Opportunity exists in a crisis

Business Times - 30 May 2009

Have a clear plan so that at the darkest hour, you can overcome inertia and won't miss out on market recovery.

IN an article contributed recently to the monthly investment magazine Pulses, a relatively young man reflected on what he has learned in his four years as a financial planner.

He joined the industry at the right time - in 2004 - and rode the market all the way up. That is, until last year. He also gained more than a few insights into investing and financial planning in the past 12 months or so. 'For the longest time I have been a strong advocate of investing-for-the-long-term,' he said. 'However, I also realise that while it is not difficult to claw back a 20 per cent loss - you need a gain of 25 per cent) - it is an increasingly uphill and uneven task to claw back deeper losses.

'Table 1 below clearly illustrates that capital preservation is key. It makes sense to cap losses to the 20 to 30 per cent mark. After all, we can still get our foot out if we fall into a drain. But drop into a manhole, that's a different story. For example, if a stock you own has fallen 80 per cent, from that level it would have to climb 400 per cent for you to recoup your capital.'

The point is to cut the loss after 20 to 30 per cent. But for those who did not cut loss and watched in horror as their investment shrank by the day to, say, only 10 per cent of its original value, the tendency at that point was either to finally throw in the towel or to do nothing. By then, few would have the presence of mind to scoop up more shares at much reduced prices.

As Jeremy Grantham of GMO puts it in his letter in March: 'It was psychologically painful in 1999 to give up making money on the way up and expose yourself to the career risk that comes with looking like an old fuddy duddy. Similarly today, it is both painful and career risky to part with your increasingly beloved cash, particularly since cash has been so hard to raise in this market of unprecedented illiquidity. As this crisis climaxes, formerly reasonable people will start to predict the end of the world, armed with plenty of terrifying and accurate data that will serve to reinforce the wisdom of your caution.

'Every decline will enhance the beauty of cash until, as some of us experienced in 1974, 'terminal paralysis' sets in. Those who were over-invested will be catatonic and just sit and pray. Those few who look brilliant, oozing cash, will not want to easily give up their brilliance. So almost everyone is watching and waiting with their inertia beginning to set like concrete. Typically, those with a lot of cash will miss a very large chunk of the market recovery.'

Indeed, at the darkest hour of the crisis, when most people had become disillusioned, the market turned. And what a turn it has been so far. From their two-year lows - most of which were registered between October last year and March this year - Singapore-listed stocks have on average risen a whopping 110 per cent. The median increase is 91 per cent.

But wait, here's some perspective. From their two-year peaks - most of which were hit in 2007 - the stocks have fallen by an average of 78 per cent to their troughs. The median decline is 83 per cent. So the explosive rebound we've seen so far didn't even bring prices back to the halfway point between the peak and the trough. Had investors invested at peak prices, and done nothing since then, they would still be sitting on a 58 per cent loss.

As the financial planner noted, prices would have to jump by some 400 per cent before one can recoup one's losses after enduring an 80 per cent loss.

But what if, as Mr Grantham advised, we had a plan to cure our terminal paralysis in the darkest hours of the market? 'It is particularly important to have a clear definition of what it will take for you to be fully invested,' he said. So suppose you had that plan, and at the trough you recognised it as that, and you duly deployed new capital into the market. Where would you be today?

In Table 2, I listed where an initial portfolio of $5,000 would be after various levels of losses. Then I assumed an equal amount of new capital were injected into the assets at the significantly lower market price. And from that low level, I presented various scenarios of market rebounds and where that would take the entire portfolio to.

From the table, you can see that if the stock has fallen 80 per cent, you would need it to rebound by two-thirds or 67 per cent to recoup your losses if you inject new capital equivalent to the initial investment at exactly the lowest point. If your loss is deeper at 90 per cent, the rebound would have to be 82 per cent for you to make back your capital. And if the market, as it has done in the past three months, rebounded by more than 100 per cent, you would be sitting on some profits now.

Indeed, many stocks here did provide investors with opportunities to more than make back their capital had they stuck to a reinvestment plan. Table 3 are some of them. Take Ausgroup. Its peak in the past two years was $2.13 on July 27, 2007. Just over a year later, on Oct 23, 2008, it traded at only 11 cents - a plunge in value of some 95 per cent.

Yesterday, it last traded at 61 cents. That's 455 per cent above its low of 11 cents but still 71 per cent off its peak. Someone who invested $5,000 in Ausgroup at its peak needed to put in only an additional $1,550 at the low to make back all their losses. Had they put in the same amount as their initial capital - that is, $5,000 - they would have made a return of almost 200 per cent on their entire capital of $10,000. That should be incentive enough to try to fight your fear.

Other stocks that have staged spectacular rebounds in the past three months or so included Osim, Yongnam, Yanlord, Swiber, SC Global and Ezra.

Of course, we should only pick stocks whose fundamentals have not been permanently impaired to average down. If not, we might just be throwing good money after bad, and eventually suffer permanent loss of capital should the company go bankrupt.

As we have witnessed time and again, in a crisis exists opportunity. So always keep a clear head and try to fight the fear and seize the value when the doomsday scenario is the only view out there. Yes, prices may go lower. Nobody can ever catch the low. But again, as Mr Grantham puts it: 'Sensible value-based investors will always sell too early in bubbles and buy too early in busts. But in return, you may make some important extra money on the round trip as well as lowering the average risk exposure.'

Strawberry Jam

Ingredients

1. 1.4 kg strawberries (3 to 3.5 punnets weighing 454g each).
2. 1 box Sure Jell For Less Or No Sugar Needed Recipes fruit pectin. 1 x lemon (juiced) could be a substitute.
3. 950g sugar.
4. 0.5 tsp butter.
5. Experimented: 250g strawberries, 15 teaspoons sugar, 1/3 box of Sure Jell...makes 1.5 bottles of jam.

Method

1. Preheat oven to 100 deg C.
2. Wash eight 250ml jars and metal lids with detergent, rinse thoroughly with warm water.
3. Run boiling water over a clean metal rack, set it over a shallow metal baking dish large enough to hold the bottles and lids. Invert the bottles and lids over the rack and leave in heated oven to dry out while you make the jam.
4. Throw out bruised or mouldy strawberries. Rinse and drain the rest. Using a sharp knife, remove the green, leafy tops and cut the larger berries in half. Leave the smallest ones whole.
5. Mash half to two-thirds of the fruit using a potato masher or a metal pastry blender. Leave the rest whole or in pieces, for a chunkier jam. Make sure you have 1.4kg of fruit. Set aside.
6. Pour the pectin into a small bowl, add 500g of sugar and stir to mix. Add to the fruit and mix well.
7. Pour fruit and pectin mixture into a large stainless steel pot, add the butter and bring the mixture to a full rolling boil over high heat, stirring constantly. The mixture is at a rolling boil when the fruit does not stop bubbling even when you stir it.
8. Add the remaining sugar quickly, stir well. Bring mixture back to a rolling boil and continue boiling for 1 minute, sitrring constantly.
9. Remove pot from heat. Take the jars out of the oven and ladle the jam into them, up to about 0.5cm off the top.
10. Wipe off any jam from the rims of the bottles. Screw on the lids. Let cool completely and refrigerate. The jam wil keep for about 3 weeks. It is best served with clotted cream.

How to tell a bull from a bear market rally

Business Times - 09 May 2009

Typically, bear markets don't end in fear and panic, but on a feeling of despair and disillusionment, By TEH HOOI LING SENIOR CORRESPONDENT

HOW do we tell a bear rally from a genuine bull market? That's the question everybody wants answers to now. Well, William Hester, the senior financial analyst at the Hussman Funds in the US, tries to shed some light on the topic with his article Trading Volume Separates Bull Markets from Bear Rallies published last month.

Most market watchers know this: to confirm a change in market conditions, watch trading volume closely. In Mr Hester's charts, the blue dates represent the beginning of bull markets since 1940, and the red dates represent the bear rallies in this decade only. (I wonder why only bear rallies in this decade were included.)

In Chart 1, the vertical axis shows the S&P 500's decline in the month prior to hitting the trough. It attempts to capture how sharp the final move was to the low. The horizontal axis shows the bounce off the low in the following five weeks. It attempts to measure the intensity of the rally that followed.

Data that fall in the upper left portion of the graph represent periods where the market bottomed with little fanfare, and the rally that followed was similarly uninspiring. It would characterise a market where most participants had lost interest in the market. Data that fall to the bottom right represent periods where a sharp rally off the bottom approximated the severity of the preceding decline.

But as the clump of data points on the upper left portion of the graph suggested, most of the market bottoms are not characterised by the typical V-bottom capitulations that most investors have in mind. The bulk of bear markets have ended by falling less than 10 per cent in the final month - and were followed by similarly modest moves off the bottom. The exceptions were 1987 and 1998.

Meanwhile, bear-market rallies (those in red) have a more pronounced tendency to carve out an acute bottom - a capital 'V' to the typical bear-market bottom's lowercase 'v'.

The current rally sits far away from the blue data points, and shares its space with the five previous bear-market rallies, said Mr Hester. Yes, market does sometimes rally strongly at the beginning of a bull market, as happened in 1971, 1982 and 2003. 'But an important distinction is that the approach to their final lows was distinguished by a more moderate decline when compared with each bear market rally,' said Mr Hester.

The second characteristic of a trustworthy bear-market bottom is the accompaniment of a healthy increase in volume. In Chart 2, the vertical axis measures the S&P 500's five week bounce off the bottom, while the horizontal axis measures the change in New York Stock Exchange's trading volume. The two dotted lines group the data into three separate areas. Data points that fall in the upper left portion of the graph represent powerful rallies on contracting volume. Data points that fall in the lower right portion of the graph represent steadier advances with increasing volume or slightly contracting volume. The lower left portion represents bull-market bottoms that began with contracting volume.

From the chart, Mr Hester draws the conclusion that bear-market rallies tend to register strong (even if temporary) returns with contracting volume. 'And for the most part, the larger the contraction in volume, the more quickly the rally tended to lose steam,' he said.

Now, what does he make of the rally so far this year? Here are his comments: 'The characteristics of this year's rally are interesting. It's the strongest five-week rally over the entire data set - even with contracting volume. One positive we can note is that the volume is contracting on this rally less than it contracted in last year's bear-market advance. But the market has also run up strongly on volume that would be unusually weak for a bull market advance of this size.'

Most initial bull advances look like in those in the lower right part of Chart 2, he noted. Except for 1982 and to a lesser extent 1971 and 2003, bull markets tend not to be explosive in their first couple of weeks. And when they are, the moves tend to coincide with a similarly explosive increase in volume. NYSE volume grew by 40 per cent in the first five weeks or so of the 1982 bull market. At an S&P 500 dividend yield of nearly 7 per cent, stocks were cheap and investors showed their conviction. Prices are not that cheap today, he noted.

At the point of the report, in April 2009, Mr Hester noted that so far the rally in the US lacked that important quality. 'Over the next few weeks stock market volume will be a metric to watch closely.'

So what have the market activities told us in the past week? Here's the data. According to Bloomberg, the average daily trading volume of the stocks in S&P 500 up till Thursday this week is 23 per cent higher than the daily average last week. That definitely puts the current rally into the section of the graph that qualifies it as a bull rally. However, if we compare the average daily volume so far in May with that of April, the increase is just one per cent. So we will need to continue to see increasing trading volume before we can be sure if this is a bull rally.

Meanwhile, as for the Singapore market, the explosion in trading volume and price increase have - going by the criteria set out by Mr Hester - categorically puts us in a bull market.

The average daily trading volume on the Singapore Exchange so far this month is double that of the daily average in April. In terms of value of shares traded, it is three times last month's! The volume has been on an uptrend since March.

If trading activities are sustained for the rest of the month, then the number of shares traded will be more than three times the average in the nine months prior to March 2009. When the market turned in 2003, coincidentally also in May, the trading volume that month was 2.6 times the average in the previous nine months. Similarly, as the STI neared its peak in 2007, trading volume in July 2007 was 2.4 times that of the average in the previous nine months. The value of shares traded was 1.8 times that of the previous nine months.

Hence on the market activities front, there are increasing signs that we have indeed formed a bottom. As Mr Hester noted, bear markets don't typically end in a crescendo of fear and panic, but more often on a feeling of 'despair and disillusionment', while strong bull markets tend to feature heavy trading volume. Indeed, around March this year, there were a lot of disillusioned investors out there.

Don't leave your career to chance

Business Times - 02 May 2009

Times of susceptibility are when we most need a reliable framework to guide our career, By KENNETH LEOW

'A RISING tide lifts all boats.' If the saying by the late John F Kennedy is anything to go by, then the opposite must be true when the tide dips: while booms create jobs, recessions lead to layoffs.
Retrenchment is an event that can jolt one out of one's comfort zone. But it is precisely during such a time of susceptibility that we most need a reliable framework to guide our career.

Time doesn't wait. And while we can't control time, we can manage it. And to most effectively do this, we need to understand its significance. As we journey through various stages of our lives, our motivations evolve, thereby influencing our career directions and in certain cases, even limiting our career options.

Our personal goals and circumstances also play a part. For example, a job that does not require frequent business trips may be of high priority with the arrival of a newborn in the family.

Of course, we also need to plan our career journey with an end goal in mind. For without a goal, we tend to drift aimlessly without knowing where we are heading or whether we have arrived. Our goals are short, medium and long-term. Analogous to an expedition to the peak of Everest, a mountaineer begins his climb in the valley, with frequent stopovers at base camps before eventually reaching the summit. So it is with us and our careers.

While the end goal is important, our identities are necessarily defined by our professional and personal roles. In the process of chasing our end goals, it is important that we do not neglect our personal priorities, which deserve equal, if not more attention, before they eventually catch up on us.

One critical aspect is our health, for without health, there is no point to anything. An asset that we often fail to appreciate until it has waned; poor health is capable of writing off all our career aspirations.

When it comes to work, our roles and accomplishments are synonymous with our inherent value. Our roles reflect our core responsibilities. But a noteworthy resume must also be a reflection of distinguished accomplishments, rather than just an account of responsibility-driven duties. While our duties form the fundamentals of what is required from us, it is our accomplishments that demonstrate our true abilities and potential that makes us stand out from the crowd.

Essentially, our abilities are the sum total of our skills - trainable and non-trainable - knowledge and talents. These are our intangible assets. While some of our abilities are observable and measurable, our immeasurable abilities can be best conveyed through real accounts of stories of what we have achieved and how.

When it comes to choosing a career, there are typically three core considerations: the size of the company, the given geographical territory of work and the potential financial gains. Depending on the development of our career and end goals, we might find the scale of certain companies more appealing than others. For example, fresh graduates might be drawn to MNCs to learn about world class processes and structures, but a mid-career person might prefer to work for a smaller company which offers more leeway for individual initiative.

Depending on the industry that we are in, we might choose to extend our duties to regional territories. And potential financial gains are of course, a key factor in our decision, though not necessarily the most decisive.

In addition, the industry that we work in is often as important as the role or the company that we choose. Apart from meeting the present needs of the industry, we also need to ensure that our skills remain relevant to the industry over the long haul.

Notwithstanding the importance to us of the timing, our end goals, personal priorities and health in our career decisions, these factors are not deemed the most critical to a potential employer. For the employer, what are important are our accomplishments achieved in our job roles, skills learnt in our jobs, the network and contacts that you bring along and your knowledge of the chosen market.

Since every job is predicated on mutual gain between an employer and an employee, an employee should ideally seek a balance when deliberating a job opportunity. As the word 'balance' suggests, an employee should strive for any two of the four elements mentioned earlier, namely accomplishments achieved, skills learnt, your network and contacts and market know-how. In return, the company would leverage on the other two elements. Hence a balance is achieved.

For example, an automotive salesperson has been offered a sales managerial role in a competitor car dealership. If the candidate was to take up the managerial position, the candidate would be assuming a new role and responsibility where he would potentially be learning new skills and knowledge on sales management.

In return, the company would be leveraging on the candidate's network and contacts within the same geographical sales territory for the automotive market. As such, a win-win situation to the candidate and the company is achieved as there is a fair exchange.

Do yourself a favour and do not leave your career to chance. Regardless of where you are in your career, choose to make conscious decisions that steer you towards your path of career actualisation.

Kenneth Leow is partner in Blue & Gray which provides consultancy services in sales and marketing.

A study in relativity

Business Times - 02 May 2009

The basis for compensation should be the incremental value leaders bring on a per population or per share level, By TEH HOOI LING SENIOR CORRESPONDENT

EVERYTHING is relative. It's an indisputable truth. Generally we cannot take an absolute number and make a value judgment based on that alone.

Take two apartments, for example. One costs $1.5 million and the other $1.2 million. Which is cheaper? Well, we can't say until we know how big each one is, which floors they are on and which district they are in.

Numbers do take on a new perspective when you relate them to something else. In December 2006, Hong Kong financial guru Marc Faber noted that it took fewer than 10 barrels of oil to buy one ounce of gold - and that, according to him, was an indication that gold was cheap compared with oil. At the time, gold was trading at around US$600 an ounce, and oil at just over US$60 a barrel.

In 1999, it took more than 25 barrels of oil to buy an ounce of gold. The average over the 10 years prior to 2006 was around 15 barrels.

Until today, Dr Faber has been proved right - gold was cheap back in 2006. In the past 28 months, the price has risen about 40 per cent to around US$900 now. Oil, meanwhile, surged to a high of US$144 a barrel in July last year before collapsing all the way down to US$36. It is now trading around US$50.

At today's price, it takes 18 barrels of oil to buy one ounce of gold. So if the relative pricing of the two commodities still holds, one can surmise that either gold is now slightly on the high side, or oil is on the low side.

Now let's talk about pay - a very contentious issue these days. Early last month, The Australian newspaper ran an article on the 10 best-paid politicians in the world. Topping the list was Singapore's Lee Hsien Loong at US$2.47 million a year. In the second position was Hong Kong's Donald Tsang, at US$516,000. Barack Obama, who has just marked his 100th day as the President of the United States, earns US$400,000.

Ireland's Brian Cowen and France's Nicolas Sarkozy make US$341,000 and US$318,000 respectively. Tenth on the list was Australia's Kevin Rudd, at US$229,000.

But The Australian pointed out that if you look at the pay relative to the size of the country run by each of the 10 politicians, you would see things in a different light.

'If you divide the salary by head of population, the ladder of remuneration is significantly reshuffled, and our own Prime Minister leaps from 10th to fourth, while Obama slides from third to 10th,' the article said. 'So by this measure, Rudd is earning roughly 10 times what the US President is.'

Based on that measure, Singapore's Prime Minister Lee Hsien Loong still tops the list.

But here's the key question. Are heads of states overpaid? I say they are not. Their compensation pales in comparison with that of corporate head honchos. For instance, Mark Hurd, the chief executive of Hewlett-Packard, was paid US$42.5 million in 2008. And in 2007, CEOs of S&P 500 companies were paid an average of US$10.5 million a year.

Relative to the responsibility that political leaders face - the livelihoods and social well-being of millions depend on their decisions - I think their pay is too low.

Well, what are the justifications for the astronomical sums paid to top executives? In Singapore, the compensation of CapitaLand chief executive Liew Mun Leong came under scrutiny recently.

Mr Liew was paid $20.52 million bonus for 2007, followed by a comparatively modest $2.98 million for 2008. CapitaLand said the 2007 figure was due primarily to an economic value added (EVA) bonus payment. Essentially, EVA measures the group's net operating profit after tax, minus the cost of all capital employed. CapitaLand's EVA was $2.3 billion in 2007, and $660 million in 20080.

Mr Liew pointed out that his $20.52 million bonus for 2007 worked out to 0.74 per cent of the company's net profit, which hit a record $2.76 billion that year. In contrast, the average bonuses drawn for the 2007 financial year by the chief executives of Singapore's 10 biggest listed companies came to a larger 3.9 per cent.

Is EVA a fair measure of the benefits accrued by all shareholders, and therefore a reasonable metric to use when deciding an executive's compensation?

There are, of course, numerous criticisms of EVA as a measure of how well a company has performed. Take two companies. Company A has chalked up a return on capital of 13 per cent on its weighted average cost of capital (WACC) of 8 per cent, and Company B has returned 7 per cent on a WACC of 6 per cent. Obviously, on a return-on-capital basis, Company A has used its capital in more profitable projects and has created more value for its shareholders.

However, had Company B deployed a significantly larger amount of initial capital, say, $2 billion, compared with Company A's $100 million, its economic value added or EVA would have been larger, even though its overall return on capital is lower.

One per cent of $2 billion is $20 million, while 5 per cent of $100 million is only $5 million. So if an executive's compensation is based on EVA, the incentive is to try to grow the company as big as possible and seek to earn slightly above the cost of capital.

And if management grows the company by raising more capital from existing shareholders, the new capital will still be earning a 7 per cent return. Furthermore, if management decides to get a capital injection from new investors, existing shareholders may suffer dilution unless the return on capital is maintained.

So while EVA translates to the addition of firm value, the real goal for managers ought to be 'addition of firm value on a per share basis'.

Another criticism of EVA is the importance placed on a precise WACC. The cost of equity in the WACC calculation is derived from the Capital Asset Pricing Model, or CAPM, which some argued is flawed.

The usefulness of EVA aside, let's get back to the question of relativity. Mr Liew earned a $20.52 million bonus, and the CapitaLand group has about 10,000 employees. So his bonus was a whopping $2,052 per person he managed. Remember, Mr Obama makes 0.1 of a US cent per American citizen.

On the other hand, Mr Liew's bonus represented a mere 0.74 per cent of CapitaLand's net profit. He himself noted that the 3.9 per cent average figure was for the CEOs of the 10 largest locally listed companies.

However, if Singapore's Prime Minister were to get 0.74 per cent of the country's GDP - and managing a country is similar if the end-game is GDP growth - Mr Lee should be paid $1.9 billion based on Singapore's 2008 GDP of $257.4 billion. As for Mr Obama, his pay should be US$105.5 billion.

So obviously, a country's GDP - and arguably a company's net profit figure or EVA - should not be the basis to derive the compensation of a head of state or the head of a company. The basis should be the incremental value they bring on a per population or per share level.

Jason Wee, a former analyst with CLSA, suggested in a recent article in Pulses magazine that besides linking the pay of Singapore's leaders to the average of the nation's best-paid individuals, one might also set a cap on this, based on a multiple of the income of the nation's bottom 20 per cent.

'This multiple can be set at some reasonable level without being excessively onerous, so that future leaders, in pursuit of higher quantitative metrics, will never forget about the less well-off in Singapore,' Mr Wee wrote. To get higher pay for themselves, the leaders should have to bring up the rest. This, I think, would also have the effect of making them continually aware of the harsh reality of the poorest people in the community.

Similarly for the private sector, compensation can be made relative to market share gained, earnings per share growth or a company's long-term sustainable growth. Also, there should be a cap, which could be based on, say, a multiple of the pay of the bottom 20 or 30 per cent of employees. Then, the bosses would be well aware of what life is like down the ranks.

As we have seen, relativity - used correctly - can give added perspective; but pegged to a wrong figure, it can lead to preposterous conclusions. And that is one of the reasons the world is in such an economic mess today.