May 2011 – SudhanP.com

Material possessions won’t bring lasting happiness

I read an article from Straits Times under the “Review” section yesterday with great interest. It was entitled “Shopping does not bring you happiness, but a concert may”. It was a wordy article so I almost wanted to brush it aside as I was too lazy to read a lengthy article at 11.30pm. However, a quote from the article caught my eye.

The quote screamed, “Increases in material possessions may well be accompanied by a decrease in happiness. This phenomenon, termed the ‘hedonic treadmill’, says that as possessions increase, so do people’s expectations. Over time, people become less sensitized towards their possessions and require even more new possessions just to sustain the same level of happiness as before”. The quote made me think for a moment and made me interested in reading the article.

Due to mass media and advertisements, people are made to believe that their well-being and self-worth are defined by what they wear, drive and use. Therefore, consumers go after the latest gadget and things that they do not really need in their lives. They think that acquiring these items will bring them happiness. However, research has debunked this proposition by demonstrating that neither the ability to acquire nor the actual acquisition of material goods brings about sustainable increase in happiness. Instead, buying more material goods, requires even more new possessions to maintain the same level of happiness as before. This reminds me of the usage of drugs or alcohols. The more you take, the more you need to consume the next time to sustain the previous levels of “feeling good”. In gaming terms, you have “upped your level”.

So what generates sustainable happiness in us? Research has shown that experiences far outweigh material goods in generating happiness. Such experiences can be going for a spa, going to the concert, going on a holiday and dining in a chic restaurant. The reason for this is that experiences are more central to one’s identity than material goods. Such experiences also have greater social value than acquisition of material goods. Attending a concert, for example, allows interactions with other people whereas material acquisition does not. Most material possessions like buying a watch, clothes or handbags necessarily benefits only the individual without much social interaction.

NUS Business School had studied material and experiential purchases in Singapore. Consistent with past research, they observed that people were happier with experiences rather than the material goods they bought.

So, if you want to be happy, aim to have experiences like going for a walk by the beach with your loved ones, enjoying the sunset with your child or by enjoying a child’s innocent laughter instead of chasing after the latest iPad 2. Another way to experience innate peace and lasting happiness is to sit relaxed and meditate. It gives immeasurable benefits.

For a start, enjoy the following video:

Buy stocks like a businessman

“Investment is most prudent when it’s most businesslike” – Benjamin Graham

Investing in a company’s stocks is the same as buying the business. Even if we are buying with a small percentage of our capital, we should research thoroughly into the company and value it as if we are buying the whole company. We should also buy the stocks with a mindset that it will feed our family for the rest of our lives (our livelihood depends on this particular purchase). If we do so, we will invest prudently and allocate capital wisely – like a prudent businessman.

Let’s say you are interested in Raffles Medical and let’s imagine that this is not a listed company. All the qualitative and quantitative criteria are met and we want to purchase it. How do we know how much to pay to purchase the whole business? We would need to look at the financial statements especially the cash flow statements and come up with an intrinsic value of the business. Intrinsic value is the summation of the future cash flow discounted to the present value. With this figure, we would know how much the business is worth and how much we have to pay for it. Now, since Raffles Medical is a listed company, we can check out the current trading price from the SGX website. We can then compare the current price to the intrinsic value of the business. If the intrinsic value is much higher than the current price with a huge margin of safety, we can safely buy into Raffles Medical. This is how to approach buying a stock from the business perspective. Calculating and knowing the intrinsic value of the business we are buying into also allows our emotions to be in check.

On the other hand, purchasing a stock by looking at the 52-week high or low is not the right way to approach stock investing. The 52-week high or low says nothing about the intrinsic value of the business. Stock market is like a voting machine in the short-term and stock prices fluctuate up and down depending on emotions of the traders. Like Benjamin Graham said, purchasing a stock should be business-like and approaching investing from a businessman perspective indicates prudence. Once we have purchased the stock, we must imagine that the stock market has closed down for the next 10 years and not check the prices regularly. It takes time for a business to grow and prosper and the stock price to be indicative of the intrinsic value of the business.

In summary, when investing, always approach investing from a businessman’s perspective and think like a businessman “How much will it cost me to purchase the whole business?”. Also, be in the mindset that your purchase will feed your family for the rest of your life, so there are no chances for error.

Psychology of Great Value Investors

1. Be disciplined

Successful investors are very disciplined and they do not let emotions (eg. fear and greed) get in the way. They buy and sell on strict rules. Using a checklist on when to buy and when to sell will help to curb out the emotions and make us detached from our stock holdings.

2. Never follow the crowd. Have an independent mind.

Warren Buffett’s famous quote, “Be fearful when others are greedy and be greedy when others are fearful” rings true. When the whole world is shouting “Buy!” and stock market is going up on a frenzy, you should be fearful and even look to sell some of your overvalued stocks. A market crash or recession, when the majority are fearful, is a good time to consider buying assets at selling at unbelievable discounts.

3. Never rely on experts. Be an expert yourself.

Never rely on experts or gurus as they are humans themselves, they do make mistakes and they can be wrong at times too. Have an independent thinking and research into companies yourself instead of relying on analysts or brokers. You won’t know what hidden agenda the guru or analyst might have in releasing a buy call on a certain stock. You can always read an analyst report, digest their materials and conduct your own intimate research into the stock you are interested in.

4. Invest only when there’s minimal risk.

Before investing, always think “What’s my downside?” or “How much am I willing to lose?”. Remember Warren Buffett’s rules “Rule No.1: Never lose money; Rule No.2: Don’t forget Rule No.1”. Always think in terms of preserving capital before thinking about making money.

5. When there’s nothing to invest in, don’t invest!

When the world stock market is in a bubble and market P/Es are hitting the roof like during the dot-com bubble, sit tight in cash and just enjoy the world go past.

6. Take responsibility of your own mistakes and never blame others.

When you make a wrong investment, think through what went wrong and do a post-mortem. This will help you to make an informed choice in the future and ensure that you will not repeat the same mistakes again. When you blame others for your mistakes, you will be bound to make the same mistakes again and you won’t be a better investor. There are no failures, only feedbacks.

7. Don’t time the market. Take action with what is presented before you.

Timing the market is futile. Take action as and when the market presents itself before you. There are many researches conducted on timing the market and all point to the same conclusion: Time in the market is more important than timing the market. It doesn’t matter if you are right or wrong. What matters is how much you make when you are right and how much little you lose when you are wrong.

U.S. hits debt ceiling

The United States government has officially hit the debt ceiling of $14.3 on Monday, 16th May 2011 (U.S. time). Treasury Secretary Timothy Geithner cited that he will suspend investments in federal retirement funds until August 2nd so that the government can continue borrowing. Beyond this period, the Congress has to either raise the debt ceiling or the U.S. government has to default on some of its debt obligations.

For the first option of Congress raising the debt ceiling, the government will be able to borrow more money till the new debt ceiling that is going to be set is reached. However, the question is how long can this go on? How long can the Congress keep on raising the debt ceiling? Since March 1962, the debt ceiling has been raised 74 times and 10 of those times have occurred since 2001. This cannot go on indefinitely and the future generation has to face grave consequences of this action. The U.S. government will just continue digging a deeper hole to bury itself. The markets will then lose confidence in the ability of the federal government to repay those debts.

For the second option of U.S. government defaulting on its debt, investors may lose confidence much more quickly in the U.S. government and this will create a mega catastrophe that is going to be worst than the subprime crisis in 2008. The world markets will plunge and unemployment will hit the roof. Remember also that U.S. dollar is the reserve currency of the world. If U.S. defaults, the confidence in the currency, which is already waning, will drop even further.

Either option does not bode well for the U.S. government. Raise debt ceiling and you dig a deeper hole that has to stop some point in the future. Default and you will cause a major financial tsunami. Personally I feel the latter will be a better option for U.S. so that they can start from a cleaner slate and at least try to put a stop to the debt problem.

As for my stock investments, I’m thinking of liquidating some of the stocks that are overvalued and sit on cash. I will monitor the U.S. debt situation closely and act accordingly. But I will always keep in mind that time in the market is more yielding than timing the market.

Update: HLS Order Book 1Q2011

HLS just released their 1Q2011 report yesterday.

Their order book stands at S$307 million as of 31st March 2011. It mainly consists of the balance of work for Jalan Gali Batu Depot and Marina Coastal Expressway project. No new contracts were won from Downtown Line 3 project. I’m kind of disappointed with the order book as it dipped further and will keep a close lookout to see if they win any Downtown Line 3 contracts in the coming months.