The great, the good and the gruesome

The great, the good and the gruesome


The businesses that make money for Warren Buffett, and those that don’t





OVER a dinner party last week, a veteran on the Singapore club scene asked those around him to define what ‘hip’ is. None could come up with a good answer. But what we all agreed on was that what’s hip today may not be hip tomorrow. Then the club owner/operator said: ‘Many people don’t realise it, but from my years of experience in this business, you can’t really make money from being hip.’


And my answer was: ‘It’s like growth and value stocks, isn’t it? Growth is hip, but time and again, it’s been shown that value pays better than growth.’


Indeed, the recent change in business outlook has exerted a severe impact on stock prices, particularly those of growth companies. A lower growth outlook poses a double whammy for prices of growth companies, given that price-earnings ratio is a prevalent valuation metrics here.


Say, a company chalked up earnings per share (EPS) of five cents last year. The market is bullish about it and is expecting the company to grow its EPS by 40 per cent this year to seven cents. To take into account its fast growth, investors value the stock at 25 times its forecast earnings. That would put its share price at $1.75.


Now that the outlook is more uncertain, the market is downgrading the growth expectation to just, say, 10 per cent. That would make its forecast EPS this year 5.5 cents. Lower growth also means lower multiples of, say, 12 times. Hence, the share price would fall to 66 cents. So a 21 per cent downgrade in earnings forecast could lead to a whopping 62 per cent decline in share price, notwithstanding that the company is still profitable!


Sage’s wisdom


Amid the current doom and gloom, investors who need some inspirations to restore their faith in stock investments can, as always, find them in the Sage of Omaha, Warren Buffett. Mr Buffett released his annual letter to shareholders of Berkshire Hathaway Inc last week. In one section of the 20-page letter, he talked about businesses – the great, the good and the gruesome.


He gave the example of See’s Candies as a dream business. However, purely looking at its growth prospects, not many analysts would be turned on by the company. Here are the numbers. See’s annual sales were 16 million pounds of candy in 1972. Last year, it sold 31 million pounds – a mere 2 per cent increase every year. During that period, its revenue grew from US$30 million to US$383 million, or a compounded annual growth of 7.6 per cent a year. Pre-tax profits grew slightly faster at 8.3 per cent a year, from US$5 million to US$82 million. Nothing to be excited about.


Back in 1972, Blue Chip (a company, controlled by Mr Buffett and his partner Charlie Munger, which was subsequently merged with Berkshire) paid US$25 million for See’s compared with its sales of US$30 million then. The deal almost did not go through because the seller asked for US$30 million, but Mr Buffett would only pay US$25 million. Luckily, the seller caved in.


Here’s the amazing bit. In the last 35 years, See’s pre-tax profits totalled US$1.35 billion. All of this, except for the additional capital expenditure of US$32 million required to finance its growth in the last 35 years, was sent back to Berkshire! Over the years, the cash from See’s was used to buy other attractive businesses and that, in turn, has given multiple new streams of cash to Berkshire.


At the time Mr Buffett bought See’s, the company raked in pre-tax earnings of about US$5 million and the capital required to conduct the business was US$8 million. Hence the company was earning 60 per cent pre-tax on invested capital. Two factors helped minimise the funds required for See’s operations, notes Mr Buffett.


First, the product was sold for cash. That eliminated accounts receivables. Second, the production and distribution cycle was short, which minimised inventories. As mentioned, See’s only needed US$32 million in the last 35 years to fund its growth.


‘Long-term competitive advantage in a stable industry is what we seek in a business,’ says Mr Buffett. ‘If it comes with rapid organic growth, great. But even without organic growth, such a business is rewarding. We will simply take the lush earnings of the business and use them to buy similar businesses elsewhere. There’s no rule that you have to invest money where you’ve earned it. Indeed, it’s often a mistake to do so: Truly great businesses, earning huge returns on tangible assets, can’t for any extended period re-invest a large portion of their earnings internally at high rates of return.’


But Mr Buffett admits there aren’t that many See’s in Corporate America, and in fact anywhere in the world.


Typically, companies that increase their earnings from $5 million to $82 million require, say, $400 million or so of capital investment to finance their growth, notes Mr Buffett. That’s because growing busineses have both working capital needs that increase in proportion to sales growth and significant requirements for fixed asset investments.


There’s nothing shabby about earning $82 million pre-tax profit on $400 million of net tangible assets. But the equation for the owner is vastly different from See’s situation, says Mr Buffett.


One example of good, but far from sensational, business economics is another of Berkshire‘s companies, FlightSafety. The flight training provider has a durable competitive advantage, but it requires a significant re-investment of earnings if it is to grow. When Berkshire purchased the company in 1996, its pre-tax operating earnings were US$111 million and its net investment in fixed assets was US$570 million.


Since then, FlightSafety’s depreciation charges had totalled US$932 million, and its capital expenditure US$1.635 billion. Its fixed assets, after depreciation, now stand at $1.079 billion. Pre-tax operating earnings last year were US$270 million, a gain of US$159 million since 1996. ‘That gain gave us a good, but far from See’s-like, return on our incremental investment of US$509 million,’ says Mr Buffett.


Finally, the gruesome businesses would be those that grow rapidly, require significant capital to engender the growth, and then earn little or no money. ‘Think airlines.’


Turning them on


Mr Buffett again reiterates the types of businesses that turn him and Mr Munger on. They would be companies that have: a) a business they understand; b) favourable long-term economics; c) able and trustworthy management; and d) a sensible price tag.


They like to buy the whole business or, if management is their partner, at least 80 per cent. When control-type purchases of quality aren’t available, though, they are also happy to simply buy small portions of great businesses by way of stockmarket purchases. ‘It’s better to have a part interest in the Hope Diamond than to own all of a rhinestone,’ he quips.


A truly great business must have an enduring ‘moat’ that protects excellent returns on invested capital. The dynamics of capitalism guarantees that competitors will repeatedly assault any business ‘castle’ that is earning high returns. Therefore, a formidable barrier such as a company’s being the low-cost producer (CEICO, Costco) or possessing a powerful worldwide brand (Coca-Cola, Gillette, American Express) is essential for sustained success. Business history is filled with ‘Roman Candles’, companies whose moats proved illusory and were soon crossed, he says.


‘Our criterion of ‘enduring’ causes us to rule out companies in industries prone to rapid and continuous change. Though capitalism’s ‘creative destruction’ is highly beneficial for society, it precludes investment certainty. A moat that must be continuously rebuilt will eventually be no moat at all.


‘Additionally, this criterion eliminates the business whose success depends on having a great manager… if a business requires a superstar to produce great results, the business itself cannot be deemed great. A medical partnership led by your area’s premier brain surgeon may enjoy outsized and growing earnings, but that tells little about its future. The partnership’s moat will go when the surgeon goes. You can count, though, on the moat of the Mayo Clinic to endure, even though you can’t name its CEO.’ (Mayo Clinic is a not-for-profit medical practice with more than 3,300 physicians, scientists and researchers, and 46,000 allied health staff in the US.)


If it is any consolation to investors out there who are sitting on losses as the stock market melts by the day, even the Sage makes mistakes. His worst mistake, says Mr Buffett, was to buy Dexter, a shoe business in 1993 for US$433 million in Berkshire stock. ‘What I had assessed as durable competitive advantage vanished within a few years. But that’s just the beginning: By using Berkshire stock, I compounded this error hugely. That move made the cost to Berkshire shareholders not US$400 million, but rather US$3.5 billion. In essence, I gave away 1.6 per cent of a wonderful business – one valued at US$220 billion – to buy a worthless business.


‘To date, Dexter is the worst deal I’ve made. But I’ll make more mistakes in the future – you can bet on that,’ says Mr Buffett.


The bottom line, of course, is to try to have winners that pay more than the losers. With market sentiment so bad now that many would not touch stocks with the proverbial 10-foot pole, it is perhaps a good time to start your search for the See’s Candies in this part of the world.


Source: Business Times

F1 ‘rooms with a view’ may not have a view

F1 ‘rooms with a view’ may not have a view


Signages, lighting system may foil fans trying to get a free view




(SINGAPORE) Fans of the Formula 1 (F1) Grand Prix hoping to get a free peek of the race – from the comfort of hotel rooms, for example, without forking out for the tickets – are likely to be disappointed during the Singapore leg.


Sources said that Singapore GP Pte Ltd, the organiser of the race here, is likely to put up fencing and advertisement hoardings which could obstruct views from ‘unofficial’ locations come Sept 28.


There are also plans for a lighting system that could make watching the race from such unsanctioned locations very hard, the sources said.


The news is unlikely to go down well with hotels, which have been selling rooms at up to three times the normal going rates for the week the race will be in town.


When contacted, Singapore GP told BT that ‘safety and operational measures’ such as safety fencing, advertising signages and the lighting system for a night race will need to be put in place for the event.


‘Once these are put in place, views of the race from unofficial locations may be obstructed,’ said Alastair Hunt, circuit park & events manager for Singapore GP. ‘At this point, there is no way that any venues along the circuit route would be able to guarantee unobstructed views of the Singapore Grand Prix.’


Sources said that the organisers could be looking to minimise ‘leakages’. This refers to the issue of people who don’t buy a ticket and instead watch the race from conveniently located properties – such as hotels and high-rise office buildings – along the route.


Most trackside hotels are charging two to three times their usual daily room rates during the peak race days.


Bookings have been strong for the race week, the hotels have said. In addition to Grand Prix fans flying in to watch what will be the world’s first night race, hotels are also seeing lots of corporate bookings, especially from multinational corporations with offices here which are looking to host staff and clients from overseas.


It was previously expected that in addition to watching from ticketed locations, fans will also be able to have a clear view of the race from numerous trackside hotels such as Swissotel The Stamford, Pan Pacific, The Oriental, Marina Mandarin, The Fullerton and Ritz Carlton.


But even as customers have been snapping up rooms and F1 packages from the hotels, most hotels are not offering any kind of ‘view guarantee’.


‘Demand for the rooms is very strong,’ said Cheryl Ng, Pan Pacific’s public relations manager. ‘But we do not offer any kind of view guarantee.’


Said Singapore GP: ‘To be assured of the best views and overall race experience, tickets and corporate packages should be bought directly from Singapore GP.’


The organiser is working to maximise the viewing locations for the race due to the overwhelming interest. Ticket sales have already started, and more tickets will be released for sale once Singapore GP secures agreements with other partners, it said.


But some fans are worried that if non-paying spectators are kept away from the circuit, it will deflate the very ‘buzz’ the race hopes to generate for Singapore.


The F1 race is one of several initiatives geared towards achieving the government’s target of attracting 17 million visitors to Singapore by 2015.


Source: Business Times

Citigroup to revamp mortgage business

Citigroup to revamp mortgage business


CITIGROUP plans to cut its home loan exposure by US$45 billion, reduce risk and save US$200 million a year in an overhaul of its US residential mortgage business.


The largest US bank, which suffered a US$9.83 billion fourth-quarter loss tied largely to mortgages, also plans to fold its Citi Home Equity and Citi Residential Lending businesses into its existing CitiMortgage Inc unit.


Over the next year, Citigroup plans to reduce by about one-fifth its roughly US$213 billion US consumer mortgage portfolio, largely by running off existing loans.


By the third quarter, it also plans to sell to Fannie Mae and Freddie Mac, or package into securities, 90 per cent of home loans it makes, up from 65 per cent in 2007.


Citigroup will also further tighten underwriting, though it will still offer sub-prime mortgages and home equity loans, unlike rivals that have stopped as default rates soared.


Savings will result from an unspecified number of job cuts, the consolidation of technology and operating platforms, and combining sales staff, CitiMortgage president Bill Beckmann said. The mortgage units employ about 13,000 people, he said.


According to its annual report, Citigroup ended 2007 with US$150 billion of first mortgages and US$63 billion of second mortgages, including home equity loans, on its books. — Reuters


Source: Business Times

She began with her first paycheque

She began with her first paycheque


The best time to start planting your money tree is when you start working Christie Loh


Weekend • March 8, 2008




YOU’VE just thrown off the shackles of school, ready to take on working life as a young woman in her 20s. When the paycheque comes in, what’s your first thought? Treat mum and dad to a nice meal perhaps. Or buy yourself new heels. Or put down the deposit for a year’s yoga classes and even save a little.


The last thing on your mind, probably, is setting aside money for investing. There’s too little left of each month’s salary for that, you say?


Maybe not.


Contrary to a widely-held belief that one must have a lot of “spare cash” before investing, financial advisers say a little can go a long way.


“Never underestimate the power of compounding, which Albert Einstein referred to as the eighth wonder of the world,” said ipac Financial Planning’s vice-president Marion Chin. (See table).


Compounding is when interest is accrued to both the original sum and the interest earned from that sum. It is the key reason why building up financial independence at an early stage is crucial — especially so for women, as they tend to live longer than men, and family needs often cause them to suspend midway or give up their careers.


Serene Goh, 23, is already sowing the seeds of her money tree.


Shortly after graduating in international development studies from Brown University, United States, in May 2006, she landed a job paying $3,000 a month in the back-office of a foreign bank here.


After working for three months, she ploughed $6,000 of her savings into two investment funds: One is a basket of stocks of China and India companies; the other invests in commodities. Curious about the stock market, she spent another $1,000 on buying a penny stock.


Such young women, who try to make their money work, are not uncommon.


According to a survey conducted last month and commissioned by Weekend Today, 55 per cent of Singapore women aged 25 to 34 — the youngest age group polled — invest.


Many are probably working in the financial industry, said Fundsupermart’s research manager Mah Ching Cheng.


But the proportion who invest is expected to rise in general and increasingly include females from non-financial sectors. That has been the trend in recent years.


Data from Fundsupermart, an online distributor of unit trusts, shows that its percentage of women investors has risen over seven years to 34.8 per cent from 27.2 per cent in 2001.


With investor education and information sources expanding, there is a growing awareness of one’s financial status compared to others, said Ms Chin.


Success stories were a big factor behind Serene investing. “When I look at the older people around me, those who are doing okay are the ones who invested in stocks or financial setups like houses,” she said. “I thought if I didn’t invest, I wouldn’t have enough money.”


Fears of inflation eroding any gains further convinced her that savings alone would not suffice.


Just compare last year’s inflation rate of 2.1 per cent with the current deposit interest rate of 0.25 per cent. This year, inflation is expected to average 4.5 to 5.5 per cent and the banks aren’t expected to be more generous.


Future needs are another motivation for investing. Wedding expenses, for instance, usually come to $40,000 to $50,000 per couple, said Ms Chin. With an investment in place, one could take out part of the sum instead of relying solely on savings, she added.


So, how does a young woman with little capital get started?


Serene had the advantage of savings accumulated from schooling days, but not everyone does.


For women beginning from near-zero base, diligently put aside a portion of your salary every month so you have at least three months’ salary as emergency cash, said Ms Chin. Then, you can start building up a pot of money for investing. (Note: From April, new rules state that you cannot use the first $20,000 in your CPF Ordinary account for investment purposes.)


It could take some time before you amass a sizeable amount, which varies according to the investment route you take. But come action time, you can choose from shares, unit trusts, real estate investment trusts, bonds, warrants, exchange-traded funds, currencies, gold and the list goes on.


With $1,000, said Ms Mah, you can buy into a unit trust — preferably one that is a global equity fund.


Ms Chin, however, recommends a more diversified, “multi-manager” approach, where a single investment fund is managed by specialist managers who spread the money across asset classes, countries, sectors and investment styles.


“The overwhelming advantage of owning diversification is to produce reliable returns over a longer time with less volatility,” she explained.


Ultimately, what you pick depends on your financial goals and risk appetite. Ms Chin said investors should be specific about what they want to achieve.


Say “I want to achieve a return of 5 per cent in five years” instead of something vague like “I want to make as much money as possible”.


In Serene’s case, her aim was to earn more than the 0.25-per-cent interest rate for bank deposits. So far, her China-India fund and commodities fund have yielded 10 per cent and 5 per cent respectively.


But she burnt her fingers dabbling in the stock market. The price of the engineering stock she bought plunged from 80 cents to around 30 cents within a year, incurring a paper loss of $625.


“It taught me that I have to research,” said Serene, who had bought the penny stock for somewhat emotional reasons. Her optimism about the company’s prospects was sparked by a post-university internship that gave her a chance to work with the management. Unfortunately, last year saw a bull market suddenly turn bearish and gains of financial markets were largely wiped out in the final months.


Still, Serene is hanging on to the stock, hoping for a recovery over time. Her nerves are also less jittery since she was prepared from the get-go to lose some money on her maiden stock-market play.


Some comfort Serene can take is this: A person in her 20s is able to go through cycles of bull and bear runs, so, her likelihood of recovering from a downturn is higher than a person in mid-career with more financial commitments and fewer years towards retirement, said Ms Mah.


But, of course, added Ms Mah, “don’t invest mindlessly”.


Source: TodayOnline

Mortgage war breaks out as DBS and UOB offer new rates

Mortgage war breaks out as DBS and UOB offer new rates


Banks focusing on specific targets, waging battles without fanfare


By Grace Ng


THE mortgage war finally erupted, as Singapore banks responded to a dramatic rate cut by Maybank three weeks ago – with one even offering a zero per cent package.


That attractive deal comes from United Overseas Bank (UOB), which has relaunched a package with a teaser first-year rate at rock-bottom.


DBS Group Holdings has also rolled out new rates on several packages, including a fixed-rate deal that claims to be the lowest of its type here in Singapore.


Unlike the fanfare that marked the rate war in 2003, though, the battle now is focused on specific targets and is being kept under the radar.


Banks are quietly offering promotional rates on a case-by-case basis and tend to target clients with loans of well over $300,000. While the market for new mortgages has softened, banks are still busy.


‘A lot of customers are looking to refinance their loans taken less than a year ago, when interest rates were much higher,’ Mr Bryan Ong of mortgage consultancy said.


Maybank sparked the war with an aggressive three-year, fixed-rate package at 1.68 per cent for the first year. This promo, which ends on Monday, has sent customers ‘rushing to submit loan applications’, said Maybank consumer banking head Helen Neo.


About 80 per cent of the applications were for buying private properties with an average loan size of about $675,000. Maybank is now ‘reviewing the rates’.


Other banks have not taken the move lying down. Most have tacitly matched – or undercut – Maybank’s rates.


DBS has a new three-year, fixed-rate package with an aggregate rate of 7.64 per cent – lower than Maybank’s 7.74 per cent. It offers a 1 per cent cash rebate in the first year.


UOB has revived its FirstZero Home Loan – a three-year, fixed-rate package available ‘only for a limited period’. The bank launched this in 2003, but it was quietly taken off the market last year amid interest rate volatility.


FirstZero is now back with a zero per cent rate on the first year, 3.6 per cent on the second and 4.5 per cent on the third, making a three-year aggregate rate of 8.1 per cent.


It has hefty penalty charges and a three-year lock-in period.


Standard Chartered Bank (Stanchart) actually moved before Maybank, cutting its three-year, fixed-rate package from 3.58 per cent to 2.98 per cent in January. It also cut its two-year package by 0.55 of a percentage point to 2.88 per cent.


DBS countered this week with a 2.88 per cent average annual rate for a three-year package and a 1 per cent cash rebate on the first year.


This three-week promotion is only for customers with loan quantums of at least $300,000.


OCBC Bank had not joined the fray, with chief executive David Conner saying last month that a mortgage rate war was unlikely.


OCBC said ‘from time to time, it offers loan packages with promotional rates that are highly competitive compared to other players’.


The most popular packages now are those linked to transparent rates, like the Singapore Interbank Offered Rate (Sibor) or swap offered rate (SOR), comprising the Sibor plus a bank’s lending costs.


These are official, regularly published industry rates customers can check to see how their packages are structured.


Riding on this interest, DBS has just cut by half its rate for its 12-month, two-year, Sibor-linked loans to 0.5 per cent for the first year.


Nearly 80 per cent of Stanchart’s new customers in recent months have taken up its package offering SOR plus 0.5 per cent for the first year.


The SOR has dropped from about 3 per cent last year to about 1.5 per cent currently.


Stanchart’s head of consumer banking, Mr Ajay Kanwal, said: ‘With the interest rate environment expected to soften further, customers of SOR-linked packages will benefit even more.’


Source: Straits Times

HSBC to give 30% cash refund on loan interest

HSBC to give 30% cash refund on loan interest


HSBC is offering customers who take out a personal line of credit or personal loan, from Monday until June 15, a 30 per cent cashback on the interest charged for a year.


The cash will be paid out each quarter for a one-year period and deposited directly into the customer’s loan repayment account.


New customers who sign up before the cut-off date will also get $30 worth of shopping vouchers.


HSBC said its 30 per cent cashback is the most attractive rebate on loan interest in Singapore.


The bank’s consumer banking head in the Republic, Ms Wendy Lim, said: ‘The quarterly cashback payouts are also the most frequent in the market.’


HSBC’s prevailing board rate is 16.5 per cent a year for a personal line of credit and 7.5 per cent for personal loans.


Depending on the loan tenor, the effective interest rate for personal loans ranges from 12.93 per cent to 13.8 per cent a year.


British bank HSBC’s personal loans can be taken for a minimum period of two years and up to seven years, the longest repayment period in the market.


Singapore‘s OCBC Bank offers an 8 per cent cash rebate on interest incurred over the year on its easiCredit product, a personal line of credit launched in 2005.


The rebate applies only when the full-year interest amount exceeds $840. However, the scheme is a permanent one.


Source: Straits Times

HDB ceiling doesn’t factor in late marriages

HDB ceiling doesn’t factor in late marriages


THERE have been calls for the Government to review the $8,000 income ceiling for new HDB flats. I would like to state the realities of life as a typical (lower) middle-income Singaporean.


Life was rosy until we decided to look for a roof to start our new family. A check on the HDB website showed a new four-room flat in Punggol selling for about $230,000.


However, we exceeded the $8,000 income ceiling by about $1,000.


We exceeded the HDB cap not because we are high fliers but because we found each other only after some years of work. We were in our early 30s by the time we were ready to settle down. Not to worry, the Government says, there are options for us:


·  Resale Flat


The resale price for a four-room Punggol flat is about $310,000. This means we have to fork out an additional $80,000. This is not a small sum. Furthermore, it was an old flat and we were wary about loan sharks calling on the former owners. We would also have had to spend more money on refurbishment.


·  Executive Condominium


We thought we could try for executive condominiums as our combined income was still below the $10,000 cap for this category. To our shock, we found that the units were selling for at least $650,000 (in suburban Choa Chu Kang and Woodlands). Should we fork out thrice the amount of money for a new HDB flat, just because we exceeded the Housing Board flat cap by $1,000?


·  Private Condominium


I shan’t go into this because the prices are just ridiculous for couples like us. At this point, our feelings are a mixture of unhappiness and helplessness.


The initial excitement about starting a family has been dampened. The moral of the HDB limit appears to be: don’t fall into the ‘in-between’ income group.


You either have to settle for an old flat which costs about $100,000 more, or spend the rest of your life paying for a new executive or private condominium.


And you wonder why there are no ‘in-between’ choices. Some say this is the Government’s way of persuading us to marry early.


If that is so, the Government should be realistic enough to note this rising trend among Singaporeans in marrying later, and failing to qualify for a new flat because of it.


Xu Zhilin (Ms)


Source: Straits Times