Intrinsic Value: Berkshire Shareholder Letter Highlights

According to the latest letter, Berkshire Hathaway's (BRKa) per-share book value increased to $ 134,973.

In comparison, 49 years ago -- when Warren Buffett began running Berkshire --  per-share book value stood at just $ 19 (no zeros missing here). So that's an overall gain in per-share book value of 693,518% compared to roughly 9,841% for the S&P 500 (or 19.7% annualized gain compared to 9.8% for the S&P 500 over that time).

Now, that S&P 500 performance isn't exactly shabby even if it looks unimpressive by comparison.

Changes to per-share book value compared to the S&P 500 has been the Berkshire performance measurement of choice for some time.

It's a useful measure though far from perfect as is explained on page 107 of the annual report:

"Inadequate though they are in telling the story, we give you Berkshire's book-value figures because they today serve as a rough, albeit significantly understated, tracking measure for Berkshire's intrinsic value."

Buffett explains that the gap between intrinsic value and book value has actually been increasing in recent years. In other words, increases to per-share intrinsic value is almost certainly greater than the already astonishing -- I think it's fair to say -- increases to book value over the past 49 years.

In the latest Berkshire shareholder letter (released over this past weekend), Buffett also explains -- as he has on prior occasions -- how he thinks about book value as it relates to intrinsic value:*

"What counts, of course, is per-share intrinsic value. But that's a subjective figure, and book value is useful as a rough tracking indicator."

He goes on to add...

"As I've long told you, Berkshire's intrinsic value far exceeds its book value. Moreover, the difference has widened considerably in recent years. That's why our 2012 decision to authorize the repurchase of shares at 120% of book value made sense. Purchases at that level benefit continuing shareholders because per-share intrinsic value exceeds that percentage of book value by a meaningful amount. We did not purchase shares during 2013, however, because the stock price did not descend to the 120% level. If it does, we will be aggressive. 

Charlie Munger, Berkshire's vice chairman and my partner, and I believe both Berkshire's book value and intrinsic value will outperform the S&P in years when the market is down or moderately up. We expect to fall short, though, in years when the market is strong – as we did in 2013. We have underperformed in ten of our 49 years, with all but one of our shortfalls occurring when the S&P gain exceeded 15%."

Buffett goes on to say this later in the new letter:

"As much as Charlie and I talk about intrinsic business value, we cannot tell you precisely what that number is for Berkshire shares (nor, in fact, for any other stock). In our 2010 annual report, however, we laid out the three elements – one of them qualitative – that we believe are the keys to a sensible estimate of Berkshire's intrinsic value."

He then provides an update for the two quantitative elements:

- Per-share investments: $129,253 per share

- Pre-tax earnings from businesses other than insurance and investments: $9,116 per share

"Since 1970, our per-share investments have increased at a rate of 19.3% compounded annually, and our earnings figure has grown at a 20.6% clip. It is no coincidence that the price of Berkshire stock over the 43-year period has increased at a rate very similar to that of our two measures of value. Charlie and I like to see gains in both sectors, but we will most strongly focus on building operating earnings."

Those two quantifiable elements provide a more straightforward starting point (though far from sufficient) for estimating Berkshire's per share value. Even so, no two people are likely to come up with the same estimate.

There are more messy aspects of estimating per-share intrinsic value -- and, yes, in some ways more challenging to judge though no less important -- that shouldn't be ignored. Things that are tough or impossible to quantify but of significance.

With Berkshire specifically, there's what Buffett has called the "'what-will-they-do-with-the-money' factor".
(The importance of this factor is explained on pages 109-110 of the latest annual report. It was initially covered in 2010.)

There's also the performance of Berkshire's float over time.**

Both can have an impact on value, favorable or not, that's very real.

Some might be inclined to minimally consider (if at all) what is, more or less, difficult to calculate or quantify -- and instead, in this case, maybe emphasize the two more quantitative elements -- but for many investments that's a good way to make a costly misjudgment. At times, looking at an entirely different discipline for perspective can be useful way to illustrate the point. Well, consider the following from Freeman Dyson as he writes aboutLord Kelvin's large miscalculation of the earth's age:

"Kelvin based his calculation on his belief that the mantle of the earth was solid and could transfer heat from the interior to the surface only by conduction. We now know that the mantle is partially fluid and transfers most of the heat by the far more efficient process of convection, which carries heat by a massive circulation of hot rock moving upward and cooler rock moving downward. Kelvin lacked our modern knowledge of the structure and dynamics of the earth, but he could see with his own eyes the eruptions of volcanoes bringing hot liquid from deep underground to the surface. His skill as a calculator seems to have blinded him to messy processes such as volcanic eruptions that could not be calculated."

Convection was important but not easily calculated, so Kelvin instead focused on what could be more easily calculated. Dyson points out that this led to Kelvin's estimate being short by something like 50-fold. Certainly enough to matter. The error of focusing too much what can be more easily quantified over what cannot applies to investment just as it applies to science.***

For example, if Berkshire's float remains a low cost (or, as has often been the case for Berkshire, better than free) and stable (i.e. a minimal need to post collateral especially at inopportune times/can't be called away or withdrawn when needed most) source of funds, it will have a significant positive impact on intrinsic value. Fortunately, estimating the impact float has on value isn't as difficult as estimating the earth's age. That's the good news. The bad news it's still not easy to more than roughly figure out what kind of economic value should be attached to it.

From the letter:

"If our premiums exceed the total of our expenses and eventual losses, we register an underwriting profit that adds to the investment income our float produces. When such a profit is earned, we enjoy the use of free money – and, better yet, get paid for holding it." 

If, instead, significant ongoing underwriting losses were to occur in the future, then Berkshire's intrinsic value would end up being much less. Buffett goes on to say that he expect Berkshire's float to be "both costless and long-enduring".

Those who are confident that Buffett is roughly right should come up with at least a somewhat different valuation than those who think he might be too optimistic about how the characteristics of Berkshire's float will change over the long run.

"The value of our float is one reason – a huge reason – why we believe Berkshire's intrinsic business value substantially exceeds its book value."

Two reasonable investors could rightly have differing views on the value of Berkshire's float. But those who think the value of float can be nailed down with some level of precision would be kidding themselves.

What's important to remember is that this cuts both ways when it comes to estimating value. The more difficult -- in some cases even nearly impossible -- to quantify but important stuff can both just as easily subtract from as add to value (and, depending on whether it subtracts or adds, lead to either errors of omission or commission).

So, when it comes to estimating value, the significance of certain elements are tough to specifically pin down beforehand. The value of float may be more easy to roughly quantify than the "'what-will-they-do-with-the-money' factor", but that's not saying much. 

Spreadsheets, no matter how complex and/or thoughtfully done, just won't provide many insights.

So, while it may not be easy to figure out the impact on value with any kind of precision, it may be possible to understand it, more or less, directionally. In other words, it's sometimes wise to admit that it's only possible to judge whether the impact is likely to be positive or negative, while maybe not knowing by just how much. Some will surely be uncomfortable with this kind of messiness but, to me, it's an inevitable part of the investment process. It just means the investor has to allow for a somewhat wider range of outcomes and pay a price that takes the low end into account.
(Others might attempt to overcome the messiness by making a complex model that's built on lots of questionable assumptions. Well, the simple and well thought out usually beats the complex. Overly complex models are a great way to create something that appears precise -- falsely so -- and, maybe, creates unwarranted overconfidence in their reliability and utility. Those who possess the ability to think critically, reduce unnecessary errors, and truly know their own limits will probably be more effective in the long run.)

That's where margin of safety comes into play. It may not be very useful to someone who is attempting to estimate the age of the earth. Yet it works just fine, at least up to a point, within an otherwise sound investment decision-making framework. An investor has the luxury of choosing to not invest at all (and moving on to something else) if they're not comfortable with not knowing the hard to quantify stuff. The key thing is to not make the equivalent of Kelvin's mistake: that is, stubbornly continuing to focus on what lends itself to calculation and ignoring what's harder to calculate but possibly, in some cases, more important. This behavior will eventually end up being expensive for those who make it a common practice.

Flexibility beats being rigid.

For investors, choosing not to invest at all works just fine; acting like Kelvin does not. There are plenty of investment alternatives so there's no need to purchase something that's not well understood (necessarily unique to each investor). There's never a good reason to do otherwise.

Those who choose to emphasize what can be quantified in lieu of what matters a whole lot more but just happens to be mostly subjective, qualitative, or difficult to calculate will likely make unnecessary mistakes; they'll also likely miss opportunities.

Of course, a focus only on Berkshire's per-share investments and pre-tax earnings (from businesses other than insurance and investments) to determine intrinsic value wouldn't exactly be the same as the mistake made by Kelvin.

The investor might just decide to view the qualitative stuff as it relates to Berkshire as upside. In other words, pay a discount to value based only on the easy to quantify stuff.

This works when confident that the qualitative stuff won't be some kind of investment wrecking ball.

So that approach might work for a Berkshire investor but, for many others, the hard to quantify but important stuff just might overwhelm everything else. For example, misjudging something like how sustainable the competitive advantage of a particular business is -- not at all an easy thing to measure but terribly important -- could end up being very costly.

The lesson of Kelvin's blunder (and similar) will remain very relevant to investment decision-making.

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Buffett on Cash

Warren Buffett on CNBC back in 2009:

"The one thing I will tell you is the worst investment you can have is cash. Everybody is talking about cash being king and all that sort of thing...Cash is going to become worth less over time. But good businesses are going to become worth more over time. And you don't want to pay too much for them so you have to have some discipline about what you pay. But the thing to do is find a good business and stick with it."

That's certainly no invitation to speculate on stocks but does help make the point that risk comes in many forms. 

Having some extra cash on hand certainly creates options in the near term, but the clock is always ticking. This ends up being in direct conflict with the need to be patient then decisive as Charlie Munger explained during the 2004 Wesco shareholder meeting:*

It wasn't hyperactivity, but a hell of a lot of patience. You stuck to your principles and when opportunities came along, you pounced on them with vigor.

So having a comfortable amount of cash around makes lots of sense. This means knowing when to resist the inherent pressure to put money to work until the right opportunity presents itself. With the benefit of hindsight that might seem easy to do.

It surely is not.

In the CNBC interview Buffett continued by saying...

"We always keep enough cash around so I feel very comfortable and don't worry about sleeping at night. But it's not because I like cash as an investment. Cash is a bad investment over time. But you always want to have enough so that nobody else can determine your future essentially."

The problem is that the environment has changed substantially since Buffett said that back in 2009. Many stocks were quite cheap back then, in part, because we were so close in time to the financial crisis. The world seemed much more risky and uncertain at that time. (Even if, in reality, the world always is uncertain no matter how it might seem at any point in time.) The scary recent events were fresh in the minds of market participants and prices reflected it. At that time it would have felt more uncomfortable to buy stocks, but that's often when it's time to be buying.

Easier said than done.

Today, cash remains a lousy investment over the long haul, but attractive investment alternatives are harder to come by. Well, at least those can be purchased with a sufficient margin of safety. In the current environment, that sort of thing has become a whole lot more challenging to find. As always, what's not very risky at one price can become quite risky at some higher price. In other words, risk necessarily does not just come down to the intrinsic characteristics of the investment itself. What is paid upfront can regulate some of the risks involved but, unfortunately, only up to a point.
(i.e. Sometimes no price is low enough because the risks are just too hard to understand.)

Most risks just do not lend themselves to being easily quantified. This can tempt some to focus on what's more easily quantified and, as a result, is easier to analyze but just happens to matter a whole lot less than what can't be reliably quantified.

That's a mistake worth avoiding.

Unfortunately, in the near-term and even longer, none of this gives an indication what stock prices might do (as always, I never have an opinion on market price action). Market prices, at times, can go to extremes on the both high side and low side while the intrinsic values of good businesses mostly do not change so quickly. If nothing else, the past 15 years has provided us with many examples of this. What's already expensive becomes more so; what's clearly cheap goes on to get much cheaper. Some inevitably try to profit from the price action thinking they'll get in or out at the right time. Good luck to those who try to do this but, chances are, it won't end well for most who do.**

Instead, how price compares to well understood underlying value should dictate behavior.

The discipline to see market price action as being entirely there to serve you as a long-term investor isn't a bad one at all.

A successful investment outcome should never depend upon selling at an expensive price. Naturally, the more elevated current price environment doesn't mean certain individual investments aren't attractive. What it likely does mean is that, on average, more risk is being taken for less reward, and the risk of permanent capital loss has increased. Eventually, market participants in increasing numbers end up letting their guard down. They'll justify, sometimes rather creatively, paying way too much for future prospects. Well, at least that's what an extended period of rising prices inevitably tends to do.

Those that ignore this will likely end up only appreciating the full extent of their mistake after the fact.

Expensive.

Figuring out how price compares to likely value may not be easy, but is doable with some work.

Timing things well mostly is not.

Short run risks are very different than long run risks. Holding cash is risky over the long haul but less so in the short-term (and maybe even medium-term).

Having enough cash on hand provides the necessary flexibility to act, for example, as decisively as Buffett and Munger did during the financial crisis.

Holding onto plenty of cash while knowing it's not a great investment is not at all inconsistent. A natural tension between the need to find more lucrative, attractively priced, investment opportunities and holding enough cash in order to remain flexible necessarily exists.

Many forms of risk are out there, but they're rarely easy to quantify in any kind of precise manner (if at all). This is where theimportance of quality -- those businesses that tend to have persistently attractive core economics in lots of different environments -- and buying at the right price comes in. The merits of this, in what is a vastly unpredictable world, seems not often fully appreciated when it comes to managing risk and reward.
(Those who primarily bet on what are essentially "lottery ticket" stocks will no doubt find this to be of little interest. Many of the high-flyers will turn out to be fine businesses; that doesn't mean the investor will be compensated sufficiently for the risk even if some of those who speculated on the price action happen to do just fine.)

Buying high quality all but eliminates the need to consistently make correct predictions and forecasts -- a fool's game -- in an uncertain world.

It's the inherent uncertainty -- the futility of making investment decision based upon on forecasting -- that increases the importance of a flexible approach.

So the idea that cash is safe and stocks are risky depends heavily on time horizon. The investor with a sufficiently long time horizon, who buys shares of a business that has durable and attractive economics (judged well, of course), may be taking on less risk than someone who decides to hold mostly cash (that nearly inevitably will have diminished purchasing power over time).

Cash feels safe but, again, the clock is ticking.

Paying near full value (or, worse yet, paying a premium in the hope that the investment will grow into its value someday) exposes the investor to the unforeseen and unforeseeable. Bad things inevitably happen. Sometimes, it's specific to the business itself, other times, it's something more external. Eventually, these things are pretty much a given. Even the best businesses get into trouble. Unexpected macro events occur. It's a fallacy to think one can consistently maneuver around these kind ofunpredictable changing tides.

The price paid should provide a meaningful buffer against misjudgments and surprises.

Many will still unwisely feel compelled to make, or listen too much to, prognostications about the future. Well, just consider the findings of professor Philip Tetlock.***

The following excerpt from Susan Cain's book Quiet summarizes it well:

"A well-known study out of UC Berkeley by organizational behavior professor Philip Tetlock found that television pundits—that is, people who earn their livings by holding forth confidently on the basis of limited information—make worse predictions about political and economic trends than they would by random chance. And the very worst prognosticators tend to be the most famous and the most confident..."

Morgan Housel explained it the following way:

"...one reason people take too much risk is because they believe in their delusional forecasts, and aren't prepared to react to events." 

Housel then adds "most people can improve their financial lives by distancing themselves from as many forecasts as possible.

Sure, we'd do better if we could anticipate the paths our lives go down. But we can't. You would not wish upon your worst enemy the track record of professional economists predicting the financial events that really mattered throughout history."

Here's how Henry Singleton once explained it:

"...we're subject to a tremendous number of outside influences and the vast majority of them cannot be predicted. So my idea is to stay flexible."

The risks will always be there. Instead of trying to predict the future, better to try and be, however imperfectly, in a position to handle all but the worst things that might occur. Singleton's track record didn't come about because of some sixth sense about the future; ditto for Buffett and Munger.

Those who realistically assess their own limits and avoid trying to figure out when to jump in or out based on how the world looks on any given day can do just fine; those who do the opposite are just inviting mistakes. It requires some discipline, sound judgment, respect for some of the psychological factors that hurt results, and the right habits. The importance of eliminating error, where possible, is underestimated.

"To kill an error is as good a service as, and sometimes even better than, the establishing of a new truth or fact." - Charles Darwin

Ultimately, instead of attempting to manage risks via prescient predictions (bold or otherwise), manage risks, at least in part, using an appropriate margin of safety considering the specifics of each individual investment; manage risks additionally by sticking to what one really knows.

Unlike trying to consistently figure out what is often an unknowable set of future outcomes, paying a reasonable (or better than reasonable) price is something well within the investors control.

The same goes for buying only what one truly understands.

When you've made a judgment that a particular business is likely to do well long term, it isn't about making a definitive prediction; it is about a combination of patience, decisiveness, while also understanding the business characteristics that make it more likely for good things to happen -- even as the world, or the business itself, inevitably throws out a curve or two -- over the long haul.

Buy quality at an attractive price then have the discipline to, as Buffett says, "stick with it."

One final thing that's at least worth mentioning: the biggest potential gains -- those things that truly capture the imagination and, often, the biggest headlines as well -- usually exist not far from where big potential permanent losses of capital can happen.

Telling the big winners and losers apart without making errors that wreck returns sounds easier than it is.

In other words, the big wins must more than compensate for the losses. More excitement, maybe, but as far as risk and reward goes, seems likely to be far less than optimal. The difficulty of getting good overall results (i.e. not just the wins that look good in a vacuum) in the long run shouldn't be underestimated.

Besides, some of the very best investors have done just fine while generally avoiding such things.

"...Warren and I are better at tuning out the standard stupidities. We've left a lot of more talented and diligent people in the dust, just by working hard at eliminating standard error." - Charlie Munger inStanford Lawyer

The plainly more aggressive approach (and, yes, almost certainly a wilder ride) contrasts greatly with the elimination -- or, at least, nearly so -- of losses, wherever possible, by always buying with a meaningful margin of safety, and sticking to those well understood things that have a narrower range of outcomes.

With the bigger misjudgments mostly eliminated, the returns of the more reliable if less exciting winners tend to take care of the rest. 

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The Market Missed This Or Under Appreciated The Multiplier Effects

When I did my weekly Murasaki Masterclasses, many were not able to pinpoint what I regarded was a most important development over the past week. Below was a decent blurb from Arab research:

The Star reported that SapuraKencana Petroleum, Hibiscus Petroleum, Sona Petroleum, CLIQ Energy and Coastal Energy are interested to bid for US-based Murphy Oil Corp’s proposed sale of a 30% stake in its Malaysian oil & gas assets, which could be worth US$2bil-US$3bil (RM6.6bil-RM9.9bil). The indicative market value translates to up to 3.3x the US$898mil (RM3bil) acquisition value of Newfield’s Malaysian assets by SapuraKencana, which was completed recently.

 

Murphy currently has majority interests in five separate production sharing contracts – Block K, Block H, Block SK309, Block SK311 and SK 314, as well as three gas holding agreements in Block PM311. In 2012. Murphy’s Malaysian assets generated revenue of US$2.4bil and operating profit of US$894mil. As at 31 Dec 2012, its assets were worth US$4.8bil, with oil reserves of 95.7mil barrels of oil and natural gas reserves of 357.6bil cubic feet.

 

Murphy holds an 80% stake in the Kikeh field, Block K offshore Sabah, which is Malaysia’s first deepwater production field, and is one of Murphy’s key assets. Other significant assets are the shallow oil fields in Block SK, Sarawak, and the yet-untapped Block H, where Petronas is planning to deploy its second floating liquefied natural gas vessel (FLNG) in the Rotan field by 2018. The engineering, procurement, construction, installation and commissioning job for the Rotan FLNG has been awarded to a consortium of JGC Corp and Samsung Heavy Industries Co Ltd.

 

One of the interested bidders are Houston-based Coastal Energy Co, a firm linked to Malaysian investor Taek Jho Low. Coastal Energy has interests in upstream blocks in Thailand and Malaysia, including a 70% stake in the Kapal, Banang and Meranti (KBM) cluster of marginal fields. Petra Energy Bhd owns the remaining 30% stake in the KBM field.

 

Amongst the Malaysian operators, only SapuraKencana appears to be sufficiently capitalised to take on Murphy’s assets. But this would not be an easy contest as we expect other international players such as Shell and Exxon Mobil to enter the fray.

 

My comments:

a) the size of the assets are significant, its almost as if another Petronas has decided to hive off marginal oil fields - its as significant

 

b) these are Murphy Oil's assets which may be deemed as "pre-qualified" thus elevating their attractiveness

 

c) I do not think Murphy is exiting but rather concentrating on "bigger things" with the big boys

 

d) I do not think the assets will end up with foreign parties as I see a deeper agenda

 

e) A new light has shone on SPACs looking for decent assets, no need to scrounge off Indonesian waters, to that end the fortunes for Sona, CLIQ and upcoming oil and gas SPACs have brightened

 

f) The last year and a half saw numerous listed counters benefiting from Petronas marginal oil fields strategy - this is as significant if not more so

 

g) However, I do not see these assets going to the same parties who have benefited last year, I think its a strategy from the top to farm out these assets to a more diversified base thus boosting the breadth and depth of the local oil and gas players

 

h) I don't think SapKen will get it as it does not make much sense, especially since they can already go regional and even global, its pretty obvious the strategy is to broaden the number of players

 

g) SONA, CLIQ and some of the upcoming players such as TH Heavy, Scomi group of companies, Yinson may a better chance

 

h) the "rush" for some of the local smaller oil and gas operators to go via RTO may be a strong indication of the need to tap capital markets to bid for such assets )e.g. Barakah and the recent on=off PDZ deal)

 

i) overall its a very significant multiplier effect on the overall markets, read it however you think I meant it be

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Retirement Epidemic

We live in an instant gratification society. The house, the car, and annual vacation take precedence over contributions to retirement and savings accounts. It therefore comes as no surprise to me that Americans spend more time on planning for vacation than they do on planning for retirement.

Given the choice of spending or saving, Americans in large part choose, “spend now, save later.” Or in other words, Americans choose to drink $10 margaritas now (spend) and swallow the more expensive poison (save) later. Spending now and saving later sounds good in theory until you reach your mid-60s and realize you’re going to have to work as a Wal-Mart Stores (WMT) greeter into your 80s while eating cat food in your tent.

o make matters worse, you don’t have to be a genius to see irresponsible government spending and globalization has compromised the health of our countries entitlements (Social Security and Medicare). Benefits are likely to be reduced over time and age eligibility requirements are likely to increase. If you fold in the dynamic of exploding healthcare costs and broad-based inflationary pressures, one can quickly realize savings habits need to change. The traditional model of working for 40 years and then relying on a pension and Social Security payments to cover a blissful multi-decade retirement just doesn’t apply to current reality. On top of the disappearance of plump pensions, life expectancy is rising (around 80 years in the U.S.), so the realistic risk of outliving your savings has a larger probability of occurring.

Surely I am overly dramatizing the situation by sounding the investing alarm bells out of self-interest…right? Wrong. As a geeky, financial numbers guy, I can objectively rely on numbers, and the statistics aren’t pretty.

Here’s a sampling:

• Empty Savings Cupboard: A 2013 study by the Employee Benefit Research Institute found that nearly half of workers had less than $10,000 saved,  and according to Blackrock Inc (BLK), CEO, Larry Fink, the average American has saved only $25,000 for retirement

• Food Stamp Living: Almost half of middle-class workers, will be forced into a poor retirement lifestyle, living on a food budget of about $5 a day.

• 401(k) Will Not Save the Day: Compared to other forms of savings, the average401(k) balance reached $89,300 at the end of 2013  – that’s the good news. The bad news is that only about half of all companies offer their employees 401(k) benefits, and for the approximately 60 million people that participate, about a fourth withdraw these 401(k) funds before retirement – out of necessity or for frivolous reasons. Even if you cheerily accept the size of the average balance, sadly this dollar amount is still massively deficient in meeting retirement needs. It’s believed that your savings should approximate 15-20 times your annual retirement expenses that aren’t covered by outside sources of income, such as social security or a pension.

If these figures aren’t scary enough to get you saving more, then just use common sense and understand the future is very uncertain. A 2012 New York Times articlesarcastically captured how easy it is to plan for retirement:

First, figure out when you and your spouse will be laid off or be too sick to work. Second, figure out when you will die. Third, understand that you need to save 7 percent of every dollar you earn. (30 percent of every dollar [if you are 55 now].) Fourth, earn at least 3 percent above inflation on your investments, every year. (Easy. Just find the best funds for the lowest price and have them optimally allocated.) Fifth, do not withdraw any funds when you lose your job, have a health problem, get divorced, buy a house or send a kid to college. Sixth, time your retirement account withdrawals so the last cent is spent the day you die.

 What to Do?

The short answer is save! Simplistically, this can be achieved in one of two ways: cut expenses or raise income. I won’t go into the infinite ways of doing this, but adjusting your mindset to live within your means is probably the first necessary step for most.

As it relates to your investments, fees should be your other major area of focus.  The godfather of passive investing, Jack Bogle, highlighted the dramatic impact of fees on retirement savings. As you can see from the chart below, the difference between making 7% vs. 5% over an investing career by reducing fees can equate to hundreds of thousands of dollars, and prevent your nest egg from collapsing 2/3^rdin value.

Source: CNBC

Lastly, if you are going to use an investment advisor, make sure to ask the advisor whether they are a “fiduciary” who legally is required to place your interests first.Sidoxia Capital Management is certainly not the only fiduciary firm in the industry, but less than 10% of advisors operate under this gold standard.

Investing and saving is a lot like dieting…easy to understand the concept but difficult to execute. The numbers speak for themselves. Rather than dealing with a crisis in your 70s and 80s, it’s better to take your poison now by investing, and reap the rewards of your hard work during your golden years.

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What If Property Prices Don't Rise

There is a place where property prices do not really rise, and the economy is a very strong juggernaut in the global sphere. GERMANY! Can you imagine your spending power, can you imagine how much more money and options you have. Let's look at the benefits, which the Germans have been enjoying:

a) you do not have to put 1/3 of your earnings towards a fixed asset, which may also prompt many to over speculate, over leverage - in terms of houses as a savings and appreciating asset to hold onto, one can easily put a lot more into EPF (maybe 30% of earnings)
b) we would save ourselves from property booms and busts
c) almost everybody with a job will find decent housing
d) you will not be tempted to buy more than one or two properties, which may better allocate your resources
e) boom bust property cycles favour those with capital to play the game, its the small fries that get killed every time things go bad, while the big guns gain a lot more in booms - thus creating more and more income disparity as we go on and on and on
f) isn't that a bit socialistic, yes it is, then are we being anti capitalism, I guess so ... not everything about about capitalism result in the greater good, here we have to consider things for the common good as well

And yes, we would have a more deflated property developers' market, and things like Iskandar or Cyberjaya may make the commercial aspects a bit hard, but its food for thought.


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When Americans travel abroad, the culture shocks tend to be unpleasant. Robert Locke’s experience was different.  In buying a charming if rundown house in the picturesque German town of Goerlitz, he was surprised – very pleasantly – to find city officials second-guessing the deal. The price he had agreed was too high, they said, and in short order they forced the seller to reduce it by nearly one-third. The officials had the seller’s number because he had previously promised  to renovate the property and had failed to follow through.

As Locke, a retired historian, points out, the Goerlitz authorities’ attitude is a striking illustration of how differently the German economy works. Rather than keep their noses out of the economy, German officials glory in influencing market outcomes. While the Goerlitz authorities are probably exceptional in the degree to which they micromanage house prices, a fundamental principle of German economics is to keep housing costs stable and affordable.

It is hard to quarrel with the results. On figures cited in 2012 by the British housing consultant Colin Wiles, one-bedroom apartments in Berlin were then selling for as little as $55,000, and four-bedroom detached houses in the Rhineland for just $80,000. Broadly equivalent properties in New York City and Silicon Valley were selling for as much as ten times higher.

Although conventional wisdom in the English-speaking world holds that bureaucratic intervention in prices makes for subpar outcomes, the fact is that the German economy is by any standards one of the world’s most successful. Just how successful is apparent in, for instance, international trade. At $238 billion in 2012, Germany’s current account surplus was the world’s largest. On a per-capita basis it was nearly 15 times China’s and was achieved while German workers were paid some of the world’s highest wages. Meanwhile German GDP growth has been among the highest of major economies in the last ten years and unemployment has been among the lowest.

On Wiles’s figures, German house prices in 2012 represented a 10 percent decrease in real terms compared to thirty years ago. That is a particularly astounding performance compared to the UK, where real prices rose by more than 230 percent in the same period. (Wiles’s commentaries can be read here and here.)

A key to the story is that German municipal authorities consistently increase housing supply by releasing land for development on a regular basis. The ultimate driver is a  central government policy of providing financial support to municipalities based on an up-to-date and accurate count of the number of residents in each area.

The German system moreover is deliberately structured to encourage renting rather than owning. Tenants enjoy strong rights and, provided they pay their rent, are virtually immune from eviction and even from significant rent increases.

Meanwhile demand for owner occupation is curbed by German regulation. German banks, for instance, are rarely permitted to lend more than 80 percent of the value of a property, thus a would-be home buyer first needs to accumulate a deposit of at least 20 percent. To cap it all,ownership of a home is subject to a serious consumption tax, while landlords are encouraged by favorable tax treatment to maximize the availability of rental properties.

How does all this contribute to Germany’s economic growth? Locke, a prominent critic of America’s latter-day enthusiasm for doctrinaire free-market solutions and a professor emeritus at the University of Hawaii, notes that a key outcome is that Germany’s managed housing market helps smooth the availability of labor. And by virtually eliminating  bubbles, the German system minimizes the sort of misallocation of resources that is more or less unavoidable in the Anglo-American boom-bust cycle. That cycle is exacerbated by tax incentives which encourage citizens to view home ownership as an investment, resulting in much hoarding and underutilization of space.

In the  German system moreover,  house-builders  rarely accumulate the huge large land banks that are such a dangerous distraction for U.S. house-builders like Pulte Homes, D. R. Horton, Lennar, and Toll Brothers. German house-builders just focus on building good-quality homes cheaply, secure in the knowledge that additional land will become available at reasonable cost when needed.

Locke is the co-author, with J.C. Spender, of Confronting Managerialism: How the Business Elite and Their Schools Threw Our Lives Out of Balance, a book I highly recommend.

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It’s not end of the world at the Fragile Five

Despite all the doom and gloom surrounding capital-hungry Fragile Five countries, real money managers have not abandoned the ship at all.

Aberdeen Asset Management has overweight equity positions in Indonesia, India, Turkey and Brazil — that’s already 4 of the five countries that have come under market pressure because of their funding deficits.  The fund is also positive on Thailand and the Philippines.

Devan Kaloo, head of global emerging markets at Aberdeen, says these economies have well-run companies that are well positioned to adjust and enjoy slightly higher return on equity (ROE) than their developed counterparts. He says:

The current shakeout is forcing companies to focus on margins and cut costs, which would bring benefits in the long term. Corporates are more profitable than DM… If you are brave, Turkey has some fabulously run companies.

Even in Russia — where the rouble is possibly the next target of fast money speculators — there are well-run corporates, such as retail chain Magnit.

In Russia there is the next generation of business leaders coming up. People are creating businesses. Magnit has parallels with Walmart, rather than Baron Rothschild.

It’s widely known that some emerging companies have good fundamentals and that they are cheap. But it’s the currency moves that can wipe out any capital gains. However, Kaloo has zero currency hedges on his portfolio. Why is that?

Capital gains make up for FX weaknesses. We’ve gone through the Russian crisis, Asian crisis, TMT crisis and Argentine crisis without hedges… yet we still delivered positive returns. (Betting on where currencies go) is a sure way to madness.

Daniel Wood, emerging debt portfolio manager at BNP Paribas Investment Partners, has gone long Turkish lira, a day after the Turkish central bank delivered a surprise interest rate hike, in part because it was getting too expensive to bet against the high-yielding currency.

More than 10 percent of his portfolio is in Turkish bonds.

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