Jockey versus Horse – Management or Business?

When we invest in stocks, we are putting our hard-earned money into the hands of management of the business. Would you want to invest in a company if the company is run by unscrupulous individuals? Of course not! Also, the leaders of the company spearhead where the business should go towards into the future. They also allocate capital and have to do so prudently. The management is akin to a jockey.

On the other hand, the business behind the ticker symbol is also important. If the business is not creating a steady stream of cash flow due to a presence of a wide moat, shareholders will not get much returns from holding the stock. For example, Coca-Cola has been creating tremendous shareholder value and this has translated into a higher stock price and increasing dividends over the years. The business is akin to a horse.

Now the question is, which is more important? The management behind the business or the business itself? Do we bet on the jockey or the horse more?

To answer this question, let us take a look at what Charlie Munger, Warren Buffett’s partner, has to say. In his speech entitled “A Lesson on Elementary, Worldly Wisdom As It Relates To Investment Management & Business”, he gave a very interesting quip:

“So you do get an occasional opportunity to get into a wonderful business that’s being run by a wonderful manager. And, of course, that’s hog heaven day. If you don’t load up when you get those opportunities, it’s a big mistake. Occasionally, you’ll find a human being who’s so talented that he can do things that ordinary skilled mortals can’t. I would argue that Simon Marks—who was second generation in Marks & Spencer of England—was such a man. Patterson was such a man at National Cash Register. And Sam Walton was such a man. These people do come along—and in many cases, they’re not all that hard to identify. If they’ve got a reasonable hand—with the fanaticism and intelligence and so on that these people generally bring to the party—then management can matter much. However, averaged out, betting on the quality of a business is better than betting on the quality of management. In other words, if you have to choose one, bet on the business momentum, not the brilliance of the manager.”

If you look at airlines businesses, this rings very true. No matter how good the management of an airline business is, fundamentally, an airline business is a lousy business to get into. This is mainly due to the dynamics of the industry itself.

Warren Buffett also tends to agree with Charlie Munger. He once said, “I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.”

Therefore, the business fundamental is more important than the management. Bet on the horse more than the jockey. However, if both the jockey and the horse are good, then you have got a hog heaven day!

Book Review – “Investing Between The Lines”

I just concluded reading a book called “Investing Between The Lines” by L.J Rittenhouse. It is an entire book that is dedicated to analysing Chairman’s Statements found in Annual Reports. This book is recommended by the Oracle of Omaha himself. In his latest 2012 shareholder’s letter, on Page 22, he says, “I also recommend… Laura Rittenhouse’s Investing Between the Lines”.

In the book, a model is shown on how to evaluate Chairman’s Statements. An effective communication by management is essential to the investors of the company doing well in the long run. How is this so? When management knows what it wants and communicates well to the employees, the employees feel passionate to work for the company and this in turn allows them to work/serve better. The customers then see that the employees are serving them well and tend to buy more of their products. This is turn gives rise to higher profits and this flows down to better share price performance.

This book is very thorough with many examples given, both with good and bad companies. People who were invested in Enron could have noticed from the statements itself that the company was engaging in something fishy. It also tells readers how to separate the PR fluff from the real deal.

This book is a must-read for anyone who wants to know how to evaluate management better. After reading the book, I highly recommended you to analyse a Chairman Statement yourself by using the framework given in the book. I did it and I could feel a paradigm shift in the way I looked at the statement.

Are SGX-listed REITs in a Bubble?

Bank deposits are giving a paltry 0.05% to 0.1%, hardly enough to beat the raging inflation currently in Singapore. Property prices are still sky-high. Singaporeans have lots of cash and they do not know where to deploy them to make their cash work harder. This is evident from the recent gold scams many fell prey to. Amid this low interest rate environment, real estate investment trusts (REITs) have been the talk of the town as investors chase for high-yielding instruments that give a bang for their buck. However, are investors looking to invest in REITs a little too late for the party? Before we answer that, let us examine a few hard truths.

Firstly, let’s take a look at the price/net-asset-value (price/NAV) and distribution yield of some REITs.


(Source: ShareInvestor)

It can be seen from the table that almost all REITs are trading above or very close to price/NAV. Only three REITs are trading at price/NAV below 0.9. Interestingly, Parkway Life REIT is trading 58% above price/NAV!

The dividend yield of around 4-5% for those REITs still trading below NAV is hardly attractive (provided those REITs are strong fundamentally in the first place!). Blue-chip companies like SIA Engineering, Singpost and Starhub are currently yielding 4.3%, 5% and 4.6% respectively. Kingsmen Creatives, one of my favourite companies, is yielding 4.6%. Some of the companies mentioned like SIA Engineering and Kingsmen give such yields by taking on much lower debt, compared to most REITs do. REITs work by taking on debt and rolling them into the future. A recent article shows that REITs may not be able to cope when interest rates rise.

Secondly, below is a three-year comparison and a one-year comparison of the Straits Times Index (STI) and the FTSE Strait Times Real Estate Investment Trust Index (FSTREI):

3 years

1 year(Source: Bloomberg)

It can be seen from the charts that up until around mid-April 2012, the FSTREI and STI have been moving almost in tandem. After mid-April 2012, the FSTREI has been going much higher than the STI at a burgeoning rate!

Thirdly, in early January this year, Business Times reported that “S’pore Reits gave highest yields at lowest volatility in 2012“. Many were talking about this article in the streets and during seminars I went to. People who do not invest wanted to buy REITs for their high yields, without understanding the risks behind it. It was like in 2000 during the technology bubble where everyone wanted to buy stocks that had a “.com” in their name.

Last month, Singapore Exchange (SGX) reported that “Singapore’s REIT index has outperformed Japan and Australia across 5 years“. This can further increase interest in REITs and cause the premium above NAV to rise further. I would not be surprised if most REITs, including those not fundamentally strong, are traded at 50% above NAV in time to come!

Lastly, many REITs recently went IPO, including the most recent Mapletree Greater China Commercial Trust IPO. Singapore Press Holdings (SPH) and Overseas Union Enterprise (OUE) are also contemplating spinning their assets into a REIT. Such IPO frenzy would not take place if the REIT market was depressed, like during the financial crisis of 2008/2009.

In any bubble, new “investors” push up the price of the asset due to the influence of other “investors” who are already making money from it. This herd behaviour of buying REITs for their distribution yield may come to an end one day and it can be scary! Warren Buffett’s quote come to my mind: “Only when the tide goes out you discover who has been swimming naked.”

Coffee With FFN and Victor Chng


Victor Chng is an investment analyst at 8 Investment Pte Ltd. He specialises in unearthing high-growth, small-capitalisation companies. Currently, he co-manages a private equity fund of over $7 million. Victor also represented Singapore in the 2008 TAFISA World Games in Busan, South Korea and was the 2008 IFMA World Muay Thai Championships bronze medallist, kicking some serious ass along the way.

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

Victor Chng (VC):I found out about value investing when I was 20 but I only started investing when I was 23.

FFN: What/Who inspired you to get started?

VC: During my polytechnic days, my family got into financial issues. This really woke me up and I started to think what I could do to be financially free. So I started to read books on why certain people are successful and rich in life. I found three common things: They own businesses, invest in properties and equity. I started to ponder which one was most suitable for me.

I had no idea how to start a business and I didn’t have enough capital for property investment. This left me with the last choice – equity. At that time, stocks equaled trading to me, so I started to read books on technical analysis but I couldn’t understand how it worked. It was rather confusing so I gave up in the end.

It was only in 2006 when one of my friends told me more about the world’s richest investor, Warren Buffett. I went to research more Warren Buffet’s investing methodology. I discovered it was value investing and it made so much sense to me. Later I sought mentors to guide me further on value investing and I came across the Millionaire Investor Program by Ken Chee and Clive Tan.

FFN: What was your life like before investing and how is it now?

VC: My life before investing was rather aimless and I did not know what to do with my life. After discovering value investing, it really changed my life. Now I’m working in a private fund where I spend most of my time analysing stocks and reading numerous investing books. I feel blessed to have found my passion early in life. I get to meet CEOs and board members of listed companies, locally or overseas, and sometimes even visit their plants to understand more about their business.

FFN: What are some of your strategies when it comes to investing in stocks?

VC: My investment strategy is focus 50% of my portfolio on fundamentally strong businesses with low debt. 30% on distressed industries and turnaround companies and the remaining 20% is held in cash at all times in case opportunity arises.

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

VC: I invested in Super Group in 2011 at $1.31 when I noticed their ingredients sales segment doubling up almost every quarter. Now, Super Group is more than $3.

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

VC: I have many sources: Newspapers, stock screeners and analyst briefings.

FFN: You have co-written a book entitled “Value Investing in Growth Companies”. Please share with us some of your experiences with regards to writing a book.

VC: Writing a book is not easy. Rusmin and I really took a lot of time doing research to ensure the facts are presented correctly in the book. In writing the book, it also increased my knowledge on value investing while I was doing the research and it gave me further distinctions on how companies should be analysed and looked at.

FFN: What are some of your financial goals and how are you going to achieve them?

VC: My financial goals are to make a million at age 32 with $10,000 passive income every month. I am going to achieve it through investing in the stock market and by managing a private fund.

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

VC: One mistake I made was not studying an industry’s macro factors when investing in commodity products or businesses. For instance, dry bulk shipping. I bought into a dry bulk shipper too early when macro factors pointed out a down-cycle and I lost more than 50% of my investment. Later I studied deeper about the industry and found out if I had done this earlier I would have avoided this pretty expensive mistake.

FFN: What psychology do people need to succeed in investing?

VC: I think people need to have courage and faith when it comes to investing. When the stock you invest in keeps dropping in price, you must have the faith in your research and reasoning that made you invest in that company in the first place – provided your research is diligent enough!

FFN: How has the investor in you evolved over the years?

VC: Over the years my investment style has evolved from just looking at the numbers to focusing more on a company’s business model. Good numbers are the by-product of a good business model.

FFN: What advice would you give for beginners who want to start investing?

VC: There are many different value investors out there in the world. Everyone has different ways of investing but only a few are able to generate at least 15% returns on average annually for their shareholders after netting off fees. Go look for those investors, see what they have in common and model their techniques.

FFN: What do you thing is the biggest misconception people have about money?

VC: People always think that money is scarce. To me money is abundant, everyday trillions of dollars are being transacted in the markets. The money is out there, you just need to know how to earn it.

FFN: What is the one thing, in your opinion, do people need to succeed in investing?

VC: A good investment process. People should focus on the process of finding good companies and generating good returns. If your process is right you can consistently get the same results.

FFN: What are the habits one must follow to have a sound financial life?  

VC: Be frugal and humble.

FFN: A parting shot for the readers?

VC: Time is scarce, so start investing now!

Calculating Annuliased Portfolio Returns using XIRR

When we invest in stocks, knowing the profit and loss for each individual stock alone is not enough. We have to know our annual portfolio returns so that we will know whether we have beaten inflation, we are on track to our financial goals and if we have beaten the market. If we have not beaten the market, it will be better off  buying the market itself by investing in exchange traded funds (ETFs). So how do we calculate our annualised portfolio returns when we have cash flow coming in and going out at random time periods? One of the ways to do that is to use internal rate of return, XIRR.

Calculating XIRR is actually very straightforward. When I was reading up on it, it sounded complicated but to the contrary, it is very simple. In this post, I will provide a step-by-step method to calculate your returns.

Things you need before calculating XIRR:

  • A computer with Microsoft Excel
  • Transaction dates and amounts (i.e. the date you bought/sold and the amount you bought/sold it for, including commissions)
  • Portfolio market value as of the date you are calculating
  • That’s all!


  1. Open Microsoft Excel.
  2. Type in the transaction dates in chronological order and the corresponding amounts. Note that all buys (cash flow in) should be entered as a positive amount and all sells (cash flow out) should be entered as a negative amount.
  3. For dividends, if they are not reinvested, enter the dividend paid date and the amount as a negative number. Ensure that the dividend paid dates are in chronological order with your transaction dates as in point 2. If the dividends are reinvested, you do not have to account for it at all (as they are staying inside the portfolio itself).
  4. Then, enter the portfolio’s market value as of the date you are calculating and add in the corresponding date. The market value must be entered as negative.
  5. Double-check and triple-check to make sure the  positive and negative signs are entered correctly as a small mistake can mean that the portfolio return can vary widely.
  6. After you have keyed in all the required information, type in an empty cell “=XIRR” (without the “”) and type in “(” to open the bracket, highlight all the transaction amounts, add a “,” highlight all the dates and then close the bracket, “)” and hit “Enter”.
  7. Viola! Your yearly portfolio returns are shown.

You can refer to the screenshot below for a summary on what to do:


Calculating my own portfolio returns has been very helpful as it gives me the impetus to improve myself further after knowing the figure. I also know where I’m heading and am able to plan for my retirement better. Do feel free to ask me any questions you have regarding calculating your own portfolio’s XIRR, by leaving a reply below.