Talk on Warren Buffett at Invest Fair 2012

I attended a seminar by Robert Miles at Invest Fair 2012 that was held on 8th April 2012. Robert Miles “is an internationally acclaimed keynote presenter, author and distinguished authority on Warren Buffett and Berkshire Hathaway” (extracted from Invest Fair 2012 site). His talk was entitled: “New at Warren Buffett’s Investment Holding Company: How It Can Super Charge Your Portfolio”.

I will summarise his talk below. My own views are stated in brackets:

  • Only 5% of the world’s investors follow Warren Buffett’s value investing style. (This presents a huge opportunity for those following the value investing methodology during a crisis. I quote an observation by Seth Klarman, the author of Margin of Safety, “So if the entire country became security analysts, memorized Benjamin Graham’s Intelligent Investor and regularly attended Warren Buffett’s annual shareholder meetings, most people would, nevertheless, find themselves irresistibly drawn to hot initial public offerings, momentum strategies and investment fads.  People would still find it tempting to day trade and perform technical analysis on stocks.  A country of security analysts would still overreact.  In short, even the best trained investors would make the same mistakes investors have been making forever, and for the same immutable reason – that they cannot help it.”)
  • Robert Miles showed us Berkshire’s annual returns arranged (can be obtained from the latest Annual Report of Berkshire) according to percentage returns. It was seen that Berkshire’s value-added years were during down years for S&P 500 and vice versa. Berkshire made lots of money during a crisis and made lesser money during euphoric times. (Warren Buffett’s “Be greedy when others are fearful and be fearful when others are greedy” rings true)
  • Robert Miles did a small demonstration on how erratic the stock market can get. He asked the audience if he’s selling a device that can produce $1 per year for 10 years, how much will the audience pay. He asked the audience to shout out the prices. People bid for the device and it started going crazy till it was “sold” for more than $200. The lesson behind this is that the stock market is an auction and it wants participants to be emotionally involved. Why would anyone pay more than $10 for this device? In the stock market, people buy overvalued companies and hope to sell even higher. This is pure speculation.
  • Every investor should know how to value a business and how to think about market prices.
  • Warren Buffett looks for companies with consistent earnings, ROE above 15%, no debt, honest and competent management and with a simple business.
  • 62% of Berkshire’s holdings is in 5 stocks – Coke, AMEX, Wells Fargo, IBM and Gillette (now owned by PG). Concentrate your holdings and don’t diversify too much.
  • Warren Buffett bought into IBM – his first foray into the technology sector as IBM’s business is predictable and will still be around 10 years into the future.
  • Non-productive assets like gold and silver are traded based on fear and they are highly speculative. Robert Miles then showed a cube with dimensions of 19.2m. He said all the world’s gold can fit into this cube. The same amount of gold can buy all of America’s farmland, plus 16 Exxon Mobils and there will still be about $1 trillion left over. He asked the audience to decide which is more worthwhile. (This was actually covered in Page 19 of the latest Berkshire’s Annual Report)
  • Several myths of Warren Buffett and his style of investing – Warren was lucky and his achievements cannot be duplicated; one needs to pick the same stocks as Warren to do well; Warren has access to special deals; one needs to invest in private companies, bonds and currencies; one needs to be an expert in more than equities
  • Lou Simpson beat Buffett’s record from 2000-2005. He invests for the long-term (3 – 5 years), does not diversify, thinks independently, buys high return businesses and pays a reasonable price even for a wonderful business.
  • Warren’s advice to Todd Combs and Ted Weschler – understand what is predictable and understand what is unknowable.
  • A company has moat if the company doesn’t have to conduct a prayer meeting whenever it raises prices.
  • Coke has moat and Warren Buffett has this to say about Coke – “If you gave me $100 billion and said, ‘Take away the soft-drink leadership of Coca-Cola in the world’, I’d give it back to you and say it can’t be done.”
  • Warren Buffett bet that the S&P 500 stock index will outperform hedge funds over 10 years from 2008 – 2017. More info can be found here.
  • Best CEOs think like business owners.
  • Berkshire Hathaway’s intrinsic value calculator can be found here. The calculator just gives a rough figure of the intrinsic value of Berkshire and might not be accurate.
  • Another way to know if Berkshire’s stock is undervalued is to look at when Warren buys back his shares. He said he will buy back whenever his company is trading less than 110% of book value.

After the talk, I quizzed Robert Miles about discount rates used for valuing companies and if Warren looks at beta of a stock. He said that Warren uses a discount rate of 11% and he doesn’t accept any returns lesser than this.  Warren doesn’t look at beta as volatility should be your friend and you should not penalise a stock just because it’s volatile.

Below is a copy of the handout given at the talk:

Lastly, an entertaining video below for all you readers, taken at his house. Do pay attention to the background.

P.S. I have also interviewed Robert Miles. His exclusive interview will be posted on 15th May 2012. Do keep a lookout for it!

Coffee with FFN and Clive Tan

Clive learnt his investing skills personally from Curtis Montgomery, an American value fund manager, who was the most successful audited value investor in Singapore. During a 5 year period, Clive applied what he learned in investing and accumulated enough investment returns with that short timeframe to successfully launch his first business Curious Minds Childcare Pte Ltd. Clive then went on to co-establish a private investment company, 8 Investment Pte Ltd.

FFN: At what age did you get started in investing? 

Clive: In 2004. I met Curtis Montgomery and he enlightened me about value investing. It made a lot of logical sense to me as there is actually a methodology to do it. I worked for Curtis for free for a short while, learnt more by reading books and attended workshops. Before 2004, I was just speculating on the prices.

FFN: How did you get interested in investing and who inspired you to get started?

Clive: Warren Buffett and Curtis.

FFN: How do you choose which stocks to invest in?

Clive: I started off as a quantitive person. I’m more of a bottom-up investor. If the numbers make sense, I look at business model, management, industry and then the valuation. At a personal level, I also have to look at how much money I have at the time of investing.

FFN: What are some of the stocks in your portfolio currently?

Clive: Boustead is one of the biggest holdings. My biggest share is in this company itself.

I was a school teacher before and I invested whatever I had when I was teaching. After quitting my job, my wife and I put in about $150,000 into a childcare business. I put in quite a big amount of my investment profit in it. Subsequently, I rebuilt my investment portfolio again.

FFN: Where and how do you look for companies to invest in?

Clive: From my interests. I will share with you some companies that have done well for me. There’s this company called Unisteel Technology that makes precision screws. The profitability was quite good even though they were a small company. There’s a niche market. They are small but big at the same time in their own pool.

Another one is Sincere Watch. At one stage I was into watches – mechanical watches, mechanism inside watches. After I bought my first Swiss watch, I became more interested in the retail scene. I remember an instance where this particular person paid for his watch in a thick pile of cash. I realized that there are people who are buying such watches even though most of the time we see these shops being empty. I then looked at the numbers and it made sense.

FFN: Is Unisteel still listed?

Clive: Unfortunately, the best companies I invest in are always privatized.

FFN: Reminds me of Thomson Medical Centre (TMC). Did u invest in TMC?

Clive: I was very keen. At the price I assessed them at, it was not a gleaming buy but the price went up so much. I even wrote about it but unfortunately, it was one of the things that got away.

FFN: What are the mistakes you have done pertaining to investing and what are the lessons learnt?

Clive: I have lost money in S-chips. The numbers looked good but I didn’t take into account the corporate governance and management. I no longer invest in S-chips but I’m not saying they are all bad. There are some undervalued ones but it will require more homework if the numbers are true. You need to do a lot of due diligence.

FFN: What lessons have you learnt over the years as an investor?

Clive: I’m still learning. I learn a lot every day. When I first started, I thought I knew very little. But I when talked to people, they said that I really know a lot of things. I was like “Is it?” Anyway, I realized the more I learn, the more I don’t know.

FFN: How about an advice for the youth who are looking to build up their future?

Clive: Start young. If they don’t have cash, build up on their knowledge first and invest when they have income. Have simple lifestyle so that you can have savings.

FFN: What does financial freedom mean to you?

Clive: Financial freedom is really about having choices. At the end of the day, it’s like “Can you choose to do this?” and “Is it a choice or is a duty?” A lot of people go to work as it’s their duty. They need to pay their bills. I don’t think in terms of that. In retrospect it’s easy to say but people in that situation have to make a conscious effort to get out of that thinking and to really plan for their own finances.

I’m not sounding arrogant here but I’m really grateful and proud that we have built up this company from nothing. What you see here is the result of what we started with three guys, two desks and nothing else. I wouldn’t say it’s big now but it’s still “Wah!” At this stage we are looking further out and we have bigger plans for the next two years.

FFN: Give us an “insider look” of a typical day in your life from the moment you wake up to the moment you sleep

Clive: I wake up at around 6.30am. Go jogging and go gym. I leave house at around 7.30am and around 9am I will be in office. I stay in office till around 5.30pm but what time I finish work depends on what tasks I need to do. Like after this interview, I have to go for another meeting outside but that’s fine. I focus on what needs to be done rather on the time itself.  I go to sleep around 11.30pm. Before that, I always read.

FFN: If you could summarise your whole life in one word, what would it be?

Clive: Ah, that’s a very good question…. Legacy.

FFN: A parting shot for the readers…

Clive: From my experience, choose the life that you want for yourself and if you decide that’s the life that you want, go all out to create that.

FFN’s input – I conducted this interview on the same day but at different time as Ken Chee’s (featured last month). However, I decided to separate the interviews into two different posts. Combining the posts into one will make the post much longer, making it unpalatable. 

Kingsmen at Invest Fair 2012

I was at Invest Fair 2012 today and heard Andrew Cheng, Group General Manager of Kingsmen, give a talk entitled “Experiencing Kingsmen”. I took away some important key pointers and they are summarised below:

  • Kingsmen was involved in Hollywood Dreams Parade in Universal Studios Singapore (USS) and were also largely involved in the show choreography. A new area of business for Kingsmen might be show production.
  • Kingsmen did the Visit Britain 3D installation in Singapore, Khalifa Observatory Gallery in UAE, Transformers Retail and F&B Outlet in USS, etc in the past year
  • Current works-in-progress include Interpretive Media in Gardens By The Bay, Fushun Dreamworld, Hongkong Disneyland, Ocean Kingdom, Imagic
  • Pitching for Disneyland Shanghai, Money Kingdom Beijing, etc
  • Barriers to entry to this business is low. Any staff of Kingsmen can resign and easily start a business like Kingsmen. However, the question is can the new competitor prise away the high end clients that are being served by Kingsmen currently. Kingsmen has scalability too.
  • Margins for the theme parks business should get better moving forward as Kingsmen is past the learning curve that it was hit by when it was first involved in USS
  • If they were to do merger and acquisition, it will involve companies that are into areas that Kingsmen is currently not into

A video of the Hollywood Dreams Parade that Kingsmen was involved in:

The following photos are courtesy of Musicwhiz:

Book Review – “The Little Book That Builds Wealth” by Pat Dorsey

This post covers the book review of “The Little Book That Builds Wealth” written by Pat Dorsey. Pat Dorsey is the Director of Equity Research at Morningstar. He has been instrumental in the development of Morningstar’s economic moat ratings. He is also the author of the renowned book, “The Five Rules of Successful Stock Investing”.

This book is all about uncovering economic moats in companies. According to the book, all moats can be divided into four categories and they are: intangible assets, switching costs, network effect and cost advantage. It explains each of this moat using real-life examples. If you find a company with solid returns on capital and with one of the four characteristics, you’ve likely found a company with a moat. This book makes discovering a company’s economic moat more like science than art.

Also contained in this book is a discussion on what are not economic moats. Great products, great size, great execution and great management do not create long-term competitive advantage unlike believed by many. I highly recommend this book to anyone who wants to learn more about uncovering economic moats easily.

Look at the video below by Pat Dorsey espousing the four categories of economic moats:

BREAKING NEWS: Adampak to be acquired by Navis Capital

Just hot off the press – Adampak has been offered to be bought over by Navis Capital at $0.42/share (Offer Price). Current market price is at $0.345. This is a premium of 21.7%. For more information, check out the SGX announcement.

Adampak has been halted from trading since 30th March 2012, pending this announcement. Trading is still halted at the time of writing. At the price of $0.42/share, the P/E ratio works out to be 17.4. This will be the highest ratio ever since FY 2005. The ratio is high due to the decrease in earnings for FY2011, mainly due to the Thailand flooding.

For most shareholders, I guess it will be a bittersweet moment as they will be unwilling to let a gem go but at the same time, cash in due to the uncertainties surrounding the HDD market.