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I sold off Yongnam shares yesterday, taking advantage of the 152 pt rise in DJ the night before to dump out all my holdings. I'm still holding Yongnam warrants still though. Those are really low cost and can be converted to yongnam should the situation becomes more favourable in the future. I'll take my time on those.


Irrational story

I woke up in the morning, feeling that I seriously need to trim the weeds of my investment garden. I've always been toying around the idea that I have to throw off yongnam since I bought at such a high price. Nothing moves it anymore and I realise construction isn't what I would like to have in the long run. Price had been moving downwards, but within range of 0.165 to 0.150.

I ran through the annual report 2007, worked out a few ratios and convinced myself that I am going to sell it at 0.160. I keyed in my orders to sell at buy price, as I do not want to wait anymore, lest I have seller's remorse and withdrew my order. Besides, the volume of the sell queue is quite huge and the volume of buy queue is low. I can't afford to wait as I'm afraid there will be a sudden sell down to push the price down 1 bid. Might as well sell it straight at buy price.

Once I sold it, I felt relieved. Finally threw my 'one ring' into the pits of Mount Doom, into the fires of Mordor!




Rational story

I bought Yongnam in two tranches - one is at 0.345 and another at 0.435, giving me an average buy in price of 0.390. It was April 2007 then, and I do not know what is the use of looking at earnings. Had I looked at it then, I would have realised that the PE at the time of purchase is 54x - I'm too optimistic about the future of yongnam!

PE (based on my average price of 0.390 and 2007's earnings) = 18x
PE (based on my average price of 0.390 and 2006's earnings) = 54x

Yongnam does not have a good consistent track record of earnings. While turnover keeps increasing since 2003, earnings after tax goes up and down. I suppose 2007 is one of their best years to date since 2003.

--------------------------2007---------------2006
Net margins-------------14.1%----------------3.5%
Gross margins-----------17.6%----------------15.0%
EPS (diluted)------------$0.0203-----------$0.0072
Current ratio-------------2.3------------------0.90
Total debt/equity--------1.46-----------------19.2
Trade debtors/revenue--11.5%-----------------5.6%

Their current ratio improved tremendously because suddenly they have a healthy cash balance. A closer look at the cash flow statement reveals where the bulk of the cash comes from. Net cash from operations is -46 million, net cash from investing is -18 million and net cash from financing is +100 million. Thus, because of their big borrowings (90 million borrowings, 10 million from warrants issuance, 63 million from ordinary shares issuance), they manage to get a huge cash balance which boosted their current assets. Trade debtors seem to be worser off than 2006. Judging from their cash from operations, they did seem to have some trouble collecting their debts (85% had passed the due date by 90 days in 2007, compared to 10% in 2006 )

The issuance of shares and warrants increase their share capital base greatly, so their total debt/equity seems lower. In absolute amount, 2006's long term borrowings is 43 mil and 2007's long term borrowings is 75 million. I am very afraid. It's a capital intensive business, cyclical in nature, full of rotten debts and is peaking or had peaked. Worse of all, I bought at 54x PE back in 2007. Can the earnings grow 54%?

I don't know and I'm not willing to bet on it.

As such, I cut it and suffered a loss of 60.24% - one of the heaviest hit, percentage wise.

On the advice of HH, I had started on this detailed tracking of my expenses and cash inflow at the start of this year. At first, the process seems very 'xiong', because everytime I spent a cent (including buying drinks/food and snacks), I'll record it on my handphone. Towards the end of the day, I'll record it on my excel spreadsheet. The spreadsheet have all the details broken down into food items, transportation, entertainment, bills, clothings and so on.

The idea here is to figure out where am I in this struggle to reach financial independence. If I do not know how much I spent nor how much I earned, it's hard to figure out where I stand. Most people (including me, in the past) will use a sort of mental accounting, like I spend roughly $5 on food everyday, or I spend roughly $80 per month on transport etc etc. After tracking my expenses for close to 7 months now, I have an excellent idea on what my spending patterns and percentages are.

Didn't some wise person say: What you track, you'll improve? Yes, I agree fully. There's even a graph showing how much I spend vs how much I earn for the months I tracked so far.


Whenever I see that the blue graph is catching up on the red graph, I'll work harder to increase my cash flow in and to decrease my cash flow out. I think it works nicely so far.

I've been tracking my total portfolio too. Total portfolio is what I define as the summation of all the money in my bank accounts, Poems MMF, SG stocks (at market value), HK stocks (at market value), Insurance (inclusive of bonus declared) and CPF. The only item I did not include is the money in my wallet and the coins in my coin pouch.


It's rather satisfying to see that, like the graph above, my 'coins' are stacking up slowly but steadily. Perhaps, like what many had shared with me, that upon marriage, my coin stack will drop one time and upon having a family with children, my coin stack will drop another time.

A few things came out of this exercise:

1. I knew how much my spending is, without resorting to agaration and guesswork. I even even how many % of my money is spent, itemised.

2. For the first time, I am no longer so hazy about my net worth in monetary sense. It gives a superb sense of satisfaction, knowing that I had accumulated a certain amount of money after working hard for this long. I said that because I know many friends who did not know their net worth. Most did not have healthy savings despite working for so long. My take is, if you do not know where you stand now, you do not know how much more to go.

3. This observation is quite a surprise for me. As I had to tally up my books for recording at the end of each month, there is a pressure to try to raise my cash inflow and lower my cash expenses to make the books look good. For example, I can kid myself that I'm spending less this month by doing somethings to push the actual spending till next month.

Suddenly, it came upon me that perhaps, that's what companies do too. They have to report every quarterly, so it's all too human to jiggle their books a little to make it look nicer, like what I do. Knowing this, I no longer treat quarterly earnings as sacred. Not even annual results in fact. Perhaps that is what old ben is trying to say - look at the earnings over a long period of time, not in one year and certainly not in 3 months.

4. This method of tracking expenses is insane. I realised that. It's painful and not many had the discipline to do it too. Even my financial advisor is surprised that out of many people he met, I'm the only one who tracked my finances like that.

Recently (okay, not so recent), there is an article on straits times regarding the tuition nation. It's here, for those who wants to read it.

The article talks about Singapore having such a high tuition penetration rate, that for every 100 students, there are 97 students have tuition. Ignoring all the sampling biasness and sampling method, it's a whopping 97% tuition penetration rate. This phenomena is exacerbated by the fact that many of these students have multiple tuition, so in fact, we're looking at a penetration rate of more than 100% (if say, each student takes more than 1 subject for tuition).

Why had we come to this stage? I do not wish to comment on it in this posting.

Here, I just want to talk about the ironies of tuition/education/school.

1. Ex or current teachers are the preferred choice for parents when choosing tutors. These are highly paid, perhaps to the tune of twice the normal rate (I'm talking about $80 to $150 per hour). Students are sent to schools to be taught by MOE trained teachers. They didn't perform well enough, so they were sent to tutors who are preferably MOE ex or current teachers. If school teachers can't help them, will these teachers-cum-tutors help?

2. Classes in school have class size of around 30-40, with the norm being 40. Some of the tuition group classes I knew have class size close to 30. Yes, it's cheaper than private tuition (can be half the price of private 1-1 tuition). School is cheap too - that's why the class size swells up so much. Thus, the poor students go from one formal school to another informal school. Does it help?

3. Elite schools draw in the best students. They get the best results, which attracts the best students in. Chicken and egg problem? Which comes first - good schools or good students?

4. Elite schools with specialised programs (IB/IP) have teachers who think like this - students are so smart, I'll just give them worksheets and let them learn themselves. School fees range from a few hundred, easily a few multiples of government schools. Almost all of them have tuition because (I dare say) the teachers can't teach. Many parents have told me about that many of their kid's classmates are have tuition, and learn way in advance of school. In fact, teachers expected their kids to have tuition to 'supplement' school work.

5. Parents select their tutors based on their academic results. I'm guilty of being positively discriminated because of it. Does having good results mean that they can teach well? No, of course not. But most people think so. Perhaps lacking any other way of selecting good tutors, parents go for the overall packaging, much like people will buy a brand of salt because it looks more attractive. Academically good tutors, naturally self-motivated, might not have a way of dealing with unmotivated students because they might find it hard to understand why a student isn't motivated.

Can I offer a better way to select tutors? Yes.

Look for those who failed miserably and managed to stand up and high and tall in the academic world. Look for those whom teachers branded as failures yet return to the teaching force to save more students. Look for those nameless applicants who wanted to go into MOE to teach but their results are not good enough to even be called up for interview. If they don't mind their poor grades, why should MOE mind?

In the end, all I've mentioned here will still not be followed. That's why I still have a job.

Many students asked me why I do not want to join the school. I think I'll be kicked out in 1 month. I'm a maverick in this education business. I can't stand wearing uncomfortable office wear, don't mind student having long, dyed hair, don't mind students using handphone, don't mind them eating in class, don't mind them being so formal and afraid to ask what's truly on their mind. Exams to me are nonsense, I will give students the topics for the coming exams, rather than play hide-and-seek. I don't require strict discipline and I'm do not require their utmost respect. I earn my respect.

Why do I do that? I believe that people learn in a relaxed environment. There are passive inattention and active inattention. The former is what happens when a student stares at you, keeping quiet, but the mind wanders off. The later are those that are openly defiant. Most tend to control the latter, not the former. A little chaos can create the right mix of factors in a genuine learning environment.

Schools cannot tolerate me, so I cannot tolerate the school.

There seem to be a healthy discussion about the recent book review which I did, ‘The Black Swan’ by Nassim Nicolas Taleb. I crossed swords with Kennynah on Huatopedia regarding the applicability of normal distribution on everyday occurrences. The comments I received for the review is also very encouraging for me. All in all, a great experience!

I promised durio I’ll share the practicality of the things I’ve learnt from the book. I’ll try to put most of the practical advice towards investing and finance, but I stressed that the advice is equally applicable for the broader aspects of life. After all, life is much more than just the financial aspects.

1. Make a distinction between positive black swans and negative black swans. Black swans events can benefit or cripple. Once identified, expose yourself maximally from positive black swans, and limit exposure to negative ones

There are some situations where you do not want black swan events to happen, as it will cripple you. There are others where you sit around, waiting for black swans to happen, as the benefits are worth all the waiting.

For instance, networking is one thing that benefits from positive black swans. You never know (and can never expect) that the least likely person is the one who will pass you the contacts that will benefit you the greatest. Since there is no significant negative effect for not making the right contacts, one should expose oneself maximally to meeting different kinds of people.

In investing, we all try our best to be minimally exposed to negative black swans. Even though we’re ‘very sure’ of the prospects of a company, do not invest a substantial portion of your capital in. If we do that, we’re really hoping that the negative black swan events do not happen. Hence, there are many methods to reduce the consequences (but not the probability) of such events, such as strict cut-loss discipline, margin of safety, fundamental analysis etc. Different methods, but same underlying principle of preventing catastrophic losses.

In my tuition business, I’ll try to expose myself maximally to all different kinds of students. I’ll never know which student will be the one that will jump from F9 grade to A1 grade, and thus pass all the positive word-of-mouth advertising to potential future students. Downside (where student gets catastrophic results of A1 to F9 type) is actually minimized. How? That’s my little secret.

2. Invest in preparedness, not in prediction

I find the value investing philosophy ties in greatly in this. Didn’t the great gurus of the financial market say about gearing one’s portfolio towards bear market, not bull market? By thinking about the pessimistic scenario, one can avoid chasing the price but one’s capital is protected. Trading philosophy also mentioned about protecting the downside, and the upside will take care of itself.

3. Seize any opportunity, even those that looks like opportunity. This is the same as exposing one to positive black swans. Work hard, not in grunt work, but in maximizing one’s exposure to opportunities.

This is the same thing as point no.1 – exposing oneself maximally to positive black swan and minimally to negative ones. Perhaps here, I’ll mention one more example.

I’ve received very positive feedback that I’m a good writer and reviewer. It’s all very flattering until one looks at the ‘silent evidence’. I’ve written nearly 600 posts in this blog, perhaps only 10 such posts have very positive comments. Thinking in such a way, first of all, humbles me. But the point I’m making here is this: write more, you’ll hit one good article that everyone loves (and everyone remembers). If other articles are not as good, at most there are no comments, thus no significant negative consequences.

What should one do given such outcomes? Expose oneself maximally to opportunities where others can love your work – write more. I’m not saying skills are unimportant, I’m saying that skills are not the ultimate leverage in one’s success.

4. When caught between unknown probabilities of choices presented to you, focus on the (known) consequences of each choice and not on the probabilities. It’s also known as Pascal’s Wager.

Pascal’s wager is actually a debate on whether God exists. The consequences of not believing in God’s existence when there is actually God are much more severe than the consequences of believing in God’s existence when there is actually no God. The probability is incalculable and unknown; one should focus on the consequences of one’s choices, rather than the chances of the choices happening.

That is why one should cater one’s portfolio for the bear market, not for the bull market. The consequences of having big losses when one’s portfolio is too ‘optimistic’ are more severe than the consequences of not making big money when one’s portfolio is too ‘pessimistic’. Assuming one cannot tell the probabilities, the consequences matter more.

When one is stricken down by diseases that cannot be cured by western medicine, should one try alternatives methods? The consequence of not trying the alternative method when it does in fact work is more severe than the consequence of trying the alternative method when it does not work. The worse that can happen when one tries alternative method is that nothing happens.

Here’s a few lessons I learnt from the book:

1. Do not have a reductionist mindset, or what the author calls ‘Platonicity’.

2. Think about the silent evidence – evidence that show the contrary but are not widely publicized

3. Expose oneself maximally to positive black swans and minimally to negative ones

4. When presented with unknown probabilities of choices, focus on the consequences of each choice

5. Do not be quick to judge. Treat empirical data as it is and do not theorize too much. Be skeptical

6. Most importantly, be open minded