Specific Return on Equity, sROE

People normally use return on equity ROE to judge the attractiveness of a business. Return on equity can be calculated from using net profit from income statement divided by equity in balance sheet. The value normally can be found in the media such as newspaper, magazine, and research report. Warren Buffet use 15% as a general guideline to judge between whether a business is attractive or not.

Here, I would like to do a little modification and introduce "specific return on equity", sROE.

Equity can also be defined as book value, which mean the value business owner will get if the business is going to closed down and liquidated. Theory wise, if the price to book, P/B, or price to equity, is 1, you buy into the book value and earn the return same as the original business owner's return on equity, ROE. However, normally you don't get to buy the exact price to book value of 1. You will buy at 0.8, 1.4, 2 etc depend on the market quoted price at the time. The equity value now you are buying into is not the same with the equity value in the balance sheet. Your specific equity value should be adjusted by multiplying the equity value of balance sheet with the price to book you are buying into.

To simplify that, your specific return on equity should be ROE divided by the price to book value you bought the share. You will get higher ROE than the business ROE if you buy below price to book value of 1. If you buy at more than 1 price to book value, the return on equity you get will be less than the business ROE.

The use shall be used in the acquisition of business, but also can be used as a guideline in general investment.

Forward from Bank Negara Malaysia: Warning on Illegal Forex Trading in Malaysia

 Bank Negara Malaysia would like to caution members of the public not to participate in any illegal investment or training programme on foreign currency trading offered by individuals or companies both domestic and foreign.

Members of the public are usually enticed to attend such investment or training programmes with promises of quick and good returns. The modus operandi of such programmes have included:

1) Offering free training, seminars or workshops to lure investors, prior to inviting investors to set-up an online foreign currency trading account with a principal company (purported to have valid licence to trade foreign currency overseas);
2) Providing convenient access to the principal company's website and trading facilities to facilitate online foreign currency trading by investors;
3) Recruitment of fresh graduates as marketing executives and encouraging them to get their family and friends to trade foreign currency;
4) Requiring investors to deposit an amount of money into a bank account to begin trading foreign currency, and subsequently, requesting for a top up on their initial investment ("margin call") to avoid losing their capital.

Under the Exchange Control Act 1953 (ECA):
1) It is an offence for a person in Malaysia to buy or sell foreign currency or do any act which involves, is in association with, or is preparatory to, buying or selling of foreign currency with any person, other than an authorised dealer.
2) It is also an offence for a person to aid or abet another person to buy or sell foreign currency with any person, unless the person is an authorised dealer.


The list of authorised dealers and financial institutions permitted by the Controller of Foreign Exchange to buy or sell foreign currency are as below:

Affin Bank Berhad
Affin Islamic Bank Berhad
Al Rajhi Banking & Investment Corporation (Malaysia) Berhad
Alliance Bank Malaysia Berhad
Alliance Islamic Bank Berhad
AmBank (M) Berhad
AmIslamic Bank Berhad
Asian Finance Bank Berhad
Bangkok Bank Berhad
Bank Islam Malaysia Berhad
Bank Muamalat Malaysia Berhad
Bank of America Malaysia Berhad
Bank of China (Malaysia) Berhad
Bank of Tokyo-Mitsubishi UFJ (Malaysia) Berhad
CIMB Bank Berhad
CIMB Islamic Bank Berhad
Citibank Berhad
Deutsche Bank (Malaysia) Berhad
EON Bank Berhad
EONCAP Islamic Bank Berhad
Hong Leong Bank Berhad
Hong Leong Islamic Bank Berhad
HSBC Amanah Malaysia Berhad
HSBC Bank Malaysia Berhad
Industrial & Commercial Bank of China (Malaysia) Berhad
J.P. Morgan Chase Bank Berhad
Kuwait Finance House (Malaysia) Berhad
Malayan Banking Berhad
Maybank Islamic Berhad
Mizuho Corporate Bank (Malaysia) Berhad
OCBC Al-Amin Bank Berhad
OCBC Bank (Malaysia) Berhad
Public Bank Berhad
Public Islamic Bank Berhad
RHB Bank Berhad
RHB Islamic Bank Berhad
Standard Chartered Bank Malaysia Berhad
Standard Chartered Saadiq Berhad
The Bank of Nova Scotia Berhad
The Royal Bank of Scotland Berhad
United Overseas Bank (Malaysia) Berhad

Last Updated Date : 08 March 2012

UPDATED 7 August 2012
You can find the list of known companies and websites which are not authorised nor approved under the relevant laws and regulations administered by Bank Negara Malaysia:
http://www.bnm.gov.my/documents/2012/Financial_Consumer_Alert_listEN.pdf

For further enquiries, members of the public can contact Bank Negara Malaysia at:
BNMTELELINK (Customer Service Call Centre)
1-300-88-5465 or
E-mail: bnmtelelink@bnm.gov.my

Globalization consequences

In last article, I mentioned about globalization widening the gap between the rich and the poor. With the pressure from the rich countries and individuals all around the world, property price has shoot up all over emerging and poorer countries. Because the property price has gone up fast in recent years, a lot of youngsters in the age of 20s and 30s in my country, Malaysia, rush and dump most if not all of their life saving, into property, thinking that if they do not buy now, they cannot afford in latter years. Some even get monetary support from their parents. They realized that the rise of their income will not keep pace with the rise of property price.

I am a bit worry about it as this may be another kind of property bubble. I am not able to tell how the problem is, but I think this "scare to fall behind" mentality is not a healthy phenomenal, and do not reflect normal affordability and demand among the youngsters of the poorer and emerging countries.

They are bearing more debt to income compare to previous generation because of that. They do not have much money left after paying off housing installment every month. Naturally, they will spend less, so consumer buying power or domestic demand should be weak.. If they borrow, their debt increase further and creating another debt bubble. Currently, a lot of countries interest rate is at very low level historically. I am not sure, but I am afraid the current global demand is somehow inflated because of that.

The 20s and 30s youngsters are the main pillar of the countries. If the property price does drop, not only their life will become more difficult, their countries also will face big problem. So, to all the youngsters except the rich one, i am not saying that buying property now is a bad idea, but I want to say is please control your financial prudently.

Globalization Causing Structural Problem

Today I learned something from a popular Chinese Economy commentary talk show 石评财金分析, about globalization. He said, globalization has benefit us but also bring in bad consequences. The benefit of course is the international trading that increase the economy pie of the world. The consequences is it has widen the gap between the rich and the poor. This is one of the important reason why the demand is so difficult to pick up after 2008/2009 financial crisis.

In the globalization world, money flow freely. The rich countries flow the money to poorer and developing countries and inflate the all the asset prices. What happen to the majority poorer people in developing country? They do not gain anything. In fact, they feel the pressure getting harder and harder to survive. The rich controls the game and gain from the poor to make them richer, while the poor stay poor and helpless. The only way for the people is to walk down the street to protest, later may be the government will implement protectionism trade policies, and hurt the global economy further.

After 2008/2009 crisis, the demand drop substantially following the burst of bubbles. Governments realized the structural problems of the widening gap between the rich and the poor, but all prefer to inject more money into the economy to save the market. The short term countermeasure although worked, but create numerous of bad consequences, such as the increase of public debt of some European countries, Spain bank's problems because of the country's housing bubbles, inflated asset price and municipal debt bubble in China. However, with all the monetary measures, after more than 3 and a half years, the demand still very weak globally, and the rich and poor gap keep widening.

I think step aside the short term economy gain, it is better to solve the structural problem before the people riot intensify and cause serious violences and spread to all the world.

Setting new goal

Feel like want to run a marathon. May be it is the desire fire lit by my favorite author, Haruki Murakami, I feel that since I like jogging, may be I should take up this challenge.

I feel awake when i have new challenge. Setting goal and work hard to achieve give life meaning. I never run more than 5 km, so I knew that in order to run the marathon, I need to adopt different mindset, and apply different running method and strategies.

To link it to investment, leaders sometimes need to try something different to solve the stubborn financial or economy problem. There is no way they can solve the problem with the same countermeasure which did not work. May be the world needs to find new direction of growth or hope to pull us out from the current global financial or economy difficulty. Same as company, company profitability or competitiveness will not change or even deteriorate if the management do not reinvent the working method or direction continuously..

Having new goal is important, to a country, company and individual like us. It gives hope and extracts our inner ability for us to grow further.

Diversification

Investment is really a scary thing. The world outside change so fast that one could not be possible to get all the information, so much so as a person as lazy and not very smart as me. What I normally do is just grab some information from news or the company announcement and link it with the annual reports and do some analysis and calculation, with the hope to outsmart the market.

Of course you need to know roughly the big picture of the world. But big picture is big picture, it is easier said than understand. To me, it is still just like me being a blind man get to know the shape of an elephant by touching the let say ear or leg of the elephant. When the stock go the way as I hope for, I will think that I get the big picture right. But when the stock go the other way round, i will think that I do not know some information and get the big picture wrong.

When something go wrong, first I will search for any new updated bad news that I miss out. If there is no bad news found by me, I will ignore and think it is just a short term market volatility, provided that it do not drop wildly out of my expectation. Once a stock I owned drop so much out of my expectation, you bet that I will get panic and revalue the stock very much lower. I sold at loss. You know, it bounced back later when somebody buyout the whole business at a very high price. That was the case of of my previous experience. The stock occupied quite a huge percentage of my portfolio causing huge volatility of my portfolio. I put a huge bet on a wrong tree that I never thought it can be a wrong tree. The lesson is to diversify.

I hope that people who happen to read my blog diversify your portfolio wisely. In that sense, it will act as many many blind men touching different part of the elephant. You will be able to define the big picture in a more accurate way. Bet on 1 single stock or 2 therefore is a very dangerous game and chances are very high that you will get it wrong.

Look beyond numbers.

In time of very depress and hopeless, a lot of the company's financial statements look the same, full of blood. Their share price also reaching no value. If you want to take really really huge profit, you have to look at those counters, and look beyond the financial statement.

Because in this point of time, government will come out with policies, helping those companies that are too important to the countries and economy, sometimes bail them out. After the government took actions, suddenly the financial statement and outlook change to good, and the share price rocketed sky high!

Dilemma of unit trust agent

One of the bad things about being a unit trust agent is they don't know what the risks are actually taken by fund manager. Combination of stocks In the fund only published semi annually or annually. Even though published, almost all unit trust agents do not understand the stocks bought by the fund manager, (if they know, they wouldn't be unit trust agents but fund managers), they also don't have detail of underwater stocks as transactions may have been made before the publication (detail transactions are not revealed).

As unit trust agents, they are told about the objective of the fund, the market risk of the fund, and they are brain washed to believe stubbornly that dollar cost averaging strategy will win ultimately. They don't realize that the too long time taken for market to recover will build up opportunity cost too high that in many case, invest in bond fund might fare better. Although stipulated in the prospectus the risks involve, the risk taken by fund manager in anticipating for long term return might turn out to be wrong bet in volatility and changing economy, which is out of expectation of investor. (you can see that when the fund performance going down is way exceed the benchmark and never recover when market or benchmark rebound).

A previously perfectly good track record may not guarantee future performance. Although every unit trust agent learn it during their license examination, they quickly forget it when they enter into sale force. They are brainwashed to worship their unit trust product and company, convincing themselves the product they are selling is the best product, and anyone miss it should feel regret. They soon become confuse when the situation turn bad.