Personal or Business Finance - An Empty Sack Cannot Stand Upright

 Ahh..  It's been a long time since I wrote here.  I now have 3 children, an ex-gf who is now an incredible wife, and more or less still the same businesses when I started working after college.

There's been a lot of ups and downs since I last wrote.  Some blessings that are more than what I deserve and some challenges that I would've preferred not to have experienced.  I guess I'll console myself in rationalizing that having both makes life truly richer overall than having just one of them.

Back to the main topic.  As I write this, the world is in the middle of a pandemic.  Many businesses and jobs around the world suddenly lost their incomes.  It is during these times which happens around once every 50 to 100 years where you have no control and there's nothing you can do in losing your job and your income.

At the moment, I think the best thing I learned from this event is not so much on the benefits of having ample reserves (cash) in your company or your personal finance but more important is how the difficulty in accumulating or saving enough reserves is not so much in not having the opportunity to do so but in avoiding the temptation to spend and grow your business and assets while you're making your money.

The tendency for most companies when they are making money is to expand their businesses even more in the current areas of their businesses or in other areas.  Usually they will spend much more than what they are earning and therefore borrow money to supplement.  That is okay as long as your balance sheet is strong and you can weather the down times.  But what you will see is that most of these businesses around the world and especially the large publicly listed companies in the Philippines have growing debt and growing earnings but almost negligible amount of cash in their balance sheet or pockets.  So when bad times hit such as the pandemic, these companies who have to sustain losses for a certain period of time (months or years depending on their situation) are unable to do so because they have no cash reserves to help them ride through the crisis.

I admit to be guilty of this somewhat.  I leave very little cash as I can never buy enough stocks and investments.  Like my father before me I throw almost everything I have into stocks (not for my father) and businesses and whatever asset appreciating investments we can find in the hopes of growing our wealth.  Like many others including the richest entrepreneurs in my country, I have failed over the years to FIRST ACCUMULATE CASH RESERVES which takes time - years to accumulate a solid level of cash say roughly equivalent to your annual sales.  I know of no company among the listed conglomerates that have cash reserves near half of their annual sales.  I remember watching Ayala Corp's CEO's interview during the beginning of the pandemic saying that they have liquidity in terms of cash plus borrowing capacity of 20 billion pesos.  That is extremely tiny relative to their company's main businesses that have sales of over 200 billion pesos a year and can easily wipe out their businesses immediately if they lose money for 2 years or more.

One of my father's brother in law together with his brothers earn a total of almost 100 million a year for 20 years.  You may say that each sibling earns around 10 million pesos a year in the last 20 years.  Yet despite each brother earning a total of around 200 million pesos over 20 years some of them are still illiquid and poor today.  This is most likely attributable to their misspending in luxuries and money losing business ventures.  Some of his brothers have multiple expensive cars and another one of his brother has more than 1 family, possibly 3 families.  My father's bro in law seems to be the biggest miser or scrooge among his brothers (but his kids are a different story) and it seems like he is also the wealthiest among all of them today with cash reserves of over 300 million pesos as of last year.

Overall, we have been blessed to be spared what has befallen majority of the world's businesses and we are able to continue to earn money and accumulate cash.  But we may have our own business storms in the future such as our services becoming obsolete or getting crushed by some competitor.  Recognizing the difficulties and challenges of accumulating cash - forgoing investment temptations for at least a few years, the priority of my family business today must be accumulating cash and at most only invest a minority of the annual earnings (say no more than 20% of annual earnings) for any other investments until we accumulate over 50% of the business' annual sales.  After we have accumulated such levels of cash reserves, we can hopefully feel confident in spending big amounts of money for investments while at the same time we can feel secure to face all kinds of business storms that can potentially wipe out our business' earnings.  With the right cash reserve levels in our balance sheet we can stand upright no matter what happens.  

It is better to be small and full sack than it is to be a large empty sack that cannot stand upright when a storm hits.  So keep your balance sheet balanced like Berkshire Hathaway or Daily Journal Corp or Google or the China Gov't or Cham Samco & Sons did!  The solution to being a full sack that stand upright is accumulating a lot of cash reserves.  This was how my ancestors survived world war 2 when they had almost 0 earnings during the japanese occupation but they had cash reserves equivalent to several times the capital needed to run their business kept in Taiwan or U.S.  Although their business is not that large anymore, their business is the longest lasting one in their industry.  They have definitely won the game when it comes to longevity.  In terms of survival, there's a lot to learn in practicing what the founding ancestors practiced that resulted in their company being one of the best there is in terms of longevity.  

Advantages of Stock Investing over creating new business

Let me start off by defining what I mean by stock investing. When I say stock investing, I don't mean buying and selling a company base on the price movement alone. I don't mean technical analysis or insider trading or investing base on the potential outlook of a certain stock. When I say stock investing, i simply mean value investing or buying bargains as started in the last century by guys like Ben Graham, John Templeton, Phil Carrett, Phil Fisher and made famous by Warren Buffett.

Now that it's clear, lets get on to the reason why I think stock investing has certain advantages for a human in this time or generation than creating new businesses.

1.) There are more stocks that you can pick than starting a business. For every business that you can think of, there's no exaggeration to say that you can probably find 1000 times as many public listed companies to select from.

2.) The one business that you come up with has no track record and only projections whereas the historical business performance of the 1000 publicly listed companies are present on top of performance projections. Think of buying a concept car vs buying from 1000 existing car models with performance review.

3.) There's a lot of things that you have to do and spend in starting a business - build the management, vendor and customer network. You may not have enough time and capital resources on your own to build on those and there's a lot of things you can do wrong when you are handling all of them yourself. According to WEB, when investing in stocks, there are only two things you can do wrong: 1.) Pick the wrong stock (company) 2.) Buy it at the wrong price.

4.) When starting your own business, you generally need to invest 100% of the capital required to kick off the business. In stock investing, there are few but occasional opportunities (approx every 5 years) for you to invest less than 100% of the capital required to run such wonderful business.

The idea of pride in one's culture and history

Last Sunday, I reluctantly went with my dad to attend a wedding function of his friend's daughter in Makati Shang but thankfully, I had a good time with him! We chit chatted about his friends =)

My dad and I hitched a ride with his Chinese Mafia friends. They are a bunch of old men, mostly 10-20 years older than my dad who are hardcore Binondo like Chinese. Practically all of them were self employed most of their life, speak in a more natural Chinese accent than Greenhills Chinese, married to pure Chinese women, require their children to marry Chinese and to be self employed if you're a son, and best of all they always meet up for breakfast during weekdays in McDonald's.

I'm particularly drawn to one of my dad's old friend, they call him Professor. Unfortunately, I never got his name and he doesn't know my name as well. Mr. Professor is a retired physics professor in UP, a subject that I like a lot next to Math (my favorite), and a school that I think is the best in the country by far. I was drawn to him because I believe we have a lot of similarities in terms of how we think and frankly I admire and like his profession. I wouldn't mind being a physics teacher for 30 years but I would probably prefer to be math teacher. After figuring out that I am an economics major in the small school beside his school, he talked to me about the financial crisis in the States. He asked me about the sequence of events in a recession, Greenspan's tenure, the budget deficit and etc. He also gave his opinion on how he thought CEOs in corporate America are being excessively paid, how lending practices were too loose and needs to be regulated, how unfortunate Bush spent his country's money too much on war and etc. Ofcourse, most of these opinions were not of his own but that of others which he agrees with. I was impressed on how updated he is with the economic events.

I think I made a striking impact on him when I brought up Sun Tzu's little wisdom on war - that one should only go to war when there is a monetary gain (profit) because going into war costs and depletes a lot of resources (money) to a nation's coffers. His face lit up as if I had said something ingenious and striking. But he was mainly impressed because he felt proud of his culture as evidenced by how he later spent a lot of time talking about how the Chinese knew so much wisdom from thousands of years ago. He encouraged me to learn more about Chinese history as there's a lot to be learned from there. When I told him I read the english translation of 3 Kingdoms, he told me that it's different and that I should read the Chinese version (which I would've if I could) which is way better.

I was reading Obama's first book when I came upon what was said to him by a black man that American schools are for white people. They only teach them about white culture, white history or THEIR history etc. As a result, black children should not be expected to be enthusiastic in going to school and doing well. The American schools should teach them about black history and culture and that will make the black children do well in school. He told Obama how bias and manipulative the white schools are. Personally, I think this is his own interpretation or his "own truth" and a disfigured and debilitating perspective on reality.

My soon to be wife, like the rest of the Filipinos and 3rd generation Filipino Chinese, enjoy the idea of going to Europe and taking a look at its very rich history. They get so excited talking about going to the Louvre and seeing all these wonderful White arts and culture or going to visit the Buckingham Palace just to admire its beauty. I try to burst their bubble sometimes by telling them that Britain's bankrupt, Forbidden City is much bigger, the royalties act like clowns and are just an entertainment expense for bankrupt Britain to attract tourist and etc. I always felt that they should appreciate their own culture and history (no matter how big or small) more than they should of others which has no relevance to them nor cares about them. I was thinking like the black man and the professor.

Later on, as I thought about what the black man said and how backward it was, hindering his own people from progress, I realize I was being as racist and as blind and as backward as the black man was. Being proud of my Chinese culture and history and boasting about it to other people is like subtly sizing them up and dividing ourselves from each other. It's like saying: "I have this nice toy and it's mine. You don't have it and it's not yours, it's mine!" Nothing can be further from the truth and backward than the thought of: "This is my history and culture, not yours and you have no claim to mine. That is your history and culture, not mine and I don't care about it."

This may be absurd, but why shouldn't the white and black man have as much claim and pride as I do with the Emperor Kang Hsi? Because they are not yellow, but white and black? Because they were not decendants of Kang Hsi as evidenced by their skin and where they were born?

But isn't it also very likely that there could be some black or white folks who were direct descendants of Kang Hsi and that there are some yellow comrades who weren't? Wouldn't they genetically be more related to Kang Hsi than their certain yellow counterparts?

"We are all one people, not I, you, we or they but US" as the saying goes. The sooner we share and realize that, the faster we should progress. The world economy and technology has progressed more rapidly in the last hundred years than it ever did in mankind's history. It's hard to dispute that global trading, sharing of goods, services, knowledge and technology among nations did not have an impact to the fastest growth that we have experienced in our history. Today's Harley Davidson motorcycle (made from all around the world) is better than the Harley Davidson motorcycle (made in USA only) of 50 years ago in terms of quality, technology and price. Now if we share our racial culture, history and wisdom with one another, take out the colored lines that divide us from one another and consider it as ours, wouldn't our own individual humanity be richer?

Now there's a saying by Rudyard Kipling (our kind of people):

Now this is the Law of the Jungle - as old and as true as the sky;
And the wolf that shall keep it may prosper, but the Wolf that shall break it must die.
As the creeper that girdles the tree-trunk, the Law runneth forward and back
FOR THE STRENGTH OF THE PACK IS THE WOLF, AND THE STRENGTH OF THE WOLF IS THE PACK.

I think this law not only applies to wolves.

Things I learned from a few Americans

Obama

1.) Audacity of hope - Not blind or ignorant optimism, but hope rather than cynnicism in the face of difficulties, darkness and difficult times. It takes strength to do this.

2.) Everybody, your friends and your team, have faults and will continue making new mistakes. Don't dwell and waste your limited time and effort on the negatives or irritability of others. It can hinder you from progressing with your work or task at hand.

3.) Abraham Lincoln's quote - "A house divided against itself cannot stand." Don't let differences in opinion, ideas and conflict divide you and your family especially when you have the same goals and vision. Don't blame each other. Work on your own faults and weaknesses instead. I know this could sound simple but it takes real effort, development and strength of character to do this.

4.) The most dangerous threat or enemy in a country, team or family is not found outside but rather inside of the country, team or family. This dangerous threat or enemy will try to divide us amongst ourselves. When united, we stand a chance to face our enemies. When divided, our enemies need not face us at all. Remember the stories in 3 kingdoms or just imagine going against a basketball team that's fighting against each other.

5.) True greatness of America is not in its tall sky scrapers, military power or the size of its economy but the pride is based on a very simple premise summed up in a declaration made over 200 years ago: "We hold these truths to be self-evident, that all men are created equal that they are endowed by their Creator with certain inalienable rights, that among these are life, liberty and the pursuit of happiness." Come to think of it, this mentality came first before the sky scrapers, military power and big economy.

John Templeton

1.) Stay ahead by working hard.

2.) Hard work is a gift from God. An ABILITY given to us.

3.) Use your time wisely by keeping yourself preoccupied with the few important things only.

4.) We all have limitations including our time, our effort and our mind. We can only do one thing at a time most of the time.

5.) Like weeds, distraction and excess comes to us continuously. We must always discard them. Keep it simple.

6.) When you rule your mind, you rule your world.

7.) You cannot have peace of mind without strength of mind.

8.) Happiness comes not from having a certain set of circumstances but from having a certain set of attitude. I guess that explains how a poor handicapped man can be happier than a rich athlete.

Ben Franklin

-Read Poor Richard's Almanack!

Some favorite quotes:

1.) If you'd be wealthy, think of saving more than getting (a distraction): The Indies have not made Spain rich, because her outgoes equal her incomes. (This is harder than it sounds)

2.) You can die quicker by being too lazy than working too hard.

3.) Necessity never made a good bargain. Don't be in that position.

4.) Tricks and treachery are the practice of fools that have not wit enough to be honest.

5.) Wink at small faults - remember thou hast great ones.

6.) Little Strokes, fell great Oaks.

7.) An empty sack cannot stand upright.

8.) Work on getting rid of one habit a year. After 10 years, you'll be a very changed man.

9.) Many a man thinks he is buying pleasure, when he is really selling himself to it.

10.) He that lives well is learned enough.

11.) He that pursues two hares at once does not catch one and lets the other go. One thing at a time.

12.) Path to wealth - Industry, Savings and Discernment.

Secondary Companies Part 1

A young man, Shai Dardashti, asked Buffett the question that if he were running a smaller amount of money ($10 million), would it be better to invest them in good companies at fair prices or fair companies at cheap prices. Buffett answered that for smaller sums, purchasing fair companies at cheap prices would be better.

What exactly are these fair companies? According to Graham, these companies could be secondary stocks. Stocks that are not well known, may not demonstrate a wonderful history as blue chip stocks in terms of profitability and generally out of favor because of some disappointing performance and outlook in their business. When I met Edwin Schloss, he gave me 4 tips on what i should buy and two of those companies are having disappointing performance and facing uncertainties in their future. A broker/analyst that he referred me to told me to take a look at an insurance company that is recently facing massive losses at one of their insurance products.

I must admit that when first faced with these companies, there was a bit of shock and fear in putting money in some of them. I believe that the general market would have the same impressions as I did when looking at these companies. To add to that, the falling of their stock prices would further the fear of people from these companies in general.

When I started investing, I could easily find so many companies that were selling way high from their appraised value than I could find companies that were statistically cheap. I guess this must be because I was always looking at companies that had been performing really really well in the last couple of years. I wasn't looking at companies that are out of favor. I guess you can say my first exposure to companies that are out of favor and with uncertain future came from my experience with Edwin Schloss. I must admit that if this came from somebody else, I might have immediately dismissed it without further thought, but this came from Edwin Schloss who along with his father has one of the world's best 50 year track record.

Does Edwin Schloss really put his money into companies as uncertain as the ones he recommended to me? I believe so. I've read a book that says that when the Schloss' father and son team started, they revealed some of their holdings and in turn lost some of their clients who got scared. I also read a recent article online that has Walter Schloss looking at a company that manufactures OEM wheels for big car manufacturers. That company has been performing pretty bad recently and they have been buying it when the price went down. Also, this approach to buying out of favor companies or secondary companies is consistent with their mentor Benjamin Graham's teaching and is also consistent with the world's best value investor's, Warren Buffett, approach when he started with smaller sums of money.

At this year's Berkshire annual meeting, Buffett was again asked what would he invest on if he only had a few million USD. Buffett said he would look at smaller companies and distressed bonds. Now I've been looking at smaller companies recently (over 700) and I can't name you companies that have a great outlook. Smaller companies in general are secondary companies. I also read a book where a man named Heilbrunn went to Benjamin Graham to have him become his financial adviser for his portfolio. When Benjamin Graham first looked at his portfolio, he told him to immediately sell all of them. Heilbrunn was shocked and told him if he's sure because the portfolio was invested in great companies. Graham replied saying that yes he is sure because the portfolio will never perform better than those great companies will. After selling them all, Graham immediately invested the funds in DISTRESSED BONDS! Ever since then, Heilbrunn's portfolio record has progressed really really well until he died. I believe he donated a building to Columbia University.

It's very easy to find secondary and out of favor companies that have a certain level of uncertainties in them. What you must screen for are companies that are low risk and uncertain when looking at out of favor companies. Many uncertain companies have high risk levels in them. We cannot underestimate the market's ability to appraise companies given that they can be irrational and not always correct.

Benjamin Franklin

I was reading Benjamin Franklin last month while I was in HK. I started getting interested with Benjamin Franklin after reading a book on a guy named Charlie Munger.

Benjamin Franklin's life was a series of progression from start to finish. He was a student, then he worked long hours for other people while writing at the same time. He became a business owner and a rich individual. After earning his financial freedom, he went on to become an inventor and politician, to which he was able to steer and mold the American culture for generations to come.

As an inspiration, I plan to adopt some of the tools he used to better himself. I plan on defining the habits I wish to have, prioritize them and work on them one at a time only. Realistically, I don't expect to ace them but I hope that in time, it will prove better that I did them and attempted to follow a structure than if I had not. I'll be evaluating myself from time to time and see how it's been.

I realize that I've let a lot of distractions in my life. tsk tsk.

26th birthday

I started off the night of my birthday by receiving two presents which were unexpected and beyond expectation.

The unexpected present came in the form of an ixus 75!!! I got my first camera when I was a dumb little 9 year old duped into buying someone else's canon slr. My mother paid for it back then. After years of tinkering around with it, I never became a great photographer because it just cost too much time, films and money (aside from the fact that I don't have a good eye). I did however learn some facts about photography and a little bit of the technical aspects of a camera. I still have that same camera up to this day but it's quite useless now since repairing it costs more than buying a 2nd hand model. This new ixus would probably stick with me for a loooong time. Despite all the complexities and flexibilities you can get with an slr, a point and shoot camera will produce better pictures in my hands than a sophisticated one. Not to mention the obvious fact that it's so much easier to carry around.

The beyond expectation gift came in the form of a scrap book compiled by no one else but thy beloved. Inside were pictures of friends and their greetings for my birthday. Beloved also wrote in the scrap book as well. But there was something in the book that ruined it, pictures of my face. This is the first time I ever received a gift like this and it really means a lot to me and it will continue to do so in the future. I'm very thankful for all those who sent their messages but the greatest thanks goes to wang ming mei. Without her, none of this would've been possible.

After receiving my gifts, I got treated to a wonderful dinner at l'opera. Among all the Western dish, Italian is my favorite. I only started liking Italian food when I got older and credit goes to my Kath. Because of Kath, I learned how to cook noodles without sauce. I still have to learn how to make my own sauce. However, I started learning more about the ingredients in a tomato sauce. It's also because of her that I was able to sample the ingredients of a dish individually before mixing and cooking them together. I was able to slowly (vvveerrryy sloooowwwly) learn where the flavors come from. There's no better way I can learn about food than from Kath's way. With her by my side, I'm sure the time will come when I can EASILY cook my own favorite food and hopefully hers as well.

In L'opera, Kath had a spaghetti that was deliciously spicy and I had an awesome foie gras that was sandwiched by a medium cooked steak! We also had onion soup and carpaccio for appetizer as well as bread with a dip made of olive oil mixed with tomato and basil leaves. The dip was so simple, yummy and healthy. What a combination!

We ended the night by watching Knocked Up in GB3. The movie was very good. It was better than what we thought it'd be. It wasn't as shallow and it was funnier than we expected.

Overall, this was a very wonderful night and a wonderful celebration. Thank you Kath for tonight. You made a big impact on me.