The Circle of Wealth

The Miser and his Lump of Gold

Aesop, twenty-six hundred years ago, told the story of the miser who sold all that he had and bought a lump of gold, which he buried in the ground.  He went to look at it every day.  One day, the lump of gold was stolen and the miser was distraught.  A neighbour, learning of his grief, suggested that he find a stone and bury it in the hole and imagine that the gold is still lying there.  

"It will do you the same service, for when the gold was there you didn't really have it because you didn't make the slightest use of it."  

The moral of the story is that the true value of wealth is not in its possession but in its use.  Wealth unused might as well not exist.

The Burdens of Wealth

The burdens of wealth are in 

• the act of creating, 
• the fear of keeping, 
• the temptation of using, 
• the guilt of abusing, 
• the sorrow in losing and 
• the responsibility of handing it over to a succeeding generation.  

Just like building a business, with wealth you need to create, build, sustain and pass the baton.

"Riches get their value from the mind of the possessor.  They are blessings to those who know how to use them and curses to those who do not."(Ancient Rome playwright Terence 190 B.C.)

"For a person to build a rich and rewarding life for himself, there are certain qualities and bits of knowledge that he needs to acquire.  There are also things, harmful attitudes, superstitions, and emotions that he needs to chip away.  A person needs to chip away everything that doesn't look like the person he or she most wants to become."  (Earl Nightingale)

The Importance of Integrity

Warren Buffett looks at three character traits in people who surround him:  integrity, energy and intelligence.  He says, if you don't have the first, the last two will kill you.  In fact, if they don't have integrity, he would rather his managers be lazy and dumb.

"Integrity is like oxygen.  If you don't have it, nothing else matters."

"Be honest.  Never lie under any circumstances.  Just basically lay it out as you see it.  Simply speak openly and frankly."

Integrity is also about principles, full disclosure and openness.

Integrity is a choice, and the lack of it most often leads to self destruction.

The Value of a Good Reputation

"Conduct all business way inside the lines. and if it is near the line or on the line don't do it."  This advice would keep you out of trouble.

"Never do anything in business that you wouldn't want printed on the front page of your local newspaper written by an intelligent but critical reporter."

Always be on the lookout for managers and business with excellent reputations as possible acquisitions.

"It takes twenty years to build a reputation and only five minutes to ruin it.  If you'd think about that, you'll do things differently."

"He that is of the opinion that money will do everything may well be suspected of doing everything for money." (Benjamin Franklin)

Respect Yourself and Others

Follow the rules of common courtesy and political politeness.  Answer all letters promptly with a lighthearted one-paragraph reply.

"Of the billionaires I have known, money just brings out the basic traits in them.  If they were jerks before they had money they are simply jerks with a billion dollars." (Warren Buffett)

Good Character, Strong Ethics

Business success and wealth creation can be achieved with the highest ethical standards and without shady, questionable practices.

Warren Buffett treats his shareholders like partners and has created wealth with them, not at their expense.  

Character is tested most in defeat or when you have great power or great wealth.  A powerful man in business has stood the test of time and power.

One of the most powerful messages Buffett delivers in his humorous style is this:  Make a list of all the traits you admire and respect in others.  Think of people close to you or even those who have passed away.  His point is that whatever character traits you put on your list, you can adopt those same qualities and be that person.  Warren Buffett also suggests to his student audiences to make another list of the character traits that they don't admire or respect in others.  If you think about it and put some effort to it, you too can avoid all of the negative characteristics of the person you don't want to be.

Character cannot be hidden or faked.  You can tell if someone is the type of person with whom you want to associate.

A German motto says this, "When wealth is lost, nothing is lost; when health is lost, something is lost; when character is lost, all is lost."

Money Can't Buy Happiness

"No matter how rich you become, how famous or powerful, when you die, the size of your funeral will still pretty much depend on the weather."

Most people agree that if you have created wealth at the expense of your relationships, health or ethics, then you have nothing.   Life is more than money and more than wealth.

"Happiness is not the mere possession of money; it lies in the joy of achievement, in the thrill of creative effort." (Franklin D. Roosevelt)

True happiness is doing what you were born to do, also known as self-actualization or following your bliss.  

Each person is born with a different genetic code.  The challenge for each of us, in order to find our happiness, is to figure out what our passion is, what our talents are and how best to express them.

Many people have found the attainment of wealth is without happiness if you fail to:

• Give credit to others
• Live with moderation
• Select the right heroes and mentors
• Give back and mentor others
• Look after your health.
• Earn the respect you deserve
• Stay well within the laws (including paying taxes)
• Be industrious
• Be socially connected and have friends 
• Have the love of those you want to love you

"Tell me who your heroes are and I'll tell you what kind of person you will become."

With the ability to buy most things, Warren chooses to enjoy few possessions and to keep the things he does have for a lifetime.  Warren finds happiness not in his vast fortune, but instead in delivering newspapers with his grandson and taking his family to the Dairy Queen on Sunday, talking with and mentoring college students, explaining that he lives no better than they do, he just travels better.

"Good managers never take credit for more than they do."

Warren carefully chooses those friends who, when they are around, bring out the best in him.  

Hang out with people who are bigger than you, bring out the best, and inspire you, and you will have a network of giants.

In the end, happiness does not come from Buffett's wealth, but rather from the number of people who love you. The most important thing is not how many or how large his assets are, but how his children feel about him.  Warren considers parenthood vital to happiness,  and unfortunately there is no rewind button on child development.

The more love you give, the more you get, and you can never give too much of it away.  It is inexhaustible.

Reference:  Warren Buffett's Lesson on Having a Rich Life

Is Inflation Good for Stocks?

Conclusions:  

Back-tested data does not show any significant relationship between inflation rates and stock market returns.

Stock valuations may be negatively impacted by higher-than-normal inflation (due to increase in the risk-free rate which makes short-term Treasuries more attractive relative to equities).

Stocks may not be as good a "hedge" against inflation as the theoretical argument may suggest, this may be limited to SHORTER-TERM stock market movements.   

LONG-TERM investors in the stock market should take comfort in the fact that the S&P 500 has steadily outpaced inflation with an annualised real (inflation adjusted) return of 3% between 1871 and 2009.

 

Notes:

1.  Deflationary fears amidst weak economic growth have led to much liquidity being injected into the financial system by various central banks around the world.

2.  Motto:  "Deflation:  Making sure "it" doesn't happen here."

3.  Fundamentally, there appears to be a strong case for stocks to perform under inflationary conditions.  

• When raw material costs rise, companies can raise selling prices and pass on the increased costs to the consumer.  The goods and services produced by companies make up the composition of the CPI, and it is not unreasonable to expect selling prices to rise in tandem with the CPI.
• Also, companies hold real assets like property and land which can rise in nominal value over time.  Thus, investors in such companies should benefit over an inflationary period as the underlying assets increase in nominal value.

4.  The threats of deflation to economic prosperity are perhaps more obvious to investors who look to the beleaguered Japanese economy as a prime example.  

• An economy where consumers postpone spending as items become cheaper in the future is certainly not an ideal one, especially for stock investors whose companies suffer from declining revenue and shrinking asset values.

Back-Testing the S&P 500

Monthly historical inflation and stock market returns

1.  Inflation in the US has historically been represented by year-on-year changes in the CPI and this is reported on a monthly basis.  

2.  We looked at monthly stock market returns based on the S&P 500 and compared the historical stock market returns to different levels of inflation.

3.  The majority of monthly historical inflation data was below 4%, with a surprisingly huge number of periods where inflation was negative (14.4%).

4.  Instead of the expected poor returns in periods of deflation, the S&P 500 actually averaged a 1.1% monthly return where the CPI posted year-on-year declines.

5.  The best average monthly return was logged in months where inflation was between 7% and 8%, but this accounted for only 18 of the 1150 months, less than 2% of the data tested.

6.  On the other hand, inflation rates higher than 8% saw negative average monthly returns.

7.  Inflation between 1% and 4%, more moderate levels of inflation, saw an average return of 0.8%.

Extension of the study to annual inflation and stock market returns.

1.  A large proportion (61%) of the annual inflation rates fell between 0 and 5%.

2.  There appeared to be little correlation between high/low inflation rates and stock market returns.

3.  The high or low inflation rates resulted in both positive and negative stock market returns.

Theoretical Benefits of Inflation May Not be Reflected in Stock Returns

This evidently does not show up in back-tested data for the S&P 500, where our results indicate a lack of any observable correlation.

Why? 

1.  Both company specific and industry-specific factors can play a huge role in determining the ability of a company to raise prices.

2.   The uniqueness of a company's product or its extent of substitutability can determine whether the company is able to raise prices without hurting demand.  If there are many substitutes available, the company may be forced to keep prices low to remain competitive.

3.  Companies whose business models depend on being low-cost producers will find it difficult to do well in an environment where raw material prices rise without a corresponding increase in selling prices.

4.  In certain highly regulated industries like the utilities or fixed-line telecommunications sector, regulatory authorities may prevent companies from raising selling prices, resulting in a price ceiling which caps profits.  

5.  Ultimately, a higher input cost which cannot be passed on to the tend consumer means lower profit margins and smaller profits.

6.  Recognizing the inflationary pressures faced by companies, it would appear that the benefits of inflation (rising asset prices, higher nominal revenue and profits) may take a significant period of time to occur.

7.  Industry consolidation and technology breakthroughs may also take place to counter the short-term negative impact of inflation, with surviving companies reaping the benefits while others go out of business.

Impact of inflation on valuations

1.  Inflation between 2% and 3% saw a wider range of valuations over the past nine decades (1950s, 1960s, 1990s and 2000s).

2.  Valuations of the 1920s and 1930s are perhaps less meaningful, as they encompass the Great Depression where unprecedented corporate bankruptcies could have skewed market earnings and thus valuations.

3.  More noteworthy are the decades with higher average inflation (1940s, 1970s and 1980s) were met with lower valuations.  How can this anomaly be explained by the impact of inflation on valuation metrics for the stock market?    

-  Periods of high inflation are generally met with interest rate hikes (as a means to subdue inflationary pressure), which make short-term treasuries more attractive relative to equities.  

-  Inflation normally results in an increase in the risk-free rate, which raises the required return on equities.  

-  The resulting impact on the stock market lowered valuations.  

Hidden hands behind penny stock surge (The Edge)

Special Report: Hidden hands behind penny stock surge 

The Edge Malaysia September 30, 2020

This article first appeared in The Edge Malaysia Weekly, on September 21, 2020 - September 27, 2020.

ASTUTE market observers would have noticed on the local bourse a group of individuals, supposedly acting in concert, who have amassed shares in more than 20 publicly traded companies. These companies — linked via shareholding and directorships — are often on the most actively traded list, with huge, fluctuating share prices. “It (the companies) is all linked to the same person; usually, the most actively traded list on a daily basis involves these counters,” one source says when asked which are the companies that are linked. 

However, research by The Edge (see chart on the 21 companies) indicates that while other businessmen have surfaced, the individual said to be in control of the group of companies is not officially onboard or present as a shareholder.   “This [his not surfacing] could be due to several issues,” another source adds. 

It is also telling that nine of the 21 companies mentioned — 

• AT Systemization Bhd, 
• MLabs Systems Bhd, 
• Focus Dynamics Group Bhd, 
• mTouche Technology Bhd, 
• Fintec Global Bhd, 
• XOX Bhd, 
• M3Technologies (Asia) Bhd and 
• NetX Holdings Bhd 

— have their principal place of business, head office, business office or corporate office in Menara Lien Hoe, near Tropicana Golf Country Resort in Petaling Jaya. 

On its website, Lambo Group Bhd states that its address is at Menara Lien Hoe, even though the address in its annual report is in Old Klang Road in Kuala Lumpur. 

In 2006, Lien Hoe Corp Bhd sold Lien Hoe Tower Sdn Bhd, which owns Menara Lien Hoe, to privately held E-Globalfocus Sdn Bhd for RM1 and the assumption of RM43 million in debts. Meanwhile, E-Globalfocus was 68%-controlled by Cubes Innovative Sdn Bhd, a company 99%-controlled by Chuah Hock Soon. 

Chuah and businessman Datuk Kenneth Vun @ Vun Yun Lun were charged with four others in July 2014 for allegedly manipulating DVM Technology Bhd shares in March 2006. 

Vun has had several issues with the Securities Commission Malaysia and, in 2009, had to restitute RM2.496 million — being the amount of company funds that he had caused to be misused for his personal benefit, according to the regulator — to his then flagship FTEC Resources Bhd. Since FTEC — which morphed into Tecasia Bhd and later Mangotone Bhd — was delisted, 

Vun has had little direct presence in the market. However, Vun’s two sisters, Carol Vun On Nei and Grace Vun Siaw Nei, hold stakes of 3.64% and 0.67% respectively in Xidelang Holdings Ltd. 

Fragmented shareholding 

While Fintec Global seems to be a prominent company at the centre of the maze, its shareholding is fragmented, with several blocks of shares parked under Sanston Financial Group Ltd. In several of the 21 companies on the list, Sanston Financial is present in the shareholding list. Other companies that surface as shareholders in these list of companies include Global Prime Partners Ltd and Cita Realiti Sdn Bhd, a private company wholly-owned by one Kamarudin Khalil. Other shareholders, albeit usually holding small stakes, among the 21 companies include Datuk Jacky Pang Chow Huat — who, apart from a 11.84% stake in Sanichi Technology Bhd — has small stakes in DGB Asia Bhd, Focus Dynamics, MNC Wireless Bhd and Xidelang. Pang is also a director in Sanichi Technology.

Meanwhile, businessman Mak Siew Wei has 23.4% in AT Systemization, 17.07% in Green Ocean Corp Bhd and small stakes in Focus Dynamics and Xidelang. He is also a director at AT Systemization, Green Ocean and Saudee Group Bhd. Datuk Eddie Chai Woon Chet recently acquired a 62.37% stake in restaurant operator Oversea Enterprise Bhd, and has a 6.71% shareholding in Anzo Holdings Bhd, where he is managing director and has a board position in M3Technologies (Asia). Another name frequently seen is Datuk Kua Khai Shyuan, who, besides a 5.9% stake in mTouche Technology, has small shareholdings in Focus Dynamics, PDZ Holdings Bhd and Sanichi Technology, and has board seats on Trive Property Bhd, DGB Asia and MNC Wireless. Former Umno treasurer and former Bank Simpanan Nasional Bhd chairman Datuk Abdul Azim Mohd Zabidi surfaces as a director in four of the companies — Fintec Global, DGB Asia, Anzo and XOX. 

Most of the companies are loss-making and small in terms of market capitalisation, with the exception of Focus Dynamics, which has a market value exceeding RM5 billion. Nevertheless, Focus Dynamics, which is involved in operating food and beverage outlets, seems to be the star performer, with its stock price hitting a multiple-year high of RM2.64 recently on Sept 17, despite mustering a meagre RM3.08 million in net profit from RM20.72 million in revenue for its six months ended June this year. Year to date, Focus Dynamics stock has gained about 400%. 

Irrational exuberance 

Trading volume on most of the 21 companies is generally high, and many have shown unexplainable strong gains over the past few months. 

• For instance, Saudee’s stock hit a low of eight sen on March 17, and picked up momentum in June to hit a 52-week high of 67 sen on Aug 13, gaining more than 300%. For its nine months ended April this year, Saudee, whose mainstay is in frozen food and poultry, suffered a net loss of RM27.78 million from RM57.61 million in revenue. Last Friday, Saudee closed at 48 sen, translating into a market capitalisation of RM77.3 million. 
• If you are impressed with Saudee’s gains, Anzo — a loss-making company that has a business in timber products — gained more than 1,000% from mid-May to hit a high of 26 sen in July. Anzo closed at 11.5 sen last Friday, giving it a market capitalization of RM102.7 million. 

There are several companies on the list that have shown similar patterns. 

• XOX, which is involved in cellular telecommunication services, gained more than 430% from mid-July to hit a high of 39.5 sen at end-August. In mid-March this year, XOX was trading at one sen. The stock closed last Friday at 19.5 sen, translating into a market value of RM562.8 million.
• Ailing shipping company PDZ’s stock was trading at one sen in mid-March, but at end-June, it gained more than 500% to 32.5 sen in mid-July. For a company mired in law suits and a significant dearth of shipping assets, PDZ’s meteoric rise is surprising to many. PDZ ended last Friday at 10 sen, giving it a value of RM89.4 million. 
• Similarly, Sanichi Technology, which is in precision moulding, saw a sudden surge in trading volume at end-May, with its stock spiking more than 150% to hit a high of 12.5 sen on June 2, after which it tapered off. 

While the peaks may be enticing to punters, the change in fortune, with counters falling to their troughs, can be a deterrent. 

• mTouche Technology, which has a wireless network and mobile messaging business, saw its stock crash from a high of 20.5 sen on Feb 20 this year to a low of 5.5 sen on May 12. 
• DGB Asia, a tracking solutions company, was trading at 19.5 sen in the early part of November last year, but by mid-March, it had shed most of its value to close at 1.5 sen on March 19. 

It is also noteworthy that companies such as Water Beaute World Bhd and WBW Global Sdn Bhd, have 1.02% and 0.42% respectively in Trive Property. These two companies were involved in get-rich-quick and fake online investment schemes. Both these companies were reported in the past to have stakes in XOX, while WBW Global also had a substantial stake in Anzo Holdings.

https://www.theedgemarkets.com/article/special-report-hidden-hands-behind-penny-stock-surge?type=malaysia

Comment:

Fine piece of investigative financial investigation and journalism.  Thanks to Edge.