Human weakness in investment –incapable of self-reflection

There is a saying that “love is blind”. This means a person in love would not be able to see any imperfection in the lover. This is maybe an extreme case. However, people do have the tendency of refusing to change their position when the relevant situation having been changed, or have bias on anything against whatever they initially believed in.

For example, a boy was brought to the same church by his parents frequently, he would not only mostly likely believe in the same religion when he grows up, but also strongly reject any other religion or atheism.

The same thing happens in stock market. When people, no difference being individual investors or institutional investors, already have a long position in the market, they tend to collect any relevant information, analyst it and present it in a way to justify that the market will go up further. The same kind of people also likely has a love affair with the company, of which they hold shares, and also with the relevant industry. They reject any information they don’t like, just like a person in love.

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Buy America & Avoid China

There will be an inevitable crash in the Chinese economy. China to exceed America in economic power under current totalitarian communist regime will only happen in the dream of ignorant people. I totally agree with Mr. Buffett that “America’s economic magic remains alive and well.” Buy America. Avoid China.

The following is another chance to learn from Mr. Buffett.

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Warren Buffett’s Advices

INVESTING

Don’t be too fixated on daily moves in the stock market: “Games are won by players who focus on the playing field — not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.” (from letter published in 2014)

Don’t get excited about your investment gains when the market is climbing: “There’s no reason to do handsprings over 1995’s gains. This was a year in which any fool could make a bundle in the stock market. And we did.” (1996)

Don’t be distracted by macroeconomic forecasts: “The cemetery for seers has a huge section set aside for macro forecasters. We have in fact made few macro forecasts at Berkshire, and we have seldom seen others make them with sustained success.” (2004)

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My First Tenbagger

It was almost end of October, 2002, when I bought the book “One Up On Wall Street” and learned the term of “Tenbagger” which was created by Peter Lynch, the author of the book. I said to myself, “Woo, that’s wonderful.” And then forgot about it.

It was in March 2004, when I noticed a Singapore listed company named “Raffles LaSalle Limited” (The name was changed into “Raffles Education” later), which specialized in creative design education. The Company owned and operated a network of private technical schools that focuses on creative design like fashion, interior, graphic, product and multimedia design with supporting business administration and language classes. The Company had ten schools in Asia with six in China and one each in Singapore, Malaysia, Australia and Thailand. The Company also planned to double the number of schools it operates by 2006 with much of the expansion in China.

Its financial figures were perfect with growth of revenue at 56.7% in the latest half year report and profit growth at 139% respectively. Its ROE were over 40% with no debt. With such high growth, it even gave a dividend with 2% yield in the latest financial year! The operation cash flow was healthy and capital expenditure was about 20% of free cash flow. The stock is not cheap with PE around 50.

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Reflection on Buffett Way – Technology

I always regret that I did not buy Google Shares at its IPO, when it was about $85. It’s now $571, almost 7 times of the IPO price 8 years ago. I was using Google for searching all the time and believed that it dominated the searching business and was doing the right thing on almost all the aspects. The only reason I did not buy is because Warren Buffett doesn’t buy technology companies whose value are difficult to estimate. He also doesn’t invest at companies whose track record is not long enough and whose business not easy for him to understand. While I do understand Google‘s business at the time with my IT background, Google didn’t have much track record and the growth of it business was indeed hard to project. Therefore it’s difficult to estimate its value.

Indeed, it perfectly all right to miss the opportunity to buy Google at its IPO based on Buffett’s way. However, no investor should rule out technology companies from his investment portfolio in this era, because these are the companies which generate high returns and high growth year after year, such as IBM, Google, Apple, Oracle, Microsoft (though slower growth now for some of them) and so on. Certain type of IT business is not too difficult to understand, as the companies I mentioned here. The real challenge is the projection for future growth, which affects the valuation of the stock. Due to the quick change of technology landscape, it’s indeed not only difficult to predicate the growth of a company in this area, but also the success or failure of such company. A good example is Research in Motion which had a serial of very successful products, BlackBerry phones, until Apple’s iPhone came to the market. On the other hand, will Apple continue its success for long? It’s very hard to predict.

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Dolby is Back

Dolby surged 17% on the news of revived Windows 8 deal with Microsoft. It doesn’t really matter whether or when such deal happens. Dolby as a matter of fact, is providing the more effective and efficient solutions than its main competitor, DTS (“Dolby vs DTS Surround Sound”). When there are more devices on the move and more contents delivered via Internet or from the cloud, efficiency, which means delivering same high quality sound with less bandwidth, matters more. No matter what devices people are using, they surely want to hear high quality sound. Dolby is the obvious choice. It’s the user experience matters most in the entertainment industry. And Dolby just has the right product.

Besides the technical advantage on the efficiency, Dolby is also moving ahead at all fronts. Dolby wins naming rights to Hollywood icon only a few days earlier before the date they stroke the deal with Microsoft. Last month, Dolby Laboratories, Inc. (NYSE: DLB – News) and Royal Philips Electronics (NYSE: PHG; AEX: PHI) unveiled Dolby® 3D, a 3D HD format and suite of technologies designed to deliver full HD 3D content to 3D-enabled devices, including glasses-free displays. Dolby 3D is being demonstrated at the NAB Show® (April 16–19, 2012) at booth SU1212. Not to mention Dolby Atom, also announced last month by Dolby, is the most significant innovation in years and represents the future for entertainment sound in cinema.( “Dolby Atmos Is the Future of Entertainment Sound”)

I never doubted that Dolby is one of the ideal companies an investor can find in this world. (“Dolby Lab Is on Sale“) When Dolby’s share price dived last year, I bought more. I thought it will take longer time to bounce back. It now seems coming back beyond my expectation.

Infinera, the Jean Maker in Web Gold Rush

We all know the famous story of Levis Jeans. (http://inventors.about.com/od/sstartinventors/a/Levi_Strauss.htm) When the California gold rush was in full swing in 1853, Levi Strauss invented Jeans, which satisfied the demand of miners who wanted strong lasting pants.

Now, it’s the web gold rush. Companies (Apple, Microsoft, Amazon, Google, YouTube, Netflix and etc.) invested billions of dollars in smart phone, Internet TV, web games, cloud computing, video streaming and so on. All these businesses have to deliver their content or services via networks. Cisco predicts that the number of network-connected devices will be more than 15 billion, twice the world’s population, by 2015. In the fifth annual Cisco® Visual Networking Index (VNI) Forecast (2010-2015), the company also said the total amount of global Internet traffic will quadruple by 2015 and reach 966 exabytes per year. With this projection, the industry needs strong lasting networks, which mean scalable, liable and easy to manage networks.

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High Speed Crash

The recent Crash of 2 high speed trains in China is not only a reminder of the danger of building a high-speed railway network in high speed without proper management, but also a reflection of vulnerable situation of Chinese economy and the corresponding political system.

One of the lessons learned from the crash is that when the speed is close to the limit, it’s dangerous. In addition, paying the high price for that kind of speed is also not worth it. Having learned the lesson, the Chinese government adjusted the speed limit of the high-speed train and the corresponding prices lower. However, many investors or speculators of the stock market in China don’t seem to learn the same reasoning behind.

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Steve Jobs Stanford Commencement Speech 2005

I am honored to be with you today at your commencement from one of the finest universities in the world. I never graduated from college. Truth be told, this is the closest I’ve ever gotten to a college graduation. Today I want to tell you three stories from my life. That’s it. No big deal. Just three stories.

The first story is about connecting the dots.

I dropped out of Reed College after the first 6 months, but then stayed around as a drop-in for another 18 months or so before I really quit. So why did I drop out?

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Dolby Lab Is on Sale

The share price of Dolby is now at $49.84 with a PE of 19. There were $1022 million in current assets and $186 million total liabilities in its first quarter’s balance sheet, among which $148 million were current liabilities. What a balance sheet! Among it, cash and short-term investments were at $787 million, long-term investments were 347 million. Adding these together, it’s $1134 million in cash and investments. With 113 million shares, it’s almost $10 per share. That means the actual price for Dolby is at $39.79, low than $40. With this, the actual PE is now at 16. If you think that Dolby will grow at 16% annually in next five years, the current price seems reasonable.

To get into deeper on the valuation of Dolby, I used discounted cash flow method. With growth projection of 10% annually in next 5 years, Dolby’s intrinsic value per share is $56. Adding $10 per share from cash and investment, Dolby’s intrinsic value per share is $66. The current price of 49.84 is almost 25% discount of $66. The current price is actually predicting that Dolby will grow even slower than 5% annually in the next 10 years.

The very question is “Will the growth of Dolby be 10% annually or even slower in next 5 years?”

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