The Value Muse

I recently had a long conversation with a friend about initial public offering (IPO) which happens to be the wet dream of many entrepreneurs. As much as I see the mouth-watering incentive of an IPO for the business owners, I never liked the idea of investing in an IPO and I’ve never participated in any exercise. To me, the process of an IPO presents a lot of inherent risks to the investors due to some obvious reasons. For the purpose of an analogy, investing in an IPO is like playing on a baccarat table against the casino with the odds stacked against you. Here are the reasons.

Asymmetric Information

Prior to the IPO exercise, all financial data never go through the same standard of scrutiny and we know that there is so much an auditor can do when it comes to historical numbers. I’m not suggesting that companies would cook their books for an IPO, but I’d imagine the numbers to be heated up to a certain extent. Very often, the idea of an IPO would be planted 2-3 years in advance and the management would manage their finances according to the roadmap. Some decisions would be made (or avoided) in a manner that wouldn’t be done if the management is driven by long-term value creation. Personally, I’ve come across examples whereby certain liabilities are shifted off-balance sheet and potential litigation is deferred to pave ways for an IPO.

I always think that it’s important to know what you don’t know. In the case of an IPO, there is a lot of things I don’t know which the issuer doesn’t want me to know.  

Timing

Almost every business owner would choose to list their business during a bull market, or when his particular industry is favoured by the market. It’s the right thing to do for existing shareholders because they get to exit with good return and the company gets more cash than what it sacrifices in terms of equity. During a bull market, it’s much easier for the investment bankers to sell the stories to the investors and the public sentiment would turn the IPO into a self-fulfilling prophecy.

We all know that all companies have good and bad years, but they only go public during the good years. If the general public only hears and sees good things at the chosen time, it’s easy to form a confirmation bias all other risks are immaterial.

Salesmanship

Companies pay a big fat sum to investment bankers to complete the IPO and underwrite the whole process in some cases. The whole machinery of the bank will kick into action, with glossy prospectus, roadshows and favourable research reports carefully curated to support the IPO. You will often see that the quality of information is judged primarily based on its aesthetic and promotional value rather than its completeness and integrity. It’s generally not easy to evaluate a bunch of information when you know that its source is biased. Have you ever heard from your hair dresser that you look so gorgeous that nothing needs to be done on your hair?

Speculation

Most of the unofficial pitch of an IPO will tell you that the offer price is X, but it will go up by Y% in a short period of time because there is a group of speculators in place to “fry” (i.e. illegal price manipulation) the stock. Some may even boast that the share is actually worth X% over the current offer price, so it’s a once-in-a-lifetime opportunity to make money. I doubt this would happen even if the issuer happens to be a charity.

Now think about this. If the share price is artificially pushed to a certain price, it’s a matter of time it would fall but the promoter would never mention how many percentage drop is expected. Everyone else somehow conveniently forgot to ask this question.

The odds of making money in this way is probably similar to winning a few rounds on the baccarat table. Wouldn’t it be more fun and simpler to just go to the casino?

***

A simple logic goes like this. If a company is so fantastic to be worthy of your investment, why not buy its share from the secondary market. The advantage of that is you can turn the baccarat bet into a poker game. Instead of buying shares from the issuer who has so much advantage over you, just buy the same thing from the public which could potentially misprice the share just like how some poker players misjudge their odds in the game. This is possible because the public shareholders don’t have the house advantage (similar access to information) and they could be misled by emotions and many other reasons you never know.

Next time when you think doing a quick slip from IPO, just bear in mind Genting Casino is just 45 minutes away from KL. Just my two cents.

The Covid-19 pandemic was an unprecedented phenomenon that shocked everybody a lot including myself. Being stuck at home, I religiously followed the news reporting on the death toll and infection numbers. Amidst all the gloom, I couldn’t help but noticed a sharp rise of another set of numbers – the share price of glove makers. What looked frothy at first started to defy my usual cow sense and grew bubbly. That was the start of a giant glove mania.

I had a little adventure in this – very limited involvement but enough to let me have a good view of some shit that happened. What’s the context? While most parts of the world went through a lockdown, the price of nitrile disposable glove shot up from about $3/box (100 pcs) to about $30, a tenfold increase that brought a bonanza to the market. Suddenly everyone was talking about it, either as a pure spectator or speculator who couldn’t afford to lose out from this once-in-a-lifetime gold rush. From the beginning, I was quite sure it’s a bubble but that didn’t stop me from looking for ways to join the fun and make some small wager.

I gave a small loan to a friend in setting up a small glove packaging outfit, with the condition that I get to participate in a deal if I see fit. There was no equity participation from me at all because I honestly didn’t see any long term prospect. In the end, my loan was fully repaid when I pressed for repayment upon seeing the writing on the wall. Though I’m not the “boss”, it didn’t stop me from getting a firsthand experience in the business as an advisor. With hindsight, some of the things that happened were so ridiculous that I wonder how did that come about. When someone ask how to spot a bubble, I’d happily ask him or her to read on.

1. When every Tom, Dick and Harry talks about it

People always say if you hear your taxi driver pitching a stock that you own, it’s time to sell it. In my case, a few real estate agents suddenly became overnight experts in disposable glove. They even could tell me in detail what’s the difference between a pair of latex glove and nitrile glove though some of them could barely pronounce the word “nitrile”. Some retirees I knew even shared their years of experience dealing with gloves even before I was born. Every social setting I went to, I bumped into wheeler-dealers peddling their glove ventures.

2. Too good to be true

A so called big buyer came to me and said he had a purchase order for 10 billion pieces of nitrile glove, to be exported in stages over the next 12 months. He even mapped out a delivery schedule and explained the logistics of sending glove across the border, including the requirement for “CE” certificate, FDA approval, SGS certification etc. All sounded very professional until we moved on to payment discussion. That’s when I realised he needed me to join his fund raising effort to fund the scheme. The scheme was so convoluted that I had a hard time convincing myself it’s not a scam.

3. Widely reported fraud

A typical glove distributor at that time asked for 50% downpayment upon confirmation of order and balance payment before the goods leave the warehouse. Based on a minimum order of one container load, the deposit ran up to a few hundred thousand dollars. It’s such a simple, old-school yet effective modus operandi by simply absconded with the downpayment. Just read the news.

A few of the common phrases that should join the list on the Scam Alert Bulletin:

• “This is a one-in-a-lifetime opportunity for you to join the 1% elite….”
• “The higher the risk, the higher the reward….”
• “Don’t waste my time if you are so risk-averse like a coward…”
• “I have this contact from my brother-in-law’s friend who is looking for 10million boxes of gloves…”
• “$10million is already in the bank but we can’t get any stock…”

4. Illogical marketing method

One of the glove buyers I know invested in a glittering sales gallery somewhere in Subang. He had such a great showmanship when it came to explaining his upcoming expansion plan, paving his way towards becoming the next glove mogul. Well, glove is a commodity and very often the users don’t even know or care about the brand behind it. Why do you need a sales gallery? It doesn’t make sense, unless what you are selling is the investment (get-rich-quick) scheme rather than the gloves.

5. Dubious and unethical practice

What prompted me to exit and demanded my loan repayment was when I witnessed the glove packing process which was getting out of hand. What I saw was two tonnes (yes, they were bought based on weight) of gloves lying on the floor of a small warehouse forming a mountain shaped mess. A few foreign workers were busy sorting, washing and drying them in the tumble dryer. Yes, it’s the same fucking dryer you use for your clothes. Looking at the stained raw material, you don’t need an expert to tell you that they were recycled gloves. I was further flabbergasted when I found out that all those recycled materials came from a wholesaler I know, who happened to be a pork seller dabbling in a glove side gig! What a giant clusterfuck.

By the way, whatever certification you see on the glove product, there was also a black market for that.

6. Irrational investment in glove production

Quite a few companies simply announced their plan to diversify into glove making and boom, the share price shot up in no time. The price tumbled in equal speed if not faster when nothing much materialised. If you look at the share price chart, it looks like a in-your-face middle finger.

I was at one point invited to join the board of a new venture in glove manufacturing and the main sponsor was a local company with over 40 years of history. It planned to set up two glove production lines in Thailand via a joint venture with a local company. I didn’t spend much time on this other than a few hours of meeting the principals, listening to the business plan and asking a few key questions. It took me probably a few minutes to conclude that it was such a preposterous idea.

Glove making is a very capital intensive business and it takes years to build up the expertise and scale needed to master the supply chain. The key is to have a production capacity so large that your unit cost is competitive at global level and our big boys like Top Glove, Hartalega, Kossan Rubber etc took over 30 years to build that scale. A capital investment in glove production will take many years to breakeven and that’s if (a big IF)

(i) production set up goes hunky-dory (did I mention it’s going to be in a foreign land?),

(ii) global demand stays high and pandemic persists for many years,

(iii) average selling price remain sky-high for many years; and

(iv) the big boys like Top Glove, Hartalega and Kossan Rubber collectively decided not to expand their capacity because they have made too much money for their own good.

Now do you see the stupidity behind that idea? I went home to check on the 40-year-old local company and guess what, it’s net worth was even smaller than mine. Another scam in the making.

7. Glossy industry research

I remember looking through an industry research report given to me by a glove hustler. It basically says the world is entering into a new norm where more people including ordinary folks will use disposable gloves in a way never happened before. Household consumption is expected to drive the exponential growth of demand for glove.

Well I agree that people in the medical profession and food processing will continue or even use more gloves but not the ordinary folks. I’ve tried using it in supermarket and absolutely hated it because it’s so fucking uncomfortable and inconvenient. I also didn’t see how it can prevent the spread of disease when people ended up touching their face with the same dirty glove. I don’t see the practicality of that just like I don’t see how you can convince people to start wearing condom everyday because of some new airborne STD discovered!

The report also contained lots of complicated forecast numbers, some even went all the way to the next decade. Honestly I’m not an expert in this field but I know that when you put in garbage assumptions, you will end up with a plate of shit. I wish I’ve kept the report so that I can have some good laugh every now and then.

Lesson: beware of beautifully designed report printed on glossy paper that makes it look super sophisticated.

***

Among all these people I know, I honestly don’t believe anyone one of them made good money out of the mania, except for those who managed to execute a perfect swindle. For those who have read about the Dutch tulip mania in the 17th century, it’s pretty obvious that stupidity always manifests itself in similar ways when you stimulate it with greed. That’s despite whatever advancement we have gone through in the past (almost) 400 years.

Not long ago, a businessman proudly told me his entrepreneurial stories over some beer. As a classic risk taker, he would jump at an opportunity with 50% visibility with the hope that things will just fall into place. He called that a calculated risk even though the calculation only happened after he took the plunge. That resonates very well with a lot of the exciting success stories I’ve read and I’m pretty sure it’s the same for many others. Consciously or subconsciously, we have been shaped to believe that to achieve success, we need to go all-in by taking heart-stopping risks. It just sounds so sexy and sensational, something to brag about when you plunge into a cauldron of fire like a dying chick and rise up from the rubble having transformed into a phoenix.

There is one major blind spot here. For every lucky bastard that jumps off a cliff and has managed to build a plane on the way down, there are probably another hundred of the same breed who just died a foolish death. People often mistake luck as capability and then start to behave recklessly. Those unlucky ones simply didn’t manage to survive to tell their version of the stories. How often you come across books or articles talking about failed entrepreneurs or folded businesses?

Here comes the problem of survivor bias. When we are assessing the risk or probability of certain scenarios, the conclusion can often be skewed by the success stories what we are accustomed to and I’m guilty of this too. Very often when we perform feasibility studies, we focus so much on the potential upside that we start looking at the downside like a stepchild – important but not the priority. The worse is after we succumb to the upside seduction and take the plunge, we then start creating justifications for the risks. Boom, survivor bias has mutated itself into confirmation bias. Like it or not, because we have already decided to do it, we choose focus our attention on the positive thesis. All the red flags identified earlier look more like light pink after rubbing our eyes a few more times.

My previous misadventure in fish farming has a lot to do with survivor bias and my decision making was also tainted by confirmation bias. I’ve tried to avoid this topic before this because every time I talk about the mistakes, the dark shadow of the past will haunt me and remind me of the pain I’ve endured. Then I realised that the best solution is to face it, dissect it just like a post-mortem and be brutally honest with myself. I can’t go back in time and change anything, but at least I can carve a big fat lesson onto my bone as a reminder. If I can’t get rid of the past shadow, I might as well embrace it as part of myself.

I’ve made a resolution that I shall rise up again from the ashes and I believe my chances will be greatly enhanced as long as I don’t get fucked by the same mistakes again. Invert, always invert: turn the focus on the downside and get the maximum protection. Like Charlie Munger said, “All I want to know is where I’m going to die, so I’ll never go there.”

Faced with a seemingly failed endeavour, one of the most difficult decisions to make is whether to persevere at all cost or simply throw in the towel. I was in that position a year ago and I opted for the latter. This time round, the decision was made with much better judgements in my opinion.

I ended my aquaponic and integrated farming venture due to a few reasons, to wit:

1. Problems with scalability

The original idea was to create a model based on a fish production of 30 tonne per cycle and then eventually scale it up to 10x of output. However, there are a lot of production variables that make it hard to control even before scaling up. For things to work out, I would need the following:

• Skilled labour (preferably with no emotion)
• Decent weather without natural disaster
• No major equipment failure
• Good genetic makeup of fingerlings
• Water parameters well controlled
• Energy efficiency
• No disease attack
• Optimal growth rate of fish stock
• Good control on food conversion ratio

Suffice to say that I underestimated the above challenges, especially when problem with any ONE of the above areas will make the model collapse immediately. Due to the labour intensive nature of the business, the bigger the scale of the operation, the more incremental effort is needed. This effectively violates the law of scalability.

In my feverish haste to “revolutionalize” the industry, I’ve listened to the wrong person who masked himself as an expert. The result was a wrong production pond design that further impede the scalability of the model.   

2. Risks significantly outweigh return

For each production cycle, the cost of production is invested over approximately six month and the return is reaped in one lump sum upon harvest. However, the lump sum return can very well be zero instead of a reduced amount. That’s simply because the nature of biological assets suggests that all the inventory can get wiped out in one go if you fuck up the oxygen level, water quality, or any of the bio-security measures. Disasters are quite common especially in an outdoor environment. Very often, you almost certainly need divine intervention just to survive one cycle and I have lost count of how many times I prayed.

The cash flow of the business suggests that I could make around RM2-3 for every RM1 invested which is more or less the same as what middlemen make in trading the same products. However the turnaround time for the middlemen is just a few days compared to my turnaround time of six months. The internal rate of return and the risk profile suggest that I’m in the wrong part of the food chain.

3. Commodity with extreme competition

In reality, the products of aquaponics are healthy and environmentally friendly because there is no harmful chemical used. The system also does not allow the use of low cost animal carcasses as feed. However, it’s incredibly difficult to market it differently unless the fish come in different appearance. Creating a brand over agricultural product is not impossible but that’s out of my league because it’s expensive, time consuming and can easily succumb to copycats.

In other words, I’m in direct competition with low cost producers who will almost certainly win no matter how unethical is their production method. For example, I’ve seen fish farms that illegally channel water from highland river (gravity is free!) and mix their fish feed with free (rotten) animal carcass. That’s a significant saving in electricity and feed, two or the largest components in the production cost. To compete with them is just ludicrous.

4. Unfavourable industry economics

Most farmers suffer from a transgenerational spell no matter how well they manage their farm. They spend so much their waking hours battling against natural forces that they become oblivious to the market intelligence in relation to their commodity. How can they get a fair treatment when it comes to selling their products to agriculture distributors who have real time supply and demand data at their fingertips? Bear in mind that it’s costly and risky for farmers to hold livestock and everybody is aware of this. The asymmetric information is further exacerbated by the following phenomenon:

• A buyer who walks into a farm can have a pretty good idea of how much livestock needs to be desperately sold but a farmer would have no idea how much the buyer desperately needs to buy.

• Fish distributors behave like a cartel and practise information sharing among themselves in relation to farm gate price and transaction volume. Some even trade among themselves when there is surplus stock. Farmers generally operate in silo.

• Distributors with cold storage facility can choose when to stockpile and control their buying pattern but farmers have no such flexibility. For example, a distributor can choose to stockpile or run down its inventory based on change of market price but it’s nearly impossible for a farmer to control the growth of their fish stock based on market condition.

5. Ultra low barriers of entry

In Dec 2021, several major fish farms in the Klang Valley were destroyed by a disastrous flood, causing a big drop in freshwater fish supply in key markets. A few months later, the increase in global commodity price for corn and soybean significantly pushed up feed cost by well over 20% (price was adjusted upwards on weekly basis by the supplier). The result was a 40-50% jump in farm gate price of Tilapia fish.

What happened next was an avalanche of new players to capitalise on the high selling price. Meanwhile, distributors started smuggling in the same but cheaper product from Thailand through our northern border. This effectively capped any further rise in selling price.

A margin squeeze on farmer is inevitable when you have ever increasing production cost coupled with limited upside on selling price. This stinks so badly that no wonder I hardly see smart money flowing into this industry.

6. Funding issue

I ran out of money at some point and got into a catch-22 situation. Without further capital infusion, I would not be able to improve the operating model but without an improved model nobody would invest a single cent. Faced with such unsavoury business economics, I simply didn’t have any confidence to raise a single cent of additional capital.

7. Not the best use of my time and energy

I’ve learned that it’s imperative to consider our opportunity cost whenever an option is made. I more or less knew what needed to be done if I were to salvage the farm but I’ll have to work full time and stay in the farm. My family with three young children simply did not allow me to make that option. This was even more so judging from the bad economics of the business that I’ve plunged myself into.

With an honest assessment of my own strength and weaknesses, I know very well that I’m better off sticking to capital allocation rather than getting into the nitty-gritty part of fixing a broken system. You can spend many months teaching a dog count from one to ten – that would turn it into a great dog, but it will never become a mathematician.

**********

Do I regret throwing in the towel? Absolutely not. Any lessons learned? Plenty of that to write about in another post.   

The year of 2020 was a watershed in my life. Although the outbreak of Covid-19 was not the cause, but it provided a fertile ground for some of my greatest mistakes to grow. The sudden onslaught of the unprecedented pandemic prompted me to think very hard on what would happen next, including some of the opportunities coming along the way. Food security was one major issue at heart and I began to develop a confirmation bias in concluding that it’s where I should start digging towards the goldmine.

A few months into the lock down, I came across an agriculture expert (more of a wannabe in hindsight) showing me the potential of integrated farming centred around aquaponics. The idea was about producing food that is safe and environmentally friendly while the waste generated is used to support other crops in the farm. The idea of circular farming with multiple revenue streams is noble and has worked in places like Israel on the back of its technological prowess but whether it would work here is another story. In fact, that’s a long story which hinges on local market condition, weather, geographical factors, government support, competition and the characteristics of the entire supply chain.  

I did perform some research in this area but it revolved very much around the technical side of aquaponic farming because that’s what I know the least at that moment. When it came to the economics of the business, my analysis was laden with assumptions which are way too optimistic in hindsight. I couldn’t see any reason for that other than a strong confirmation bias planted in my mind and I humbly admit that it was an unforced error that led to many others.

I invested a large sum of money (in relative term compared to my tiny net worth) and spent a year constructing the farm. I sacrificed many weekends and slogged under the rain and sun, battling all sorts of problems. Basically, every single piece of equipment that could break down did break down at some point. Construction was delayed due to the lock down and I overran my budget due to many unforeseen difficulties. At the same time, I had to fend off some local gangsters asking for “security fees”.

I went through another six months completing the first cycle of production with no less pain and frustration. Compared to dealing with mechanical failures, handling biological assets sent my stress level through the roof in no time. I’ve gone through the emotional pangs of seeing thousands of dead fishes floating on my pond overnight. It’s one thing dealing with the usual inventory obsolescence in a business, it’s another level of pain handling inventory that can turn absolutely worthless in just a few hours. Having sleepless nights is an understatement.

The first cycle was completed successfully, though financially at loss. I’ve obtained the data I needed and figured out what needed to be done to improve things. Throughout this period, I visited many other farm operators and spoke to many players in the supply chain including feed suppliers, animal health experts, fish distributors, wholesalers, agriculture researchers, farming association members etc. I consolidated all the information obtained with my own experience and operational data to decide what to do next. Then I realised that the writing was already on the wall. Within weeks, I decided to close down the operation and cut my losses immediately. Despite the pain, I knew in my heart that it’s the right thing to do.

Until today, I regard that as one of the best decisions I’ve ever made in the middle of all the mistakes. As for the rationale behind that, I would love to explain in a separate post.

The last post I wrote was 22 months ago and that shows a pretty bad track record when it comes to consistency. I’m forever guilty for what I attribute to my procrastination though I’d like to say I have been very busy. I have so many thoughts that I wanted to put down in words but I didn’t realise that when I said I’ll do it later, it actually meant two years later.

Why the sudden itch to start writing again? Well, I reckon the itch comes from the scars left by the multiple failures I’ve endured in the past two years. The pain was immense and the lessons were unforgettable. Unforgettable, yes, but have I really learned the lessons well? Someone used to tell me that I have not truly learned something until can write it down in words. I largely agree with that and I think it’s an imperative step for me to document all the mistakes to get the best out of them. Perhaps it can also help you to avoid some of my pitfalls (read stupidity) if you ever come across similar situations.

Stay tuned if you are interested.

I’m not a big fan of new year resolutions but I’m definitely guilty of making some on new year’s eve and forgetting about them the next day. As today marks the end of 2021 and this is my last post of the year, I feel the itch to do the same thing again. This time round, I’ve decided to make only one simple resolution, to wit: be agile enough to improvise and do not over plan.

Throughout the year of 2021, I reckon there are two most frequently asked questions.

1. When will the Covid-19 crisis end and when can we be back to normal again?
2. When is the next general election?

I’ve met quite a number of people who gave their answers in a very sophisticated manner (or at least they tried) but very often, the more sophisticated it sounds, the further it is from the truth. When I began writing this blog during the first lockdown, I guessed that this Covid-19 crisis would be a temporary thing, perhaps lasting 6 months. Then came Delta variant, Lambda, Omicron etc and we went through so many dizzying rounds of lockdowns and opening up, coupled with nauseating government actions. Some of the measures even defied logic and none of us could have anticipated that.

Talking about elections, we went through the change of Prime Ministers again and several rounds of State Elections with many frogs jumping around. Nowadays there are so many moving parts in our politics that you simply cannot make any judgement or anticipate any political outcome if you try to be logical. But then what should you rely on if not simple logic?

The correct answers to the above questions should be “Nobody knows”. In fact, I don’t think you need to bother about the right answers. It’s impossible to get the answers anyway. What is more important is to adapt and improvise according to the changing environment. At the beginning of the Covid-19 crisis, some business owners decided to defer their major plans until the crisis is over. Then they realised they should just fuck it and do it, because the problem doesn’t seem to be going away anytime soon. Similarly, if you want to wait for political stability then I wish you have enough patience to enjoy the long wait.

The older I get, the more I’m convinced that I no longer need a 5 year plan for myself because I don’t think I can realistically plan ahead even for six months. The only place you will find a 5 year plan useful is probably the “Career Progression” column on the employee evaluation form. It’s sad but I’ve seen some people waste so much time enthusiastically filling up all the pie-in-the-sky bullshit.

Our economy is being hit by Covid-19 on the back of serious political instability. It’s like being hit by a bullet and the doctor who is supposed to save you is drunk at the same time. Instead of helping the economy, some of the haphazard government policies just confused the shit out of us. The biggest lesson I’ve observed is that we need to stop hoping for certainty and start working with uncertainty. In other words, it’s better to rely on ourselves than relying on certain environment. Malaysians are generally quite resilient when it comes to this and I’m particularly proud to see this among the small medium enterprises (SME). Some businesses diversify their income streams into e-commerce while some just closed down and started in new fields. Most business owners I know have this mentality that they have not and will never rely on the government. Nowadays they can’t be bothered when will the borders open or when will everything be fully opened up. What they care is how to survive and change their business model to suit the current situation. Just look at the F&B industry, if they cannot fit as many people in their restaurants as before, they try to do more takeaways or frozen meals. If they have worker shortage, they introduce self-ordering an self-payment via QR code on each table. To be honest, I really don’t think they would have planned for all these measures in their 5 Year Corporate Masterplan few years ago, even if they really have one.

What about the election? Do I still care? Of course I care, but not really on timing. I care about who runs the country and how the policies support our long term prosperity. Right now, what we see is almost all politicians are being intoxicated by a bonanza of plundering. Just look at the massive flood and how the politicians made a fool of themselves by holding brooms in front of cameras. Can you imagine they still believe in these 1980s public relation stunts when everyone in this era has smart phone cameras capturing all the behind-the-scene mockery. Instead of launching speedy rescue effort, they are more proficient in playing blame game and ditching half-baked consolation goodies after being slammed from all angles.

To me, inflation is one of the biggest nightmares coming up and it is likely to be driven by supply side factors. It’s already there, just look at food prices, construction materials, logistics cost etc. What worries me is we don’t have a stable and efficient government to combat this while we are trying to survive the Covid-19 impact. It just seems to me that most people in position of power are busy raising fund for the upcoming election. Sad but true.

I think enough said about 2021, what about 2022? In my humble opinion, I still don’t see any light in the tunnel when it comes to cyclical industries and industries that have significant regulatory risks. I’m optimistic when it comes to retail, hospitality, food production, logistics, healthcare and wellness among others. Let’s pray for a better Malaysia in 2022.

For some reason when I came across setbacks in business or life in general, they appeared from many areas all at the same time like an avalanche. It was so frustrating that I even questioned some of the decisions and paths I took before this.

Then I came across this mental framework called the Third Person View which resonates very well with my some of my personal experience on handling stress. It’s outrageously simple – just withdraw yourself from your current view and switch to a third person view watching yourself perform in real time. It’s kinda like watching yourself starring in an action film. Suddenly, all the problems you face will feel a lot lighter because they somehow become someone else’s problems. This third person view allows you to look at things more objectively without most of the negative emotions attached to the original character.

Very often when I watch an action film, I tend to anticipate what happens next and even strategically “advise” the main actor what to do next to defeat his enemies. By adopting this perspective in real life, I somehow manage to elevate myself towards having a bird’s eye view of the scenario and hey, things aren’t that complicated after all. The most satisfying part is probably the optimism it gives you because like in most movies, things often turn out alright in the end – the hero triumphs over the villain!

Will this work all the time? I don’t know but I do find it more enlightening than the first person view. After all, there is absolutely no harm trying.

A few months ago I gave my two cents on agriculture and continued to make some observations along the way. There is one particular industry that stands out and I’d like to delve a bit deeper into this.

Aquaculture

Recently there is this Netflix documentary named “Seaspiracy” that stirred up some discussions among my peers. I watched it, appreciate it but I take the statistics with a pinch of salt because I feel that it’s too much of being a propaganda to wean us off seafood in favour of alternative protein. That’s a pure display of stupidity because it’s simply unrealistic at all. There are also a lot of factual disputes and controversies generated by that film. The key is not about ditching seafood but looking at farmed seafood replacing wild catch.

One major highlight from the film we can never deny is the overwhelming evidence of declining wild catch due to the unscrupulous overfishing. You can always google this topic and get overwhelmed with anecdotes and numbers but I also rely on some common personal observations.

During my childhood, I hardly remember eating any farmed seafood because there were plenty of affordable wild catch. Wild catch was also widely perceived as being tastier and healthier than their farmed equivalent because they live in natural habitat and consume natural food. Fast forward to my current routine, almost half of the seafood I currently consume come from the farm and I foresee that my grandchildren will hardly eat any fish from the wild. In fact, since 2014 the world’s aquaculture production has exceeded wild catch and the gap continues to grow. Just like how we hardly eat any chicken or beef from the wild, seafood will eventually joint the rank and I think aquaculture has tremendous potential because of the following observations.

1. Demand for seafood is enormous simply because our population is expected to grow another 2 billion in the next 30 years and the growing economic prosperity means more people opt for seafood rather than relying on grains to survive. This is evident in China as it has become the largest seafood consumer in the world in line with its growing prosperity. Currently, it’s like a giant vacuum cleaner which is particularly efficient in sucking up all the sea cucumbers from the ocean bed. Now don’t forget our growing standard of living and the penchant for seafood doesn’t just come from China but the entire world. Bear in mind that seafood is also widely favoured by people across different races, cultures and religion.
2. Fish or seafood in general is widely perceived as healthier source of protein compared to red meat. As people have more access to information nowadays, health consciousness is one of the major factors driving consumer behavior.The key is to make sure there is no contamination and drug abuse in the aquaculture food chain.
3. The dwindling wild catch is hard to reverse because it is inherently difficult to enforce any policy to manage fish stock in the ocean spanning multiple jurisdictions. Most countries in the world do not even have enough resources to monitor their vast oceans. You can rely on traffic police and the public complaints to enforce traffic rules but how are you going to do that in the middle of a fucking ocean where the only ones watching are the powerless sea creatures.
4. The advancement of technology has significantly reduced the mortality rate in aquaculture which is one fo its greatest pain points. Through cross breeding, genetic studies and good farm management, farmers have also produced more variety of better quality seafood. All these have led to a growing acceptance of farmed seafood and I hardly come across anyone who still rejects it nowadays.
5. The barrier of entry is not punishingly high but good enough to prevent oversupply because aquaculture is simple but not easy. Anyone can easily build a fish farm but to maintain a sustainably low mortality and to operate a large commercial fish farm competitively is a totally different story. This is probably the reason I don’t see a lot of speculative investments in this sphere. This is a good sign.
6. The adoption of technology in this sector has massive room for improvement and this is what separates the successful giants from the backyard farmers. What I mean is there is a lot of room for growth and innovations that eventually provide an economic moat. In line with the growing emphasis on food security, there is a growing pool of talents and capital piling into agritech looking to solve various pain points in aquaculture. I have this vision that one day we can accurately count the underwater fish stock and track fish health without anyone touching the water. I also have this vision that we can reliably trace the fish source via blockchain technology to ensure food safety.
7. Malaysia still has some natural advantage as we have adequate access to land, water, cheap labour and low energy cost. All these have to be viewed in relative term compared to the global standards because the market has no boundaries if the products are identical. One example to elaborate this is by looking at the attractive chilli plantations that occasionally get whacked by very cheap import from India. You simply cannot overlook your faraway competitors.

Again, I always emphasise that no matter how lucrative an industry, it has its own sets of problems and risks and I’m glad it’s the same for aquaculture. This prevents the crowding of competitors and create a balanced ecosystem for a sustainable growth. I’d set myself a target to revisit the above argument one year from now and see if any of that has changed but for now I don’t see any reason they will. If you have not watched Seaspiracy, please give it a go as it’s quite entertaining but don’t worry too much about the numbers and predictions. Remember this, if any of those doomsday predictions hold water, we all would have died many times already.

The current Covid-19 pandemic has greatly affected most businesses and many of them start to evolve. More importantly, it makes people ponder what’s coming up next and you will hear that a lot in coffee shops. When you hear people explain how the glove making industry is becoming the next “Big” thing similar to the 5G technology, you will realise how little people understand about either of them. Generally, most people just look at what businesses are doing well during the pandemics (pharmaceutical, glove, logistics, e-commerce etc) and start pouring money into them. Well, in this case, I mean throwing their money into the zero-sum game of stock market speculation rather than making productive investments.

For me, I somehow develop a strong faith in agriculture – I think its potential will certainly outlast the current pandemic and my own life expectancy. The reasons are very simple if we just go back to the basic common sense.

1. Population Growth

The United Nation has projected an increase of 2 billion population in the world in the next 30 years and how are we going to sustain so many mouths to feed? I think we have three choices. We can kill a portion of them (like how we wiped out 75 million in WW2), implement birth control (doomed to fail miserably) or find the best way to feed them. Of course the last is the only sensible option and to feed this 2 billion people is not easy. As people are getting more prosperous and having a penchant for quality food higher on the food chain, we need to grow the equivalent amount of food we have grown in the past ten thousand years. Roughly speaking, countries will need to increase food production by 60-70% in the next 30 years.

That simply tells us that the market is enormous!

2. Geography

Even though we have plenty of inhabited land according to what we see on Google Map, most of that is not suitable for farming due to soil condition, lack of water source, climate and logistical challenges. Arable land with sufficient water source is in short supply and this is not easy to resolve. For countries like Saudi Arabia, UAE and Singapore, I don’t think they can ever achieve self-sufficiency in terms of food security.

Fortunately, Malaysia has considerable amount of natural advantages in terms of climate, supply of arable land, water supply and labour (though it’s getting more challenging). Despite having such advantages, we are still a net importer of food and this is where the potential lies.

3. Technological Advancement

We would have experienced major famines if we didn’t attain the technological breakthroughs in chemical fertilisers and genetically modified crops. No matter how controversial they are, we cannot run away from the fact that the resulting jump in crop yield has sustained our current 7 billion population. Take away GM soy and you probably have to pay many times the current price for meat. If you think that’s suffocating then what about the 680 million people living on less than USD2 per day?

Traditional agriculture assumes significant risks because it relies heavily on weather and other ecological changes beyond our control. The future is to shift agriculture into a more controlled environment using robotic technology, artificial intelligence, genetic engineering and big data powered by advance sensors. This is the era of precision farming and that includes reducing the waste generated from food logistics.

4. Capital

There are growing number of investment funds paying attention to food production and agritech due to the underlying potential. The more active ones are sovereign wealth funds from countries facing severe food security threat. Funds from Saudi Arabia and UAE were busy buying overseas arable land and investing in agritech companies to secure the most important lifeblood in times of crisis.

As long as we can create a sustainable, profitable and scalable business model, there is a ready pool of capital to supercharge its growth. Here we are talking about smart money looking for long term sustainable return rather than hot money which leaves a trail of destructions on its way out.

5. Competition

I generally don’t like industries governed by the winner-takes-all fundamental which is so prevalent in the Silicon Valley because the odds are heavily stacked against the small guys. I don’t know any agriculture giant which completely dominates one particular market that no one else can survive. CP Group is probably the largest poultry company in South East Asia but there are plenty of smaller companies thriving in local markets across the regions. You will see the same trend among many other agriculture sectors and there are plenty of opportunities for the small guys.

The barriers of entry for each agriculture sector differ by a lot but it is possible to start with low barriers of entry and then build economic moat around the business. For example, a traditional vegetable farm can evolve into vertical urban farm powered by 5G technology. You don’t usually get this opportunity in other capital intensive or highly regulated industries.

As agriculture generally doesn’t offer supernormal profits and outsized returns, I don’t see an influx of players backed by speculative capital. Therefore I don’t expect lots of boom and bust driven by dizzying competition. In fact, agriculture requires a lot of hard work and it certainly doesn’t sound sexy at all. The unsexy appearance is what I love the most because it doesn’t attract speculators.

***

I’m certainly not stupid enough to say that agriculture is the best way to make money because there are significant operational risks and many other problems attached to it. Have you heard of plant disease? What about livestock mortality, escalating energy cost, commodity price swing and profiteering by middleman? If agriculture is so good then why are there so many impoverished farmers around? These are very long stories and I shall leave it for another time.

To me, the key is getting into the right sector that you understand its key risks and build a sustainable business model out of it with whatever resources you have.

About 10 months ago, I wrote about the potential bargains in the property sector after the end of loan moratorium in September 2020. I don’t have the data (too lazy to compile) to justify whether my prediction was right but I personally did pounce on an attractive bargain which I’m going to share a little bit. I got the timing a bit off because it happened before the end of loan moratorium, but who cares?

In June 2020, I stumbled upon a terrace factory for sale in an established industrial area asking for 10% below the market price. When I realised the owner was also trying to sell the next door unit owned by him, I smelled blood and immediately aimed for the kill. When someone was holding two properties for sale at the height of the crisis, it stank so badly that you could feel the flies rushing in. After much haggling, I offered to take both of his units and we settled for a price 25% below market value.

Then came the challenging part because I absolutely couldn’t afford the second unit and I had 3 weeks to look for a buyer otherwise my earnest deposit would be forfeited. After some frantic hustling, I was introduced to a businessman who agreed to take over my second unit and pay me a profit equivalent to 9% of the purchase price. That effectively pushed down my own acquisition cost to 33% below market value. Not a bad return for a few weeks of running around.

The loan was not difficult to obtain due to the attractive discount and the rental market at that location is quite strong. To my benefit, the Central Bank had aggressively cut interest rate to ease the economic crisis and my borrowing cost effectively reduced to 3.4% while I managed to lease out the property at 4.8% yield. To my surprise, there were 3 parties looking to rent my property within the first week of closing the whole transaction.

A few lessons learned along the way:

1. There are opportunities even when times are bad, if you keep your eyes and mind open. I did not specifically scout for properties to buy at that time and there wasn’t any banner indicating those two factories were for sale. I discovered it through a casual conversation with a property agent when I tried to find out what happened to the industrial property market during the lockdown.
2. Don’t be afraid of the risk if you can understand and manage it. Back then, the biggest risk in this deal was losing my earnest deposit if I failed to flip the second unit to someone else. Even if that happened, I reckoned that the earnest deposit forfeited would be well compensated by the additional discount I obtained from buying two units in one go. This is a classic example of head I win, tail I don’t lose.
3. Things are not as bad as they look like and vice-versa. During the lockdown period, everyday I came across news report showing business failures due to the Covid-19 crisis and almost all experts were anticipating a doomsday scenario. I just held the opinion that most commercial properties would get the first hit due to the worsening tourism and retail sectors. Meanwhile, most other industries such as manufacturing, trading, logistics, healthcare, agriculture etc were still performing and they were the primary users of industrial properties. For a tiny factory lot like mine, there should be big enough pool of potential tenants to fish for. As for my loan, it was approved in 2 weeks (though 3 other banks refused to lend me at the margin I wanted) even though most people said banks have frozen their lending. If I blindly listened to those pundits, I wouldn’t have done anything at all.
4. Make new friends when you are making deals. I made an effort to build a strong relationship with the property agent involved in the deal and I paid him decently and promptly. In return, he helped me secure a tenant within one week and took care of the whole leasing process professionally. While flipping my second unit, I made good rapport with the businessman who became my partner as the owner of the second factory unit. I still see him often by patronising his restaurant and he could well be my co-investor in my future deals.

This is my first investment in non-residential property and I hope a good beginning will lead to greater heights. A lot more to learn.

In the past one week, I have received several calls from real estate brokers peddling some “below market value” commercial properties to me. Most of the properties are not that exciting because they are either in lousy locations or occupied by questionable tenants. Some of them even suggest that I buy the property and increase the rent because the tenancy is going to end soon. Really? Aren’t most landlords struggling to just maintain the rental now?

In the end, I had a rather long conversation with one of the more experienced brokers mainly because I wanted to get more market insights. The conclusion was, she would call me back towards the end of the year when we get to know who is swimming naked after the tide recedes.

“I know what all of you Chinese bastards are thinking right now. I’ll call you again with good news probably sometime in December,” she said to me. By the way, she’s a Chinese lady and no, I’m not offended at all by her seemingly racist remarks. That’s probably the single most important piece of market intelligence I managed to pick up from her – everyone can smell blood in the water.

Thinking back on our conversation, I’ve made a few observations to conclude that it’s very hard to see meaningful property transactions for the next few months due to the following reasons:

1. Even if you are not a desperate seller, everyone will assume you are and the potential buyer will likely lowball you with a very insulting offer price.

2. If you are a desperate seller who accepts the insulting offer price, the potential buyer will probably find a reason to back out because he/she want to lowball you further in a few more months.

When you talk to property investors now, most of them are quietly singing “Wake Me Up When September Ends” (check out Green Day). All the loan repayment moratorium in our country will end in September 2020 and that’s when most banks will start seeing how bad their loan book will turn.

Right now, there are a lot of businesses trying to shore up their cash reserve by refinancing their assets or selling their shares. The problem with refinancing is that banks are very reluctant to lend because they don’t want to be caught swimming naked too when September ends. By the way, I know a few banks have blacklisted several industries such as oil and gas, entertainment, construction and anything related to tourism. Selling shares? I just think it’s too time consuming given the limited chance of success.

Suffice to say that the most straightforward option is selling non-core assets and usually that means investment properties. People generally won’t sell the factory they operate or the house that their whole family is living in. But hang on. If most investors are waiting to pounce, isn’t there a ready pool of buyers to prevent a sharp fall in property prices?

I still think the price will fall badly and the logic is very simple – this pool of buyers will be significantly outnumbered by desperate sellers. The pinch will come in September and slowly transform into wounds that start oozing blood in December. No, this is not my random prediction because I’m just trying to decode the underlying message from the broker when she said she will call me back in December. After all, I assume she’s more experienced than me in this.

I think everyone can smell blood now but hardly anyone will pounce until blood is all over the place. Stay tuned.

When it comes to a heavy topic like this, the biggest challenge is to make it less boring. After all, it’s quite a dry subject but no one can dispute its importance when it comes to critical period like this point in time. Therefore you hear people talk about it everyday simply because we see the word “recession” everyday in the media. But what kind of recession? Is it different this time? What other things are brewing? Let me try to provide some perspectives in the most layman manner I can.

Recession happens when there is a contraction of gross domestic product (GDP), a measure of all the economic output generated. The fact that you produce and sell a loaf of bread tomorrow for RM10 means you contribute an equivalent amount to the GDP. I have no doubt this number will go down because almost the whole population stay at home for two months and produce nothing except probably babies (which unfortunately are not included in GDP number). Then you see companies closing down on an unprecedented scale and the job market is getting hit really badly. I’m lazy to elaborate this, just read the newspaper.

What I do want to talk about is the specific factors that affect our GDP and what kind of recession we are going to face (in my humble opinion). First of all, GDP is made up of private consumption, investments, government spending and net export. By looking at each component will give us a clearer perspective on how things will progress going forward.

Other than essential products and services, private consumption has certainly gone down because most people are in lockdown. There is no way it will recover immediately even after the lockdown is lifted because sentiment is at all time low. With job security at risk, most people will just defer their non-essential spending and focus on saving money for the rainy days. Just google and read the news with the title “Malaysia vehicle sales volume plunges 59% year-on-year in March” and you will know what I mean.

Investment in the corporate sector will go down the same route for pretty much the same reasons. Corporate executives make investment decisions based on their expectation of demand, availability of fund, cost of capital etc. Right now, what I can anticipate is a drastic drop in demand coupled with more stringent lending by the bank in light of the impending bad debts. Despite the announcement of a special relief fund to assist businesses, banks generally avoid high risk sectors like hotels and entertainment industry.

Some companies are even finding ways to unwind their mergers and acquisition deals entered into before the Covid-19 crisis unfolded. For example, Boeing is trying to walk away from a US$4bil deal to acquire a Brazilian jet business called Embraer. On the real estate front, Anbang, the Chinese insurer is suing South Korean asset manager Mirae who is trying to renegotiate the deal to buy 15 US luxury hotels, arguing the hotels had lost value during the coronavirus shutdowns. Won’t our local businesses go through the same mental exercise?

The right thing to do now is for central bank to flood the market with liquidity and government to invest heavily in infrastructures or any other sectors with high multiplier effects. Just look around the world and you will notice that central banks are busy printing money and governments never hesitate to introduce stimulus package at enormous scale. Unfortunately at this point in time, our government suffer from a triple whammy – political instability, low oil price and the loss of goods and service tax (GST).

While we can’t control oil price, the political upheavals and loss of GST are self-inflicted. I’m a big supporter of GST as it’s fair and efficient. With GST, we probably don’t have to squeeze Petronas so hard to the point of choking it. It’s sad that good things succumb to politics. We have no choice but to push up the fiscal deficit even though the current stimulus package is expected to increase the deficit to 6% of GDP.

What about export?

In my opinion, the damage caused by Covid-19 in other countries is worse than us. Again, I don’t need to elaborate, just read the international news. Look at which industries on government life support and the amount of business closures. Or just look at how stressful Donald Trump looks nowadays and the amount of blames he unleashed on others.

With that, the sentiment on our export sector is at all time low, except for very few industries (glove manufacturing for example). With the understanding that major economies are in recession, how would export-oriented businesses behave? Talking about sentiment, some of our public listed furniture exporters are trading at 4X PE and 0.5 book value right now. You tell me what you think.

***

Again, I want to emphasise that it’s crucial to address the elephant in the room now – GOVERNMENT’S BEHAVIOUR. It desperately needs to restore political stability and stimulate the economy via effective government spending to restore market confidence. This will directly boost private consumption and investments. Business leaders generally know that things will recover but they need to be assured that we are on the right path before taking any actions.

The thing about consumption and investment is that both are interdependent and each individual’s habit directly affects the outcome. The more you refuse to spend or invest, the less economic activities generated and it all becomes a self-fulfilling prophecy. Confidence is the key and most policy makes try to tackle this but with mixed result because it’s inherently difficult to manage the psychology of millions of people.

Taking an example from the Japanese asset price bubble in the 1980s, the balance sheet of the Japanese private sector switched from rapid expansion to rapid contraction because of the risk aversion. When the private sector received money, they paid down their debt and save the money instead of investing for business expansion because they could not really visualise the path towards recovery. This effectively caused a large-scale contraction in the economy similar to the 1930s Great Depression in the US. What I’m afraid is we may enter into this so-called balance sheet recession due to the erosion of market confidence, which is very hard to get out of. Once economic hardship becomes a reality, things will just spiral down with more risk aversion kicking in. It’s just like once you get cheated, it’s difficult to place your trust in someone again.

At the moment, we are having a very unstable government and the political infighting have no sign of abating. Several large scale infrastructures are put on the back burner and there is no clear direction on certain policies. Businesses are very reluctant to make major decisions without political certainty and this has been like that even before the recent political coup. When I went to every single business function before this, most conversations started with one common topic – who will be the next Prime Minister. In a more matured economy like the United Kingdom for example, you would expect the continuity of certain important policies no matter who wins the election and people generally have faith in the public institutions. Malaysia is an entirely different animal because a different government could mean a different tax regime, different people heading the public institutions and the rise (or fall) of politically connected businesses.

During the 1997 financial crisis, no matter how bad things were, we had a stable government with clear leadership. Without debating the merits of capital control and other policies, the general public at least had a clear idea where they were heading and hence decisions could be made. Right now, I don’t even know if the current government can survive the Covid-19 crisis because it is still busy making political appointments to ensure its survival. To make things worse, you can still see our politicians making a mockery of themselves by saying stupid things and behaving in a more ridiculous manner than Donald Trump.

Are we going to escape this coming recession unscathed? No way.

How fast is the recovery? I don’t know but I think it largely depends on how our government behaves. Let’s observe and you may enlighten me.