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Super Crunchers: Why Thinking-By-Numbers is the New Way to be Smart
December 21, 2007, 5:25 am
Filed under: investments/finance/economics, Law

A book written by a law and economics guru, Professor Ian Ayres of the Yale Law School. The central thesis of the book is that there is a growing trend for the common people, academics and businesses to utilise statistical predictive models in making decisions, instead of relying on pure intuition. This trend is partly due to the inadequacies and inaccuracies of utilising intuition and relying on “experts” and the development of powerful computers that can crunch numbers quickly. Concomitantly, statistical methods seem to be much better predictors than the naked human mind.

American law schools are the biggest proponents of interdisciplinary approaches to the study and advancement of the law and law and economics is probably the hottest of the palette of mixtures available. This approach is just starting to take root in Singapore with the offering of double-degree programmes in law and business, law and life sciences and of course, law and economics of which yours truly is in one of the pioneer batches, amongst other combinations. Reading this book gave me the impression that American law professors are much more broader in their thinking and they have a wider intellectual range that encompasses the ability to blend issues from other disciplines into the law and allows them to write outside of the narrow legal academic circumference.

I am of course a biased observer but I do believe that an interdisciplinary approach is the right way to go. Currently my impression is that the law is unhealthily focused on language, interpretation and argument; the rigour of applying empirical techniques that once belonged to the domain of science and the “harder” social sciences would serve as a complement. It would be great if courts accept economic arguments and statistical analysis when deciding cases that primarily turn on “intuitive” issues like public policy and morality. The law exist to govern human actions and promote the social good; adopting methods that aid decision-making helps the law achieve its aims.

The application of mathematical methods will serve to remove much of the vagueness and uncertainty of intuition and allow the courts to come to more definite answers. For example, in determining compensation when a victim of a car accident sues in tort, cash flow analysis that takes into account inflation and growth in earnings capacity can lead to a fairer prediction of the amount that the victim is allowed to recover compared to a purely intuitive, arbitrary number determined by the judge.

As suggested in the book, regression analysis can be used to test the effect of laws that are implemented. For example, the current big issue here pertains to Article 377A of the Penal Code and whether it is archaic and should be abolished. Any Tom, Dick and Harry can say whatever they want about the arguments for and against the abolition of 377A, but to me, the argument ends there. The argument that abolishing 377A will lead to more homosexuals in society to me is as appealing on a logical level as the argument that abolishing 377A will lead to more equal rights for all members of society. It’s really anyone’s game and anyone can make a perfectly acceptable argument against and for the abolition without any real proof of whether one side is better than the other.

Applying empirical statistical methods to the situation will help decisions. It provides a means of testing the validity of a statement. Of course, it sounds Machiavellian and crazy but one way to test if abolishing 377A will indeed lead to more gays in society is to abolish it, collect data subsequently and apply regression analysis to see how this one factor affects the number of gays. Alternatively, bearing in mind that social situations differ between different countries and cultures, one can utilise data from other countries which have done the same and do an analysis of it.

The point here is that crunching numbers allows decision makers to weigh options and test statements. It does not totally remove the role of intuition and choice and reduce the decision-making process to a purely mechanical one, but it does lend a degree of objectivity that can weed out and expose opinions made solely on emotive grounds. Rather than merely speculate in one’s mind the impact of a decision of a court of law in ruling in a particular way, more weight can be given to options that are proven statistically to work better.

Moving on to less dreary stuff, here are some interesting ideas and trends that I have picked out from the book:

1) The rise of data crunchers – Data gets more expensive

Companies that aggregate raw data and help businesses crunch data will become more numerous and profitable, with the change in the way businesses make decisions. Data will become more valuable as consumers and businesses alike start to recognise the usefulness of crunching numbers and pay good money for it.

2) Economic efficiency

I am a bit iffy about whether crunching numbers can lead to overall social benefit and economic efficiencty. The jury remains out on this issue. Consumers seem to be exploited by companies that utilise these methods to maximise profits. One example stated in the book that of a airline company that calculated the “pain level” of service that will lead to a customer switching to other airlines; once the optimal level is arrived at, the company can just pitch their level of service to that particular standard and keep the maximum number of passengers without being required to continually improve services, which is desirable from a consumer point of view.

Conversely, the argument that consumers themselves can utilise these techniques to protect themselves against businesses is not as strong because consumers are less equipped intellectually and resource-wise to crunch numbers and predict prices to aid themselves. Even though the book provides the examples of how some organisations and websites have gathered information and crunched data on the best time to say, book flights for the lowest rates, the problem remains as these entities remain organisations and not individuals. One cannot expect an individual consumer to spend the time and effort to crunch their own numbers to avoid being duped at the cash counter.

3) The distinction between forward and backward crunching

Backward crunching is when historical data not purposely gathered and created by the user is statistically analysed. This analysis is much more difficult given the lack of control groups and the myriad of factors that can affect variables.

Forward crunching is when the user actively engages in “experiments” with control groups and surveys and gather data for analysis. This is what happens with Google when they send out random ads to test which arrangement of words lead to the greatest clicks. Information is gathered in a structured way and the impact of changed variables is analysed through the data.



The New Buffettology – Mary Buffett & David Clark
September 24, 2007, 4:25 pm
Filed under: investments/finance/economics

Personal notes from The New Buffettology by Mary Buffett & David Clark Continue reading



Jim Cramer’s Mad Money
August 11, 2007, 5:10 pm
Filed under: investments/finance/economics

Personal notes from Jim Cramer’s Mad Money Continue reading



From Wall Street to the Great Wall – How to Invest in China
August 7, 2007, 3:38 pm
Filed under: investments/finance/economics

Personal notes from From Wall Street to the Great Wall – How to Invest in China by Jonathan Worrall and Peter O’Shea Continue reading



the skies have opened and data rains from the blue above
August 6, 2007, 3:53 pm
Filed under: diary, investments/finance/economics

06/08/07

The STI dropped 3.7% today while I was at my inauguration ceremony. I was already feeling a bit uneasy about not being able to check out my portfolio at the start of the week and I rushed home the moment everything was over and done with. A little bit of worry was simmering somewhere in the recesses of my heart throughout the day and I had a hunch that today would be different; my premonitions were justified when I opened my Shareinvestor account to check my portfolio. Most surprisingly bank stocks fell and this might be an indication of changing investor sentiments. Subprime was always a possible banana peel but I never thought it will be so bad that it can affect Asian markets. However there are worries that Singaporean banks own a substantial amount of CDOs and that the subprime debacle will hurt them.

My question is why Chinese stocks listed on the SGX fell, together with a whole bunch of Singaporean counters which have no easily deduced relation with bank stocks. Fundamentals have not changed but prices are falling. Is this the start of a sustained fall? I am quite doubtful.

On a brighter note, I found a fabulous source of economic, financial and business data. Borrowing Jim Cramer’s pet expression, BOOOYAAAAHHH!



Capital Ideas Evolving – Peter L. Bernstein
August 5, 2007, 8:28 am
Filed under: investments/finance/economics

Personal notes from Peter L. Bernstein’s Capital Ideas Evolving Continue reading



Jim Cramer’s Real Money
August 4, 2007, 3:15 pm
Filed under: investments/finance/economics

Personal notes from Jim Cramer’s Real Money Continue reading



August blues
August 1, 2007, 3:49 pm
Filed under: diary, investments/finance/economics

01/08/07 Continue reading



Chinese companies on the SGX worth looking at
July 20, 2007, 9:09 am
Filed under: investments/finance/economics

I have filtered the list of Chinese companies on the SGX using good old Shareinvestor and came up with a list of companies with net profit margins above 10% and return on equity of at least 15% thereabouts. It’s a good way of categorising and keeping track of possible companies to invest in. A note of caution: this is neither a recommendation to buy nor to sell. Valuations and prices have not been taken into account. Here’s the list, grouped according to industry with a brief description of each business:

Water/ Waste

  • Asia Environment – water and wastewater treatment solutions
  • Asia Water – water purification and wastewater treatment systems projects
  • Zhonghui – turnkey services for entire domestic solid waste management systems

Pharmaceutical

  • Asia Pharm – produce and sells a wide range of drugs, distribution of products, processing and sale of active ingredients and sale of patents
  • C&O Pharmaceutical – marketing and selling 3rd party pharma products, manufacturing and sale of own drugs and development and selling of know-how
  • Sihuan – cardiocerebral vascular drugs and noncardiocerebral vascular drugs

Beauty/ Fashion

  • Beauty China – colour cosmetics and skincare products
  • Hongguo – ladies’ shoes
  • Suneast – beauty, skincare and hygiene products
  • China Hongxing – sports goods

Chemicals

  • Jiutian – production of methanol, dimethylformamide and methylamine and processing and sale of consumable carbon dioxide and oxygen
  • SP Chemicals – production of chlor-alkali products

Equipment

  • Bright World – stamping machines
  • China Farm – combine harvesters, plough machines and components and diesel engines
  • China Bearing – ball bearings
  • Hengxin – coaxial cables used in telecommunications
  • MIDAS – aluminium alloy extrusion products and PE pipes
  • Midsouth – fibreglass reniforced plastic products, used in vehicle parts, industial fittings, doors and windows.

Textiles

  • C&G Industrials – manufacture PET chips and yarn products
  • China Powerprint Group – printing books and specialised print products
  • China Print & Dye – providing dyeing and printing services and selling dye products
  • China Sky – chemical fibres manufacturer
  • Fibrechem – manufacture and sale of polyester fibre and polyester differential fibre products
  • Foreland – manufacture and sale of fabrics and provision of fabric processing services
  • Hongwei – manufacture and sale of polyester differential fibres

Tapes

  • CHT – makes and sales adhesive products, PVC film and pressure sensitive adhesives, as well as machinery to make adhesive products

Food

  • Celestial Nutrifoods – soybean protein-based food products
  • China Fish – catches and sells fish; also has fishmeal processing operations
  • China Lifestyle – making jelly, marshmellows and candy
  • China Milk – produces bull semen, cow embroyoes and raw milk
  • China Kangda – processed, ready-to-eat food products
  • China Sun – processing corn and selling starch-based products
  • China Essence – processing potato and selling potato-starch-based products
  • Synear – quick-freeze foods

Property

  • Sunshine – Henan-based cluster estate developer of mid level residential and commercial properties, also engages in property investments by leasing out commercial properties
  • Yanlord – high-end real estate and commercial properties developer and provider of property management services

 Shipping

  • COSCO – shipping company with diverse activities
  • Courage Marine – dry bulk shipping company


A Zebra in Lion Country
July 18, 2007, 1:49 pm
Filed under: investments/finance/economics

Personal notes from A Zebra in Lion Country by Ralph Wanger

Continue reading



rollercoaster
July 18, 2007, 9:00 am
Filed under: investments/finance/economics

18/07/07

Is the start of the inevitable bear market? Early in the day, my portfolio stands pretty with a overall gain of 9%; as of now (4:30pm), my portfolio has shed its returns to a miniscule 0.7%. The market is down 60 basis points. This is the lowest it got ever since I started investing my money on the SGX: my lowest return was 3%. Luckily, I have been divesting some of my poorer counters for small gains for the past few months in anticipation of a possible correction.

Anyway, I will stay vested since most of the companies I have invested in are value stocks. I see nothing wrong with the fundamentals of the companies I own. Meanwhile I shall research more about companies and wait for an attractive price fall. I think the next crash will make my wealth. Meanwhile I need to stand firm and study more, formulate strategies in the event of a bear market. Tomorrow will be an interesting day, I wonder if investors will go bargain hunting.



some thoughts on investing in SGX-listed stocks
July 12, 2007, 6:47 am
Filed under: investments/finance/economics

After an internship doing stock research and investing cash in the stockmarket, here are some thoughts I have on the Singaporean stockmarket. 

1. There are no Buffett-esque companies.

After looking through so many companies, none of them fit the Buffett criteria exactly. Most fail to meet the criteria of having a strong franchise which itself leads to a strong sustainable competitive advantage. The SGX is replete with faceless and garden variety technology manufacturers and China companies that sell commodity products like food and raw materials. Don’t get me wrong, I am not saying that they are bad companies, that they are not profitable and are not good investments. I am just pointing out that they do not have strong, international franchises like a Disney, Gillette or Coca-Cola.

2. What is a great company on the SGX might not be a great company in its industry- the proverbial big fish in a small pond

Unlike bigger markets like the US or London, the SGX holds companies “incompletely”. It holds a minority of companies in their sectors; this is especially the case for China-based companies listed on the SGX. This makes competitive analysis harder as the shares of similar companies trade in different markets and valuation becomes harder (e.g. P/E comparisons). Hence for example, I might find Hongguo to be a great company, with high profit margins and impressive ROE. However what I don’t know is that it is the second in its fashion shoe industry, and its leader is listed on the Shanghai exchange. Hongguo might have a much better profit margin or ROE than many other Singaporean companies but when compared to its direct rivals in China, it might be nothing.

3. China stocks are the way to go.

Small-cap China stocks are simply in a different ball game compared to Singaporean-based small-cap companies. The margins, ROE, ROA, whatever are way above that of most Singaporean companies. And many of them trade at low P/E multiples and valuations, a far cry from the superlatives we see in the Chinese market now. The business logic behind it is simple: Chinese markets are young, large and growing and hence supernormal profits and high returns on allocated capital are possible. Think of the average Singaporean company selling its goods to Singaporeans solely or if it is more internationalised, to a few other Asian (usually Southeast Asian) nations where markets are saturated already.

4. There is an end to the bullrun for Chinese stocks listed in the SGX.

This point may seem to contradict the previous point. Many if not most of the Chinese stocks are that of companies producing commodities, like milk, potato starch, paper and pork. As an economic rule of thumb, profits within commodity industries will thin out with increased competition in the future due to lack of product differentiation. The current lack of companies within these industries in China is one of the many reasons why these companies earn supernormal profits and enjoy good financial ratios. This will not persist forever, unless these companies find a way to create a niche for themselves and go international in its orientation. Meanwhile, the idea is to ride the growth while keeping an eye on competitiveness in these industries, moving money out when the growth peters out or becomes average.

That’s about all I have for now.



The 5 Keys to Value Investing
July 7, 2007, 10:14 am
Filed under: investments/finance/economics

Personal notes from The 5 Keys to Value Investing by J. Dennis Jean-Jacques Continue reading



lessons from edward lampert
July 5, 2007, 9:23 am
Filed under: investments/finance/economics, Lifeskills

I have been going through this Businessweek article on investor Edward Lampert again and I feel that there are some things I can learn from the article and Lampert’s life about how to achieve success (at least in the investment field).

Some pointers and observations:

  • Greater risks often comes with greater potential for gains. Evaluate risk properly and be active in pursuing gains.
  • Believe in your judgement but be careful and thoughtful in formulating one.
  • Be an independent thinker: do not follow the crowd just for the sake of it or because it is “conventional wisdom”.
  • Lampert searches for deep value and/or poorly-runned companies; he than actively seeks to change the way the company does things to unlock value.
  • Like Buffett, Lampert buys companies that generates a lot of cash flow to aid his investment activities. He is obsessed with how capital and cash is used in a business.
  • Lampert seeked high-powered mentors- to advance in a career, find good mentors.
  • Lampert studied Buffett’s moves very closely- study the greats extremely closely for lessons.
  • Lampert’s intense drive to succeed was a result of his father’s death. Many self-made millionaires and successful businessmen have some burr in their side that fuel their drive to succeed.
  • Lampert read up and is very knowledgeable- study and read a lot. Than study and read even more.
  • Lampert plotted a path that led him to his dream career- he was Tobin’s research assistant, an intern at Goldman Sachs and was a member of the student investment club while at Yale.
  • Lampert’s investment philosophy: “Evaluating risk and valuing risk is really what it is all about.” – Learn how to evaluate risk quickly using incomplete information.


Buffettology
July 3, 2007, 8:36 am
Filed under: investments/finance/economics

Personal notes from Buffettology by Mary Buffett and David Clark Continue reading