Questions on US Bancorp

By David Shankbone (Own work) [CC BY 3.0 (], via Wikimedia Commons

In my last post I mentioned that US Bancorp is arguably the best run US bank in terms of metrics, beating the golden standard Wells Fargo in ROA, ROE, and Efficiency Ratio.

What has eluded my comprehension is why US Bancorp can have such a low cost efficiency ratio.

Fitch thinks that US Bancorps’ low cost efficiency stems from two sources:

  • Low-cost deposit base
  • Corporate culture focused on operating expense management

The natural follow-up questions that confuse me right now are:

  • Why is US Bancorp’s deposit base lower cost than its peers?
  • What does it mean to have a corporate culture focused on operating expense management?

Let’s start off with my first confusion, which is “Why is US Bancorp’s deposit base lower cost than its peers?”

It’s definitely not because of having deposits making up a huge part of total assets, since for the top 20 banks in asset size, the average deposit to total asset % is 73.2% compared to US Bancorp’s 74.5% [1].

It’s not really because of size because all of the top 20 banks in asset size have past the threshold of $1 billion in assets, which marks the threshold where anymore assets doesn’t really contribute to cost efficiency.

It’s also not really unit-level economy of scale (which is supposedly another aspect that drives higher operational efficiency). There does seem to be a correlation (but not very strong) between deposits / branch versus cost efficiency (as seen in graph below) when looking at the top 20 banks in # of bank branches, but considering there are a total of 10 banks with higher deposits / branch but still possessing higher cost efficiency ratio than US Bancorp in this group [2], unit-level economy of scale isn’t a sufficient explanation.

Correlation Between Deposit per Branch to Cost Efficiency.png

What’s left is the illusive concept of culture being the source of lower cost deposit base, which I find to be extremely hard to judge, which is why I ask the question “What does it mean to have a corporate culture focused on operating expense management?”

And why is culture hard to judge? Well I’ve went through US Bancorp’s annual reports from 2000-2015, and all of them describe how cost efficient US Bancorp is and how cost efficiency is a key focus for US Bancorp, but none of the annual reports delve into details of how they do it.

The closest thing I have to gauging US Bancorp’s culture of focusing on operating expense management is US Bancorp:

But I don’t know enough about other banks to know if this already constitutes a culture of focusing on operating expense management that’s much more superior to peers, because in my mind, what US Bancorp can do with the aforementioned initiatives, its peers can also copy. The questions thus becomes:

  • Are US Bancorp’s peers cost cutting in the same way, same degree and same effectiveness?
  • If not, what’s stopping US Bancorp’s peers from following suit?


[1] As of Jul 9th 2016 ( + (

Ranking by Asset Size – Bank – Cost Efficiency Ratio (%)

  1. JPMorgan Chase – 62.10
  2. Wells Fargo – 55.39
  3. Bank of America – 59.68
  4. Citigroup – 55.68
  5. U.S. Bancorp – 54.32
  6. Capital One Financial – 57.63
  7. PNC Bank – 65.15
  8. Bank of New York Mellon – 70.32
  9. Toronto-Dominion Bank – 72.26
  10. State Street Bank – 80.08
  11. Branch Banking and Trust – 61.60
  12. HSBC Holdings – 71.15
  13. SunTrust Bank – 59.29
  14. Morgan Stanley – 21.45
  15. Charles Schwab Bank – 16.98
  16. Citizens Financial Group – 65.15
  17. Goldman Sachs – 33.14
  18. Fifth Third Bank – 59.47
  19. M&T Bank Corp – 58.63
  20. Regions Bank – 60.26

Above Average Cost Efficient Bank- Deposit % of Total Assets – Deposits ($) / Assets ($)

  • Wells Fargo – (75.87%) – 1,285,439,000,000 / 1,694,163,387,000
  • Citigroup – (70.53%) – 947,446,000,000 / 1,343,346,509,000
  • U.S. Bancorp – (74.48%) – 315,187,684,000 / 423,203,763,000
  • Morgan Stanley -(66.48%) – 119,548,000,000 / 179,838,000,000
  • Charles Schwab Bank – (92.32%) – 135,753,000,000 / 147,039,000,000
  • Citizens Financial Group – (52.67%) – 77,780,394,000 / 145,687,025,000
  • Goldman Sachs – (64.71%) – 92,800,000,000 / 143,403,000,000

Below Average Cost Efficient Bank- Deposit % of Total Assets – Deposits ($) / Assets ($)

  • JPMorgan Chase – (64.47%) – 1,391,743,000,000 / 2,158,702,851,000
  • Bank of America – (77.39%) – 1,297,680,000,000 / 1,676,743,000,000
  • Capital One Financial – (56.33%) – 208,821,499,000 / 370,739,538,000
  • PNC Bank – (72.46%) – 254,089,464,000 / 350,643,006,000
  • Bank of New York Mellon – (77.03%) – 249,861,000,000 / 324,382,710,000
  • Toronto – Dominion Bank – (78.13%) – 213,629,023,000 / 273,414,002,000
  • State Street Bank – (79.77%) – 190,872,030,000 / 239,277,838,000
  • Branch Banking and Trust – (76.40%) – 158,050,500,000 / 206,874,891,000
  • HSBC Holdings – (72.84%) – 144,846,147,000 / 198,852,159,000
  • SunTrust Bank – (81.53%) – 154,833,252,000 / 189,907,589,000
  • Fifth Third Bank – (75.58%) – 105,781,664,000 / 139,966,392,000
  • M&T Banking Corp – (75.40%) – 95,316,346,000 / 126,407,811,000
  • Regions Bank – (79.95%) – 99,645,528,000 / 124,637,433,000

[2] As of Jul 9th 2016 ( + ( + (

Ranking by # of Branches – Bank – Cost Efficiency Ratio (%) – Deposit $ / Branch

  1. Wells Fargo – 55.39 – 205,440,147
  2. JPMorgan Chase – 62.10 – 251,217,148
  3. Bank of America – 59.68 – 270,350,000
  4. U.S. Bancorp – 54.32 – 97,672,043
  5. PNC Bank – 65.15 – 91,202,248
  6. Branch Banking and Trust – 61.60 – 69,198,993
  7. Regions Bank – 60.26 – 60,870,817
  8. SunTrust Bank – 59.29 – 105,257,139
  9. Toronto-Dominion Bank – 72.26 – 160,865,228
  10. Fifth Third Bank – 59.47 – 82,706,539
  11. KeyBank – 63.74 – 75,790,871
  12. The Huntington National Bank – 61.50 – 60,283,489
  13. M&T Bank Corp – 58.63 – 110,192,308
  14. Citizens Financial Group – 65.15 – 90,653,140
  15. Capital One Financial – 57.63 – 252,810,531
  16. Citigroup – 55.68 – 1,174,034,696
  17. Woodforest National Bank – N/A – 5,886,650
  18. Santander Bank, N.A – 88.47 – 91,801,086
  19. Compass Bank – 72.06 – 102,387,717
  20. BMO Harris Bank – 72.74 – 127,469,966


I currently own US Bancorp (USB) stocks, and intend to keep increasing my position size of USB.


Not advice. No offer. Do not rely. May lose value. Risky. Conflicts hidden/obscured. (Borrowed from Terrence Yang‘s Disclaimer on Quora)


Questions About Banks

By Noël Zia Lee (Flickr: Big Pink) [CC BY 2.0 (], via Wikimedia Commons

There’s no answers or explanations, just a few questions that I haven’t finished thinking through:

  • What is it about Wells Fargo that Warren Buffett and Charlie Munger love so much about than US Bancorp? (Wells Fargo have much bigger position sizes than US Bancorp for both their portfolios (As of Jul 6th 2016, Warren Buffett – 18.04% Wells Fargo vs 2.69% US Bancorp; Charlie Munger – 67.4% Wells Fargo vs 4.98% US Bancorp) yet US Bancorp beats Wells Fargo in ROA, ROE, and Efficiency Ratio)? Isn’t US Bancorp a better run bank in general? Or is purely a valuation matter?
  • What does Warren Buffett and Charlie Munger’s position sizing in respective portfolios of US Bancorp reveal / hint to anyone’s appropriate position sizing for US Bancorp in their portfolio (eg. Is it a 90% position size stock? Is it a 33% position size stock? Or is it just one of many stocks like 5-10% position size?)
  • How do I know if a bank I now own stocks on is no longer as prudent as it should be? At what moment do you go “screw it, I’m leaving this stock”? (Wells Fargo is now entering Investment Banking, an area that’s fraught with much bigger dangers than just sticking to simple retail banking)
  • How strong are the moats of Canadian and Australian Big Banks? The Big 6 Banks in Canada have similar cost efficiency ratio (57.9%) as well run US banks like Wells Fargo (52.6%) and US Bancorp (52.1%), while the Big 4 Banks in Australia have an even more ridiculous low cost efficiency ratio of 45.9%. The questions I have in mind are:
    • Why are these banks so cost efficient on aggregate? (US Banks’ cost efficiency on aggregate is 70.8%…)
    • What’s the differentiation between the Big 6 in Canada and Big 4 in Australia? (I see not much)
    • How are the Big 6 and Big 4 able to keep a highly profitable oligopoly when differentiation is low between the banks? (What’s stopping them from one day going nuts and price war the crap out of each other?)
    • How well would the Big 6 and Big 4 fare if politicians suddenly changed their minds and banned all regulations that currently favor such domestic bank protectionism?
    • Is a moat that has a significant chunk of it upheld just because of favorable regulations really a moat? Or does the catastrophe risk inherent in it make it a great pillar to have but not something to entirely rely on?


I currently own US Bancorp (USB) stocks, and intend to keep increasing my position size of USB.


Not advice. No offer. Do not rely. May lose value. Risky. Conflicts hidden/obscured. (Borrowed from Terrence Yang‘s Disclaimer on Quora)

Treat Yourself As a US Technology Company

By Heiti Paves (Own work) [CC BY-SA 3.0 (], via Wikimedia Commons

Going into the US stock markets on Jun 24th after Brexit was confirmed made me confront the issue of how much cash to retain for emergency reserves, which then determines how much cash I can deploy to take advantage of the correction.

And I realized as a person who’s income is mainly from one source (employment) and would be completely obliterated in the event of a lay-off, I displayed characteristics like a typical US technology company – Once a disruption happens (technological disruption such as digital cameras for technology companies like Kodak, or economic recession after 1929’s Black Thursday that had 19% unemployment for people like me), income sharply drops to zero.

One could even argue, anyone who relies heavily on employment as their source of income displays characteristics of a typical US technology company on steroids. Any technology company that gets disrupted has their income sharply drop to zero, but it doesn’t drop to zero over night. For people like me, the income goes to zero over night once I’m laid off and receive my severance payment.

And that’s terrifying. Conventional advice for emergency reserves has always been around 6 months of cash. Let’s be generous and double it, but for the emergency reserves to work it assumes you can find a job within 12 months. Under normal economic conditions, the search for a new job could easily take 24 months, let alone during bad economic conditions where the economy was the reason that you got laid off and the reason why the job search gets prolonged.

So if the top 10 cash hoarding companies (IT and pharmaceuticals) have an average current ratio of 3[1] (which means if they had zero income they could survive for 3 years), and they have multiple lines of products / services that reduce the probability of all sources of income going to zero, shouldn’t employees like me who rely almost exclusively on employment for my source of income hold even more cash?

After all,wasn’t the book name of Intel’s Co-Founders Andrew Grove called “Only the Paranoid Survive“?


[1] As of Jul 1st 2016, the current ratio of the following companies:

Apple – 1.28

Microsoft – 2.90

Alphabet – 5.14

Cisco – 3.27

Oracle – 3.74

Pfizer – 1.44

Johnson & Johnson – 2.83

Amgen – 4.95

Intel – 1.56

Qualcomm – 2.87

Tax & Cost Efficient Fundamental Trading Strategy

See page for author [CC BY 4.0 (], via Wikimedia Commons

I must admit, my temperament isn’t suited for Charlie Munger’s Sit On Your Ass investing style or Joel Greenblatt’s Magic Formula style.

The reasons are as follows:

  • (Charlie Munger) In theory it’s great (only buy great businesses at great prices and be idle most of the time), but in practice it’s damn hard regarding the “great price” aspect. I don’t have Charlie Munger’s golden touch of sitting idle in cash for a decade and suddenly buying stocks at the perfect rock bottom of the 2008-2009 bear market. Attempts at this strategy myself with the lack of Charlie Munger’s aptitude, temperament and experience would be near suicide as I’m most likely going to keep second guessing on whether prices can get any better and miss out the whole bear market entirely.
  • (Joel Greenblatt) I also can’t execute Joel Greenblatt’s strategy because his strategy essentially forces each position to be 3% – 5% without the option to average down lest you become overweight. This drives me crazy because every time a stock’s price drops my head keeps telling me “Buy more! It’s even more of a bargain!”

So I have to adopt my style to suit my temperament while still incorporating the principles of both styles.

My strategy now is more of a high turnover strategy that still takes company quality and valuation into consideration, but instead now takes market sentiment into consideration as well to approximate Charlie Munger’s golden touch of hitting perfect rock bottom:

  • (Charlie Munger) Still identify great businesses that I would be comfortable to invest 90% of my net worth in. That way I can happily average down like crazy on the most under-valued of the great businesses shortlist of mine if the stock market keeps dropping
  • (Tax Efficiency) Further filter the list of great businesses shortlist by taking out any company that pays dividends. As a non-US investor I pay 30% tax on dividends and 0% on capital gains, and in a long term it would absolutely kill my compounded returns if I had to keep bleeding away with dividend taxes
  • (Charlie Munger) Let market sentiment guide half the decision on how much of your portfolio should be in stocks or cash. This will be my proxy to Charlie Munger’s golden touch by overweighing my portfolio more and more into stocks as the market sentiment turns sour. I won’t hit perfect rock bottom, but by the time rock bottom happens my cost basis has been averaged down so much it would good enough for my purposes.
  • (Joel Greenblatt) Let valuation guide the other half of the decision on how much of your portfolio should be in stocks or cash, with the potential upside (1 / discount %) of the most under-valued of the great businesses shortlist being the yardstick.
  • (Joel Greenblatt) Rebalance constantly as market sentiment and valuation changes, so that my investments always reflect the most up to date information and is concentrated in the most under-valued opportunity. Rebalance frequency is ~bi-weekly to monthly, which is similar to Magic Formula’s rebalance frequency
  • (Cost Efficiency) Only rebalance in increments of fees being max. 10% of returns [1]. I determine the returns based on typical amount of stock market fluctuation in a month, which is 2.6%.

As for my list of great businesses that don’t pay dividends, I’ve only identified 3 that I would be comfortable investing 90% of my net worth in, namely Amazon, Berkshire Hathaway, and Fiserv (why these 3 would probably be for another post).

What I’ll be doing in the next couple of months is read the annual reports since inception of each of these 3 companies, books / videos about these 3 companies and their management team, and just any dis-confirming evidence I can gather to better assess the catastrophe risk of these 3 companies.

Since Berkshire Hathaway’s the most undervalued of the 3 right now, I’m starting to read Warren Buffett’s letters to shareholders since 1965. I’m currently up to 1978 and it’s been a wonderful gateway to understanding why Warren Buffett operates the way he does today, and how Berkshire Hathaway’s competitive advantage that he’s built over half a century will endure now and beyond Warren Buffett.


[1] Determined by my best alternative, which is S&P 500. If I used Vanguard’s S&P 500 which costs 0.05% annual management fee and also costs 0.9% in dividend taxes if S&P 500 was 3% dividend yield and the potential S&P 500 return is 9%, then essentially my best alternative’s implied okay amount of costs is fees being max. 10% of returns


Not advice. No offer. Do not rely. May lose value. Risky. Conflicts hidden/obscured. (Borrowed from Terrence Yang‘s Disclaimer on Quora)

Reflecting on Four Burners Theory

I’ve been constantly thinking about the Four Burners Theory since James Clear released an article about it 7 days ago. The gist of the theory is that everyone has to juggle with four burners in life, namely family, friends, health and work. The dilemma that everyone has to face is that if you want to be successful you need to turn one burner off, and if you want to be really successful you need to turn two burners off.

The reason why I kept thinking about the Four Burners Theory was because it coincided with a recent period of feeling lost, where I was and still am in a middle of a period of reflection upon where I am in life and where I want to go in life.

So where am I in life? Actions speak louder than words, and so when I look at how my days are scheduled, I see a pattern emerging already on what my current habits implicitly prioritize:

[Weekdays] – 8 hours of sleep (Health), 1 hour of walking + calisthenics (Health), 30 minutes of filtering menus for the most healthy food option (Health), 75 minutes of eating healthy food (Health), 9 hours of work (Work), 1 hour reading / thinking about investing (Work), 3 hours 45 minutes of doing random things (Neutral)

[Weekends] – 8 hours of sleep (Health), 1 hour of walking + calisthenics (Health), 30 minutes of filtering menus for the most healthy food option (Health), 75 minutes of eating healthy food (Health), 3 hours reading / thinking about investing (Work), 2 hours chatting with mum (Family), 60 minutes chatting with friends (Friends)

So what do we have? 45% of my time spent on health, 33% of my time spent on work, 18% of my time spent on random things, 3% of my time spent on family and 1% of my time spent on friends.

Time Spent
I must say I’m surprised for the family and friends part. For someone who always publicly espoused that relationships are important to me (heck I even did a Europe trip just to exclusively meet friends), I look very like a hypocrite. Even if I merged family time with friends (I consider my mum to be a very close friend), that still only makes up a meager 4% of my spent time.

And I think that’s why I’m in a period of feeling lost. The recent combination of being friend zoned and getting promoted within a very short time frame made me really question my priorities.

Maybe it’s the pent up sadness / frustration that came from being friend zoned by someone you explicitly told you liked and whom reciprocated and was willing to try out but eventually found out that being in a relationship wasn’t for her that’s still affecting how I feel, but I can just sense how hollow I felt ever since even though I don’t really feel it since I’m very good at subconsciously disguising my emotions even to myself.

And that hollowness is telling me that something’s wrong, and that what’s wrong is my priorities aren’t aligned with what I want.

I think what it boils down is that I have no intention to be very successful in two aspects of life (which I am implicitly doing by spending 78% of my time on work and health), but rather be successful in three aspects of life (work, health and friends). And I am failing miserably on the latter.

One reason why I’m failing miserably is that I’m looking for heart to heart friendships in the wrong places. The workplace is a horrible place to find such relationships due to the need for professionalism and the huge amounts of conflict of interests between colleagues. Going to interest groups in hasn’t been satisfying so far as they usually just end up being very small talk oriented. Overall my experience since university graduation is that it’s been very hard to get to know new friends which might develop into more heart to heart friendships.

Another reason why I’m failing miserably is that I seem to attract people who don’t like spending too much time together all the time. I mean sure that means that I can keep the friendships of a lot of people while I spend personal time with myself. But the downside is that I’m just never close to any particular friend. And come to think of it, I’ve never had any close friends in a conventional sense since I’m never always thinking of someone when I make plans or want to find someone to talk to.

Which leads to the other reason why I’m failing miserably. I’ve become very reclusive. I don’t know if it’s because the amount of time spent being by myself when outside of work, but whenever there’s a problem (emotionally, financially, physically etc.), my first reaction is never to ask for help or reach out – my first reaction is to deal with it myself. And the thing is, I’m usually able to solve it almost all the time. Even for the friend zone incident, sure it hurt like hell and I sure would like to cry those negative emotions out and get it over with, but I never sought out anyone for a crying shoulder or attentive ear, I just dealt with it just like how I deal with any other adversity I’ve faced since university graduation – with Stoic calm. I just acknowledge that the negative emotions are there but I’m able to keep my composure and keep my performance level or decision making at the same level. And this to a certain extent makes me less human as I just rarely share with others how I really feel, and thus it’s hard to expect anyone to reciprocate and share with you how they really feel too, so I just end up not having close heart to heart relationships.

So for all the success I’m having so far in my career, it’s as I expected, not fulfilling. I always knew I didn’t want career to be my only focus in life, but ironically it has been. For someone who keeps defending himself as not a workaholic but an unwilling person who’s working workaholic hours, I sure do act like one.

So I don’t know. I’m stuck. It’s not the first time where I kind of feel lost and sad about being lonely. The only difference is I would really break down and cry during high school or university while now I’m just calmly typing up this article and being very callous to my emotions.

A Slight Shift in Investment Strategy

By Nick Hobgood (Own work) [CC BY-SA 3.0 (], via Wikimedia Commons

I’m still very blue-chip stock oriented and I’m still hedging based on some form of indicator on market sentiment.

The only difference is that I’m much more diversified (44 stocks as of May 10th 2016), I only exclusively hold world class companies’ stocks (Wide Moat + Exemplary Stewardship Rating by Morningstar) and I hedge not only on market sentiment but also on market valuation as well (Fear & Greed Indicator and Shiller P/E).

The reason behind this shift in investment strategy were as follows:

  • Even though I was generating 30+% annualized returns between the period of March to May 2016 for my stocks (I was ~2/3 hedged in cash, so ~10+% actual returns), the volatility that came in investing heavily in the most undervalued stocks still made feel very uneasy
  • Another thing that made me uneasy was that even though majority of very undervalued stocks I invested were blue-chip stocks (wide moat or narrow moat by Morningstar definition), I still had a sizeable portion of no moat stocks as well which made me uncomfortable as they could easily die during an economic recession
  • The shift to a diversified portfolio of world class companies was simply because of two statements that Charlie Munger and Joel Greenblatt made (I unfortunately can’t find the sources for both statements, but I definitely remember reading them):
  • I’ve also taken market valuation into consideration when considering how much cash to hedge because even though the overreaction of market sentiment is good (over-fearful = great buying opportunity and vice versa), I could have easily mistook an over-fearful reaction to the beginning of a bear market as a great time to go all in, when it would’ve been more prudent to wait longer while the bear market kept raging on
  • Every time I wrote an equity research report and compared it with Morningstar’s equity research report, I’ve always been impressed at how much better their research is versus an amateur like me. So to not let my ego get in the way, I now use Morningstar’s research extensively so that I can focus on portfolio management
  • Since I am heavily relying on research not from me, it provides a further reason to be widely diversified since I can’t guarantee that Morningstar is right on each stock, but I know on aggregate that Morningstar would be right based on my due diligence on each equity research report.

Until I somehow have a lot of time to research companies in-depth myself and beat Morningstar in their game of research, this will be the investment strategy that I will deploy.


Not advice. No offer. Do not rely. May lose value. Risky. Conflicts hidden/obscured. (Borrowed from Terrence Yang‘s Disclaimer on Quora)

Eating My Own Cooking for Financial Advice

By Madhu15121992 (Own work) [CC BY-SA 4.0 (], via Wikimedia Commons

Any friend I have a conversation with which ends up on the topic of investment or retirement savings would always end up with advice for investing which would be that “if you don’t have the interest, time, energy or competence to invest, stick with index funds”.

The rationale is simple, 90% of fund managers fail to beat the market.

But here comes the problem with my advice. Even though the advice is sound (read The Little Book of Common Sense Investing for a detailed explanation of why, I don’t get paid for referring you to John Bogle’s book), a lot of people always ask me, “well but what about you? Do you invest in index funds?”

And I think that’s the problem. I don’t invest in index funds, because I think I’m the statistically improbable few who can beat the market, and that sets a bad example to my friends of do as I say and not as I do.

Sure I have friends who say “well you did say if you don’t have the interest, time, energy or competence to invest you should stick with index funds, but you obviously have the interest, time, and energy”, but I’m pretty sure quite a few are actually convinced by my actions that they might be the statistically improbable few who can beat the market as well.

And generally speaking, for the majority of friends who hear my advice but go their own merry way to trade stocks with disregard to fundamentals or valuation, many have been burned badly. Still they remain deterred and continue stubbornly without index funds.

So when a friend actually told me that he took heed to my advice and was socking away a regular amount of money into the Hang Seng Index every month, a sense of responsibility and an epiphany dawned upon me.

For my friend who believed in me, my sense of responsibility compelled me to match the amount of money he’s invested so far in the Hang Seng Index and his monthly contributions to the Hang Seng Index as well. I wanted to eat my own cooking since if my advice of investing in index funds was shit, I’d suffer too.

The good thing about aligning interests was that it would also force me to closely monitor the fundamentals and valuations of the constituents of the Hang Seng Index since I absolutely hate overpaying for things and losing money. This way I could also give advice to my friend when to pause monthly contributions if overvalued, or even when to sell if the Hang Seng Index is ridiculously overvalued.

The epiphany part was basically that if I wanted my advice to be taken seriously, I needed to walk the talk. Sure the Hang Seng Index would never give me great returns, but it would still guarantee a good return at the right valuation, and that’s the lesson I want my friends to learn regarding index funds, that a good return is still good in a world of sub-market returns of active investing.

So that’s it, I’m officially indexing for a part of my stock portfolio so that I can eat my own cooking and walk the talk. The idea still kind of drives me crazy that that amount of capital would never generate potentially market beating returns (there’s still a decent amount of wide moat companies that I deem under to fairly valued), but if it helps me be responsible for the financial advice I give people and allow people to take my financial advice seriously, then so be it.

After all as mentioned earlier, a good return is still good.


Not advice. No offer. Do not rely. May lose value. Risky. Conflicts hidden/obscured. (Borrowed from Terrence Yang‘s Disclaimer on Quora)

I Thought Operating Income was Conservative…

By LaurMG. (Cropped from “File:Frustrated man at a desk.jpg”.) [CC BY-SA 3.0 (], via Wikimedia Commons

But I’ve decided that even Operating Income isn’t conservative enough when used for valuation.

The reason being that even though Operating Income is more conservative than Net Income due to the lower room for accounting manipulation, it’s still susceptible to accounting manipulation that masks the true picture.

An example is Exxon Mobil (3.41% of my net worth as of this writing).

If judged by a 5 year average Operating Income / (Market Cap – NNWC), it’s currently yielding at ~12% [1], which is a bargain for long term oriented shareholders (eg. The Operating Income maybe muted last year and for the next foreseeable 2-3 years, but Oil prices must rise again in the long term due to increasing demand globally).

But I don’t want to talk about speculations on when Oil Prices will rise and by how much, I want to talk about the shortcomings of Operating Income.

You see, even though 5 year average Operating Income / (Market Cap – NNWC), Free Cash Flow / (Market Cap – NNWC) is at an astonishing 3.02%[2]!!

The reason why this is astonishing is two-fold:

  • Free Cash Flow (FCF) is a company’s Operating Cash Flow – Capital Expenditures, which means that’s what shareholders would expect to receive after deducting from the Cash Flow what’s required to keep operations going if shareholders required the company to distribute 100% what’s leftover (a.k.a. True Earnings)
  • As of 2015-12 Annual Report, Exxon Mobil’s dividend / share is $2.88 while its FCF / share is only $0.98, which means the dividends are nowhere nearly as safe as the 60% payout ratio indicates

Which makes me uncomfortable, because what we’re looking at is a potential double whammy to my original Exxon Mobil investment thesis, which bet on Exxon Mobil using its disciplined capital allocation streak and strong balance sheet to make distressed investments. Based on the burn rate of dividends on FCF, it seems unlikely Exxon Mobil would be able to make any distressed investments without damaging its Triple A credit rating since the amount of cash needed to do both investments and pay an increasing dividend must come at a cost of balance sheet health deterioration due to the insufficiency of FCF to cover both activities simultaneously.

So I’m exiting Exxon Mobile (thankfully at a profit if I can sell at today’s price of $84.20), since I no longer see it as an attractive investment due to the better insight I have on hand.

And I will be looking at 5 year average FCF / (Market Cap – NNWC) in the future for any non-financial company for valuation.


[1] 5 year average Operating Income ($56.9 Billion); Market Cap (Mar 21st 2016 = $349.7 Billion); NNWC (2015-12 Annual Report = -$137.8 Billion)

5 year average Operating Income / (Market Cap – NNWC) = 11.67%

[2] 5 year average Free Cash Flow ($14.7 Billion); Market Cap (Mar 21st 2016 = $349.7 Billion); NNWC (2015-12 Annual Report = -$137.8 Billion)

5 year average Free Cash Flow / (Market Cap – NNWC) = 3.02%


What I Learnt Cutting My Hair For A Few Months

This was my hairstyle before and after the few months cutting my own hair.


This was my hairstyle (freshly cut) during the few months cutting my own hair.


And this was my hairstyle when my hair grew out more.


So what did I learn about cutting my own hair for a few months (from around mid-July 2015 to around mid-Jan 2016)?

1. If it doesn’t cost much to learn and do something, and you’re intrigued, go for it.

I had the idea of cutting my own hair one weekend when I thought to myself, “I’m paying QB House $50 every month just to cut a very simple haircut (see the 1st photo). Why don’t I go cut my own hair and save that money?”

And so I did. I paid $498 for a Philips QG-3362 Multigroom Plus and went ahead and taught myself how to cut my own hair referencing this article called “How To Cut Your Own Hair With Clippers“.

2. Bank on the activity’s ROI on the fun you get from fulfilling your intrigue rather than financial ROI.

Theoretically speaking, a $498 hair clipper would break-even after 10 cuts. Considering I cut my hair around once every 3 weeks, I probably only did cut my hair for 9 times.

Which means I never did break-even before I called quits.

I think the same can be said about my Kindle, since I don’t think I’ve broke-even yet on the price I bought the Kindle with the savings I made on cheaper e-Books versus hard copy books.

And that taught me a good lesson, which is any purchase that promises to save you money on a long haul should be carefully reviewed before committing to it, because the premise of the long term savings relies on consistently reaping the benefits of the purchase, but I usually over-estimate / under-estimate how much I can or am willing to commit to any purchase.

You might save more on the average unit cost theoretically, but in reality you might end up spending more on average unit cost if you don’t fully utilize your purchase.

3. When making a purchase that promises to save you money on a long haul, take your salary into consideration

I usually quantitatively measure my time’s worth based on the hourly rate of my monthly salary divided every hour in a month. I call it my passive hourly rate (money I’d make by just being alive).

It might sound ridiculous that I consider myself getting paid outside of work as well, but essentially the clause in my contract of not being able to do part time work unless getting approval by my line manager is implying that my company owns my time at work and off work.

And from a company or personal perspective, rest is work, because maximizing productivity in a short term but risking the employee burning out doesn’t make much business sense. A well rested employee that has consistently good productivity makes business sense.

And making those calculations made me realize that cutting my own hair just wasn’t worth it. The number of hours required to cut my hair and clean up * passive hourly rate was higher than the savings I was making versus my alternative (which was QB House).

Couple with the fact that I also had to break-even my Philips hair clipper purchase first before I could reap any financial benefits, then the whole thing made less and less financial sense a few months into the project.

4. If the displeasure from hassle > pleasure from activity, really consider quitting

I quit cutting my own hair at least 2-3 months late.

I probably continued because I was lazy to switch my decision (which is ironic since committing to cutting my own hair cost me even more hours). Or maybe it was sunk cost bias of not wanting to let my hair clipper’s investment go to waste. But either way, I was stupidly 2-3 months late in calling quits.

And the signs were so obvious I should’ve been quitting earlier:

  • I really hated having to clean up my hair every time I cut (I grow hair very fast).
  • It was always frustrating to get my hairstyle right (even though I was already choosing a relatively easy style, the High and Tight), especially on the back side with no additional help.
  • As I improved in hair cutting skills it created a sense of discontentment as I realized that if I really wanted to cut my hair the way I really wanted it, I would need to buy more equipment (hair trimmer and hair thinning scissors) and spend more time per haircut to perfect the fading.

And that just killed the fun out of the activity.

The original premise was that I’d cut my own hair and have an easy time because my hairstyle was a simple one, but for something that could be done in 10 minutes by a barber I would require so much more time since I had to constantly evaluate my hair cutting progress with many mirrors and measurements.

5. Some kinds of money really deserve to be earned by the professionals

This cut my own hair experience really gave me a new appreciation for barbers.

Something that seemed so simple was simply because the barber has paid his / her due to be able to cut a decent hairstyle in 10 minutes (I’m still referencing QB House). Plus he / she has all the equipment to get the job done in 10 minutes, rather than mimic different effects with just one equipment (hair clipper).

And to an extent, for $60 / haircut (yes QB House has increased their price recently), the money I pay for knowledge / experience / equipment arbitrage is really nothing.

It saves me money compared to cutting my own hair, it’s much more fun, and I end up liking the end product more (since I can better communicate with the barber what I want since I know about the hair cutting techniques better).

But all in all I enjoyed the experience, and I have no regrets going ahead to do something like this.

Poor Charlie’s Almanack Notes

By Nick (Charlie Munger) [CC BY 2.0 (], via Wikimedia Commons

I’ve finished reading Poor Charlie’s Almanack, and wanted to jot down some notes that I would continually reference upon without the book since I’m about to lend it to someone.

25 Common Tendencies of Human Psychology Misjudgments:

  1. Reward and Punishment Superresponse Tendency
  2. Liking / Loving Tendency
  3. Disliking / Hating Tendency
  4. Doubt-Avoidance Tendency
  5. Inconsistency-Avoidance Tendency
  6. Curiosity Tendency
  7. Kantian Fairness Tendency
  8. Envy / Jealousy Tendency
  9. Reciprocation Tendency
  10. Influence-from-Mere-Association Tendency (Steroetypes)
  11. Simple, Pain-Avoiding Pyschological Denial
  12. Excessive Self-Regard Tendency
  13. Overoptimism Tendecy
  14. Deprival-Superreaction Tendency
  15. Social-Proof Tendency
  16. Contrast-Misreaction Tendency
  17. Stress-Influence Tendency
  18. Availability-Misweighting Tendency
  19. Use-It-or-Lose-It Tendency
  20. Drug-Misinfluence Tendency
  21. Senescence-Misinfluence Tendency (Affected by by old age)
  22. Authority-Misinfluence Tendency
  23. Twaddle Tendency
  24. Reason-Respecting Tendency
  25. Lollapalooza Tendency

10 Examples of Eliminating / Minimizing Common Tendencies of Human Psychology Misjudgments:

  1. Carl Braun’s communication practices (5Ws for each communication)
  2. The use of simulators in pilot training
  3. The system of Alcoholics Anonymous
  4. Clinical training methods in medical schools
  5. The rules of the U.S. Constitutional Convention (totally secret meetings, no recorded vote by name until final vote, votes reversible at any time before end of convention, one vote on whole constitution)
  6. The use of Granny’s incentive-driven rule to manipulate oneself toward better performance of one’s duties
  7. The Harvard Business School’s emphasis on decision trees
  8. The use of autopsy equivalent at Johnson & Johnson
  9. Double blind studies required in drug research by F.D.A.
  10. Warren Buffett rule for open-outcry auctions: Don’t go.

Charlie Munger’s Recommended Books:

  • Deep Simplicity: Bringing Order to Chaos and Complexity (John Gribbin)
  • F.I.A.S.C.O.: The Insider Story of a Wall Street Trader (Frank Partnoy)
  • Ice Age (John & Mary Gribbin)
  • How the Scots Invented the Modern World: The True Story of How Western Europe’s Poorest Nation Created Our World & Everything in It (Arthur Herman)
  • Models of My Life (Herbert A. Simon)
  • A Matter of Degrees: What Temperature Reveals About the Past and Future of Our Species, Planet and Universe
  • Andrew Carnegie (John Franzier Wall)
  • Guns, Germs and Steel: The Fates of Human Societies (Jared M. Diamond)
  • The Third Chimpanzee: The Evolution and Future of the Human Animal (Jared M. Diamond)
  • Influence: The Psychology of Persuasion (Robert B. Cialdini)
  • The Autobiography of Benjamin Franklin (Benjamin Franklin)
  • Living Within Limits: Ecology, Economics, and Population Taboos (Garrett Hardin)
  • The Selfish Gene (Richard Dawkins)
  • Titan: The Life of John D. Rockefeller, Sr. (Ron Chernow)
  • The Wealth and Poverty of Nations: Why Some Are So Rich and Some So Poor (David S. Landes)
  • The Warren Buffett Portfolio: Mastering the Poewr of the Focus Investment Strategy (Robert G. Hagstrom)
  • Genome: The Autobiography of a Species in 23 Chapters (Matt Ridley)
  • Getting to Yes: Negotiating Agreement Without Giving In (Roger Fisher, William Ury and Bruce Patton)
  • Three Scientists and Their Gods: Looking for Meaning in an Age of Information (Robert Wright)
  • Only the Paranoid Survive (Andy Grove)

Peter D. Kaufman’s Recommended Books:

  • Les Schwab: Pride in Performance (Les Schwab)
  • Men and Rubber: The Story of Business (Harvey S. Firestone)
  • Men to Match My Mountains: The Opening of the Far West (Irving Stone)