Monday, July 16, 2007

Former Remisier King: Equities Still Have Legs

There was an interesting interview in the Business Times (BT) yesterday by Ms. Teh Hooi Ling on the former remisier king, Mr. Peter Lim. He was the influential businessman who made his millions during the 1990s being involved in businesses and deal-making. He retired in the late 1990s to settle his divorce proceedings, and is currently working as a business advisor for various business deals, garnering up to S$300,000 per deal.

What I wish to highlight are some of the lessons to be learnt from the 4-hour (yes 4-hour !) interview with Mr. Lim. Below is a summary of what I have learnt from Mr. Lim's years of experience and wisdom:-

1) Dangers in small-cap sector - Mr. Lim warned that many small-cap (penny) stocks had run up a lot over the past few weeks. This is due to investor optimism and speculation running rampant and much of the potential has been priced in, meaning that risks proportionately increase as prices go higher. He says that all it takes is one piece of negative or bad news to send the entire stock price crashing, as free float can be very small for such companies. Lesson Learnt: Buy stocks with solid fundamentals, and maintain a margin of safety.

2) Higher Rentals for Businesses - Higher property prices equates higher costs of rental as well, especially for companies with offices in "prime" areas such as Orchard Road or Raffles Place. This will be a severe drain on profits if property prices continue to soar, and investors should take note of the % which rental expenses take up in the Profit and Loss Statement. Lesson Learnt: Watch the company's profit and loss statement for increased costs as a result of higher property prices.

3) "Don't Gear, Don't Gamble" - Another prudent piece of advice from Mr. Lim is not to gear (meaning take on more debt) and not to gamble (punting/speculating on equities and property). During bull markets, most new investors sign up for margin accounts in order to make use of leverage in order to magnify their gains. This is highly risky as a sudden drop in prices would mean mounting debts which may be in excess of their net worth. Lesson Learnt: Do not let rising prices mislead you, it is a sign of higher risks in the market and one should be even more wary. Do not leverage and always maintain sufficient cash balance for emergencies.

4) Build Wealth, not Debts - Mr. Lim mentions that people always get it wrong: they build more debts during good times because of abundant liquidity and higher cash inflows; but forget that these commitments are still present when a downturn or recession comes along. I happen to notice more and more sports cars on the road (is it my imagination ??) and there are increasing signs that people are "wealthier", meaning they tend to spend more on big ticket items. Couples may also be cheered on to buy high-priced properties in expensive areas which may fall prey to falling valuations in a bear market or recession. Lesson Learnt: Build wealth and cash reserves during a bull market without needlessly adding on to your debt and capital commitments. Live simply and below your means. Do NOT use tomorrow's cash to pay for today's enjoyments.

5) Adequate Portfolio Asset Diversification - Mr. Lim has 50% of his net wealth in equities, 10% in properties and 40% in cash. This is another sign of prudence as he does not sink the majority of his wealth into equities as equities are over-valued at this point. Ideally, I would have expected him to park some money into bonds, but he did not indicate this. Lesson Learnt: Have adequate diversification across asset classes. For me, I park about 40% in cash, 60% in shares but am aiming to reduce this to 50%:50%.

6) The Importance of Management - The importance of Management was brought up as well when Mr. Lim said: "The most important factor to consider when investing in a company is the person running it; you look at whether the person is honest, and whether he or she is master of their trade." This goes back to my previous investment mistake No. 4 when I stated that Management is an important measure of the quality of the company. Lesson Learnt: Engage Management in a candid discussion on the company's prospects and industry trends to see if the company can continue to grow earnings into the forseeable future.

Let's all continue to learn from the "gurus" of society and how they build their wealth. Of course, not all gurus preach such conservative methods for building wealth, but from what I know, most wealth is built through running businesses or prudent investing and NOT gambling/punting !

Business Trip to Myanmar July 18, 2007 to July 21, 2007

Dear readers, I will be on a business trip to Myanmar on the above dates, and will only return on Sat July 21, 2007 in the afternoon. Since Internet access is almost non-existent there, I cannot be expected to blog at all during this period. I thank readers for their understanding. I will be back on either Sat or Sunday with a new posting once I have settled down.


fishman said...

Good post!

Personally I've like the point on "build wealth, not debt" a lot. Think that's a very good piece of advice.

It's quite a paradox isn't it? As economy gets better, things also get more expensive. But because people feel good, they therefore take on more debt....vicious cycle!

A question - how do you know whether the management is good? How can you read them?

SJ Reader said...

It is interesting readng the King's first point Dangers in small cap sector. His Roswley falls exactly in this category. The only pc of bad news needed for Rowsley is if the 'thing' falls through. At this pt, there's no solid fundamentals to talk about.

On noticing more and more sports cars on the road. I noticed that too. Besides, more crashed cars too. I sent my car in for servicing yesterday. Couldn't help but noticed badly damaged cars (both WRX models). Both with SGV plates, i.e. very new cars. Both with very young drivers (mid twenties). Their cars were towed in by tow trucks.

SJ Readers

Anonymous said...

Hi musicwhiz

Happen to chance on your blog. Will visit it regularly to read more on value investing.

Thanks for sharing your info.

musicwhiz said...

Hi fishman,

Sorry for the late reply, just back from my Myanmar trip and the Internet !

Yes, you are right about the paradox. That's usually the way things work, as I have read of many people going bankrupt when the 1997 Asian Financial Crisis hit because they had over-leveraged during the good years of 1993-1994. Most of them became increasingly over-confident due to the bull market, and ploughed more and mroe of their hard-earned money into a rising market. Needless to say, the crash wiped out most of their life savings...sad but true. We are here now to learn from the mistakes made 10 years ago.

As for Management, one good way is to actually attend the AGM/EGM and engage them. I depend very much on factors such as tone of voice, attitude and body language to make judgements. If you have read my posting on MIIF you would realize that Management can be very evasive at times over stuff they wish to sweep under the carpet. Try it for yourself and you will see what I mean. There's nothing better than meeting the Management yourself to see if you can trust them to run the company well.

musicwhiz said...

Hi SJ Reader,

Yes, more cars as well as sports cars on the road. The Government never fails to tell us how much is being spent on cars as a sign of the country being so wealthy and prosperous ("golden age"). Businessmen who are making tons of money are buying expensive gifts for their children, in what I consider is a wanton waste of cash. These youths have no inkling of the struggle to earn more and how some people slog just to eat a decent meal.

At the risk of sounding preachy, I feel that youths these days do not fully appreciate the value of money; especially since they were born in the boom years. Today's sat papers even had a special report on boom-time grads earning more than their peers a few years back and having a good array of jobs to choose from. All this news breeds complacency and encourages extravagance, which I am very against. Let's hope they can survive the harsh lessons of a downturn or recession without suffering too badly.

musicwhiz said...

Hey Anonymous,

Thanks for dropping by, appreciate it. Yes, do come back more often to read up on value investing. Feel free to comment also on my posts !

Have a great week !

fishman said...

Hi musicwhiz, thanks for sharing your experience on how to "read and judge the management"! Your sharing reminded me of the article in "the edge" a couple weeks back when shareholders of CK Tang walked out of the meeting to show their displeasure of the management...At that immediate point, I already figured that Tang is not a company I'll support!

One more question, can I attend AGM/EGM when I'm not a shareholder yet? And is there a minimum? Like at least hold 10,000 shares then can attend? Or every shareholder no matter how small can attend? Thanks in advance!

musicwhiz said...

Hi fishman,

You can attend the AGM as an observer, but that means you can't vote or ask questions at all during the AGM proper. In other words, you must be silent.

You only need 1 lot to be able to attend. In the USA, it's even better, you can buy 1 share just to qualify to attend ! :)

Anonymous said...

Hi Musicwhiz,
everyone wants to build more wealth , not debts. However you cannot build wealth without havig some cash first. That is why most people start with debts (cash) in order to create wealth.
All I want to say is it is not as straightforward as it seems.....

musicwhiz said...

Hi Anonymous,

When you say they start out with debts in the form of cash, I assume you mean that people borrow in order to generate more wealth. Yes, this does happen for businesses who need the cash in order to buy assets and inventory, and also for businesses who wish to expand by taking up bank loans.

However, for individuals, the opportunity to gear or leverage may be good or bad. On one hand, leverage gives us the chance to grow our earnings much faster, while at the same time, interest costs may also be high.

I will usually advocate saving as a way of generating wealth (through the componding effect) when one is not working yet. Just make sure you spend less than your allowance given by your parents. Financial discipline is what one requires to generate wealth; it does not take a lot of money to start with. Buffett himself was not famously rich or with any inheritance when he set out to build his wealth.

Thanks for your feedback ! :)

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