- do not give investment advice to other people (when it is not your profession)
- think about upside and downside in probabilities, but do not forget about black swans
- momentum and valuation both are good indicators for buy and sell-it is impossible to time peak and bottom precisely, but it is not too difficult to avoid at least part of the correction/decline
- taking contrarian positions require extremely strong nerves
Wednesday, August 26, 2015
What I learnt from the recent correction
Sunday, August 23, 2015
Apple - Linear vs. Non-linear Thinking
Human beings tend to think in linear fashion: what happens in the past will happen again in the future...the future follows the patterns drawn by the past...what is going well will keep going well...what is falling will continue to fall...
Linear thinking on Apple:
- iPod: people will never switch to MP3 players because of they investments they made in CDs and CD players; why would anyone go through the trouble of plugging their MP3 players to a computer to get music?
- iPhone: it has no keyboard! the battery lasts hardly longer than one day! why would I need to browse the internet on such a small screen when a laptop can do the job 10x better?
- iPad: why would I need a smaller, but more expensive Netbook? and no keyboard?!
- Apple Watch: why would I want to update my expensive watch every two years? why would I substitute the status simple (Rolex) for a general piece of consumer technology on the wrist? the battery hardly lasts longer than one day!
- China: consumers in China will keep buying the more expensive iPhones because it is one of the must-have middle-class symbols
- India: consumers in India will never afford iPhones when lower cost Android phones from China can do the same tasks at 1/4-or-below the retail prices
Non-linear thinking on Apple:
- iPod: MP3 players is not about music, but about the distribution of music
- iPhone: the new smartphone is about replacing feature phone functions, or mimicking productivity tools on notebook and PDAs, but about rethinking computing as personal and mobile necessity
- iPad: tablet is not about replacing notebooks, but mobile computing in a simplified package
- Apple Watch: the most frequent way people communicate with a computing device are measured in seconds, not minutes or hours; the number of digital connections between devices will grow exponentially, some a devices is needed to sit in the center of that mesh network
- China: a nationalist chairman and ascending value of Chinese handset OEMs will lure domestic consumers away from Apple. A increasingly conservative government will shut down App Store (over which it does not have control) in China, reducing iPhone to a standalone smartphone without the benefit of the iOS ecosystem
- India: without strong domestic handset maker presence, Indian consumers will flock to iPhone in a more aggressive fashion than Chinese in pursuit of middle class status
Linear thinking on Apple:
- iPod: people will never switch to MP3 players because of they investments they made in CDs and CD players; why would anyone go through the trouble of plugging their MP3 players to a computer to get music?
- iPhone: it has no keyboard! the battery lasts hardly longer than one day! why would I need to browse the internet on such a small screen when a laptop can do the job 10x better?
- iPad: why would I need a smaller, but more expensive Netbook? and no keyboard?!
- Apple Watch: why would I want to update my expensive watch every two years? why would I substitute the status simple (Rolex) for a general piece of consumer technology on the wrist? the battery hardly lasts longer than one day!
- China: consumers in China will keep buying the more expensive iPhones because it is one of the must-have middle-class symbols
- India: consumers in India will never afford iPhones when lower cost Android phones from China can do the same tasks at 1/4-or-below the retail prices
Non-linear thinking on Apple:
- iPod: MP3 players is not about music, but about the distribution of music
- iPhone: the new smartphone is about replacing feature phone functions, or mimicking productivity tools on notebook and PDAs, but about rethinking computing as personal and mobile necessity
- iPad: tablet is not about replacing notebooks, but mobile computing in a simplified package
- Apple Watch: the most frequent way people communicate with a computing device are measured in seconds, not minutes or hours; the number of digital connections between devices will grow exponentially, some a devices is needed to sit in the center of that mesh network
- China: a nationalist chairman and ascending value of Chinese handset OEMs will lure domestic consumers away from Apple. A increasingly conservative government will shut down App Store (over which it does not have control) in China, reducing iPhone to a standalone smartphone without the benefit of the iOS ecosystem
- India: without strong domestic handset maker presence, Indian consumers will flock to iPhone in a more aggressive fashion than Chinese in pursuit of middle class status
"Strong Views, Weakly Held"
"Strong views, weakly held" is the critical principle futurist Bob Sutton identified to navigate uncertainty. I couldn't agree more.
One of the biggest nuisances sell side analysts face is the reluctance to flip their investment views overnight. The practice is not forbidden, but rare. Most analysts choose to "ease into" their ratings change, from Buy to Hold, then from Hold to Sell. It makes sense in theory, because most analysts prefer to identify themselves as fundamental analysts. Unless a unforeseeable, major event such as natural disasters occur, fundamentals don't change overnight. Those analysts are brave enough to make the call can be perceived as fickle and lacking "conviction".
In practice, I would argue, the change from Underperform to Outperform should happen more often. Ideas accumulate gradually. When they reach a critical mass, it often calls for a drastic change in analysts' stance. But the drastic change often implies that analysts are wrong previously. I think fewer people are brave enough to admit directly that they were wrong.
One of the biggest nuisances sell side analysts face is the reluctance to flip their investment views overnight. The practice is not forbidden, but rare. Most analysts choose to "ease into" their ratings change, from Buy to Hold, then from Hold to Sell. It makes sense in theory, because most analysts prefer to identify themselves as fundamental analysts. Unless a unforeseeable, major event such as natural disasters occur, fundamentals don't change overnight. Those analysts are brave enough to make the call can be perceived as fickle and lacking "conviction".
In practice, I would argue, the change from Underperform to Outperform should happen more often. Ideas accumulate gradually. When they reach a critical mass, it often calls for a drastic change in analysts' stance. But the drastic change often implies that analysts are wrong previously. I think fewer people are brave enough to admit directly that they were wrong.
Tuesday, August 18, 2015
China Smartphone Market - What is Going on?
Fear is growing for macroeconomic weakness in China. 2Q GDP growth of 7% was in-line with government guidance, but lower than 7.5% in 2Q14, depreciating currency has sparked fear across sectors and borders, consumer consumption appeared weak. And most devastating news in financial analysts eyes, is that the stock market has dropped from a peak of 5178 (on Jun. 11) to 3667 as of yesterday (Aug.17), a 29% drop from the top.
Many people were panicking that smartphone market in China is doomed for the above reasons. They are not wrong. 2Q sell-through data from GfK is showing a 10% Y/Y drop in China, while North America was up 10% Y/Y. After three years of Xiaomi, Xiaomi copycats, and their social media blitz, Chinese consumers are a little worn out. China will probably never see as big a unit shipment surge (like that in 2013) again, ever. Its smartphone penetration already quite high, and 4G roll-out will proceed at a much more rationale pace, given the lack of generous carrier subsidies. But I think it is way too soon to lose hope on China. Why? because North America could still grow 10% Y/Y, because iPhone shipment could still deliver 100% growth in South Korea (June Q in 2015). China naysayers are ignoring one secular trend that will keep the market thriving for the next 3 years:
Middle class to-be in China will drive the largest scale upgrade to premium smartphone in the world: this is already showing in the same GfK data for 2Q15. Although unit shipment was down 10% Y/Y, sales were up an impressive 17%. ASP rose 28% Y/Y from 1,400 yuan to 1,800 yuan. Also, "high-end" category rose from 10% a year ago, to 17% of total shipment in 2Q. Apple's market share gain in China is far from over. But Samsung should see a drastically different outlook. Domestic OEMs in China is catching up on build quality, user experience, and brand image. And they are 50-100% cheaper with the same performance. Samsung's brand equity, will follow Blackberry and HTC's footsteps and fall to zero quickly. There is no way out for Samsung, without its ecosystem, there is no way it can out-innovate its competitors in China. Flexible OLED is a differentiator competitors cannot have, but it also happens to be a feature real consumers find no use for. Apple, on the other hand, is quite different. iPhone is an object of desire, just like a LV bag or a Hermes belt. It easily conveys income level and taste. It is the ultimate affordable luxury - it is obtainable, but at the same time, it represent the ultimate mobile computing experience. A LV bag owner may feel poor at the sight of a Berkin bag, but an iPhone owner has no competition - it is the best mobile handset, period. Owners of the silly Vertu phones are merciless ridiculed and pitied nowadays.
The upgrade will not only happen in tier-2 and above cities, where markets are getting saturated quickly. It will be unleashed in tier-3 cities and below, by sheer scale, that is a much larger market then all of the top tier cities combined.
Many people were panicking that smartphone market in China is doomed for the above reasons. They are not wrong. 2Q sell-through data from GfK is showing a 10% Y/Y drop in China, while North America was up 10% Y/Y. After three years of Xiaomi, Xiaomi copycats, and their social media blitz, Chinese consumers are a little worn out. China will probably never see as big a unit shipment surge (like that in 2013) again, ever. Its smartphone penetration already quite high, and 4G roll-out will proceed at a much more rationale pace, given the lack of generous carrier subsidies. But I think it is way too soon to lose hope on China. Why? because North America could still grow 10% Y/Y, because iPhone shipment could still deliver 100% growth in South Korea (June Q in 2015). China naysayers are ignoring one secular trend that will keep the market thriving for the next 3 years:
Middle class to-be in China will drive the largest scale upgrade to premium smartphone in the world: this is already showing in the same GfK data for 2Q15. Although unit shipment was down 10% Y/Y, sales were up an impressive 17%. ASP rose 28% Y/Y from 1,400 yuan to 1,800 yuan. Also, "high-end" category rose from 10% a year ago, to 17% of total shipment in 2Q. Apple's market share gain in China is far from over. But Samsung should see a drastically different outlook. Domestic OEMs in China is catching up on build quality, user experience, and brand image. And they are 50-100% cheaper with the same performance. Samsung's brand equity, will follow Blackberry and HTC's footsteps and fall to zero quickly. There is no way out for Samsung, without its ecosystem, there is no way it can out-innovate its competitors in China. Flexible OLED is a differentiator competitors cannot have, but it also happens to be a feature real consumers find no use for. Apple, on the other hand, is quite different. iPhone is an object of desire, just like a LV bag or a Hermes belt. It easily conveys income level and taste. It is the ultimate affordable luxury - it is obtainable, but at the same time, it represent the ultimate mobile computing experience. A LV bag owner may feel poor at the sight of a Berkin bag, but an iPhone owner has no competition - it is the best mobile handset, period. Owners of the silly Vertu phones are merciless ridiculed and pitied nowadays.
The upgrade will not only happen in tier-2 and above cities, where markets are getting saturated quickly. It will be unleashed in tier-3 cities and below, by sheer scale, that is a much larger market then all of the top tier cities combined.
Sunday, August 16, 2015
Fundamental Analysis Examples - Starboard
Looking through the Starboard's presentations on AOL and Darden, I find plenty of useful tidbits on ways to think about a underperforming business and fundamental analysis.
AOL: http://www.sec.gov/Archives/edgar/data/1468516/000092189512001124/dfan14a06297101_05222012.pdf
Darden: http://www.sec.gov/Archives/edgar/data/940944/000092189514000699/ex991dfan14a06297125_033114.pdf
AOL: http://www.sec.gov/Archives/edgar/data/1468516/000092189512001124/dfan14a06297101_05222012.pdf
Darden: http://www.sec.gov/Archives/edgar/data/940944/000092189514000699/ex991dfan14a06297125_033114.pdf
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