Good Advices from Bad People and Critical Thinking

Two events that happen recently that I thought are good lessons here.

The first one, which I brought to readers attention here on Tony Robbin’s new book on something similar to the all weather portfolio. In the article Barry Ritholtz goes back in time to take a look at some questionable forecasts that he made on the stock market in public interviews (long story short his advice would have cause folks to miss a great bull run in the SP500’s history)

The second one, was what I link to my friends on my Facebook on an inspirational Russian born US guy Anton Ivanov,  who shares on his blog and Yahoo Finance how he amassed $1 million dollar by 27 years old through the things that he has done. Some how he was exposed by colleagues in the army and friends questioning how the heck he can have $1 million so fast. Turns out, a large part of it is down to inheritance. He has since taken down his blog.

While I feel that both situations are a bit different, but they largely has a negative tilt to it. In the case of the Robbin’s situation it is to show that public people might not make the best market oracle and basing your wealth building on that can be rather detrimental. The Anton situation is that he has betrayed a lot of people’s trust. To such an extend that a few blogs allow him to guest post on their blogs.

What is similar in both cases, to me, is this:

The materials provided are generally fundamentally sound. They do more good than harm. If you have listen to the two of them, you get more closer to the destination than the starting point. And its not going cost you an arm and a leg considering they are pretty cost focus.

What clouds the two situation was that emotions and character comes into the question. I have no reason to defend them cause I am no friend of them, but at times when you come across something, no matter how much you hate the writer, the group, its good to build up the system to critically think, and be able to reason effectively. I was able to look at a lot of people’s investment that I disagree with and see how I could have missed out certain subtle things. 

Its not gonna be easy to do that but reading things you disagree with also guard against confirmation bias or endowment effect.

The opposite is also true. How many times we taken advice from someone who we connect very well with, very well meaning but their advice and instructions are just unsound? If the person is the most pleasant person in the world does that mean he provides sound advice?

The last point that is similar amongst the two is that, they write about this, but you realize that Robbins probably don’t build his wealth or preserve his wealth this way, and that sine majority of Anton’s wealth comes from inheritance, what he has now might not be due to what he writes.

Does this mean we should trust what they put out less? Thinking along this line, wouldn’t Kyith be a hypocrite if he has written so much on passive investing yet if you look at where he puts his money, its more actively manage!

This last one seem to be liken to your doctor. You go for him or her for advice and help, but that doesn’t mean the doctor have your problem.So should we trust the doctor less because of it? We should trust the guru who recovered from cancer and trying to sell how she got better than your western doctor?

Sometimes I think we get spammed by too much Facebook inspiration, myth debunking and helpful tips that we accept them too much and stop exercising our brain muscles. While we go to such social medium to take a break from work and not to put more pressure on the brain, these ‘information’ does have a profound impact that might adversely affect how we view the world in an unsound manner.

This Keppel Infra Trust and CitySpring Merger

This Keppel Infra Trust and CitySpring Merger

Past 2 weeks, there were rumours of Keppel Infrastructure Trust (KIT) and CitySpring Infrastructure trust (CIT) merging. The rumours turned out to be true when KIT will issue new units to CIT. CIT will pay out to their shareholders a one time distribution of 1.98 cents per unit. There after, all unit holders will receive 1.05 cents per unit held.

To complicate matters, the new entity, which will be called Keppel Infrastructure Trust, will call a rights issue to purchase a 51% stake in Keppel Merlimau Cogen which owns a 1300MW power generation facility on Jurong Island.

This is complicated. Perhaps more so to yield investors.

The two managers on both KIT and CIT tried to work out a deal that to both shareholders looks yield accretive on paper. Then they shoved one existing Keppel asset down shareholder’s throat.

KIT

I was a shareholder in KIT shortly after the IPO stage. I got invested, tried to do some due diligence and realize to my dismayed that this trust, which was sold as an ungeared infrastructure play basically contains 3 concessions that goes down year after year. You can check the concession in the financial statements to see their value during IPO and now.

A rough XIRR computation shows that although they are distributing 7% dividend yield, the XIRR over the lifespan is roughly 3% (if my memory still serves me well, which often isn’t). The rest of the 4% is paid out of asset.

The remarkable thing about KIT is that, despite this, the share price of KIT was largely stable. In terms of total return its not really too bad.  KIT’s largest concession asset, which produce the most cash flow, also is the shortest concession.

If you compare the service concession receivables at IPO, which is 587 mil, versus that of the latest quarter, which is 480 mil, you can see that it is indeed shrinking.  NAV shrank from $1.16 to $0.93. Thus I say its great the share price remain so stable.

Hindsight, you realize that all the Keppel spun-offs are clearly ways where Keppel Corp realize their less valued assets to spin off.  Its not just KIT, take a look at KREIT in the past as well.

The winner here clearly is the Keppel Corp share holders. Even this latest purchase looks more like an asset dump.

CIT

CitySpring IPO at 89 cents in 2007, and debut at 1.49. It traded well in that range but since then, results have been extremely disappointing.

Investors have been time and again seduced by high dividend yields in the region of 9%, and the idea of a sturdy high barriers to entry industry.  Since listing there have been 2 rights issue where capital was required to de-leverage its highly geared balance sheet.

It also acquired Basslink in 2007 to 2008 time frame on a 75-100% debt leveraged deal.  If you are getting something on leverage and you want to earn the spread, you better make sure that you can guarantee it will be accretive soon.

Basslink didn’t show the cash flow it was suppose to show and the business struggled partly because of it. The company got lots of debt to repay and not enough cash flow to show for it.

In recent times, things have been looking up for CIT in that they are moving towards setting up data centres a forward looking cash flow stream.

The important thing

Many would lament that business trust have not been as good of an investment as REITs. This is certainly evident if you take a look at the comparative yields on the Dividend Stock Tracker. My opinion is that, the retail, industrial and office property scene is in an environment much conducive to perform, and that they have adequate support to turn around even when they face issues. This is not so much for ships and other infrastructure assets for CitySpring.

The most important thing for shell businesses such as REITs, ship trusts, utilities trust, pipeline trusts, data centre trusts is that you have good managers that can grow the trust, but grow it within their capacity, taking the appropriate risk management.

The governance structure of trusts needs to be established because there is a bias locally not to view these trusts as strategic growth areas but more as a dumping ground. In that case why put your best men there. But governance can only do so much.

The trusts in USA does look as highly leveraged but perhaps they deliver the appropriate share holder returns as well.

Its not a problem with the structure of the shell, or the assets within. If the manager works for the shareholders, you know that even though you do not understand the asset that much (KIT could go out and buy a train for all I care), you know that they feel its conservatively accretive.

If you look at the track record of these 2 entities, they don’t give you that feeling. They may have learnt from their past experiences and you have a good manager, or perhaps you have insider knowledge that the man in charge is not what Kyith describe him to be, make sure you suss out the competency of the manager that its a right fit if you are to get invested. If you can’t do it, have a good reflection of their past management moves.

Else, this isn’t the only flower out there, take a look at other similar or higher yielding assets here. They may prove to be less of a headache and more value than this.