EVA versus ROE ?

In business as in everyday life, be careful what you wish for. Lehman Brothers, a defunct company had wished for a better return on equity(ROE) and what could be wrong with that??  It paid its executives according to that measure and their men did exactly what they had to deliver to reach the ROE quotas. In some years the firm had the best ROE in its industry and was bigtime in it's performance compared to others.

But now it had been realised LB is "dead meat" because managing for ROE seemed to allow financial staff to overborrow; after all, debt looks to be capital that earns a return (in good times). Yet it isn't equity, so extreme leverage simply juices ROE until bad times arrive. Their staff had wished for the wrong thing, managing for the wrong ratio and eventually busted the reputable and renowned company.

The chilling fact is that every other ratio out there can lead to the same disaster. Gross margin? Earnings per share? It's easy to make any of them look better while damaging the corporate financial banking and business.

Which is why corporations nowadays swing to a new concept and theory ratio, i.e. EVA and is maybe intriguing but needs more in-depth knowledge on this terminology. It has been developed by consultant Bennett Stewart, one of the creators of the financial measure called economic value added, or EVA.   [ Our company uses it partly to retained "valuable staff" with lump sum payout yearly,i.e. if company is in the black. It is one of the useful retention tool, apart from others like, share options, bonuses, good career path, promotions, etc ]

Now many firms use this term, including Siemens, Best Buy (BBY, Fortune 500), and Herman Miller (MLHR), EVA is essentially profit after deducting an appropriate charge for all the capital in the business. Because it accounts for all capital costs, its proponents say, EVA is the best measure of value creation.
Now Stewart is making a bold claim about his latest idea: EVA momentum, he says, is the one ratio that can't be manipulated. "It's the only percent metric where more is always better than less," he says. "It always increases when managers do things that make economic sense." If he's right, it is worth knowing about -- for managers at every level and for investors.

EVA momentum idea

It's the change in a business's EVA divided by the prior period's sales. So if a company increases its EVA by $10 million and the prior period's sales were $1 billion, then its EVA momentum is 1%. That's not bad, considering that for most companies this figure is zero or negative, and the average for many companies is generally around zero.

The key insight is that achieving high EVA momentum requires a business to do two difficult things at once. It must grow while at the same time maintaining healthy EVA profit margins or improving poor ones.

Can this ratio be gamed?
It's hard to see how. A popular gambit of conniving managers is to shrink a ratio's denominator recklessly, which is what Lehman executives did when they cut the E in ROE dangerously low. But the denominator in EVA momentum is the last period's sales, so it's fixed going in. Relentlessly jacking up EVA -- the numerator -- is difficult; a proper calculation of EVA values spending on R&D and employee/staff skill and knowledge training, those long-term investments that help companies over time.
EVA momentum is quite a new concept or idea mooded to measure hundreds of companies however real businesses have yet to apply it. What will happen when this ratio confronts actual managers trying to make actual profits. But when a big new idea comes along, adopting it first creates a major advantage. This could be one of those times.

EVA momentum getting it right

1. Don't obsess about sales or profit margins. Managers fixate on how to increase their company's revenues, but if it doesn't boost EVA, it does nothing to create value.
2. Bail out of EVA-negative businesses. Ford's sale of capital-intensive, EVA-sapping Jaguar and Land Rover shrank the company, but in the end increased its value.
3. Annihilate wasted capital. Cutting working capital, as Wal-Mart (WMT, Fortune 500) did in 2009, and offloading unproductive assets are great opportunities to build EVA when growth is slow

Do not jump into the investment foray too fast !

Although come 2010 some investments will look too good to miss but be wary of the economic mood and watch carefully how the "green shoots" have grown out of the soil and whether the "green leaves and branches" have developed solidly as we started off the year 2010 ........


You may think you'll find at least one 'too good to miss' investment in 2010. Perhaps you will be enticed maximising your invested returns, or the argument that 'everyone is doing it', so with the singaporean "kiasu" mentality, let's all jump into the boat and hope it is stable and not capsize .

We may imgaine that returns could be over-optimistic, or have unexplained risks that may not surface till years later. High returns are not impossible and can be obtained through leveraging - but the downside risks are also leveraged.

Singapore property sector ( private side ) is a classic example of the effect of gearing. For example, you could buy a condo for $1 million ( very small square foot area and likely just a studio apartment )  and borrow $0.8 million. If the property gains 10 per cent, then your gain on your $200,000 investment could work out to close to 50 per cent after borrowing costs. But you must not overlook that your risk on your investment is not straightforward property market volatility, it is at a greatly amplified level due to leveraging.

Let us all be alert and wary of the property market sentiment. Salient points of an investment could be exaggerated, selectively presented or misunderstood by sellers. Mouth-watering past returns could be the result of selection bias - meaning you only get shown the good results by agents who are trying all means to talk you into signing on the paper, and the hidden bad results are always conveniently dropped if you do not ask. Any investment that sounds too good to be true, probably is not going to happen to what you expect.  Note that this is long term commitment and long term loan repayment and if anything happen to you physically, make sure you are covered by insurance and your next of kin are not burdened by the future loan payment.

Average private house prices will gain ??

However, on the flip side (there always is), we are quietly confident that the average house price will improve in 2010. The unexpected good performance of the stock market in 2009, rising consumer confidence, an improving labour market and the increasing positive impact of the integrated resorts on the Singapore economy and tourism sector all seem to be heading for the "right investment mood" for everyone.

Most analysts' predictions could well be turn out not in your favour ! !

It's an easy prediction that no one can forecast the future accurately and consistently, nor can anyone create a reliable model of the world economy. Arguably, the past is not a good guide to the future. Famous fund commented: 'Charts are great for predicting the past.'  Warren Buffett reportedly said: 'If past history was all there was to the game, the richest people would be librarians.'

Even if we accept that prices of stocks (or oil, or gold) eventually tend towards fair values, large and persistent market bubbles and slumps occur regularly. Over the short run (for example, the 12 months of 2010), there is a huge random element affecting the outcome of complex systems such as an economy. Whatever the mechanisms, there is no foolproof way to explain (let alone predict) market movements.

So take all the 2010 market and economic forecasts you read with a big chunk of salt - most of them will likely be wrong if happen to be wrong, and the ones that are spot on will probably be due to luck. Remember, just like gambling, 99.9% depends on luck and almost zero percent depend on your gambling skill, provided if there is such school that teaches skill !

Bank deposits pale against money market funds

A typical 12-month fixed deposit (FD) promises you around 0.45 per cent at the moment. Although FD rates may gradually move up as global monetary tightening pressures are felt, they still look paltry. When money market funds are averaging around 1.4 per cent (LionGlobal SGD Money Market) and one per cent (Phillip Money Market), it's a fairly reliable forecast to say that such funds will be better places for your cash in 2010.

CPF Special Account rate to stay attractive

The CPF Board announced recently that members will continue to receive at least 4 per cent interest on a portion of their savings until the end of 2010. In terms of risk and reward, it's hard to beat anything (in SGD) that offers 4 per cent with no volatility. 

Watch out for overconfidence

If 2010 turns out to be a great year for stock markets, then it's safe to say that there will be a wave of overconfidence building up. Shares or commodities always look great during a bull run, but it's easy to forget that the downside risks are still high - and arguably get higher as markets reach new peaks.  [ Watch out for cars COE as well, it likely will follow the mood and with dropping quotas, it seem COE is having a bull run as well, Jan2010 has seen the price above $20K for a piece of paper ! ]

Trends are very hard to predict ahead of time and most investors don't spot a profitable trend until it has already happened and is on the verge of collapse.

Economic crisis - fault of MBA schools ?

BUSINESS schools were somehow being partly blamed for the economic problem faced globally last year. MBA students are said to be the cause for wreaking the havoc in the financial markets that we are all now suffering from - and business schools are chastised for not training them better, not least in failing to instil a clear sense of the wrongs from what they have studied.


Are MBA schools to blame? To the extent that graduates have been closely associated with many of the spectacular failures of financial institutions witnessed over the last 18 months, they may be criticised for the mis-quoting of risk in relation to specific financial products and an underestimation of systemic risk.

In some cases, where incentives of compensation systems were at work, the criticism also seems warranted that these individuals focused solely on serving their own self-interest and gave scant regard to their obligations to others, even shareholders.  Just as bank officers and financial advisers, trying to maximise their commissions, they sweet talked their customers to take up loans, plunge their savings into worthless bonds,etc....

I think a bit unfair to say that business schools are directly to blame, even where their graduates were closely involved; there are more basic drivers. But business schools have played a role indirectly, fundamentally due to their adherence to, and perpetuation of, an ideology that has contributed significantly to the crisis, albeit unintended. That is, the theory of maximising value (MV).

There is a theory in business schools to justify MV that says shareholders are the 'residual claimants'. Shareholders should be uppermost in the minds of management because they only receive their returns after the claims of other stakeholders have been met.

However, not all ethical obligations would be reflected in a potential economic loss, even in the long term. Consider a management practice of engaging in bribery where one can get away with it. This might be consistent with shareholder value maximisation, but not advancing societal welfare.

Aside from the assumptions required in subscribing to the MV model and the potential ethical issues unaddressed, there are major practical considerations in the teaching and application of the MV.

Many large companies today operate in countries with little or no government and a huge potential for corruption and, given technologies like the Internet and mobile phones, the way they operate can be instantly broadcast worldwide. Today's global business environment is not the simple US-centric world of free-market economist Milton Friedman - it is far more complicated.

What should business schools do? Jack Welch was right when he described value maximising as 'a dumb idea'. Business schools need to stop worshipping VM and teach with greater intellectual honesty and with attention to its many deficiencies. They also need to do a better job of developing its most plausible contending framework: stakeholder theory. This is a more complex but current and realistic view of management that recognises that the task of managers is to serve multiple stakeholders; it gives shareholders their due, but not to the exclusion of others with legitimate claims.

Finally, business schools should give more attention to their input, as well as their output. With starting salaries for MBA graduates often well in excess of probably an estimated annual sum of 6 digit figure, they need to be careful not to attract narrow- minded, self-centred people who might see it as a way to get rich quickly by eagerly and unquestioningly embracing an "money making theory" that serves that end.

Business schools should look to attract and properly train people to be responsible leaders who are well-rounded and have the capable minds and the courage to ask the critical questions that went unasked for too long.

Arrogance in workplace

The dictionary defines ARROGANCE as “offensive display of superiority, self-importance, overbearing pride, haughtiness, behaving in a superior manner toward inferiors, etc.”

We would have definitely experienced arrogance by someone at some time in your workplace or school or somewhere in the public place. An arrogant person can affect you in some ways, and for workplace, depending on your current working position you may just ignore or may unable to control the behaviour of such people. For example, an arrogant engineer, boss or reputed personalities can make life difficult for all his subordinates, and continue to behave with brazen superiority or for some whom happened to be recently promoted in his or her workplace. You may not be able to do anything because such people may indirectly control your core necessities like passing exams, promotions, salary hikes, sales figures, brand, etc. You may, if opportunity exists, hit back with all your power at unreasonable and arrogant staff. Nevertheless arrogant staff in your office in all walks of life are a pain and will be an important topic of discussion everywhere. Behind the back gossip like, "He or she has become arrogant, but wasn’t like that before" is quite common in most workplaces. However it does not mean people will be arrogant with everyone, but they will definitely not miss an opportunity to demonstrate it on someone they can afford to be rude with, either to impress his superior or trying to overexert his authority. Often the person being branded arrogant may not truly realize they have indeed become arrogant. It is always someone else who can be arrogant, but not we. We rarely think of ourself as being arrogant. But arrogance does exist in various degrees in everyone, including you and me. Now suppose you discover that people who matter to you are calling you arrogant behind your back? Or worse, someone tells you flat on your face that you are indeed arrogant. What will be your reaction? Being branded arrogant is something that nobody would like to hear. It can rudely jolt you from the grand benevolent image you hold of yourself. You could get furious, outraged and vehemently disagree with their opinion, or you can stop and think of it as a wake up call to mend your ways.

Arrogance is like some with body odour that they can’t smell themselves, but others can. But unless somebody tells you openly, or you have a mirror you don’t get to know it. So what are those signs that can make you arrogant? Here are some signs that could make you arrogant over time, unless you take appropriate steps to puncture your bloated ego periodically, which as some point in time, may be hard for you alter your ego.

Knowledge: Your subject knowledge is good and improving day by day. People come to you for advice, tips, guidance. Soon you begin to think you have become an expert and feel others are dependant on you. You have all the answers for anything and everything, or you believe so. And you gradually become dismissive of suggestions and recommendations by others, except yours, of course.

Job title: You have recently got a new title and fancy the job title so much that can create an aura of awe around you. Titles having groovy words like deputy general manager, director, leader, etc., can corrupt a person’s ego faster than a person who is having a mediocre title like manager, though both could be doing identical jobs. Worst still, the manager knows much more than those gotten the new title by sheer luck or opportunity….

Contacts: You develop contacts and connections with reputed people, famous personalities, top brass, etc., and hover around important people. You have the blessings of godfather who worships the ground you walk on, protects you, listens to you and does not make a move without consulting you. So you now feel like a VIP with the power to crush ordinary mortals.

Promotion: You have had a series of successes and promoted and are the envy of others. Everything you do seems like success when your time is just on your side and right. Or you have been very smart and quick in burying or covering your failures and making up stories before anyone notices them. Or somebody is doing the hard work and producing the results, while you are getting the rewards. Frequent success and winning can be a powerful arrogance booster. During temporary lucky periods in life a feeling of Midas touch can get into people’s head.

Question without the Answer: You don't provide solutions to questions anymore at your level. Instead you now answer every question or problem with another question. You develop the “Taichi” skill to invent a dozen smart, tough and tricky questions on the fly that can make others squirm, chew their head off or make them “lose their face” from the scene. Of course, it is not necessary for the arrogant to know the answers, or if answering is unavoidable, you can invent some more jargon filled questions to confuse the other party. In a way, you also finger point with questions “why you do not know what happened?? “

To summarize, the challenge for each one of us is to frequently stop and self reflect ourselves to see if any of the above factors are making us feel with guilt. And we can conclude with a quote from Henry W Shaw, “It is not only the most difficult thing to know oneself, but the most inconvenient one, too.”  Hope we do not see too many of such arrogant staff being bred overtime in our organisation, as it may be detrimental at some point in time, arrogant decision made without going through proper decision and judgement, will likely cause much mayhem to the company than losing one or two arrogant chaps.

What investment portfolio after 2009 crisis ?

When stock markets started picking up strength and rallied sometime july-august 2009 last year, soon after the financial crisis, seems that mainly the bold and those with extra bucks dare start to dash in hoping to get their investment multiplied. [ Big guns like Oei Hoeng Leong, Indonesian billionaire, has got nothing to lose and what he had lost, he had sued Citibank and gotten back an undisclosed sum out of court settlement.  Looks like the rich individual has got the right advice from his legal adviser to sue and even one of the biggest bank in the world did not dare fight back ! ! ]


Many others were wary, including myself without any guts and only getting a miserable 0.002% interest from savings put in banks or no interest at all, might as well spend the money for a cause. Was this a false dawn, only to be followed by more market mayhem? They were reasonable fears, given the prognostications of so-called experts.

But now that the market rebound is proving resilient, many more investors have regained their confidence and are keen to take their chances. However, prices of stocks looks like have peaked to back in 2007 highs and is now still a time to dive in ??

A recent nationwide survey by Citibank on the financial well- being and attitudes of Singaporeans showed that consumers are looking for higher returns and ways to better build their wealth, though it did indicate that there is also greater caution now.

A total of 44 per cent of respondents stopped investing during the crisis, but have either resumed investing or are open to doing so once the right opportunity arises.

One plus is that the survey found that the majority of Singaporeans are not relying on their Central Provident Fund (CPF) savings as their only source of retirement income. About 73 per cent of respondents believe CPF will provide 'only some' or 'very little' of their retirement income.

The start of 2010 is an opportune time to reassess the impact of the financial turmoil on your portfolio, learn from mistakes and re-work your investment strategy if you have some spare $$$ in hand to try and see if you senses giving the right note.

If you are doing just that, here is what some financial experts recommend for investors:

AGE GROUP ( where I am in this category and going to reach 55 years soon in a blink of the eye )
41 - 59

If you are employed, keep working. After a review of your portfolio, you may need to re-organise your affairs and set new financial priorities.

The risk outlook for this group of investors, particularly those nearing 55, should be moderate as retirement is not far away. Besides, you are likely to have school-age children entering the tertiary phase of their education so you would need cash.  [ My two girls, one will be going JC and the other first year of secondary education....... so I am in need of MORE $$ ?? ]

With this in mind, you are likely to be shifting your investment mix towards a balanced portfolio.

A suggested asset allocation would be 30 per cent to 50 per cent fixed income and 50 per cent to 70 per cent equities exposure. Think of creating an income stream when in retirement.

Investors who took a beating in the crisis should stay invested to recover their losses but how to when you got no $$$ and if you lost your pants during last year ???  However, as these investors approach the maturity of the investment timeline, it is important to move towards safer assets. This might occur about three years from retirement or when they need the cash to fulfil an objective.

Another tip is 'Watch your spending and start reducing your debt'. That is standard theory and everyone should follow, not just this age group investors. But what if some has sickness and need $$$ to set aside for treatment, insurance would be better bet and make sure you are covered.

AGE GROUP
60and above

If you have not done so, it is time to reassess your retirement nest egg by determining your sources of retirement funds. Re-examine how long the funds would last you and take actions such as lowering your cost of living. This means you will have to eat less into your retirement portfolio every month.

You should work towards creating an income stream for when you retire. This includes seeking part-time jobs and downsizing your home or renting out one of the rooms at your existing home to supplement your income.  [ OK, I will start looking for part time tution at some private institutions offering degree courses maybe ]

Capital preservation is key for this age group. One tip is to move some of your assets into high interest or dividend bearing instruments for income. A recommended portfolio mix is 20 per cent to 30 per cent in equities and 70 per cent to 80 per cent in fixed income.

Keep track of your expenses to make sure you are not living beyond your means. And ensure you have adequate medical insurance coverage.

At the end of the day, a retiree's investment mix would be determined by his personal situation. For instance, a rich retiree who has already built up his retirement nest egg can probably afford to take on more risk and have a higher equity allocation. But a retiree with only enough money to get by cannot afford any losses and needs to be more conservative. Needless to say about the rich, their wealth nest would have enough to suffice till their next generation if they have cash assets in the region of double digit millions and above........ what have they got to lose ?  Those lower income earners would have hard time and if they need to support kids and their parents, I just wonder how they will get through at the end of the day. Ask the financial advisers, they tell you from the book after crunching some figures and those are ridiculous calculated sums that no one would be able to achieve in their lifetime.

Will Google Phone create impact ?

Google Nexus is competing against handset partners like Motorola, HTC, Sony Ericsson, LG and Samsung, which have been rolling out their own smartphones running on Google's Android operating system software.


“Android is a mobile operating system running on the Linux kernel. It was initially developed by Android Inc., a firm later purchased by Google, and lately by the Open Handset Alliance. It allows developers to write managed code in the Java language, controlling the device via Google-developed Java libraries. The unveiling of the Android distribution in late 2007 was announced with the founding of the Open Handset Alliance, a consortium of 47 hardware, software, and telecom companies devoted to advancing open standards for mobile devices. Google released most of the Android code under the Apache License, a free software and open source license”.

Android phones are now making an impact and are expected to surge from their current 2 per cent global market share of smartphones to 14 per cent in 2012 - placing the search giant in second position behind long-time market leader Symbian (most commonly found in Nokia phones).

Google selling the N1 directly to customers through its new Web store, Google is ruffling the feathers of telcos globally which might see their direct relationship with consumers using lock-in contracts weakened.

SingTel, is launching a Motorola Android phone here (new to Singapore, but already launched months ago worldwide). But with the latest top-of-the-line N1 now available via a three-day DHL delivery, it has taken the shine off the impending launch.

Google has proven itself to be a master strategist in the way it works. When it was a dwarf, it played its role as a humble free search engine for the Web, making friends with everyone and enemies with no one. But since becoming a public-listed behemoth, Google has pulled out all the stops to compete and is not afraid to ruffle feathers. Google looks set to disrupt the tech world by giving out free software to consumers. Unlike other tech companies which make money by selling products, Google earns money from online advertisements, and the more people get online, the more Google earns.

Integral to that, Google will try to grow the base of Android phones. If Android becomes a dominant phone platform, then Google can make its apps and ads optimised for the phone. At the same time, it is insurance against other phone platforms blocking its apps, as Apple did when it blocked Google Voice from the iPhone's App Store in 2009.

The N1 is designed by Google but made by HTC, so if the phone sells well, HTC benefits. But by choosing HTC over other handset makers, Google risks alienating them. Will Google work with all of its key handset partners to roll out the N2s and the N3s ?? Wait and see.