Who is Mr. Market?

March 29, 2009

Mr. Market is the character Benjamin Graham uses to explain illogical mindset of traders . The story goes something like this:

Imagine that you own 50% of a business, which you purchased for RM3,600 mil. Mr. Market approaches everyday to tell you what he thinks the business is worth based on latest news. And everyday, he offers to either buy your business for a price which he forms in his head, or, to sell you his share of the business for that price.

Each day, however, he quotes you a different price from the day before. Sometimes the price he quotes sounds about fair. Sometimes it’s high. Sometimes it’s low.

Let’s say the whole business is producing on average, RM 1,200 mil free cash flow with net profit of RM 600 mil. What is the value of the business to you?

By owning 50% of the business, you own RM 600 mil FCF and net profit of RM 300 mil per annum.You paid around RM 3,600 mil for this business a year ago. Hence, you bought this business for 6 times its FCF and 12 x earnings.Let’s say the nature of the business is stable and you anticipate the FCF and net profit will increase over time,you might not want to sell it unless Mr. Market offers you a ridiculously high price.

One day, Mr. Market offers you an additional 40%  extra of what you paid a year ago. He offers RM 5,040 mil to for your holdings.Most of us will let go after making 40% profit per annum.

But if you are a sensible businessperson,  you won’t let Mr. Market’s daily communication determine your view of the value of 50% interest in the business. He is a sweet talker and convince  you with various economic prediction,charts,information and etc to create doubt and fear in you. 

Most of us will be swayed by Mr Market ‘s offer.

But as a sensible business owner, you may be happy to sell out to him when he quotes you a ridiculously high price, and equally happy to buy from him when his price is low. But the rest of the time you will be wiser to form your own ideas of the value of your holdings, based on full reports from the company about its operations and financial position.

Remember, fluctuations in the market price for a given business don’t really affect the fundamental value of that business. If you own a share in a company, the value of each share is a function of the business ‘s profitability/cash flow/management/branding and not a related to the price quoted in Bursa M’sia.

So, as long you understand the business you’re buying,today’s market price is totally irrelevant.

Why corporate governance is important?

January 29, 2008
This article was taken from The Edge. The article is very important to long term investors in KLSE.

On enforcement
Last year was a successful year for our enforcement efforts. Our enforcement measures resulted in swift action against the perpetrators of offences. We also have increasingly resorted to civil action to obtain restitution for investors.


Is that partly because the other actions, such as criminal prosecution or action under the securities offences, have not got the kind of results that you expected?
We have got a range of enforcement tools available to us. We have been increasingly adopting a more strategic approach towards enforcement. In the past, we have tended to rely mainly on criminal prosecution but that takes time. The courts have a backlog of cases and we have to take our turn. So, we needed to look at more effective and efficient enforcement measures although we still resort to criminal prosecution where it is warranted. But increasingly we apply administrative action, which offers quick and effective resolution, and we take civil action in appropriate cases. But we assess each case and still prosecute the major offences.


The evidence is that a lot of crime has been committed but eventually no one gets charged or if charged, not convicted with a stiff penalty. And that seems to encourage more such crime. Your comments, please.
There is a perception that because the SC is the regulator of the capital market, every offence in the capital market, be it by public—listed companies or the directors or the management or even the auditors, falls within the jurisdiction of the SC. Where it does fall within our jurisdiction, our approach is very clear. We will take action, investigate and, if the facts and the evidence warrant it, enforcement action will be taken. And you have seen our track record on this. But sometimes offences in the capital market do not fall within the jurisdiction of the SC. The SC has jurisdiction only where there is a breach of securities laws. Many offences committed in the capital market may not be breaches of securities laws. Some may be criminal breach of trust, which is a penal code offence. Or it could be a breach of directors’ duty to act honestly in the best interest of the company, which is a Companies Act offence. Where in the course of our investigation we uncover these offences, we hand over the information to the relevant agencies as we don’t have the powers to investigate and prosecute. Where, however, the facts reveal multiple offences, then we will be able to mount a joint prosecution.


What is Value Investing? Part 9

June 12, 2007

There you have it,eight parts on value investing. Part 9 will touch on corporate governance. But this part will be explained by my fellow friend, Ben McClure.Anyway, Who is this guy?

But before we go to that topic,let’s learn about The Basics of Corporate Structure.

In summary,

Step 1: Read ‘Who is this Guy’?

Step 2: Read ‘The Basics of Corporate Structure’

Step 3: Read ‘Corporate Governance’


What is Value Investing? Part 8

June 3, 2007

Now,you need to read all audited financial statements provided by the KLSE. Take extra notice on the foot notes and analyze financial ratios in the financial statements. You might need to study about financial statements from Investopedia and other websites.

Summarize all the computation on the financial ratio and % changes from year to year. Dig more information if there are large increment/decrease in any figures. Get to know what the company is trying to hide behind the financial statements…(continue)

What is Value Investing? Part 7

May 27, 2007

Now,you should have calculated annual EPS growth (from Part 4), understood a company’s strength,weakness,opportunity and threats (SWOT) (from Part 5) and analysed financial ratios in financial statements (Part 6). Next is to dig further into the management of the company.

Well, there are cases which companies were investigated by S.C on irregularities in annual report and some CEO are investigated for corruptions.As a value investor, you should put  these companies away from your portfolio. Remember, it is ……(continue)

What is Value Investing? Part 6

May 13, 2007

The 3rd criteria is to recognize ‘EPS Manipulation’ in financial statement.Before buying a share, read the ‘Notes to the financial statement’. Get to know how the company define its sales, expenses, debt and others. Look for irregularities in the financial statements such as extraordinary write off, special expenditure and so on. This means you as an investor must question every ‘weird’ numbers in the financial statement. Each financial statement will go through an artist work (by the accountant) to hide any ugly sides of the company.

For example, a company can declare its sales before the products are sold to the end users. This means the company declares its revenue before it receives the cash or before the cerdit term expires. By doing the ‘art work’, the company can significantly increase revenue, reduce expenses and get a better EPS. 


What is Value Investing? Part 5

May 8, 2007

The second criteria is a synergy between the management & political influence. A company with the best management team will fall if the current government policy hinders the core business operation. NEP policy towards certain industries must be given great attention. To stay updated with the economy news, get different views from the local media, which are controlled by the government & oppositions’ sources.Relying on one source is an act of a fool.By analysing different views from both sources,a better investment decision can be made.

A company’s business operation is largely affected by the change in the government policy and law.For example,if the price of a product/service is tagged by the law,then the company can only increase its net profit by reducing the expenses,increase efficiency or ….(continue)