A Closing Chapter

This week has certainly been a break from my routine schedule... read Straits Times and Business Times in the morning, read books and play games in the afternoon, watch tv in the evening and chat at night. I finally bought my new pair of shoes (replacing my new balance) to sever all my ties with the army... : ) did my first tutoring at Boys Town which was a fun experience and went for my second round of interviews in SMU. (which really isn't an interview because it is a full day of activities planned by the second year scholars of SMU)

I just received a call from SMU saying that I wasn't shortlisted for the third and final round of interviews with the CEOs and big shots. Actually, I was somewhat disappointed but not defeated. Afterall, I feel I did well during the interview and I have also finally regained a part of me that has been lost for so long. Basically during the interview, my group had 2 parts of a project to fulfil... to make a device and act out a skit that uses materials from selected novels to re-enact certain issues in Singapore. I did the second part of the project which is the skit. We chose to re-enact the NKF saga with TT... as Dracula sucking money off the patient (for those who know the Dracula novel, the patient represents Mina). Eventually, the patient's boyfriend found out about TT...'s atrocity and staked him with a rolled up newspaper before realising that modern day Draculas aren't afraid of stakes anymore. And so he opened up the newspaper and used the NKF report on the newspaper to scare the daylights out of TT... until he turns to dust. I was more involved in generating the ideas for the play and the supporting roles and maybe directing the play... (I used the word "maybe" because it seems most of my group members are pleased with me directing except for one) In short, I'm the backstage guy. Interestingly, I really was not myself on that day. I came up with plenty of crap ideas like getting a guy to act as the sickly girly female patient and a girl as the macho boyfriend. (reversal of sexual roles) Not to forget Dracula (acted out by another girl) literally sucking off dollar notes from the guy's body who acted as the patient and the staking of Dracula with the newspaper only to find out Dracula is more afraid of the newspaper report than the stake. I also helped to direct certain scenes to make them more comical...

Anyway, there was this gal who was really quite bossy thoughout the whole project. (I think she also did not have a good impression of me) Initially when this guy, Peter, switched to our group from the device-making group, she sort of snobbed him and quite rudely swept the piece of paper with the instructions to him when he asked for it. She also often interrupted others when they were talking and had a very queer tendency to keep on thinking that she always had the final say (eg. I think that this is the best solution so WE will just stick to this idea... and the next scene...) At one point in time, I couldn't stand it anymore because all the other group members were visibly opposed to her ideas while she kept rattling on and on that I stopped her in her tracks and told her bluntly the group doesn't agree with her. Well... I must admit I never expected myself to do something like this when my initial intention during the interview is just to get it over and done with asap.

Maybe I didn't get selected because I was more of a-behind-the-scenes person during the project. But it really doesn't matter. I went there with a feeling of dreadfulness and a purpose to just get out asap. However, I left with some new friends whom I really got along well with and some happy memories too. I also realised that while sometimes I used to think of myself as an over-reliant burden on others in the past, I am also capable of taking up the role of leadership and helping my team members solve problems using my own beliefs and strengths. After losing out this chance to getting a scholarship, I also realise that I have many other plans waiting for me to work on. For example, I have yet to find a mentor to coach me on investing and I am also seriously considering joining the Young Entrepreneurs Society to learn the ropes of business. All in all, the scholarship is only a fantastic monetary platform for me to work on my dreams. However, I also have other ways of getting the financial support I need and most importantly, I'm seriously thinking of my next steps to achieving my dreams. : )

P.S: For those who wish to try the scholarship interviews in SMU, the scholarships offered are the prestigious LKC and SMU scholarship and there are 4 rounds altogther (1 for admissions, 3 for interview) whereby you will be involved in group interviews, group debates and project work. So it is most important to be mentally charged for these rounds of exhausting and hopefully fulfilling interviews. : ) Best of luck!!!

Can there be a stock market crash?

A friend told me recently that although he believes in the possibility of short term market fluctuations (which is reasonable for him to believe considering market efficiency inevitably causes fluctuations in the short term), he feels that it is impossible for the stock market to just crash anytime without any reason. Well, it seems unlikely that any stock market crash may happen anytime soon, considering current economic trends such as a bullish US market with controlled inflation and interest rates.

However, he has never experienced a real stock market crash before, and admittedly he also said that he isn't too familiar with the stock market behaviours. Allow me to explain the 1987 stock market crash, also known as the Black Monday, October 19, 1987. The extent of damage was tremendous. From 13 to 19 October 1987, the Dow Jones Industrial Average "Dow" went down by 31 percent, which translates into a decline of US stocks by $1 trillion. On October 19 itself, the Dow dropped by 22.6 percent. Only the combined fall of October 28 1929 and the following day which together constituted the Crash of 1929 (Great Depression) have approached the October 1987 decline in magnitude. Nobody actually really knows what could have triggered this crash to such an extent as there were no major news or events that occurred prior to the crash. Economists have provided some reasons for the crash, but none of them would have the ability to cause the market to crash to such an extent. The most important reason given was that the US decided to prop up the dollar and restrict inflation faster than the Europeans owing to a monetary policy dispute during the G-7 industrialised nations meeting. This caused the dollar-backed Hong Kong stock exchange to collapse, hence resulting in a crisis of confidence. (But note that this problems spreads from Hong Kong to Europe and then to the US, which doesn't explain why the US market is particularly so badly affected.) Another major reason was the Great Storm of 1987 which caused traders in London to be unable to reach their offices in time, hence resulting in panic. However, these do not sufficiently explain what causes an entire US stock market to decline 1/3 in value in just the span of one week? What power is at work?

First, we have to understand that most of the investment money belongs to institutional financial managers, be it pension funds, REITS, banks, insurance companies, brokerage firms or unit trusts. In the 1980s, many such financial institutions used programme trading to carry out their investment decisions. Programme trading is a large-scale, computer-assisted trading of stocks or other securities according to systems in which decisions to buy and sell are triggered automatically by fluctuations in price. This means that once the programme detects for example a 10% drop in the S&P index, the programme AUTOMATICALLY sells off 50% of its stocks, and such massive selling usually comes in the billions. On top of that, a new innovative financial instrument known as index arbitrage was introduced. This is a form of speculation (it is also known as a futures contract) whereby for a little money down you can buy units of an index of stocks for a fixed price in the future. (Something like buying a call or put option) During the crash of 1987, many institutions which used programme trading sold $2 billion of their stocks and $4 billion in S&P 500 contracts. This massive selling drove the S&P 500 contracts far below the price of the basket of S&P 500 stocks. Hence, the programme traders then started buying the contracts which is at a lower price and sold a like-kind pool of S&P 500 stocks to take advantage of the price discrepancy. However, this puts additional selling pressure on the individual stocks in S&P 500 and before you know it, these stocks dropped in prices in another round of frenzy selling. The point to note is although the companies in the S&P 500 index might have excellent business economics and the overall business climate was optimistic, their stock prices plummetted to ridiculous levels because of programme trading on indices which resulted in swift and tremendous fluctuations. (Talking about market efficiency...)

And the thing is that programme trading still exists in today's brokerage firms and financial institutions. (Although I'm not sure how affected Singapore's financial institutions are by programme trading) Hence, there is still a likelyhood the stock market may just crash one day. While it takes one major event to affect stock markets worldwide temporarily, it just takes a concept like programme trading to devastate these stock markets' traders permanently. I'm not speculating on a stock market crash, don't get me wrong and in fact there is no reason for me to do so since everything seems fine up to now. However, what I'm trying to point out is that there is always a buying opportunity for value investors to take advantage of the stock market's whipsaw prices. At the same time, if you feel that options trading or technical buying is relatively safe, think again. People now have programmes that receive news on stock market prices first hand and these programmes also automatically execute their technical buying or selling in an instant. Hence, it is wise to note that it is rather unlikely to beat the market on prices alone, especially since it is becoming far more efficient. All in all, capitalise on the market's inefficiency in understanding a business true value and avoid competing with the market's high efficiency in price trading.

A few thoughts on investing

I remember Jingyang told me before that my blog entries seem like book reviews... on books like The New Buffettology and The ABCs of gold investing. Well, it most certainly isn't plagiarism... but it may have created a misunderstanding because I did not properly qualify my opinions or express doubts to certain theories in the books. (well, it's obvious in this case I don't really have any major disapproval with the books' content in general) Anyway, I wish to express my thoughts clearly in this entry so that my friends can find out how I really view topics on investments and maybe even share their opinions on this matter.

I have recently read up a bit on Warren Buffet's investment strategies and therefore would also naturally find out the root of his ideas - Benjamin Graham. I would like to clarify certain ideas first on investment. I strongly feel that investing is NOT speculating. I guess our experiences with investing would be from TV dramas showing stockbrokers shouting across the floor or newspaper articles announcing yet another case of massive losses and bankruptcies following a stock market crash. However, as all things are, the form may not be the substance. What I mean is that these seemingly complex trading methods (futures trading, options trading, index arbitrage) are creative innovations (people get excited with new ideas with big names) of financial banks and institutions which have little to do with investing at all... basically people bet on a future scenario using past and current technical trends (mostly on stock prices) which sometimes is a win all or lose all scenario. (Sounds very much like playing blackjack or poker right?) Investing is in fact making business sense, which means you look at the stocks as an ownership of a business instead of commodities which are traded on the basis of price. (Surprisingly, many people still view investing as buying or selling shares just because your stockbroker called and tell you that the price is rising steadily and the prospects of the market is good, btw your stockbroker also earns a commission on every transaction you make)

Benjamin Graham believes in value investing like Warren. However, he does not invest selectively in good businesses with a durable competitive advantage like Warren did. Instead, his main motivation for investing in any company is the price of its stocks... if its stocks are selling way below the intrinsic value of the business he would consider buying. Now, I'm not exactly very sure what is his definition of intrinsic value too because he uses many factors and a series of complex calculations to determine the intrinsic value and the safety margin. (the difference between the price and the intrinsic value, which should be more if he expects the invetment to be risky) However, some people believe that the intrinsic value is the book value of the company. (the total capital that a company can work with which includes plants, machineries, cash reserves, also known as assets minus liabilities) Their rationale is that this is the value of a company if it is liquidated, hence if price is just trading slightly above this value it means that it is likely to go up cause you pay almost what you will get if the company is forced to shut down. Warren believes that the intrinsic value is the total projected annual compounded rate of return for the next 10 years or so discounted to the current government bonds (for example) rate. Afterall, you wouldn't want to be paying more than what the business can earn you in total.

Anyway, I feel that it is important to understand why certain ideas are expounded and this doesn't mean I totally ignore the view of intrinsic value being the book value, because it serves to remind me of the consequences if it is trading at book value or even the liquid cash value of a company. As I said earlier, Graham determines whether a particular stock is worth buying by calculating the intrinsic value of a business and at the same time determining if the price is sufficiently below this value. Warren first picks the companies he has an interest in, then he lets the price determine whether he should buy it. Graham isn't all that interested in the economics of a business, (however later he implements certain safeguard procedures such as requiring the company's earnings to grow at a steady rate) rather he lets price be the main motivating force behind every investment. He is not speculating, because he has a theory that any business will eventually reach its intrinsic value after some time and he will sell it for the gain. However, the problem lies in the fact that the longer the time it requires for the price of the stock to reach the intrinsic value, the lower the returns would be. Also, what if it never reaches this value? Graham follows a strict system of selling these stocks that fail to perform in 2 to 3 years time because he believes they either never will or the rate of return would be too diminished. Another point to note is that even if it works, the profits often are erroded away significantly by capital gains tax. Graham also owns a portfolio of very diversified stocks (often more than a hundred) while Warren owns a very concentrated porfolio with stocks of companies in his circle of confidence. Graham has to do that because there will be losses on some stocks which fail to reach their intrinsic value while Warren can do with just a few stocks because he is confident that these stocks will perform to his expectations. In fact, Warren even once said that diversification is only for people to protect themselves from their own stupidity. (I also wish to give my views on diversification but in a later entry perhaps because this entry is becoming extremely long and boring)

My purpose in writing such entries is not to glorify certain knowledge or praise Warren to the skies. Rather, I feel that together with all "intellectual" arguments, (pardon me for this expression but this is the common term used for such discussions) we are trying to sell our logic to people and hopefully get some opinions on our logic. It is just like arguing whether the price increase in public transport is fair to us, or whether the job environment is upbeat enough for you to demand a raise or job hop. And I feel that this topic on investment is relevant enough to many people, as investing is one of the main methods to achieve financial independence (which I believe everyone should aim for such a goal to varying degrees) because as I said before no one would want to be financially desperate on top of being poor. Well, my hope is that after reading this entry if you have anything to contribute or discuss please leave a note or talk to me about it. In this way, I can also benefit from your logic and learn to be a better investor. : )

SMU experience

Just came back from my SMU interview... thought it would be good to quickly blog down all my experiences before I forget.

Well the first part of the process is a group interview with 8 people in my group. I was really quite amazed by how these people quickly got to know one another during the waiting session and one of them even said we would be friends after this inteview. Anyway, the interview was conducted by 2 professors, one from the School of Business and the other from the School of Law. The topic is about an article which the author argues that Singapore brands need time to grow in order to compete with Western international brands. The first guy to speak mentioned about how important advertising is to branding and he gave his personal experiences based on his design course in poly. I was the second guy to speak and I rattled on about how I disagreed with the author's point of view that time is the essence. Basically, the author compares Singapore brands to age-old established brands such as Coca-Cola and Tiffany which took more than 150 years to establish. I remarked that in the past advertising was mainly by word of mouth, newspapers (which most people were illiterate at that time) and radios (which don't show any pictures). Hence, marketing will take a considerable time before people are aware of these products. However, in the information era that we are living now, any product can be easily marketed and together with creative advertising, the product might even gain a certain diffentiation and advantage over other similar products. I also mentioned that Singapore brands need not necessarily be at a big disadvantage against established Western brands as Singapore companies can easily access the rapidly growing Asian markets like China and India and we can capitalise on this while there is still a gap between the Western and Asian world.

One of the professors later asked us whether it is the style or the substance of the product that creates a brand since both ideas have been brought up by the interviewees. He asked the girl who mentioned substance to relate it to the car industry and brought up examples of Rolls Royce and Mercedes. I substantiated her views later by arguing that the professor is relating to a very specialised market, the luxury products group where style (eg. Mercedes signifies a person's affluence and taste) far surpasses quality. However, most common products such as food, normal clothing and other necessities like toilet paper would depend very much on their quality to establish their branding. (Even Levi's jeans which have a certain style about it markets its durability, after all it was the most durable pants for the gold miners during the California gold rush)

The seond part is the essay and the topic is on writing about a favourite movie to a friend. I wrote about Brokeback Mountain to an imaginary gay friend Danny and argued about certain themes such as social discrimination and gender identity. All in all, I feel that the whole process was rather successful, but at the same time I was also rather guilty about depriving some interviewees of their time by talking too much at times. (But then again some of them really don't want to talk too much)

Anyway, I intend to email SMU soon whether I can change my single business degree to a double degree in both business and accounting. I must admit it was a pleasant surprise when I received an email last night from the assistant dean of NUS School of Business asking me to consider their scholarships and overseas programmes even though they haven't officially shortlisted anyone on their website. Hmmm... she even said she is willing to help me with the NUS global merit scholarship although the deadline is over. (Wonder whether it is true) So I suppose I will also email her soon about my "enthusiasm" to get a scholarship. (Haha) I don't know how all these will work out, but one thing is for sure, I'm beginning to like SMU's environment more and more after today's visit. : )