Wednesday, 20 December 2017

The Risks facing the Investors in Hengyuan

Edge Weekly
Analysing Hengyuan’s discount to Petron

Good article on Hengyuan in the Edge.

Well written and very balanced views.

Good luck in your investing.

Highlighting some of the points in the above article.


1.  A key driver of the refiners’ earnings has been better margins arising from improved spreads between crude oil prices and their refined finished products, primarily RON92 and RON95 gasoline or motor gasoline (mogas).

Based on forward indices, however, the spreads are expected to peak in the fourth quarter. The 2Q2018 forwards show spreads easing 11.6% to US$8.9 per barrel.

Comments:  "The 2Q2018 forwards show spreads easing 11.6% to US$8.9 per barrel."


2. ... investors have to rely strictly on Hengyuan’s quarterly financial reports to evaluate its prospects. This can be tricky. Some details, for example, the cause of the RM76 million swing, were not explained in the 2Q2017 report.

Comments:  The author wished for more details in the account to understand Hengyuan's business more thoroughly.


3.  Furthermore, it would be difficult to anticipate the company’s capital expenditure plans.

What is not clear, however, is the timeline for the capital expenditure.

Comments:  Upgrading is already facing a delay.


4.  The good news is that Hengyuan has lots of cash — RM897.77 million as at Sept 30, which was more than double its cash holding a year ago. However, the group also carries a lot of debt — RM1.31 billion in total.

While net gearing has improved to a healthy 9.87% from 34.47% last year, aggressive capital expenditure could put pressure on the group’s balance sheet.

Comments:  Lots of cash, also lots of debt. Heavy capex.


5.  Nevertheless, the company has not been paying dividends, which gives its capex plans more leverage and reduces the need for a cash call.

Comments:  With its present balance sheet and huge capital expenditure for next year, this is not unexpected.  Not paying dividend is not a big deal.


6.  ... the bulk of Hengyuan’s debt is denominated in US dollars — two separate term loans of US$350 million, some US$200 million of which has to be repaid (or refinanced) by 2022 while the balance will be run until 2024.

Comments:  Short term debt repayment will put pressure on its cash flow


7.  ... both Petron and Hengyuan can expect better margins in the fourth quarter. However, margins should begin to normalise next year, although they will remain higher than this year’s.

Comments:  The high margins enjoyed this year is unlikely to be sustained next year. Margin is expected to normalise next year. The good results this year may just be a short term temporary one.


8.  .... without further elaboration from management, it is difficult to ascertain why Hengyuan has been able to enjoy such good margins compared with Petron.

....... The group notes that revenue was further boosted by a 600,000 barrel increase in sales (from the previous year) during the quarter. Unlike Petron, however, Hengyuan does not disclose exact sales volume each quarter.

....Coupled with big fluctuations in the US dollar and ringgit exchange rate and the steady uptick in crude oil prices this year, it is difficult to ascertain what is driving Hengyuan’s margins.

Comments:  The author repeatedly highlighted (in 3 places in the same article) the difficulty establishing what is driving Hengyuan's margins. The management seems not forthcoming it would seem from the author's writing.


9.  That said, the outlook for both companies, PetronM and Hengyuan, is not without risk, given the difficulty in anticipating what crude oil price volatility will do to spreads going forward.

Comments:  The author rightly and honestly drew this conclusion:



The author of this article shares some insights into Hengyuan's risks.

Well written indeed.

Edge Weekly
Analysing Hengyuan’s discount to Petron
Ben Shane Lim
The Edge Malaysia December 19, 2017

Analysing Hengyuan’s discount to Petron

Edge Weekly
Analysing Hengyuan’s discount to Petron
Ben Shane Lim

The Edge Malaysia

December 19, 2017 16:00 pm +08

This article first appeared in The Edge Malaysia Weekly, on December 11, 2017 - December 17, 2017.

THE broader oil and gas industry may be in the doldrums but refiners like Hengyuan Refining Co Bhd and Petron Malaysia Refining & Marketing Bhd have enjoyed a stellar run.

At its close of RM11.28 last Friday, Hengyuan’s share price had shot up 403% year on year while Petron’s share price closed at a near-record high of RM12.46, gaining 205% year on year.

Their share price performance was matched by an equally impressive surge in the earnings of the two companies. Petron’s earnings spiked 144% year on year to RM305.61 million for the nine months ended Sept 30 while Hengyuan saw a 469% year-on-year improvement from a lower base to RM725.67 million.

A key driver of the refiners’ earnings has been better margins arising from improved spreads between crude oil prices and their refined finished products, primarily RON92 and RON95 gasoline or motor gasoline (mogas).

Against this backdrop, it is interesting to note that Hengyuan is priced at a substantial discount to Petron in terms of earnings — only 3.5 times annualised 2017 earnings (9M2017 earnings per share came to RM2.42). In contrast, Petron is being valued at 8.26 times earnings on the same basis.

The difference in valuation is even starker, considering that Hengyuan’s 2Q2017 earnings were weighed down by a RM76 million swing in “other operating gains/(losses)” during the quarter. Adjusted for this, Hengyuan’s historical valuation would be even more attractive.

Of course, there are some major differences between the two companies. The most obvious is the fact that Hengyuan is a pure refinery play while Petron also distributes petrol via several hundred stations in the country.

A less obvious difference is the fact that Hengyuan has kept a relatively low profile since its new major shareholder, China’s Shandong Hengyuan Petrochemical Co, took over Shell Refining Co’s 51% stake late last year.

Channel checks reveal that both fund managers and analysts alike have not been granted meaningful access to management. In contrast to Petron, which is tracked by two local research houses, there is little to no marketing of the stock from the sell-side.

This also means that investors have to rely strictly on Hengyuan’s quarterly financial reports to evaluate its prospects. This can be tricky. Some details, for example, the cause of the RM76 million swing, were not explained in the 2Q2017 report.

Furthermore, it would be difficult to anticipate the company’s capital expenditure plans. Recall that one of the key reasons oil major Shell exited the market was its reluctance to invest additional capex in expanding, reconstructing and upgrading Hengyuan’s refining capacity.

Hengyuan has broadly indicated that it plans to upgrade existing facilities to meet Euro 4 and Euro 5 fuel standards. In its quarterly financial reports, Hengyuan states that it has capital commitments totalling RM790.07 million, 24.1% of which has been contracted while the balance has not.

What is not clear, however, is the timeline for the capital expenditure.

The good news is that Hengyuan has lots of cash — RM897.77 million as at Sept 30, which was more than double its cash holding a year ago. However, the group also carries a lot of debt — RM1.31 billion in total. While net gearing has improved to a healthy 9.87% from 34.47% last year, aggressive capital expenditure could put pressure on the group’s balance sheet.

Nevertheless, the company has not been paying dividends, which gives its capex plans more leverage and reduces the need for a cash call.

In contrast, Petron is now a zero-debt company with RM113.64 million cash on its books or 42 sen per share. Generating RM320 million in net cash from operating activities and with no debts to service, Petron is in a much better position to pay dividends. The group only had capital commitments of RM170 million as at Sept 30.

Better earnings in 4Q

While Petron’s balance sheet may look stronger, Hengyuan boasts better gross and net margins of 14.5% and 12.2% respectively. Petron’s net and gross margins in the third quarter were 8.5% and 4.14%.

Again, without further elaboration from management, it is difficult to ascertain why Hengyuan has been able to enjoy such good margins compared with Petron.

In its latest financial report, Hengyuan attributes the better margins to “an unforeseen spike in the average price of market-traded refined products, following unplanned production outages caused by hurricanes in the Gulf of Mexico and a fire incident reported in a world-scale European refinery”.

The group notes that revenue was further boosted by a 600,000 barrel increase in sales (from the previous year) during the quarter. Unlike Petron, however, Hengyuan does not disclose exact sales volume each quarter.

Coupled with big fluctuations in the US dollar and ringgit exchange rate and the steady uptick in crude oil prices this year, it is difficult to ascertain what is driving Hengyuan’s margins.

Sure, mogas spreads picked up in the second half of the year. Bloomberg data shows that the Singapore Mogas 92 ICE Brent Crack Spread for December expanded to US$9.885 per barrel last week, about 65% higher than the two-year average of six points. The index is an indication of the spread between crude oil prices and refined mogas, a general indicator of refiners’ margins.

Based on forward indices, however, the spreads are expected to peak in the fourth quarter. The 2Q2018 forwards show spreads easing 11.6% to US$8.9 per barrel.

In other words, both Petron and Hengyuan can expect better margins in the fourth quarter. However, margins should begin to normalise next year, although they will remain higher than this year’s.

This, of course, assumes that foreign exchange movements do not distort the companies’ earnings. Both employ a myriad of hedging and derivative instruments to protect themselves from forex movements.

As the dollar weakened against the ringgit, Hengyuan booked a RM67.3 million realised forex loss in the third quarter (and a RM17.8 million unrealised forex gain). In contrast, Petron only booked a RM6.5 million realised forex loss in the same period.

Another difference between the two companies is that Petron is also an exporter while Hengyuan is focused purely on the domestic market. About 9% of Petron’s revenue comes from exports.

Adding to the forex conundrum is the fact that the bulk of Hengyuan’s debt is denominated in US dollars — two separate term loans of US$350 million, some US$200 million of which has to be repaid (or refinanced) by 2022 while the balance will be run until 2024.

In the final analysis, it may be justified that Hengyuan is valued at a discount to Petron. However, the discount may be a little deep at the moment, approaching the low single digits. Barring unforeseen circumstances, Hengyuan could be considered Petron’s cheaper peer.

That said, the outlook for both companies is not without risk, given the difficulty in anticipating what crude oil price volatility will do to spreads going forward.

Sunday, 17 December 2017

Some stocks will perform better than others and these "stunners" will dominate the investor's portfolio.

You won’t improve results by pulling out the fl owers and watering
the weeds.

For an investor who—like Keynes and Buffett—adopts a buy-and-hold policy in respect of stocks, portfolio concentration is something that tends to happen naturally over time. 

Inevitably, some stocks within a portfolio will perform better than others and these “stunners” will come to constitute a large proportion of total value. A policy of portfolio concentration cautions against an instinctive desire to “re-balance” holdings just because an investor’s stock market investments are dominated by a few companies.

Buffett illustrates this point with an analogy. If an investor were to purchase a 20 percent interest in the future earnings of a number of promising basketball players, those who graduate to the NBA would eventually represent the bulk of the investor’s royalty stream. Buffett says that:

To suggest that this investor should sell off portions of his most successful investments simply because they have come to dominate his portfolio is akin to suggesting that the Bulls trade Michael Jordan because he has become so important to the team.

Buffett cautions against selling off one’s “superstars” for the rather perverse reason that they have become too successful. 

The decision to sell or hold a security should be based solely on an assessment of the stock’s expected future yield relative to its current quoted price, rather than any measure of past performance  

Focus investor and Risk

In contrast to the diversified stockholder, the focus investor will ordinarily demand a significant margin of comfort prior to allocating substantial funds to a single stock. Fear of loss can concentrate the mind wonderfully, and the investor staking a large proportion of his or her total funds on only one security is more likely to rigorously scrutinize this potential investment.

As Buffett summarizes, a policy of portfolio concentration should serve to increase “both the intensity with which an investor thinks about a business and the comfort-level he must feel
with its economic characteristics before buying into it.”

Focusing on only a handful of stocks should not, therefore, increase portfolio “ risk,” at least as it is defined by the layperson—that is, the possibility of incurring financial loss.

  • The intelligent investor will only select those stocks that exhibit the largest shortfall between quoted price and perceived underlying value—that is, those securities that are likely to provide the greatest margin of safety against financial loss in the long term. 
  • Although a compact suite of stocks will be undeniably more volatile than a diversified holding, short-term price fluctuations are of little concern to a long-term holder of stocks who focuses on income rather than capital appreciation.
  • Indeed, value investors favor those stocks that display the potential for extreme volatility— the difference is that these investors expect predominantly upside volatility.

Risk, for value investors, is not a four-letter word—it is embraced and addressed proactively, not defensively

Portfolio concentration can produce better results than diversification.

Portfolio concentration can produce better results than diversification due to a number of factors, including 

  • lower transaction costs—broker commissions proportionately decrease as deal size increases— and
  •  potentially lower administration costs. 
But perhaps the most compelling argument for portfolio concentration by informed investors is the simple logic expressed in one of Warren Buffett’s shareholder letters:
I cannot understand why an [educated] investor . . . elects to put money into a business that is his 20th favorite rather than simply adding that money to his top choices—the businesses he understands best and that present the least risk, along with the greatest profit potential. 
The same impulse that propels stock market speculation also motivates the drive toward diversification—the desire to be part of the crowd.

As the financier Gerald Loeb recognized, a widely diversified portfolio “is an admission of not knowing what to do and an effort to strike an averagefor those investors who believe that they can in fact rank stocks, a policy of portfolio concentration is preferable.  

Keeping It Simple
Diversification is, in reality, more a strategy of risk dispersion than risk reduction.

Keynes’ response to uncertainty and risk in the share market was radically different to the prevailing wisdom—as he explained in a letter to one of his business associates:
 . . . my theory of risk is that it is better to take a substantial holding of what one believes shows evidence of not being risky rather than scatter holdings in fields where one has not the same assurance.

To ascertain which stocks “show evidence of not being risky,” the value investor searches for those securities that exhibit a sufficiently large margin of safety—that is, those stocks with a substantial gap between estimated intrinsic value and the quoted price.

In undertaking this analysis, the intelligent investor will necessarily focus only on those businesses he or she understands. Keynes noted that he would prefer “one investment about which I had sufficient information to form a judgment to ten securities about which I know little or nothing.” His contention was that intelligent, informed investors will reduce their downside risk by scrutinizing only those sectors within their “circle of competence” —to use Buffett’s phrase—and then only investing in those stocks which exhibit a satisfactory margin of safety. 

Like Socrates, the intelligent investor is wise because he recognizes the bounds of his knowledge  

Waiting for a Fat Pitch

Waiting for a Fat Pitch 

I call investing the greatest business in the world because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! US Steel at 39! and nobody calls a strike on you. There's no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it.
— Warren Buffett, quoted in FORBES magazine

 A policy of portfolio diversification is the logical outcome of a belief in efficient markets. As Keynes noted, it is “false to believe that one form of investment involves taking a view and that another does not. Every investment means committing oneself to one particular side of the market. ”A strategy of extreme diversification is, at its core, a concession by the investor that stock - picking is futile for that particular individual — that, indeed, one stock is as good as another. It is a candid admission that the market knows more than that person.

Keynes rejected the notion that markets always priced securities correctly based on publicly available information and that, therefore, it was pointless to search for potential stunners. His view was much more pragmatic, and was grounded in his experience as an investor and financial theorist: Keynes believed that financial exchanges — although perhaps usually efficient — were not always efficient. On occasions, the stock market generates prices that veer radically from underlying value — Mr. Market is perhaps in the throes of a particularly acute bipolar episode — and it is at these times that the intelligent investor should buy in quantity. 

The poet Paul Valery once asked Albert Einstein if he kept a notebook to record his ideas — Einstein is said to have replied,
“ Oh, that’s not necessary — it’s so seldom I have one.
Similarly, opportunities to buy quality stocks at a material discount to fundamental value are infrequent.  As stock investor and author Philip Fisher commented:
. . .practical investors usually learn their problem is finding enough outstanding investments, rather than choosing among too many. .. Usually a very long list of securities is not a sign of the brilliant investor, but of one who is unsure of himself. 

Agreeing that “ ultra - favorites”are usually thin on the ground, Keynes noted that
“ there are seldom more than two or three enterprises at any given time in which I personally feel myself entitled to put full confidence. ” 

When the market does offer a security at a substantial discount to its intrinsic worth the investor should, therefore, acquire meaningful amounts of that stock. 

Charlie Munger opts for a metaphor close to his heart when explaining Berkshire Hathaway ’ s policy of “loading up ”on mispriced bets:
Playing poker in the Army and as a young lawyer honed my business skills. What you have to learn is to fold early when the odds are against you, or if you have a big edge, back it heavily because you don’t get a big edge often

Opportunity comes, but it doesn’t come often, so seize it when it does come.

Good investment opportunities are too scarce to be parsimonious with, Buffett often reminds his acolytes — when a stunner presents itself, the value investor should not be afraid to back his or her judgment with relatively large capital outlays. 

Ref:  Keynes and the Market

“What works in Investing”. VALUE INVESTING


Buffett contributed to the Columbia Business School Magazine, Hermes the article, “The Superinvestors of Graham-and-Doddsville”. 

This reviews the very long run investment performance of investors educated in the search for value.

This cognition, the value approach, is unparalleled in how many investors it has successfully served, compared to other approaches – technical analysis, sector rotation, momentum, and so on.

  • As evidence of this, Warren names disciples of the value approach – Walter Schloss, Tom Knap and Ed Anderson of Tweedy Browne, Bill Ruane of the Sequoia, Rick Guerin of Pacific Partners, and Stan Perlmeter of Perlmeter Investments. 
  • Today, there is a new line-up of younger value orientated 11 investors contributing to Buffett’s case – Bill Miller, Chris Davis, Bruce Berkowitz, Seth Klarman to name a few. 

As Buffett says “the idea of buying dollar bills for 40 cents takes immediately with people or it doesn’t (grab a person right away, no matter how much you talk to a person and show him records).” 

We believe Warren Buffett’s genius is his ability to judiciously (as opposed to opportunistically) transcend investment philosophies in search of the answer to the question asked , “What works in Investing”. 


We aim to stand on the shoulders of the above-mentioned giants using investment philosophy and process wholly based on buying stocks at a margin of safety to our view of intrinsic value.


While we enormously prefer to buy high quality companies with wide moats protecting excess profitability, there are of course occasions when the market bids up quality beyond fair value, negating the types of opportunities sought out by Buffett and Munger.


In these instances, we walk in the footsteps of classic value investors like Walter Schloss, sifting through less advantaged (or more mediocre) companies in search of even larger margins of safety to our view of intrinsic value.


What we refuse to do is to buy risk instead of value in search of excess returns.  

Quality has outperformed the market by 40% over 50 years!


Quality companies are defined as those with high profitability, low profit volatility and minimal use of leverage.

Quality has outperformed the market by 40% over 50 years!

Amazingly, this out-performance is not because of an unwinding of some sort of specific risk.

It came from management teams of wonderful businesses simply reinvesting in their competitive advantages and generating more cash which they reinvested to generate further cash – an autocatalytic process that is the hall mark of intrinsic value.

Such excess return, combined with less fundamental risk, is called a “free lunch”.


The Efficient Market Hypothesis refutes the existence of “$100 bills lying on the side walk waiting to be picked up by investors”.

The theory hypothesizes that these opportunities will be immediately arbitraged away, thus preventing anyone from getting rich on them.

Yet this is what Warren Buffett has been doing.

"Investing in wonderful businesses) is like having a Triple A Bond outperforming the B+ bond in the long term by 1% a year, when in a reasonable world, it “should” yield, say, 1% less. "

Now would be a good time to circle back to Keynes and validate his reasons for concentrating his portfolio in “well managed industrial companies that compound value by re-investing part of their profits.”

“Quality” has outperformed the market forever: The S&P had a High Grade Index that started in 1925 and handsomely outperformed the S&P 500 to the end of 1965'.

"Cheap" classic value companies versus Quality (growing intrinsic value) companies

Classic value metrics such as P/B, P/E or DY do not represent intrinsic value. 

To illustrate this, Grantham says when he poses the following question to investment audiences

  • “I give you Coca Cola at 1.2x book or General Motors 1.0x. 
  • Which would you have?” he gets no takers for GM. 

That is the clearest difference between P/B as a corner stone of classic value, and not intrinsic value.

The extra qualities represented by Coca Cola are worth a premium. The only question is, “how much?’ 


What this means is that

  • any outperformance of intrinsic value (quality) is pure alpha
  • where outperformance of low P/B (as it is for many small caps) is compensation for a high risk premium. 

To support this point, Grantham points out that had the US government not bailed out the behemoths of the US financial system in the crises of 2008, many companies trading at low price to book ratios would have gone bankrupt (not just in the US, but across the world due to the interconnectedness of the global financial system).

What we learn from Buffett’s review of the first 25 years of his investment experience is that this risk premium sometimes comes back to bite you. 

It should not be surprising that in times of deep economic crises, more of these “cheap,” classic value companies go bust than is the case for the “expensive” intrinsic value companies.

Further studies found that classic value investment opportunities tend to coincide with other characteristics such as

  • small capitalization, 
  • illiquidity, 
  • high leverage, or 
  • dissipating fundamentals due to severe cyclical conditions.  

 “The pure administration of classic value investment style really needs a long term lock-up, like Warren Buffet (Partnership) has or it will have occasional quite dreadful client problems.” 

Investment history is replete with examples of such dreadful client problems – Gary Brinson of UBS in the late 90s, Tony Dye who ran a value based contrarian portfolio for Phillips and Drew, and low PE value manager David Dreman in 2008, all lost the majority of their clients due to severe underperformance. 

The big lesson to learn here is not that classic value investing doesn’t work. 

It is the fact that it works far less frequently in recent times than it used to, enough to produce dreadful client problems.  

The reasons for Buffett’s evolution (from using classic value metrics in his Partnership years to intrinsic value at Berkshire).

Chris Davis shares that classic value investing would have denied Buffett the benefits of compounding (of shareholder value) that comes along with the intrinsic value found in wonderful businesses. 

Further, Buffett would have also suffered from a scale disadvantage if he had continued investing in cheap but small companies.


We quote “Buying cigar butts at less than liquidation value would almost certainly have continued to work out well for Buffett as long as the amounts involved were small enough. 

Such opportunities tend to be in very small companies. 

This approach requires more portfolio turnover as time works against lousy businesses.” 

In other words, while the decision to sell a mediocre investment that has done well for you is immediate, it moves much further out in great quality business.

Failure to calibrate the right price to sell a mediocre business could negate your whole investment case.


In the mean time, a wonderful business continues to renew corporate value by garnering more and more of the profit pool in its industry.

You have to be vaguely right about when to sell it. 

Last, and as importantly, the tax implications of high portfolio turnover are highly unfavorable.


The investment philosophy that has guided Berkshire Hathaway until today is more reminiscent of Keynes and Fisher than Graham. 

In fact, Buffett has paid homage to Keynes in various letters to Berkshire shareholders.

Further, he is known to have once said his strategy was 15% Fisher and 85% Benjamin Graham.

We believe this to be genius of Buffett – finding out what works and evolving to it.

Investment Strategies employed by Warren Buffett in his Partnerships

Throughout the aforementioned paradigm shift incorporating corporate growth into valuation, Benjamin Graham continued to utilize his net asset based definition of value in managing money for limited partners/shareholders in his partnership. Benjamin Graham retired (and wound up his partnership) in 1956'


  • In 1956,  the same year that Benjamin Graham retired, Warren Buffet started up his investment partnership, Buffett Partnership Ltd. 
  • By 1960, Buffett had seven partnerships operating under Buffett Partnership Ltd, namely, Buffett Associates, Buffett Fund, Dacee, Emdee, Glenoff, Mo-Buff, and Underwood. 
  • In 1962, Buffett merged all partnerships into one. 
  • In 1966, he closed the partnership to new money. 
  • In 1969, following his most successful year, Buffet liquidated the partnership and transferred their assets back to his limited partners (shareholders). He further recommended his partners to Bill Ruane who then founded Sequoia Fund. 

At his point, the stock market is simply roaring with growth stocks powering ahead until the 1973 oil crisis.


Of importance to us at this stage are the investment strategies employed by Buffet in his Partnership.

In one of his letters to his limited partners in 1962, Buffett explained in detail the strategies he used to generate excess returns. 

1.  Between 5% - 10% of his portfolio was invested in undervalued securities, a group of companies he referred to as ‘generals’. 

The group provided relative margin of safety at the time of purchase, but subsequently behaved just like the market. He expected this section of the portfolio to display limited downside in falling markets but have a very good chance of outperforming in upwardly drifting markets. 

A good example of this was the purchase of a company by the name of Dempster, a windmill manufacturing company in 1962. Buffett consulted his friend, Charlie Munger, to whom he was introduced in 1959, on this investment. Just a year later (1963), Buffett sells Dempster for three times (3x) the amount he invested. Dempster, almost worthless when Buffett bought it, had built a portfolio of assets worth over $2m during the time of Buffett’s investment! 

2.  The second group tended to focus on workouts – M&A, spin offs, reorganizations and liquidations. 

Because of this, such shares would be underpriced and would outperform in down years, but underperform in strong markets. 

For instance, Munger recommended that Buffett buy a company by the name of Harry Bottle in 1962. This move turned out to be very profitable as Bottle cuts costs, laid off workers, and moved into a cash rich position. 

3.  The third strategy was control situations where he would initiate a large enough position in a company to try and influence corporate policy. 

A famous control situation is Berkshire Hathaway which started out as an undervalued position (general) in 1962. Buffett arranged a business coup to take control of it at Berkshire’s board meeting in 1965. He appointed a new president, Ken Chance, to run it. After distributing (unbundling) Berkshire to his limited partners in 1969, Buffett, himself a partner, remained with 29% of the stock. 

There is a wealth of knowledge we learn from letters Buffett wrote to his limited partners (and after to his Berkshire Hathaway shareholders) on the pros and cons of the investment strategies employed during the partnership years (1956 to 1969).  

Buffett writes about lessons learned (mistakes) in his first twenty five years of investing.

In 1989, Buffett writes about lessons learned (mistakes) in his first twenty five years of investing.


On the investment in Berkshire itself, he says, “Though I knew its business – textile manufacturing – to be unpromising, I was enticed to buy because the prices looked cheap. 

Stock purchased of that kind had proved reasonably rewarding in my early years, though by the time Berkshire came along in 1965, I was becoming aware that the strategy was not ideal.” 

This lesson is instructive to Buffett’s increasing realization not to limit his view on valuation to “classic value metrics” but to consider growth (future prospects) as part of value. 


He continues with an instructive focus on quality or structural advantages that create intrinsic value over time, “Unless you are liquidator, that kind of approach to buying businesses is foolish. 

First, the original “bargain” price probably will not turn out to be a steal after all. 

In a difficult business, no sooner is one problem solved than another surfaces – never is there just one cockroach in the kitchen. 

Second, any initial advantage you secure will be quickly eroded by the low return that the business earns. 

For example, if you buy a business for $8m that can be sold or liquidated for $10m and promptly take either course, you can realize a high return.

But the investment will disappoint if the business is sold for $10m in ten years and in the interim has annually earned and distributed only a percentage on cost.

Time is the friend of the wonderful business, the enemy of the mediocre.” 


One last illustration of Buffett’s evolution, “I could give you other personal examples of “bargain purchase” folly but I am sure you get the picture: it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price. 

Charlie (Munger) understood this early; I was a slow learner.

But now, when buying companies or common stocks, we look for first-class businesses accompanied by first class managements.”

The Future of Common Stocks

Thursday, 14 December 2017

The FIVE KEY DECISIONS every investor needs to make

The 5 key decisions every investor needs to make:

1. The Do-It-Yourself Decision
Retail Brokers
Independent, Fee-Only Advisors
How to Select an Independent, Fee-Only Advisor
Investment Philosophy
Personal Connection and Trust

2. The Asset Allocation Decision
The Impact of Volatility on Returns
Risk and Return are Related
The Asset Allocation Decision
Cash, Bonds and Stocks
Small vs. Large Companies
Value vs. Growth Companies
Your Emotional Tolerance to Risk
Your Age

3. The Diversification Decision
Positively correlated, uncorrelated or negatively correlated.
Domestic or International Stocks
Domestic or International Bonds
Portfolio Risk and Return

4. The Active versus Passive Decision
Active Investing
Passive Investing
Cash Drag, Consistency, Costs Matter

5. The Rebalancing Decision
Rebalancing = Buy Low and Sell High, minus your emotions
Rebalancing Methods
The Benefits of Rebalancing
Rebalanced Annually
Never Rebalanced

Everyone who takes the time to address these five investment decisions can have a successful investment experience.

The elegant truth of economics is that the return on capital is exactly equal to the cost of capital.

Wealth is created when natural resources, labour, intellectual capital and financial capital combine to produce economic growth.

As an investor, you are entitled to a share of that economic growth when your financial assets are invested in and used by the global economy.

So, how can you best capture your share?

The most effective way is to deploy your capital throughout the public fixed income and equity markets ### in a broadly diversified manner designed to capture a global capital market rate of return.

With the proper time horizon and discipline you can reach your financial goals and outperform most investors with less risk.

Remember, do not focus on what you cannot control. You cannot predict the occurrence of an event like the mortgage crisis, the sovereign debt crisis or an oil spill in the Gulf of Mexico.

You can control your costs, diversify properly, establish the right asset allocation, and maintain the discipline to stay the course.

Going forward, when you see the investment predictions on the cover of the latest financial periodical, watch the talking heads make their forecasts on TV, and listen to your friends and neighbours boast about their latest great investment scheme, you will understand that they are speculating instead of investing.

You know a better way and you have the answer.


Fixed Income Asset Classes
Cash Equivalents
Short-Term U.S. Government Bonds
Short-Term Municipal Bonds
High-Quality, Short-Term Corporate Bonds
High-Quality, Short-Term Global Bonds

Equity Asset Classes
U.S. Large Stocks
U.S. Large Value Stocks
U.S. Small Stocks
U.S. Small Value Stocks
International Large Stocks
International Large Value Stocks
International Small Stocks
International Small Value Stocks
Emerging Markets Stocks (Large, Small and Value)
Real Estate Stocks (Domestic and International)

The 5 key decisions every investor needs to make:

1. The Do-It-Yourself Decision
[Should you try to invest on your own or seek help from an investment professional? And if so, which type of advisor is best?]

2. The Asset Allocation Decision
[How should you allocate your investments among stocks (equities), bonds (fixed income), and cash (money market funds)?]

3. The Diversification Decision
[Which specific asset within these broad categories should you include in your portfolio, and in what proportions?]

4. The Active versus Passive Decision
[Should you favour an actively managed approach to investing that seeks to outsmart the market, or a more passive approach that delivers market-like returns?]

5. The Rebalancing Decision
[When should you sell certain assets in your portfolio and when should you buy more?]

Each of these decisions has a significant impact on your overall investment experience.

Whether you know it or not, every day you are making these decisions.

Even if you decide to just stay the course and do nothing with your investment portfolio, you are inherently answering all of these five questions.

By learning how to make five informed investment decisions that capture the essence of investing you will never again be afraid of financial markets or uncertain about what to do with your money.

You will no longer be a speculator .. you will be an investor.

The Investment Answer
Daniel C. Goldie & Gordon S. Murray

Wednesday, 13 December 2017

How did Keynes perform as an investor? (Audio)

John Wasik says:

Excellent piece, but I should note that in researching my book “Keynes’s Way to Wealth,” I discovered that the great economist’s investing skills evolved over time and were enhanced by his notable failures in 1920, 1929 and 1937 when he was nearly wrecked by downturns. Fortunately, Keynes recovered brilliantly and kept investing at the bottom of some of the worst declines in the 20th Century and died perhaps the wealthiest economist ever. Along the way, he pioneered some of the basic principles of value investing. His notion of “animal spirits” is also the cornerstone of behavioral economics and a solid guidepost for anyone trying to outguess the market and rely solely upon metrics like p/e ratios. Sadly, though, he’s rarely given credit for being ahead of his time, although this recent research sheds some new light on his investing acumen.

Power Point Presentation of
The Investment Wisdom of John Maynard Keynes (1883 - 1946)

John Wasik wrote an excellent book titled Keynes's Way to Wealth.

Here are some related comments on John Maynard Keyne's investing prowess.

-- John C. Bogle, founder, The Vanguard Group, author, The Clash of the Cultures: Investment vs. Speculation (from the foreword)
As you follow Keynes from his early years with the Bloomsbury Group, through two world wars and the Great Depression Keynes's theories and practices come to life by way of the historic and personal events that shaped them. Like today's investors, Keynes faced markets roiled by panic, inflation, deflation, widespread unemployment, and war-and he developed a core set of principles to prosper in every climate. With the individual investor in mind, this straightforward guide makes it easy for investors at all levels to implement the action-oriented strategies presented in each of the 10 chapters and start investing like Keynes today by:
  • Buying and holding quality stocks
  • Ignoring short-term news
  • Building diversified portfolios
  • Trading contrary to market momentum
  • Getting the most out of dividend stocks
Using the eloquent insight of a seasoned investment writer, author John F. Wasik digs down into what investments Keynes owned, how he bought and sold them, how his theories guided his investments, and vice versa. He illustrates why Keynes's ideas, insights, and portfolio strategies have withstood the test of time, and how they will continue to produce financial gains for dedicated investors. In a nutshell, Wasik delivers a pragmatic guide to the style of portfolio management practiced by such Keynes followers as Benjamin Graham, Warren Buffett, and Charles Munger.
The smart money gets richer in all types of weather, and so can you by following Keynes's Way to Wealth.
"Intelligent investing ultimately depends on having an intelligent theory of the economy. This story of Keynes's life as an investor illustrates this beautifully."
--ROBERT SHILLER, professor of Economics, Yale University; New York Times columnist; and author of Finance and the Good Society
"The great economist John Maynard Keynes speculated and lost big-time. Out of the ashes, he evolved some great long-term investment strategies that will work for every prudent investor. While picking up tips, you'll also find that this book is a great read."
--JANE BRYANT QUINN, author of Making the Most of Your Money NOW
"I'd always heard Keynes was a talented investor but never knew any of the details. John Wasik's excellent book uncovers that story and reveals Keynes's considerable investing skills. If you enjoy studying great investors, add this book to your list."
--JOE MANSUETO, founder and CEO, Morningstar, Inc.
"With the possible exception of Mark Twain, no one surpasses John Maynard Keynes as a source of pithy financial wisdom and sayings. Keynes's Way to Wealth mines the reasoning and investment experiences behind his quotability, abounty that will simultaneously edify, entertain, and augment your bottom line."
--WILLIAM J. BERNSTEIN, author and principal

Tuesday, 12 December 2017

Price is always an approximation; any precision is an illusion.

Price is a number that is often a delusion and nearly always a distraction.

The price attached to a stock or other financial asset changes in a frantic hum, often several thousand times a day, causing corrosive intellectual damage.

It may have little relation to VALUE, although it is more interesting and keeps most of the financial media quite busy.

The continual flux and spurious precision of price will cast an illusion of certainty, fooling many investors into thinking that the exact worth of a stock is knowable at any given moment.

That tricks investors into believing that even tiny changes in price can have great significance when, in fact, the constant twitching of stock prices is nothing but statistical noise.

Under the illusion of certainty created by PRICE, investors forget that VALUE is approximate and that it barely changes on even a monthly time scale.

Investors who fixate constantly on price will always end up trading too much and overreacting to other people's mood swings; only those who focus on ascertaining value will achieve superior returns in the long run.


If asked what your house is worth, would you respond, "$237,432.17?"  Of course not.

You know perfectly well that nobody, including you, knows what your house is worth to the nearest thousand dollars, let alone to the nearest penny or fraction of a penny. 

Instead, you would say, "Between $200,000 and $250,000 maybe."

With stocks and other financial assets, price is also an approximation; any precision is an illusion.

Price/Earning Ratio or P/E Ratio

This is a company's stock price divided by its earnings per share over the previous twelve months.

Because earnings can be manipulated in many ways and because past earnings are a poor guide to future profits, a P/E ratio is an imprecise and often misleading guide to what the company is worth.

A "normalised" P/E ratio averages several years's worth of earnings to arrive at a somewhat more reliable number.

A "forward" P/E relies on analysts' expectations of earnings in the coming year to arrive at a nonsensical number.

Sunday, 10 December 2017

Bursa Market PE 10.12.2017

Date 10.12.2017
KLCI 1721.25
Market PE 16.5
Market DY 3.29%

DateMarket PEMarket DYKLCI

(Sorted by DY)
Company Mkt Cap (B) Last Price PE DY ROE EPS
SIMEPLT (5285) 35.976 5.29 0.00 0.00 0.00 0.00
SIMEPROP(5288) 8.705 1.28 0.00 0.00 0.00 0.00
IHH (5225) 46.304 5.62 56.03 0.53 3.7 0.10
GENTING (3182) 33.857 8.79 14.14 1.42 6.83 0.62
AXIATA (6888) 48.497 5.36 84.28 1.49 2.28 0.06
PPB (4065) 19.916 16.8 15.03 1.49 6.29 1.12
KLK (2445) 26.111 24.46 25.98 2.04 8.66 0.94
IOICORP (1961) 28.215 4.49 28.26 2.12 13.47 0.16
HLFG (1082) 19.232 16.76 12.21 2.27 9.21 1.37
RHBBANK(1066) 19.449 4.85 11.11 2.47 7.61 0.44
PCHEM (5183) 59.36 7.42 14.27 2.56 15.11 0.52
IJM (3336) 10.377 2.86 16.96 2.62 6.41 0.17
HLBANK (5819) 34.683 16 15.47 2.81 9.07 1.03
PETDAG (5681) 24.34 24.5 15.99 2.86 25.71 1.53
PBBANK (1295) 77.72 20.02 14.22 2.9 15.14 1.41
GENM (4715) 31.175 5.25 13.01 3.14 11.87 0.40
CIMB (1023) 54.984 5.96 12.88 3.36 8.72 0.46
MAXIS (6012) 46.395 5.94 21.71 3.37 31.09 0.27
TM (4863) 22.698 6.04 28.12 3.56 10.72 0.21
HAPSENG (3034) 23.652 9.5 22.19 3.68 17.41 0.43
PETGAS (6033) 31.66 16 17.88 3.88 14.38 0.89
TENAGA (5347) 87.936 15.52 12.74 3.93 12.07 1.22
WPRTS (5246) 12.106 3.55 20.33 3.94 28.86 0.17
MISC (3816) 31.782 7.12 13.01 4.21 6.71 0.55
AMBANK (1015) 12.449 4.13 9.51 4.26 8.04 0.43
DIGI (6947) 36.309 4.67 24.35 4.48 274 0.19
KLCC (5235SS) 14.027 7.77 15.95 4.59 6.85 0.49
ASTRO (6399) 14.182 2.72 19.32 4.6 110 0.14
MAYBANK(1155) 99.926 9.27 12.89 5.61 10.56 0.72
BAT (4162) 10.873 38.08 15.52 7.3 164.68 2.45
YTL (4677) 12.874 1.18 16.32 8.05 5.06 0.07
SIME (4197) 14.826 2.18 4.59 10.55 8.38 0.47

FBM KLCI’s valuation tells a ‘compelling’ story

KUALA LUMPUR: The FBM KLCI, which is one of the worst-performing markets in Asean despite seeing the most foreign inflow this year in the region, is now trading at a compelling valuation as its forward price-earnings ratio (PER) remains below both its five-year and 10-year averages, according to RHB Asset Management Sdn Bhd chief executive officer (CEO) Ho Seng Yee.

“In terms of valuation, the [FBM] KLCI is very undemanding now. Valuation is relatively compelling as we’re now below the average 10-year price-earnings ratio,” Ho told The Edge Financial Daily in an interview.

Bloomberg data shows that the forward PER for the FBM KLCI is at 15.33 times, while its five-year average and 10-year average PER are at 17 times and 16.5 times respectively.

Notwithstanding the FBM KLCI’s underperformance so far in the region, Ho said the outlook for Bursa Malaysia is very positive, though it hinges on a key aspect: the upcoming corporate earnings report card. But Ho is also upbeat about that.

“Our corporate earnings have been on a downtrend for the past three years, but has now stabilised. We believe corporate earnings have bottomed out and when earnings growth is reflected, the market will move up,” said Ho.

The positivity comes amid a stronger economic environment in Malaysia and globally. Ho noted that the country’s economic prospect has improved tremendously this year — its gross domestic product (GDP) growth gained at a commendable 5.7% in the first half of the year — while strong exports have helped to support the economy, partly thanks to the relatively cheap ringgit.

“The worst is pretty much over,” said Ho, as he recalled the collapse of the oil price in 2014 that resulted in the stock market, which was trading at around 1,900 points at the time, to slump. “The scenario has changed now,” Ho noted, and pointed out that the ringgit has stabilised and could strengthen further with the oil price steadying above the US$60 (RM251) per barrel level.

At the time of writing, the oil price was trading at US$64.08 per barrel, compared with the year-ago level of US$50 per barrel. Though it’s still far from the US$100 per barrel level seen before the collapse, Ho thinks it provides sufficient support to Malaysia’s economy to achieve the Budget 2018 objective, which is based on the assumption of the oil price being at US$52 per barrel.

On FBM KLCI’s underperformance this year compared with its regional peers, Ho said one of the reasons was due to the strong participation of institutional investors in the local bourse.

“One of the key things to note about our market is the presence of institutional players like KWAP (Kumpulan Wang Persaraan [Diperbadankan]), EPF (the Employees Provident Fund) and such. Their participation makes up about 50% of the market. In the past few months, when foreign investors bought in, they sold. That in itself may have kept the [FBM] KLCI from moving to a fantastically high level. Today, the index is only up about 6% to 7% [year to date],” he said.

On the positive side, he said the strong participation of local institutional investors gives good support to the market and helps stabilise it from volatility. Back in the 1990s, Ho said the Malaysian stock market comprised about 70% retail investors, who now only make up about 20% to 25% of the market.

“We’re changing into more of an institutional market, which will make it more stable and defensive,” he added.

Downside risks or buying opportunity?

Regardless of his positivity, with geopolitical risks rising around the world, Ho said caution remains the order of the day. “It probably will not hurt the Malaysian market directly, but it will affect the global market, which in turn will spill over here,” he said.

The global equities market have run and reached record highs recently, noted HSBC Global Asset Management Ltd director and senior equity product specialist Stephen Tong, who was also present in the interview.

“While there’s a concern on whether there will be a crash or not, you just have to remember that corporate earnings are strong and so the market can be supported at this kind of level. Geopolitical risk events, or any event for that matter, could cause investors to take profit and because the volatility is very low, a small event can cause this profit-taking to accelerate, and you will have a small correction. But when these corrections occur, it could be a buying opportunity for those with cash,” Tong said.

While geopolitical risks cannot be ignored, he said its impact on one’s investment can be contained by scenario planning. Besides that, economic indicators and the US Federal Reserve’s (Fed) policy are two other key risks to world shares.

“If there’s some weakness in the economic indicators, then the environment for corporate earnings would be soft. Another key risk is the Fed’s policy, if it raises rates too quickly,” he added.

Regardless, Tong is upbeat about global equities despite its recent runs, which he said was based on strong corporate earnings, which have pushed up subsequent earnings expectations.

“Corporate valuations are based on earnings. Corporate earnings are strong because of synchronised global recovery. Interest rates continue to remain low and the central banks’ normalisation is going to be very gradual, which is supportive of the economy and the market,” he added.

Against this bullish view, RHB is launching its RHB Global Real Estate Equity fund, a fund that feeds into HSBC’s Global Investment Funds — Global Real Estate Equity. Tong said the fund will invest in a portfolio of equities related to the real estate industry in developed markets.

The minimum initial investment is at least RM1,000 for the ringgit class or US$1,000 for the US dollar class. The fund targets the upper-middle class in Malaysia who wants exposure to the property sector in developed markets, said Ho. It is expected to generate an average return of about 6% over a long-term period, based on dividend yield, potential earnings growth and valuation.

“Malaysia is not part of the investment universe in that fund. That means for Malaysian investors who focus on property stocks or own properties in Malaysia, this offers a diversification to exposure outside Malaysia,” Tong said.

He also said that given the low correlation between real estate’s return and other investment assets, it gives a good diversification alternative within one’s investment portfolio.

“Returns on real estate equity has been very similar to global equities, so it’s not giving up much of the return potential compared to investing in equity. It also offers a higher dividend yield relative to global equities, about 4% against 2.6% on average,” he said.

The companies it invests in are typically real estate investment trusts (REITs), and could involve those in operating in retail, residential, office, self-storage, industrial parks, logistics for e-commerce, healthcare facilities and others.

Hope in the retail space

On retail REITs, Tong disagreed with the perception that there are systemic problems plaguing the sector with the advance of e-commerce, saying instead that retail spaces that fail are due to specific problems at specific stores.

“There’s actually a silver lining to some of the stores’ closure seen in the US. If retail space is freed up, you can refurbish and relet the space to better tenants at a higher rate. While some think e-commerce is eating away traditional shops, we see customers like the retail experience such as eating out, going for movies, bowling and many more. It’s much more than just a singular shopping experience,” Tong said.

He highlighted that leading e-commerce player Amazon has bought into Whole Food, which reflects the continued importance of a brick-and-mortar presence.

In Malaysia’s retail space, however, RHB’s Ho agreed that there has been some declines in retail spending in shopping malls, but noted that an improved consumer sentiment, along with better economic environment and higher wages, could see the return of retail spending growth.

Billy Toh
The Edge Financial Daily
November 13, 2017 08:36 am +08