Misinfluence of Human Judgement

1. Reward and Punishment Superresponse Tendency
2. Liking/Loving Tendency
3. Disliking/Hating Tendency
4. Doubt-Avoidance Tendency
5. Inconsistence-Avoidance Tendency
6. Curiosity Tendency
7. Kantian Fairness Tendency
8. Envy/Jeolousy Tendency
9. Reciprocation Tendency
10. Infuence from Mere-Association Tendency
11. Simple, Pain-Avoiding Psychological Denial
12. Excessive Self Regard Tendency
13. Overoptimism Tendency
14. Deprival-Superreaction Tendency
15. Social Proof Tendency
16. COntrast Misreaction Tendency
17. Stress Influence Tendency
18. Availability Misweighing Tendency
19. Use it or loss it Tendency
20. Drug Misinfluence Tendency
21. Senescence Misinflence Tendency
22. AUthority Misinfluence Tendency
23. Twaddle Tendency
24. Reason Respecting Tendency
25. Lollapallooza

Cause and Effect

Part 1

We can learn by observation. However, we must be clear on the cause and effect, in order not to make the wrong conclusion.Looks can be deceiving.Someone had made this observation that all rich people have "opportunity fund". Which is the cause and which is the effect?

1. these people are rich because they have opportunity fundor

2. these people have opportunity fund because they are rich?

This is not playing with words. Cause and effect.

I give you an example. I notice that all my successful business partners drive BMW 5 series or 7 series. Can I then conclude that to be successful in business, you have to drive the BMW 5 or 7 series?

Part 2

Let me give another example on cause and effect.

Basketball and tall people.Did Yao Ming become tall after he started playing basketball? Or was he tall and that's why he became a basketball player? We notice that both answer could be correct. Most probably, he was tall and became taller after he played basketball. He was tall from the genes of his parents and became taller because of environmental stimulus.

Now let's look at the cause and effect.

Will you be tall if you played basketball?

Will you be playing basketball if you were tall?

Notice that the answer to both questions can be "No".

It is also difficult to conclude unless we perform a statistical analysis on the effect of playing basketball on making one tall.

So, if I were to go back to opportunity fund, people get rich in many many ways (I am sure of this). And when "investment ideas" arefewer than the amount of cash available, it ended up as spare cash, which some termed it as "Opportunity Fund". The answer to my cause-and-effect question is really obvious.

1. Very Poor: In debt, what ever cash goes to creditors.

2. Poor: Hand to mouth, no savings

3. Not Poor: Some savings for rainy days, no spare cash for investment

4. Rich: Plenty of savings for rainy days, spare cash can be fully invested.

5. Very Rich: Cash is more than investment ideas.

If people can be classified into 5 groups (I apologise for doing so), I don't see how Group 1, 2 and 3 can have spare cash (read opportunity fund). Perhaps for these 3 groups of people to become rich, they should focus on reducing debt, increasing their earning power and/or changing their lifestyles and habits.

Part 3

I was talking about cause and effect. If you have a decent argument or counter argument, I welcome you to post it here. This is a forum. Don't get emotional because someone else has a different opinion or perspective or something else to talk about. In the first place, what I had posted in this thread are from observations and are discussions of intellectual quality.

I repeat. This thread is about cause and effect. I don't argue against having an "opportunity fund" if one has no investment idea at a particular moment. In fact, this is the right thing to do. Like WB said, if there is nothing to do, do nothing. I say if there is nothing good to buy, buy nothing and keep cash. A pokemon card collector knows that.

If I were to define, an opportunity fund is simply spare cash after setting aside expenses for rainy days, which can be invested to receive a higher return compared to risk-free rates. The precursor is "spare cash".

Part 4

Unfortunately I have to poke my nose into this by pointing out another common misconception. It is related to cause and effect, and we have learnt that in our elementary maths. You may refer to the link that I have appended to refresh our memory on set theory.

http://www.statpower.net/Content/310/Introduction%20to%20Set%20Theory.ppt

Example: All red apples are apples, but not all apples are red.

Warning: Stop reading if you think that the above statement is just a play of words. Do not continue because it requires a certain level of logical thinking and a language proficiency.

An opportunity fund is a fund for opportunity. Clear and simple. Savings on the other hand is money not spent. Savings can be used for many other things, including but not limited to taking advantage of opportunity. When it is intended for "opportunities", then it is called "opportunity fund". But savings can be used to fund a wedding, to buy a car, spent on a holidays, and on a million other things. So you see, savings is definitely not an opportunity fund. Instead, the reverse should be true: Opportunity fund is a form of savings.

If I venture further, could we then say that PhD holders are ONLY good for academics?

Shenzhen Flextronics-Insulet Project

http://www.reuters.com/article/companyNewsAndPR/idUSN0432406620071004

This is a wierd project to be in, where Mandarin is not the main language of communication. The site engineers are mostly from Hong Kong and they speak Cantonese among themselves. The technology is from US and there is a team of English speaking Americans. In the US team, there is this guy who was raised in Hong Kong, speaks Cantonese and American English. About 120kg and the best way to describe his waist is that "it has a circumference". He reminds me of the movie character "Fat Bastard".

I purposely brought the Chinese 3-pin plug for my notebook and I am very surprised that the default socket is the English one, the same kind that Singapore has. The reason I was told is that there are many Hong Kong people working here.

Shipping Trust

PART 1

For those who treat shipping trust as a business.

Shipping trust is a business for only the Management but not for the unit holders. The units are more like preferred shares with variable dividend rate. The growth in the "business" will not result in the growth of the "intrinsic value" of the units.

After all, the units are just part-ownership of the ships that the trust owns. From value investing point of view, the overarching question will be "Am I over-paying or under-paying the assets less an annual management fee?"

To the management, more ships equal more fees equal more value for themselves. To unit holders, more ships when divided over more unit results in no net gain per unit. (Assuming debt is optimized)

PART 2

I think the intrinsic value of a shipping trust lies in its ability to use debt at a lower interest rate to fund the purchase of an asset that generates a higher rate of return. The "intrinsic value" of the trust does not change significantly whether the trust is fully leveraged or running without debt, even though the dividend payout as well as the level of risk the management is taking could be different. The different dividend payouts (and hence yields) resulted in different valuations. But in my opinion, there is still minimal change to the intrinsic value of the trust.

I agree that because debt level affects yield which in turns affects valuation, these create opportunities for investors to purchase the units at depressed valuations.

PART 3

If I were the management of a shipping trust, what will be the intrinsic value?

1. Capability of management in utilizing capital (i.e. borrow cheap and lend dear)
2. The amount of capital (through issuing units) the trust can raise
3. The amount of leverage the trust can use
4. The amount of earnings that the trust can keep (to fund growth) and hence the amount of dividend paid

From the 4 factors, can we improve any of them without a corresponding dilution through issuance of new units?

1. Yes
2. No
3. Yes
4. Yes

You are right to say that the intrinsic value of the trust can change. My point is that any improvement on the intrinsic value will rely on:

1. an improvement on the management
2. a change in the leverage policy (to yield on the positive side, of course)
3. an adjustment of the payout ratio

I think our "disagreement" stems for the definition of intrinsic value. How intrinsic is intrinsic? You mentioned that the trust has so far committed only $290mn of debt. I agree that if the trust borrows more, it can earn more. However, the ability to leverage should already be factored in when we estimate the intrinsic value, whether or not the money has been borrowed. To me, if a trust CAN borrow up to 50%, that figure, among others, determines the intrinsic value, whether or not it HAS actually borrowed anything at all. If it hasn't the DPU will be lower, if it does DPU will be higher. The use of leverage affect the DPU. The ability/restriction to borrow, as defined within the trust corporate policy, affects the intrinsic value.

PART 4

The discussion is coming to full circle. I started with "Whose business is this - Unit Holders or Trust Managers?" and then said that the trust is like preference shares. If I can add now, that means that the unit holders get LIMITED upside but ALL the downside.

- On Debt to Equity
I believe there is some information in the Trust Deed on the maximum leverage the trust can use. You may verify this as I did not get to look at it myself. A more appropriate estimate would be to look at other trusts, including those listed elsewhere. The total amount of debt cannot be estimated over the lifetime of the trust, but the debt to equity will not go too much out of proportion. And the debt to equity is what matters to the unit holders because any increase in debt without an increase in units will result in a higher ratio.

- On Interest Rates
The management must be shrewd enough to borrow (cash) cheap and lend (the ship) dear. They must also borrow long and lend long. This will "hedge" their interest rates and earn the unit holder money.

- On Equity Issuance
Each time the Trust issues more units, the trust manager benefits if he can use the funds successfully.

- On Net Distributable Amount
The trust will distribute at least 90% of the Net Distributable Amount. That means that the trust can retain only up to 10% of the profit for reinvestment. I view such terms negatively. If the trust can have a 15% return on invested capital, I would rather have my dividend reinvested. On the other hand if the return is bad, I would rather not own the units. The third option would be to use the dividend and purchase more units if the return is good. That leads to the question: What is the ROE? After all, business-like investing is about ROE.

To sum up, rather abruptly (sorry), investing in a shipping trust is really investing in a fixed income instrument. I don’t view it as a business because the interests of management and the unit holders cannot be aligned. I would look at the margin of safety from the perspective of whether or not the trust will have the financial capability to continue paying dividend (my expected return) as opposed to a discount to the intrinsic value.

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More discussion at:
http://sgmusicwhiz.blogspot.com/search/label/First%20Ship%20Lease%20Trust

"A Business that I can Understand"

If you are in the business of buying businesses, you will know that legendary investor Warren Buffett's most stringent criterion is that he has to understand the businesses that he buys.

"I look for businesses that I can understand."

Like his other statements, this one is simple and yet offers sofistication. As far as I read, there hasn't been an explanation on this statement. I guess the main reason is that no big words were used and people would appear silly if he asked. However, after I read this statement for the 359th times, it ponders upon me. Exactly what he wants to understand about the business? What elements are difficult to understand even for a guru like him?

My thought process aloud...

1. How is the business going to get its revenue and profit?
2. What is the cost structure?
3. Are there cost factors that cannot be controlled? e.g. labor, raw material, rental, regulatory expenses, R&D
4. Can these costs be passed on to the customers?
5. Can the business raise its price to raise overall revenue and profitability?
6. Are there regulations on pricing?
7. Is there intense competition that squeezes the margin?
8. If there is no competition, why? e.g. Is it worth for an incumbant to compete in the market?
9. How much capital does the business need to double its profitability. i.e. Can the business employ a greater amount of capital at the present rate of return.
10. How can the revenue/profitability disappear? i.e. MARGIN OF SAFETY
11. Can I be sure that the product or service that is provided by this business will continue to be desirable in 10 years time?
12. Does the business need to constantly innovate itself to stay in business? or can it simply do the same thing over and over again to strengthen its position?