The Role of Hedge Funds in Financial Crise

The Role of Hedge Funds in Financial Crises – Stephen Brown 

On October 2, the U.S. House Oversight and Government Reform Committeeannounced a Hearing on Regulation of Hedge Funds scheduled for Thursday, November 13, 2008. The focus is on the causes and impacts of the financial crisis on Wall Street, and the Committee will hear from hedge fund managers who have earned over $1 Billion.

The underlying premise of these hearings was expressed by Dr. Mahathir Bin Mohamad, the former Prime Minister of Malaysia, who wrote on September 26 “Because of the extraordinary greed of American financiers and businessmen, they invent all kinds of ways to make huge sums of money. We cannot forget how in 1997-98 American hedge funds destroyed the economies of poor countries by manipulating their national currencies”. The Prime Minister is recognized as an authority on the role of hedge funds in financial crises, given his experience managing the Asian currency crisis as it engulfed his nation in September eleven years ago. He is particularly critical of the role of George Soros who will in fact be invited to testify before the House Committee at their November hearing.

It is perhaps too early to write about the causes and consequences of the current financial crisis while the storm still rages. However, it is not too early to examine the history of the earlier financial crisis. During the 1990s, according to the International Monetary Fund, financial intermediaries had been investing steadily into South East Asia. There was a net inflow of about US$20 billion into the region over and above portfolio and direct investment, up until 1995 and 1996 when the amount increased dramatically to US$45 billion per annum. Then with the collapse in both the Baht and the Ringgit in 1997, there was a sudden outflow of US$58 billion. It was self-evident to the central bankers in the region that the collapse in the currency had everything to do with an attack on the currencies of the region by well-financed international speculators. As Dr. Mahathir observed in a Wall Street Journal opinion piece that was published on September 23, 1997: “We are now witnessing how damaging the trading of money can be to the economies of some countries and their currencies. It can be abused as no other trade can. Whole regions can be bankrupted by just a few people whose only objective is to enrich themselves and their rich clients…. We welcome foreign investments. We even welcome speculators. But we don’t have to welcome share- and financial-market manipulators. We need these manipulators as much as travelers in the good old days needed highwaymen”. What was most remarkable about this statement was that its premises and its conclusion were immediately accepted by the international community, despite the fact that Dr. Mahathir did not provide any evidence to support his analysis of the role of hedge funds in the Asian financial crisis.

The first premise of Dr. Mahathir’s argument is that hedge funds act in concert to destabilize global economies. This is at best a misapprehension of the definition of a “hedge fund”. There is no such thing as a well defined hedge fund strategy or approach to investing. Rather, a hedge fund is a limited investment partnership otherwise exempt from registering with the Securities and Exchange Commission under Sections 3C1 and 3C7 of the Investment Company Act of 1940. As I note in my testimony last year before the House Financial Services Committee the available data show a remarkable diversity of styles of management under the “hedge fund” banner. The long-short strategy often associated with hedge funds captures about 30 to 40 percent of the business. The style mix has been fairly stable (in terms of percentage of funds) although there has been a dramatic rise in assets managed by funds of funds. These diversified portfolios of hedge funds are attractive to an institutional clientele. Event-driven funds focussing on private equity have risen in market share from 19% to 25% over the past decade, while the global macro style popularized by Soros has actually fallen from 19% to 3%. In my paper Hedge Funds with Style, with William Goetzmann, Journal of Portfolio Management 29, Winter 2003 101-112 we show that accounting for style differences alone explains about 20 percent of the cross sectional dispersion of hedge fund returns. The facts do not support a presumption that hedge funds adopt similar investment strategies coordinated with the objective of causing global instability. If their objective was to profit from the current instability, they were remarkably unsuccessful. According to Hedge Fund Research, the average fund this year is down 10.11 percent through September with equity hedge funds down 15.45 percent.

The second premise of Dr. Mahathir’s argument is that hedge funds are risktakers – gunslingers on a global scale. While it is true that the aggressive incentive fee structures (often 20 percent of any profits on top of a management fee of about 2 percent of assets under management) appear to encourage risk taking, career concerns are an offsetting factor. Given that the typical hedge fund has a half life of five years or less and the fact that it is hard to restart a hedge fund career after a failure, managers can be quite risk averse as we document inCareers and Survival: Competition and Risk in the Hedge Fund and CTA Industry, with William Goetzmann and James Park, Journal of Finance 61 2001 1869-1886. According to a recent Wall Street Journal article (10/14/2008)some of the few remaining successful hedge fund managers such as Steven Cohen of SAC CapitalAdvisors, Israel Englander of Millenium Partners and John Paulson of Paulson & Co (who is scheduled to appear in the November 13 hearings) have taken their funds out of the market and are in cash investments.

This last result seems at variance with popular wisdom that has arisen around some recent and spectacular hedge fund failures. The failure of Amaranth, a multi-strategy fund with more than $8 Billion assets under management, with more than 80 percent invested in a natural gas trading strategy, is often cited as an example of undiversified financial risk exposure. However, a close reading of the U.S. Senate Permanent Subcommittee on Investigation’s report on the Amaranth blow-up, Excessive Speculation in the Natural Gas Market shows clearly that excessive risk taking took place in a context of poor operational controls, where trading limits were exceeded multiple times and ordinary risk management procedures were dysfunctional. In recent research forthcoming in the Financial Analysts Journal Estimating Operational Risk for Hedge Funds: The ω-Score, with William Goetzmann, Bing Liang and Christopher Schwarz we argue that operational risk is a more significant explanation of fund failure than is financial risk, and that financial risk events typically occur within the context of poor operational controls.

Given that the initial premises are false, it is not surprising to find that the strong conclusions Dr. Mahathir draws from them are also false. In Hedge Funds and the Asian Currency Crisis of 1997, with William Goetzmann and James Park, Journal of Portfolio Management 26 Summer 2000 95-101 we show that while it is possible that hedge funds involved in currency trade could have put into effect the destabilizing carry trade Dr. Mahathir describes, there is no evidence that these funds maintained significant positions in the Asia currency basket over the time of the crisis. As to the question of illicit enrichment that Dr. Mahathir charges George Soros with, his funds did not increase in value, but actually lost five to ten percent return per month over the period of the crisis.

From a point of pure logic, there cannot be any factual basis for any of these claims. Malaysia is fortunate in having a very fine and able Securities Commission. If there were any factual evidence at all to support a claim that Soros had intervened in the markets to bring down the Ringgit, it would have been produced by now. I should note that the silence is deafening. I suspect that what is really going on is that Soros was an expedient target of opportunity. The only remaining question is why, given the lack of evidence, Dr. Mahathir felt compelled to bring such serious charges against the hedge fund industry in general, and George Soros in particular. There is an interesting story here which I document in Hedge funds: Omniscient or just plain wrong, Pacific-Basin Finance Journal 9 2001 301-311.

It is interesting to note that Dr. Mahathir’s feelings about currency speculation have changed over the years. In the shark-infested waters of international Finance the name of Malaysia’s central bank, Bank Negara stands out. In late 1989, Bank Negara was using its inside information as a member of the club of central bankers to speculate in currencies, sometimes to an amount in excess of US$1 billion a day. The US Federal Reserve Board had advised Bank Negara to curtail its foreign exchange bets, which were out of proportion to its reserves which at that time were about US$7 billion. At the time, Dr. Mahathir defended this currency speculation, referring to it as active reserve management and was quoted by the official Bernama News Agency in December 1989 as saying “We are a very small player, and for a huge country like the United States, which has a deficit of US$250 million, to comment on a country like Malaysia buying and selling currency is quite difficult to understand”. According to a report in the Times of London (4/3/1994) . Bank Negara came something of a cropper in 1992 when it thought to bet against George Soros on whether Britain would stay in the European Rate Mechanism (ERM), and promptly lost US$3.6 billion in the process and would end up making a US$9 billion loss for 1992. Malaysia’s loss was Soros’ gain.

http://www.financems.com/the-role-of-hedge-funds-in-financial-crises-stephen-brown.html

KNM 1.4.2010

Bursa Malaysia
Company Announcement


Name of Principal Officer : Ho Guan Ming

Description of securities	Date of transaction	Direct/Indirect interest	No. of securities disposed	% of securities	Disposal price per share (RM)
Ordinary shares	26.3.2010	Direct	50,000	0.001	0.70

A quick look at NTPM

NTPM Holdings Bhd Company

Business Description:
NTPM Holdings Bhd. The Group's principal activity is manufacturing paper products, such as toilet rolls, tissues, serviette and personal care products, such as sanitary products. It distributes its products under the brand names of Premier, Royal Gold, Cutie, Intimate, Diapex and Premier Cotton. It is also involved in trading of paper, cotton, diapers and sanitary products, as well as providing management services and operating as an investment holding company. Operations are carried out in Malaysia, Singapore, Thailand, Hong Kong, Brunei, the Philippines, Africa, Australia, New Zealand and the United States of America.

Wright Quality Rating: LAA1



A quick  look at NTPM
http://spreadsheets.google.com/pub?key=tGFeNNTvEX3qSBBWES_QXTA&output=html

This is a 'Great' company.
Its earnings and dividends have grown consistently.

There are many Great Stocks in the market.  The only catch is to acquire them at bargain prices.

Is NTPM undervalued, fairly valued or pricey?

At the present price (PE), what is the upside reward/downside risk ratio?

Read also:

NTPM 28.7.2009

Is Poh Kong a Great, Good or Gruesome Stock? Is it Undervalued, Fair price or High price?

There is a rising trend in its EPS.  However, earnings are rather cyclical, as evidenced by its ups and downs.
Poh Kong has grown its revenue and earnings through opening new outlets.  Its SSS figures are probably stagnant (this need to be confirmed).  It has acquired a lot of debt in growing to its present size.  Though its recent CFO and FCF are strongly positive, its FCF will mainly be used for paying down its debt and reinvesting into new stores.  Its DPO is in the region of 20% of its earnings and its DPS has increased little if any over the years.

Its ROE in 2009 was 10.05%.

Is Poh Kong a Great, Good or Gruesome stock?
Not a Great stock.  Perhaps more a Good stock rather than a Gruesome stock.

So,  perhaps it is better to skip this stock and search for another.

But then, let's look at the fundamentals of Poh Kong.

http://spreadsheets.google.com/pub?key=tx8wcqGqfTVH8s7RRSy-19g&output=html

What should be its intrinsic value?  Note in particular, its net working capital minus total debt owed equals RM 146 m.

At a price of 39 cents, its market cap is RM 160 m.

Therefore, effectively, the investor is buying the whole business of Poh Kong for RM 14 m.

Is Poh Kong not undervalued?  Severely undervalued?

Moreover, owning this stock gives you a DY of 3.6%.  Given its strong FCF, this dividend level can probably be sustained and this should protect the downside of your investment dollar.  Therefore, the upside reward/downside risk ratio is also favourable.

Disclaimer:  Please invest based on your own assessment and decision.  Always do your own homework.

Also read:

What are value traps?

5 Value Traps to Avoid Right Now

 I’m all for buying stocks on the cheap.  But there’s a catch: We’re only interested in good values if they also happen to be great businesses, companies with years of exceptional performance behind and ahead of them. And, of course, ones that pay us to wait for our thesis to play out.


and this:
Understanding  "Value Trap"

Leaving on a jet plane

Buffett (1984): 'Investments in bonds' and 'Corporate dividend policies'

We saw Warren Buffett put forth his views on the concept of 'economic goodwill' and why he prefers companies that have a high amount of the same. Let us now see what the master has to offer in terms of investment wisdom in his 1984 letter to the shareholders.

While Buffett has devoted a lot of space in his 84' letter to discussing in detail, some of Berkshire's biggest investments in those times, but as usual, the letter is not short on some general investment related counsel either. In a rather simplistic way that only he can, the master gives his opinion on a couple of extremely important topics like 'investments in bonds' and 'corporate dividend policies'. On the former, he has to say the following:

"Our approach to bond investment - treating it as an unusual sort of "business" with special advantages and disadvantages - may strike you as a bit quirky. However, we believe that many staggering errors by investors could have been avoided if they had viewed bond investment with a businessman's perspective. For example, in 1946, 20-year AAA tax-exempt bonds traded at slightly below a 1% yield. In effect, the buyer of those bonds at that time bought a "business" that earned about 1% on "book value" (and that, moreover, could never earn a dime more than 1% on book), and paid 100 cents on the dollar for that abominable business."

Berkshire Hathaway in 1984 had purchased huge quantities of bonds in a troubled company, where the yields had gone up to as much as 16%. While usually not a huge fan of long term bond investments, the master chose to invest in the troubled company because he felt that the risk was rather limited and not many businesses during those times gave as much return on the invested capital. Thus, despite the rather limited upside potential, he went ahead with his bond investments. This is further made clear in his following comment:

"This ceiling on upside potential is an important minus. It should be realized, however, that the great majority of operating businesses have a limited upside potential also unless more capital is continuously invested in them. That is so because most businesses are unable to significantly improve their average returns on equity - even under inflationary conditions, though these were once thought to automatically raise returns."

Years and years of studying companies had led the master to conclude that there are very few companies on the face of this earth that are able to continuously earn above average returns without consuming too much of capital. Indeed, such brutal are the competitive forces that sooner or later and in this case, more sooner than later that returns for majority of the companies tend to gravitate towards their cost of capital. If we do a similar study on our Sensex, we will too come to the conclusion that there are not many companies that were a part of the index 15 years back and are still a part of the same index. Hence, while valuing companies, having a fair judgement of when the competitive position of the company, the one that enables it to consistently earn above average returns is likely to deteriorate. This will help you to avoid paying too much for the company's future growth.

After touching upon the topic of bond investments, the master then gives his take on dividends and this is what he has to say:

"The first point to understand is that all earnings are not created equal. In many businesses particularly those that have high asset/profit ratios - inflation causes some or all of the reported earnings to become ersatz. The ersatz portion - let's call these earnings "restricted" - cannot, if the business is to retain its economic position, be distributed as dividends. Were these earnings to be paid out, the business would lose ground in one or more of the following areas:

•  its ability to maintain its unit volume of sales, 
• its long-term competitive position, 
• its financial strength. 

No matter how conservative its payout ratio, a company that consistently distributes restricted earnings is destined for oblivion unless equity capital is otherwise infused."

While the master is definitely in favour of dividend payments, he is also aware of the fact that not all companies have similar capital needs in order to maintain their ongoing level of operations.

• Hence, in cases where businesses have high capital needs, a high payout ratio is likely to result in deterioration of the business or sooner or later will require additional capital to be infused. 
• On the other hand, companies that have limited capital needs should distribute the remaining earnings as dividends and not pursue investments which drive down the overall returns of the underlying business. 
• In a nutshell, capital should go where it can be put to earn maximum rate of return.

He then goes on to add how his own textile company, Berkshire Hathaway, had huge ongoing capital needs and hence was unable to pay dividends. He also further adds that had Berkshire Hathaway distributed all its earnings as dividends, the master would have left with no capital at all to be put into his other high return yielding investments. Thus, by not letting the operational performance of the company deteriorate by retaining earnings and not distributing it as dividends, he was able to avoid a situation in the future where he would have had too put in his own capital in the business.

http://www.equitymaster.com/detail.asp?date=8/16/2007&story=1

Buffett (1983): Great business fortunes built up during the inflationary years arose from ownership of operations that combined intangibles of lasting value with relatively minor requirements for tangible assets.

While corporate excesses and the concept of economic earnings, different from accounting earnings remained the focal points in the master's 1982 letter to shareholders, let us see what Warren Buffett has to offer in his 1983 letter.

In this another enlightening letter, Warren Buffett, probably for the first time discussed at length the concept of 'goodwill' and believed it to be of great importance in understanding businesses. Further, he blames the discrepancies between the 'actual intrinsic value' and the 'accounting book value' of Berkshire Hathaway to have arisen because of the concept of 'goodwill'. This is what he has to say on the subject.

"You can live a full and rewarding life without ever thinking about goodwill and its amortization. But students of investment and management should understand the nuances of the subject. My own thinking has changed drastically from 35 years ago when I was taught to favor tangible assets and to shun businesses whose value depended largely upon economic goodwill. This bias caused me to make many important business mistakes of omission, although relatively few of commission."

From the above quote, it is clear that the master's investment philosophy had undergone a sea change from when he first started investing. Further, with his company becoming too big, he could no longer afford to churn his portfolio as frequently as before. In other words, he wanted businesses where he could invest for the long haul and what better investments here than companies, where the economic goodwill is huge. The master had been kind enough in explaining this concept at length through an appendix laid out at the end of the letter. Since we feel that we couldn't have explained it better than the master himself, we have reproduced the relevant extracts below verbatim.

"True economic goodwill tends to rise in nominal value proportionally with inflation. To illustrate how this works, let's contrast a See's kind of business with a more mundane business. When we purchased See's in 1972, it will be recalled, it was earning about US$ 2 m on US$ 8 m of net tangible assets (book value). Let us assume that our hypothetical mundane business then had US$ 2 m of earnings also, but needed US$ 18 m in net tangible assets for normal operations. Earning only 11% on required tangible assets, that mundane business would possess little or no economic goodwill.

A business like that, therefore, might well have sold for the value of its net tangible assets, or for US$ 18 m. In contrast, we paid US$ 25 m for See's, even though it had no more in earnings and less than half as much in "honest-to-God" assets. Could less really have been more, as our purchase price implied? The answer is "yes" - even if both businesses were expected to have flat unit volume - as long as you anticipated, as we did in 1972, a world of continuous inflation.

To understand why, imagine the effect that a doubling of the price level would subsequently have on the two businesses. Both would need to double their nominal earnings to $4 million to keep themselves even with inflation. This would seem to be no great trick: just sell the same number of units at double earlier prices and, assuming profit margins remain unchanged, profits also must double.

But, crucially, to bring that about, both businesses probably would have to double their nominal investment in net tangible assets, since that is the kind of economic requirement that inflation usually imposes on businesses, both good and bad. A doubling of dollar sales means correspondingly more dollars must be employed immediately in receivables and inventories. Dollars employed in fixed assets will respond more slowly to inflation, but probably just as surely. And all of this inflation-required investment will produce no improvement in rate of return. The motivation for this investment is the survival of the business, not the prosperity of the owner.

Remember, however, that See's had net tangible assets of only $8 million. So it would only have had to commit an additional $8 million to finance the capital needs imposed by inflation. The mundane business, meanwhile, had a burden over twice as large - a need for $18 million of additional capital.

After the dust had settled, the mundane business, now earning $4 m annually, might still be worth the value of its tangible assets, or US $36 m. That means its owners would have gained only a dollar of nominal value for every new dollar invested. (This is the same dollar-for-dollar result they would have achieved if they had added money to a savings account.)

See's, however, also earning US$ 4 m, might be worth US$ 50 m if valued (as it logically would be) on the same basis as it was at the time of our purchase. So it would have gained US$ 25 m in nominal value while the owners were putting up only US$ 8 m in additional capital - over US$ 3 of nominal value gained for each US $ 1 invested.

Remember, even so, that the owners of the See's kind of business were forced by inflation to ante up US$ 8 m in additional capital just to stay even in real profits. Any unleveraged business that requires some net tangible assets to operate (and almost all do) is hurt by inflation. Businesses needing little in the way of tangible assets simply are hurt the least.

And that fact, of course, has been hard for many people to grasp. For years the traditional wisdom - long on tradition, short on wisdom - held that inflation protection was best provided by businesses laden with natural resources, plants and machinery, or other tangible assets. It doesn't work that way. Asset-heavy businesses generally earn low rates of return - rates that often barely provide enough capital to fund the inflationary needs of the existing business, with nothing left over for real growth, for distribution to owners, or for acquisition of new businesses.

In contrast, a disproportionate number of the great business fortunes built up during the inflationary years arose from ownership of operations that combined intangibles of lasting value with relatively minor requirements for tangible assets. In such cases earnings have bounded upward in nominal dollars, and these dollars have been largely available for the acquisition of additional businesses. This phenomenon has been particularly evident in the communications business. That business has required little in the way of tangible investment - yet its franchises have endured. During inflation, goodwill is the gift that keeps giving.

But that statement applies, naturally, only to true economic goodwill. Spurious accounting goodwill - and there is plenty of it around - is another matter. When an overexcited management purchases a business at a silly price, the same accounting niceties described earlier are observed. Because it can't go anywhere else, the silliness ends up in the goodwill account. Considering the lack of managerial discipline that created the account, under such circumstances it might better be labeled 'No-Will'. Whatever the term, the 40-year ritual typically is observed and the adrenalin so capitalized remains on the books as an 'asset' just as if the acquisition had been a sensible one."

http://www.equitymaster.com/detail.asp?date=8/9/2007&story=3

Buffett (1982): Always maintain strict price disciple; a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments.

While the world of stocks seems to be tearing apart on US subprime woes, what could be better than to indulge in some thought provoking lessons that can help you, as an investor, in staying calm in such situations of panic.  We saw Buffett (the master) talk about his policies for making acquisitions and how managers tend to overestimate themselves. Let us see what the investing genius had to offer in his 1982 letter to shareholders.

In what was probably a bull market, Berkshire Hathaway, the master's investment vehicle faced a peculiar problem. By that time, the company had acquired meaningful stakes in a lot of other companies but not meaningful enough for these companies' earnings to be consolidated with that of Berkshire Hathaway's. This is because accounting conventions then allowed only for dividends to be recorded in the earnings statement of the acquiring company if it acquired a stake of less than 20%. This obviously did not go down well with the master as earnings of Berkshire in the 'accounting sense' depended upon the percentage of earnings that were distributed by these companies as dividends.

"We prefer a concept of 'economic' earnings that includes all undistributed earnings, regardless of ownership percentage. In our view, the value to all owners of the retained earnings of a business enterprise is determined by the effectiveness with which those earnings are used - and not by the size of one's ownership percentage."

As for some examples in the Indian context, companies like M&M and Tata Chemicals, which hold small stakes in many companies should not be valued based on what dividends these companies pay to M&M and Tata Chemicals but instead one should arrive at the fair value of these companies independently and that value should be attributed on a pro-rata basis to all the shareholders, whether minority or majority.

While the master tackled accounting related issues in the first few portions of the 1982 letter, the next few portions were once again devoted to the excesses that take place in the market time and again. This is what he had to say on corporate acquisitions and price discipline.

"As we look at the major acquisitions that others made during 1982, our reaction is not envy, but relief that we were non-participants. For in many of these acquisitions, managerial intellect wilted in competition with managerial adrenaline. The thrill of the chase blinded the pursuers to the consequences of the catch. Pascal's observation seems apt: 'It has struck me that all men's misfortunes spring from the single cause that they are unable to stay quietly in one room.'"

He further goes on to state, "The market, like the Lord, helps those who help themselves. But, unlike the Lord, the market does not forgive those who know not what they do. For the investor, a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments."

The above comments once again bring to the fore a strict discipline that the master employs when it comes to paying an appropriate price. In fact, as much as his success is built on finding some very good picks like Coca Cola and Gillette, he has never had to sustain huge losses on any of his investment. The math is simple, if you lose say 50% on an investment, to make good these losses, one will have to unearth a stock that will have to rise at least 100% and that too in quick time. A very difficult task indeed! No wonder the master pays so much attention to maintaining a strict price discipline.

http://www.equitymaster.com/detail.asp?date=8/2/2007&story=5

POS Malaysia recommends 12.5c per share dividend

POS Malaysia recommends 12.5c per share dividend
Written by Joseph Chin
Wednesday, 31 March 2010 18:16

KUALA LUMPUR: POS MALAYSIA BHD [] has recommended a first and final dividend of 12.5 sen per ordinary share less tax.

It said on Wednesday, March 31 the dividend was subject to shareholders' approval at its forthcoming AGM.

"The entitlement date and payment date in respect of the proposed first and final dividend will be determined and announced in due course," it said.

Khazanah Nasional Bhd has proposed to divest its 32% stake in POS Malaysia under the New Economic Model.

AmResearch, had in its morning outlook report, said it was maintaining a Hold on Pos Malaysia with an unchanged fair value of RM2.30 a share.

"Khazanah's entry price into Pos Malaysia has been kept sketchy, with bulk of the deals done off-market," it said.

The research house said Pos Malaysia was expecting its new Mail Processing Hub (MPC) to be up in 4Q10. More importantly, it felt the MPC will now allow Pos Malaysia to position itself as a mail outsourcing distribution centre for the Asia-Pacific region.

"Pos Malaysia's well-due tariff review will certainly be hastened in order to tempt takers for Khazanah's shares in the company. A 10 sen (+20%) hike will swell Pos Malaysia 's FY11F's EPS by 61%. Pos Malaysia is currently trading at a slight 2% discount to DCF valuation of RM2.30/share.

"While there is meagre room for upside at this point - possibilities of a more meaningful upside could emerge should its plan to expand its presence regionally, in hand with the tariff hike, materialise," it said.

http://www.theedgemalaysia.com/business-news/162814-pos-malaysia-recommends-125c-per-share-dividend.html

"While there is meagre room for upside at this point - possibilities of a more meaningful upside could emerge should its plan to expand its presence regionally, in hand with the tariff hike, materialise," it said.

Berjaya Corp posts net loss of RM155m in 3Q

Berjaya Corp posts net loss of RM155m in 3Q
Written by Joseph Chin
Wednesday, 31 March 2010 18:04

KUALA LUMPUR: Berjaya Corp Bhd posted net loss of RM155.12 million in the third quarter ended Jan 31, 2010 (3QFY10), mainly due to investment related expenses of RM162.05 million and also weaker hotels and resorts business.

It told Bursa Malaysia on Wednesday, March 31 that revenue was RM1.66 billion while pre-tax loss was RM48.75 million. Loss per share was 3.72 sen. The investment related expense surged to RM162.05 million in 3QFY10 from RM21.02 million in 3QFY09.

In the previous corresponding quarter, it made net profit of RM17.94 million on the back of RM1.73 million in revenue. Earnings per share was 0.47 sen.

BCorp said in 3QFY10 the Group recorded a decrease in revenue of 4%. This was unlike 3QFY09 where BCorp enjoyed higher sales due to the Chinese Lunar New Year festivity that fell in January 2009, resulting in high festive sales for the gaming business operated by Sports Toto (Malaysia) Sdn Bhd and the strong sales registered from the Mega 6/52 game.

"In the current financial year, the Chinese Lunar New Year festivity fell in the month of February 2010. Apart from this, the hotels and resorts business was adversely affected by cutbacks in business travels due to the global economic downturn," it said.

For the nine months ended Jan 31, 2010, it posted net loss of RM61.43 million versus net profit of RM61.50 million in the previous corresponding period. Revenue was RM4.89 billion versus RM4.83 billion.

"The increase in the current period's revenue mainly resulted from the higher contributions from the consumer marketing business and higher brokerage income (from stockbroking business), due to the more active stock market. The performance is all the more commendable as the current period did not have the benefit of the
traditional Chinese Lunar New Year festivity which was in February 2010," it said.

BCorp said excluding the non-cash equity dilution effect of RM208.69 million, the group's pre-tax profit would have been RM522.62 million, showing a 57.1% increase over the preceding year corresponding period.

This increase was mainly contributed by Cosway, (benefiting from its revamped business model from retail to free franchise hybrid outlets in Thailand, Korea and Australia, coupled with the introduction of new products and attractive monthly promotions) and the recognition of negative goodwill as well as write-back of impairment in value of investment in associated companies and other investments.

http://www.theedgemalaysia.com/business-news/162810-berjaya-corp-posts-net-loss-of-rm155m-in-3q.html

Mary Buffett - Warren Buffett and Long-Term Investing

Value Investing Conference Videos

Buffett (1981): Prefers buying 'easily-identifiable princes at toad-like prices'. These 'princes' are able to preserve margins and generate attractive return on capital year after year.

Warren Buffett wrote in his 1981 letter.

"Our acquisition decisions will be aimed at maximizing real economic benefits, not at maximizing either managerial domain or reported numbers for accounting purposes. (In the long run, managements stressing accounting appearance over economic substance usually achieve little of either.)

Regardless of the impact upon immediately reportable earnings, we would rather buy 10% of Wonderful Business T at X per share than 100% of T at 2X per share. Most corporate managers prefer just the reverse, and have no shortage of stated rationales for their behavior."

By making the above statements, Buffett is trying to highlight the difference between acquisition rationale for Berkshire Hathaway and most of the other corporate managers. While for the latter group of people, the motivation behind high premium acquisitions could range from reasons like penchant for adventure, misplaced compensations and a fair degree of overconfidence in their managerial skills, for Berkshire Hathaway, the maximisation of real economic benefits is the sole aim behind acquisitions.

Infact, the company is even happy to deploy large sums where there is a high probability of long-term economic benefits but an absence of ownership control. In other words, the company is comfortable both with total ownership of businesses and with marketable securities representing small ownership of businesses.

The paragraphs that follow bring to the fore some of the biggest qualities of the man and what makes him an extraordinary investor. Warren Buffett has a knack of knowing his circle of competence better than most and also a rather unmatched ability to learn from past mistakes. These could be gauged from the following comment:

• "We have tried occasionally to buy toads at bargain prices with results that have been chronicled in past reports. Clearly our kisses fell flat. 
• We have done well with a couple of princes - but they were princes when purchased. At least our kisses didn't turn them into toads. 
• And, finally, we have occasionally been quite successful in purchasing fractional interests in easily-identifiable princes at toad-like prices."

In the above paragraph, the master uses a childhood analogy and likens managers to princesses who kiss toads (ordinary businesses) to convert them into princes (attractive businesses). Put differently, there are certain managers who believe that their managerial kiss will do wonders for the profitability of a company and convert them from toads to princes. While the master has gone on to add that there are indeed certain managers that can achieve this feat, his own track record is nothing to write home about and hence, he would rather prefer buying 'easily-identifiable princes at toad-like prices'.

Although the opportunities for finding these types of companies are very rare, the master is willing to commit a large sum once such opportunities surface. According to him, such businesses must have two favored characteristics:

1. 
   
   An ability to increase prices rather easily (even when product demand is flat and capacity is not fully utilised) without fear of significant loss of either market share or unit volume, and
2. 
   
   An ability to accommodate large dollar volume increases in business (often produced more by inflation than by real growth) with only minor additional investment of capital.

Indeed, an ability to preserve margins and generate attractive return on capital year after year are the qualities that one should seek in a firm that one wants to invest in.

http://www.equitymaster.com/detail.asp?date=7/25/2007&story=8

Buffett (1980): The true value is determined by the intrinsic value of the company and not the dividends.

Warren Buffett in his 1980 letter to the shareholders of Berkshire Hathaway:

"The value to Berkshire Hathaway of retained earnings is not determined by whether we own 100%, 50%, 20% or 1% of the businesses in which they reside. Rather, the value of those retained earnings is determined by the use to which they are put and the subsequent level of earnings produced by that usage."

The maestro made the above statements because in those days he felt that the prevailing accounting convention/standards were not in sync with a value based investment approach (Infact, they still aren't). In the paragraphs preceding the one mentioned above, he painstakingly explains that while accounting convention requires that a partial ownership (ownership of say 20%) in a business be reflected on the owner's books by way of dividend payments, in reality, they are worth much more to the owner and their true value is determined by the 20% of the intrinsic value of the company and not by 20% of the dividends that are reflected on its books. In the Indian context, imagine someone valuing a company like say M&M -if it had say a 20% stake in Tech Mahindra- based on the 20% of dividends that the latter pays out to M&M. This will be a rather incorrect way of valuing M&M, which in effect should be valued taking into account 20% of the intrinsic value of Tech Mahindra and not the dividends.

"The competitive nature of corporate acquisition activity almost guarantees the payment of a full - frequently more than full price when a company buys the entire ownership of another enterprise. But the auction nature of security markets often allows finely run companies the opportunity to purchase portions of their own businesses at a price under 50% of that needed to acquire the same earning power through the negotiated acquisition of another enterprise."

Buffett, as most of us might know, is a strong advocate of buyback, especially at a time when the stock is trading significantly lower than its intrinsic value and the above paragraph is just a testimony to this principle of his. Indeed, when stock prices are low, what better way to utilize capital than to enhance ownership in the company by way of buy back. The master further goes on to add that one can buy a portion of a business at a much lower price, provided there is auction happening. In other words, when there is a panic in the market and everyone is offloading shares, the chances of getting an attractive price is much higher. On the other hand, when there is a competition between two or more companies for buying another enterprise, the competitive forces will more likely than not keep the acquisition price higher, in most cases, higher than even the intrinsic value of the company.

http://www.equitymaster.com/detail.asp?date=7/12/2007&story=2

Buffett (1978):"Turnarounds" seldom turn. Be in a good business purchased at a fair price than in a poor business purchased at a bargain price.

Warren Buffett in his 1978 letter to his shareholders places a great deal of importance on the quality of business and also the fact that he had to let go of many attractive investment opportunities just because the price was not right. In the following write up, let us see what the master has to offer in terms of investment wisdom in his 1979 letter:

"The inflation rate plus the percentage of capital that must be paid by the owner to transfer into his own pocket the annual earnings achieved by the business (i.e., ordinary income tax on dividends and capital gains tax on retained earnings) - can be thought of as an "investor's misery index". When this index exceeds the rate of return earned on equity by the business, the investor's purchasing power (real capital) shrinks even though he consumes nothing at all. We have no corporate solution to this problem; high inflation rates will not help us earn higher rates of return on equity."

The above paragraph clearly demonstrates that in order to improve one's purchasing power, one will have to earn after tax returns that are higher than the inflation rate at all times. Imagine a scenario where the inflation rate touches 9%, which means that a commodity that you purchased at Rs 100 per unit last year will now cost you Rs 109. Further, assume that you put Rs 100 last year in a business that earns 10% return on equity and the tax rate that currently prevails is 20%.

Thus, while you earned Rs 10 by virtue of the 10% return on equity, the tax rate ensured that only Rs 8 has flown to your pocket. Not a good situation since your purchasing power has diminished as while your returns were only 8% post tax, you will have to shell out Re 1 extra for buying the commodity as inflation has remained higher than the after tax returns that you have earned. Further, high inflation does not help the business too unless it has some inherent competitive advantages, which enables it to pass on the hike in inflation to the end consumers. Little wonder, investors lay such high emphasis on businesses that earn returns way above inflation so that the purchasing power is enhanced rather than diminished.

"Both our operating and investment experience cause us to conclude that "turnarounds" seldom turn, and that the same energies and talent are much better employed in a good business purchased at a fair price than in a poor business purchased at a bargain price."

In the above paragraph, the master once again extols the virtues of a good quality business and says that he would rather pay a reasonable price for a good quality business than pay a bargain price for a poor business. It would be worthwhile to add that in the early part of his investing career, the master himself was a stock picker who used to rely only on quantitative cheapness rather than qualitative cheapness. However, somewhere down the line, he started gravitating towards good quality businesses and out of this thinking came such quality investments as 'Coca Cola' and 'American Express'. These were the companies that 

• had virtually indestructible brands (a very good competitive advantage to have), 
• generated superior returns on their capital and 
• had ability to grow well into the future.

We prod you to find similar businesses in the Indian context, pick them up at a reasonable price and hold them for as long as you can. For if the master has made millions out of it, we don't see any reason as to why you can't.

http://www.equitymaster.com/detail.asp?date=7/5/2007&story=1

Buffett (1978): Commodity type businesses must earn inadequate returns except under conditions of tight supply or real shortage

In this write up, let us see what Warren Buffett has to say to his shareholders in the 1978 letter:

"The textile industry illustrates in textbook style how producers of relatively undifferentiated goods in capital intensive businesses must earn inadequate returns except under conditions of tight supply or real shortage. (Comment: Note Glove companies!)  As long as excess productive capacity exists, prices tend to reflect direct operating costs rather than capital employed. Such a supply-excess condition appears likely to prevail most of the time in the textile industry, and our expectations are for profits of relatively modest amounts in relation to capital. We hope we don't get into too many more businesses with such tough economic characteristics."

The above paragraph once again highlights the fact that no matter how good the management, if the economic characteristic of the business is tough, then the business will continue to earn inadequate returns on capital. This can be further gauged from the fact that despite all the capital allocation skills at his disposal, the master was not able to turnaround the ailing textile business that he had acquired in the early years of his investing career. He further adds that such businesses have little product differentiation and in cases where the supply exceeds production, producers are content recovering their operating costs rather than capital employed.

While the comment is reserved for the textile industry, we believe it can be extended to all commodities like cement, steel and sugar. Infact, the current downturn the sugar industry is facing has a lot to do with supply far exceeding demand and this in turn is having a great impact on returns on capital employed by these businesses. The only hope for them is a scenario where demand will exceed supply.

"We get excited enough to commit a big percentage of insurance company net worth to equities only when we find 

• (1) businesses we can understand, 
• (2) with favorable long-term prospects, 
• (3) operated by honest and competent people, and 
• (4) priced very attractively. 

We usually can identify a small number of potential investments meeting requirements (1), (2) and (3), but (4) often prevents action. For example, in 1971 our total common stock position at Berkshire's insurance subsidiaries amounted to only US$ 10.7 m at cost and US$ 11.7 m at market. There were equities of identifiably excellent companies available - but very few at interesting prices."

Those of you, who are regular readers of content on our website, the above paragraph must have rang a bell or two. Indeed, time and again, in countless articles, we have been highlighting the importance of investing in good quality businesses run by honest and ethical management. That the master himself has been looking at similar qualities does go a long way in further reinforcing our beliefs. Buffett then goes on to make a very important comment on valuations and says that no matter how good the businesses are, there is a price to pay for it and he in his investing career has let many investing opportunities pass by because the valuations were just not right enough.

Comparison can be drawn to the tech mania in India in the late nineties when good companies with excellent management like Infosys and Wipro were available at astronomical valuations. While these companies had excellent growth prospects, investors had become far too optimistic and had bid them too high. Thus, investors who would have bought into these stocks at those levels would have had to wait for five long years just to break even! Hence, no matter how good the stock is, please ensure that you do not pay too high a price for it.

http://www.equitymaster.com/detail.asp?date=6/28/2007&story=2

Buffett (1977): ROE is a more appropriate measure of managerial economic performance

Over the past many years Warren Buffett has been dishing it out in the form of letters that he religiously writes to the shareholders of Berkshire Hathaway year after year. Many people reckon that careful analyses of these letters itself can make people a lot better investors and are believed to be one of the best sources of investment wisdom.

Laid out below are few points from the master's 1977 letter to shareholders:

"Most companies define "record" earnings as a new high in earnings per share. Since businesses customarily add from year to year to their equity base, we find nothing particularly noteworthy in a management performance combining, say, a 10% increase in equity capital and a 5% increase in earnings per share. (Comment:  This leads to a drop in ROE).   After all, even a totally dormant savings account will produce steadily rising interest earnings each year because of compounding. Except for special cases (for example, companies with unusual debt-equity ratios or those with important assets carried at unrealistic balance sheet values), we believe a more appropriate measure of managerial economic performance to be return on equity capital."

What Buffett intends to say here is the fact that while investors are enamored with a company that is growing its earnings at a robust pace, he is not a big fan of the management if the growth in earnings is a result of even faster growth in capital that the business has employed. In other words, the management is not doing a good job or the fundamentals of the business are not good enough if there is an improving earnings profile but a deteriorating ROE. This could happen due to 

• rising competition eroding the margins of the company or 
• could also be a result of some technology that is getting obsolete so fast that the management is forced to replace fixed assets, which needless to say, requires capital investments.

"It is comforting to be in a business where some mistakes can be made and yet a quite satisfactory overall performance can be achieved. In a sense, this is the opposite case from our textile business where even very good management probably can average only modest results. One of the lessons your management has learned - and, unfortunately, sometimes re-learned - is the importance of being in businesses where tailwinds prevail rather than headwinds."

The above quote is a consequence of repeated failures by Buffett to try and successfully turnaround an ailing business of textiles called the Berkshire Hathaway, which eventually went on to become the holding company and has now acquired a great reputation. Indeed, no matter how good the management, if the fundamentals of the business are not good enough or in other words headwinds are blowing in the industry, then the business eventually fails or turns out to be a moderate performer. On the other hand, even a mediocre management can shepherd a business to high levels of profitability if the tailwinds are blowing in its favour.

If one were to apply the above principles in the Indian context, then the two contrasting industries that immediately come to mind are cement and the IT and the pharma sector. Despite being stalwarts in the industry, companies like ACC and Grasim, failed to grow at an extremely robust pace during the downturn that the industry faced between FY01 and FY05. But now, almost the same management are laughing all the way to the banks, thanks to a much improved pricing scenario. Infact, even small companies in the sector have become extremely profitable. On the other hand, such was the demand for low cost skilled labor, that many success stories have been spawned in the IT and the pharma sector, despite the fact that a lot of companies had management with little experience to run the business.

It is thus amazing, that although the letter has been written way back in 1977, the principles have stood the test of times and are still applicable in today's environment. We will come out with more investing wisdom in the forthcoming weeks.

http://www.equitymaster.com/detail.asp?date=6/21/2007&story=2