhere from 20-70% in the 500 days following where the yield curve is now.

Unfortunately, 500 days is a long time and I suspect that many people will not be able to live with the drawdown that comes with a recession. As always, you can’t react to things when a recession or a bear market comes, you already need a plan before these things happen.

 

The topsy turvy logic of Trump’s trade tirades (Tim Harford)

One more for the econ crowd. Tim Harford always makes current economic affairs so simple to understand. If I read his books while I was in junior college, I might not have been so bad at economics.

Anyway, go read his piece to realise how stupid Trump is with his war on trade.

The same is true for Mr Trump’s new steel and aluminium tariffs. Ostensibly an attack on perfidious foreigners, the tariffs hurt any American who directly or indirectly uses steel or aluminium, all 327m of them. And by obstructing US imports they obstruct US exports, too.

And also some American’s obsession with the trade deficit:

There is the US trade deficit. This is the result of the world’s insatiable desire to invest in US assets, coupled with the American consumer’s preference to spend rather than save. It has little to do with tariffs on milk powder or anything else.

 

Advertisements

No one can predict how the markets will go but here are some signs that the markets are in a state of optimism. I’ll show you the exhibits first and then explain later.

 

The Exhibits

zuckerberg3rdRichest

Exhibit 1: Zuckerberg passes Buffett to become the world’s third-richest person

FAANG

Exhibit 2: FAAM makes up 10% of the S&P 500

What does all this mean?

It’s pretty obvious that markets are celebrating growth stocks and there is nothing more representative of growth than the tech sector.

Is this a repeat of the dot-com bubble? No, it isn’t.

First, the dot-com bubble was a bubble because it was built on air. Earnings and cash flows were non-existent and yet companies were being valued more than companies that had actual businesses. The FAAM or FAANG (apart from Netflix) stocks represent businesses that have solid earnings and cash flows.

However, we cannot deny the flow of money into the tech sector.

Therefore it should be no surprise that Mark Zuckerburg has passed Warren Buffett on the World’s Richest List. The writing was probably on the wall when Bezos passed Buffett and Gates. This is just a byproduct of the flow of money into tech stocks and therefore inflating* the wealth of these CEOs whose fortunes are closely tied to this sector.

Why the rotation to tech?

My interpretation of the rotation to tech is that people are optimistic. We’ve come on the back of a 20% increase in markets (or more if you were in tech) last year and hope is still present in the minds of investors.

Furthermore, earnings figures back it up. The established side of tech is still seeing a growth in earnings and that’s fueling the growth in money that’s being funnelled towards the start-ups seeking venture capital. People are still hopeful that one of these will establish a new order and be the new Google, Microsoft, or Facebook. Of course, whatever company comes next won’t be a successor to these companies but a company, based on new technology, that disrupts the old way of doing things. For example, Amazon has fundamentally changed the book business. In a larger way. retail has also been hit by Amazon and Alibaba.

What everyone seems to be eyeing these days is a disruption in payments and the banking sector. That’s the hype behind blockchains and robo-advisors. Many people will read this and think that what I’m saying is that all these new-fangled tech are just bubbles waiting to evaporate.

I’m not.

The tech could work out. The problem is that many other tech or companies with the similar tech could work out as well. This would dampen any returns to any given company so if you pay the sky for a company promising the next biggest thing, you still may not make much on your investment if there are lots of competitors for this company’s product.

I’ve digressed a little but the main thing is that the fact that we’re seeing this rotation to tech is due to investors being willing and able to take on a little more risk today. This risk is not the volatility that these investments might go through but rather the fact that these investments may not even pay off due to the uncertainty behind how profitable they are.

Last Word

The point I’m making is that what we’re seeing in the U.S. markets today is a sign of the times. People are willing to bet on unsure things and what we’re seeing are sure signs of that.

Notes:

*I don’t mean to use inflating in a way that suggests that the increase is temporary or illusory although, in a sense, it is.

The focus has turned to the markets this week. Here are some things to catch up on.

gold link pocket watch

Compounding requires Absorbing Damage so You’re Never Forced to Quit (Investment Moats)

Kyith has a post that I think underscores that in order for compounding to work, it takes time. And throughout that period of time, things can (or should I say, will?) get pretty nasty sometimes.

For me, the interesting bit is that I never knew there was an ishares ETF that tracks the Singapore market. Kyith’s example about how buying this ETF at its inception* during the highs of the Asian Financial Bubble led to paltry returns over the next 21 years is also very illuminating.

In short, if you buy when markets are expensive, you will live to regret it.

 

New cooling measures: The show has just begun (Property Soul)

Vina at Property Soul has come out with her take on the new ABSD measures and what it means for the property market in Singapore. I’m pretty sure many of you may have already read this but FWIW, stay tuned to her site for more in the coming days.

 

Some Considerations For Investing Globally (A Wealth of Common Sense)

Ben Carlson has a great post on the case for investing globally. He’s written it from the perspective of an investor in the U.S. but of course, the same would apply for someone outside of the U.S.

What’s interesting for me is how the S&P 500 and MSCI EAFE (which represents investing in developed global markets) have taken turns to outperform one another.

While the simple case would be to invest equally in both and rebalance periodically, the more enterprising investor could invest in one, and then start switching to the other as valuations become relatively cheaper in the other.

Also, based on the table, might it be suggesting that in the next period, markets outside the U.S.? From a valuations standpoint, it certainly seems possible.

 

Mainland developers are ‘money mills’ that rely on spiralling asset prices (South China Morning Post)

Many people have been warning about credit bubbles in China for some years now. This opinion piece provides a look at the mechanism by which the credit bubble has developed. If this is true, then the stock markets in China may be on to something after all. And if it bursts, then expect HK and SG markets to be badly affected as well.

 

Wealth Is What You Don’t See (Fervent Finance)

Sustaining Wealth is Harder Than Getting Rich (A Wealth of Common Sense)

Finally, on the personal finance front, two different articles which highlight what should be obvious truths.

The first one makes the point that for most people, getting wealthy is a result of cultivating good habits with money — being frugal and thrifty are sufficient components to getting rich.

I personally know a few colleagues who have been mid-level civil servants for a good 30 years and right now, they would easily qualify for the top decile in terms of net worth. Yet, they watch every dollar. To them, the best meals are the ones in the hawker centre or coffee shops. They fly economy because it’s cheaper and they would never stay in a 5-star hotel unless it came at a good price. They are some of the most practical and humble people I know.

The irony is that some of the kids we teach think buying Yeezys or NMDs, which cost hundreds of dollars, and 80-dollar T-shirts show that they are rich. What they don’t realise is that the guy standing before them in the classroom could be worth millions, never have to work another day in his whole life but is wearing a $20 polo tee and sport shoes he copped at a sale.

The second one makes the points that getting rich and staying rich are two different things. You may have gotten rich through a lucky break such as riding the wave of an industry that’s experiencing unprecedented growth or an inheritance. But staying rich takes much more than that.

You can’t spend like a drunken sailor (which is essentially what Johnny Depp did) and expect to remain wealthy. This is why the Chinese have a saying that “Wealth doesn’t last three generations.”

In my life, I’ve seen how some of my extended family behave and everything is playing out according to the pattern above. In my family’s case, it may even be accelerated. The first generation built the wealth through sheer hard work and grit. The second generation has grown it (somewhat) but my generation, the third one, is pretty much spending it away.

 

 

STIjul18.JPG

Markets have been hit. Are you worried?

 

So, in February I wrote this:

I’m not out of the markets because I believe timing it is a futile exercise but I moved more money to cash/bonds as valuations got higher. In fact, I stopped buying anything after Feb last year.

This week, no thanks to the government increasing the Additional Buyer Stamp Duty (ABSD) on the sale of property, the markets fell roughly 2% on Friday alone. The STI is now down some 268 points or roughly 8% from the start of the year. From the highs of 3,577 reached in April, the market is now down 11.7% which puts us firmly in correction territory.

As mentioned in my February post, I stopped buying into the markets since February of 2017 as things were getting expensive and I basically enjoyed the ride up. I also started trimming some positions towards the end of 2017 as markets climbed. Selling UMS at what was nearly the peak for it netted some accounts a nice profit.

In case, you’re thinking that I made out nicely, I haven’t.

A couple of stupid decisions, like not selling Venture at its peak (I actually placed the order to sell it at $28 but it didn’t get filled) and not selling Starhub at all (this could be one for the history books) meant that my portfolio has been hammered somewhat. Not knowing when to sell has been one of my weak points and still continues to haunt me.

However, what I’m much better at is knowing when to buy. Thankfully, I’m (relatively) young and therefore being a net buyer is still the right way to go. By all the measures that I’m tracking (e.g. CAPE for the STI, difference between PE10 yields and the 10 year government bond, and some trend indicators), it appears that a buying opportunity is starting to appear.

A word of caution. Things are NOT dirt cheap based on valuations. We have seen cheaper valuations in late ’08-09 as well as ’16-early ’17. What many people don’t realise is that the market was much cheaper in early ’17 compared to mid ’10-’11 despite them being roughly at the same levels. This is because earnings had risen from 2011 to 2017 while prices barely rose.

This is the mistake that my senior colleague made. He was anchored on the price of the market and therefore, a level of 3,000 looked expensive to him in early 2017. This caused him to basically miss out on the upswing in markets in 2017.

If you think things are going to be as bad as they were in 2009, then based on current normalised earnings, the STI should bottom out somewhere around the 2,700 level. Expecting the STI to hit 1,500 as it did in the depths of the Global Financial Crisis is expecting the market to be hit CAPEs of 6x! That’s probably even lower than levels during the Asian Financial Crisis.

 

What do you all think? Let me know in the comments below.

In part 1, I detailed the most important takeaways from ‘The Intelligent Investor‘ (although in my haste, I left out the idea of Margin of Safety). In this part, I want to show you the parallels between the act of buying the book and investing.

This is essentially the second reason why I asked my younger brother to buy the book. I wanted to see what his thought and action process was like.

Reason 2: Buying stocks from a value perspective is pretty much like buying anything else

intelligent-investor-benjamin-graham

#1: Hardcover or Softcover?

Now, there are various ways to think about the difference but let’s take a look at the first factor that comes to mind — price.

Hardcover books are more expensive than softcover books although the first print comes out earlier than the softcover. In the past, I used to automatically buy the softcover version of the book since I figured that I was getting the same content for a cheaper price.

As the years have passed, I’ve come to realise that hardcover version of the book lasts much longer than the softcopy version of the book. Sadly, my own copy of ‘The Intelligent Investor’ is an example of this.

For things that you genuinely treasure, it never makes sense to consider only the price of the stock. In investing, the parallel to this would be buying stocks just by looking at price. Some people who buy stocks actually think that a stock that costs $10 is a more expensive stock that cost $1.*

The other parallel is to remember that sometimes, cheap stuff is cheap for a reason. Just like the book, a stock that sells for pennies (aptly called “penny stocks”) could reflect the actual fundamentals of the company.

#2: Borrowing before buying

Although I recommended that my brother buy the book, one other thing he could have done is go to the library to borrow the book first. You may say that he trusted me, as his brother and someone who knows a thing or two about the markets and therefore didn’t have to check the book out first.

However, borrowing the book is a smart thing to do if you want to know whether it’s worth spending your money on. In investing, this is akin to fundamental analysis where a would-be investor investigates the earnings, assets and cashflows of the firm in order to know what price to pay for the stock.

This could also be a good step before you decide whether it’s worth buying the hardcopy or just the softcopy, or whether the book is even worth buying at all.

Conclusion

In short, most people know exactly what to do when they buy a product. They check out the reviews, they compare the specifications between one product and another and they also compare where they can buy the good for the best price as well as other factors like delivery and any warranties from the manufacturer.

It’s strange that many people don’t do this when it comes to investing. They don’t compare the returns from one investment to another, whether those investments are guaranteed or the guarantee is merely a probability. They buy high for fear of missing out and sell low for fear of losing everything. Swayed by fluctuations in price, they hold investments for ever shorter periods of time.

It’s just weird.

Investment should be like buying anything else. Thinking of it as such will make you a better investor.

 

Notes:

In case you’re wondering, paying $1 or $10 for a stock doesn’t matter. What matters is how much you pay relative to the earnings per share.

Some weeks back, my younger brother wanted to learn about investing. I thought about it long and hard for quite a few weeks and eventually, I told him to go and buy this book – The Intelligent Investor by Benjamin Graham, the version with annotations by Jason Zweig.

intelligent-investor-benjamin-graham

Don’t call yourself an investor if you haven’t even read this

Who is Ben Graham?

Benjamin Graham is more famously known as Warren Buffett’s professor and former boss. Graham, together with Dodd, wrote the classic textbook, Security Analysis. Essentially, Graham is the godfather of Value Investing.

Graham biggest contribution was to popularise the idea that buying stocks should be a function of what you get relative to what you pay for. What you pay for is the price but what you get is a share of the profits and assets of the business. In essence, Graham popularised the use of the P/E (price-to-earnings) ratio and, together with Dodd, suggested normalising earnings before comparing with price, which is basically what Shiller’s Cyclically Adjusted Price to Earnings (CAPE) ratio is.

Anyway, I told my brother to buy the book for two reasons and this post is essentially for him.

 

Reason 1: It’s the right way to think about Investing

I don’t mean to offend anyone from what I’ve seen, too many people approach business and investing the wrong way. They learn wrong ideas and end up doing stupid things until they either realise it too late or never at all.

Many people think that investing is all about buying low and selling high and they fail to understand what it really means to buy a stock. From ‘The Intelligent Investor’, there are three important lessons to learn.

#1: Price is what you pay, Value is what you get

Buying a stock means buying a share of the business which is why stocks are also known as ‘equities’ which basically translates into ownership. The essence of Graham, which is at the core of what Buffett and other Value Investors believe, is that an owner of the business cares about the assets of the business and what earnings or cashflows those assets can bring the owner.

Now, the majority of “investors” in Singapore only care about price. They know how much they bought a share of Singtel for. And they know how much they can sell one share of Singtel in the market right now. Why? Because the price is the simplest piece of information to find.

Better investors can cite the earnings, cashflows or dividends that the business can bring in each year. But imagine you’re a business owner. Will those metrics be enough? You’d probably want to know other things: How your competitors are doing? What do customers think of the product? What are the largest components of the cost of production?

The first important lesson from Graham is that being a stockholder means being an owner of the business. If you only buy the stock based on its price and the hope that the price will go higher than the price that you paid for it, that’s speculation. And Graham made it quite clear in the book that therein lies the difference between investing and speculation.

The trick is knowing which activity you’re engaging in.

#2: Price and Value can, and will diverge

The second important idea from Graham is that the stock market is driven by emotion, short-termism, and irrational behaviour. He personified the market as a fellow called Mr. Market who quotes you prices on the stocks each business day.

As Buffett understood, the advantage investors have is that an investor can afford to ignore Mr. Market and take advantage of his over-pessimism or over-optimism. On days where Mr. Market believes that the world is going to end, he ends up quoting prices that are so low that it’s benefit to buy. On days where he thinks markets will keep going up forever, he’ll quote prices that are so high that the business will never be able to provide a decent rate of return for investors*.

#3: Price and Value will converge (eventually)

Of course, for Value Investing to work out, prices and value must converge. In other words, buying at prices that are low relative to value lead to good returns because the market will eventually recognise that the company is worth much more than the current price and therefore bid prices back up to what the company is actually worth.

The problem with this is that this recognition can take time. For example, prices of financial stocks remained fairly depressed following the Global Financial Crisis of ’08-09 and it was only until last year (2017) that bank stocks finally started to gain some favour again.

This is why the great economist, John Maynard Keynes, who was a pretty successful investor as well, said that the markets can remain irrational longer than you can remain solvent. This is why many investors caution against the use of excess leverage. For the majority of retail investors, leverage is something to be VERY careful of. If you choose to proceed, do so with caution.

On the other hand, prices tend to come down fast. So if you’ve bought at a very high price relative to value, don’t expect to hang on to your gains for long. Once again, taking on leverage by shorting the market is also not for the faint-hearted. There are many Value Investors who short Growth and have paid a high price for it. When you short, being early is (almost) the same as being wrong.**

I wanted to do this in one post but it’s gone on for a little too long. In the second part, I’ll show you the parallel between buying “The Intelligent Investor” and investing.

Notes:

*The classic example of knowing how ridiculous the market was when a dot-com CEO told his shareholders that given the company’s share price at the time, he would need to return them 10 years worth of revenues in order for them to just break even. I thought it was Cisco but I can’t seem to find a source for this. Cisco’s price to sales went as high as 37 though.

**For those interested in finance, go watch ‘The Big Short’. It’s accessible and the heroes in the show almost lost everything by being early.

The local paper ran this headline today in the ‘Me & My Money’ section.

He’s hit his goal of $1m worth of investments at the age of 26

I was really impressed until I read the sub-header

Full-time investor saw return of over 1,000% because of bull run in cryptocurrency market

My first thoughts were that his wealth is illusory and then my second thoughts were ‘ST is really getting terrible because crypto fever was at least half a year ago.”

Unfortunately, I don’t (and can’t) have access to read the entire article because it’s hidden behind a paywall but if the ST doesn’t caution that making money from a bull run is more a sign of luck than intelligence, this article may do more harm than good.

Thankfully, the crypto fever already seems to have passed so this sort of news shouldn’t attract a whole new wave of investors. Anyway, I don’t think Singapore is big enough of a market to move the crypto markets up in a meaningful way.

You have to admit that the ST running this sort of an article is like being late to the party. I would have expected this sort of an article to have come out late last year or early this year.

I normally say that if you see the local papers putting news of market crashes on the front page, then it’s time to go into the markets.

Markets in this region have been tanking and the STI has fallen below the 200-day EMA to the point that it’s about to pull the 50-day EMA below the 200-day. While this isn’t a perfectly reliable indicator in itself, this could present a good buying opportunity if this trend continues for another 6-9 months.

Anyway, if you’ve had a tough week, here are some reads to make it better.

 

‘Stingy’ millionaire donates S$3.35 million from S$20 million fortune to charity after his death (TODAY)

I’ve written about people like Agnes Plumb and Ronald Read. Finally, there’s an example from our local shores. Mr. Low Kum Moh was a sub-accountant who was born into a family of fishmongers. The secret to his wealth? Frugality and investing in the stock market over a long time-frame. This is pretty much the same story as the other ones I’ve featured here. The point of it all is that great fortunes can be made by people that most would consider very normal. The trick is to find a strategy that works and keep plugging away at it.

Which brings us to the second read.

 

In Praise of Incrementalism (Rebroadcast) (Freakonomics)

Freakonomics was the book that convinced me that economics could be interesting and that probably saved my university life.

In this episode of their podcast, they make the point that lots of progress in this world are based on incremental progress. The problem with most of us is that we tend to view great events or inventions as if they happened miraculously.

In particular, I love this example that their guest, economist David Laibson points out:

LAIBSON: One has the impression that it’s impossible to save enough for retirement — and to a certain extent, it is impossible if you start at age 50. But if you start early in life, and every year, you contribute let’s say 10 percent of your income, and maybe there’s an employer match, so now we’re up to maybe 15 percent, and you invest that savings in a diversified mutual fund, stocks and bonds, and you have low fees, and you keep going at that year in and year out, and you don’t decumulate prematurely — it’s amazing how that process produces millions of dollars of retirement savings. So it’s kind of hard to imagine how you go from what seems like a little bit of money each year to being a millionaire but that’s exactly the way it works when you work out the math.

Instead, most people often aim for that lottery ticket like buying bitcoin. Most people who do this put very little at the beginning (like a lottery ticket) and when it starts to pay out in a substantial way, they then proceed to bet the farm thinking that what has happened will go on indefinitely.

Unfortunately, this is almost always precisely the time when things start to go bad. Think of someone who bought bitcoin at $500 or $1,000. After seeing the price of bitcoin go to $10,000, they feel like a genius and proceed to place even bigger bets. Well, the bet may have paid off temporarily but look at how it’s turned out.

Which brings us to…

 

Bitcoin Bloodbath Nears Dot-Com Levels as Many Tokens Go to Zero (Bloomberg)

I’ve been writing about the problems with Cryptos since late last year (see here, here and here). To be honest, I’m not as pessimistic about crypto now as I was last year. Of course, there’s nothing fundamental to base my thoughts on but buyers are surely not as euphoric about cryptos as they were late last year.

I suppose the article compares the crash in cryptos to the crash in the tech sector during the dot-com era as prices in both situations have nothing fundamental to support them but I would argue that bitcoin is in a worse situation because, in case of the dot-com stocks, you could at least see if things were getting better based on a turn-around in cashflows and profits.

For bitcoin and cryptos, you have to track whatever these cryptos are meant to replace and see if those things are getting replaced at all.

Anyway, here’s the million-dollar picture from the article above.

bitcoinCrashJun18

 

Have a great week ahead!

It’s that time of the week again!

Get yourself a cup of tea and get ready to get smarter before the week starts.

 

Social Security benefits buy 34 percent less than in 2000, study shows (CNBC)

The World Isn’t Prepared for Retirement (Bloomberg)

This week, I wrote a post which touched on financial literacy. The sad thing is that many people around the world have very little idea about things like inflation or compound interest.

Unfortunately, these are exactly the things that you need to think about once you no longer have a source of income. Many people also think that they will have a source of income until they reach the official retirement age but a downturn in the economy or changes to the industry can easily mean that a person loses his/her job during their prime working years.

To see how you stack up on the financial literacy scale, go and take the little test included in the Bloomberg article. It’s only three simple questions and frankly, I’m surprised that anyone can get it wrong.

The CNBC article highlights the problem with our CPF. CPF works wonders in terms of forced savings and compounding that sum into something much more. The problem is that once CPF starts paying out, inflation isn’t really factored in. It’s not really that different for most insurance products. Whole life plans and annuities often don’t adjust for increases in the cost of living.

Unfortunately, as the article and even the statistics in Singapore (Table A.1 in the document) show, inflation for medical costs tend to be higher than what the CPI shows us. And if you think about it, this is precisely what retirees and seniors should be concerned with.

 

Bull Markets & P/E Multiple Expansion (The Big Picture)

Ritholtz has a post commenting on research done by UBS. The research shows how bull markets tend to be a function of P/E multiple expansion. The takeaway is basically how bull markets are driven by (over?) optimism as investors re-rate stocks to deliver faster than expected growth.

In other words, bull markets tend to be driven by a narrative on investor confidence due to the economy doing well while bear markets get punctuated by cycles of optimism and pessimism.

Take the finding/theory with a pinch of salt though. After all, if these things were so predictable, then we’d all be rich.

 

Guide to Dividend Withholding Tax for Singapore Investors (Financial Horse)

Finally! Someone has come up with information on withholding tax on dividends and this clarifies things up so much. I suppose Financial Horse’s training as a lawyer helps because all the legal jargon and heaps of information just confuses me. The table that shows the tax rates for other countries helps so much as well. Useful information to know if you invest in overseas markets.

 

The Story Of Agnes Plumb: Dividend Millionaire (The Compound Investor)

Another unknown millionaire story. Same themes from all the others – money compounded over long periods, frugal lifestyle but the twist in this story is that she actually inherited the stock from her father and subsequently did nothing.

Nothing! She sat on her thumbs and just waited, and waited.

You may argue about the wisdom of not spending all that money but you cannot argue about the wisdom of how compounding is a powerful force. As my wife’s favourite bear said,

“Don’t underestimate the value of Doing Nothing, of just going along, listening to all the things you can’t hear, and not bothering.”

As for Plumb, she may not have spent a lot of the money on herself but she left a lot of it to charity and if you ask me, that’s a lot of good done for the world.

 

chinahustle

More money has been lost reaching for yield than at the point of a gun.” – Raymond DeVoe Jr.

 

So, I just watched this awesome documentary on Netflix called ‘The China Hustle‘ and it brings to mind some events that happened in our local stock markets some years back.

The China Hustle

The film is a documentary that follows how some investors in the U.S. got into the business of short-selling Chinese companies listed in the U.S. Basically, what they uncovered was that some Chinese companies listed on the U.S. stock exchanges were selling stories too good to be true.

The thing is that no investor can trust the financials for these companies because the numbers were all inflated in some way. What made things worse was that the investment banks, together with the auditors, bringing these companies to the market either didn’t or couldn’t do the due diligence on these firms but brought them to market anyway.

Stage two of the play saw the banks promote these stocks to clients and after having cashed out, the CEOs of the company in China, the banks who collected the fees for helping the companies list, and the brokers who sold investors the stock all made out nicely.

Stage three then saw the investors left holding on to stocks that were worth much less than they paid for them because the underlying business was then exposed as being worth many times less.

The film also interviews three investors who lost a lot of money from investing in those stocks and it’s quite painful to see retirees lose six-figure sums from what is essentially fraud.

I’m pretty sure the film also has its agenda and, therefore, takes that angle quite consistently so the thing to keep in mind is that not every Chinese company is going to turn out to be a fraud or that every banker out there is working against your best interest.

Getting educated about such things is one thing we can do to ensure that we don’t fall for schemes and scams that could ruin our lives.

 

S-Chips: The Singapore Version

Why did it bring to mind some things that happened in our local markets?

Well, first, the short-seller featured in the show who was purportedly the first one to expose a Chinese company is none other than Carson Block. Carson who? Block is the guy who runs Muddy Waters who basically wrote a damning piece on Olam way back in 2012. Of course, Olam turned out fine after Temasek took a stake in it and is definitely not in the same category as the Chinese companies featured in the show.

More importantly, Chinese companies listed in Singapore (called ‘S-chips’) have been a feature of our market for some years now and quite a few of them had their own accounting scandals brought to light after the Global Financial Crisis.*

There’s an anonymous account by someone who’s supposedly a former S-chip CEO that has been circulating on the internet since 2009 and it reads pretty much like the stories presented in ‘The China Hustle’. Go google and you’ll realise that it wasn’t just a problem confined to the U.S. or Singapore, the Australian and U.K. markets were similarly hit by such cases.

Of course, the China growth narrative has been played, some investors made money, and some lost big time.

 

People Never Learn

It’s crazy but if you’ve been investing the markets long enough, you’ll see certain patterns repeat over and over again.

One pattern is how speculators get FOMO and end up chasing the next growth story. In the early 2000s, it was tech, then housing. Then it was financials and China.

The last two years? It’s definitely been tech. People have been so open to putting money into technology (think crypto) that hasn’t any demonstratable proof of profitability. The venture capital space also seems to have no problems raising money and even in the publicly-traded space, which is usually where private investors find an exit for their holdings, investors have been quite happy to pay PE ratios of a few hundred for stocks like Amazon and Netflix.

When you see news like how Jeff Bezos is the richest person in the world and how Mark Zuckerberg is poised to overtake Warren Buffett in the richest people in the world standings, you know that’s where money has been flowing to.

I’m not saying that these businesses are not legitimate or that you’ll lose money investing in these companies. I’m also not saying that the stock prices of these companies are going to fall tomorrow.

What I’m saying is that when most people get too optimistic about something, that’s when I’d be careful about it.

Notes:

*If you’re interested, Cynical Investor has a whole collection of posts on the troubles that S-chips have had in the past.