Sunday, August 29, 2010

Marketocracy Portfolio As At 27 August 2010

price history right curve

[download spreadsheet]

graph of fund vs. market indexes
SMF m100 S&P 500 DJIA Nasdaq

Graph Period: [7 Days] [30 Days] [90 Days] [6 Months] [1 Year] [2 Years] [3 Years]
[4 Years] [5 Years] [Since Inception]

left curve recent returns vs. major indexes right curve

Beating Today MTD QTD YTD
-0.23% -3.55% 4.16% -4.53%
S&P 500 -0.77% -4.75% 1.92% -4.86%
DOW -0.74% -4.59% 2.17% -4.24%
Nasdaq -1.07% -6.03% 0.45% -6.63%

recent returns right curve

Last Week -3.57%
Last Month -4.81%
Last 3 Months -6.04%
Last 6 Months -4.36%
Last 12 Months 0.78%
Last 2 Years 28.52%
Last 3 Years N/A
Last 5 Years N/A
Since Inception 20.59%
(Annualized) 9.38%
Last Week -3.53%
Last Month -5.15%
Last 3 Months -3.87%
Last 6 Months -3.54%
Last 12 Months 4.74%
Last 2 Years -12.67%
Last 3 Years N/A
Last 5 Years N/A
Since Inception -11.85%
(Annualized) -5.86%
Last Week -0.03%
Last Month 0.35%
Last 3 Months -2.17%
Last 6 Months -0.82%
Last 12 Months -3.96%
Last 2 Years 41.19%
Last 3 Years N/A
Last 5 Years N/A
Since Inception 32.44%
(Annualized) 15.25%

left curve alpha/beta vs. S&P500 right curve

Alpha 17.21%
Beta 1.16
R-Squared 0.77

left curve turnover right curve

Last Month 13.02%
Last 3 Months 28.99%
Last 6 Months 66.53%
Last 12 Months 167.19%

Symbol Price Shares Value Portion of Fund Inception Return
NYB $15.60 6,000 $93,600.00 7.78% 42.39%
QSII $56.77 1,500 $85,155.00 7.08% 13.93% Details
SUN $33.75 3,000 $101,250.00 8.41% 12.99% Details
BP $35.42 3,000 $106,260.00 8.83% 11.48% Details
FMC $61.15 1,500 $91,725.00 7.62% 8.92% Details MIDDLE
C $3.66 25,000 $91,500.00 7.60% 19.46%
GE $14.50 4,000 $58,000.00 4.82% -2.09%
PLD $10.56 8,118 $85,726.08 7.12% -4.28%
F $11.17 8,000 $89,360.00 7.43% 35.78%
WFMI $35.75 2,500 $89,375.00 7.43% -12.63% Details
UCO $8.78 6,000 $52,680.00 4.38% -14.56% Details
BAC $12.47 9,000 $112,230.00 9.33% 9.72% Details

Close Date Type Symbol Shares Net Avg. Price Net
Aug 17, 2010 Sell POT 1,000 $140.3169 $140,316.93
Aug 12, 2010 Buy F 8,000 $12.4259 $99,407.51
Jul 29, 2010 Sell NVDA 9,000 $9.1826 $82,643.21
Jul 22, 2010 Sell C 5,000 $4.0199 $20,099.65
Jul 22, 2010 Buy UCO 6,000 $10.2768 $61,660.69
Jul 12, 2010 Sell BP 1,750 $36.6356 $64,112.22
Jun 25, 2010 Buy BP 800 $27.55 $22,040.00
Jun 14, 2010 Buy BP 1,500 $31.4431 $47,164.65
Jun 11, 2010 Buy BP 2,000 $34.1535 $68,306.95
Jun 11, 2010 Sell GS 700 $133.7412 $93,618.86
Jun 11, 2010 Buy BP 450 $34.05 $15,322.50

Friday, August 27, 2010

Good Deals, Bad Deals, Win-Win Deals

The way a company handle acquisition and disposal of assets tells us a lot about management's savvy and the way they would handle corporate strategy.

London Biscuits / Lay Hong / QL

I like QL and London Biscuits, but following the deal, I would have to take London Biscuits off the list. I liked their expansion plans, but obviously London Biscuits had no inkling of how to leverage, improve, rebrand, strategise their acquisitions. I doubt there was any positive value add management input from London Biscuits. Since they acquired Lay Hong, which was a good deal relative to Lay Hong's NTA, nothing has changed, Lay Hong was still barely profitable but trades at a 50% discount to NTA. Its share price did not budge much from the time London Biscuits bought them a few years back. Why buy in the first place??? Yes, bought at a good price, so what, you loaded debt to do it, unless you think you can increase value in Lay Hong, or the earnings from Lay Hong would more than cover your interest cost, why buy?

Now, Lay Hong is a lot better than TPC, why two egg companies? Both also not profitable and you sell the more attractive one. How do shareholders of London Biscuits view your selling of Lay Hong, and then to see Lay Hong's share price double literally in a matter of days??? What does that tell you???

That was a good deal by QL but a very bad deal for London Biscuits. Was it to pay down debts? Your debt level was just as high a year ago, and almost the same as when you loaded debt to buy Lay Hong, what gives?

I don't think its necessary to bring down debts by selling Lay Hong. They have been poorly advised. If you know there is deep value in Lay Hong, you should be selling close to NTA. If the buyer is not willing, then take QL shares, not cash. At least you can ride the unlocking of value in Lay Hong. Now London Biscuits look very silly indeed. If anyone asks London Biscuits about the Lay Hong deal now, they can only shrug their shoulders. Sigh...

Cocoland / F&N

Win-win deal. Fun is over when investors realise that F&N bought their stake at such a deep discount. Couldn't fault Cocoland as the deal would secure a big customer and a platform to emlarge earnings. This shows Cocoland management having the vision to forgo a bit to gain a lot. Look at where their share price is now.

3A / Wilmar

Win-win deal. Same as above. If I was 3A, I would have done the deal at 50 sen even, because the platform would be so enlarged and the prospects improving by multiples with just Wilmar inside.

MFCB / Jadi

It may not make sense to many but I think MFCB is on a winner and will be able to leverage and extract more value by having Jadi into its stable. Win-win deal.

Management needs to know when to do deals and using the right way. It can be cash, convertible notes, shares issuance, even a put and call deal ~ each option is important in its own way depending on how things would flesh out following the deal. An asset may be multiplied in a different company's ownership. There has to be consideration of "opening of doors", "whether you can take the asset to the next level", etc...

In the same note, advisers and bankers should be able to advise these deals better and not just do the deals for deal making sake, just to earn some fees.

Thursday, August 26, 2010

Tanah Pusaka by The Solianos

Readers of this blog will be aware of my strong support for Leslie from pop pop music label. His stable of artists have churned out excellent audiophile recordings by JZ8, 2V1G, Roger Wang and Gina Panizales. I have been a fan of The Solianos through the years, but mainly listening to their interpretations of jazz standards and the occasional Malay songs.

Don't get me wrong, I love Gadis Idaman Ku, which was composed brilliantly by Alfonso Soliano. During a night session at No Black Tie, I heard them play Tudung Periuk, followed by Gadis Idaman Ku, and a few songs later Tanah Pusaka. It clicked in me that this is a great concept of an album. For my life, I never could fathom why The Solianos never got an album out.

I dragged Leslie to their next gig and he was sold. Pure talented slogging Malaysian musicians with such a storied family, which has contributed immensely to the very fabric and development of modern Malaysian music culture and legacy. I said this album must be an all Malay songs album. There is certainly room for a great jazzy Malay album that reflects their talent and heritage.

Hence their song list below has a few songs composed by Alfonso Soliano, and the rest given the special Solianos treatment. The harmonies and virtuosity of The Solianos shine through the grand guidance of Ador as well.

As an appetiser, they have released a video of their superb recording of Tanah Pusaka, which will be in the album, but is brought forward to all ahead of Merdeka Day. We all love our country, we may hate the politics or some of its policies now and then, but let's be clear, most of us love our country. We all know in our hearts we really want a 1Malaysia, the one that is promulgated is still "in the works it seems", but we know the vision of the one we want in our hearts. Happy Merdeka everyone ...

p/s please do post / link / embed the video onto your blogs and facebook ... knowing that many offices have banned youtube, we have added the megavideo link as well ha-ha.

The Solianos Project - Why!!!???

This will be in a series of articles on The Solianos Project. Why them? Although I begged Leslie to have a listen to The Solianos, although it seems like I "discovered" them as a recording potential, the truth is not so exceptional on my side. How do you discover a group that has been around for twenty thirty years?

Listening to the live, doing these 3 songs convinced me that there is something "big" ... Tudung Periuk, Tanah Pusaka and Gadis Idaman Ku. The Solianos have been plying their trade at various venues and even corporate events, and while most of their repertoire were in English jazz standards, I was convinced they had to do a Malay album which will totally encapsulate their brilliance, musicality, musicianship and melodious harmonies. It had to be a Malay album because it reflects their heritage perfectly (Alfonso Soliano and Tony Soliano).

The final song list is equally distributed with numbers composed by Alfonso Soliano and emblematic Malay songs through the years (with the Solianos treatment, they were given a fresh breath of vibrancy again - you didn't know that some Malay songs could actually sound so good).

In many ways, The Solianos represent the music culture for the past 60 years and the Pusaka album is more "1Malaysia" than anything I can imagine. If you are between 35-75 you will really feel that you lived through these songs, in your own country, cause nowhere else on earth will you get an album like this or get to appreciate one like this.

Both Tony and Alfonso were greats in their own rights. Alfonso was behind many artistes in the 70s, in fact he was the music arranger / director for Sharifah Aini's Pasir Roboh, Damak Ku Sayang, Serampang Laut, Dodoi Si Dodoi, etc... and thats just one artiste. I like Kartina Dahari a lot, and she also sang one of Alfonso's composition, Tunas Kasih. Tunku Abdul Rahman sought help from Radio Malaysia – Alfonso Soliano, Lanthall, Croft, Bert Read, Dol Ramli and Datuk Ahmad Merican to create the national anthem, Negaraku from a love song, Terang Bulan. Alfonso was always top of the list even then.

Alfonso's better known compositions include: Gadis Idaman Ku and Airmata Berderai. Hence the album which they are doing has almost half of them songs that linked the Soliano name to this group of talented musicians.

This great article was written by errol de cruz for NST and was published on merdeka day august 31, 2007,

IF there's one family that stands above all others in Malaysian music-making, it must be the Soliano clan.

There's an often-used joke which says that if you don't want to become a millionaire, all you need do is become a jazz musician. It's probably what used to happen in the early 1900s what with so many talented jazz and blues musicians succumbing to "occupational hazards".

In today's musical climate, however, jazz musicians have come a long way and several have made a big name for themselves, the Malaysian list includes Michael Veerapen, Lewis Pragasam, Andy Peterson, David Ah Wah, Julian Chan, Vincent Ong, Josie Thomas, David Gomes and many others.

Jazz itself has come a long way, finding its way into pop, rock and ethnic fusion; it's not surprising to find pop artistes who have matured, so to speak, turning back to their roots and hitting jazz joints with sets that include songs by Cole Porter, Frank Sinatra, Barbra Streisand, Ray Charles, Duke Ellington, Nat King Cole, Ella Fitzgerald, Nina Simone and Antonio Carlos Jobim.

Last week, for example, at popular jazz joint No Black Tie, patrons were pleasantly surprised to find evergreen artiste Khatijah Ibrahim at the mike, belting out her own originals and also jazz standards like Don't Rain On My Parade, Luck Be My Lady Tonight and Fever.

Accompanying her was an ensemble starring a renowned music family - the Solianos, arguably the only family in Malaysian showbiz who can claim a heritage of jazz that dates back well into the nation's history, well past the inaugural Merdeka celebrations, thanks to their forefathers, the legendary Alfonso and Tony Soliano.

The Soliano name hails back to the days of the British occupation, when Rufino Soliano and Dominado Tirona were brought in from the Philippines to play in the Constabulary Band.

Later, Alfonso and his nephew Tony came into the picture. Alfonso was the serious one, leading and writing for the orchestras of the time, while Tony was happy being the live wire, leading local musicians in one jazz ensemble or another on both sides of the Causeway, and in the heady Bangkok scene, too.

"Those were the days," many say, "when we had talented artistes like Ahmad Wan Yet, Zain Azman and Julie Sudiro entertaining us."

Alfonso and Tony died, months apart, in 1990, and it has been up to their children and families to keep things going.

Today's Soliano clan remembers the days of yore well, especially Valentino "Tinoy" Soliano who was the only one who performed with his father Alfonso. "I was the lucky one and yes, those were the days," he said.

"If you went to any of our homes after he passed away, there'd be a portrait of him above the piano and as we practised, we'd get that echo that said: "No bluffing, ah."

"Dad's talent was his wealth," Tinoy said. "He'd always bring himself down to the playing level of other musicians and make them sound good."

The Soliano Brothers picked up the flag from Alfonso and performed all over the country for more than 15 years, until individual talent and creativity nudged them into forming their own groups.

Now, instead of just one family ensemble plying the trade, there are at least six outfits pushing the Soliano envelope, from Langkawi to Singapore.

* Tinoy's sister, Isabella, leads one band at the Datai in Langkawi, with Conrado playing trumpet.

* Brother Rizal and niece Rachel have two bands, now performing at No Black Tie.

* Sister Irene sings with the Soliano Brothers whenever she can.

* Cousin Daniel Guerzo leads his Nine Lives in Langkawi.

* Tony Soliano Jr has a band in Johor Baru.

* Cousin Louis Tan Soliano plays drums at Jazz At Southbridge in Singapore.

* Older brother Remy had an accident recently and is currently bed-ridden.

* Tinoy and Tristano are session musicians. "We're the family mercenaries," Tano laughed.

The entire family gets together at Christmas and last year, they more or less took over Langkawi island for two whole weeks. And when they do get together, it's Salvador Guerzo who leads them.

Ado, pianist Rachel's dad, is the elder that the Solianos look up to nowadays. Like Alfonso in his time, Ado writes and arranges for the RTM Orchestra and also plays as often as he can with any of the Soliano outfits. Another "mercenary", yes, but this saxophonist is rather devoted to his daughter's band.

"Times have changed," Rachel chipped in. "I used to follow him; now it's the other way around."

It's a tough job, leading the entire clan when they get together, but Ado wears the mantle well, and his big hope is that he will one day be instrumental in making some Soliano dreams come true.

Rachel has plans to organise the Alfonso Soliano Jazz Festival and is hoping to acquire enough sponsorship over the next two years, and Ado wants to establish what they would all like to see - the Soliano School of Music.

"These are our dreams," Ado said, "and I know we can do it if we put our heads and talent together."

In this case, however, Rachel has the level-headed voice. "What we really need is someone with the business acumen to run it."

Considering the reputation the Soliano clan has earned over half a century and more, the realisation of such dreams would only be fitting.

Or as Rizal put it: "Dad didn't leave us any wealth because making music was more important than making money. But he did leave us with a big name, and it's up to us to do something with it."

Wednesday, August 25, 2010

Country Market Cap As A Measure

It is popularly known that emerging markets as a percentage of total listed market cap in the world was a dismal figure. I don't have the exact number but I believe it was under 30% 10 years ago. That figure has been rising steadily as emerging markets got bigger, and more companies get listed in emerging markets.

Just think, as emerging markets companies grow bigger, and thanks to the last couple of financial crisis, emerging markets have made more inroads into that equation. The other factor is the recycling of petrodollar and massive trade surpluses - much of that went into buying big banks and mining firms.

It is foreseeable within the next 10 years that the BRICs plus another 10 emerging markets should overtake the old guard (US, Europe) in terms of percentage of market cap. It is almost inevitable, they keep spending beyond their means, and the trade surpluses keep going the other way. The main way to pay down their debts is actually via these emerging markets to buy out large stakes of their companies, as that would recycle back the funds.

Bespoke Investment Group:

One of the main headlines on The Drudge Report this morning is that China has overtaken Japan as the world's second biggest economy. Looking at Bloomberg numbers of equity market caps for countries, China is getting very close to second biggest as well.

As shown below, Japan's stock market capitalization is currently 7.97% of world market cap. China ranks second at 6.89%. Five years ago, Japan accounted for 10.34% of world market cap, while China accounted for just 1.10%. Back in 2005, China ranked just 17th in terms of market cap, behind countries like Saudi Arabia, Spain, Switzerland, South Korea, Taiwan, India, and the Netherlands. Now with the world's second biggest economy and third biggest stock market, it's hard to classify China as an emerging market, but it is indeed still emerging in terms of growth.

In the bottom chart we highlight the change in percent of world market cap over the last five years. As shown, China has had the biggest growth in percentage points, while the US has had the biggest fall. Hong Kong, India, and Brazil have seen pretty big increases in share, while the UK, France, and Japan have all lost the most ground after the US. It will be interesting to see how things look in another five years.

It is heartening to see Malaysia's percentage jumping from 0.49% five years ago to 0.77%. That was quite a jump in terms of absolute percentage. Somehow I think that was more because of the calamities the developed markets went through rather than through "actual initiatives" undertaken by ourselves. Singapore rose from 0.63% to 1.11%, also remarkable. If we strategise better, take better care of how we allocate our resources, we should be hitting 2% by now, seriously.

Tuesday, August 24, 2010

How To Spot A Good Trade Part 2

There is earnings recovery, and then there is distinctive earnings recovery. There are still a number of issues which troubles the stock but overall its a concerted recovery over the past 18 months. Time for a major rerating. Its not a business I particularly like or fancy, just a trade in rerating.

A good indication of firmer footing, the company also declare a 2 sen dividend after paying nothing for sometime.

I only manage to get a report by RHB Research. This was dated February 2010, and their estimates have been surpassed, plus they had a target price of RM1.80. I am sure they would be revising that a bit higher now.

RHB Research:
Outlook. We remain positive on LFIB’s earnings outlook and on the back of:
1. The change in the National Automotive Policy in end-Oct that introduced incentives for local autoparts manufacturers, which is positive for SCB’s motorcycle parts and accessories business; and
2. Our projected total industry vehicle (TIV) sales volume growth of 8.5% in 2010, which will boost sales volumes at LFIB’s tyre manufacturing division;
3. The implementation of the two stimulus packages that will boost demand for building materials.

Earnings forecasts. We are raising our FY06/10-12 net profit forecasts by 43.4-51.5% to RM56.3m, RM62.0m and RM65.3m respectively, to reflect higher sales volume at the tyre manufacturing division.

♦ Investment case. Following the upward revision in our net profit forecasts, indicative fair value is raised by 43.9% to RM1.80 based on 7x revised CY2010 core EPS of 25.7 sen. Upgraded from underperform to Outperform as valuation has become attractive.


Quarterly rpt on consolidated results for the financial period ended 30/6/2010
23 Aug 2010, 18:33
Report Status UnAudited
Quarter 4th Quarter
For Financial Year End 30/06/2010

Individual Period Cumulative Period

Current Year Quarter Precending Year Corresponding Quarter Current Year to Date Precending Year Corresponding Period

30/06/2010 30/06/2009 30/06/2010 30/06/2009

RM'000 RM'000 RM'000 RM'000
Revenue 241,648 190,782 873,619 598,037
Profit/(Loss) before Tax 56,145 17,574 183,667 170,351
Profit/(Loss) after Tax and Minority Interest 46,318 12,435 150,817 167,495
Net Profit/(Loss) for the Period 47,976 13,087 163,745 160,885
Basic Earnings/(Loss) per Shares(sen) 20.03 5.40 65.38 75.38
Dividend per Share(sen) 2.00 0.00 2.00 0.00

As At the End of Current Quarter As At the Preceding Financial Year End
NTA per Share(RM)

4.6800 4.0900

NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

Monday, August 23, 2010

Sell Side & Buy Side Research

I received the following article from Singapore on sell side and buy side analysts. At the end I have added a posting on the same topic.


Fund managers value honest and independent analyst reports that offer a different viewpoint. But they feel that such reports are few and far between.
Of course, underscoring that assessment is what they perceive to be a potential conflict of interest between sell-side research and stockbroking arms housed within a brokerage firm.

One fund manager who declined to be named says that 'sell' calls are as important to him as 'buy' calls. But he feels that very often, some brokers tend to issue only 'buy' calls and no 'sell' calls.

'I still see many reports which are done for marketing purposes. That is, they are written to get new businesses rather than present the true picture of the targeted companies,' he adds. 'There is still a lack of real independent research out there.'
The fund manager, who is with an Australian private equity firm, says that he values regular, continual coverage on stocks rather than 'ad-hoc' coverage.

One criticism about the industry has been a lack of research continuity for underperforming stocks where 'sell' calls are warranted, as it is the 'buy' calls that drive equity team sales at these brokerages.

A case in point is OSIM International, which was a magnet for analysts in its early years of sterling growth. But after it started reporting losses following its acquisition of US retailer Brookstone in 2005, analysts stopped covering the stock. Coverage of the stock has returned recently after OSIM staged a turnaround in earnings by writing off its Brookstone investment last year.

'These days, the large financial institutions have underwriting, proprietary trading and stock-broking businesses. Which is a larger profit centre?' asks Wong Kok Hoi, chairman and chief investment officer of APS Asset Management. 'They say they have China walls but frankly I am not sure how thick the walls are.'

But on balance, the unwillingness of users to pay for the research also has a part to play for the quality of sell-side research, Mr Wong adds. On a positive note, he believes that sell-side research has improved over the years.

Fund managers typically have large in-house research teams to meet specific research needs. The difference between sell-side research and buy-side research is who pays for them.

Sell-side research is often funded by the stockbroking business and its recommendations are directed across the general mass of the brokerage clients.
Buy-side research is paid for by the funds' clients, and recommendations are based on how well the investment meets the fund's investment strategy and portfolio.

Fund managers say they generally use sell-side research to gain new insights or investment ideas, obtain a third-party view, or to know more about new companies.

Hugh Young, managing director of Aberdeen Asset Management Asia, says he typically seeks out sell-side research for specific industry expertise that Aberdeen does not possess in-house. But he laments that there has been much rehash in research reports on what company management says.

'It's useful for people who don't have time to read the full management report. We do a lot of research in-house, so we can only blame ourselves when we get things wrong.'

Since short-term estimates or assumptions of the analysts are quickly priced into the market before fund managers could act on them profitably, fund managers often look out for the long-term views of the analysts.

'As long-term investors, we naturally would like to know the intrinsic value of a company,' Mr Wong says. 'Hence, we appreciate analysts' work on the long-term value of a company which, among others, must at least include long-term growth prospects of the industry and the company business franchise, including its durability.

'We also like to know what they think of the integrity and competence of management and appreciate those who can help flesh out the quirks among the fine print in the annual accounts,' he adds.

'We have always found it productive to speak with analysts who know management well, truly understand the business franchise's strengths and limitations, the company's competitors, etc.'

Sunday, August 09, 2009

Buy Side Vs Sell Side Analysts

For those not in the industry, the terminologies may be confusing. Buy side analysts refer to the analysts working within a fund management firm, generating reports, analysis and recommendation for their own portfolio managers or strategy sessions. Sell side analysts are those at brokerages trying to generate ideas on buys and sells to clients.

An example of a buy side analysts team (and its a big team) locally would be the analysts at Public Mutual. These recommendations by buy side analysts, made exclusively for the benefit of the fund that pays for them, are not available to anyone outside the fund. If a fund employs a good analyst, it does not want competing funds to have access to the same advice. A buy-side analyst's success or talent is gauged by the number of profitable recommendations he or she makes to the fund. In most cases, top buy side analysts end up as their in-house fund managers. This is usually why many of the traditional fund mangers positions are not advertised - they have instituted a hoard of analysts clamoring for those positions.

The buy-side differs from the sell-side in three main ways: they follow more stocks (30-40), they write very brief reports (generally one or two pages), and their research is only distributed to the fund's managers.

Buy-side analysts can cover more stocks than sell-side analysts because they have access to all the sell-side research. They also have the opportunity to attend industry conferences, hosted by sell-side firms. During these conferences, the managements of several companies in a sector present why they are a better investment. After gathering this information, buy-side analysts summarize their case in a brief report that also contains an earnings forecast. These reports are only distributed to the fund's managers.

The sell-side provides research and conferences to the buy-side in the hope that the buy-side will let them execute the large trades that the funds make when they act on the recommendation provided by the sell-side. Having access to the sell-side's primary research and the ability to attend industry conferences allows the buy-side analyst to follow many more stocks than a sell-side analyst. To compensate the firm for this information, the funds will buy and sell stocks with the brokerage firms that provide the best information.

You would think that a buy side analyst recommendation would perform better than a sell side because the former only has to please one client, while the latter may be "forced" to generate new ideas or do flip-flops in order to generate trades / commissions. The buy side is paid by the fund management house itself, hence just one client to please or piss off. The sell side is paid by the brokers, which means you can be praised or pilloried or pile-driven by many clients of the firm.

In a 2008 study by Boris Groysberg, Paul Healy and Craig Chapman for the CFA Institute in the Financial Analysts Journal Vol. 64, they looked at buy-side and sell-side earnings forecasts from 1997-2004. The conclusion was that buy-side analysts made more optimistic and less accurate forecasts than their counterparts on the sell-side. The performance differences appear to be partially explained by the buy-side firm's greater retention of poorly performing analysts and by differences in the performance benchmarks used to evaluate buy-side and sell-side analysts.

In a new study by professors from Harvard Business School and the University of North Carolina, they found that shares chosen by sell-side analysts performed more than 3x better than those selected by the buy-side analysts (1997-2004 as well). The findings are a surprise because buy-side forecasters have none of the conflicts with investment banking units like the sell-side.

A probable explanation is that sell-side research is published while buy-side is not. The fact that it circulates spurs competition, comparisons, scrutiny, and maybe even get recognised when "best of awards" come around. It is also fair to assume that buy-side analysts have a much much less of a chance to be fired, retrenched or replaced than sell-side, and for that reason as well sell-side analysts make much more money.

The results were culled from over 12,000 analysts at brokerages and 340 buy-side institutions. Buy-side "buy calls" generate an annual market adjusted return of 2.3% while sell-siders generate an 8.1% return average. This would really beg the question why fund management firms would continue to fund these buy-side research? One main benefit is to cover those stocks that generally do not appear on the radar of the sell-side analysts. Sell-siders can only reasonably cover big stocks as those are the ones that generate the commissions. Buy-side may need to discover more of the smaller companies.

In my view, the sell-side analysts will always know the companies and the senior management of the companies covered better than the buy-side analysts. Now that there is a stricter and hardier Chinese wall between research / sales / investment banking, it will make sell-side research have a bit more integrity and reliability.

Sunday, August 22, 2010

GDP and IQ

This is not new, the study on a country's average IQ and how that correlates to GDP growth and/or per capita income. In any study that implies intelligence with citizenship or race - it is bound to be controversial. I think there is some merit to the study, but seriously, you do not need the entire population IQ to be high to be successful. We have to take into consideration how some populous countries have a large rural population (which may not get ready access to education).


Central to the book's thesis is a tabulation of what Lynn and Vanhanen believe to be the average IQs of the world's nations. Rather than do their own IQ studies (a potentially massive project), the authors average and adjust existing studies.

For 104 of the 185 nations, no studies were available. In those cases, the authors have used an estimated value by taking averages of the IQs of neighboring or comparable nations. For example, the authors arrived at a figure of 84 for El Salvador by averaging their calculations of 79 for Guatemala and 88 for Colombia. Including those estimated IQs, the correlation of IQ and GDP is 0.62.

To obtain a figure for South Africa, the authors averaged IQ studies done on different ethnic groups, resulting in a figure of 72. The figures for Colombia, Peru, and Singapore were arrived at in a similar manner. For People's Republic of China, the authors used a figure of 109.4 for Shanghai and adjusted it down by an arbitrary 6 points because they believed the average across China's rural areas was probably less than that in Shanghai. Another figure from a study done in Beijing was not adjusted downwards. Those two studies formed the resultant score for China (PRC). For the figure of Macau, the average IQ is 104 which is obtained from the score of the Programme for International Student Assessment (PISA) and in such a way transformed into an IQ score.

In some cases, the IQ of a country is estimated by averaging the IQs of countries that are not actually neighbors of the country in question. For example, Kyrgyzstan's IQ is estimated by averaging the IQs of Iran and Turkey, neither of which is close to Kyrgyzstan—China, which is a geographic neighbor, is not counted as such by Lynn and Vanhanen. This is presumably because the ethnic groups of the area speak Iranian and Turkic languages, but do not include Chinese.

To account for the Flynn effect (an increase in IQ scores over time), the authors adjusted the results of older studies upward by a number of points.

Rank↓ Country↓ IQ estimate[3]↓
1 Hong Kong 107
2 South Korea 106
3 Japan 105
4 Republic of China (Taiwan) 104
5 Singapore 103
6 Austria 102
6 Germany 102
6 Italy 102
6 Netherlands 102
10 Sweden 101
10 Switzerland 101
12 Belgium 100
12 China 100
12 New Zealand 100
12 United Kingdom 100
16 Hungary 99
16 Poland 99
16 Spain 99
19 Australia 98
19 Denmark 98
19 France 98
19 Mongolia 98
19 Norway 98
19 United States 98
25 Canada 97
25 Czech Republic 97
25 Finland 97
28 Argentina 96
28 Russia 96
28 Slovakia 96
28 Uruguay 96
32 Portugal 95
32 Slovenia 95
34 Israel 94
34 Romania 94
36 Bulgaria 93
36 Ireland 93
36 Greece 93
39 Malaysia 92
40 Thailand 91
41 Croatia 90
41 Peru 90
41 Turkey 90

Rank↓ Country↓ IQ estimate[3]↓
44 Colombia 89
44 Indonesia 89
44 Suriname 89
47 Brazil 87
47 Iraq 87
47 Mexico 87
47 Samoa 87
47 Tonga 87
52 Lebanon 86
52 Philippines 86
54 Cuba 85
54 Morocco 85
56 Fiji 84
56 Iran 84
56 Marshall Islands 84
56 Puerto Rico 84
60 Egypt 83
60 Saudi Arabia 83
60 United Arab Emirates 83
61 India 81
62 Ecuador 80
63 Guatemala 79
64 Barbados 78
64 Nepal 78
64 Qatar 78
67 Zambia 77
68 Congo 73
68 Uganda 73
70 Jamaica 72
70 Kenya 72
70 South Africa 72
70 Sudan 72
70 Tanzania 72
75 Ghana 71
76 Nigeria 67
77 Guinea 66
77 Zimbabwe 66
79 Democratic Republic of the Congo 65
80 Sierra Leone 64
81 Ethiopia 63
82 Equatorial Guinea 59

In several cases the actual GDP did not correspond with that predicted by IQ. In these cases, the authors argued that differences in GDP were caused by differences in natural resources and whether the nation used a "planned" or "market" economy.

One example of this was Qatar, whose IQ was estimated by Lynn and Vanhanen to be about 78, yet had a disproportionately high per capita GDP of roughly USD $17,000. The authors explain Qatar's disproportionately high GDP by its high petroleum resources. Similarly, the authors think that large resources of diamonds explain the economic growth of the African nation Botswana, the fastest in the world for several decades.

The authors argued that the People's Republic of China's per capita GDP of roughly USD $4,500 could be explained by its use of a communist economic system for much of its recent history. The authors also predicted that communist nations whom they believe have comparatively higher IQs, including the PRC, Vietnam, and North Korea, can be expected to gain GDP by moving from centrally-planned to market economic systems, while predicting continued poverty for African nations. Recent trends in the economy of the People's Republic of China and Vietnam seem to confirm this prediction, as China's GDP has grown rapidly since introducing market reforms. South Korea has a higher average IQ and a market economy. However, South Korea still has a lower GDP/Capita than many Western nations (but relatively high overall), but South Korean economic reform started in 1970s and it is one of the fastest growing economies in the world. Contrary to the theory of correlation between IQ and economy type many planned economies had higher literacy rates than most market economies. Still, South Korea went from amongst the poorest nations in the world to advanced economy by recording among fastest growth rate in the world. Despite a supposedly higher average IQ and a market economy since the Meiji Restoration in 1867, Japan still has a lower GDP/Capita than many Western nations.

The two most striking exceptions, however, may be Ireland and the United States. Ireland, whose average I.Q. is listed at 93, had the fourth highest per capita GDP (PPP adjusted) of any country in the world (after tiny Luxembourg, Norway and the United States). The United States, with an average I.Q. of 98, has the third-highest per capita GDP (PPP adjusted), and is by far the most populous of the richest 10 countries. Both of these countries have I.Q. averages considerably below those of countries such as South Korea, Taiwan, and Germany, but have per capita GDPs about 1.5 times higher.

In the case of The United States, there is a striking contrast existing within its cultural sectors of the population. Several aspects must be hold into account. The African American population scored on average 87 while the Latino population scored 88, leaving the Asian and Caucasian population with an average IQ of 106. Although it is undeniable that some of this is due to cultural, educational and historical factors, there is also strong evidence that there is a genetic component to these observed differences

Erich Weede and Sebastian Kampf wrote that "there is one clear and robust result: average IQ does promote growth." Edward Miller wrote that "the theory helps significantly to explain why some countries are rich and some poor." Michael Palairet wrote that "Lynn and Vanhanen have launched a powerful challenge to economic historians and development economists who prefer not to use IQ as an analytical input." In a reanalysis of the Lynn and Vanhanen's hypothesis, Dickerson (2006) finds that IQ and GDP data is best fitted by an exponential function, with IQ explaining approximately 70% of the variation in GDP. Dickerson concludes that as a rough approximation "an increase of 10 points in mean IQ results in a doubling of the per capita GDP."

Whetzel and McDaniel (2006) conclude that the book's "results regarding the relationship between IQ, democracy and economic freedom are robust". Moreover, they address "criticisms concerning the measurement of IQ in purportedly low IQ countries", finding that by setting "all IQ scores below 90 to equal 90, the relationship between IQ and wealth of nations remained strong and actually increased in magnitude." On this question they conclude that their findings "argue against claims made by some that inaccuracies in IQ estimation of low IQ countries invalidate conclusions about the relationship between IQ and national wealth."

Voracek (2004) used the national IQ data to examine the relationship between intelligence and suicide, finding national IQ was positively correlated with national male and female suicide rates. The effect was not attenuated by controlling for GDP.

Barber (2005) found that national IQ was associated with rates of secondary education enrollment, illiteracy, and agricultural employment. The effect on illiteracy and agricultural employment remained with national wealth, infant mortality, and geographic continent controlled.

Both Lynn and Rushton have suggested that high IQ is associated with colder climates. To test this hypothesis, Templer and Arikawa (2006) compare the national IQ data from Lynn and Vanhanen with data sets that describe national average skin color and average winter and summer temperatures. They find that the strongest correlations to national IQ were −0.92 for skin color and −0.76 for average high winter temperature. They interpret this finding as strong support for IQ-climate association. Other studies using different data sets find no correlation.

Kanazawa (2006), "IQ and the wealth of states" (in press in Intelligence), replicates across U.S. states Lynn and Vanhanen's demonstration that national IQs strongly correlate with macroeconomic performance. Kanazawa finds that state cognitive ability scores, based on the SAT data, correlate moderately with state economic performance, explaining about a quarter of the variance in gross state product per capita.

Hunt and Wittmann (in press) use data from the Programme for International Student Assessment (PISA) to conclude that "in spite of the weaknesses [in] several of their data points Lynn and Vanhanen's empirical conclusion was correct, but we question the simple explanation that national intelligence causes national wealth. We argue that the relationship is more complex".

The book was followed by Lynn's 2006 Race Differences in Intelligence, which expands the data by nearly four times and concludes the average human IQ is presently 90 when compared to a norm of 100 based on UK data, or two thirds of a standard deviation below the UK norm, and Lynn and Vanhanen's 2006 IQ and Global Inequality.

Jared Diamond's Guns, Germs and Steel instead argues that historical differences in economic and technological development for different areas can be explained by differences in geography (which affects factors like population density and spread of new technology) and differences in available crops and domesticatable animals. Richard Nisbett argues in his 2004 The Geography of Thought that some of these regional differences shaped lasting cultural traits, such as the collectivism required by East Asian rice irrigation, compared with the individualism of ancient Greek herding, maritime mercantilism, and money crops wine and olive oil.