The following story is making the rounds in Singapore. A young Malaysian guy named Gaw Yu Han is trying to get a sports car for free. Not sure how serious he is, but at least Singaporeans have something to talk about.
Call him shameless or naive but a 20-year-old has sent more than 300 letters to the richest residents in Sentosa Cove asking for a "sports car sponsorship".
And as incredible as it may sound, he said 10 have responded to him within a week - though none has granted him his wish.
In a brief letter sent last Thursday, Mr Gaw Yu Han introduced himself, giving his name and age, before stating his purpose which was "the hope of finding a sponsor".
He said he likes cars and listed as his favourites Audi R8 Coupe, Mercedes-Benz SLS AMG and Honda CR-Z.
"May I have the courage to ask for a car as a gift from you?" he wrote.
Owners of a Sentosa Cove property, he added, "must be a person of great success" and "it will be nice to know and perhaps learn from you".
His mobile phone number, e-mail address and Facebook page were included in the letters sent to landed-property addresses he found in an online street directory.
When contacted yesterday, Mr Gaw told The Straits Times over the phone: "Call it an experiment or a request if you want."
He claimed he is the only child of parents who run a real-estate business and drive a Toyota Camry. The Malaysian, who is a permanent resident here, said he lives in a private apartment in Upper Bukit Timah.
"But I don't like to ask my parents for money. I'd rather get a sponsorship," said Mr Gaw, who has lived here for 13 years.
He also claimed he is a first-year undergraduate at Singapore Management University. But when contacted, an SMU spokesman said the school is unable to confirm that he is a student.
When pressed on why he thinks strangers would be willing to give him such an expensive gift, Mr Gaw said he was "just trying his luck".
"Anyway, I spent only five cents on a letter. And even if nobody offers a car, I can still make friends. It is important to network and have connections," he said.
"I don't expect to give anything in return. What I can offer is casual friendship."
So far, 10 Sentosa Cove residents, all Singaporeans, have contacted him, he claimed.
But they were more interested in finding out why he is doing this than buying him his dream car.
One of them, a property developer known as Victor who owns two properties at Sentosa Cove, even arranged to meet him during the F1 race last Sunday and they chatted for 30 minutes, he told The Straits Times.
Victor had asked about his background and even requested to see his identity card - but no promises were made.
"I could tell that he was not interested," said Mr Gaw, who got his F1 ticket from an uncle.
"Singaporeans will never give me a car," he said.
But he is not discouraged.
He is pinning his hopes on foreigners, who could have missed his letter because they travel frequently, he said.
"Times have changed and foreigners are the wealthy ones," he said, adding that foreigners, like those from mainland China and Indonesia, are "so rich they don't know where to spend their money on".
Yesterday, his letter was circulated on the Hardware Zone online forum, garnering 10 pages of more than 100 comments in a day, with some netizens calling him naive and shameless.
Sentosa Cove resident Adora Ang, 22, a student, who lives in a bungalow on Ocean Drive, said he is brave to give all his contact details but silly to think it would work.
After reading the letter, she texted him: "Do you think that by sending a letter you'd get a car? Try harder."
She has yet to get a response.
From The Straits Times, by goh shi ting
Sunday, 30 September 2012
The secrets of Buffett’s success
Low beta stocks (meaning low volatility, "boring" stocks) and leverage (through the insurance business) explain some of Buffett's success, according to the below article.
I would like to add that very low expenses are also important, he is running his company with minimal staff and is only charging USD 100K yearly in wages. Furthermore, his partnership with Charley Munger, who helps with filtering investment opportunities.
And lastly, most importantly, his own stock picking ability to find wonderful companies at a relative cheap price and sticking with them.
From the Malaysian/Singaporean point of view his results are even more spectacular, since in the US one has to pay taxes on capital appreciation.
Beating the market with beta
If investors had access to a time machine and could take themselves back to 1976, which stock should they buy? For Americans, the answer is clear: the best risk-adjusted return came not from a technology stock, but from Berkshire Hathaway, the conglomerate run by Warren Buffett. Berkshire also has a better record than all the mutual funds that have survived over that long period.
Some academics have discounted Mr Buffett as a statistical outlier. Others have simply stood in awe of his stock-picking skills, which they view as unrepeatable. But a new paper* from researchers at New York University and AQR Capital Management, an investment manager, seems to have identified the main factors that have driven the extraordinary record of the sage of Omaha.
Understanding the success of Mr Buffett requires a brief detour into investment theory. Academics view stocks in terms of their sensitivity to market movements, or “beta”. Stocks that move more violently than the market (rising 10%, for instance, when the index increases by 5%) are described as having “high beta”, whereas stocks that move less violently are considered “low beta”. The model suggests that investors demand a higher return for owning more volatile—and thus higher-risk—stocks.
The problem with the model is that, over the long run, reality has turned out to be different. Low-beta stocks have performed better, on a risk-adjusted basis, than their high-beta counterparts. As a related paper† illustrates, it should in theory be possible to exploit this anomaly by buying low-beta stocks and enhancing their return by borrowing money (leveraging the portfolio, in the jargon).
But this anomaly may exist only because most investors cannot, or will not, use such a strategy. Pension schemes and mutual funds are constrained from borrowing money. So they take the alternative approach to juicing up their portfolios: buying high-beta stocks. As a result, the average mutual-fund portfolio is more volatile than the market. And the effect of ignoring low-beta stocks is that they become underpriced.
Mr Buffett has been able to exploit this anomaly. He is well-known for buying shares in high-quality companies when they are temporarily down on their luck (Coca-Cola in the 1980s after the New Coke debacle and General Electric during the financial crisis in 2008). “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price,” he once said. He has also steered largely clear of more volatile sectors, such as technology, where he cannot be sure that a company has a sustainable advantage.
Without leverage, however, Mr Buffett’s returns would have been unspectacular. The researchers estimate that Berkshire, on average, leveraged its capital by 60%, significantly boosting the company’s return. Better still, the firm has been able to borrow at a low cost; its debt was AAA-rated from 1989 to 2009.
Yet the underappreciated element of Berkshire’s leverage are its insurance and reinsurance operations, which provide more than a third of its funding. An insurance company takes in premiums upfront and pays out claims later on; it is, in effect, borrowing from its policyholders. This would be an expensive strategy if the company undercharged for the risks it was taking. But thanks to the profitability of its insurance operations, Berkshire’s borrowing costs from this source have averaged 2.2%, more than three percentage points below the average short-term financing cost of the American government over the same period.
A further advantage has been the stability of Berkshire’s funding. As many property developers have discovered in the past, relying on borrowed money to enhance returns can be fatal when lenders lose confidence. But the long-term nature of the insurance funding has protected Mr Buffett during periods (such as the late 1990s) when Berkshire shares have underperformed the market.
These two factors—the low-beta nature of the portfolio and leverage—pretty much explain all of Mr Buffett’s superior returns, the authors find. Of course, that is quite a different thing from saying that such a long-term performance could be easily replicated. As the authors admit, Mr Buffett recognised these principles, and started applying them, half a century before they wrote their paper.
From the website of The Economist
I would like to add that very low expenses are also important, he is running his company with minimal staff and is only charging USD 100K yearly in wages. Furthermore, his partnership with Charley Munger, who helps with filtering investment opportunities.
And lastly, most importantly, his own stock picking ability to find wonderful companies at a relative cheap price and sticking with them.
From the Malaysian/Singaporean point of view his results are even more spectacular, since in the US one has to pay taxes on capital appreciation.
Beating the market with beta
If investors had access to a time machine and could take themselves back to 1976, which stock should they buy? For Americans, the answer is clear: the best risk-adjusted return came not from a technology stock, but from Berkshire Hathaway, the conglomerate run by Warren Buffett. Berkshire also has a better record than all the mutual funds that have survived over that long period.
Some academics have discounted Mr Buffett as a statistical outlier. Others have simply stood in awe of his stock-picking skills, which they view as unrepeatable. But a new paper* from researchers at New York University and AQR Capital Management, an investment manager, seems to have identified the main factors that have driven the extraordinary record of the sage of Omaha.
Understanding the success of Mr Buffett requires a brief detour into investment theory. Academics view stocks in terms of their sensitivity to market movements, or “beta”. Stocks that move more violently than the market (rising 10%, for instance, when the index increases by 5%) are described as having “high beta”, whereas stocks that move less violently are considered “low beta”. The model suggests that investors demand a higher return for owning more volatile—and thus higher-risk—stocks.
The problem with the model is that, over the long run, reality has turned out to be different. Low-beta stocks have performed better, on a risk-adjusted basis, than their high-beta counterparts. As a related paper† illustrates, it should in theory be possible to exploit this anomaly by buying low-beta stocks and enhancing their return by borrowing money (leveraging the portfolio, in the jargon).
But this anomaly may exist only because most investors cannot, or will not, use such a strategy. Pension schemes and mutual funds are constrained from borrowing money. So they take the alternative approach to juicing up their portfolios: buying high-beta stocks. As a result, the average mutual-fund portfolio is more volatile than the market. And the effect of ignoring low-beta stocks is that they become underpriced.
Mr Buffett has been able to exploit this anomaly. He is well-known for buying shares in high-quality companies when they are temporarily down on their luck (Coca-Cola in the 1980s after the New Coke debacle and General Electric during the financial crisis in 2008). “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price,” he once said. He has also steered largely clear of more volatile sectors, such as technology, where he cannot be sure that a company has a sustainable advantage.
Without leverage, however, Mr Buffett’s returns would have been unspectacular. The researchers estimate that Berkshire, on average, leveraged its capital by 60%, significantly boosting the company’s return. Better still, the firm has been able to borrow at a low cost; its debt was AAA-rated from 1989 to 2009.
Yet the underappreciated element of Berkshire’s leverage are its insurance and reinsurance operations, which provide more than a third of its funding. An insurance company takes in premiums upfront and pays out claims later on; it is, in effect, borrowing from its policyholders. This would be an expensive strategy if the company undercharged for the risks it was taking. But thanks to the profitability of its insurance operations, Berkshire’s borrowing costs from this source have averaged 2.2%, more than three percentage points below the average short-term financing cost of the American government over the same period.
A further advantage has been the stability of Berkshire’s funding. As many property developers have discovered in the past, relying on borrowed money to enhance returns can be fatal when lenders lose confidence. But the long-term nature of the insurance funding has protected Mr Buffett during periods (such as the late 1990s) when Berkshire shares have underperformed the market.
These two factors—the low-beta nature of the portfolio and leverage—pretty much explain all of Mr Buffett’s superior returns, the authors find. Of course, that is quite a different thing from saying that such a long-term performance could be easily replicated. As the authors admit, Mr Buffett recognised these principles, and started applying them, half a century before they wrote their paper.
From the website of The Economist
Saturday, 29 September 2012
The independent adviser challenge
Excellent article by P. Gunasegaram in The Star.
By all accounts what happened recently at Glenealy Plantations (Malaya) Bhd raised more than a few eyebrows and plenty of questions over how valuations should be done and why minority shareholders don't seem to be exercising their rights.
There are two aspects to this and both warrant further action and investigation by the Securities Commission and Bursa Malaysia. First, despite the very vocal opposition of the minority to the privatisation offer of RM7.50 per Glenealy share eventually only just over 4% voted against it. Second, why was the plantation land not revalued as part of the valuation process?
On the first point, perhaps minority shareholders thought if they did not accept the offer, there would be nothing else for them.
But really a premium of about 15% over the market price then prevailing in January this year when the offer was first made is not that much especially if it is a plantation company with undervalued land and which gives good dividend yields.
Besides, the broad market has moved up much since then, reducing the premium although some of this would have been made up by the 52.75 sen dividend the company paid out just before the meeting to approve the offer earlier this month.
Considering that just 331 shareholders held some 85% of the shares not controlled by the majority shareholder, the Samling group, it would be appropriate to trace the ownership to see when the shares had been acquired to ensure that everything is above board.
Together with this and other shareholders, just over 94% of shareholders voted for the privatisation, four percentage points more than the required 90%.
This is indeed puzzling, and the same point has been made in The Edge of September 17 2012 (page 5), titled "Surprise! Surprise" . It appears to be the duty of the frontline regulator, Bursa Malaysia, to investigate this. But I can not remember that this has ever happened, despite many dubious deals "miraculously" been voted through, with the majority shareholders abstaining. Is it possible that PAC's (Parties Acting in Concert) have been "underreported", that there were much more shareholders aligned to the PAC's? Bursa Malaysia should step up its enforcement in this particular field and at least be transparent about it.
The second and perhaps more important question was why there was no revaluation of the plantation assets for 14 years. Between the first announcement of the offer in January and the meeting in September, there were more than six months for this to have been done.
Some minority shareholders charged that if the plantation assets had been revalued, Glenealy would have net tangible assets per share of over RM10.
A revaluation would have clearly established if that was the case and removed all doubt. It would also have been material to the entire valuation process.
Independent adviser Hwang DBS made no comment on the valuation of the plantation land in its executive summary in the offer document and so shareholders did not have that piece of information to evaluate if they should accept the offer.
This is indeed a serious matter, Hwang DBS definitely should have mentioned this in their report. The last valuation was done in 1998, not only 14 years ago, but also in the midst of the Asian crisis. That valuation hardly looks relevant nowadays.
The Securities Commission has now come with changes to Practice Note 15 of the Malaysian Code on Takeovers and mergers by inserting 28 new paragraphs. The most significant of this is that in takeover offers independent advisers must analyse the terms “fair and reasonable” as two separate criteria.
An offer can only be considered fair if the offer price is higher or equal to the market price and the value of the securities of the target company. Otherwise, it is not fair.
If an offer is not fair, the independent adviser has some explaining to do. “Generally, a takeover offer would be considered reasonable' if it is fair'.
“Nevertheless, an independent adviser may also recommend for shareholders to accept the takeover offer despite it being not fair', if the independent adviser is of the view that there are sufficiently strong reasons to accept the offer in the absence of a higher bid and such reasons should be clearly explained,” the practice note says. Fair enough.
The new practice note also says the independent adviser has to consider and select the most appropriate valuation method and consider more than one valuation technique. It should compare the results and justify its choice, preferably a range which is as narrow as possible.
Generally, those new practice notes go a much longer way but do not go long enough in one particular direction. As the Minority Shareholders Watchdog Group has pointed out, the new notes don't make a revaluation of assets mandatory. A revaluation should be mandatory if there had been none for the last three years.
Even if all these were done, how does one ensure the independence of minority advisers? How does one ensure that they are not chosen based on an understanding that they will make the appropriate recommendation the board wants?
Tough problems call for radical solutions. Simply make it unnecessary for independent advisers to market for the job. All of them will simply be put on a queue by ballot and take the next job that comes along.
The fees will be on a scale according to the size of the job and the SC will remind them sternly that the recommendations will be purely professional and independent. Those advising the particular company on the deal will be disqualified.
Companies may object that they are paying for someone they did not choose but in this instance that's precisely what is needed to ensure that independent advisers are indeed independent.
Although the new practice note seems to be an improvement, I still think that the old rules were good enough to take action against errant independent advisors.
We have seen much too many independent reports that looked very biased in favour of the majority shareholders and it is puzzling why the authorities have not take any action whatsoever against those biased advisers. Here is one example from the past, and here another (but there are really dozens of similar cases). In both cases the authorities are well aware of the situation, they should be transparent to the public why no action has been taken and explain their non-action.
The advice to more or less randomly assign independent advisers looks good. But surely the authorities should also very much increase enforcement in this area. It is long overdue.
By all accounts what happened recently at Glenealy Plantations (Malaya) Bhd raised more than a few eyebrows and plenty of questions over how valuations should be done and why minority shareholders don't seem to be exercising their rights.
There are two aspects to this and both warrant further action and investigation by the Securities Commission and Bursa Malaysia. First, despite the very vocal opposition of the minority to the privatisation offer of RM7.50 per Glenealy share eventually only just over 4% voted against it. Second, why was the plantation land not revalued as part of the valuation process?
On the first point, perhaps minority shareholders thought if they did not accept the offer, there would be nothing else for them.
But really a premium of about 15% over the market price then prevailing in January this year when the offer was first made is not that much especially if it is a plantation company with undervalued land and which gives good dividend yields.
Besides, the broad market has moved up much since then, reducing the premium although some of this would have been made up by the 52.75 sen dividend the company paid out just before the meeting to approve the offer earlier this month.
Considering that just 331 shareholders held some 85% of the shares not controlled by the majority shareholder, the Samling group, it would be appropriate to trace the ownership to see when the shares had been acquired to ensure that everything is above board.
Together with this and other shareholders, just over 94% of shareholders voted for the privatisation, four percentage points more than the required 90%.
This is indeed puzzling, and the same point has been made in The Edge of September 17 2012 (page 5), titled "Surprise! Surprise" . It appears to be the duty of the frontline regulator, Bursa Malaysia, to investigate this. But I can not remember that this has ever happened, despite many dubious deals "miraculously" been voted through, with the majority shareholders abstaining. Is it possible that PAC's (Parties Acting in Concert) have been "underreported", that there were much more shareholders aligned to the PAC's? Bursa Malaysia should step up its enforcement in this particular field and at least be transparent about it.
The second and perhaps more important question was why there was no revaluation of the plantation assets for 14 years. Between the first announcement of the offer in January and the meeting in September, there were more than six months for this to have been done.
Some minority shareholders charged that if the plantation assets had been revalued, Glenealy would have net tangible assets per share of over RM10.
A revaluation would have clearly established if that was the case and removed all doubt. It would also have been material to the entire valuation process.
Independent adviser Hwang DBS made no comment on the valuation of the plantation land in its executive summary in the offer document and so shareholders did not have that piece of information to evaluate if they should accept the offer.
This is indeed a serious matter, Hwang DBS definitely should have mentioned this in their report. The last valuation was done in 1998, not only 14 years ago, but also in the midst of the Asian crisis. That valuation hardly looks relevant nowadays.
The Securities Commission has now come with changes to Practice Note 15 of the Malaysian Code on Takeovers and mergers by inserting 28 new paragraphs. The most significant of this is that in takeover offers independent advisers must analyse the terms “fair and reasonable” as two separate criteria.
An offer can only be considered fair if the offer price is higher or equal to the market price and the value of the securities of the target company. Otherwise, it is not fair.
If an offer is not fair, the independent adviser has some explaining to do. “Generally, a takeover offer would be considered reasonable' if it is fair'.
“Nevertheless, an independent adviser may also recommend for shareholders to accept the takeover offer despite it being not fair', if the independent adviser is of the view that there are sufficiently strong reasons to accept the offer in the absence of a higher bid and such reasons should be clearly explained,” the practice note says. Fair enough.
The new practice note also says the independent adviser has to consider and select the most appropriate valuation method and consider more than one valuation technique. It should compare the results and justify its choice, preferably a range which is as narrow as possible.
Generally, those new practice notes go a much longer way but do not go long enough in one particular direction. As the Minority Shareholders Watchdog Group has pointed out, the new notes don't make a revaluation of assets mandatory. A revaluation should be mandatory if there had been none for the last three years.
Even if all these were done, how does one ensure the independence of minority advisers? How does one ensure that they are not chosen based on an understanding that they will make the appropriate recommendation the board wants?
Tough problems call for radical solutions. Simply make it unnecessary for independent advisers to market for the job. All of them will simply be put on a queue by ballot and take the next job that comes along.
The fees will be on a scale according to the size of the job and the SC will remind them sternly that the recommendations will be purely professional and independent. Those advising the particular company on the deal will be disqualified.
Companies may object that they are paying for someone they did not choose but in this instance that's precisely what is needed to ensure that independent advisers are indeed independent.
Although the new practice note seems to be an improvement, I still think that the old rules were good enough to take action against errant independent advisors.
We have seen much too many independent reports that looked very biased in favour of the majority shareholders and it is puzzling why the authorities have not take any action whatsoever against those biased advisers. Here is one example from the past, and here another (but there are really dozens of similar cases). In both cases the authorities are well aware of the situation, they should be transparent to the public why no action has been taken and explain their non-action.
The advice to more or less randomly assign independent advisers looks good. But surely the authorities should also very much increase enforcement in this area. It is long overdue.
Wednesday, 26 September 2012
Genneva taken to court by customer
She wins interim judgment; other lawsuits may follow
Genneva Pte Ltd, a gold trading company offering a "buyback" scheme, appears to be in hot water. At least one customer has recently won an interlocutory judgment against it in the Subordinate Court, pending an assessment of damages. It remains to be seen, however, whether she will recover her claim of about $190,000. Genneva failed to respond to the writ of summons or to contest the case.
A number of other customers are also looking into launching a lawsuit against the firm for its alleged failure to honour its part of the agreement to buy back gold. One group of about 60 customers, representing a total of roughly $10 million in gold purchases, is understood to be consulting lawyers.
Genneva is on the Monetary Authority of Singapore's Investor Alert list of unlicensed entities. Its scheme basically sells gold to customers at a hefty premium of 20-30 per cent. Customers, however, are told that they enjoy a "discount" of about 2 per cent off the headline price.
They are given the option to sell back the gold after a pre-agreed term of one month or three months. The gold can be sold back at the headline price and customers get to pocket the so-called discount. Assuming monthly rollovers, this could mean a return of as much as 24 per cent a year.
The above snippets from Singapore Business Times. Surprising that so many people seem to fall for these kind of schemes, although low interest rates will be one factor. However, promising 24% returns per year (cumulative even 27%) is way above what Bernie Maddoff offered. Surely some people should have been suspicious, if something sounds too good to be true, normally it is.
Bank Negara's alert can be found here and the same for the Monetary Authority Singapore here.
Genneva Pte Ltd, a gold trading company offering a "buyback" scheme, appears to be in hot water. At least one customer has recently won an interlocutory judgment against it in the Subordinate Court, pending an assessment of damages. It remains to be seen, however, whether she will recover her claim of about $190,000. Genneva failed to respond to the writ of summons or to contest the case.
A number of other customers are also looking into launching a lawsuit against the firm for its alleged failure to honour its part of the agreement to buy back gold. One group of about 60 customers, representing a total of roughly $10 million in gold purchases, is understood to be consulting lawyers.
Genneva is on the Monetary Authority of Singapore's Investor Alert list of unlicensed entities. Its scheme basically sells gold to customers at a hefty premium of 20-30 per cent. Customers, however, are told that they enjoy a "discount" of about 2 per cent off the headline price.
They are given the option to sell back the gold after a pre-agreed term of one month or three months. The gold can be sold back at the headline price and customers get to pocket the so-called discount. Assuming monthly rollovers, this could mean a return of as much as 24 per cent a year.
Genneva's model appears to fall into a grey regulatory area. Because there is typically a physical purchase of gold, the company is not classified as an investment adviser. The so-called discount that customers are extended is also not described as a yield or return.
The above snippets from Singapore Business Times. Surprising that so many people seem to fall for these kind of schemes, although low interest rates will be one factor. However, promising 24% returns per year (cumulative even 27%) is way above what Bernie Maddoff offered. Surely some people should have been suspicious, if something sounds too good to be true, normally it is.
Bank Negara's alert can be found here and the same for the Monetary Authority Singapore here.
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