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1 Thing That Won’t Change In The Stock Market

A paradigm shift may be happening soon in the financial markets, according to Ray Dalio. But there’s one thing that won’t change.

Ray Dalio published an article in July 2019 that captured plenty of attention from the investment industry. When Dalio speaks, people listen. He is the Founder, Chairman, and Co-Chief Investment Officer of Bridgewater Associates, an investment firm that is currently managing around US$160 billion.

The times they are a-changin’

In his article, Dalio shared his view that a paradigm shift will soon occur in financial markets. He defines a paradigm as a long period of time “(about 10 years) in which the markets and market relationships operate in a certain way.”

The current paradigm we’re in started in late 2008/early 2009, according to Dalio. Back then, the global economy and stock market reached their troughs during the Great Financial Crisis. The paradigm was driven by central banks around the world lowering interest rates and conducting quantitative easing. The result is we’re now in a debt-glut, and a state of “relatively high” asset prices, “low” inflation, and “moderately strong” growth.

Dalio expects the current paradigm to end soon and a new one to emerge. The new paradigm will be driven by central banks’ actions to deal with the debt-glut. Dalio thinks that central banks will be doing two key things: First, they will monetise debt, which is the act of printing money to purchase debt; and second, they will depreciate currencies. These create inflation, thus depressing the value of money and the inflation-adjusted returns of debt-investors. For Dalio, holding gold is the way for investors to navigate the coming paradigm.

Plus ça change (the more things change)…

I don’t invest based on paradigm shifts, and I’m definitely not abandoning stocks. In fact, I prefer stocks to gold. Stocks are productive assets, pieces of companies that are generating cash flows. Meanwhile, gold is an unproductive asset which just sits there. Warren Buffett explained this view better than I ever can in his 2011 Berkshire Hathaway shareholders’ letter:

“Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.

What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As “bandwagon” investors join any party, they create their own truth – for a while…

… Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At [US]$1,750 per ounce – gold’s price as I write this – its value would be [US]$9.6 trillion. Call this cube pile A.

Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about [US]$200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than [US]$40 billion annually). After these purchases, we would have about [US]$1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with [US]$9.6 trillion selecting pile A over pile B?

Beyond the staggering valuation given the existing stock of gold, current prices make today’s annual production of gold command about [US]$160 billion. Buyers – whether jewelry and industrial users, frightened individuals, or speculators – must continually absorb this additional supply to merely maintain an equilibrium at present prices.

A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops – and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.

Admittedly, when people a century from now are fearful, it’s likely many will still rush to gold. I’m confident, however, that the [US]$9.6 trillion current valuation of pile A will compound over the century at a rate far inferior to that achieved by pile B.”

…plus c’est la même chose (the more they remain the same)

But Dalio’s opinion on a coming paradigm shift led me to an inverted thought: Are there things that don’t change in the financial markets? Inverting is a powerful concept in both business and investing. Here’s Jeff Bezos, founder and CEO of US e-commerce giant Amazon, on the topic (emphases are mine):

“I very frequently get the question: “What’s going to change in the next 10 years?” And that is a very interesting question; it’s a very common one. I almost never get the question: “What’s not going to change in the next 10 years?” And I submit to you that that second question is actually the more important of the two — because you can build a business strategy around the things that are stable in time…

…[I]n our retail business, we know that customers want low prices, and I know that’s going to be true 10 years from now. They want fast delivery; they want vast selection. It’s impossible to imagine a future 10 years from now where a customer comes up and says, “Jeff, I love Amazon; I just wish the prices were a little higher.” “I love Amazon; I just wish you’d deliver a little more slowly.” Impossible.

And so the effort we put into those things, spinning those things up, we know the energy we put into it today will still be paying off dividends for our customers 10 years from now. When you have something that you know is true, even over the long term, you can afford to put a lot of energy into it.”

My inverted-thought led me to one thing that I’m certain will never change in the financial markets: A company will become more valuable over time if its revenues, profits, and cash flows increase faster than inflation. There’s just no way that this statement becomes false.

Finding great companies – companies that are able to grow much faster than inflation – is something I’ve been doing for more than nine years with my family’s investment portfolio, and for nearly three-and-a-half years in my previous role helping to run The Motley Fool Singapore’s investment newsletters.

But there’s a problem: Great companies can be very expensive, which makes them lousy investments. How can we reconcile this conflict? This is one of the hard parts about investing.

The tough things

Investing has many hard parts. Charlie Munger is the long-time sidekick of Warren Buffett. In a 2015 meeting, someone asked him:

“What is the least talked about or most misunderstood moat? [A moat refers to a company’s competitive advantage.]”

Munger responded:

“You basically want me to explain to you a difficult subject of identifying moats. It reminds me of a story. One man came to Mozart and asked him how to write a symphony. Mozart replied: “You are too young to write a symphony.” The man said: “You were writing symphonies when you were 10 years of age, and I am 21.” Mozart said: “Yes, but I didn’t run around asking people how to do it.””

I struggle often with determining the appropriate price to pay for a great company. There’s no easy formula. “A P/E ratio of X is just right” is fantasy. Fortunately, I’m not helpless when tackling this conundrum.

“Surprise me”

David Gardner is the co-founder of The Motley Fool and he is one of the best investors I know. In September 1997, he recommended and bought Amazon shares at US$3.21 apiece, and has held onto them since. Amazon’s current share price is US$2,079, which translates into a mind-boggling gain of nearly 64,700%, or 33% per year.

When David first recommended Amazon, did it ever cross his mind that the company would generate such an incredible return? Nope. Here’s David on the matter:

“I assure you, in 1997, when we bought Amazon.com at $3.21, we did not imagine any of that could happen. And yet, all of that has happened and more, and the stock has so far exceeded any expectations any of us could have had that all I can say is, no one was a genius to call it, but you and I could be geniuses just to buy it and to add to it and to hold it, and out-hold Wall Street trading in and out of these kinds of companies.

You and I can hold them over the course of our lives and do wonderfully. So, positive surprises, too. Surprise.”

There can be many cases of great companies being poor investments because they are pricey. But great companies can also surprise us in good ways, since they are often led by management teams that possess high levels of integrity, capability, and innovativeness. So, for many years, I’ve been giving my family’s investment portfolio the chance to be positively surprised. I achieve this by investing in great companies with patience and perseverance (stocks are volatile over the short run!), and in a diversified manner.

It doesn’t matter whether a paradigm change is happening. I know there’s one thing that will not change in the stock market, and that is, great companies will become more valuable over time. So my investing plan is clear: I’m going to continue to find and invest in great companies, and believe that some of them will surprise me.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.

What Investors Don’t Get About Netflix

Netflix may be one of the most divisive stock in the market today. However, I think there may be some aspects of the company the bears are overlooking.

As one of the best performing stock of the 2010s, it is no surprise that Netflix is also one of the most talked-about stocks on the internet. But despite the seemingly endless discussions online, I still think there are some aspects of the company that some investors may be overlooking.

I want to discuss these aspects in this article.

#1 There is a clear path to positive free cash flow generation

Netflix had a negative free cash flow of US$3.5 billion in 2019, extending a streak of eight years of increasing cash burn. This burn rate certainly cannot go on forever and it is what’s putting many investors off. The negative free cash flow is even more alarming when you add the fact that the company is in a net debt position of around US$9 .7billion.

However, Netflix’s high cash burn rate may soon be a thing of the past. Netflix’s CEO, Reed Hastings, believes a turnaround is on the cards. In its most recent 2019 fourth-quarter shareholder letter, Netflix said:

“For the full year, FCF was -$3.3 billion which we believe is the peak in our annual FCF deficit. Our plan is to continually improve FCF each year and to move slowly toward FCF positive. For 2020, we currently forecast FCF of approximately -$2.5 billion… With our FCF profile improving, this means that over time we’ll be less reliant on public markets and will be able to fund more of our investment needs organically through our growing operating profits.”

I think management’s confidence is entirely warranted. Let’s break it down. The majority of the cash Netflix is spending is for the licensing and production of content. In 2019, Netflix spent US$14.6 billion on streaming content, meaning around 75% of its US$20 billion in revenue was spent on content alone.

To improve its free cash flow metric, Netflix needs to spend much less as a percentage of its revenue. And I think its entirely possible that this scenario will play out sooner rather than later.

The math is simple.

There is a fixed cost to producing content but the value of the content scales as the user count grows.

For instance, the content that Netflix is producing today can reach its 167 million global subscribers. But as the number of subscribers grows, the content it is producing will reach a larger subscriber base. Put another way, the fixed amount spent on each movie or series will be spread out across a much larger revenue base as user count grows.

Over time, the amount of cash spent on content will take up a much lower percentage of revenue and, in turn, free cash flow should eventually be positive.

#2 Content retains value over a long time frame

Another point to note is that the company is actually already profitable and has been for a few quarters. Then why is the company free cash flow negative?

For one, the company is spending money upfront for content that it is only releasing in the future. As such, it does not recognise this into its income statements. Think of it as capital expenditure for the future.

The second reason is that the content is amortised over a multi-year time frame. I think investors underappreciate the fact that much of the original content that Netflix is producing will be in its content library forever. Good content, while most valuable when it’s first released, retains some of its value to viewers for years. Case in point include hits such as Friends and Seinfield, which fans love to rewatch.

I think investors often overlook these two facts: (1) that Netflix’s current cash burn includes its spending for the future, and (2) good content retains its value over a multi-year period.

#3 Competition is not hurting Netflix as much as feared

When Disney and Apple announced that they would be entering the online streaming market, I’m sure many Netflix watchers (shareholders included) must have feared the worse. Disney has a vast library of intellectual property and Apple is flush with cash. Surely, Netflix would be in trouble.

However, competition has not hurt Netflix as much as some may have feared. In the fourth quarter of 2019, Netflix’s paid memberships in the United States increased by 400,000. While this fell short of analyst estimates, the growth in paid subscribers at a time when Disney Plus was released shows how sticky Netflix’s user base is. More impressively, the gain in member-count in the US in 2019 coincided with an increase in the membership price by US$2.

Internationally, growth continues at a breakneck pace. Paid memberships outside of the US increased from 80.8 million in 2018 to 106 million in 2019, a 25% increase.

There are a few things to glean from these trends.

First, Netflix’s subscriber base is sticky. The lure of original content that customers love and the fact that Netflix’s price point is still considerably lower than cable TV means customers are willing to stick around despite price hikes.

Second, Disney Plus, Apple TV, Amazon Prime, and Netflix can co-exist.

A recent survey of Netflix subscribers showed that they are willing to subscribe to multiple streaming video subscriptions. The trend is fueled by consumers reducing their spending on traditional TV offerings by turning to streaming services.

On top of that, subscribers who want to watch Netflix Originals have no alternative besides subscribing to Netflix.

In its most recent shareholder letter, Netflix explained:

“We have a big headstart in streaming and will work to build on that by focusing on the same thing we have focused on for the past 22 years – pleasing members.”

With Netflix’s content budget dwarfing all its competitors (US$15 billion in 2019 vs US$6 billion for Amazon Prime, the second-largest spender of content), the chances that subscribers switch to another online streaming platform looks much slimmer than what investors may have initially feared.

The Good Investors’ conclusion

Netflix is one of the more divisive stocks in the market today. There seems to be an endless discussion between bears and bulls online.

In my view, I think there are a few crucial aspects of Netflix that some investors may be overlooking:

Netflix has a clear path towards free cash flow generation
It is spending wisely on well-loved content that retains value over a multi-year period
The threat of competition is not as bad as it looks

Moreover, management has a knack of spotting trends well before they develop. As such, shareholders should be confident that management will be able to adapt and thrive even as operating environments change.

Given all this, I think Netflix looks poised to prove its doubters wrong.

Share Buybacks: Good or Bad?

When should a company conduct a share buyback? Here are my thoughts on share buybacks and what investors should know about it.

Share buybacks is one of the more divisive topics in investing.

If you’re not familiar with the topic, share buybacks refer to a company repurchasing its own shares. Put another way, buybacks occur when the company uses its cash to purchase its own shares in the open market.

Simple economics suggests that share buybacks boost share prices by reducing the number of outstanding shares in the market. Fewer outstanding shares means remaining shareholders now own a larger piece of the pie.

However, share buybacks also reduce the company’s cash position. As such, the size of the pie is also smaller after share buybacks.

So when are share buybacks good for shareholders and when are they detrimental?

When do share buybacks make sense?

Share buybacks can benefit shareholders if they tick certain boxes. The great Warren Buffett is a big fan of buybacks at the right price. He once said,

“The best use of cash, if there is not another good use for it in business, if the stock is underpriced is a repurchase.”

One advantage share buybacks have over dividends is that share buybacks reward shareholders in a more tax-effective manner in certain countries. In the US, local shareholders are taxed on dividends, while foreign shareholders from certain jurisdictions incur a 30% withholding tax. These taxes invariably reduce shareholder’s returns. But with share buybacks, companies can reduce their shares outstanding without incurring any tax expenses.

Share buybacks should also be most beneficial when shares are bought back below their true value. Apple, for instance, has a share buyback plan that reduced the total shares outstanding of the company. The share buybacks were made at strategic periods when shares of Apple traded at unfairly low valuations.

Competing for capital…

But share buybacks should only be undertaken when it is the best use of capital. On top of buybacks, a company has so many ways to deploy its cash, such as paying dividends, reinvesting the cash into the company, and acquiring other firms. Management, hence, needs to examine each possibility before deciding which is the best way to allocate capital. Jamie Dimon, CEO of JP Morgan Chase, reiterated:

“Buybacks should not be done at the expense of properly investing in our company.”

Again, Apple is a great example of buybacks done right. The iPhone maker generated more than US$50 billion in free cash flow each year for the past few years. Its shares were trading well below what the management believed to be its intrinsic value. As a result of its share repurchase plan, despite a fall in net income in the fourth quarter of fiscal 2019, Apple still managed to post a slight increase in earnings per share.

With more than US$100 billion in net cash, finding ways to put the capital to use can be a tough ask for Apple. That’s why I believe Apple’s decision to use the cash for buybacks when its share price was depressed is a prudent use of its excess cash.

When are share buybacks bad?

As mentioned at the start, share buybacks can be bad for shareholders too. This can happen when companies decide to pursue buybacks for the wrong reasons.

Below are some commonly cited but bad reasons I’ve come across that companies use to validate their buyback plan:

To prop up their share price
As a means to negate the impact of dilution due to share-based compensation
To fend off an acquirer
To boost earnings per share
Because they have run out of ideas for the cash

Such companies do not take into account whether the shares are cheap or not. Simply buying back shares to boost earnings per share or prop up the share price is not good to shareholders if the stock is overpriced.

Worse still, companies that buy back shares so that they can negate the impact of dilution without thinking about the stock price will invariably hurt shareholders.

I also believe that companies that use debt to make buybacks are asking for trouble. Buybacks should only be made when the company has excess cash and as a way to reward shareholders.

In addition, in Singapore, paying dividends is just as beneficial to shareholders as buybacks. Dividends in Singapore are not taxed and by paying out dividends, shareholders can decide for themselves if they wish to reinvest the dividends back into the company by buying more shares.

The Good Investors’ conclusion

Buffett is a big fan of share buybacks and with good reason too. It is a tax-efficient way (in certain countries) of rewarding shareholders and are a great way to allocate capital if the company’s shares are trading below its true value.

However, buybacks can also harm investors if the company buys back shares that are overpriced or do not provide a good return on capital.

As investors, we should not assume that buybacks are always the most efficient use of capital. We need to look deeper into the decision-making process to assess if management is really making the best possible capital allocation decision for growing shareholder value over the long-term.

How We Can Stop Sabotaging Ourselves When Investing

One of the great tragedies of modern-day investing is that we are self-sabotaging. We need an investing plan to save us from ourselves.

Odyssey is an epic ancient Greek poem that is attributed to Homer. It was composed nearly 3,000 years ago, but it can teach us plenty about modern-day investing.

An ancient epic

Odyssey recounts the tale of Odysseus, a Greek hero and king. After fighting for 10 long years in the Trojan War, Odysseus finally gets to go back to his home in Ithaca. Problem is, the way home for Odysseus was fraught with danger.

One treacherous part of the journey saw Odysseus having to sail past Sirenum Scopuli, a group of rocky small islands. They were home to the Sirens, mythical creatures that had the body of birds and the face of women.

The Sirens were deadly for sailors. They played and sang such enchanting melodies that passing sailors would be mesmerised, steer toward Sirenum Scopuli, and inevitably crash their ships.

Odysseus knew about the threat of the Sirens, but he also wanted to experience their beguiling song. So, he came up with a brilliant two-part plan.

The Greek hero knew for sure that he would fall prey to the seductive music of the Sirens – all mortal men would. So for the first part of his plan, he instructed his men to tie him to the ship’s mast and completely ignore all his orders to steer the ship toward Sirenum Scopuli when they approached the islands. For the second part, he had all his men fill their own ears with beeswax. This way, they couldn’t hear anything, and so would not be seduced by the Sirens when the ship was near Sirenum Scopuli.

The plan succeeded, and Odysseus was released by his men after his ship had sailed far beyond the dark reaches of the Sirens’ call.

A modern tragedy

One of the great tragedies of modern-day investing is that we, as investors, are self-sabotaging.

Peter Lynch is one of the true investing greats. During his 13-year tenure with the Fidelity Magellan Fund from 1977 to 1990, he produced an annualised return of 29%, turning every $100,000 invested with him into $2.7 million. But the investors in his fund earned a much lower return. In his book Heads I Win, Tails I Win, Spencer Jakab, a financial journalist with The Wall Street Journal, explained why:

“During his tenure Lynch trounced the market overall and beat it in most years, racking up a 29 percent annualized return. But Lynch himself pointed out a fly in the ointment.

He calculated that the average investor in his fund made only around 7 percent during the same period. When he would have a setback, for example, the money would flow out of the fund through redemptions. Then when he got back on track it would flow back in, having missed the recovery.”

A 7% annual return for 13 years turns $100,000 into merely $241,000. Unfortunately, Lynch’s experience is not an isolated case.

In the decade ended 30 November 2009, CGM Focus Fund was the best-performing stock market fund in the US, with an impressive annual gain of 18.2%. But the fund’s investors lost 11% per year on average, over the same period. CGM Focus Fund’s investors committed the same mistake that Lynch’s investors did: They chased performance, and fled at the first whiff of any temporary trouble.

Two data points don’t make a trend, so let’s consider the broader picture. Investment research outfit Morningstar publishes an annual report named Mind The Gap. The report studies the differences between the returns earned by funds and their investors. In the latest 2019 edition of Mind The Gap, Morningstar found that “the average investor lost 45 basis points to timing over five 10-year periods ended December 2018.”

45 basis points equates to a difference of 0.45%, which is significantly lower than the performance-gaps that Lynch (22% gap) and CGM Focus Fund (29% gap) experienced. But the Morningstar study still highlights the chronic problem of investors under-performing their own funds because of self-sabotaging behaviour.

(If you’re wondering about the distinction between a fund’s return and its investors’ returns, my friends at Dr. Wealth have a great article explaining this.)

Tying the tales together

On his journey home, Odysseus knew he would commit self-sabotaging mistakes, so he came up with a clever plan to save himself from his own actions. The yawning chasm between the returns of Magellan Fund and CGM Focus Fund and their respective investors show that the investors would have been far better off if they had taken Odysseus’s lead.

Having a fantastic ability to analyse the financial markets and find great companies is just one piece of the puzzle – and it’s not even the most important piece. There are two crucial ingredients for investing success.

The first is the ability to stay invested when the going gets tough, temporarily. Even the best long-term winners in the stock market experience sickening declines from time to time. This is why Peter Lynch once said that “in the stock market, the most important organ is the stomach. It’s not the brain.” The second key ingredient is the ability to delay gratification by ignoring the temptation to earn a small gain in order to earn a much higher return in the future. After all, every stock with a 1,000% return first has to jump by 100%, then 200%, then 300%, and so on.

We’re in an age where we’re drowning in information because of the internet. This makes short-term volatility in stock prices similar to the Sirens’ song. The movements – and the constant exposure we have to them – compel us to act, to steer our ship toward the Promised Land by trading actively. Problem is, the Promised Land is Sirenum Scopuli in disguise – active trading destroys our returns. I’ve shared two examples in an earlier article of mine titled 6 Things I’m Certain Will Happen In The Financial Markets In 2020. Here are the relevant excerpts:

“The first is a paper published by finance professors Brad Barber and Terry Odean in 2000. They analysed the trading records of more than 66,000 US households over a five-year period from 1991 to 1996. They found that the most frequent traders generated the lowest returns – and the difference is stark. The average household earned 16.4% per year for the timeframe under study but the active traders only made 11.4% per year.

Second, finance professor Jeremy Siegel discovered something fascinating in the mid-2000s. In an interview with Wharton, Siegel said:

“If you bought the original S&P 500 stocks, and held them until today—simple buy and hold, reinvesting dividends—you outpaced the S&P 500 index itself, which adds about 20 new stocks every year and has added almost 1,000 new stocks since its inception in 1957.”

Doing nothing beats doing something.”

We should all act like Odysseus. We should have a plan to save us from ourselves – and we should commit to the plan. And there’s something fascinating and wonderful about the human mind that can allow us to all be like Odysseus. In his book Incognito: The Secret Lives of the Brain, David Eagleman writes (emphasis is mine):

“This myth [referring to Odysseus’s adventure with the Sirens] highlights the way in which minds can develop a meta-knowledge about how the short- and long-term parties interact. The amazing consequence is that minds can negotiate with different time points of themselves.”

Some of you may think you’re an even greater hero than Odysseus and can march forth in the investing arena without a plan to save you from yourself. Please reconsider! Nobel-prize winning psychologist Daniel Kahneman wrote in his book, Thinking, Fast and Slow:

“The premise of this book is that it is easier to recognize other people’s mistakes than our own.”

My Odysseus-plan

So what would our Odysseus-plans look like? Everyone’s psychological makeup is different, so my plan is not going to be the same as yours. But I’m still going to share mine, simply for it to serve as your inspiration:

I commit to never allow macro-economic concerns (some of the recent worries are the US-China trade war and the unfortunate Wuhan-virus epidemic) to dominate my investment decision making.
I commit to focus on the performance of the business behind the ticker and never allow stock price movements to have any heavy influence on my decision to buy or sell a share.
I commit to invest for the long-term with a holding period that’s measured in years, if not decades.
I commit to not panic when the stock market inevitably declines from time to time (volatility in the financial markets is a feature, not a bug).
I commit to diversify smartly and not allow a small basket of stocks to make or break my portfolio.

I can’t tie myself to a ship’s mast, but I can keep my plan within easy visual reach so that I can sail safely toward the real Promised Land each time I find myself getting seduced by the Sirens’ song. If you have your own plan, we would love to hear from you – please share it in the comments section below, or email it to us at thegoodinvestors@gmail.com!

My Thoughts on Elite Commercial REIT

Elite Commercial REIT will start trading on 6 Feburary 2020. Here are some factors to know If you are considering buying into the UK-focused REIT.

Elite Commercial REIT is set to be the first REIT listing in Singapore in 2020. I know this article is a little late as the public offer closed yesterday. However, if you are still considering buying units in the open market, here are some factors to consider.

Things I like about the REIT

Let’s start with a quick rundown of some of the positive characteristics of the UK-based REIT. There are many points to go through here so I will be as brief as possible for each point.

Multi-property portfolio

Based on the prospectus, Elite Commercial REIT has an initial portfolio of 97 commercial properties in the UK. While the properties are all located in the United Kingdom, the large number of properties means that the REIT is not overly-reliant on any single property. The properties are also well-spread across the entire UK, with properties situated in Northern Ireland, Wales, Scotland and England.

Another thing to like is that all except for one property is free-hold. Even the sole property that is not free-hold has a very long land lease of 235 years.

Reliable tenant

Perhaps the most appealing aspect of the REIT is that all of its properties are leased to the UK government, specifically the Department for Work and Pensions.

As it is virtually impossible that the UK government will default on its rent, there is very little tenancy risk.

Long leases

The weighted average lease expiry for the properties stands at a fairly long 8.6 years. Given the long leases, investors can rest easy knowing that the distribution will be fairly consistent for the next few years.

However, investors should note that some properties have a break option in 3.6 years. Assuming these options are exercised, the portfolio’s weighted average lease expiry will drop to 4.89 years.

The properties are important to the UK government

80 of the 97 properties in the portfolio are used for front-end services such as JobCentre Plus. Furthermore, 86.3% of these JobCentre Pluses do not have an alternative JobCentre Plus within a 3-mile radius. This is important as investors need to know that there is a high likelihood that the Departement for Work and Pensions will renew its leases when the current contracts expire in 2028.

Triple net leases

The UK government has signed triple net leases for the properties. What this means is that it will cover all operational costs, property taxes and building insurance. The triple net leases provide the REIT with more visibility on cost for the period of the remaining lease.

Low gearing

Another thing to like about the REIT is its low gearing of 33.6%. That is well below the 45% regulatory ceiling, giving it room to make acquisitions in the future.

Decent Yield

The REIT’s IPO price of £0.68 represents a price-to-book ratio of 1.03 based on Collyer’s valuation report. In addition, the indicated distribution yield of 7.1% is higher than the average distribution yield of Singapore-listed REITs.

What I dislike

There are certainly a lot of things I like about Elite Commercial REIT. On the surface, it looks like a very stable REIT with a reliable tenant and the potential for acquisition growth. However, looking under the hood, I found unsavoury characteristics that might put off some investors.

Leases all expire at the same time

The previous owners of the property negotiated to lease the properties back to the UK government with all leases expiring on the same day- 31 March 2028. I much prefer a staggered lease expiry profile as it gives the REIT time to find new tenant should existing tenants fail to renew their leases.

Another concern is whether the UK government will indeed renew all contracts with the REIT when their leases expire. While the REIT is quick to point out that the UK government is likely to renew its leases, things could easily change in the future. If the UK government decides not to renew a few of its leases, the REIT will need to find a quick solution to prevent a rental gap.

Inflated market value

Another thing that I got alerted to by a fellow blogger’s article was that Collyer’s valuation of the portfolio was based on current rental leases. The existing leases are slightly above market rates and could suggest that the market value is somewhat inflated.

Likewise, as market rent is below the current rent, we could see rental rates reduce come 2028 when new contracts are signed.

IPO NAV Price Represents a 13.1% jump from purchase price just a year ago

Another thing to note is that the private trust of Elite Partners Holdings is selling the portfolio to the REIT just a year after buying the property. The sale price represents a 13.1% gain for the initial investors of the property portfolio.

Floating rate debt

The REIT has taken a floating rate loan. While floating-rate loans tend to have lower rates when it is first negotiated, it can also rise in the future. Even though rates have been dropping the last year, things could change in the future. Higher interest rate payments will result in lower distribution yield for investors.

Brexit concerns

The United Kingdom has just finalised its exit from the European Union. There are so many uncertainties regarding its exit. How will this impact its economy, property prices and even the value of the pound?

All of which could potentially impact distribution and rental rates in the UK.

The Good Investor’s Take

Elite Commercial REIT has both positive and negative characteristics. The indicative 7.1% yield and backing by the UK government are the main draws. However, the fact that all leases expire on the same day, the uncertainty surrounding Brexit and the potentially inflated market rate of the properties are things that investors should be concerned about.

Given these concerns, I will likely be staying on the sidelines for now.

*Editors note: In an earlier version of the article I stated that one of my concerns was that the private trust of Elite Partner Holdings was not participating in the IPO. However, upon clarification with the managers of Elite Commercial REIT, I realised that the four individual investors and Sunway Re Capital, who were the investors in the private trust that initially owned the portfolio were individually participating in the IPO. They each rolled over their principal investment amount from the private trust to the REIT. Elite Partner Holdings also has an interest in the REIT via Ho Lee Group and Tan Dah Ching. I have since edited the article to reflect the new information gleaned from management.

Why Facebook Shareholders Shouldn’t Panic

Facebook saw its shares slip 6% after releasing its 2019 fourth-quarter results. Despite this, I’m more bullish than ever on its prospects.

I woke up last Thursday to a rude surprise. My shares of Facebook had fallen 6% in a single trading session, following the company’s 2019 fourth-quarter earnings results. A big jump in expenses during the quarter was the culprit.

However, after reassessing Facebook’s position, I think the decline was unwarranted. In fact, I feel more optimistic than ever for the social network’s long term prospects and am more than happy to hold onto my shares.

Why investors have been put off

Before discussing the reasons why I am bullish about Facebook, let me first say that I acknowledge that there are very real reasons why the broader market is sceptical of Facebook.

The first possible reason is that Facebook carries a degree of regulatory risk. We can’t sugarcoat that.

In recent months, Facebook incurred a US$5 billion fine from the Federal Trade Commission due to a privacy breach and had to pay a US$550 million settlement for collecting users’ facial recognition data. In addition, there have also been a few threats from European regulatory bodies.

These regulatory concerns are, in turn, the reason why Facebook’s expenses have skyrocketed. The company has spent big hiring thousands of employees to update its platform and make it safer for users.

The second reason is Facebook’s decelerating growth. Facebook enjoyed 36% annualised top-line growth over the last 3 years. However, that growth has since decelerated. Shareholders who have been accustomed to the 30%-plus growth rate may have been disappointed by the latest figures.

Despite these two factors, I think Zuckerberg’s brainchild is still a great investment. Here’s why.

The numbers are still really good

Despite a slight deceleration in growth in recent times, Facebook is still posting solid numbers.

In the fourth quarter of 2019, Facebook saw revenue jump 25% and income from operations grow 13%. Looking ahead, management said that it expects revenue-growth in 2020’s first quarter to decelerate by a low to a mid-single-digit percentage point compared to 2019’s fourth quarter.

Although a deceleration looks bad, that still translates to a healthy 20% increase in revenue.

The social media giant is also now sitting on US$55 billion in cash and marketable securities, and zero debt. On top of that, its cash flow from operations in 2019 was 24% higher than in 2018.

Other metrics are healthy too

Besides its financials, the company’s all-important user engagement metrics are also very healthy. Daily active users, monthly active users, and family daily active people were up 9%, 8% and 11% respectively at end-2019 compared to a year ago.

The worldwide average revenue per user also ticked up 15.6% from 2018’s fourth quarter, demonstrating that Facebook is doing an excellent job improving the monetisation of its gargantuan user base.

Facebook is addressing the regulatory concerns

Zuckerberg and his team have also taken privacy concerns very seriously. Zuckerberg emphasised in his recent conference call with analysts:

“This is also going to be a big year for our greater focus on privacy as well. As part of our FTC settlement, we committed to building privacy controls and auditing that will set a new standard for our industry going beyond anything that’s required by law today. We currently have more than 1,000 engineers working on privacy-related projects and helping to build out this program.”

Facebook is also rolling out a privacy checkup tool to close to 2 billion of its users to remind them to set their user privacy control to the level they wish for.

I think with Facebook’s size, the task of managing privacy is going to be a multi-year process but Facebook’s commitment to addressing the issue is certainly heartening for investors.

Becoming a Super App

While advertising is Facebook’s bread and butter, the social media giant has the potential for so much more.

It now has online dating features, e-commerce, gaming, Watch and other features. Although not all of these features will cater to everyone, they each appeal to a certain segment of people. This will grow user engagement and increase ad impressions per user.

This is similar to WeChat in China. The Super app of the East has built-in functions such as payments, e-commerce, bookings, and much more. Facebook, with its billions of users, has the potential to become the Super app of the world.

New functions also give Facebook a different source of revenue. One example is through implementing a take rate for payments made on its platform. This could be a new revenue growth driver as Facebook plans to roll out WhatsApp payment and payment services to facilitate Facebook Marketplace.

History of great capital allocation decisions

Although there is a lot to like about Facebook’s business going forward, I think the most exciting thing is how Facebook will use its massive cash pile, which is growing by the day.

As mentioned earlier, Facebook is sitting on US$55 billion in cash (US$50 billion after it pays off the aforementioned US$5 billion fine). That’s an incredible amount of financial resources and the possibilities are endless.

Most importantly, Facebook has a brilliant track record of spending its cash wisely. In the past, it bought Instagram for just a billion dollars in 2012, solidifying its position as the leading social media player in the world. On top of that, the outlay for the Instagram investment should have already been more than covered by the ad revenue that Facebook has generated from it.

More recently, Facebook has been aggressively buying back shares. In its latest announcement, it said it has earmarked another US$10 billion for share repurchases, which I think is a great use of capital given its stock’s ridiculously cheap valuation (more on that later). This again shows that the decision-makers in Facebook are doing the right things with its ever-growing cash hoard.

Valuation too cheap to ignore

It is no secret that Facebook is not the most loved stock on Wall Street. Despite growing its top line by 26% in 2019 and the numerous tailwinds at its back, the stock still trades at just 23.5 times normalised earnings (after removing the one-off fines and settlement charges).

That’s the lowest multiple among the FAAMG stocks. For perspective, Alphabet, Apple, Microsoft and Amazon trade at price-to-earnings multiple of 31, 25, 29, and 87 respectively.

I simply don’t see how Facebook can suffer a further earnings multiple compression unless there’s a market-wide collapse.

Even after factoring the deceleration in growth, Facebook is still expected to grow revenue and profits by close to 20% in 2020 and beyond. Moreover, Facebook has so much cash on hand, its growth could even be boosted if Facebook decides to make an acquisition down the road.

The Good Investors’ Take

With so many opportunities for growth and the heavy fines behind it, Facebook is likely to see double-digit growth to its bottom line for years to come. Its enduring competitive moat looks unlikely to be eroded any time soon and the capital allocation decisions have been extremely sound.

Just as importantly, the stock trades at unreasonably beaten down valuations. Given everything, I’ve seen, I like my position in Facebook.

How To Make Better Investing Decisions

To make better investing decisions, we need to simplify. The more decisions we have to make in investing, the worse-off our results are likely to be.

The excerpt below is from a recent blog post of Tim Ferris, an investor and author. It talks about how we can make better-quality decisions in life (emphasis his):

“How can we create an environment that fosters better, often non-obvious, decisions?

There are many approaches, no doubt. But I realized a few weeks ago that one of the keys appeared twice in conversations from 2019. It wasn’t until New Year’s Eve that I noticed the pattern.

To paraphrase both Greg McKeown and Jim Collins, here it is: look for single decisions that remove hundreds or thousands of other decisions.

This was one of the most important lessons Jim learned from legendary management theorist Peter Drucker. As Jim recounted on the podcast, “Don’t make a hundred decisions when one will do. . . . Peter believed that you tend to think that you’re making a lot of different decisions. But then, actually, if you kind of strip it away, you can begin to realize that a whole lot of decisions that look like different decisions are really part of the same category of a decision.””

To me, Ferriss’s thought is entirely applicable to investing too. The more decisions we have to make in investing, the worse-off our results are likely to be. That’s because the odds of getting a decision right in investing is nothing close to 100%. So, the more decisions we have to string together, the lower our chances of success are.

I was also reminded of the story of Edgerton Welch by Ferriss’s blog. There’s very little that is known about Welch. But in 1981, Pensions and Investment Age magazine named him as the best-performing money manager in the US for the past decade, which led to Forbes magazine paying him a visit. In an incredible investing speech, investor Dean Williams recounted what Forbes learnt from Welch:

“You are familiar with the periodic rankings of past investment results published in Pension & Investment Age. You may have missed the news that for the last ten years the best investment record in the country belonged to the Citizens Bank and Trust Company of Chillicothe, Missouri.

Forbes magazine did not miss it, though, and sent a reporter to Chillicothe to find the genius responsible for it. He found a 72 year old man named Edgerton Welsh, who said he’d never heard of Benjamin Graham and didn’t have any idea what modern portfolio theory was. “Well, how did you do it?” the reporter wanted to know.

Mr. Welch showed the report his copy of Value-Line and said he bought all the stocks ranked “1” that Merrill Lynch or E.F. Hutton also liked. And when any one of the three changed their ratings, he sold. Mr. Welch said, “It’s like owning a computer. When you get the printout, use the figures to make a decision–not your own impulse.”

The Forbes reporter finally concluded, “His secret isn’t the system but his own consistency.” EXACTLY. That is what Garfield Drew, the market writer, meant forty years ago when he said, “In fact, simplicity or singleness of approach is a greatly underestimated factor of market success.””

Welch reduced a complicated investing question – “What should I invest in?” – into something simple: Buy the cheap stocks. By doing so, he minimised the chances of errors creeping into his investing process.

My own process for finding investment opportunities in the stock market is radically different from Welch’s. But it can also be boiled down to a simple sentence: Finding companies that can grow at high rates for a long period of time. I focus my efforts on understanding individual companies and effectively ignore interest rates and most other macroeconomic developments when making investment decisions. My process sounds simple, but that’s the whole point – and it has served me well.

To make better investing decisions, reduce the number of decisions you have to make in your investing process. Simplify!

Does Twilio Fit Our Investing Framework?

Twilio’s stock has risen more than eight-fold since its IPO in 2016. Is the Communication software as a service company still worth investing?

Twilio (NYSE: TWLO) isn’t a household name, but many of us unknowingly use it every day. The software company provides developers with an in-app communication solution. By integrating phone numbers and messaging communications, Twilio offers communication channels including voice, SMS, Messenger, WhatsApp, and even video.

When your Uber arrives and you receive a text, that’s Twilio. Airbnb uses Twilio to automate messages to hosts to alert them of a booking. eBay, Twitter, Netflix, Wix, Mecardo Libre each use Twilio in some form or other.

With in-app communications set to boom and Twilio the top dog in this space, is Twilio worth investing in? To answer this, I will use my blogging partner’s six-point investment framework to dissect Twilio’s growth potential.

1. Is Twilio’s revenue small in relation to a large and/or growing market, or is its revenue large in a fast-growing market?

Twilio recently surpassed US$1 billion in annualised revenue run rate in the third quarter of 2019. That’s tiny compared to its market opportunity. The CPaas (communications platform as a service) segment is forecast to grow from US$3.3 billion in 2018 to US$17.2 billion in 2023- a 39% annualised growth rate.

International Data Corporation said in a report that CPaaS companies are driving this growth by “integrating new segments, churning out new use cases, and piquing the interest of enterprise developers with innovative digital solutions for customer engagement.”

With the acquisition of SendGrid last year, through an all-shares purchase, Twilio added email communication into its array of products. SendGrid also brought with it 84,000 customers, giving Twilio a new base of developers to cross-sell existing products to.

2. Does Twilio have a strong balance sheet with minimal or a reasonable amount of debt?

Twilio is financially sound. As of 30 September 2019, it had US$1.9 billion in cash and marketable securities and around US$450 million in debt (in the form of convertible senior notes). That translates to a net cash position of around US$1.5 billion.

That said, Twilio’s cash flow from operations has been lumpy over the past few years as it chased growth over profitability or cash flow.

While its relatively large cash position should provide it with a buffer to last a few years, investors should continue to monitor how Twilio is using its capital.

Twilio already ended up having to issue new shares in a secondary offering in 2019 to raise money. This diluted existing shareholders, and current shareholders of Twilio should not rule out further dilution in the future.

The table below shows Twilio’s cash flow over the past four years.

3. Does Twilio’s management team have integrity, capability, and an innovative mindset?

Twilio’s founder Jeff Lawson has overseen the company from the start (the company was founded in 2008). As mentioned earlier, Twilio has a US$1 billion revenue run rate. That’s an impressive achievement, and a testament to Lawson and the rest of the management team’s ability to scale the company.

I also believe Twilio’s executive compensation structure promotes long-term growth in the company.

Lawson’s base salary in 2018 was only 2% of his target pay mix. 51% was in restricted stock units and the other 47% was in stock options. As the stock options vest over a few years, it encourages planning towards increasing shareholder value over the long term.

Lawson’s base salary of just US$133,700 in 2018 is also low in comparison to what other CEOs are getting.

So far, Twilio’s management has also been able to strategically acquire companies to expand its product offering and customer base. Its purchase of SendGrid brought with it email communication capabilities and more than doubled Twilio’s existing active users.

Twilio’s management has also taken the opportunity to raise more capital as its shares trade at relatively high multiples. This, to me, seems like a prudent move, considering that Twilio needs some cash buffer as it looks to grow its business.

Twilio is also proving to be led by innovative leaders as the company has consistently introduced new products. In 2018, Twilio introduced Twilio Flex, a programmable contact centre that integrates multiple tasks into a single user interface. Twilio Flex opened a new door of opportunity to tap into.

4. Are Twilio’s revenue streams recurring in nature?

Twilio’s enjoys a sticky customer base. Its existing customers have a history of becoming increasingly dependent on Twilio’s services over the years.

The communication software company’s net dollar base expansion rate, a metric measuring net spend by existing customers, was 132% in the quarter ended 30 September 2019. What that means is that existing customers spent 32% more on Twilio’s services in the last 12 months compared to a year prior.

More importantly, Twilio’s net dollar expansion rate has been consistently north of 100% for years. Its net dollar expansion rate was 140%, 128%, 161%, and 155% for 2018, 2017, 2016 and 2015.

The beauty of Twilio’s business model is that there are no built-in contracts. Customers simply pay as they use the company’s software. The more messages they send using Twilio’s API, the more Twilio charges them.

As customers such as Uber, Lyft, Airbnb grow their own customer base, the need for in-app messaging increases, and Twilio grows along with its clients. The model also allows small enterprises to start using Twilio at the get-go due to the pay-as-you-go model.

It is also heartening to see that there is little concentration risk as the top 10 accounts contributed around 13% of Twilio’s total revenue in the most recent quarter.

5. Does Twilio have a proven ability to grow?

With a steady base or recurring revenue, Twilio has been able to focus its efforts on expanding its services and winning over new customers. Its customer account has risen more than six-fold from 2013 to 2018.

The growth in customer accounts is also reflected in its financial statements. Revenue increased from below US$100 million in 2013 to more than US$600 million in 2018.

That growth still has legs to run with base revenue (excluding the impact of its acquisition of SendGrid) in the first three quarters of 2019 increasing by 47% year-on-year.

6. Does Twilio have a high likelihood of generating a strong and growing stream of free cash flow in the future?

While Twilio’s topline has shown impressive growth, it has neither been able to generate consistent profit nor free cash flow.

Twilio has been spending heavily on research and development and marketing. In fact, the company has consistently spent around a quarter of its revenue of research and development.

However, I believe that there is a clear path towards profitability and free cash flow generation, as Twilio can eventually cut back its R&D and marketing expenses.

That being said, the company is still laser-focused on top-line growth at the moment and consistent profitability and free cash flow generation may take years.

Risks

One of the big risks I see in Twilio is succession risk. Lawson is the biggest reason for Twilio’s success so far. He is the founder and has led Twilio every step of the way.

That said, Lawson is only 42 this year and is likely to continue at the helm for the foreseeable future.

I also believe that the high cash burn rate is still a concern. Investors should keep a close watch on Twilio’s free cash flow levels and hopefully, we can see it turn positive in the coming years.

Twilio also faces competition that could eat into its market share. Its competitors such as Nexmo, MessageBird, and PLivo are also growing quickly. Twilio will need to consistently upgrade its APIs to ensure that it defends its competitive edge. For now, Twilio’s competitive moat includes the high switching cost to a competitor.

Twilio also enjoys a network effect. In its 2018 annual report, Twilio said:

“With every new message and call, our Super Network becomes more robust, intelligent and efficient…Our Super Network’s sophistication becomes increasingly difficult for others to replicate over time as it is continually learning, improving and scaling.”

Valuation

Valuing a company is always tricky- especially so for a company that has no profits or consistent free cash flow.

As such, we will need to estimate what is the company’s long term growth potential and mature-state profit margins.

While some best-in-class SaaS companies enjoy profit and free cash flow margins of around 30%, that does not seem feasible for Twilio.

Twilio’s gross profit margin is only around 54%, much lower than other software companies such as Adobe which has a gross margin north of 80%. As such, I think that Twilio’s steady-state profit margin could potentially be closer to 10%.

Given the total addressable market of US$17 billion, and assuming Twilio can achieve a market share of around 50%, revenue can increase to around US$8 billion. Using my 10% net profit assumption, net profit will be around US$800 million. If growth can sustain at current rates of around 35%, Twilio will take around seven years to hit this size.

We also have to estimate a reasonable multiple to attach to its earnings. Adobe has a price-to-earnings (P/E) ratio of 58 but it is still growing. Let’s assume a discount to that multiple and assume Twilio can command a P/E ratio of 40. That translates to a US$32 billion market. Given all these assumptions, Twilio will have a market cap that is twice its current market cap in seven years, which translates to a decent 10% annualised return for existing shareholders.

The Good Investors’ conclusion

There are certainly compelling reasons to like Twilio as a company. Its 40%-plus top-line growth, huge market opportunity, dominant position in the CPaaS industry, and capable management team, are just some of the reasons why I think Twilio has a bright future ahead.

However, its stock is richly priced, trading at more than 16 times revenue. It has yet to record a profit and has been burning cash. There is a lot of optimism baked into the stock already and the company needs to live up to the high expectations if investors are to make a decent annualised profit from the stock.

While my valuation assumptions predict a decent return, there are certainly risks involved. Any stumble in those growth projections or an earnings multiple compression will result in mediocre returns to investors. I suggest that investors who want to take a nibble off of Twilio’s growth should size their position to reflect the risk involved.

Investing Advice From Robert Vinall, A Little-known Investing Expert

Robert Vinall’s fund, Business Owner TGV has compounded at more than 19% per annum. How did Vinall achieve such mouth-watering returns?

Robert Vinall may not be a name that rings a bell with many investors. Yet, his investing performance certainly warrants some attention. His fund, Business Owner TGV, has produced a mouth-watering 649.6% total gain since its inception in late 2008. That translates to a 19.6% annualised return, easily outpacing the MSCI World Index’s 9.47% annualised return over the same period.

I recently spent a few hours reading some of his writings on investing and his investment philosophy to gain some insight on how he managed to achieve these amazing returns.

He invests like a business owner

As the name of his fund suggests, Vinall invests as though he owns the businesses that he invests in. He says:

“My philosophy can be summed up as: Investing like an owner in businesses run by an engaged and rational owner with the capital of investors who think like an owner.”

But what does thinking and acting like a business owner really entail? In essence, it means ignoring short-term movements of share prices, and putting greater emphasis on buying great companies that can compound value over time.

Vinall is, therefore, comfortable with buying shares that (1) have a troubled short-term outlook but have solid long-term prospects, (2) have no near-term price catalysts or (3) is shunned by Wall Street analysts.

Because of the above, he is able to buy shares that Wall Street has ignored, giving him a great entry point on what he believes are long-term compounders.

In addition, he also looks for business managers who act like business owners. Shareholder-friendly managers focus on long-term steady results, rather than near-term share price movements.

He looks for four key things in a company

To determine if a stock is worth investing in, Vinall looks for four key characteristics in a company:

It is a business he understands
The business is building or has a long-term competitive advantage
The managers act with shareholders’ interests at heart
The share price is attractive

Using this framework, Vinnal has found investments that have compounded meaningfully over time.

Although the framework is simple it is by no means easy. Vinall points out:

“An investment process which consists of four steps, each of which has a “yes” or “no” answer may sound simple and indeed it is. This is because the best capital allocation decisions are typically made at moments of extreme market distress. To operate effectively in such an environment requires a process which is robust and simple to administer.
However, each capital allocation decision is preceded by months of research and often years of waiting for the right price to come along.”

He has a concentrated portfolio

Some of the best investors such as Warren Buffett, Chuck Akre, and Terry Smith prescribe having a concentrated portfolio and Vinall is no different.

As of January 2020, Business Owner TGV only had 10 stocks in its portfolio. That’s a heavily concentrated portfolio when compared to most other funds.

A concentrated portfolio of high-conviction stocks gives investors a better chance of market-beating returns. In his 2019 letter to shareholders, Vinall noted that he had dinner with legendary investor Charlie Munger at his home. Over the course of dinner, one of the topics that came up was how concentrated an investment portfolio should be.

Vinall wrote:

“His (Munger’s) bigger point was that the truly exceptional opportunity only comes along a few times in a lifetime. When it does, the important thing, according to Charlie, is to: ‘use a shovel, not a teaspoon’.”

He believes it’s always better to be invested than on the sidelines

With recession fears looming, investors today are asking whether it is a good time to invest.

Vinall believes there are two faulty assumptions underlying this question. The first faulty assumption is that the stock market gyrates around the same level. On the contrary, developed markets should increase at around 6% per year which translates to around an 8-fold increase over 48 years.

Vinall wrote:

“If you have a 40 year plus time horizon and an investment opportunity that will go up 8-fold, how much is there to think about? The smart money is invested, not on the side-lines fretting about what to do.”

The other flawed assumption is that investing is easy. Investing is never easy, as most successful investors will tell you. As such it is not as simple as asking whether now is a good time to invest.

Vinall explains:

“In my experience, good investment opportunities are always plentiful. The limiting factors are the ability to identify them and, having identified them, the courage to act.”

The Good investors’ conclusion

Vinall has been one of the top-performing investors of the last decade. His fund’s return speaks for itself. Vinall is also an exceptionally generous investor who is willing to share his investing insights, philosophies, and success stories. I strongly encourage you to read more of his writings which can be found here.

Should Investors Be Worried About The Wuhan Virus?

The Wuhan virus is sadly proving more destructive than earlier anticipated. What should investors do in these uncertain times?

Sadly, the Wuhan Virus is proving more devastating than earlier expected. The latest figures yesterday afternoon showed that the death toll had already risen to 102, with more than 4,500 cases confirmed. These numbers are almost certain to mushroom.

The coronavirus has also impacted global stock markets as investors fret about the financial impact of the disease.

The S&P 500 in the US fell 1.6% on Monday, while the Straits Times Index at home in Singapore was down by as much as 3% yesterday. So what should investors do now?

Think long term

Unfortunately, the Wuhan Virus is certain to impact the world economy. Tourism to and from China is expected to fall. Shopping malls in China are closed. Schools and universities there have extended their Chinese New Year holiday and will only be reopened on a case by case basis.

China has even shut public transport in certain cities to discourage people from going out. It is likely that we will see consumers in China adjusting to the fear of the virus by going out less and spending less for a few months after the virus is controlled.

All of which will have a very real impact on not just companies in China, but around the world. The impact is exacerbated due to the Wuhan virus epidemic coinciding with the Chinese New year period- a period that usually sees higher travel and consumer expenditure.

That being said, investors should not let the near-term impact of the virus affect their investment decision making.

The SARs, H1N1, and Ebola epidemics have each been devastating. However, financial markets continued ticking on like clockwork.

As you can see from the chart above, the world has experienced 13 different epidemics since the 1970s. Yet, global stocks – measured by the MSCI World Index – has survived each of those, registering long term gains after each outbreak.

Where do you see the world in five years?

With society more prepared today to deal with a global epidemic, the spread and impact of the Wuhan virus will also hopefully not be as devastating as prior outbreaks.

Perhaps the best way to keep a clear head in these uncertain times is to do a simple mental exercise.

Consider the questions below:

In 5 years time, will Chinese consumers still fear going out?
Will shopping malls in China still be closed?
Are public transports likely to be still shut down in five years time?
Will we still even be talking about the Wuhan virus?

I think the most likely answer to all of the questions is “No”.

The Good Investors’ conclusion

Sadly, the Wuhan virus is having a devastating impact. Lives have been lost and the number of deaths is likely to balloon. My heart goes out to everyone affected by this destructive disease.

But from a financial point of view, we as investors should not let the near-term earnings-impact cloud our judgement. Yes, the Wuhan virus will likely affect the economy and bottom-line of some companies. However, I believe the world today is better equipped to curb the spread of an outbreak than ever before. As such, I believe investors who continue to focus on fundamentals, ignore the noise, and think long will likely be rewarded eventually.