From Gabriel Yap: Confessions of a Sophisticated Investor Since leaving the complicated and fast moving world of investment banking and stockbroking 5 years ago to devote myself to philanthropy, I have travelled the world extensively - I have travelled to more than 60 countries or about one-third of 204 countries in the world. In doing so, my scope of investments have also extended into Africa via diamond and gold investments in Sierra Leone, Liberia and Guinea through Golden Saint Resources which is listed on AIMS. As I travel from one culture to another, one continent to another, it is quite apparent that the underlying fabric of investment markets do not change much -no matter how developed capital markets are like in New York and London or how bad developing capital markets are in Lagos and Addis Ababa, one must be clear that investors must do their own homework, rather than listen to the cacophony of voices, advertisements, market commentaries etc. dished out by the popular media. Do your own homework and analysis To me, stock markets are an encapsulation of many different investors feelings at any moment of time. These emotions are influenced by the latest media news, corporate results, shifts in macro-environment factors like interest rates and speeches by key Central Bank figures. The sophisticated investor should just shut out such gibberish noise as very little of these are fodder for good analysis. To quote Pascal - The mind of man at once and the same time is both the glory and shame of the universe. Investors should learn to distinguish what is new, what is data and what is discounted news and data. Or, one would arrive at the wrong conclusions. No wonder most forecasts turned out to be wrong. It never ceases to amaze me that when markets correct, fear and confusion sets in. To me, fear should have set in, in the period preceding the market correction, if one has done their own homework, rather than during the correction. One should understand that a stock market correction is a beautiful thing as it adjust equity prices closer to their actual or intrinsic values. It is what it is - stock prices come down because of speculator reactions to expectations of news, reactions to actual news and profit taking. This is nothing to be fearful of especially if markets previously, have had a good run. Steel your psychological make-up In Julius Caesar, Time and Tide waits for no man (or woman), but instead of acting, most investors are further confused by the constant barrage of noises from popular media warning of markets falling further. Investors should steel up their psychological make-up - do not get disorientated during a market correction even if you had not sold your stocks/bonds earlier. At the end of the day, risk and returns correlate my dear Brutus! So shut your ears and open your eyes to companies profit trends and free cashflows analysis - therein lie the pot of gold. In my more than 20 years of investing (I started watching the stock market and was chasing stocks while in college while my class mates were chasing girls) experience, I actually revel in market corrections as there has never been a correction that has not proven to be a good buying opportunity. Doing ones homework would also entail dismissing from my mind certain companies/sectors that do not fit into my investment style which bear a strong emphasis on generation of free cash flows from the underlying businesses. Companies/Sectors to Avoid 1.Companies that make huge acquisitions and undertake rapid geographical expansion at the expense of profits Raffles Education listed on SGX in 2002 and went to increase its share price by almost 10x to about $2 in 2007. It then made an ego-boosting but money-draining RMB2 billion acquisition in Langfang-based Overseas University or OUC which came with a large landbank. When companies make huge acquisitions, my main worry is can they turn these investments to profits immediately? If no, they should not be paying expensive prices as such acquisitions strain the balance sheets and drain cashflows. Since 2009, profits from OUC have been minimal. In fact, most of the profits from OUC were from sales of land, rather than from the core education business. A glance at its latest results for FY2013 revealed that if not for a Fair Value gain on investment properties, in this case, a net reversal on provision for land restructuring costs in OUC, of $37.6 million, Raffles Education would have registered a net loss again. In FY202, the company had continued to bleed at a loss of $71.8 million! It has indeed been many years, since its core operating business of education had been profitable. Its India operations continue to bleed - little information is provided on which Indian schools in which it has poured in more than $50 million worth of investments, had turnaround, if indeed any. Predictably, it is on to its latest big investments, this time in Iskandar, Malaysia when its previous big investments in OUC and India have hardly bear good fruits. Needless to say, Raffles Education share price has collapsed more than 90% from its 2007 high as it had combined 3 shares into 1 share, as its shareholders continue to wait for it to deliver huge earnings from its acquisitions. 2.Companies or Industries where variables of earnings or costs vary substantially There are certain industries like Commodities, Shipping and Aviation where I find the variables of earnings or cost vary substantially and are very difficult to verify independently, in both the direction and magnitude of change. Such industries, I watch, but hardly make it to my investment portfolio unless during crisis times like 1997 and 2007 when they sell at near liquidation values. Bet Big Whilst many learn from Warren Buffets books on investments, I find George Soros advice on making money better. Soros made headlines betting against the British Pound in 1992 and subsequently made US$1 billion on the trade. He has conceded that his investment picking skills are not too good - he is right 6 times out of 10. But what distinguishes him from the rest is that, when he is right, he bets big on the right bets. Essentially having the balls (referring to soccer balls just in case you are thinking otherwise) on the right bets is key. To be able to achieve what Soros have achieved is a mix of thrill-seeking gene variations with the right temperament. I find such environments conducive in my Melbourne home (where I have lived half the time, splitting with my other travels and Singapore for the past 6 years) where I come back for a few weeks once every 2 months. Certainly the slower pace of life and cool air have enhanced my cerebrum cortex processing skills and steel me with the confidence of what and when I should be buying and selling, decisions which if you are right more than 90% of the time, and if u had bet big each time, you would be singing at the stars every night.
Posted on: Wed, 18 Jun 2014 06:49:30 +0000