Monday, June 25, 2007

Shout out: A dangerous time to be in Singapore market

I can't resist myself. I can't resist shouting that the Singapore small caps market is dangerous now. It has risen 60+% last year and now, it has risen 82% year-to-date.

Currently many small caps stocks are moving upwards, especially those that have some properties element. Also, small caps with funny fundamentals are also starting to move. I think the small cap market is showing quite an exuberance now, similar to the China Spore-listed stocks at start of 2006.

History almost never repeats. But most servere corrections come after a period of extreme exuberance. We are currently in exuberance stage, perhaps in extreme exuberance stage. I don't know. Likewise, I do not know when the small caps market may crash or correct.

But my guess is someday sometime the crash or correction will come. The only question is time.

Friday, June 22, 2007

Book Review: Happiness Lessons from a New Science

I have just finished reading the book “Happiness: Lessons from a New Science” by Richard Layard. This book has a few controversial points, which people may find them disagreeable. However, I shall start with the more agreeable points first. Before I start, I shall state that this content in this book is lighter than most non-fiction books and it is not a bad read. The book can be found in NLB under 302.5 LAY.

1) We (humans) tend to seek happiness. That is, we would want to feel better.

2) We tend to prefer to be with company most of the time than to be alone. This is supported y research that friendship and marriage tend to improve happiness. Unemployment, on the other hand, lead to unhappiness as one of the reasons is that it cuts away the social ties one has with one’s former colleagues.

3) We will be happier if we can trust people more. For example, if you can trust your family, friends or colleagues, you tend to worry less and enjoy their company more.

4) We are attached to status quo. In other words, we hate losses more than we like gains (prospect theory). In addition, we would demand a higher price for an item that we owned compared to the price that we would pay for the same item if we do not own it (endowment bias).

5) We are status conscious. That is, we prefer to be among the winners and the elite compared to being among the losers and the weak. A personal example. Although I may have higher absolute portfolio return year-to-date compared to last year, I am feeling worse than I felt last year. This is because I am outperforming both STI and Sesdaq last year and I am underperfomring Sesdaq this year.

6) We are very adaptable to new situations. This is both good and bad. It is good as we may be happier than we thought if something bad happen to us. At the moment, the complaints about higher GST seem to die down and most people are adjusting themselves for the GST increase in July. This is unlike the scenario early this year, where complaints on GST and unhappiness on the GST increase are seen. Being adaptive is bad because we will get use to a happier situation such that the increase in happiness will slowly die off. For example, newly married couples would tend to feel happier than couples who had married for a few years.

7) Additional income increases happiness less and less when people become richer. For example, an additional $1 million may lead to more happiness in poor countries compared to the same additional amount in rich countries.

8) Finally, individuals have the means to increase their happiness. For example, more religious people or people who practices mediation tend to be happier.

Now I shall talk about the controversial points.

9) The author opines that the best society is the happiest. That implies that public policies should aim for higher overall happiness rather than the result of making more people happy. If a poor person gets more happiness when they receive an additional $1 compared to the loss of a $1 to the rich person, public policy should tax the rich for that $1 and distribute it to the poor person. This would increase overall happiness in the society, assuming that there is no distribution cost. Somehow this view runs counter to the prevalent view that we should lower income tax and tolerate higher income inequality so as to attract more talents and investments.

10) As mentally ill people tend to be more depressed compared to patients suffering from other illnesses, the author suggests devoting more resources to treat mentally ill people. This point is a bit controversial as the overall happiness criterion is used as the basis for resource distribution. Although I would support devoting more resources to treat the mentally ill patients, I also realize that the use of overall happiness criterion may not be the agreeable criterion for some people.

Thursday, June 21, 2007

Oak Value Fund Manager Interview

Have just read this informative interview of Oak Value Fund Managers at Motley Fool.

Here are some excerpts. Happy reading.


But I will tell you, one of the things we have wrestled with often is when you find a good company,if you find a great company -- and in many ways youhave talked about your interest in eBay, and I thinkwe would all probably agree, it really has many of thecharacteristics of a great company.

Valuation is the hard part. We run a worst case, abest case, and a base case. We do our work using abase case of what we think is a very reasonable,rational, and what we usually find to be a veryconservative thought process of what will unfold. Therisk to us is that if we find a really great one, andthere are not that many really great ones, we have tospend lots of time on the maintenance part of ourresearch to understand and make sure we are properlyvaluing it. We want a good understanding what itreally is worth, because we don't want to sell tooearly. But when it does get to our intrinsic value, wedo move on even if it is a great company.David Carr: One of the reasons we always demand themargin of safety is we have been through severealligator-biting times, and we have seen our rear endshanging out there, and we have the bite marks to proveit. That experience is valuable, and I am not sure itcan ever be passed on without having been experienced.

Final thoughts

DM: You get one final parting shot here. If peoplewant to become better investors, what do you think isthe first thing they should focus on?DC: I think the service that you all provide and theeffort that you make is important in trying to educatepeople, because there are so many people saying youmust do something now and time is going away quickly,and I think the ability to be able to think long termand to understand is a nice perspective. So I wouldsay, maintain perspective.

LC: There is a quote by Ben Graham where he says,"Investing is most intelligent when it isbusinesslike." And so, have the same perspective whenyou look at investing in businesses, even though youare only buying a hundred shares or a thousand sharesor a million shares, or whatever you are buying.Recognize that you are buying a piece of a business,and pursue it with the same diligence and thoughtprocess and analysis that you would if you were goingto buy the entire business.

Friday, June 15, 2007

A book on America Fringe Economy

This post will present a short review on a book ”Shortchanged” by Howard Karger. Next, a personal niggling thought on the stock market is posted.

”Shortchanged” is a book depicting the financial life and debt in the fringe economy in America. It tries to show how financial companies (e.g. pawnshops, credit card, cash cashiers) do business with the low-income as well as debt-ridden consumer (which is the fringe economy). As these low-income or debt-ridden consumers are usually deemed as high-risk borrowers, they are not able to borrow funds at the normal interest rate. Neither do they have the funds to purchased discounted white goods without the use of installments. As such, the financial companies would levy higher interest rate (too high, in fact, as the book describe some interest rate charged is around a few hundred percent a year!) on the loans given to these group of people.

Of course, these low-income consumers are likely to lack the financial education or time to read through the conditions or understand what they are getting into. Even though they understand, sometimes the lack of alternatives for emergency loans may lead them to take up these high-interest loans. The book also discuss on plausible solutions to alleviate the predicament in the fringe economy.

When I am reading “Shortchanged”, I often think whether Singapore will follow the footsteps of America’s fringe economy. We have already seen the impact of credit cards where banks try to offer consumers cash advances at double digit interest rate and the probable scenario that more people are getting into debt-mire with credit cards. In the recent years, we have also seen companies like James and Ezycash offering loans to low-income individuals with high interest rates. While I am not certain of the Singapore fringe economy future, I wonder whether the low-income group will become more debt-laden or whether they will be even be in more dire circumstances in future. Nonetheless, the book ‘Shortchanged’ will be worth reading if one is interested in the fringe economy.

Recently, I have been thinking on the strong run-up seen in Sesdaq. From Jan to the current date, Sesdaq has returned 74%. I guess that Sesdaq will probably advance in the near future. However, what I am concerned about is the future Sesdaq correction. I am guessing that the future correction in Sesdaq would be dire in magnitude. Given that many common people are currently playing the stock market and the strong run-up Sesdaq is having, the correction period may not be far-off (maybe in a year’s time? I dare not predict a narrow timeframe).

Meantime, I will be under-performing Sesdaq for the current year. The under-performance is getting worse. Sigh. This is perhaps not surprising as I am more of a low-PE shooter (ie recent purchase of China Power Print) rather than a growth investor. Therefore, my performance would lag (seriously) behind growth investors when growth stocks are soaring high. Well, happy for the growth investors and hibernation for me.

P.S. I have sold all my positions in Shanghai Asia and Shanghai Turbo recently.

Saturday, June 9, 2007

The Power of Diversity

I have recently read the book “The Difference” by Scott Page. It is a book on how diversity can create better groups, firms, schools and societies. Similar to previous post, I would recommend you to buy the book and read it. I am not sure if the local bookstores have it as I got mine from

I shall list the learning points I gathered from the book below. However, these points may not be correct or may not be complete as it depends on my understanding from my first read of the book.

1) Diversity helps to solve difficult problems given certain assumptions. The assumptions are that the group of diversified people can coordinate well, the diverse group has different skills and the group must be smart.

2) Why diversity helps. Given that a smart person in a diverse group may get stuck at a sub-optimal solution to a difficult problem, another person in the diverse group may be able to start from the sub-optimal solution to get to a better solution using different skills and knowledge from the first person. In a diverse group, the more diversity there exist in the set of skills, the more likely the group solution can get to the best solution, given all other things remain constant.

3) How diversity comes. Different people have different perspective or viewpoints, different heuristics or rules-of-thumb, leading to different interpretation of events. The different perspective, heuristics and interpretations may then lead to different solutions to the same problem.

Read the book for more learning points.

Sunday, June 3, 2007

An Engine, Not a Camera

The following are my notes (or what I have learnt) from the book, ‘An Engine, Not a Camera'. It is written by a sociologist. I would recommend those who are interested in financial theories and its effects on the market to read it. My notes may not be self-explanatory if one lacks the context behind the book.

The notes are:

1) Financial theories may be performacity or counter-performacity. Performacity are theories that act to make the markets to conform more towards the theory. For example, B-S options model when known actually help the option prices to converge to B_S model. But after 1987, B-S model becomes off-the-mark as traders become more risk-averse (introduction of volatility smile). Efficient market hpothesis (EMH) lead to index funds which may have the counter-performacity effects. Shares that are announced to be included in the S&P index may have an increase in prices of these shares. The announcement of shares being removed from an index would lead to a decrease in the prices of these shares. As such, such price movements due to inclusion or exclusion of shares in index are anti-EMH.

2) Levy distribution, as recommended by Mandelbroit, may be used in options models to take care of fat-tails or Black Swan problem after the 1987 crash.

3) The fall of LTCM is due to the feedback mechanism and the size of the fund. The feedback mechanism in the markets may cause the correlation of seemingly uncorrelated financial productions to increase sharply (ie when investors’ risk aversion has increased sharply due to adverse events). The size of the fund may lead to the speculation that the fund may be in trouble and if the fund being seen as large as the market, traders may converge to cause a negative feedback effect on the fund’s products. This is what has caused the fall of LTCM where first, investors’ risk appetite has fallen due to some external events. LTCM start to lose money and it become known to investors and outsiders. Outsiders speculate that LTCM is large and thus would have impact on the market if it starts to dispose its positions. So funds and traders start to converge by acting like anti-LTCM positions. As LTCM is a leveraged fund and it has recently returned cash to investors, it is not able to withstand the onslaught and thus a liquidity crisis has formed.