5 Secrets in Plain Sight of Warren Buffett

I have finished reading “Secrets in Plain Sight: Business & Investing Secrets of Warren Buffett” by Jeff Matthews some time last month. It is quite a simple read describing what the author learnt in his two visits to the annual meeting of Berkshire Hathaway in 2011 and 2012. There are 42 “secrets” in the book, mostly about investing and some about life in general.

The title of the book is highly appropriate, since the “secrets” are not rocket science but things we all know but tend to forget. I understand there are many Buffett fanatics out there, but understanding how he does things may not be that useful for smaller investors. After all, he leads a different lifestyle from most people and not many people have the opportunity to buy whole businesses instead of odd lot. Nonetheless, I have picked up 5 “secrets” that may help us see more clearly the way to huatting.

#1: Think about what may happen, not when it will happen

Warren Buffett makes his investment decisions based on cold, hard appraisal of each particular market at a particular moment in time. After investing in undervalued stock, he leaves time for the correction of the price. I am a believer of intrinsic value, and by having time on your side, you definitely will have a better chance of success. Whether it is in investing or value betting, periods of loss may be unavoidable. If you are sure that your expected returns are positive, have ample capital and time and returns will come eventually.

#2: Remember what Albert Einstein called “the most powerful force in the universe”… compound interest

Warren Buffett has managed to achieve a growth rate of 20.2 percent a year for 46 years between 1965 and 2010. That itself is an impressive figure. When you calculate the cumulative gain amounts of 20.2 percent compounded over 46 years, that’s an amazing half a million percent. One big regret I had is not starting young enough. Even if the amount you started off is small, if the compounded period is long enough, a year of compounding is able makes a whole lot of difference. I urge the young readers out there to start if you haven’t start so, and aim for a lower but more certain return.

#3 Diversification is for the know-nothing investor

Buffett put 2/3 of his net worth in shares of Geico in January 1951. School taught us to diversify so that at the end of the day, we will only be subjected to market risk and that is the only risk we are rewarded for. At the end of the day, who is right? My take is both are right. What we learnt in school refers to buying shares that are priced correctly and reap the returns of an average equity. On the other hand, Buffett looks for shares which are underpriced and waits for the price to correct. It will depends on how much time and effort the investor is willing to put in. If he is willing to find out everything about the business and do a proper valuation, it will be alright to not diversify as long as he is confident that he is right.

#4: Always remember: “a single, big mistake could wipe out a long string of success”

In Buffett’s own words, “Over time, markets will do extraordinary, even bizarre, things. A single, big mistake could wipe out a long string of success. We therefore need someone genetically programmed to recognize and avoid serious risks, including those never before encountered.” Those who have read a number of posts on my blog will know that I have been there done that. I am probably not someone who are programmed to recognize and avoid serious risks. For those like me, do not despair. Search for the best practices in risk management and make it a point to make them your SOP when investing. This should give you a sufficient layer of protection.

#5: Be open-minded. You never know where you’ll find opportunity

That is what I always advocated in terms of huatting, as you can see the diverse ways I have introduced in the HuatWithMe matrix. Yes it is true that if you have already found a method that works for you, you can stick to it and get rich. However, by being open-minded, you may find new opportunities that can offer you much higher returns compared to what you have been doing all the time. In addition, if you ever face the “problem” of having too much cash and too few opportunities to invest, keeping open-minded can allow you to diversify effectively instead of being forced to make sub-optimal investments.

Some rules I do not agree with

I do not agree with all 42 rules mentioned in the book. In particular, there are 2 rules which I find quite disturbing. One of them is actually the very first rule stated in the book, that is “The first rule is not to lose. The second rule is not to forget the first rule.” For me, losing it not an issue, as long as at the end of the day, you win more than you lose. If you follow strictly the first rule, you might tend to be over-conservative and maybe left with very limited options to invest. You will probably miss out on promising growth stocks and other good but slightly riskier opportunities, just like how Warren Buffett missed out on Microsoft despite Bill Gates being his good friend.

The second rule that I do not agree with is “If you don’t like the product, don’t buy the stock!” Most of the time, listed companies that can produce goods that you do not like tend to have certain competitive advantage or monopolistic power that can keep them profitable. Take SMRT or Singtel for example, there are many complains about their service level, yet people continue to use their services due to the lack of alternative. Moreover, if you don’t like the product and yet produce a high valuation (probably biased downwards) for the company, the margin of safety is actually higher since the actual valuation is likely to be higher than the biased valuation you produce.

In overall it is still quite a good read and if you are interested in getting the book, it is just $4.99 on amazon.

Breaking up with Gambling

Dear gambling, I am breaking up with you. Yes, I mentioned this to you several times in the past seven years but eventually forgave you and returned to you. But this time, it will be for real. I am leaving you for good.

Meeting you seven years ago was probably the worst thing that has happened in my life. Memories of that dreaded day still remain fresh in my mind. It was the day I learnt about the chi distribution during a mathematics class. Being young and naïve, I actually believed that I could accurately predict the number of goals that would be scored in a soccer match with high school mathematics. I place a bet that very night. That bet was lost, but it was just the beginning of our relationship.

Since that day, the ups and downs of my life were exemplified drastically. You introduced so much greed, fear, remorse, disappointment and despair to my life that some times I felt that I have lost myself. The stress level and losses start to pile up that I was amazed at how we actually managed to stay together for the past seven years. It was probably due to the false hope you gave me after each setback that by working smarter and heavier commitment, the losses will soon be a thing of the past and the winnings will follow soon enough. Or it was simply too hard to call it quits to move on after so much money was committed and lost.

Again and again, you took advantage of my soft-heartedness to satisfy your every growing demand. From a harmless five-dollar bet in the beginning, you started to ask for hundreds and a thousand dollar a bet. Soon, when it was certain that soccer betting was not the way to go, you introduced me to options trading, binary trading and the different games in the casino. I kept my faith in you throughout, but in the end, all the promises of a bright future together were no more than empty promises.

I believe I will miss you after our break-up. After all, we did have some happy times together, when I had winning streaks that seem to be able to last an eternity. I enjoyed those days so much that I could imagine spending every single day of my remaining life with you. Yet, time is the best proof that we will not have a future together.

Life will definitely be less exciting compared to the times with you but it is okay. I have learnt to treasure certainty and want to know that if I spend more than I earn, my bank account will grow. At my current age with so little money to my name, I could no longer afford to lose my life savings any more.

This time I am sure I will move on with my life without you. And you should too. Go ahead and find you next victim. There will be many out there who are like the old me waiting for you.

The Huat With Me Matrix – Part 2

Previously we have discussed that strategies to maximum returns from income categories with positive expected returns. For this post, we will discuss on maximizing returns from income categories with negative expected returns. A disclaimer before I begin – it is IMPOSSIBLE to get a positive return in the long run if investments are made in these categories on a regular basis.

A quick recap on the HWM matrix. Similarly, the income sources with negative expected returns can be categorised into low, medium and high variance category.

Category 4 – Negative expected return, low variance

It is not easy to find any logical examples of income sources from this category. It is akin to buying all 10000 numbers for 4D, or both black and red for roulette. One possible example I can think of will be the purchase of depreciating assets such as cars. There is a small chance that you can sell a car at a higher price than you purchased it for due to increase in the price of COE, but in general the price of the car is expected to fall with time and mileage.

Strategy for this category:

Strategy for this category is simple. AVOID IT! In fact, money ‘invested’ in this category should be categorised as expense instead of an investment. For example, a person purchasing a car should consider it as a mode of transport, and a person who purchased both black and red  for roulette should consider the money wagered as a form of entertainment expense.

Category 5 – Negative expected return, medium variance

Casino games and sports betting will fall in this category. The variance in this category allows individuals to have a positive return in the short run, making it a very popular choice for ‘income’ for many people.

Strategy for this category:

The aim of this category is to have a positive income in the short term. To have a higher chance of doing so, one should opt for games with a higher probability of winning with a lower odds. Using roulette as an example, instead of betting on just 5 numbers, a way of increasing the probability will be to bet on two dozens instead. Similarly for soccer betting, instead of placing a bet on draw, placing a wager on the team receiving a larger handicap than the even money line will constitute a high probability set up.

In addition, since a short term return is targeted. The frequency of investments made should be kept low so that the average return of each bet will not move towards the negative territory. To compensate for the low frequency, the amount invested per bet can be increased slightly.

In short, the appropriate strategy is a hit and run strategy. Greed will be the greatest obstacle for success in this category. Set a target and stick to it. Once the target is achieved, enjoy with your income instead of hoping for more.

Category 6 – Negative expected return, high variance

Well this is the last category of income. The outcome of category is highly dependent on luck. Nothing should be expected from this category, but once you receive something, it is bound to change your life.

Lottery with a high payout will fall in this category.

Strategy for this category:

Since income from this category cannot be depended on, the obvious move is to put in as little money as possible. You should also look for sources with the highest potential payout possible. For example, comparing between 4D and Toto, toto should be the preferred choice.

Just once is enough

What you hope to achieve in this case will be to strike possibly just once in your lifetime, and the prize money will be more than sufficient to cover your expenses for the entire lifetime. For example, spending $1 per draw for Toto will cost you approximately $5000 for 50 years. If you are able to hit the group 1 or group 2 numbers for just once, you will stand to gain.

The Huat With Me Matrix – Part 1

Money can be made almost everywhere. In fact, there are so many ways to make money that people finds it hard to choose the most efficient and effective ways to make money. This problem may not be so relevant for the highly conservative who only receive income from their job. However, as multiple stream of income becomes a trend nowadays, it may be useful to categorise our source of income and optimise the allocation of resources to make the most money out of it.

There are many ways to categorise the sources of income, but as a statistician, it is only natural for me to categorise the different sources based on expected return and variance. Presenting to you the HuatWithMe Matrix (which I will write as HWM Matrix from this point onwards), a 3 by 2 matrix to present the different forms of income. A point to note is that there is an extra box which cannot be categorised into one of the six categories since whether the expected return is positive or negative depends on the individual.

In the following paragraphs, I will be explaining to you the 6 categories in the HWM matrix and how to go about getting the most return out of each category.

Category 1: Positive expected return, Low Variance

This category of income can be further categorised into 2 sub-categories – income from capital and income from time. Income from capital will refer to investments that are almost certain to reap a positive return, such as high grade bonds, savings accounts and arbitrage, while income from time will refer to income from employment, both primary and secondary. This category of income forms the bulk of the total income of most employees.

Benefit of the category 1 income

This category of income is attractive mainly due to its stability. Unless you have already achieved financial freedom, the stability of this category of income makes it an obvious choice for the primary source of income to ensure survival.

Strategy for this category:
This category of income can also be called ‘free’ money, since the risk is negligible. To get the most income out of this category, one will need to put in as many resources as possible. However, since resources (time and capital) is limited, the correct strategy will be to go for opportunities with the highest rate. For employees, this will mean to choose the job that can pay you the highest for the longest period of time, while for investment opportunities, invest in the opportunity with the highest rate of return within the low variance category.

Category 2: Positive expected return, medium variance

This category is fairly similar to the first category and is often a main source of income for businessmen as well as commission-based job-holders. The higher variance keeps the risk-adverse away, but is seen as an opportunity for those with higher risk appetite. After all, the likelihood of getting very rich (and also very poor) is much higher by starting a business than working for someone else for life.

Strategy for this category:

I am neither a businessman nor a salesperson, so I will not be teaching you how to make more money with your business or earn more commission. However, for this category rate still remains a top priority. The rates should not be compared only among businesses but also with income from category 1. If you are not a natural businessman or salesman, you might be better off working for others. On the other hand, if you are born with these talents, unlike in the first category, going all out is not advisable. With the variance, you are required to keep some capital for the rainy days.

Category 3: Positive expected return, medium variance

Well, it is quite tough to think of examples in this category. All I can think of will be value betting. Some may classify value investing in this category, but I have classified investment in equity as a separate category since I am not totally convinced that these investments have a positive expected returns.

Strategy for this category:

As per any high variance investment, the strategy for this category is to put only a small percentage of your total capital per investment. Even though in the long run you are expected to make a profit, in the short run you may loss significantly with a chain of losses. Money management is of top priority and for the amount of money to invest in a specific investment, it will be useful to read up on Kelly’s Criterion.

To be continued…

Having covered the three categories with positive expected return, in the next post I will be covering the three categories with negative expected return. Should we follow the ‘first rule’ strictly or is there any non-monetary factors that we need to consider? Stay tuned to find out.

4 Lessons I Learnt the Past 3 Months from Gambling

As promised for the previous post, I have promised to share with you the things I have learnt in my little experiment. Some of the lessons might be generic in nature, but hopefully the details I have inserted can help you to visualize the magnitude of the emotions I was having then.

1)      Statistics always win

During the first one and a half months of my little adventure, I was up by around 11k. There seems to be no stopping to the long strings of win I have, and money seems to come in too easily. Everything appears so rosy that I can start to make projections about how much additional income I can have per month, and how much savings I will have by the end of the year. I foolishly believed that I actually had a system to beat the house edge.

Only when the string of losses came, my statistician self took over from my gambling self. Variance can be your good or bad friend when gambling, but a negative expected return will always be your enemy. That is the hard fact of statistics and will always be true whenever you are exposed to it.

2)      Anything that can go wrong will go wrong

I have seen Murphy ’s Law in action several times in the past few months.

While playing roulette in the casino, I have the habit of leaving out 3 numbers while betting on 2 dozens, e.g. 1-24 except 4, 5 and 22. Based on statistics, I am supposed to hit the 3 numbers that I missed out on an average of once every 12 spins. While at the casino, I seem to be hitting these numbers on an average of once every 5 spins. Since I’m using a high probability, low payout strategy, a few losses here and there can easily wipe out my capital.

Murphy’s Law set in more cruelly during my recent bet with Singaporepools. The match was between Juventus and Chievo. After some calculations, I figured out that betting on 1 and 2 goals while covering 0 goals would pay out at an odd of around 1.8. Place my bet and went to sleep. Woke up the next day to see the final score is Juventus 1 – 1 Chievo. I proceed to check my poolzconnect account to see that my account balance actually fell from the night before. Puzzled, I check my bet history and realised that I BET THE WRONG AMOUNT FOR 1 AND 2 GOALS!!! I accidentally swapped the amount I was supposed to bet on 1 goal and 2 goals.

3)      You are not as disciplined as you think

I always thought that I was a highly disciplined person, especially since the lack of discipline had thought me a painful lesson in the casino last year. Unfortunately, I was only half right. When I was winning, I could walk out and board a cab home easily most of the time. When I’m losing, it was particularly difficult to stop. Even if I hit my daily withdrawal limit for the ATM, I will withdraw money from the DBS branch at Marina Bay Sands.

My record loss in one session during the past 3 months is an incredible 4.8k. Even though my initial stop loss is just 1.7k, plus the $100 levy, I did not leave upon triggering the stop loss. I increased my stake to 1-2k so that I can cover my loss.

Chasing losses, that’s what it’s called. Unless you are a millionaire playing $100 per hand, you had no chance against a string of losses.

4)      Count your blessings

It has been almost a month since I last entered the casino. Even though I could have walked away 11k richer if I stopped earlier on, I am not depressed over the loss.

In the first place, that isn’t my money to begin with, and I think I still have a small profit in the end.

During the past few months, there were times where I went to meet my girlfriend after a losing session. I was genuinely happy when I went out with her. I am glad that I did not turn into a problem gambler who neglects his family and loved ones. Even though I did not become richer as a result of this little experiment, I learn to appreciate my girlfriend more.

Money can’t buy happiness. You can lose your money, but don’t lose your family and loved ones.

A Roller Coaster Ride

It has been more than a month since my last post. Unfortunately, the lack of post is not a result of being too busy huatting, but to be honest, I was busy TRYING to huat for the past three months. I was trying so hard that I went against my very first rule of only going for opportunities with a positive expected return. Gambling, obviously has a negative return, and that was what I experimented with for the past three months. This little experiment of mine has provided me with a teeny weeny profit (that is not worth my time and effort at all) and a vast amount of experience that I will share with you in this post.

Since the beginning of the year, I have been visiting Marina Bay Sands (MBS) casino on a regular basis, on an average of 3-4 visits per week. On top of that, I have been engaging with soccer betting on a regular basis. The term ‘roller-coaster ride’ is not an exaggeration of what I have gone through in the last few months. Perhaps putting some real numbers will help you to understand my experiment better.

In January, I won 6k and 500 from casino gambling and soccer betting respectively. By mid-February, I have made another 5k from casino, bringing a total winning of 11k from MBS since the start of the year. However, a string of losses made me lose all my winnings for the month, and an additional 4k from January’s winning. In March, I diverted my attention back to soccer betting. With a stake of 1k per bet, in a few days I was down by 2.5k, effectively wiping off all my winnings since January save less than a hundred dollars. That was when I decide to stop my experiment, especially since I will be going on an overseas trip next month so losing my capital will not be such a good idea.

That is the end of some updates of what I was up to for the past three months. In the upcoming post, I will share the lessons I obtained from this roller coaster ride and how that can help us continue to huat together. So stay tuned!

New Additions to the Zodiac Family

The Marina Bay Sands Dragon of Fortune game is coming to an end tomorrow. I visited MBS yesterday in order to collect a couple more figurines before the end of the promotion. Since I already have 5 “any zodiac redemption receipts” and 2 “dragon redemption receipts”, getting any zodiac redemption receipts will guarantee two additional figurine for me. Having earned six points in the short casino visit, I earned two chances in the game. I managed to get 2 “any zodiac redemption receipts”, which aren’t too bad since I can add two more figurines to my collection.

From some earlier reading on Feng Shui, the dog, horse and tiger belong to one allies group. For those whose horoscope is either one of the three, harnessing the power of the horoscope will help to increase the luck of them. Since I already have a pair of tigers, I opted to have a dog and the horse. Probably I will display this set of allies on my office desk to boost my luck!

The Horse

The Dog

The Allies

Ban-Luck, the CNY Blackjack

Apart from eating all the yummy snacks, what Singaporeans do most often during Chinese New Year will be gambling. Since Mahjong is a game for four players only, blackjack offers a good alternative where the whole family can join in with the coins and small notes. For a regular blackjack player in the casino, it amazes me how do the young and old understand the complicated rules of this variant of blackjack that I actually need to wiki to understand it.

Wikipedia has labelled this form as Chinese Blackjack, but since young I have known this variant of blackjack as Ban-Luck, or simply 21-points (二十一点）Similar to the typical blackjack, the objective of the game is to have a hand of higher points than the dealer, without exceeding 21 points. Even though the objective of the game is same, the counting of the points, the dealing of the cards and the options available are quite different from casino blackjack.

Point Counting

For 2-10, J, Q, K, the counting is basically straight forward, similar to normal blackjack.

The value of Ace is more complicated, since the value depends on the number of cards in the hand as follows:

Number of card = 2: Ace = 10 or 11
Number of card = 3: Ace = 10 or 1
Number of card >=4: Ace = 1

Dealing of the cards

Perhaps one of the reason why ban-luck is so popular during CNY is that only one deck of cards is required, even though two decks may be used occasionally. After the dealer shuffles the card, a player will then proceed to ‘cut’ the deck (splitting the deck into two) and the dealer the place the lower stack above the higher stack. The dealer will then proceed to deal two cards, faced down, to each player, including himself.

Options

While casino blackjack gives players the option to hit, stand, surrender, split and double, players are only given the option to hit, stand and surrender. Unlike casino blackjack where player can stand and hit at will, players can only stand if they have 16 points or more. The player can opt to hit or stand when they have 16 points or more. If the hand exceeds 21 points and bust, the player need not reveal the cards. A surrender option is available when the player have exactly 15 points for the first two cards (There may be some house-rules where player can surrender with 15points for more than two cards).

The dealer in Ban-Luck has definitely more options than the casino blackjack dealer. Similar to the player, the dealer will have to hit if he do not have 16 points or more. The skills of the banker will set in if he has between 16 and 20 points. In this scenario, the banker has the option to reveal the cards of certain players only. The banker will settle the bets with these players before deciding whether to hit or stand. This option will allow banker with only 16-17 points to cut loss by opting to reveal the cards of players with three or four cards in hope that these players have already busted. The banker will also have the option to escape when he has exactly 15 points in his first two cards.

Special Combinations

In casino blackjack, the only special combination is a blackjack. Whereas for Ban Luck, there are more interesting combinations for both players and dealer.

Ban Luck (An ace with K,Q,K or 10): A player with Ban Luck wins twice the amount of his bet unless the dealer has a Ban Luck or 15 points (draw) or a Ban Ban (Lose). A dealer with Ban Luck will collect twice the bet amount from all players without Ban Luck, Ban Ban or 15 points.

Ban Ban (Ace pair): Similar to Ban Luck but the bet amount is tripled.

7-7-7: This rule is more of a house rule. If a player or banker wins with 7-7-7, the bet amount is multiplied by 7. In some variant the bet amount may be only tripled and in some variant the bet may even be multiplied by 21 times!

Dragon (obtain 5 cards without bursting): When the player wishes to hit after receiving the fourth card, he first reveals his hand. After receiving the 5th card, if the total points do not exceed 21 points, he will receive double his bet, regardless of the point count of the banker subsequently. On the other hand, if the total points exceed 21 points, he will pay the banker double his bet. This special combination applies for the banker as well.

Year of the Dragon

Huatwithme.wordpress.com wishes all readers a prosperous Year of the Dragon ahead!

Huat Ah!

Marina Bay Sands Dragon of Fortune

In conjunction with the year of the dragon, Marina Bay Sands (MBS) is having a dragon of fortune game. Each Sands Rewards Club member is entitled to a free swipe per day, and for an additional 6 points earned, an additional swipe will be earned, up to a maximum of 5 swipes per day. The prizes to be won are Zodiac Collectible, cash prizes and merchandises such as tote bags, polo shirt, mug, etc.

The details of the promotion can be found in the e-flyer below or at the MBS dragon of fortune page.

Dragon of Fortune e-flyer

I had fun playing with the game. Unlike some of the previous promotions when most of the time you will only receive bonus chances for a lucky draw, the win rate for this promotion is quite high. In particular I think they are pretty generous with the Zodiac Collectibles, which are 24k gold-plated figurines of the Zodiac animals. Since the year of the dragon is upcoming, people generally like dragons, special receipts are required to redeem the Dragon figurines. For the rest of the animals, you can choose any one of the eleven animals when you have collected three of the required stickers.

As of now, I have swiped for around 15 times and have won 3 figurines (including 1 dragon) and a tote bag. There were three occasions where I won bonus chances for the lucky draw and one occasion where I won a option to win a Regal gift set with $48 sands dollars. Since I am born in the year of the dragon and there was no way I can complete the whole collection, I opt to receive a pair of tiger figurines instead.

Nice box containing the figurines

Unboxing the tiger

The tiger which do not look like tiger

Here comes the dragon

The much sought after Dragon

All three figurines

The tote bag

The promotion ends on 2 Feb 2012. I hope that I can win a couple more good prizes before the promotion ends.

Note: This is not an advertorial. No monetary benefits were received for mentioning Marina Bay Sands Promotion.