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Archive for October, 2008

It looks like I am going to miss my target of writing 12 posts in a year. Wahahaha. I can’t even manage to write 1 post per month. BTW, if you google sohai, my sohai post is ranking as #1 now (sometimes #2). Thanks Google for its recognition to this meaningful word. Hopefully one day dictionary.com and wikipedia.com will also include the definition to their database. :D

Back to what I want to write today. What does the so-called ‘financial crisis’ means to you as an ordinary investor? What does the 50%+ fall of the whole world stock market (30% fall in October 2008 alone) means to you? Is my popular 20% compounded growth plan still relevant? Is my review on ICAP a rubbish? What about all the value investing posts that I have been writing?

Instead of answering them directly, let’s ponder some interesting facts that newspaper won’t be publishing and you won’t see them as headlines in NTV7 news.

What investing gurus are saying?

Gurus from all over the world are using almost the same word to describe the current crisis. It is not ‘sad’, not ‘disappointing’, not ‘bad’, not ‘scary’ but ‘exciting’! They are using the word exciting to describe the current stock market.

Ken Heebner a guru who compound more tan 20% per year for many years is actually buying bank stocks!

What did Seth Klarman, another great value investor said a few days ago (just before the market tank another 10% in a day)?

“Normally, as a buyer you have to compete with a lot of very, very smart competitors,” said Mr. Klarman. “But many of the smartest people are on the sidelines now because of redemptions, margin calls or panicked-out-of-their-mind selling. So you don’t have to be as smart as you did before. You just have to be in the game.” article link

What he said contains a lot of intelligence that you need to understand. Let me explain the whole concept in AhYap’s style.

Perspective #1 – What happened when you are forced to only sell and are not allowed to buy

I have condemned mutual funds many times but I have to do it again because now you will learn the most. Unlike ICAP, mutual fund is open ended. That means the fund size can increase and decrease depending on how many people willing to pour money into it or take money out of it. So a mutual fund as large as RM 100 million can shrink their size to RM10 million if the holder want to take the money out from it.

In normal days, mutual fund usually invest only 70-90% of their money and keep the remaining in cash. The prospectus will specify the percentage that need to be invested. Say a mutual fund that specify that they need 90% of money invested in the stock market all the time, they have to follow that and make sure 90% of money in the stock market, no matter if the stock market is overvalue or undervalue.

The problem is that when time of panic selling comes, 10% cash is not enough for redemption (the fund doesn’t have enough money to pay to his holders who sell the mutual fund). So where do they get the money to pay them? They have to sell stocks to get money in order to pay them. So when more and more and more people what to get out of mutual funds, the fund managers have no choice but to keep on selling their stocks no matter what is the price! The fund managers may think a stock is cheap at RM3 but are forced to sell it at RM1 because someone want to get out from the fund.

The ice ball roll bigger when more and more people want to get out of the mutual fund. The continue selling from the mutual fund creates a big SUPPLY but the DEMAND is very low. Everyone what to sell but no one what to buy! They ask for lower and lower price. Price tank. Market tank.

The fund manager might be very intelligent in investing. But he can’t do a shit even if he is as good as Warren Buffett. Because he has no choice! He can only be at the sideline watching. First he is forced to sell at cheaper price. Second he cannot buy anything that he think is cheap because he has no money to buy! Money flow out quickly from the fund and no new money flow into it.

When you are in mutual fund, you are partnering with many Ah Beng and Ahmad that you don’t know (maybe just live next door to you) and what they do affect your investment.

How have margin calls affected the stock market? Many people borrow money to buy stocks and use the stock they bought as collateral. Same thing as you borrow money to buy your house and use your house as collateral. Problem is when the value of the collateral drops to a certain value, they are required to either increase the collateral (pump in more money) or sell stocks to reduce the borrowings to the acceptable margin level, which is what we called ‘margin call’ [i.e. your broker call you and tell you that you don't have enough margin].

Unfortunately most people don’t have money to pump in! If they have the extra money, why would they need to borrow? So they have no choice but to sell no matter what is the price! The key phase that is same as the mutual funds, ‘sell no matter what is the price!’.

This creates another surge is selling orders that crash the stock market. And mind you, it is not you and me the small little guy that have only RM23 in Maybank account that is margin called but the BIG guys that control billions of dollars! These guys run hedge fund (unregulated but leveraged mutual funds) that borrow a lot of money to invest! These guys are forced to sell because their collateral (stocks they bought) are no longer enough to cover their borrowings.

In short, the force selling of mutual funds and margin calls has create a big SUPPLY of stocks, contributing to a big fall to the stock market. Because they have to sell disregard of price, but the selling doesn’t have much relation with the underlying value of the stock.

Here comes the intelligent investor.

People who are not forced to sell or who have the courage to buy now has the advantage than those who choose to sell or stupid enough to buy mutual funds all the years. Unlike common mutual fund which is open-ended, ICAP is a closed-end fund. It doesn’t need to sell even a single stock even ICAP shareholders are dumping the share in the market. ICAP can keep anything that the fund manager thinks is cheap and at the same time can utilized the RM50 million cash it has to buy more shares that is selling at big discount. That means the next door Ah Beng who owns 1 million shares of ICAP and dump it crazily in the market yesterday until the market price drop to RM1.20 can’t do a shit to its real value (NAV – RM1.42).

For individual investor who has money right now, you also have the chance to grab stocks that are in big discount. Stock market are currently in 4-5 years low. That means in order to buy something at current price, the last chance is 4-5 years ago.

Perspective #2 – The Gap Between Price and Value

Price is what you pay and value is what you get. You can pay whatever price for anything but what you get is just the value. You can pay RM500 for a Mc Fillet O Fish but what you get is still a Mc Fillet O Fish (RM5.90).

“In the short run, the market is a voting machine, but in the long run it is a weighing machine.”
– Benjamin Graham, The Intelligent Investor

Warren Buffet explains what his teacher said a few weeks ago in CNBC.

“Well, the stock market in the short — my old boss Ben Graham said that in the short-run the stock market is a voting machine, in the long-run it’s a weighing machine. As a voting machine, it responds to people’s emotions. There’s no literacy test for voting. You vote according to how much money you have, not according to how smart you (are.) So the stock market does some very silly things in the short-run. Over the long-run, it behaves quite rationally. And, you know, five years from now, ten years from now, we’ll look back on this period and we’ll see that you could have made some extraordinary buys. That doesn’t mean it won’t get more extraordinary a week or a month from now. I have no idea what the stock market is going to do next month or six months from now. I do know that the American economy, over a period of time, will do very well, and people who own a piece of it will do well. But they shouldn’t own it on leverage. That’s what people have learned in this period, that you’ve got to be able to play out your hand and it’s a big mistake to let somebody else be in a position where they can sell you out.”

Why the gap between price and value will eventually closed? Why it is a “weighting machine” in the long run? Because the longer time goes by, the more OBVIOUS the fact that Mr. Market is mispricing a stock and eventually more and more people will noticed it, buy it and push up the price.

Mohnish Pabrai bought IPSCO for 3 times free cashflow (read my post on PE Ratio), a stock that Pabrai knows the market is mispricing. Since it is a voting machine in the short term, the price may remain low and even drop further for the short term. But what will happened after 3 years? The company would have generated cash that is more then it market capitalization! (market cap: the price the whole company is worth i.e no of shares x share price) That means you are exchanging RM1 for RM1 cash in that company PLUS the factories, inventories, future profits, management, employees, palm trees, Diamond water filter, toilet papers, CEO’s secretary, etc. ALL FOR FREE! At this time, even sohai can notice the value-price gap! It is so obvious.

Pabrai bought it at $45 and sold it for $155. And Pabrai said currently many of his stocks is trading at 1 times free cash flow. How long do you think he needs to wait before things get obvious for others?

Perspective #3 – How many McChicken will be sold in China and India?

Tan Teng Boo organized a seminar last year about his theory on ‘i Capital Long Boom’. After paying a few hundred bucks, you received a ‘seminar’ book that look more like a nuclear bomb manual written in Russian. You listen to Uncle Tan speaks for numerous hours about facts and figures and looking at charts and data on the screen that you can never underestand. And yet, ironically, everyone get very excited!

Dump away all the statistics – the nickle comsumption per capita, the price of USD vs Nigeria Naira, the washing machine sold per household, stainless steel nuts and bolts consumption, etc etc etc … Why not just ask yourself a few questions.

How many Nike shoes do you think the China and India man will buy in the next 10, 15, 20 years?
(Hint: China has 1.3 billion people. India has 1.1 billion. India population will surpass China in 20+ years. US population is only 0.3 billion!)

How many chicken (real chicken ok) have to be fried by KFC in the next 10, 15, 20 years?

How many condoms are required by China and India man to make sure they don’t have too many ‘liabilities’?

How many toilet paper do they need? Toothpaste? Hand phones, computer chips, rubber bands, Diamond/Nesh water filter, Crocodile underwear, etc etc etc.

It is mind boggling. The China, India and all other Asian countries will play a big role in the world economies in the future. Tan Teng Boo describe it as something that happened once in a millennium.

Perspective #4 – When Price Drops, It Gets Less Risky, Not More Risky!

Given that you have done a thorough analysis on a stock and you bought it a discount, the stock will not get riskier when the price fall! For example, Mohnish did a research on IPSCO, a cyclical steel company. His analysis read like this -

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AhYap is confirmed a dai sohai for being conned gao gao not once but twice from the same men. This proves again that AhYap is only good at talking cock theory but fail to implement them practically. If you are a follower of my blog, you would have read my post on the immobilizer conman and thought that I am very smart. Unfortunately, I have to admit that, “Book smart is not street smart.” [To know how book smart I am, I have at least 10 books highly relavant to conning tactics and its psychologies]

Time: Saturday evening
Place: My House @ Ipoh

My friend and I was at my garden and suddenly 4 Indians driving a blue van stopped in front of my house. That was scary because I really wonder if they are bad guys! Then 1 of them came down, point to my grass and start talking about my grass. He told me the name of my grass, different types of grasses, problems with my grass, etc. etc.  Then he said that he work as the gardener for a golf course for 25 years and he do gardening for people at part time. He knows what he speaks. He talk for a very long time outside the gate until at one moment he requested to come in to explain in more details the ‘problem’ of my grass. [I Broke Rule #1 - Never let stranger come into your house]

As precaution I only let him in and have others waited outside. He pointed to some yellow patch of the grass and some holes and told me that there are ‘worms’ eating the root below and digging the hole up. The hole indeed look like being dug by some insects, and I have also heard of such worm that eat the roots of grass. So I didn’t doubt about that. But till now, I still don’t expect myself to pay him anything.

He then started to promote 2 products. The first one is bat’s shit. Yep, the fertilizer made with the shit of Batman by Joker and Two Face. Actually I google it and find out that the correct term is bat guano. It is indeed a very expensive type of fertilizer that is high in phosphorus which is good for roots growing (Nitrogen is good for leaves, Potassium is good for flowers).

The 2nd product is a ‘liquid’ that he said his golf course imported overseas specially for use in their golf course. Until now I also don’t know its real purpose. Something like preventing the grass to grow tall but make them grow to the side, thus making your grass more ‘carpet’ and at the same time killing the weeds because they no longer can ‘stand up’. I have never heard of such product but I am very curious on it.

This Indian guy is very skillful in talking. He can speaks Indian, English, Malay and Hokkien! (I don’t know Hokkien!) And he knows almost everything about plants and gardening. He talked for a very long time and the goal of the whole process is to convince me that he is ‘genuine’ and ‘trustable’.

How he broke pattern (breaking pattern in NLP means make someone suddenly dumb and stupid and can’t think normally like he did before. For example if you are talking very excited about something to your friend and suddenly he asked you a question that is totally unrelated, your thought pattern was broken and you respond by asking, “WHAT?!” and then you forget until where you talk until just now) -

He told me that you can’t buy this craps (bat craps) anywhere else because he ‘steal’ it out from his gold course! The greed in me kicks in. And I didn’t doubt this fact at all. He said he had to steal a little bit a day from the golf course (including the ‘liquid’) so no one notice. He say he wants to cari makan a bit.

He keeps talking and talking (for a very long time) to convince me to put those shits and urine (the ‘liquid’ lar) to my grass. So I asked about the price and he said the urine cost RM95 per bottle and the shit cost RM65 per packet. Sounds expensive to me. So I didn’t agreed.

He kept on talking and talking. He asked his teammates outside to bring in sample of the liquid which is filled up in old 7up and Sarsi bottles! And he showed me some of the bat shit and let me touch it. He is trying very hard to convince me. I later asked him how many bags and bottles I need. He said 3 bottles and 3 packs is more than enough.

You see, I indeed love my grass very much and if the products can really deliver what it promised, I am willing to pay. My parents said this is the reason I fall for it – I can afford the money.

2nd event that break my pattern came in. My friend wanted to say bye bye and leave my house, so I opened the gate for him and then the Indian guy immediately order all his friends to come in and bring in all the urines and shits. He opened up the shit and ask me to see (see shit!). Then what he did is too surprising for me. He started pouring the bat shit to my lawn. I thought he was just giving me a demo on a small area but hell not, he is pouring a lot! Then he instructed his partners to continue pouring the shit while asking another one to spray the liquid to my glass.

Since my pattern was broken, I thought I can afford a try of that since it is around RM400 for 3 bottles of 7up and 3 packs of shit. So I didn’t stop them but let them finished.

It was scary. They keep pouring and pouring and pouring until my whole lawn is full of black shit. Fortunately they are not ‘smelly’ like fertilizer made with chicken shit. End up they have used 5 bottles of liquid and 6 packs of shits!!!

This is a very common sales technique. If you tell somebody in advance the whole thing will cost RM815, they won’t want the deal, but if you tell them one pack is RM65 and mostly you will need 3 packs, they have higher chances of agreeing, which is my case! The problem is that they will quietly add up the number of packs without asking you and when you know about it, it is too late. Shit is already on the floor! It is very hard to argue, unless you know it is really a con case and reject it. But I don’t know yet!

[In Ipoh got a very popular Hakka mee store. They use this tactic to ALL their customers. When you order the fishballs and fu-pei, you might say, "I want 20 mix mix." Then come a big bowl of fish balls and fu-pei and you eat happily with your family. After you finished and you wanted to pay, they charge you very expensive and you ask, "WTF! How much is your fishball and your fu-pei, I only order 20!" And then he will answer, "Oh, we give you 30 fishballs and fu-pei mar, that's why." @*&$$%(% How do you argue? Fishballs are already in your stomach! Pay lor.]

He is so good. He put all the empty bags and bottles on the floor and asked me to calculate how much to pay him! This is funny, now I feel like what he is saying is, “Now I want to cheat you, you calculate how much you should let me cheat. Since you calculate it yourself, that means you agree to be cheated by me. I didn’t force you at all.”

So I calculated with my Sony Ericsson and the amount is scary, RM815 (double the RM400 I expected). He said RM800 is OK, RM15 no need to count. He also promised me that tomorrow he will bring me a lot of nice pebbles to put beside my plants and bring me ‘uri powder’ (powder made from urine?) for FREE! [actually he means he will steal the pebbles and uri powder for me] The powder according to him is used to prevent grasshoppers and other insects eating the leaves of the plants.

So I try to act smart and wanna fished him back to make sure he will come back tomorrow to give me those stuffs (greed again!). What I don’t know is I am actually trying to fish this shark back to bite me again tomorrow. I gave them only RM700 and ask them to collect the RM100 tomorrow after they bring me the pebbles and uri powder. (greed! greed! greed!) Sometimes when you think you are acting very smart, you are actually acting very stupid. That’s me.

Although I have paid them RM700, I felt quite happy with the shits and is eagerly waiting for my lawn to turn green and nice. (I love my lawn a lot, my girl friend sometimes said I love my lawn more than I love her) It is always easier to sell someone things that they want and need, like selling weight loss program to women, selling Yunnan hair care to Yap Kim Hock and other bald mans, selling ‘healing’ pills to cancer patient, etc.

At night I told my parents my story of the “encounters of the 4 Indians”. As expected, parents always worried that their children get conned. So they said things like, “Where got shit that is so expensive!”, “You trusted people too easily already lor”, blar blar blar. And that make me very angry because they still talk to me like a kid and THIS, drive up my ego and I want to proof that I am right.

I also googled for bat shit at night from the internet and notice that the price is indeed very expensive! 1 kilo cost around RM40 to RM50! So the little-greedy man feel very proud of himself on the day. But I can’t find anything about the liquid because I don’t even know the name of it.

— — — — —

Time: Sunday evening
Place: My Same House @ Ipoh, now with bat shits.

They came back!

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