Bots can give "annual returns of over 40 percent" ......?

There is a lot going on in the fintech world and while I am hesitant about certain directions (I am definitely not convinced about digital currencies like bitcoin), I do agree that I might simply be wrong (some would say: "too old to understand this").

One new direction of fintech is regarding robot programs that place automatically trades based on programs provided and certain parameters that the user chooses. My eye caught the following announcement on TechInAsia's website:


Robo-investor AlgoMerchant begins trading after $2m-plus funding

Everyman securities trading platform AlgoMerchant will officially launch this month after raising more than US$2 million in funding from East Ventures and a “network of prominent individuals in the fund management and broking industry.”

The Singapore-based startup offers a range of robo-traders that allow investors of all shades – from part-time retail investors to professionals and high-net-worth individuals – to automate securities trading through their personal trading accounts.

The robo-traders use data analytics and machine learning tech to automate trading, while also avoiding delays and human error. The basic service is free, while a range of premium packages can be paid for.

AlgoMerchant said it collaborates with freelance quantitative traders  – in other words, those that specialize in automated trading – and data scientists from around the world to discover profitable investment algorithms. More than 1,000 traders tested out the service during its nine-month beta phase.


So far so good, it definitely sounds interesting.

But I almost dropped out of my chair when I read the following:


Forty percent returns

The startup claims that its bots can give everyday retail investors “an edge similar to resource-rich top quantitative hedge funds,” securing projected annual returns of over 40 percent.



Annual, consistent returns of over 40 percent are simply from another world. Even Warren Buffets returns would pale in comparison to those.

Just as an example, $ 10,000 would turn into $ 8,360,000 over 20 years using 40 percent returns. I guess we all would love that, it would for instance solve all pension problems of the world.

But worrisome, there is no basis whatsoever given in the article for these kind of returns, it looks like they are plucked from the sky.

On the company's website the only thing I can find regarding returns is this:


The majority of retail investors’ portfolios follow the returns of the market. AlgoMerchant’s strategies, however, are alpha-seeking and target upwards of 20% per annum.


Suddenly the "over 40 percent returns" has changed into "upwards of 20% per annum".

Following the same example, $ 10,000 would turn over 20 years into $ 383,000.

Not bad at all, but a rather far cry from the $ 8,360,000 based on 40% returns.

The graph supporting these claims is as follows:

Two obervations:

• The starting point of any simulation is very important. In this case the company used January 1, 2008, in other words exactly at the start of the global recession. Thirteen months later equity markets are down 47%, the company claims Paladin (their algorithm) would theoretically be up by 45%, a huge outperformance by all means in a rather short while. But that crisis is a "one in a generation" event, it is very tricky to start a simulation exactly there.
• After the crisis, the central banks started the largest financial "experiment" (QE, quantitative easing) ever, driving interest rates down to a level not seen in 5,000 years. Again, the question is, how would Paladin have theoretically performed under more "normal" circumstances?

My guess is that these hypothetical results are derived from optimising on the data itself, causing over optimisation (especially given the rather unique circumstances of the last ten years), and thus generating much too rosy projections of future returns.

"Becoming Warren Buffett"

Interesting HBO documentary about Warren Buffett, his family and Berkshire Hathaway.

Blast from the Past: UEM/Renong

From an "old hand" in the industry, someone who was first a bank analyst, then Head of Research and finally Sales. Lightly edited by me:


..... But then the super bull-run for Malaysia came in 1993 when the index moved from a low of 645 points to a high of 1332. Everyone was a winner then and I remember the words of my remisier friend, “money is like free!”. From thereon I was hooked. The adrenalin rush, the excitement of coming to the office every morning and feeling smug given that all your BUY recommendations are winners.

Its was am amazing ride right  to the BIG crash in 1997. Along the way I became the infrastructure analyst and was right at the epicenter of the major infrastructure projects from the North South Expressway, the Second Link, LRT and all the highways and byways and the KLCC twin towers, Gelang Patah – now known as Iskandar Malaysia and Putrajaya.

Naturally I was the analyst for the infamous UMNO related UEM/Renong group.  I still remember accompanying clients on helicopters to have an overview of  the construction works and the countless roadshows globally. I even travelled on the Concorde from London to New York for an IPO. Those were the go-go days. …. Of course I was not with [company] then!

UEM/Renong was also the tipping point for both the Malaysia market and me as an analyst for the wrong reasons.  It was the TWO stocks to own in Malaysia as there were the prime beneficiaries of the government’s infrastructure spending and took the market to dizzy heights. The music stopped 17th November 1997 when UEM bought a 33% stake in its parent Renong @ RM3.24 a piece when the market price was RM1.90 for USD685.8m. This was  just when the Asian Financial crisis was unravelling!  The market lost 20% in value in three days. Talk about governance. 

...... The Malaysian market has never seen those days since. 


Interesting that the "old hand" mentioned the UEM/Renong scandal as the tipping point, and not for instance the capital controls, or any of the other scandals of those days.

As Warren Buffett mentioned: "It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.".

Unfortunately for Malaysia, in the UEM/Renong case things were not done differently, and the country suffered a huge reputational damage.

Have we learned anything from that episode, was there ever a proper analysis done what exactly happened, why, by whom, who profited and when, by an independent committee? No.

For those people that are counting for an inkling of justice in the 1MDB case, these are not hopeful words.

Creative Accounting

There used to be a time when creating profits would require a real effort in hard work.

These days a much more simple way is available: call in the financial engineers.

I have written many times about the ways these people are able to polish up accounts.

In the tech world creativity to make profits out of thin air seems to have reached a whole new dimension.

Article from Bloomberg: Tech Startups Come Up With Some Creative Definitions for ‘Profitable’

Some snippets:

.... the startup [SpoonRocket] calculated that the business had become "contribution margin positive," meaning that it sells an item—in this case, pre-made meals delivered to customers—for more than the cost to manufacture, distribute, and sell it.

Uber said it was profitable in the U.S. and Canada during the first quarter of this year. Lyft said it is "on a clear and defined path to profitability." Postmates said it will be profitable by the end of 2017. DoorDash is "cash-flow positive" in some markets. TaskRabbit will be "profitable profitable" by the end of this year. It "won't be too long" until Airbnb is profitable. Instacart is "gross margin profitable." Luxe Valet is "on the precipice of being profitable" in some markets. At Y Combinator's demo day in March, many bright-eyed entrepreneurs clinched their pitches with a robust "and we're already profitable!"

Tech startups are increasingly touting a mix of less common financial metrics, even as their public counterparts move more toward generally accepted accounting principles. Amazon and Facebook recently began breaking out employee stock compensation in more of their results, bowing to pressure from regulators and investors. LinkedIn and Twitter still focus on numbers that exclude equity costs.

When Uber said it is profitable, the company similarly left out equity grants to employees, along with interest and taxes. Its main ride-hailing rival in the U.S., Lyft, declined to elaborate on its "path to profitability" statement, leaving questions about how or when it will reach its destination. Airbnb also declined to provide details on an executive's profitability comments. TaskRabbit said "profitable profitable" means it will turn a net profit but declined to say whether specific costs such as equity grants and taxes were included. Postmates, the courier service, used a profitability calculation that doesn't include taxes.

Several startups slice their numbers by markets to demonstrate financial maturity in certain cities or countries. Again, the criteria for what's included in those calculations can vary. Instacart told Bloomberg in February that it was profitable in its biggest markets and that 40 percent of its volume was profitable. The company later clarified that it meant gross margin profitable, which is usually limited to direct costs such as supplies and delivery labor. Instacart's calculation leaves out other costs, such as customer service, central office salaries, rent, and the cost of acquiring its workers. Instacart also said it is gross margin profitable, on average, across all its markets.

Luxe, an on-demand valet parking service, said it's currently profitable in some cities but declined to name them. The company defined "profitable in a market" as gross profit, excluding central operations costs. DoorDash, which delivers food from restaurants, said its cash-flow positivity is limited to its "earliest markets" and includes customer service and salaries of regional workers but leaves out central rent and operations.


However, at the end of the day, when the dust has settled:


"You can always say, 'We're profitable if we don't include X,' " Behr said. "But no matter how many ways you say you're kind of profitable, if your bank account ends up lighter than when you started—eventually, that doesn't work."


This is what Warren Buffett wrote in his last annual report (page 8, emphasis mine) about GAAP:


Though we sold no Kraft Heinz shares, “GAAP” (Generally Accepted Accounting Principles) required us to record a $6.8 billion write-up of our investment upon completion of the merger. That leaves us with our Kraft Heinz holding carried on our balance sheet at a value many billions above our cost and many billions below its market value, an outcome only an accountant could love.


It definitely seems that accounting these days is more of an art than a science. I am not sure if that is a good thing though.

Utusan crushes Buffett's track record

Utusan Melayu (Malaysia) announced that it is selling its stake in Maqamad Sdn Bhd for RM 48 Million. It had bought this stake eight months before for only RM 100K.

Kinibiz's "Tigertalk" wrote about the deal:


"What about the possibility that Utusan has been harbouring the Malaysian answer to Warren Buffett all this while? Possible, possible… the possibilities are endless. Numbers don’t lie and Utusan really is selling what it says was worth RM100,000 eight months ago for RM48 million now.

With an investment manager able to pick out an investment giving 47,900% in returns within an eight-month timeframe lurking in our midst, perhaps Khazanah Nasional extended the contract of its managing director Azman Mokhtar a tad too hastily, eh?"


Details are scant, understandably so, why would any fund manager give away his secrets? Transparency is of course for softies, while corporate governance, honestly, who cares with RM 48 Million cash in the bank?

Warren Buffett's record on Berkshire Hathaway is definitely not bad, increasing the share price from USD 13 to about USD 200,000. But that took a full fifty years, who has so much patience?

Buffett's track record shows an annualized return of about 21% per year, while Utusan scored 47,900% in only eight months time. Now we are talking business ......


Wishing all readers happy holidays.

iCapital: "Ostrich policy" will not solve the issues

I have written several times about iCapital (of which I am a long time shareholder), most notably here and here.

The two elephants in the room regarding iCapital's share performance are:

• Persistent underperformance relative to its benchmark (KLCI) since 2008
• Persistent discount to its NAV price since 2008

The new year report has been published, so I was interested to see how the company handles both matters. Well, the way the issues are handled is best described by the below picture:

"Underperformance, discount ...... I don't see any ...... do you?"

In the Netherlands this is called "Ostrich Policy": "to ignore obvious dangers or problems and pretend they don't exist; the expression derives from the supposed habit of ostriches to stick their head in the sand rather than face danger".

Lets start with the results for the latest year:

That is really disappointing, given that the funds cash level was a whopping 65% throughout the year. That cash is generating interest of about 3 per cent a year, so one would have thought that the fund would have performed clearly better than the KLCI.

One reason for this is the management fee (including relatively high expenses for advertisements and AGM), the total is about RM 7 Million. That translates to about 1.75% per year, which is not a problem if the fund is fully invested and outperforms. But it is a problem if 2/3rd is held in cash, earning about 3% per year on that cash, of which more than half is eaten away by fees and expenses.

Given the persistent high cash level, the board of directors should renegotiate the management fee, for instance a lower fee for the cash it is holding (one does not need a degree in rocket science to manage a fixed deposit), and a higher fee for the equity part. However, no indication is found in the year report that this is even considered.

All the outperformance of the fund came in the first few years. The last seven and a half years the fund has underperformed, especially if dividends are accounted for. The combined effects of the underperformance and discount is shown in the red column, showing that the share price has actually decreased since December 31, 2007.

One must therefore put question marks behind the comment by the Chairman:

Also puzzling is the comment regarding "shorter-term options which do not benefit share owners in the longer-term", how is it possible that company decides this for its share holders?

On December 31, 2013 the NAV was around RM 3.10 while the share price was around RM 2.47 for a discount of around 20%. Apparently the fund manager could not find enough value and decided to raise cash levels to 50%. If the fund had decided to discontinue and return back the money to shareholders, surely share holders would have been in a much better situation than currently (the share price is now RM 2.18).

iCapital continues to harp on its performance since its IPO. But which percentage of the shares is actually still held by the same persons who bought them at the IPO? If people bought their shares say 1, 3 or 5 years ago, would they not be interested in the performance over that period, instead of the performance since IPO? The performance over those intervals are simply disappointing.

Another puzzling comment is the following:

There is absolutely no need to seek for viable options to address the discount, they have been conveniently listed in iCapitals IPO brochure, as described in my previous posting:

• Shareholder activism: this is very ironic, given the way the fund and its manager have responded so far on any attempts in this direction (for instance here)
• Share repurchase: in my opinion an excellent way to decrease the discount
• Open ending
• Takeover
• Liquidation: again an excellent way to get away of the discount; after this the investors can decide themselves where they want to invest in
• Managed distribution policy

Another issue is that there seems to be an "obsession" with Warren Buffett and Berkshire Hathaway. Rather surprisingly, since Berkshire Hathaway is a US based fund (and thus accounted in USD, a currency that has performed very strongly relative to all currencies including the RM), investing a lot of money in non-listed companies, and only being interested in large acquisitions while iCapital is focused on Malaysian listed companies (which might include small caps, given its small size).

In other words, if there was ever a comparison between apples and oranges, this would be it.

Another rather interesting issue is that Warren Buffett and Charlie Munger each only charge USD 100K per year in wages, versus USD 1.5 Million (RM 6.4 Million) charged by the fund manager of iCapital, despite Berkshire Hathaway having a market cap of more than a thousand times the market cap of iCapital.

I have no idea where iCapital got these charts from, but they must be completely wrong. One of the best investors in the world has an annual compound return on its NAV of -0.39% over the last ten years?

The reality is very different according to the last year report, despite its huge size it actually was able to book very decent increases in its book value:

Another matter is that Berkshire Hathaway announced the following:

In other words, it might be better to look at the market value of Berkshires shares instead of the (understated, conservative) NAV.


[1] What iCapital should have done (instead of focus on Berkshire Hathaway) is give a clear and correct (that is based on dividends reinvested, it is not giving those at the moment) comparison of iCapitals performance versus similar funds, like the Malaysian ETF or Malaysian equity based unit trusts of reputable fund managers over the last 10, 5, 3 and 1 year periods. That would be comparing apples with apples.

[2] Next to that it should have openly discussed the persistent discount to its NAV, and why it has not taken any of the six measures as described in its IPO brochure. Those measures were listed there for a good reason, to assure potential investors that if there is a persistent discount, then there are measures (and implicitly: those measures will be taken).

[3] And lastly, it should have openly discussed the expenses and fees, which have been simply too rich in the last years given the high cash levels.


I used to have a lot of sympathy for iCapital and its founder Tan Teng Boo, they have been good for Bursa in areas of educating Malaysian investors. But that sympathy is decreasing each year, at least with me.

Xidelang: worrying warrants

I wrote before about Xidelang's previous warrant issue.

Xidelang issued a new warrant, XDL-WC. The motivation:

The first two are of course blatant nonsense, since all shareholders receive the same deal there is no reward for any specific shareholder.

And if all shareholders exercise their warrants, then they all have more shares, but in percentage of course still exactly the same.

Let's put it differently: Warren Buffett has managed Berkshire Hathaway for 50 years, increasing the share price from around USD 20 to around USD 200,000, a ten thousand fold increase. He did this without ever issuing warrants (or bonus shares or rights shares or any other instrument).

Can Warren Buffett be accused of not having rewarded its shareholders by not issuing truckloads of warrants?

Xidelang IPO-ed on Bursa in 2009, and the share price is still lower than its IPO price. Just to put things in perspective.

Would it not be better if Xidelang would simply mend its business, instead of bothering with the attempts at financial engineering through issuing all kind of instruments?

The third and fourth reason mentioned above are potentially "dangerous", some companies who issue warrants count on the money to come in from the exercise, but when the shares suddenly go down no warrant is exercised and the company runs into financial troubles.


The Edge Malaysia (edition July 20, 2015) published a article "Why, Xidelang?" in which it wrote that Xidelang has not adjusted the exercise price of the previous warrant of Xidelang, XDL-WB, which was issued last year, leaving it at 35 sen against the mother share of 16 sen.

The Edge writes: "as of the end April 30, none of the directors surface as the 30 largest holders of XDL-WB. Could this be the reason for the nonchalance?".

This sounds outright unfair for the holders of those WB warrants.

And strangely enough, it seems to be allowed according to the rules.


I wrote a few times about the horrific treatment warrant holders get for instance at a delisting exercise (here and here).

For minority investors in shares the environment on Bursa is already difficult enough from a corporate governance point of view. So often the big guys win.

But for investors in warrants things appear to be much worse, they don't have much rights at all.

That bags the question: is the public properly informed of this, is there a label attached to warrants warning potential investors about the lack of rights that they will have?

If the rights of warrant holders are so minimal, why can Bursa not simply do away with them? These financial instruments are simply not needed. Abolishing them will not negatively impact the Malaysian economy in any way, shape or form. If there is any impact, it would be (slightly) positive.


Wishing all Muslim readers:

Maybulk: large paperlosses on its investment in POSH (3)

Maybulk published its 2014 year report. Two excerpts, the first from the Chairman:

And from the CEO:

"Yielded satisfactory returns", "continues to contribute positively", that sounds all very good.

This is in rather stark contrast to what I wrote before (here and here) about the hundreds of millions of paper losses that Maybulk should book on its investments.

Was I wrong? Unfortunately, I was not.

"Hidden" deep in the report, somewhere in the notes on page 66 we find the following:

So Maybulk is indeed sitting on a huge paper loss of about RM 780 Million, according to market value!

However, while Buffett marks to market the Berkshire Hathaway accounts for 50 years, Maybulk decided not to write the investment down. Apparently they think they know things better than Buffett.

The reasoning can be found here:

Based on price-to-book ratio?

Firstly, they haven't bothered to substantiate the reasoning by numbers, what is the price-to-book, how are other companies in the same industry valued to their book value? Disappointing, since we are talking about a RM 780 Million difference, not exactly peanuts.

Secondly, POSH is indeed trading at a discount to it's book value, but only a discount of 30%. If we correct for that factor, then the valuation still doesn't even come close to the RM 1.3 Billion for which it is valued in the books.

Thirdly, POSH has USD 295 Million of intangibles on its balance sheet, due to take overs it made in the "goldilocks" period before the global financial crisis.

I think it is questionable that those intangibles should still remain on the books, branding wise (under the POSH name), asset wise (some ships have been sold, new ships have been bought) or employee wise (some will have moved on, new ones have been hired). I think the intangibles should have been written down to zero by now.

If POSH is indeed overstating its balance sheet (by not writing down its intangibles), then that will result in low ratio's of profitability (earnings compared to assets and equity), and that seems indeed to be the case:

Although 2014 was a difficult year for the industry, 2011 until 2013 were fine, and the ratio's should have been clearly higher. These are really low indicators, they might even be lower than the cost to borrow funds, which doesn't make sense. Why borrow money to buy assets that yield less than the interest rate to be paid?

In other words:

• POSH should write down its intangibles, which will decrease its book value
• Maybulk should impair it's investment in POSH, it should have marked to market it's investment.

Maybulk's year report is very disappointing in that is does not want to face reality, although it was expected:

"Will the 2014 year report give more information on this subject? I doubt it, but hope to stand corrected."

It is the first year report after the IPO of POSH, the first time an objective (market) value is available for it's huge investment.

Nowhere in the report is the decline in price of POSH quantified (for the benefit of the readers of this blog: it is 59% down compared to its IPO price). Nowhere in the management discussion it is mentioned that the market value of it's investment has occurred huge paper losses.

This is important, since the investment is for a large part held for 6.5 years, that is rather long.

But also, Maybulk could have sold the shares in POSH for a profit a bit more than one year ago, but it decided not to do that and even to add further to the position at the IPO price, which looks like a very expensive mistake.

What was started in 2008 through a RPT has led to a huge destruction of capital, at a moment when there was in fact a huge opportunity. Not many companies had the luxury to sit on top of RM 1 Billion cash in the middle of the global crisis. Now the company is sitting on a large paper loss while having a net debt position, and has cut it's dividend to a measly 1ct.

The AGM will be held on May 27, 2015.

Fairfax: "tech bubble will end very badly"

Fairfax Financials posted their year report, in it the Chairman's letter to the shareholders.

Some people call V. Prem Watsa the "Canadian Warren Buffett".

People who are heavily invested in the tech-sector might want to take note of the below excerpts, and especially the last line:

Berkshire Hathaway: 50 years of Value Investing

Berkshire Hathaway, the conglomerate managed by Warren Buffett and Charlie Munger, published its much anticipated 2014 year report. It is the 50th since Buffett took control of the company. A true monument of value investing.

At the end of the day, the only thing that counts is the long term returns, and they are extremely impressive:

Berkshire Hathaway always uses "marked to market" for listed securities despite their limitations, Maybulk and Noble might want to take note:

It is the hallmark of the great manager to admit mistakes, Buffett does not try to hide the mistake he made regarding Tesco, about which I wrote here and here.

The last three sentences are a proof of the amazing stock picking abilities of Buffett and Munger.

Reviews about the year report can be found at Fortune, Forbes and The New York Times.

Maximizing Shareholder Value is the worlds dumbest idea

James Montier tells it as it is, he is very outspoken about the financial world, the things that are very wrong in his view.

In this extremely interesting presentation he argues that Maximixing Shareholders Value (MVS) is arguably the worlds dumbest idea. The presentation starts at 5:30.

One of his main arguments is wrong incentives, a subject that is also close to people like Warren Buffett and Charlie Munger, who warned about it many times. Many of the problems in the financial world stem from incentives that are either too much focused on the short term, or are misaligned.

One slide contains a collection of more dumb financial ideas, according to Montier:

Fans of Milton Friedman might want to consider skipping a few minutes from 10:00 onwards, Montier doesn't mince his words, describing the damage that Friedman has caused.

An earlier post on Montier can be found here.

ACGA: CG in Malaysia improving

I have written before about the highly regarded country reports by ACGA-CLSA:

• "Asean: Virtue and Vice"
• "Malaysia’s perennial problem: enforcement".

The new report "CG Watch 2014" has been published, I have not yet read the full report, but this is what MSWG wrote about it in their weekly newsletter:


Malaysia is on the 4th position out of 10 in the ACGA-CLSA CG Watch 2014.  The Report mentioned that Malaysia was the only country that had consistently edged up in the score from 49% in 2007 to 58% in 2014. The improvements were largely through a mix of government-driven reforms in the corporate sector such as the implementation of CG Blueprint 2011, a state-grandfathered push to require domestic institutional investors to take up CG seriously through the Malaysia Code of Institutional Investors and the creation of one of the region’s better independent Audit Oversight Board (AOB). The Report also recognised the emergence of some aspect of culture emanating through the development of the Institutional Investors Code, and elements of voluntary poll voting with improved communications by PLCs.

The Report highlighted that the Asian region as a whole often gets caught up in politics making legislative changes tough and thus would depend upon strong government support which normally is not forthcoming.  Securities commissions are beginning to take enforcement seriously, but the disclosure of these efforts can be improved.  The Report also highlighted the conflicts of interest in the role of stock exchanges. Shareholder rights in the different markets were said to be weak, especially relating to takeover and major or related-party transactions.

The CG Watch 2014 reported that our country began promoting corporate social responsibility (CSR) well ahead of many other Asian markets, however, the implementation stopped at the aspect of CG financial reporting.

The Report had suggested that PLCs in Malaysia should disclose more details in the AGM agendas and should provide commentary on services covered by non- audit fees.

Lastly, the Report also highlighted several sure ways to be downgraded in the next rating. One; is the continuation of voting by show of hand at AGMs/EGMs and two; if the implementation of the Malaysian Code of Institutional Investors is weak.


While I do agree that in general CG seems to have improved over the last years, there is still the lingering fear that "corporate governance [is] lacking substance".

The real test would be the next recession, "Only when the tide goes out do you discover who's been swimming naked" (a quote from Warren Buffett).

In the meantime, I am looking forward to the detailed report regarding Malaysia and Singapore.

Tesco: Buffett vs Woodford (2)

I posted before about Tesco, with Warren Buffett increasing his stake in the UK supermarket chain, and Woodford selling all his shares.

I wrote:

"Below is the share price of the last 5 years, the stock hasn't done much and might thus be relatively cheap, it pays a decent dividend. Also, it is not often that one can buy a share at a decent discount to the price that Warren Buffett paid. But Woodford's selling does look like a red flag, Woodford is playing a home game in the UK, Buffett is playing away. I prefer to wait, there is anyhow not much good economic news lately, markets look jittery."


The question who was right, Buffett or Woodford, seems to have been answered in a very clear way:

"Warren Buffett: ‘Tesco was a huge mistake’", from an article in The Guardian. Some snippets:


Renowned US investor Warren Buffett has said he made a “huge mistake” by investing in Tesco, as the problems mount at Britain’s largest retailer.

Tesco shares have slumped 45% this year as the supermarket issued four shock profit warnings and last week became embroiled in an accounting scandal, admitting it had overstated its profits by £250m. The retailer has been the worst performer in the FTSE 100 index this year and its shares are at an 11-year low.

Undaunted by a shock profit warning from the company, Buffett raised his stake to over 5% when others were selling the stock. Tesco was the only stock in his top 15 picks that recorded a loss last year. Buffett told CNBC: “I made a mistake on Tesco. That was a huge mistake by me.”

The UK’s financial regulator has launched a full-scale investigation into the  accounting scandal that has plunged Tesco even deeper into crisis. The retailer’s new boss, Dave Lewis, is tasked with restoring Tesco’s battered reputation as well as fixing its business amid rapidly declining sales.

Meanwhile, star UK fund manager Neil Woodford – who decided to sell his stake in Tesco in 2012 after its first profit warning – said last week it could be a long time before any of the British supermarkets became good investment prospects again.


It takes a good investor to admit his mistake, and Buffett (despite the Tesco investment) must indeed be deemed to be one of the best (if not the best) investors of all times.

Berkshire 200K, German 10 year bonds below 1%

CNBC reports:

"For the first time ever, a Class A share of Berkshire Hathaway will cost you more than $200,000. That's just one share for the price of a nice 6-bedroom, 4-bath house in Omaha."

While many companies use stock splits to keep their per-share price under $1000, or even below $100, Warren Buffett isn't a fan of that manuever because he thinks it encourages short-term trading rather than long-term ownership.

As a result, Berkshire's Class A has, by far, the largest dollar price per share for any stock trading in the U.S.

Bloomberg reports:


"Germany’s 10-year yields fell one basis point, or 0.01 percentage point, to 1.02 percent at 4:14 p.m. London time after touching 0.998 percent, the least since Bloomberg began tracking the data in 1989."

"Germany’s five-year rates dropped to an all-time low 0.203 percent while the two-year note yield reached minus 0.01 percent, the lowest level since May 2013. A negative yield means investors who hold a security until it matures will receive less than they paid to buy it."


We live in strange times. The global central banks (FED and the like) can be satisfied.

But what negative effects will all this have in the long run? Yield hungry investors are searching for some returns above the meagre interest rates they receive on their fixed deposits, creators of pyramid (and other fraudulent) schemes are having a great time, their business is booming.

AirAsia profit up 33%? And why does it need derivatives?

Many news sites reported about the good numbers of AirAsia, for instance Business Times / New Straits Times:

AirAsia profit up 33.3pc


BRIGHT SKY: Carrier earns RM139.7m in first quarter on flat revenue of RM1.3b

LOW-cost carrier AirAsia Bhd’s net profit for the first quarter ended March 31 2014 rose 33.3 per cent to RM139.71 million from RM104.79 million registered in the corresponding quarter last year.
....

“(I am) very pleased with what we have achieved despite (the) turmoil in (the) industry. Well done all stars. The future is bright,” AirAsia group chief executive officer Tan Sri Tony Fernandes posted in his tweet yesterday afternoon before the company’s results announcement.

That sounds all very optimistic.

But if we analyse the bare numbers, then a very different picture appears:

1st quarter results      2014     2013

Revenue                 1302M    1300M
Operating Profit         224M     251M

Net finance              -97M     -86M
Net Operating Profit     127M     165M

Foreign Exchange gain      7M     -33M
PBT                      134M     132M

Taxation                  -3M      -4M
Deferred Taxation          9M     -23M
PAT                      140M     105M

From the above we can easily see that operationally the result in 2014 was much worse than in 2013: minus 23%.

Only because of a foreign exchange loss in 2013 and the difference in Deferred taxation does the PAT suddenly grow by 33%.

Frequent readers of this blog will know that I don't like the aggressive accounting of AirAsia by using deferred taxation (I like it even less in the case of AirAsia X). Good companies should account in a conservative way, in my opinion.

But there is something else in the accounts that worries me much more:

AirAsia has burned their fingers in the paste with derivatives in oil, why do they need such large contracts regarding interest rates and foreign currencies, almost RM 7 Billion in Notional Value?

This is from their 2008 results, losses of more than RM 1 Billion on derivatives:

Warren Buffett wrote in the 2002 annual letter to the shareholders of Berkshire Hathaway:

Tesco: Buffett vs Woodford

I have often blogged about Warren Buffett but never about Neil Woodford, a fund manager who is rather famous in the UK. The two are squaring off on Tesco, the large global supermarket chain.

From the website of the DailyMail (Mail Online):

"Buffett vs Woodford: Two years after watershed Tesco profit alert, which legendary investor called it right?"

Tesco dumbfounded investors with a profits warning two years ago.

It also unwittingly created a face-off between two legendary investors, American billionaire Warren Buffett and British fund guru Neil Woodford, who laid opposing bets on the supermarket giant's future prospects.

To recap, very few saw Tesco's profit alert coming despite some rumblings of discontent about problems neglected under the regime of ex-boss Sir Terry Leahy. On the day the news broke in January 2012, shares in the company plummeted 16 per cent and closed at 323.45p.

But it wasn't clear whether Tesco had just suffered a temporary trading setback that Christmas or was in much deeper trouble.

Ordinary shareholders were torn between seizing the chance to buy in on the cheap or dumping the stock. Then a couple of extraordinary shareholders waded in on different sides - Buffett increased his stake, while Woodford sold all his stock in the company.

It's easy at this stage to say Woodford was right.

A couple of years on and despite valiant attempts by current boss Phil Clarke to turn the business around, Tesco's stock is still hovering around the 320p mark.

It's off the worst lows during this grim stretch for shareholders, but remains around 17 per cent lower than the 385p closing price on 11 January 2012 - the day before the watershed profit warning.
 
And with no sign of a robust recovery in sight, Buffett looks like he's starting to have doubts about his investment. He sold off some, but not all, of his stake in Tesco last autumn.

His firm Berkshire Hathaway holds 3.18 per cent of the supermarket's stock and is still its fifth biggest shareholder.

But after just two years, it's probably too soon to say Woodford has won this unintentional stand-off with Buffett.

Both Buffett and Woodford are contrarian investors who pursue long-term strategies. They are more than likely indifferent to whether the wider world judges their investing decisions as wrong - or right - over very extended periods so long as they make money in the end.


Below is the share price of the last 5 years, the stock hasn't done much and might thus be relatively cheap, it pays a decent dividend. Also, it is not often that one can buy a share at a decent discount to the price that Warren Buffett paid.

But Woodford's selling does look like a red flag, Woodford is playing a home game in the UK, Buffett is playing away. I prefer to wait, there is anyhow not much good economic news lately, markets look jittery.

Buffett's Billion dollar memo

Article in Fortune titled: "The 1975 Buffett memo that saved WaPo's pension".


One of the (many) things that surprised people about the recent $250 million sale of the Washington Post to Amazon (AMZN) founder Jeff Bezos was the health of the Washington Post's pension plan. At a time when most pension plans are struggling, the Post has $1 billion more than it needs. (As part of the deal, Bezos is getting $333 million for the new newspaper company's pension fund, which Post chairman Don Graham says is $50 million more than Bezos needs to meet his current obligations.) Graham told Fortune there are two words that explain why: Warren Buffett.

In October 1975, Buffett sent The Washington Post's (WPO) then chairman and CEO Katharine Graham a memo about the brewing problems in pension plans, and Buffett's suggestions for how the Post could avoid them. Graham took Buffett's advice, and the rest ... you know. For a story in the current issue of Fortune, Buffett talked about the story of the Washington Post's pension plan ("Kay Graham was a smart woman," says Buffett) and shared for the first time publicly the letter that he sent Graham.

The letter alone is quite amazing. In it, Buffett identifies the pension problems that others would key in on only a decade or so later. But he also lays out perhaps for the first time -- Buffett was 45 when he wrote it and years away from attaining the investment fame he has today -- his philosophy behind what it takes to be a successful investor. His main pieces of advice: Think like an owner, look for a discount, and be patient.

Buffett's obvious wit and signature charm are evident throughout the letter. And there's an early version of Buffett's famous story of why investors shouldn't chase the hot fund managers and instead focus on how they got those returns:

"If above-average performance is to be their yard stick, the vast majority of investment managers must fail. Will a few succeed -- due to either to chance or skill? Of course. For some intermediate period of years a few are bound to look better than average due to chance -- just as would be the case if 1,000 'coin managers' engaged in a coin-flipping contest. There would be some 'winners' over a five or 10-flip measurement cycle. (After five flips, you would expect to have 31 with uniformly 'successful' records -- who, with their oracular abilities confirmed in the crucible of the marketplace, would author pedantic essays on subjects such as pensions.)"

[If the viewer below doesn't work properly then please first download the letter and then read it]

Warren Buffett Katharine Graham Letter

Weekly roundup

Several interesting articles in Singaporean newspapers:

[1] Article about Claire Barnes and the Apollo fund managed by her, one of the best performing funds in Asia. Warren Buffett often warned investors in Berkshire Hathaway that the performance of the previous years would not be able to sustain. This humility is typical of good fund managers and Claire Barnes is no exception, she explains the stellar performance of her fund for a good part on the initial years which coincided with  the Asian crisis, when some unbelievable bargains were available. Peter Lynch was a successful fund manager for Fidelity, but he was very much disappointed once he found out that investors on average had actually lost money in his fund. The reason was that much more money was invested when the index had gone up a lot, and money was withdrawn when the index had gone down a lot. The Apollo Fund has closed on occasions, when Claire Barnes had problems finding value. This seems to make perfect sense.


[2] Article about AirAsia X CEO Azran Osman Rani and his entrepreneurial background. Great story, also touching on his twitter against racism. I have issues with Corporate Governance in both AirAsia and AirAsia X and have written several times about them, but I do admire the people who run these businesses.


[3] Article about BFM 89.9 founder and CEO Malek Ali and his entrepreneurial journey, another great story. However, also a less great paragraph, Malek was summoned to Malaysia's Communications & Multimedia Commission (MCMC) where he had to explain why his radiostation invited someone from the Economist Intelligence Unit (EIU) to discuss its Global Democracy Index. More about this index can be found here and here. Malaysia was classified as a "flawed democracy", which is less bad than it sounds, it means Malaysia is in the 2nd category out of 4, and ranked 71st out of 167 countries. Apparently the results from the EIU were deemed to be not favourable enough for the powers that be, hence the need to call Malek, a very worrisome development.


[4] Article in The Business Times about the important role that short sellers play in governance, highlighting the case of China Metals Recycling (CMR), which is the latest China company to come under official scrutiny amid allegations involving inflated accounts:

"What's interesting from a markets and governance perspective is that the allegations about CMR's finances first surfaced in January when US short-selling firm Glaucus Research Group published a report recommending a "strong sell" because, among various reasons, CMR's claim (on its website) that it is China's largest scrap metal recycler was a "lie" and that "many of the company's key financial and operational metrics deviate so significantly from other scrap metal recyclers that its reported performance defies credibility".

"Those which act responsibly like Glaucus by providing full disclosure can complement regulatory efforts and should be viewed as an important component of the governance framework."


[5] Everything was going nicely with MISC, minority investors rejected the low offer from PETRONAS (a nice and rather rare victory for shareholder activism in Malaysia) and the share recovered to a price that was higher than the offer price (again, indicating that the offer was really not sufficient). But things have changed quickly, PETRONAS wants to ship the liquid gas themselves. With PETRONAS controlling MISC (whose main source of input is the transport of liquid gas), a clear conflict of interest situation will be created. I hope that PETRONAS will reconsider their plans, this new development doesn't sound like a good idea at all. KiniBiz's "Tiger" asked the following pertinent questions:

• Is it Petronas’ intention to deliberately undermine MISC’s prospects so that the price can be depressed for another future takeover offer by Petronas?

• If it is, is it the right way for Petronas to behave as a national oil corporation which has or should have high standards of corporate governance?

• Is this what we can expect from Petronas in terms of its other listed subsidiaries — go to the market, get investors, try and privatise for a low price and if that fails, deliberately sabotage that listed company so as to mount another takeover on it?

• Is this an act of vengeance that the misguided management is trying to impose on minority shareholders for rejecting the offer, even if the move will ultimately undermine and perhaps even destroy its very own subsidiary?


[6] My article "Maemode: accurate predictions by Ze Moola, but why did nobody notice?" received quite a lot of web traffic. I uncovered some more issues and hope to revisit this subject in the future in more detail.


[7] There has been speculation in the press of an IPO of POSH Semco, a subsidiary of POSH in which Maybulk has invested close to RM 1 Billion. I don't like to react on speculation (which has been proven so often to be wrong), I just like to point out that POSH itself (the mother company of POSH Semco) was supposed to be listed within 5 years, a term that will expire before the end of this year. Also, there is still a put option by Maybulk to sell back their stake in POSH at a premium of 25% to their purchase price. I have written many times about the extremely pricey purchase of POSH by Maybulk during the depth of the global crisis, especially regarding the questionable valuation report and the biased independent report. I hope that the minority investors are given the right to decide if the put option will be exercised or not, and that the majority investors will abstain from voting, although I doubt this will actually happen.


[8] And lastly some good news reports KiniBiz, which can be seen as another victory for shareholder activism in Malaysia:

"Final ‘voluntary termination’ payments were issued today in a media conference called by the management company of the beleaguered Country Heights Grower Scheme.....

Today’s payment by the management company of the scheme, Plentiful Gold-Class to CIMB Commerce Trustee comprised a 90% capital refund of RM182.9 million, unclaimed monies with regard to the first 10% capital refund and a goodwill payment of RM25 million by Lee Kim Yew, the founder and head of the Country Heights Grower Scheme."

Irish banks abusing state guarantee

Bank bailouts are a terrible moral hazard: "Heads I win, Tail you lose".

In Ireland the economy is doing really badly, partly by the 2008/2009 crisis and the subsequent bank bailouts, to be paid by the taxpayers. Details are emerging that are not exactly pretty, from an article of The Irish Times:

David Drumm, former chief executive of Anglo Irish Bank, laughed at the prospect of abusing the State guarantee, the latest revelations from tapes reveal.

 

“We won’t do anything blatant, but . . . we have to get the money in . . . get the f***in’ money in, get it in,” he tells a senior manager at the bank, John Bowe.

In another recording, Mr Bowe and another senior executive at the bank, Peter Fitzgerald, are heard laughing about the prospects of nationalisation. They see it as “fantastic” and are delighted at the prospect of becoming civil servants.

The victims? The ordinary people, as usual:


Mr Gilmore said that the decision cost the Irish people billions of euro. “I think we need to get to the bottom of how the decisions were made and what was behind them.”


I often complain about the slow enforcement in Malaysia, but Ireland is also not exactly quick in taking actions either.


The chairman of the Oireachtas Finance Committee Ciaran Lynch said the latest disclosures were proof-positive that an inquiry into the banking collapse was urgently required.


Urgently? After five whole years?

Even Warren Buffett invested in two Irish banks just before the crisis, although not in the Anglo Irish Bank. He is, apparently, human after all. The good thing is, he did acknowledge his mistake.

For more background on the Irish crisis, a long but very interesting article by Michael Lewis: "When Irish Eyes Are Crying"

AirAsia and AirAsia X

[1] AirAsia announced its quarterly results. They were not that great, but also not that bad, increased spending on fuel was a drag. Revenue was up by 11%, operating profit by only 3%. PBT was down since the previous gain on foreign exchange was this time reversed in a loss.

My worry, about which I have written before, is the very aggressive growth plans that this company has. Its capital commitments are simply unbelievable:

RM 64,829,008,000.00

As if this was not yet enough, "AirAsia still wants jets after record orders".

Simply unbelievable ....

Of course, when all goes well, this could work out very nicely for its shareholders.

But what if competition heats up (as is happening at this very moment), or a recession strikes, fuel prices / exchange rates or interest rates fluctuate wildly, the company runs into regulatory problems, etc. or a combination of these (when it rains it pours)?

The airline industry has not exactly been a bed of roses for its investors, it is a cutthroat industry where many companies having gone bankrupt.


[2] AirAsia X filed a new IPO draft document on the SC website, I wrote before about the first draft (unfortunately it has been taken of the website).

AirAsia X managed to book a profit over 2012, but only with the help of deferred tax accounting and gains on foreign exchange, without these 2012 would also have been a loss (like all previous years). To me, it completely hasn't proven its business model on the long haul flights.

Since the results of AirAsia X were not exactly rosy, the company also published its EBITDA numbers (Earnings Before Interest, Tax, Depreciation and Appreciation), showing profits every year.

Charles Munger has a very clear opinion about EBITDA:

"Every time you see the word EBITDA in a presentation, you should replace it with BULLSHIT EARNINGS, because that's what they are!"

And Warren Buffett added:

"Yeah, why not put all expenses in the footnotes and say that "sales equals profits". Depreciation is real and it's the worst kind of expense. They will, as depreciable assets, need to be replaced."

Let's take AirAsia's as an example, the yearly depreciation is about RM 600 million, interest payments about RM 400 million, for a total of more than RM 1 billion. Not counting these huge amounts, well, let's say I full agree with what Munger said.

EBITDA is one of those financial engineering inventions from the US that better is left alone.

[3] On a side note, AirAsia X's CEO Azran Osman Rani spoke out (or rather: twittered) against racism, for which he ran into troubles. Needless to say, what he did was excellent, and it is a pity not more Malaysian VIPs speak out on important, national issues like racism, corruption and cronyism, controlled mainstream media, the persistent budget deficit, etc..