Monday, 26 December 2016

A Look-Back at My Blog for 2016

2016 is drawing to a close and it is an opportune time for me to reflect on my blog for this year. Regular readers of my blog would know that my blog posts this year have tilted towards understanding the business of the industry/ company. This is most clearly manifested in the series of 14 Oil & Gas posts and a couple of sporadic posts in banks and Global Logistic Properties (GLP). This tilt towards business analysis is also reflected in my investments, with selective positioning along the O&G industry chain and a big investment in GLP.

This shift towards business analysis as opposed to financial analysis has yielded advantages. Previously, being trained as a value investor, most of my investments were solely based on analysis of the financial statements, i.e. the company must have good earnings, low debts, strong cashflows, etc. However, the issue with financial statements is that they reflect the past business conditions, not the future business conditions that drive stock prices moving forward. It is like driving with the rear-view mirror. Thus, many times, I would buy into a stock with good earnings but whose price is declining, only to end up with declining earnings and further declines in share price later. This is most clearly epitomised by the misadventures in O&G stocks in late 2014.

With business analysis, past financial statements are only an input for understanding the business of the company and constructing a business model for it. They are a means to understand what factors drive the revenue and costs of the company. Using this model, you can feed prevailing news about the economy in general (e.g. rising interest rates), industry news (e.g. OPEC cutting oil production) and company-specific news into the model and forecast how future financial statements would look like. This way, when the next financial statement is released, you would not be surprised by the earnings report. Also, the next financial statement is used to check how accurate your business model is and make the necessary adjustments. It is also used to check how well management has executed their strategy and business plans and understand what are the potential risks. Financial statements are a means to an end and not the end itself.

Having said the above, I have actually not carried out an in-depth business analysis of any company in my blog. What I have done is broad-level analysis of industry groups instead, as a single industry analysis can provide a quick understanding of many companies in the industry. A blogger who has done in-depth business analysis of companies very well is SG Thumbtack Investor. Looking forward to 2017, I hope to carry out more business analysis for more industry groups.

Thanks for staying tuned to this blog throughout the year. Wishing all readers Merry Christmas and a Happy, Prosperous and Healthy 2017!

See related blog posts:

Sunday, 18 December 2016

Why Is Protectionism A Concern For Singapore?

After the election of Donald Trump as US President, it has been said that his protectionist stance is bad for open, trade-reliant economies like Singapore. But what is trade? My idea of trade has stagnated since the secondary school days, when we learnt that Singapore had a thriving entrepot business due to its strategic location at the southern tip of the Straits of Malacca. Thus, if it is just the port business that is affected by protectionism, then it is not a very big deal, isn't it?

However, on further thoughts, trade is not just about the port business. When we buy goods from the supermarket or shop online from Amazon or Taobao, that is trade. When we watch the Premier League on TV, that is also trade. As investors, when our companies such as Keppel Corp builds and delivers an oil rig to the Gulf of Mexico, that is trade. And when SIA flies passengers from New York, it is also trade. Thus, trade is all over the place. It is what enables us to consume goods and services that Singapore does not produce and sell goods and services that Singapore produces. The smaller the domestic market is, the more reliant we are on trade with other countries.

The figure below shows the correlation between Non-Oil Domestic Exports (NODX) and GDP. The correlation between NODX and GDP is 0.52. It illustrates the importance of trade to GDP in Singapore.

Correlation between NODX and GDP

What would happen if there is no trade with external countries, as a result of protectionism and/or trade wars? In the extreme case, we would not have food, enough water, and power (because no natural gas), not to mention creature comforts like the latest iPhone or watching the Premier League. Keppel Corp could only build oil rigs for drilling oil in Singapore waters and SIA could only fly from Changi Airport to Seletar Airport! Very soon, these companies would go out of business and all the staff that work for these companies and supporting industries would be jobless! Thus, although we seldom think about it, trade is essential for the survival of Singapore. When there are threats of protectionism and/or trade wars, perhaps we should pay more attention to them, because our survival depends on free trade!

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Sunday, 11 December 2016

Making America Great Again and Its Impact to Asia

I delayed writing about the impact of Trump's victory in the US presidential election, primarily because I wanted more time to observe his policies. However, since US Fed is meeting this week to discuss interest rate rise, I will pen down my current thoughts. Things will change, as Trump might adjust his policies after he becomes president.

Since Trump's surprise victory, stock markets have rallied strongly. Part of the reasons has to do with some of the positive policies proposed by him, such as infrastructure spending, tax cuts, reduced regulations on banks, etc. If enacted, these policies will increase aggregate demand and speed up the recovery of the US economy. This is a refreshing change, considering that we have had 8 years of loose monetary conditions and the economy has not improved much since the end of the Great Financial Crisis. In fact, risks have increased in some areas of the economy, as described in What Have We Got After 8 Years of Easy Money?

However, Trump's proposed policies are not all positive. Chief concerns among his policies are his protectionist stance and worries that increased infrastructure spending would lead to inflation and interest rates rising more rapidly. Although increased infrastructure spending and tax cuts would strengthen the US economy, if US adopts a protectionist stance and raises import tariffs against other countries, other countries would not benefit from increased US demand as much as previously. This is especially so if other countries engage in a tit-for-tat retaliation against US protectionist policies. Furthermore, given the rise of anti-globalisation sentiments in many developed countries, the risks of increasing protectionist policies and trade wars cannot be ignored. Thus, while the US stock market has valid reasons for rallying, it is a little strange for other stock markets outside US to cheer when protectionist policies have beggar-thy-neighbour effects.

It should be highlighted that US policies have significant impact on other countries, as the world economy is mostly centred around US. US is a major export destination for many countries. Thus, when US decided not to proceed with membership in the Trans-Pacific Partnership (TPP), the TPP is said to be practically dead. When US pulls out of TPP, the net effect is equivalent to all other 11 members of TPP pulling out at the same time. In contrast, Brexit is only one country pulling out of the European Union. Had it been Singapore which pulled out of TPP, the Singapore stock market would have dropped, not risen as it had after Trump's victory.

Although a protectionist trade wall can limit economic benefits spilling outside of US, it does not restrain financial tightening from spilling into other countries. Given the unimpeded capital flow around the world, increase in US interest rates will lead to increase in interest rates in other countries as they try to hold back capital from leaving the country. Not only that, US dollar will rise relative to other currencies as investors get attracted to the better economic prospects in US. Companies that hold large amounts of US dollar debt are especially vulnerable. During the Asian Financial Crisis in 1997/98, regional currencies depreciated significantly against the US dollar (due to unsustainable trade deficits) and companies with large US dollar debts collapsed.

When news of Trump's surprise victory initially filtered through to the markets, stock markets fell precipitiously before rebounding equally sharply. Part of the reason is the reconciliatory tone in Trump's victory speech, which gave the markets hope that he might not go ahead with some of the more controversial policies proposed during the election campaign. It is interesting to note that the markets are willing to discount the negative policies but continue to give full weight to the positive policies. Whether Trump is able to implement the positive policies in full can only be seen a few months after he becomes president. If, for budgetary or political reasons, the policies cannot be implemented in full, the markets will likely be disappointed.

Thus, I am not optimistic about the recent rally in the Singapore stock market. It might continue for some time, but a few months into Trump's presidency, the markets will have a clearer picture of what he can or will do. Also, the interest rate path will become clearer by then.

Related blog posts:

Sunday, 4 December 2016

Being A Co-Owner of GLP

It is often said that buying shares in a company means becoming a co-owner of the company. However, what does it really mean to be a co-owner? After my large investment in Global Logistic Properties (GLP), I finally understood what it means. Usually, for any investment, if the company is not doing well, I could simply sell and walk away. But when I initiated the 15% to 20% concentration in GLP, I told myself that there shall be no exits. If GLP sinks, I sink as well. Hence, I have to understand the business very well and monitor the prevailing risks to protect my investment. Such a mentality requires very different actions from the usual mentality in stock investments. In fact, I differentiate GLP as a business investment as opposed to other stocks which are financial investments.

The first difference between a business and a financial investment is the duration of the holding period. After I had overcome my initial jittery over the stock price fluctuations for such a large concentration in GLP (see My Roller Coaster Ride with GLP), I am prepared to hold GLP for 15 to 20 years or more instead of taking profit in the short term. Having understood the business model of GLP, even a 50% gain in the short term will not be sufficient. GLP has the potential to be a multi-bagger if it is given enough time to develop to its full potential according to its business model. It does not matter if the stock market were to close for the next 10 years. Financial investors make money from the markets, but business investors make money from owning and growing the business.

The second difference is in how financial statements, especially quarterly ones, are viewed. For financial investments, I would read the financial statements, possibly discover some concerns, and sell off the investment the next morning. I once sold off a growth stock (Riverstone) after it reported weaker-than-expected quarterly results, only to see the stock doubled in price. But with GLP, the quarterly results are reviewed to monitor how well the company is executing its business model and plans and what are the potential risks. A set of poor quarterly results does not lead to the stock being sold.

An analogy would be the quarterly exam results of your children. If the child only scored 60 marks for one particular quarterly exam, would you quickly give up on the child, or would you look past the score and delve deeper into the exam questions to understand how well the child has mastered the subject syllabus (i.e. followed the business plans) and which areas has the child done poorly (i.e. what are the risks)? Likewise, a business investment focuses less on the actual earnings figures but more on evidence of business model execution and potential risks.

Because of the differences in emphasis, the questions asked by financial and business investors at Annual General Meetings (AGMs) are also different. It is not uncommon to hear questions such as why is the dividend so low or why has the profit margin dropped in AGMs, but these are mostly focused on the short term financial results. Between quarters or even financial years, there are certain to be variations in the results. Sometimes, the variations might simply be a matter of timing, which will reverse in the subsequent financial period. Long term business investors are more concerned about the viability of the business model and the potential risks. For example, if you are a long term shareholder of GLP, would you not be concerned over whether it is at risk of being disrupted by technological innovations or economic trends, or how it is going to manage rising interest rates and declining renminbi value? These are issues that could threaten the viability of GLP and everybody's investment in it if not managed well. In constrast, how low the dividend or profit margin are for one financial year seem less significant compared to these issues. Financial investors ask questions related to the past (e.g. earnings, dividends, etc.), while business investors ask questions concerned with the future (e.g. opportunities, risks, etc.).

There is also a conflict in what financial and business investors want from their investments. As an example, GLP was recently rumoured to be the subject of a takeover by a group of Chinese investors. Financial investors might be satisfied with a gain of, say, 20% over several months if the takeover were to materialise, but business investors would see a great business and a potential multi-bagger over 15 to 20 years being taken away.

In conclusion, the mentality and actions from being a financial investor and a business investor are very different. It might be a lot more risky being a long-term business investor, but also more rewarding if you get it right.