Trade tariffs

Lessons from the past

In 1930, the USA enacted the Smoot-Hawley tariff, which raised tariffs on imported goods to record levels.  These tariffs reduced demand for foreign goods.  Foreign countries retaliated by imposing their own tariffs.  The result was a collapse in world trade that worsened the effects of the Depression.  It took decades to rebuild the world economy.

The costs of tariffs

Why politicians continue to impose policies that are likely to damage the overall economy, even though the costs are widely known?

A small number of large domestic producers and their workers - suffer a visible impact from cheap imports.  They are 'protected and saved'.

However, the potentially larger number of consumers who have to pay higher prices because of tariffs, and those workers in affiliated industries who might lose their jobs through knock-on impacts, are dispersed around the economy.

Examples of effects of tariffs:

• US tariffs on Chinese car tyres in 2009

 In 2009, China accused the USA of "rampant protectionism", for imposing heavy tariffs (taxes) on imported Chinese car tyres.  The decision to increase tariffs came after pressure from US workers who had seen tyre imports grow from 14 to 46 million from 2004 - 08, reducing US tyre output, causing factory closure and creating unemployment.  

However, the USA had previously accused China of unfairly subsidising its own tyre industry, so tensions mounted.  China's response was to threaten retaliatory increases in import taxes on US cars and poultry. 

Tariffs produce effects that ripple through economies.  Any protection gained for US tyre producers from  the tariffs on tyres, for example was counteracted by other negative impacts.  Higher tyre prices increased the costs of US cars, making them less competitive and reducing the numbers bought by US consumers.  The retaliation by China also damaged US export industries.  The jobs of some US tyre workers may have been saved, but in the wider economy, many more jobs were lost.

• India removed tariffs on cheap Indonesian palm oil imports

When the government of India removed tariffs on imports of cheap palm oil from Indonesia, it had the positive effect of raising the living standards of hundreds of millions of Indians, but it destroyed the livelihoods of 1,000,000 farmers who grew peanuts for oil, which was now passed over for palm oil.  The peanut farmers cannot simply transfer into the production of other goods, because their investment in capital is immobile - a machine that processes peanuts has no other use.  

The future of globalization

Today, markets are more integrated than ever as transport costs have continued to fall and most tariffs have been scrapped altogether.  

One vision of the future of globalization involves the elimination of other kind of barriers to trade caused by institutional differences between countries.  Markets are embedded in institutions - in property rights, legal systems and regulatory regimes.  Differences in institutions between countries create trading costs in the same way that tariffs or distance do.  

Despite the removal of tariffs the world is far from being a single market.  Borders still matter because of these kinds of institutional incompatibilities.  Complete integration requires the ironing out of legal and regulatory differences to create a single institutional space.

Risk and Ruin

Risk and Ruin 

You can be risk loving and yet completely averse to ruin.  And indeed, you should.

The idea is that you have to take risk to get ahead, but no risk that can wipe you out is ever worth taking.

Russian roulette

The odds are in your favour when playing Russian roulette.  But the downside is not worth the potential upside.   There is no margin of safety that can compensate for the risk.

Playing Russian roulette with your own money

Same with money.  The odds of many lucrative things are in your favour.   But if something has 95% odds of being right, the 5% odds of being wrong means you will almost certainly experience the downside at some point in your life.  And if the cost of the downside is ruin, the upside the other 95% of the time likely isn't worth the risk, no matter how appealing it looks.

Leverage is capable of producing ruin

Leverage is the devil here. Leverage - taking on debt to make your money go further - pushes routine risks into something capable of producing ruin.  The danger is that rational optimism most of the time masks the odds of ruin some of the time.   The result is we systematically underestimate risk.   

Housing prices fell 30% last decade.  A few companies defaulted on their debt.  That is capitalism.  It happens.  But those with high leverage has a double wipeout:  Not only were they left broke, but being wiped out erased every opportunity to get back in the game at the very moment opportunity was ripe.  A home owner wiped out in 2009 had no chance of taking advantage of cheap mortgage rates in 2010.  Lehman Brothers had no chance of investing in cheap debt in 2009.  They were done.

Survive to succeed

I take risk with one portion of my own money and am terrified with the other.  This is not inconsistent, but the psychology of money would lead you to believe that it is.  I just want to ensure I can remain standing long enough for my risks to pay off.   You have to survive to succeed.   The ability to do what you want, when you want, for as long as you want, has an infinite ROI.

You have to give yourself room for error.  You have to plan on your plan not going according to plan.

The best way to achieve felicity is to aim low.  (Charlie Munger)

Things changed. Is detailed analysis of individual stocks necessary?

Just before he died, Graham was asked whether detailed analysis of individual stocks - a tactic he became famous for - remained a strategy he favoured.  He answered:

"In general, no.  I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities.  This was a rewarding activity, say, 40 years ago, when our textbook was first published.  But the situation has changed a great deal since then."

What changed was:   Competition grew as opportunities became well known; technology made information more accessible; and industries changed as the economy shifted from industrial to technology sectors, which have different business cycles and capital uses.

Things changed.

Profit drivers

 

Have an obsession for cash flow conversion. What is the free cash flow of the company?

Charlie Munger:  If you take a business that is a GOOD business but not a fabulous (GREAT) business, they tend to fall into TWO categories:

One is the business where the whole reported profit just sits there in surplus cash at the end of the year and you can take it out of the business and the business will do just as well without it, as it would if it stayed in the business

The second business is one that reports the 12% (return) on capital but there's never any cash.  (This) reminds me of the used construction equipment business of my old friend John Anderson and he used to say in my business every year you make a profit and there it is, sitting in the yard.   There are awful of businesses like that where just to keep going (and) to stay in place, there is never any cash.  Now that business doesn't enable headquarters to drag out a lot of cash and invest it elsewhere.  We hate that kind of a business.  Don't you think that is a fair statement?

Warren Buffett:   Yeah, that is a fair statement.

https://www.facebook.com/reel/507646045755285

Summary:

2 types of Good Businesses:

One that generates a lot of free cash flows; you can take this cash out of the business and the business will just do as well without it.

One that generates little or no free cash flows, as it requires a lot of working capital or capex to maintain and sustain its business.

Valuation cheat sheet. What are some of your favourite metrics?

 

Valuation Cheat Sheet

What are some of your favourite metrics?

1.  How to think about valuation

All intelligent investing is value investing:  you try to buy stocks for less than what they're worth.

Here are some valuation ratios you can use:

P/E ratio:  stock price / earnings per share

EY (Earnings yield):  earnings per share / stock price

P/B ratio:  stock price / book value

PEG ratio:  P/E ratio / yearly EPS growth

FCF yield:  free cash flow per share / stock price

2.  Always buy stocks at a discount

When you go to the mall, you like to buy your favourite products on sale.

The same goes for stocks.  You want to buy a stock at its cheapest possible price and valuation.

The beautiful thing about the stock market is that Mr. Market often acts as a Manic-Depressive.  You can use this volatility to your advantage by buying when there's blood running through the streets.

3.  Short term versus long term

Over a one-year period, most stock price fluctuations are driven by changes in valuation. 

versus 

In the long run, stock prices are driven by the evolution of the intrinsic value of a company.

This means that in the short term the valuation you pay for a company is very important while in the long term the rate at which a company can grow its earnings per share is the crucial factor.

Markets are Competitive

Passive Management

Holding a highly diversified portfolio

No attempt to find undervalued securities

No attempt to time the market.

Active Management

Finding mispriced securities

Timing the market

The biggest mistake that investors make

The biggest mistake that investors make is not sticking with the plan when the market goes down.

What you do when the market goes down is more important than what you do as it is rising.  WHY?

Because the worse days are followed by the best days.

Manage your emotions

When it is our own money, we think it is math, but it is actually not.  Just because we learn about money in math class doesn't mean it is math to us.  It is actually very EMOTIONAL. 

One of the things that we need to do is manage the emotion, because we do feel the pain of a loss more than the euphoria of a gain.  

Manage the emotion and just keep plodding along, paddling along in the markets for a long time.

Catherine Keating

Global Head of BNY Wealth

Bloomberg Interview

Emotional Intelligence

Conflict between our thinking and our feelings makes things complicated.   

Instincts, feelings and personal values take over and become a major part of our actions and behaviour. 

Gut instincts or intuition rely a great deal on emotion and feelings.  

Both feelings and instincts are major influences on our behaviour in the real world.

How can you benefit from improving your emotional intelligence?   

Doing so, will also make life easier for those who have to interact with you.  

Emotional intelligence is a valuable set of ideas you can use everyday and everywhere:  in the workplace and in the home; as a parent, teacher or manager.

It is about being aware of feelings in yourself and in others, understanding them and managing their impact.

It is about being in control, interpreting body language, coping with negativity, working with others and building psychological well-being.

Emotional Intelligence

Emotional Intelligence is an assortment of mental abilities and skills that can help you to successfully manage both yourself and the demands of working with others.

Developing your own emotional intelligence enables you to:

• Know yourself reasonably well
• Control your own emotions
• Show empathy with the feelings of others 
• Use social skills in an effective as well as simply pleasant way.

How to develop your own emotional intelligence?

This involves:

• Mindfulness: being aware - understanding yourself and others
• Being in control of your own thoughts, emotions and needs
• Being positive and self motivated particularly in the face of setbacks
• Using empathy:  being able to put yourself in others' shoes
• Communicating effectively to build productive and positive relationships
• Using emotional reasoning:  being able to use emotions to enhance rather than restrict your thinking.

What are the components of emotional intelligence?

Emotional intelligence incorporates at least these two:

Cognitive intelligence - the ability to think rationally, act in a purposeful way and manage your environment.  It is your intellectual, analytical, logical and rational skill set.

Social intelligence - the ability to understand and manage situations which involve other people.  It is your ability to be aware of yourself, to understand yourself, to manage relationships and understand the emotional content of behaviour.

Importance of emotional intelligence for our own mental health

In everyday life, people universally experience the difficulties of both coping with their own emotions and the practical difficulties created by those of others.

Emotional disorders affect huge numbers of people.  

• It is estimated that 15% of people will have a bout of severe depression at some point in their lives.
• 2% of teenagers are diagnosed with emotional disorders before the age of 18.
• Emotional disorders in old age is also a major and increasing problem.

Emotional intelligence is important for our own mental health and gives us the capacity to understand both ourselves and how we deal with the pressures we face.

The Next Global Crash is Inevitable - Top Economist Professor Linda Yueh (An excellent video)

12 Aug 2024 Making Money Linda Yueh is Professor of Economics at London Business School and a Fellow at Oxford. She’s written a book called The Great Crashes: Lessons from Global Meltdowns and How to Prevent Them (https://www.penguin.co.uk/books/31558... )

Chapters: 00:00-00:34 - Intro 00:34-08:23 - Why crashes are inevitable 08:23-14:00 - What causes an economic depression? 14:00-18:51 - How credible leaders stop crashes 18:51-19:36 - Vanta ad 19:36-25:30 - Lessons we haven’t learnt 25:30-30:00 - Who gets bailed out? 30:00-32:34 How often do global crashes happen? 32:34-37:42 - What’s the biggest risk today? 37:42-38:41 - Manual ad 38:41-43:06 - What can we do to stop a great crash? 43:06-46:34 - How a crash in China could have global consequences 46:34-51:51 - Why are crashes more frequent now? 51:51-56:55 - Is AI a bubble? 56:55-59:53 - Can cults of personality cause crashes? 59:53-01:04:00 - The great reset 01:04:00-01:08:34 - Could climate change cause the next great crash? 01:08:34-01:13:17 - We need to learn from history and not repeat mistakes 01:13:17-01:15:03 - Financial coaching 1:1

Selling is often a harder decision than buying

 Selling is often a harder decision than buying

"If you have bought a good quality stock at bargain or reasonable price, you can often hold forever."

Investing is fun. For every rule, there is always an exception.

The main reasons for selling a stock are:

1. When the fundamental has deteriorated permanently, (Sell urgently)
2. When it is overpriced, whereby the upside gain will be unlikely or very small and the downside loss will be big or certain.

We shall examine reason No. 2 through the property market. The property market is also cyclical. There were periods of booms and dooms.


If you have a good piece of property that is always 100% tenanted and which gives you good consistent return (let's say 2x or 3x risk free FD rates), would you not hold this property forever? The answer is probably yes.

Then, when would you sell this property?

Note that the valuation of property, as with stocks, is both objective and subjective.

Would you sell when someone offered to buy at 500% above your perceived market price?

Probably yes, as this is obviously overpriced. You could cash out and probably easily re-employ the money to earn better returns in another property (or properties) or other assets.

Would you sell when someone offered to buy at 50% above your perceived market price?

Maybe yes or maybe no. You can offer your many reasons.

However, all these will be based on the perceived future returns you can hope to get from this property in the future. This is both objective based on past returns obtained and subjective and speculative on future returns.

However, unlike reason No.1 when you would need to sell urgently to another buyer to prevent sustaining a permanent loss, you need not sell just because someone offered to buy the property at high price. (However, there are also those who "flip properties" for their earnings; they will sell quickly for a quick profit.) You will not suffer a loss but only a diminished return at worse. You can take your time to work out the mathematics.

You maybe surprised that you may still achieve a return higher at a time in the near future by rejecting the present immediate gain based on the present high price offered.

Also, you would need to price in the lost opportunity cost when the property is sold at this price, even though it is 50% above the perceived normal market price. Could you buy a similar quality property with the same sustainable increasing income or return by offering the same price?



Similarly, the same line of thinking can be applied to your selling of shares.

When should you sell your shares?

Yes, definitely when the fundamentals have deteriorated permanently. The business has suffered for various reasons and going forward, the earnings will be permanently impaired and deteriorating.

Yes, when the price is very very overpriced. However, you need not sell your shares in good quality companies that you bought at fair or bargain price. As long as the fundamentals are strong and the business is adding value, selling now at a higher price may mean losing the return that you could have obtained in the future years from owning this stock and the opportunity cost of reinvesting the cash into another stock of similar quality and returns.

Once again, the importance of sound reasoning and doing the mathematics in making a decision whether to sell or not.

Is it not true, that the really big fortunes from common stocks have been garnered by those

• who made a substantial commitment in the early years of a company in whose future they had great confidence and
• who held their original shares unwaveringly while they increased 10-fold or 100-fold or more in value?

The answer is "Yes."

http://myinvestingnotes.blogspot.com/2012/07/my-18-points-guide-to-successfully.html




Additional notes:

Other reasons for selling a stock (or property) are:

• To raise cash to reinvest into another asset with better return.
• A certain stock (or property sector) may be over-represented in your portfolio due to recent rapid price rises and you need to reduce its weightage to reduce your risk of over-exposure in this single stock (or property sector).

Footnote:

This is a true story. 

A rich man was approached by a buyer to sell his property. A few neighbouring lots were sold for $1.6 m the last 2 years. 

A buyer asked.  "What offer will ensure that you sell your property to me? Please let me know." 

The unwilling owner replied, "$5 million". There is a lesson here too. :-)

Profit from Inflation

 

The best investors have a process. Masters of the Market: featuring Alex Green

0.00  Intro

2.14  What did you learn from your career

6.54  Investing is a long game

9.41  The best investors have a process

12.45 Smart money in hedge funds

14.18 Is Wall Street trustworthy

18,13  How to deal with fear

23.30  How to pick stocks

28.39  How to judge management

30.14  How to build a portfolio

34.02  Do dividends matter

37.05  What are we missing

39.13  Option oriented ETFs

41.40  Trends investors are overlooked

48.15  Small Cap Stocks

51.29  Biggest Mistakes

56.14  My Biggest Mistake

57.54  Top 3 Positions