Tuesday, June 28, 2016

Book Review: Clara Ho Tung : A Hong Kong Lady, Her Family and Her Times

In my research and investing I stress three things: people, structure and value.  I look for companies that are controlled and managed by quality people, have corporate structures that align minority and majority shareholder interests and trade at valuations that are below fair value if not outright cheap.

This post is about people, and specifically about one of Hong Kong’s most prominent and oldest family, the Hotungs. People are the most important aspect in business and I enjoy reading business biographies to better understand what characteristics successful leaders have that may help me evaluate today’s CEOs and controlling shareholders.

I bought the book to gain insight into Sir Robert Hotung Bosman, one of the wealthiest people in Hong Kong if not all of China before its 1949 liberation.  I’ve heard a lot about him over the years, but never really knew the source of his wealth, family dynamics, etc.  Despite his notoriety, I never found a good book about him or his family.  “Clara Ho Tung: A Hong Kong Lady, Her Family and Her Times”, written by his daughter Irene Cheng was the closest I could find.  Clara Hotung was Robert Hotung’s second wife.

Unfortunately, there isn't much information on Robert Hotung’s business dealings and how he became so rich.  

Between the book and Internet searches, he seems to have made most, if not all, of his money as a comprador for the Jardine group.  

The following paragraphs from another book provide a good background to the comprador system and Robert Hotung’s role in it.

'…the comprador systems was crucial to the rise of Sino-foreign commerce in modern China.  Named after the Portuguese word for "buyer", the comprador system originated in the late Ming dynasty but came to prominence in the early 1800s'. 

'Some Western company officials became so dependent on their compradors that they were hardly aware of how their businesses in China functioned below the highest levels of operation.  By the end of the nineteenth century, compradors were among the richest men in China – not just in the treaty ports but in all of China.  Two compradors would become especially famous for their great wealth.  One was the comprador for Jardine’s in Shanghai in the 1890s, one of the richest men in China. The other was Robert Ho Tung, the Eurasian comprador for Jardine’s in Hong Kong from 1883 to 1900, and the wealthiest man in the colony.'  (From: Edge of Empires: Chinese Elites and British Colonials in Hong Kong, John M. Caroll, 2005)

The late 1800s was perhaps the height of China’s opium epidemic, and Jardine’s is widely believed to have its biggest dealer.  Although I’ve not seen any source directly linking the Hotung's wealth to the opium trade, it’s pretty clear that a large part, if not the vast majority, of the family’s wealth originated in some form from the drug trade. (Link to my blog post comparing William Jardine to the main character in the TV show Breaking Bad is here).

This is likely true for many of Hong Kong’s old prominent families and companies. Hong Kong was founded in the 1840s as a legal place to store opium that was destined for China, where it was illegal (at least on paper).  At one point opium contributed 22% of the Hong Kong government’s budget (see here).

From the book and additional sources I got the impression that he invested most of what he made into property in Hong Kong, Macau and other places in China.  Hong Kong continues to be very property focused.

While there isn't much here for the investor or business reader, the book is nevertheless an interesting read.  It describes growing up in a traditional household when China was undergoing tremendous change. Although mixed, the Hotongs considered themselves Chinese and provided lots of funds and support to Sun Yat San and modern China.

Many of Hong Kong’s oldest schools and institutions were started or initially funded by the Hotungs.  Amongst their many charity works are the Lady Hotung Hall at Hong Kong University, the Hotung Secondary School, the King George V School and the Tung Lin Kok-yuen Buddhist temple in Happy Valley.  The website of the Robert H.N. Ho Family Foundation, run by Robert and Lady Clara Hotung’s grandson can be linked to here.  

Wealthy and powerful, the family’s disputes and internal squabbles are often public and they are they favourites of Hong Kong's paparazzi.   The latest has the patriarch's oldest son, Eric Hotung, disputing a deal that was made some 50 years ago with his cousin (link here).

Like other book reviews I’ve written, I’ve cut and pasted portions from the book that I think are especially interesting.  

The Hotungs were very, very rich.  Located on Hong Kong’s expensive Peak neighbourhood, their compound,‘Idlewood was a large, well-known house, with an excellent view of the harbour and with gardens on several levels linked to each other by flights of stairs and pathways, two cement tennis courts and a large vegetable patch on the highest level.'  

‘The houses Father bought on Victoria Peak in 1906 were named The Chalet”, The Dunford”, and “The Neuk”.  Each house had five main rooms - three bedrooms (with two or three bathrooms), a living room and a dining room. "The Chalet’"and "Dunford’"were joined to each other by two tennis courts, one of which was never used.'

'In addition to the Idlewood and Peak houses, Father also had residences outside Hong Kong.  In Macao, he owned No.25, Praya Grande, which immediately faced the Pacific Ocean.'

'He also bought a house in Shanghai during the 1920s.  There was a large lawn and vegetables patches at the back.' ‘...Father also bought a house in the beach resort of Tsingtao (Qingdao)’.  ‘Lastly, there was a house in England at 18, Mortlake Road, Kew Gardens.  The house stood in large grounds which included a lawn in the front, with roses, a mulberry tree and flower-beds; and a tennis court, garage, vegetable gardens….’.  ‘Father acquired several boats’.

There was no motor road which went up to the Peak until the early 1920s.  The only way to go other than walking was the Peak Tram.  The Tram station on the Peak itself was reached by sedan chair, by rickshaw or by walking.’ ‘...for convenience, our family had several chairs and rickshaws of its own and men to handle them.’ 

'When my parents travelled, they took along...everything they might need'.  'We even took an upright piano with us, because Mamma did not want us to neglect our musical education during the holiday.' 

Other family members worked for Jardine's.  ‘After Father retired, because of poor health, from the compradoreship of Messrs. Jardine, Matheson and Company, Uncle Ho Fook was appointed to the position…’. ‘Our Fifth Uncle, Mr. Ho Kom Tong...also worked for Messrs. Jardine Matheson…’  

But lived simply. Mamma always encouraged us to have simple tastes, and brought us up frugally.  She explained that if some day we were not able to live affluently, we would not feel the difference so much if we had not become accustomed to luxuries.

They were generous.  '...in 1930 she established the first Po Kok Free School in Macao, and a second one, with the same name, in Hong Kong.  In 1932 she established the Po Kok Buddhist Seminary at Castle Peak, in the New Territories.'  'She named the temple, “Tung Lin Kok Yuen", the first word being Father’s first name and the second and third her own Buddhist names.'  

Tung Lin Kok Yuen
Changing times.  'I have often felt that among the Chinese, Mamma’s generation and mine have been hardest hit by the rapid social changes that took place during our lifetimes’.

‘She had come from a refined family and so had bound feet’.

When Eva and I graduated from D.G.S. (Diocesan Girl’s School), there was no higher education open to girls in Hong Kong.' ‘In September 1921, the University of Hong Kong admitted girls for the first time, and I was one of the first three to enter.  During the academic years 1921 to 1922, there were only three, and later four or five lady undergraduates, as we were then politely called, among more than three hundred male students…'  ‘But we endeavoured to keep up with the men in our academic pursuits, so as to overcome any impression that girls would not be able to hold their own in an institution of higher learning.  It was pioneering work and Mamma encouraged us as always.'  

Changing race relations.  'In the late nineteenth century and on into the twentieth, there was considerable social prejudice against Eurasians from both European and Chinese.  This prejudice made many of them the more determined to "make good"....Their best course was to make a lot of money, for with wealth came power and prestige.'    'They were also determined that after they had attained this objective they would contribute generously to local charities and to worthy causes in both countries of their heritage'.

'Except to conservative Chinese or Europeans it simply is not important anymore'.  'Their numbers have grown considerably by intermarriage and it is well recognised that many of the most successful people in Hong Kong are Eurasian, so it is no longer felt to be a handicap to belong to this group, even though it remains a small minority.

Good descriptions of family life.   'For many westerners it may not be easy to imagine a situation in which a man had two wives and a concubine alive at the same time, all getting on amicably with one another, including the children born of different mothers.  Yet to us this seemed quite natural.  Mamma brought us up to have great respect for our elders…’  

'We had three parents: my father, Sir Robert Ho Tung, my mother, "Lady Clara Ho Tung", and Father’s first wife, "Lady Ho Tung", or "Lady Margaret", who was childless.  In accordance to Chinese tradition, she herself arranged for my mother to be also married to Father, as a "ping tsai" or "equal wife".  We children were taught to call our mother, ‘Mamma’ and Father’s first wife, "Mother".  

Opium was legal. I must, however, add a final touch to the account of our acquaintance with the theatrical couple. They were opium addicts, and in those days opium smoking was still legal.  So every time they came to our house to teach us Chinese opera, we had to supply them with opium and the necessary smoking equipment.’

Monday, May 16, 2016

Sisters Are Doing It For Themselves...And Others

In my research and investing I stress three things: people, structure and value.  I look for companies that are controlled and managed by quality people, have corporate structures that align minority and majority shareholder interests and trade at valuations that are below fair value if not outright cheap. This post is about people and how women are making big strides in developing countries.

One of the most important steps in my research process is checking the background and reputation of corporate leaders, politicians and policy makers. Basically anyone that may influence equity valuations. Over the past several years I seem to be spending more time researching and evaluating female leaders.

The increase in the number of women leaders in ‘emerging’ and ‘frontier’ markets is particularly noticeable. I've been spending a lot of time looking at companies in these markets as for the last few years as they've been trading at valuations significantly less expensive than their counterparts in the ‘developed’ markets.

This is a large and long-term positive development.  Theoretically a larger pool of candidates should lead to better leaders. This should ultimately benefit companies and countries that make full use of their resources.  I read years ago in The Economist that educating girls and young women was almost a sure-fire way to increase a country’s living standards.

The increase in female executives was most noticeable on a research trip to Romania last year. As I've written before, stocks traded in Bucharest were some of the world’s least expensive and I went to see if they were merely cheap or had value (see here). 

On the last day I realized that at least half of my meetings were with women.  This was especially surprising considering that most of them are leaders in the traditionally male-dominated energy companies, the largest sector by far on the Bucharest Stock Exchange.

In fact, three of Romania’s largest listed companies are led by women.  OMV Petrom – the country’s largest private oil and gas company is headed by Mariana Gheorghe.  Transelectra – the country’s largest electricity transmitter is headed by Carmen-Georgeta Neagu, and Nuclearelectrica – the country’s largest electricity generator and sole nuclear generation company, is headed by Daniela Lulache.

At my last meeting – with two women executives – I asked what policies Romania had enacted that led to such a large proportion of female executives.  The response was pretty blasé.  They couldn’t think of any, but suspect it had to do with Romania’s communist past.

This could be true.  Eastern Europe and Russia have a higher percentage of women corporate leaders than any other region in the world if the 2015 Women in Business report by Grant Thorton is accurate (see here).

The report notes that 40% of senior business roles in Russia are held by women, which is significantly higher than Western Europe’s 26%.  The report also notes that seven of the top eight countries with the highest percentage of women in senior roles are in emerging European countries. In addition to Russia, these are Georgia, Poland, Latvia, Estonia, Lithuania, and Armenia.  Another factor could be the high proportion of women to men in the ex-Soviet Union (see here).

Interestingly, one thing that the warring brother countries (sister countries?) of Russia and Ukraine had in common until recently were highly respected female finance ministers. Russia’s Elvira Nabiullina is spoken of as being one of the best in the world and someone who has Putin’s confidence; while Natalie Jaresko is one of the few people in Ukraine’s cabinet who seems competent (see here and here).

The Soviet and communist past likely doesn't explain it all. Half-way around the world there are many women in leadership positions in Jamaica. As I wrote in last year’s post, this includes the mayor of its largest city, the head of its stock exchange, its largest bank as well as its largest electric utility (see here). While the female Prime Minister recently lost to her male rival, a recent article on corporate merry-go-rounds in Jamaica emphasizes the prevalence of women in the country’s private sector (see here).

Further south, trends in Latin America also point to more women in corporate leadership positions.  According to a study by Mercer, by 2025 Latin America should lead the world in the proportion of women in professional jobs.  The report notes that in contrast to the developed markets, where the focus has been on recruiting women for top positions, Latin American companies are adding female workers across the board (see here).

I don't know if female leaders will do any better than their male counterparts over time.  I’ve read articles saying women make better investors, financial consultants and political leaders than males.  This could be true, but I suspect that given all the sexism that exists, the ones that make it to the top faced a much higher barrier to entry so have to be that much better.  As more women enter the workforce and obtain leadership positions, I suspect they will prove no better or worse than men.  Regression towards the mean works in just about every other large sample set, and I suspect it will work here.

Another way to put this: for every Sheila Dikshit (the highly respected Mayor of Delhi), Tri Rismaharini (Surabaya), and Michelle Bachelet (2x President of Chile), there’s a Dilma Rousseff (close to being impeached President of Brazil) and Cristina Kirchner (controversial ex-President of Argentina). 

It’s been over 20 years since I very briefly met Benazir Bhutto on my second investment trip to Karachi in 1992, and over thirty years since Aretha Franklin and the Eurythmics released this blog’s soundtrack (see here). Since then women throughout the developing world have made great progress.  I notice this on an on-going basis as I look for value around the world.

In some countries, the proportion of female corporate leaders has leap-frogged developed markets.  I suspect this trend will continue and if anything provides yet another reason for investors to look at developing countries as a long-term investment just as they do for ‘developed’ countries.

Other Influential Women in Emerging Markets (I suspect I just scratched the surface. Please leave additional insight in the comments section below):

  • Ellen Johnson-Sirleaf – President of Liberia
  • Sheikh Hasina Wajed – Prime Minister of Bangladesh
  • Ewa Kopacz – Prime Minister of Poland
  • Ngozi Okonjo-Iweala – Economist and ex-Minister of Finance of Nigeria
  • Sri Mulyani Indrawati – Managing Director of World Bank Group, ex- Finance Minister of Indonesia
  • Nguyen Thi Phuong Thao – CEO of VietJet and Vietnam's first female US$ billionaire 
  • Chandra Kochar CEO of ICICI Bank, India
  • Dong Mingzhu – President of Gree Electronic
  • He Qiaonu – Founder and Chairperson of Beijing Orient Landscape and China's most generous philanthropist in 2015 
  • Valeriya Gontareva, Head of the National Bank of Ukraine

Monday, February 22, 2016

CAPE Strategy Update

In my research and investing I stress three things: people, structure and value.  I look for companies that are controlled and managed by quality people, have corporate structures that align minority and majority shareholder interests and trade at valuations that are below fair value if not outright cheap. This post is about value.  

About a year ago I wrote about an investment strategy that returned a little over 14% per annum on average in our backtest.  It achieved this by investing in the five least expensive countries as ranked by CAPE, holding for a calendar year, and then re-balancing (see post here).

As noted in that post, CAPE stands for Cyclically Adjusted Price-to-Earnings ratio.  It is like PE except that it compares the current price of a company to its earnings averaged over a number of years. PE or "Price to Earnings" ratio is a popular way to value companies, particularly those that are listed on stock markets.  

2015 was the first year of tracking this strategy and the results are out. They are more or less in line with the backtest. The ‘cheap’ country basket increased by 12.1% local currency, and 2.7% in US dollars.   The best performing markets were Hungary and Slovakia, whose headline indexes rose 44% and 32%, but only 29% and 18% in USD.  The third best performing market, Czech Republic, was up a mere 1% in Koruna and down 7% in USD. Romania was largely flat and Bahrain fell by 14.8%.

The ‘expensive’ countries did not do as well.  On average they fell by 1% in local currencies, and 5% in USD.  Only Lithuania’s headline index was up in local terms, increasing by 7.4%, but down by 3.1% in USD.  Only Israel was up in USD last year.

What is interesting was the spread between ‘cheap’ and ‘expensive’. The 'cheap' countries outperformed the ‘expensive’ countries by 12.1% in local currency terms and 7.7% in USD. This is close to the 6.7 percentage point difference between ‘cheap’ and ‘expensive’ in our study. 

Taiwanese and Mainland Chinese investors would have done slightly better than USD investors with the ‘cheap’ basket increasing by about 7%. The spread for both was also a tad higher than for USD investors. 

Relative to major indexes, the performance of this strategy in 2015 was not bad. The S&P 500 index was flat, and most markets ended the year down in USD terms.  “Emerging markets”, how most countries in both baskets are classified, fell by 17% last year according to the most followed index. This is a massive 19% out performance (see here).    

Global equity markets generally did not do very well last year.  In addition to Hungary, only a few were up more than 20% in USD.  This included Latvia (up 31%), and Jamaica (up 88%, write-up on Jamaica is here).   Venezuela increased by over 200%, but I think this number is very squishy given the country's uncertain exchange rate.  

Despite its decent relative return, the NAV of the "cheap" strategy is still below its 2007 peak. The last several years have seen a good rebound, but still not enough to break its end 2007 high-water mark. 

What’s Cheap and Expensive in 2016?

Our list of ‘cheap’ countries is almost identical to last year’s.  Four of the five countries are still there. The only addition is Latvia.  It remains inexpensive despite last year’s increase. Hungary is no longer among the five cheapest countries after its solid increase last year.

The list of expensive countries however is completely different.  It includes two very large markets, the US and China, which is a cause for concern. Being so big, they are seen as bellwethers for much of the rest of the world.  Being expensive means that it's more likely they will fail to increase or decrease which could put pressure on other smaller markets. This was and remains my biggest fear going into 2016.  But this was also a fear going into 2015 and China was one of the better performing markets last year despite its dramatic rise and fall.

Part of the reason there are so many new countries in the expensive category is that we have slightly changed our screening methodology.  We removed companies whose primary listing was elsewhere.  This means that companies such as the inexpensive Petrobras, whose primary listing is in Brazil, is no longer classified as a US company in our screen.

If the first eight weeks of 2016 make a good indication of any kind, it could a be a bumpy year for global equity markets.  The US and China are down by 5% and 18% respectively.  

So far, the ‘cheap’ basket is leading so far, but it’s not a pretty race.  In USD ‘cheap’ is down by 2.0% and 'expensive' by 6.4%. Only two in the ‘cheap’ basket have increased. The Slovak Republic’s tiny market is up by 9% and Latvia’s not much bigger one is up by 5%. No 'expensive' market is up so far.  

But it’s a long year and a lot can happen in the next 10+ months.

“Cheap” 5 as of 1 Jan 2016
Bucharest Stock Exchange Trading Index
Bahrain Bourse All Share
Czech Republic
Prague Stock Exchange Index
Slovak Republic
Slovak Share Index
OMX Riga
“Expensive” 5 as of 1 Jan 2016
China CSI 300
Zagreb Stock Exchange Crobex
OMX Copenhagen 20
United States
S&P 500
South Africa
FTSE JSE All-Share

CAPEd Crusader

CAPE is a long term metric. It was introduced as a way to smooth out the business cycle.  Studies point to it doing a good job of identifying inexpensive markets that tend to perform well in the long-term.

'Cheap' countries have many problems and tend to be in or close to a crisis.  Big markets that are inexpensive on a CAPE basis include Brazil, Russia, and Greece.  Hardly the places your investment adviser is likely recommending.  

However, as written before, some of the best investments are in ugly markets and sectors when prices are low and virtually no one is expecting things to improve (see here).

Tuesday, January 19, 2016

Taipei Trip Report - Christmas and New Year 2015/16

In my research and investing I stress three things: people, structure and value.  I look for companies that are controlled and managed by quality people, have corporate structures that align minority and majority shareholder interests and trade at valuations that are below fair value if not outright cheap. This post is about people and structure.  

Taiwan is one of my favorite places in Asia if not the world.  People are friendly, the food is good, and compared to my Hong Kong home, the environment is cleaner and things are generally less expensive. Just about everybody I know in Hong Kong has positive things to say about Taiwan, but few Taiwanese I met like coming to Hong Kong these days.  They have fond memories, but feel it’s now too crowded, noisy and expensive.

While the trip to Taipei was Christmas and New Year’s vacation, talk inevitably turned to the economy, Taiwanese society, and of course the upcoming elections.
For those who don’t know, Tsai Ing-wen and her DPP party won the election with more than 50% of the vote for both presidential and the Legislative Yuan.  Wikipedia has a decent update on the election results (see here).

The KMT is believed to be among the richest political organizations in the world and is widely believed to be very integrated into the government and state-owned businesses.  With a new party controlling both the presidency and legislature this cozy relationship may start to unravel.

What is most important is that the campaign period and election seemed to have been peaceful and orderly.  While there is the usual uncertainty of a new leadership, a peaceful change of government is typically good for investors and asset values. 

There are four months before Tsai is due to be sworn in on 20 May so there could still be some drama.  Less than 48-hours after the polls closed Taiwan’s entire cabinet resigned (see here).  

Stormy Weather
It could have been the depressing rainy and cold weather, but most people I talked to were not upbeat on Taiwan’s prospects.
While most headlines were about cross-strait relations, I got the impression during my trip that the election is just as much about local issues.  Grievances that favor the opposition taking over include Taiwan’s slowing economy, housing affordability, and the lingering benefits given to ‘waisheng ren’ (外省人). 
Taiwan’s economy is estimated to have grown by just 1% in 2015.  Much of this weakness is due to Taiwan’s large technology industry, which is in a slump according to the several people who follow and work in the sector.  There are no killer products in the pipeline, high-end smart phone sales are leveling off and there has been a steady decline in consumer demand for electronic products in China and globally (see here).

Local firms know they are in a dangerous position as many seem to have one key customer, Apple, but don’t seem to know how – or even want – to diversify.  Family owners of successful companies are getting older and may not be interested in launching new business lines.
Property prices are in a funk with most expecting further falls. According to one local agent prices are down 10-20% YoY in the upper-middle class neighborhood of Neihu.  Most thought that property will fall even more when/if Tsai Ing-wen is elected.  I was told there was a lot of residential property built in anticipation of new laws being passed that would give PRC nationals Taiwan residency if they invested in property as was the case in Hong Kong until a few years ago.  This is less likely to happen under a DPP-led government.  
Taipei Real Estate Falling –
Neihu Store Front
Falling prices may not be a bad thing.  Prices in Taiwan are up 3X in the past 15 years and it now has some of Asia's least affordable property and among its lowest gross rental yields (see here).

Finally, some contacts were grumbling about the benefits eligible to people from the post-war wave of immigration from China, known as waishengren (外省人).  These differences were played down in past visits, and I’m surprised they’re resurfacing.  A good summary of some of these can be found here.

The Sun Will Come Out Tomorrow
I’m not as depressed as the locals are about Taiwan and its economy.  Its citizens are amongst the smartest and most educated in the world.  It has stable institutions, and amongst the most savvy business people in the world.
While technology may not be the growth driver as it once was, other industries such as biotechnology, high-end consumer goods, and arts and entertainment may pick up the slack.
Taiwan has a large non-tech sector and these companies have been some of the best investments in Taiwan (see my previous post here).

It’s also hard to feel too down on Taiwan after a plate of hot dumplings (小籠包), a shot of local hooch kaoliang (高粱), and a Soft-Lipa rap (link here). 

Wednesday, December 30, 2015

Music - A Different Investing Analogy

In my research and investing I stress three things: people, structure and value.  I look for companies that are controlled and managed by quality people, have corporate structures that align minority and majority shareholder interests and trade at valuations that are below fair value if not outright cheap. This post is mostly about people and the beautiful music we make.

There is a host of famous investors that compare investing to American baseball.  Both have lots of statistics, and involve strategy, skill and patience.  One good write-up by world famous financial author Michael Lewis can be found here.

While baseball is fine, the analogy that resonates with me most is music. Especially the process of looking for and discovering new bands and music before others, or raw old rare-gems that others did not see value in.

I also love to introduce friends to new bands and genres.  I picture myself as being cool and hip by knowing obscure Japanese hip-hop bands and forgotten jazz greats that others don’t.  There’s not any money in all this, but the music itself is enjoyable and it gives me something to talk about besides small cap Jamaican stocks which not many of my Asia-based friend can relate to.

R.I.P. Don Cornelius
Process.  Finding good investments and new music is a process.  Although I’ve never written it down, when I was younger I had a procedure for sampling and finding new bands.  I read Rolling Stone and other magazines, hung out at independent record stores, watched Soul Train and American Bandstand, and sat through many live performances.   I’d stay up late to tape full albums that were played midnight to six on the radio, talked to other geeky music lovers and trade albums and CDs.  Anything to try new stuff at a cheap price.  If nobody had what I wanted, I’d bite the bullet and spend money on an album or CD that I just had to have. 

It wasn’t work, but looking back it took time away from other worthwhile pursuits.  Like watching baseball.

My investment process is more formalized than my music exploration ever was.  It involves searching globally for undervalued companies, thinking of new financial ratios to backtest, and making deep-dives into corporate structure and controlling shareholders.  This involves lots of reading, travel and talking.  Instead of listening to a lot of different bands, I now sift through lots of corporate data and reports to find the few that make sense to spend more time on and eventually invest.  
F Street's Minor Threat
(Washington, DC, USA)

It doesn’t feel like work, but it takes time away from other ways to earn a living.

Technology.  Music changes with technology. What would jazz be without the saxophone (invented in 1840)?  Could rock exist without electric guitar (1931)? How many modern genres owe their life to computers, synthesizers and other electronic instruments? Musicians are typically at the forefront of utilizing new technology.

Investing and finance are the same.  Investors quickly adopt new technologies.  Before Internet trading and ‘robo-advisors’, there were carrier pigeons, the telephone, ticker tape, and the non-stop rise of computing power.
When Digital Was Analog

Technology is a double-edged sword.  It underpins much of my favorite music styles such as house and hip-hop, as well as ground breaking and multi-genre pioneers such as Kraftwerk.  But it’s also what drives techno, which I detest. 

Technology allows me to invest in Eastern European and Jamaican stock markets from my Hong Kong base.  Something that was virtually impossible 20 years ago.  But it’s also what drives high-frequency trading which is basically front-running.  Something that is certainly immoral and should be illegal.

Importance of luck.  Luck is a big factor.  Just like I can’t predict which stocks will increase, I really don’t know why one band will do well commercially and another doesn’t. 

Many undervalued stocks stay inexpensive before others see value and bid up prices. It can happen quickly or may not happen for a long time.

Overlooked Value
This is similar to ground breaking albums.  The Velvet Underground and Nico only sold 30,000 copies after its 1967 release.  But in 2003 Rolling Stone called it the ‘most prophetic rock album ever made’.  A six CD box set based on that one album alone was released.  Whoever had the foresight to buy the album’s rights must have made a bundle.

I could likely fill many pages with bands and singers that did not make it as big commercially as I originally expected.  Troublefunk, Chuck Brown, the Knack, Wreckless Eric, Altered Images, the (English) Beat, Biz Markie, the Feelies, Love Tractor, Kool DJ Red Alert, are but a small sample of bands that I thought were as good as or even better than those that became much more popular.

Open-mind and independent thought.  Most of my best investments have been from original ideas.  I’ve made money from others’ recommendations, but the majority of my multi-baggers have been due to my own research and analysis.  

This is similar to most of my favorite music.  I’ve been fortunate to have friends who like music as much or more than myself.  Many of their recommendations have been fantastic. But most of my favorite stuff has come from just keeping an open mind and ears. 

HK's Best
Khalil Fong / 方大同
I first heard my favorite Hong Kong singer when I was wandering through Causeway Bay one late rainy evening and Khalil Fong’s (方大同) video was playing at the record store. My introduction to the Indian subcontinent’s great and varied musical traditions came from a jet-lagged meander into a record store in Delhi’s Connaught Circle.  I discovered my favorite Taiwanese band, Soft Lipa (蛋堡) from the try-before-you-buy listening station at Eslite bookstore. Listening stations at Tower Records in Tokyo and Osaka yielded many great finds including one of my all-time favorites, Small Circle of Friends.

Age and experience help.  Being older means knowing what you like and what you don't.  I now rarely spend much time and expense on music and shows that I don’t like.  I still enjoy trying new stuff but am more discerning.  I love Taylor Swift’s latest single - “Shake If Off” is as catchy as they come – but also know that it’s not for me.  It's catchy but without some sort of edge I doubt I’ll be listening to it in a year or so. 
Early Small Circle of Friends

This is true of investing.  I know what style works for my temperament and holding pattern.  I've a process that I’m comfortable with and I know what has a good chance of working.  There is lots of room for improvement, but I’m adding very few new diamonds to my decision tree these days.

Personal/Lonely.  Music and investing are also very personal.  We all like different sounds at different times.  A great investment for a long-term investor can be a money loser to the short-term speculator. 

Both can be lonely.  In most of my better investments, I rarely know of any peers that have also invested in the same companies.  Many times I’m going against the advice from others. This can be lonely.  But mostly it’s been profitable. As I wrote in a previous post, it’s good to look where others don’t (see here).

It’s only in rare circumstances that I’ve gone with others on company visits. Three weeks in a very foreign Eastern Europe and Moscow was a great learning experience, but it made me homesick for family, friends and Asian and Chinese food.

Bragging Rights – Putting It All Together

I got lucky seeing REM as the opening act in a small 200 person punk/new wave club when I was 15 or 16. They were incredible and the next day I rushed out to buy their first single, “Radio Free Europe/Sitting Still”, which was put out on the wonderfully named “Hip-Tone” label. In the next few years REM’s popularity grew very fast.  Record contracts, concerts in larger and larger venues and making the cover of magazines.  It was a like a ‘hundred-bagger’ and I still brag about it. 
REM's Murky First

Like a value investor that sells too soon, my interest moved to other bands and types of music after REM’s second or third LP.  They got way more popular and stayed popular for a long time. I still listen to their songs and still brag about seeing them so early when they were raw, hungry, and passionate.  It was a personal and somewhat lonely experience as friends and parents questioned why I became so enamored with an unknown band from down south.  Looking back it was all worth it as many blissful moments were spent listening and dancing to their music, and tracking the band’s progress.

Investments are similar.  I’ve seen many bad shows and bought albums and CDs that I’ve barely played.  I’m happy with most of what I’ve seen and bought, and the few brilliant performances make all the time spent on the poor ones worthwhile.  This is similar to stocks. In the last few years I’ve made some bad investments, but also some good ones.

2016 Recommendation 

It’s been a while since I’ve seen a live rock/punk/funk performance and I’ve never been to a rave.  Jazz is my musical drug of choice these days.  Instead of searching for new music, most of my time and energy is now spent looking for good companies that have been overlooked, beaten down or for one reason or another trade at a price lower than what it should be.

Last Year's Logo
Which brings this blog to its first ever recommendation.  Perhaps the best value for money is the annual Jakarta Jazz Festival.  A 3-day pass costs about USD 60 and gives one access over 100 performances.  Shows are concurrent and one can’t take it all in, but seeing 20-30 shows over 3 days will likely be more than enough for even the most passionate music aficionado. The Indonesian Rupiah has been weak compared to the USD, HKD, CNY, the Euro and other currencies so now is an even better year to give it a try (reviews of past festivals can be found here and here).  Website of the Jakarta Jazz Festival is here.


Baseball analogies seem to be the most popular, but there are others.  Ken Fisher, who runs one of America’s largest financial advisers, compares investing to hunting wild lions in America – it takes patience, effort and thinking two steps ahead to bag a wild lion (see here).  Howard Marks, a famous American investor, compares it to playing tennis (see here).  Others compare it to running a marathon and even buying avocados (see here and here)   

These are all valid comparisons and there are certainly many more.  

With a song in my heart, tapping feat and a few more dance moves left in my shoes, I’ll stick to my music analogy.  See you in Jakarta.

Investment Strategy
Music Comparison
Great musicians overlooked for some reason.  Comeback acts.  Bill Laswell, Lonnie Smith, Jimmy Cliff, Mike Stern, Christian McBride, Kelly Rowland, Maxwell, M-People, George Clinton/Parliament/-Funkadelic, etc,
Deep Value / Small Caps
Live local music.  Many cities have numerous free/low-priced and high-quality live performance by local musicians, singers and bands.  Check local papers.  Experiment.  In Hong Kong try Full Cup Cafe, Orange Peel, Hidden Agenda, and the Wanch.   Washington DCs 9:30 club is now in a bigger building
Up-and-coming artists and genres.  Check the music magazines.  See a show. Surf the web
Large Cap Growth
Trendy ‘stars’.  They may be good, but it could just be the hype and group think that makes you like them.  Taylor Swift, Justin Beiber, the Weekend
Large Cap Value
Headliners that seem to get better with age.  Herbie Hancock, U2, Faye Wang (王菲), Tonny Bennet, Kreaftwerk, Mariah Carey, Allman Brothers
K- and J-Pop; Brit pop, rock etc, Swedish Pop, Eurotrash, German / Danish / Europe EDM, Cantopop, Indonesian pop
Emerging and Frontier Markets
Huge variation.  Dangdut, Gamelan, Reggae, Bossa Nova, Soca, Qawwali, Tabla, West African, etc.
Technology – Good
House (Happy, Deep, etc.), Drum and Bass, Kraftwerk, Cabaret Voltaire, Switched on Bach
Technology – Bad