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Tuesday, 28 February 2017

(Tradeview 2017) - Warren Buffet's Berkshire Hathaway Annual Shareholder Letter Key Takeaway

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Dear fellow investors / readers

Warren Buffet annual shareholder letter has many nuggets of wisdom for all to learn. As there are many articles covering key points, I would like to share one from Forbes which I feel summarised it well. 

Once again, these writings are just my humble sharing (not recommendation), feel free to have some intellectual discourse on this. You can reach me at :

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The Seven Best Quotes From Warren Buffett's Annual Shareholder Letter

I cover the good, the bad and the ugly of finance. 

It was a good year for Warren Buffett, the 'Oracle of Omaha,' who saw Berkshire Hathaway's BRK.B +% stock rise 23.4% in 2016 and the firm's book value per share grow by 10.7%. In characteristic form Buffett, worth $76.3 billion according to FORBES' Real Time Rankings, used his annual shareholder letter to offer a review of Berkshire's performance during the year, which included a major bet on Apple AAPL +0.10% and airlines and the closing of its $37.2 billion acquisition of Precision Castparts.

Berkshire Hathaway generated $17.6 billion in operating earnings, or a 1% annualized increase, from businesses that span insurance, railroads, industrials, chemicals and home-building, to name a few. Its capital gains, mostly from realized investments, were $6.5 billion. Buffett's annual letter offered an optimistic view on the prospects of American capitalism, but the 29-page report also highlighted pitfalls like investment fees, and gimmicky corporate earnings. Though Buffett is the most followed investor on earth, his annual letter did not dwell much on new investments like Berkshire's Apple and airlines bets, or deals in the marketplace.

Of note, Berkshire Hathaway is a large investor in Kraft Heinz, having partnered with Brazilian private equity firm 3G Capital to buy Heinz in 2013 and then Kraft Foods in 2015. Recently, Kraft Heinz pulled a $143 billion takeover offer for consumer products giant Unilever . Only four years in, Berkshire's Kraft Heinz investment is one of the firm's most profitable on record, with gains exceeding multi-decade holdings in American Express AXP -0.36%, Coca-Cola KO +0.29% and Wells Fargo WFC -1.16%. Berkshire has invested $9.8 billion in Kraft Heinz; its 325.4 million shares are now worth over $30 billion.

Below are excerpts of the best quotes from Berkshire Hathaway's 2016 shareholder letter:

NEW YORK, NY - JANUARY 19: Warren Buffett attends 'Becoming Warren Buffett' World Premiere at The Museum of Modern Art on January 19, 2017 in New York City. (Photo by Jamie McCarthy/Getty Images)

Stock Buybacks Aren't Always Bad

As the subject of repurchases has come to a boil, some people have come close to calling them un-American – characterizing them as corporate misdeeds that divert funds needed for productive endeavors. That simply isn’t the case: Both American corporations and private investors are today awash in funds looking to be sensibly deployed. I’m not aware of any enticing project that in recent years has died for lack of capital. (Call us if you have a candidate.)

Vanguard's John Bogle Is A Hero

If a statue is ever erected to honor the person who has done the most for American investors, the handsdown choice should be Jack Bogle. For decades, Jack has urged investors to invest in ultra-low-cost index funds. In his crusade, he amassed only a tiny percentage of the wealth that has typically flowed to managers who have promised their investors large rewards while delivering them nothing – or, as in our bet, less than nothing – of added value.

In his early years, Jack was frequently mocked by the investment-management industry. Today, however, he has the satisfaction of knowing that he helped millions of investors realize far better returns on their savings than they otherwise would have earned. He is a hero to them and to me.

Don't Bet Against America

Our efforts to materially increase the normalized earnings of Berkshire will be aided – as they have been throughout our managerial tenure – by America’s economic dynamism. One word sums up our country’s achievements: miraculous. From a standing start 240 years ago – a span of time less than triple my days on earth – Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers.

You need not be an economist to understand how well our system has worked. Just look around you. See the 75 million owner-occupied homes, the bountiful farmland, the 260 million vehicles, the hyper-productive factories, the great medical centers, the talent-filled universities, you name it – they all represent a net gain for Americans from the barren lands, primitive structures and meager output of 1776. Starting from scratch, America has amassed wealth totaling $90 trillion.

Fake Profits!

Too many managements – and the number seems to grow every year – are looking for any means to report, and indeed feature, “adjusted earnings” that are higher than their company’s GAAP earnings. There are many ways for practitioners to perform this legerdemain. Two of their favorites are the omission of “restructuring costs” and “stock-based compensation” as expenses.

Charlie and I want managements, in their commentary, to describe unusual items – good or bad – that affect the GAAP numbers. After all, the reason we look at these numbers of the past is to make estimates of the future. But a management that regularly attempts to wave away very real costs by highlighting “adjusted per-share earnings” makes us nervous. That’s because bad behavior is contagious: CEOs who overtly look for ways to report high numbers tend to foster a culture in which subordinates strive to be “helpful” as well. Goals like that can lead, for example, to insurers underestimating their loss reserves, a practice that has destroyed many industry participants.

Charlie and I cringe when we hear analysts talk admiringly about managements who always “make the numbers.” In truth, business is too unpredictable for the numbers always to be met. Inevitably, surprises occur. When they do, a CEO whose focus is centered on Wall Street will be tempted to make up the numbers.

Fees... Cut It Out!

Over the years, I’ve often been asked for investment advice, and in the process of answering I’ve learned a good deal about human behavior. My regular recommendation has been a low-cost S&P 500 index fund. To their credit, my friends who possess only modest means have usually followed my suggestion.

I believe, however, that none of the mega-rich individuals, institutions or pension funds has followed that same advice when I’ve given it to them. Instead, these investors politely thank me for my thoughts and depart to listen to the siren song of a high-fee manager or, in the case of many institutions, to seek out another breed of hyper-helper called a consultant.

That professional, however, faces a problem. Can you imagine an investment consultant telling clients, year after year, to keep adding to an index fund replicating the S&P 500? That would be career suicide. Large fees flow to these hyper-helpers, however, if they recommend small managerial shifts every year or so. That advice is often delivered in esoteric gibberish that explains why fashionable investment “styles” or current economic trends make the shift appropriate.

The wealthy are accustomed to feeling that it is their lot in life to get the best food, schooling, entertainment, housing, plastic surgery, sports ticket, you name it. Their money, they feel, should buy them something superior compared to what the masses receive.

In many aspects of life, indeed, wealth does command top-grade products or services. For that reason, the financial “elites” – wealthy individuals, pension funds, college endowments and the like – have great trouble meekly signing up for a financial product or service that is available as well to people investing only a few thousand dollars. This reluctance of the rich normally prevails even though the product at issue is –on an expectancy basis – clearly the best choice. My calculation, admittedly very rough, is that the search by the elite for superior investment advice has caused it, in aggregate, to waste more than $100 billion over the past decade.

Figure it out: Even a 1% fee on a few trillion dollars adds up. Of course, not every investor who put money in hedge funds ten years ago lagged S&P returns. But I believe my calculation of the aggregate shortfall is conservative.

Much of the financial damage befell pension funds for public employees. Many of these funds are woefully underfunded, in part because they have suffered a double whammy: poor investment performance accompanied by huge fees. The resulting shortfalls in their assets will for decades have to be made up by local taxpayers.

Human behavior won’t change. Wealthy individuals, pension funds, endowments and the like will continue to feel they deserve something “extra” in investment advice. Those advisors who cleverly play to this expectation will get very rich. This year the magic potion may be hedge funds, next year something else. The likely result from this parade of promises is predicted in an adage: “When a person with money meets a person with experience, the one with experience ends up with the money and the one with money leaves with experience.”

Why Berkshire Loves Dividends

Before we leave this investment section, a few educational words about dividends and taxes: Berkshire, like most corporations, nets considerably more from a dollar of dividends than it reaps from a dollar of capital gains. That will probably surprise those of our shareholders who are accustomed to thinking of capital gains as the route to tax-favored returns.

But here’s the corporate math. Every $1 of capital gains that a corporation realizes carries with it 35 cents of federal income tax (and often state income tax as well). The tax on dividends received from domestic corporations, however, is consistently lower, though rates vary depending on the status of the recipient.

For a non-insurance company – which describes Berkshire Hathaway, the parent – the federal tax rate is effectively 101⁄2 cents per $1 of dividends received. Furthermore, a non-insurance company that owns more than 20% of an investee owes taxes of only 7 cents per $1 of dividends. That rate applies, for example, to the substantial dividends we receive from our 27% ownership of Kraft Heinz, all of it held by the parent company. (The rationale for the low corporate taxes on dividends is that the dividend-paying investee has already paid its own corporate tax on the earnings being distributed.)

Berkshire’s insurance subsidiaries pay a tax rate on dividends that is somewhat higher than that applying to non-insurance companies, though the rate is still well below the 35% hitting capital gains. Property/casualty companies owe about 14% in taxes on most dividends they receive. Their tax rate falls, though, to about 11% if they own more than 20% of a U.S.-based investee.

And that’s our tax lesson for today.

Buy When Others Are Fearful

Many companies, of course, will fall behind, and some will fail. Winnowing of that sort is a product of market dynamism. Moreover, the years ahead will occasionally deliver major market declines – even panics – that will affect virtually all stocks. No one can tell you when these traumas will occur – not me, not Charlie, not economists, not the media. Meg McConnell of the New York Fed aptly described the reality of panics: “We spend a lot of time looking for systemic risk; in truth, however, it tends to find us.”

During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well.

As for Berkshire, our size precludes a brilliant result: Prospective returns fall as assets increase. Nonetheless, Berkshire’s collection of good businesses, along with the company’s impregnable financial strength and owner-oriented culture, should deliver decent results. We won’t be satisfied with less.

(Full Disclosure: I own some Berkshire B-shares in a retirement account)


Please note that I respect all investment styles and in no way saying one method of investing is better than another. I know that everyone has their own preferred method and that is what makes the market interesting. Diversity. 

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Saturday, 25 February 2017

(Tradeview 2017) - Market Irrationality (On LiiHen, PetronM, GHLSYS and others)

Dear fellow investors / readers

Today, I would like to talk about Market Irrationality. I am sure many of you are well verse with this term. For those who are not, it stems from a phrase used by former FED Chariman, Alan Greenspan (Today, it is Janet Yellen). As below 
Once again, these writings are just my humble sharing (not recommendation), feel free to have some intellectual discourse on this. You can reach me at :

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For the past 3 months, the equities market has been considerably buoyant. Some analyst said we have been enjoying a mini bull run. Some say it is a technical rebound. Some say it is in anticipation of the corporate earnings rebound. Whatever anyone says, the fact is the market has been good for many.

By now, I am sure most of you are aware Tradeview, believes in value investing. Usually, whatever stock pick we call can be categorise to the following :

1. Dividend Yielding stocks
2. Fundamentally sound and value stocks (Stocks that meet our FA metric / also known as FA stocks)
3. Growth stocks 

Usually, the stocks we call take a long time to move. Very simply, value investing takes time. It is based on the fundamental growth of the business, not short term punting / speculative play. Of course, there are cases where the market misprice the true value of the stock, upon realisation, the rerating is fast. However, across the board, our calls for the past 3 months have moved at an extraordinary pace. Most calls that usually takes more than 6 months moved in less than 2 months. I would like to think I am good at what I do, but I must admit, the market has been the bullish force behind the upwards movement. Hence, market irrationality comes in. 

Based on the market's movement the past 3 months, at which point do you think KLCI was? Euphoria, Thrill, Excitement or Optimism? Thing is, few can tell the future right? On hindsight everyone is 20/20, but if you ask me, I would say for the past 3 months, KLCI was at Relief towards Optimism. This is in line with the global markets especially the way US markets rally following appointment of Trump as President + the promises of pro-economic reforms that he brings with him. I think US market potentially is at Euphoria as the market continued to create new highs based on unfulfilled promises and reform plans to a large extent it has already been factored into the share price. 

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The most basic concept of market irrationality is when people oversell and overbuy. Ex: Buying something for a price beyond its true value VS selling something for a price below its true value. When things are negative, irrational people think it will be worst, hence they sell things below its true worth. When things are good, irrational people think it will be even better, hence they continue buying beyond its true worth. 

To help all see it in better light, let me explain with 3 stocks namely LiiHen, PetronM and GHLSYS

1. LiiHen (oversold) :

Liihen is a very popular counter. Many would have invested in this counter some time or another. It is a net cash, high growth furniture exporter. The company has been doing well year after year especially so since the MYR has depreciated against USD. Recently, the Quarterly Results released was nothing short of spectacular. Record high dividend, Revenue increased 10%, good profit and others. Any normal investor would have read the report and say, kudos to the Management of LiiHen. The next day, instead of gapping up, it was sold off (subjected to profit taking). It continued till today and it close at RM3.36. In this case, market was irrational.

My view : Putting aside all the talks of the future direction of the MYR, the potential slowdown of US housing market, the DY for just the Quarterly Dividend at current price of RM3.36 stands at 2.97%. This is not including the other quarterly dividend. The valuation wise, it is trading at only 8x PER excluding all dividends. How can a high growth counter net cash company with strong ROE, CAGR and DY be trading only at 8x PER just because it is in the low tech furniture sector? Clearly it is undervalued and oversold.


2. PetronM (in between) :

It has been a terrible 2 years plus for the oil and gas sector. I called a rebound in oil and gas in March 2016, the rebound was from 35 USD per barrel crude oil to 54 USD per barrel today. Following OPEC cut, many counters have jump. PetronM clearly is beneficiary as well. Recent results is outstanding. A simplistic valuation at a conservative multiple of 10x would value PetronM close to RM8.80 despite the lumpy earnings. Some are even calling it at 15x multiple attaching a premium by comparing to PetDag valuing it at Rm11+. As a result, PetronM limit up the day before from RM4.63 to RM 6.01. It continued on the next day all the way to RM6.66 but faced profit taking and closed at RM6.09. In this case, the market was mixed.

My view : Reading the QR on PetronM, it was clear their refining margin improve substantially following the rebound in oil price especially in the last Q. Furthermore, due to the outstanding results, PetronM declared 22 sens dividend to reward shareholders which is a positive move. At current price of RM 6.09, the DY is 3.6%. The valuation wise, it is trading at only around 7x PER excluding all dividends. Based on such metrics, many jump on the bandwagon and pushed up the price significantly. Some chase high at RM6+ as they believe PetronM is still cheap. Of course, those who sold off / profit take believe it has went up too fast. I neither consider PetronM overbought or oversold but an in between where the market forces will determine its value based on the majority expectation. Those who dislike lumpy earnings and believe the coming Q might be subdued will not invest further in this counter. Those bullish will aim for at least RM8+ going into the next Q or at least to ex-dividend date.

3. GHLSYS (overbought) :

The tech sector has been very hot for the past few years. Increasingly so with new technology disrupting our way of life. As a result, the NASDAQ is breaking record high and many unicorn starts up are achieving the billion dollar status even if their earnings have yet to even breakeven. In short, the best example would be UBER, valued close to USD 50 billion but yet to churn out profit. This is true market irrationality. We can see it in the same light with GHLSYS. GHLSYS is currently in a good space. It is a technology counter, it is specifically involved in FINTECH, it is backed by banks / big funds and it is trading at 40x PER valuation despite making less profit than many traditional businesses. Granted, revenue and profit have been growing for the past few years at extraordinary rate, hence many attached the bullish future prospect to it. In this case, the market was irrational.

My view : I think the tech space and fintech is always interesting and exciting. I do like the fact GHLSYS is improving bottomline and topline. It also declared dividend for the first time. However, I did not like how the market was overly bullish going into the QR when its original valuation was already beyond 40x PER. Even if the QR results was extraordinary, it would have already been factored into the share price long ago. A counter like GHLSYS should be collected on retracement, not chased high especially when the valuation is over the top with limited margin of safety. Hence, I consider GHLSYS to be overbought and to accumulate on weakness.

Conclusion :-

The market is always irrational. It was like that in 1920s, 1980s, 2000s and it will continue to to be so. The irrational market stems from the different emotions, character, intelligence, greed, risk appetite of human in place. That is what makes the market interesting. The only way we can protect ourselves and our investment is to exercise prudence and diligence in studying a share. We have to look at the true value of the stock for what it is and not listen to the noises in the market. Long term view vs short term view, upside vs downside will help in our decision making. Never ever lose sight and conviction if you know the true value of the stock regardless how noisy the forum may be or what investment "gurus" are preaching. If Warren Buffet can be wrong, everyone is allowed to make mistakes too. As long as the % of wins exceed losses, you are alright.

Please note that I respect all investment styles and in no way saying one method of investing is better than another. I know that everyone has their own preferred method and that is what makes the market interesting. Diversity. 

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Food for thought: 

Sunday, 19 February 2017

Video Series No.3 - Ray Dalio & Equities Investing (How Can You Win In The Market)

Dear fellow readers, 

Ray Dalio said being invested in the market for too long is dangerous as the market is becoming increasingly difficult. This is how he thinks investors can win in the share market.

This is my Video Series No. 3 for 2017. Enjoy the learning experience.

Once again, these writings are just my humble sharing, feel free to have some intellectual discourse on this. You can reach me at :

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Tradeview - Ray Dalio & Equities Investing (How You Can Win In The Market) 

Thursday, 16 February 2017

(Tradeview 2017) - Asean Fixed Income Conference 2017

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Dear fellow readers, 

As some of you all may know, my background is a professional in the Corporate M&A and Real Estate industry. Recently, I was honoured to be invited by RAM Holdings Berhad as part of the delegate to the ASEAN Fixed Income Conference 2017. 

The conference held in Mandarin Oriental, Kuala Lumpur on Valentine's Day congregated the brightest minds in the financial sectors including World Bank economists, local, ASEAN and Asian bankers, fund managers, academicians, analyst, regulators, lawyers and the media. While the topic primarily relates to the Fixed Income markets, there were many good intellectual sharing and knowledge exchange that would be beneficial to understanding the of the current financial markets. I would like to take this opportunity to share some key takeaways for all.

Once again, these writings are just my humble highlights (not recommendation), feel free to have some intellectual discourse on this. You can reach me at :

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1. 2016 was tough year as 2.5% global growth which was lowest since 2009 and trade growth was ~2+%

2. World Bank Economist Dr Rafael Munoz Mureno believes Malaysia economy for 2017 will be a continuation of 2016 but likely to achieve a 4.3% growth in GDP.

3. Vincent Conti of Standard & Poor believes oil price will not go too much above $60 per barrel for crude oil.  On 2 reasons, shale oil production will be efficient above $55 per barrel hence will kick in should the price sustains above $55 USD coupled with high level of global inventory. This was align with Tradeview forecast of USD $55-65 per barrel for 2017.

4. Most of ASEAN is in energy trade deficit when it comes to oil except Malaysia and Indonesia. Inflation driven by oil price but if oil price remain low then unlikely.

5. Growth in productivity level key for growth for countries and most important to move from current level to high income nation like Singapore and Korea

6. Indonesia banking and infrastructure has huge potential as lagging behind countries like Malaysia and Singapore which means bond market big opportunity for growth provided there is ASEAN integration. 

7. Malaysia services sector is key as it is one of the main sector of Malaysia that is closer to competitors based on the submission of information to TPPA as per World Bank research. TPPA unlikely to happen with the pullout of US.

8. Malaysia 55% debt ceiling is important. Many infrastructure project ongoing but there is worry of the debt level as such the government is managing actively but contagion liability still persist

9. Indonesia has policies like tax amnesty and recapitalisation of SOE to manage fiscal deficit while going on with infrastructure 

10. World Bank Economist do not think Malaysia will be able to achieve high income nation in 3 years as the benchmark moves globally and will required a nation to exceed global benchmarks to qualify. However, that should not be the key milestone for a country but productivity instead should be the focus.

11. Mr. Nik Mukhariz Director of CIMB Fixed Income Research believes the valuation of the current bond market is very attractive to foreign investors and offshore funds. There is some strong indication that the yields are good and will likely have some capital inflow back to Malaysia markets soon. Apart from Malaysia, Thailand deemed the forgotten market is also looking interesting for the investors. Also confident that Malaysia can achieve better GDP growth for 2017. 

12. Dr. Park, Principal Economist of Asian Development Bank believes that 2017 uncertainty of the economic condition will prolong. Monetary policy of the US should normalise this year as it has been a case of a "patient being in an emergency room for too long". BOJ and ECB struggling to meet inflation targets. Central bankers around ASEAN are adopting a wait and see approach due to US normalising rates.  


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Food for thought: 

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