What I aim to do in this article is to explain the three horizons framework based on my personal experience as an investor and business person and in today’s (2018) context — about 9 years after Steve published his article.

Personally, I am a big fan of studying business frameworks. I like to learn how things work in the business world.

I’d like to know what works and what does not.

Studying business frameworks helps me in making better decisions also on which stocks to invest — as well as helping me to be a better manager, managing my family business’s operations both in Jakarta and in Singapore.

What is the McKinsey’s Three Horizons of Growth Business Framework?

The three horizons framework was based on research into how companies are able to sustain their growth — how to manage and maintain current performance and maximize future opportunities for growth. Both at the same time.

The framework was first introduced in the book “The Alchemy of Growth”. It says that a company who wants to sustain their growth would need to have active projects in all three horizons.

The idea is that as a company grow bigger and begin to mature, they will usually face declining growth. In Peter Lynch investing terms, he will call these companies as stalwarts.

These stalwarts companies would face declining growth. They would now be growing at perhaps 3–4% a year from a previous growth of above 30% simply because innovation slows down. The inertia kicks in.

The three horizons framework states that for a company to achieve consistent levels of growth throughout the lifetime of the business, they must both attend to existing businesses while still considering areas they can grow in the future.

Look at the image below illustrating the three horizons of growth by McKinsey.

Horizon one is the core businesses commonly associated with the company. It is usually those that provide the greatest profits and cash flow today. The framework states that the focus here is to improve the performance of these existing businesses to maximize any remaining value available. As you can see, the profit is the lowest in the framework, but we need to focus and utilize it so that we can go to…

Horizon two, which is driving growth in emerging new businesses / nurturing emerging opportunities based on current core businesses’ strengths. They are ventures that would most likely generate huge profits in the future but would need huge investments today to drive its growth. Since horizon two is the next step from horizon one, it is natural that they would be executed leveraging onthe company’s core strengths.

At the same time, we also need to focus on horizon three — which are ideas for genuine and new profitable growth down the road in the long run. These are smaller ventures such as minority stakes in new businesses or research project — but with the intention of creating an entirely new businesses in the longer time frame into the future — which create the biggest profits.

The problem with the above three horizons is that human are naturally complacent when things are going well. They are too focused on only staying at horizon one which focuses on their core business. They forgot that they need to invest in horizon two and three today to prevent their business in the future to be disrupted.

A good example here is Blockbuster’s CEO John Antioco who focused too much on horizon one back in 2000 when he rejected a partnership with Reed Hastings, founder of Netflix.

Blockbuster allows people to rent movies from their brick and mortar store while Netflix as you know, lets people watch those movies online as long as they are a subscriber.

Back in 2000, Netflix proposed to run Blockbuster’s brand online and John would promote Netflix in its stores.

John said no and declined to purchase Netflix for $50 million. As of 13 May 2018, Netflix is worth $142.21B.

Blockbuster was out of business 10 years later in 2010.

A pity that John did not apply the McKinsey’s three horizons of growth framework back then. If not, he would have bought Netflix for $50 million using the profits he got from his core business back then.

Although Netflix in the year 2000 was still unproven, it would fit nicely into horizon two of the framework as Netflix capabilities to let customers stream movies online would fit nicely into Blockbuster’s experience in renting out movies through offline stores.

From the Netflix and the Blockbuster example, we would realize that a company’s ability to properly execute McKinsey’s three horizons of growth well can also be defined as a company’s competitive advantage or moat — which is used to defend competitors’ attack and sustain the business and the growth of the business in the long run.

How do we apply McKinsey’s Three Horizons of Growth Framework?

In any business that we do, the framework would guide us to have active projects in all three horizons today.

This is to ensure sustained growth.

That means that our company’s core strength today should be leveraged on.

How?

The fund from the activity that gives us the most profits and cash flow today should be used partly to fund future riskier projects in both horizon two and three.

In the context of my family business in manufacturing paper packagings/bags, our focus in horizon one is to improve our marketing capabilities to get more order and manage customer expectations better. Our focus in production would be on maintaining good quality and timely delivery. This will improve the overall profits and cash flow today.

At the same time, we should think of emerging new businesses based on our core strengths. For example, will the future generation be more eco-friendly? It would benefit us greatly if more people used paper bags instead of plastic bags as the latter is deemed lesser eco-friendly. But are there other alternatives? For example, cloth bag whereby people can use repeatedly? Or recyclable kraft paper? Would that be better?

The framework states that we should be putting some profits into investing in these future potential new businesses based on our existing core strengths. In my case, I should think of possibly investing in new business line such as making cloth bag. Just to give you an example.

Because the framework states that horizon three is the furthest away from a company’s core strengths, it could be in a totally unrelated industry.

Even though our core strengths are in manufacturing/factory management and supplying customised paper products, I could develop a new business in a totally new industry like food and beverages under horizon three.

To further apply the three horizons framework better, we should not only question what would be in each of the three horizons, we should also ask who is working on it and the goal of each of it.

After that, it would be about monitoring the results of the active projects in each of the three horizons.

In conclusion

“ Someone is sitting in the shade today because someone planted a tree a long time ago.” — Warren Buffett

Horizon two and three would be the future shade for us and it can only be done if we plant that seed today — utilizing the principle of using the profits from horizon one to invest in horizon two and three.

The key takeaway for McKinsey’s three horizons of growth framework would be that for a company to not be obsolete, at any point in time, they have to be active in all three horizons of growth.

So the question that should be on everyone’s mind at any point in time is… what are our current three active projects in the three horizons of growth?

Chris Lee Susanto is the founder at Re-ThinkWealth.com, a value investing and options selling blog established in 2015. And also IMMPrinting.com, a fully customized quality retail paper packaging supplier established in 2016. Both based in Singapore.

“The community at RWOA.io is indeed a great platform for like-minded value investors to come together and share insights. It has also expanded my investing knowledge and boost my confidence in putting theory into action. Chris is passionate and dedicated as a personal mentor and help people achieve their financial goals.” — Darren Lau, System Analyst , FJ Benjamin

“The Monthly Newsletter which is a Part of The Elite value investing mentorship with Chris is very comprehensive. The Content is Well Organised and Serves as Useful Advice, be it on Value Investment Strategies or Stock Picks. I’m pleased to Have Signed Up and Looks Forward to It Every Month.” — Leonard Tan, Entrepreneur

“Chris is a genuine person who is passionate about educating his students about value investing. Every month, I look forward to receiving his monthly newsletter.” — Ken Tan, Associate Senior Marketing Director , Huttons Asia

“I am learning stock investing using value investing methodology from Chris. Chris could answer any questions that I have well thought out details. His monthly newsletter under value investing mentorship program can provide me insights that I could learn in choosing the correct company. I look forward to learning more from Chris.” — Vincent Tatan, Software Engineer (Mainframe and Core Processing) at Visa

“I’ve just started my investing journey with Chris. Despite being a curious, doubtful and meticulous person, Chris is always sincere and positive in guiding me. Being introduced to the world of investing by Chris, I assimilate that patience, hard work and discipline are imperative to be successful. Nothing comes free and easy. Chris has been very generous in sharing his investment portfolio, strategy and wisdom with me. Chris had already past me the tools of his trade, ultimately it is up to me to make things happened. I’m sincerely grateful and fortunate to learn from him. I still have a long way to go and I’m sure Chris is always available when I require assistance.” — Jackson Pay, HR Executive, Fu Yu Corporation Limited

“I never regret of my decision to join as Chris’s student. Even though I just joined recently, I have learned a lot from Chris. By just few days, I gained lots of knowledge that has raised my confidence to put my money into stocks. Chris is a very kind mentor, I feel so lucky that I can know Chris. He always helps me even though I asked tons of questions almost every day. Joining this program will be a very good start for anyone who wants to join. I definitely recommend this platform. DON’T HOLD YOURSELF, START NOW AND YOU WILL BE AN AMAZING INVESTOR THAT YOU WILL NEVER IMAGINE BEFORE!” — Matthew Adrian, Student and Startup Founder at ShipMall

“Being in the value investing mentorship with Chris program has changed my life financially for the better. Chris is a passionate value investor and it is evident in the work that he put in for his members. So far I have made over 20% in just 1 stock that I invested in — which easily covered multiple times the fees I invested in Chris’s mentorship program.” — Jess Liu, Executive Director, DBS Treasury & Markets

Hi there,

Chris here. The above are just a few of the testimonials from members of my previous version of the RWOA.io value investing mentorship program (as you can see, there are a variety of people that joined as member — from startup founder, entrepreneur, realtor and even executive director in DBS!).

Right now, I am announcing a new value investing mentorship (vim) — 2018 version — launching officially on 16 April 2018 (of course, the members of the previous version of vim will still be a part of our community!).

The key difference between the new and the old vim is that the new vim has offerings more suitable for people with little to some investment experience (so no complete beginners please!) and that person should also have quite a substantial amount of cash to invest (to make their subscription worth it in relative to their capital and potential gain!) but not enough time to do their research to shortlist stocks to invest in and make a decision on (this is where I come in).

Below are just two of the benefits that you can get by being a part of the new vim (hint: new contents every week and month):

1. Weekly Value Investing Insight — New Contents Every Week!

Example #1: Seth Klarman Net Present Value Analysis

One of the stock valuation methods that Seth Klarman finds useful is called the Net Present Value (NPV) Analysis.

NPV is the discounted net present value of the business’s future expected cash flow.

It is especially useful as Seth said in his book Margin of Safety,” Net present value would be most applicable, for example, in valuing a high-return business with stable cash flows such as a consumer-products company; its liquidation value would be far too low. Similarly, a business with regulated rates of return on assets such as a utility might best be valued using NPV analysis.”.

In my opinion, this NPV valuation method is like the discounted cash flow (DCF) and the dividend discount model (DDM) method of valuation.

All of them essentially is taking the future expected cash flow of the business and then they discount it to the present value -at a proper discount rate.

Remember, one criterion that is needed for the NPV valuation is a relatively stable future expected cash flow — as that is the biggest determinant of the business’s fair value.

Example #2: Asset Plays as Investment Opportunities

I am sure you are familiar with Peter Lynch’s 6 types of companies.

Today you will learn more about Asset Plays.

So asset plays are one type of company that we can potentially invest in the stock market.

For example, a long time ago, when Disney stock is still low, not many people know that they have a hidden asset — which is their Disney characters which could be monetized in movies.

In asset plays type of situation, we need to be patient.

You will never know when the value of these assets will be realized in the stock market.

There are of course many types of asset plays that you can target: a company with lots of hidden intangible value that is not displayed in the balance sheet such as copyrights, patents etc.

Also, there may be asset plays whereby the balance sheet does not accurately show the real value of the assets — such as in land/property. In the United States, the value of the land/property displayed in the balance sheet is the value at cost, not the market value.

So some companies may have hidden asset plays there.

We should take note of asset plays in our investment journey.

Asset plays are a real investment opportunity. Provided we do an in-depth analysis on it, it is within our circle of competence and we take action based on our conviction.

Example #3: Warren Buffett Owner Earnings Explained

This week I would like to talk about owner earnings which are a valuation method explained by Warren Buffett in 1986.

Warren stated that the value of any company is the total owner earnings that he expects the company to earn over the life of the business, minus any reinvestment of earnings.

So what exactly is owner earnings?

It is:

1) Net income

PLUS

2) DDA (Depreciation, depletion and amortization) and other noncash charges

LESS

3) Average annual capitalized expenditures for plant and equipment, etc. that the business requires to fully maintain its long-term competitive position and its unit volume

= Owner earnings

This method of valuation is one of the many that we as an investor can use to value companies on top of multiples valuation and discounted cash flow.

Example #4: Payout ratio and why it is important for us as value investors

Payout ratio is an important metric for us to understand as value investors. It is a simple yet useful metric to analyse a company’s dividend paying ability or whether it is overstretching itself as a company.

Payout ratio is simply put — the percentage of net income that the company pays out as dividends to its shareholders. A payout ratio of 30% for a company simply means that the company is paying out 30% of its net income as dividends to its shareholders.

For example, recently I averaged down on GameStop at $16 and that represents an annual dividend yield of around 9.5% at that price. The dividend yield may seem high — but GameStop payout ratio is only 50%. That means that they are not overstretching their payment ability at the current 9.5% annual yield. This also means that by paying 9.5% dividend yield, they still have about half of their net income to save up as retained earnings to reinvest in the business in the future or simply save it as cash.

So payout ratio is an important metric for value investors to look at because for people like me, I appreciate dividend as an income for me while waiting for my capital gains to potentially come when the market fully value my stocks.

2. Monthly U.S. Stock Case Study — New Contents Every Month!

1. Chosen Company for This Month’s Stock Analysis/Case Study

Mastercard (NYSE: MA)

2. Company Analysis

Mastercard is a technology company that generates revenue by charging fees to its customers based on both the dollar volume of card activity and the number of transactions processed through the network. It generates most of its revenue mainly from the United States.

Between Visa and Mastercard, Visa is the bigger brother in terms of market capitalization.

But what about in terms of valuation and profitability?

Let’s find out.

Recently Mastercard are launching a new global marketing campaign in which the name I really like, it is called Start Something Priceless.

“Start Something Priceless is a call to action at a time when people expect actions, not just ads, from brands,” said Raja Rajamannar, chief marketing and communications officer at Mastercard.

“This is a time when people truly believe in their power to fuel change, and whether big or small, an action has the ability to make the world a better place. That movement is what we aim to unleash this year,” Raja said.

In comparison, the latest campaign that Visa created is called The Future We’re Working On.

I personally think Mastercard’s campaign name is more catchy (that is just my opinion, what do you think?).

But both ad clearly wants to position themselves as not just a card company — but something bigger than that.

And for companies like Mastercard and Visa, campaigns are a big part of their customer retention and acquisition strategy due to the mass use of their processing system by most of the people around the world.

Mastercard’s ability to grow their business further is influenced by people’s consumption through electronic forms of payment instead of cash and check transactions.

The more people pay electronically through their platform, the more they will earn. So the future growth of electronic payments adoption in the world matters a lot for Mastercard.

As you can see, Mastercard’s earnings per share (eps) over the past 10 years has been consistently going up except for the recent drop in 2017 to $3.643 in December 2017.

The reason for the drop of earnings per share for Mastercard in December 2017 was because they booked $998 million in charges primarily due to the U.S. tax reform. Other than that, their revenue jumped 20.2% to $3.31 billion during that period.

The increase in revenue was due to a number of reasons: outside U.S. cross border volumes rose 22.4% on a U.S. dollar-converted basis in the fourth quarter and also growth in the overall U.S. economy over the 4th quarter helped them to generate more revenue.

Overall for the past 10 years, Mastercard has benefited a lot from the growth of online shopping. The payment processing system in online selling companies such as Alibaba or Amazon usually has a Mastercard paying option too. Although now they are facing threats with companies having their own payment transactions system like AliPay or Apple Pay.

Over the past 5 years, their eps has grown at a compounded annual rate of 10.76% annually from $2.185 in December 2012 to $3.613 in December 2017. The growth of 10.76% over the past 5 years is without a doubt slower than the growth for the last 10 years.

How do you think the next 5 years growth will be for Mastercard?

Their price to earnings ratio paints a different picture with it going up on a trailing twelve months basis. Usually a high pe ratio would means that a high future expected growth is expected. At the current pe ratio of 46.61, it means that Mastercard would need to grow 46.61% a year just to have a price to earnings growth ratio of 1 — which simply indicate that it is fairly valued. Over the last 5 years, its growth is merely 10.76%.

Mastercard’s return on equity may seem high at 70.39% but debt fuels it. So its roe is artificially increased because of the increase in debt as you can see from its rising debt to equity ratio at the image above. Another evidence is that the return on assets is going in a downward trend as its return on equity is on a upward trend. This divergence is a sign of an artificially increased roe.

With higher injection of debt, naturally Mastercard have a higher return on equity because the equity denominator need not to be much because there is debt to fuel the growth of the numerator which is net income.

Apparently Mastercard has higher current liabilities as compared to non-current liabilities.

As you can see, they have a 5 year high of current liabilities of $8.793 B. These are liabilities which needs to be paid off within the year. Also, this is the huge chunk of debt which artificially increased Mastercard’s roe. But it seems to be the case with card processing companies/banks in general.

Fortunately, if we look at their net income and total long term debt, Mastercard seems to not have any problem paying off it with its net income in less than 2 years.

What worries me is their huge amount of current liabilities.

Let’s look at their quick ratio shall we, to analyse their ability for current liabilities repayments.

They have more than enough liquid assets to cover their current liabilities so there is no cause for concern here.

Mastercard CEO is Mr Ajaypal Singh Banga. He has held the role since 1 July 2010.

Ajaypal started his career with Nestle in India as a management trainee and spent 13 years there.

When he was already Mastercard CEO in 2014, he was named annual best-performing CEO by Harvard Magazine. He was the only indian-origin person in that magazine. He has a good reputation in the media stream as someone who is very wise and he often gives advice to people too.

Here is Ajay’s take on taking risks in our life and here’s his six lessons on leadership.

He has no history of scandals.

Potential future growth: With Ajay origin being back in India, it gives him a hometown advantage in terms of expanding Mastercard’s business to India.

On October 2017, Ajay said that Mastercard is working closely with government and corporations across the world. Specifically, he mentioned that India market is ready to reduce the 95% dependence on cash for payments because of the investment it has made in Aadhaar.

Aadhar is an Indian government program which gives all its residents a 12 digit unique identity number based on their biometric and demographic data. It has 1.19 billion holders as of 30 November 2017.

3. Competitors Analysis

So, after knowing what Mastercard is like as a company, we shall now shortlist 2–3 competitors to analyze it against.

Preferably I want the competitor to be in the same industry which got to do with payment processing.

The potential competitors list that I have screened through before shortlisting the chosen competitors are these companies: Visa, Paypal, American Express, Capital One and Synchrony financial.

Finally, after reading through their websites and annual reports, I decide to choose Visa and Paypal because both of these companies are more closely related to processing payments via online (linked to online shopping and more relevant for Mastercard).

In terms of profit margin, Visa and Mastercard is head to neck. Although over the past 5 years, Visa tends to have a higher profit margin than Mastercard. As for Paypal, it consistently posts lower profit margin relative to Visa and Mastercard since 2015 when it was listed.

Paypal is the least leveraged out of the 3 companies. With Mastercard being the one with the highest amount of debt based on their debt to equity ratio.

All the three companies would not have any problems paying off their long term debt with their net income in less than 3–4 years. So they are all in a healthy long term debt position.

Using PEG ratio as one of the indicator of over or undervaluation comparing their current PE ratio and past growth rate, all 3 companies are overvalued as their ratio is above 1.

4. Determine Valuation

The above image shows the respective multiples valuation for Mastercard’s chosen competitors — namely Visa and Paypal — two very relevant company to compare for their valuations.

These two competitors’ multiples are the basis for our multiples comparison to gage Mastercard’s under or overvaluation.

So, should we go for enterprise value or equity value multiples?

As I have said in the RWOA.io stock investing checklist, we should use enterprise multiples if we are comparing companies with different capital structure — which means that if some companies have more debt than equity with a huge divergence

That is because enterprise valuation is independent of capital structure so its is good for comparing different companies with different capital structure. Otherwise, we could have used equity valuation such as price to earnings ratio.

Debt to equity ratio is calculated simply by taking a company’s long-term debt and divide it by its total shareholder’s equity.

Visa debt to equity ratio is 0.561, Paypal’s 0.063 and Mastercard’s 0.992.

There is a divergence between the three debt to equity ratio. But the divergence is not a lot. So to value them, let’s go with price to earnings ratio multiples comparison. Mastercard’s current trailing twelve months price to earnings ratio is 47.79.

The dotted line above is the current equity value of Mastercard of about $189B.

As you can see, Mastercard is relatively overvalued as compared to its competitors as it sits right around the middle of the minimum and the maximum of its competitors’ price/ttm earnings but leaning more towards the maximum. And definitely more than the mean and the median of the competitors valuation.

Looking at the absolute figure of their pe ratio which is in the range of 40 and above, it is too expensive for my liking.

Mastercard has a downside potential from its stock price at $175.76 (as of 24 January 2018) of about 3.12% if we are targeting its median and mean of its competitors.

That means a potential target price of $170.27 by targeting the median and the mean of its competitors.

5. Conclusion

Does Mastercard have a competitive advantage? Mastercard indeed have a competitive advantage in terms of its branding that exudes trust when handling payments that involves money. This is important. A new company that just started will find it hard to compete in terms of branding with Mastercard who have been in the industry for so many years. So branding that exudes trust is the first one — we would not want to trust a shady brand to facilitate our transferring of money. Second one is high switching cost — it is relatively cumbersome to terminate our current payment processing provider and switch to a new one. Especially if we are already using them for a long time.

What are the risks with regards to this potential investment? The price its stocks is currently trading in the stock market. Not only that it is above its peers’ mean and median multiples, its peg ratio is above 1. This is a cause for concern as personally I feel that there may not be sufficient margin of safety for me in this investment.

Note: the above analysis on Mastercard is dated 28 February 2018.

The above are just two of the benefits (out of many others) that you can get (every week and month) by being a part of my value investing mentorship (VIM for short).

Disclaimer: The information provided is for general information purposes only and is not intended to be a personalized investment or financial advice.

A mentor by Oxford dictionary definition is an experienced and trusted adviser.

Based on that definition, there are two parts that a person needs to satisfy to be classified as a mentor:

1. He or she has to be experienced in the particular subject matter at hand
2. He or she needs to have a character and reputation that you trust

So… How do we know if that person has the experience and is really trustworthy? I will answer this question at the end of this write up.

First, let’s look at the science backed evidence on why having a mentor is important, shall we?

Case study #1: Mentorship is the science field

Mentorship is a concept that covers a lot of different industry — even in the lab for scientists. Christine Pfund, an associate scientist in the Wisconsin Center for Education Research at the University of Wisconsin-Madison who have had extensive research on the topic of mentoring in sciences says, “In short, good mentorship impacts who does science, how productive they are, and how satisfied they are on a science career path.”

This means that someone who have had a mentor in the early phase of their career as a scientist, can be more probable to be more successful in their career as mentioned by Christine Pfund, an associate scientist in the Wisconsin Center for Education Research at the University of Wisconsin-Madison

Joshua Morgan — posses similar views on mentorship — a postdoctoral researcher in the Department of Biomedical Engineering at the University of Delaware, and recipient of the 2016 Proteintech Best Postdoc Mentor Award, says, “Research is uniquely frustrating, and without positive mentoring, it can drive good scientists away from the lab, or worse, to ethically questionable choices.” and “Honestly, mentoring is one of those things that just keeps paying dividends. In addition to the emotional rewards of helping fellow scientists achieve, surrounding yourself with capable scientists enables good science.”

Hence, in the science field — having a mentor is proven to be useful to a scientist’s success.

Case study #2: Mentorship in Business

Management Mentors is a company near Boston that focuses on corporate mentorship best practices for over 20 years now — founded by Rene Petrin. He said that employees are a company’s biggest asset and taking care of them is key.

He said that mentoring creates more loyalty and breaks down the mentalities of silo. Mentoring is important because every employee comes in with different backgrounds, experiences and wisdom — and in business, in corporate, they should tap on those — if not, a lot of opportunity is missed.

While coaching is about building a skill set, mentoring is about building transformational relationship. The beauty of mentoring is that it works — with the focus being on a transformational relationship.

In business, relationship is important — and mentoring creates a unique improvement in the mentee’s ability to be a success in the business world.

Case study #3: Warren Buffett and Benjamin Graham (value investing living legend and legend)

Now, let’s see the evidence in relation to value investing — mentorship in value investing.

Warren Buffett has been in investing in the stock market since he was 11 years old — he is 87 years old as of 2018 — meaning that he has been in the stock market for 76 years. That is a long time.

Warren is passionate about stock investing for sure — more specifically, value investing. Have you ever wondered how did he start to be so passionate about value investing? What inspired him to embark on this lifelong mastery in value investing?

He has a mentor.

When Warren Buffett was 20 years old, he went to Washington D.C., Columbia University to find Benjamin Graham — who became his mentor.

Why did Warren find Benjamin Graham out of any other individuals out there? The answer is because when Warren was 19, he bought The Intelligent Investor book written by Benjamin Graham. And he was so inspired by it — by the concept that we have to look at a stock as if it is a business — that he re-read Benjamin’s book at least half a dozen times — inspiring him to be a value investor.

“Ben Graham was certainly the man who set me on the course that’s worked now for a good many years,” — Warren Buffett

Ben also taught Warren the two rules of investing that Warren lives by — the first being to never lose money and the second is to never forget rule number one.

“Investment is most intelligent when it is most businesslike” — Benjamin Graham

The above quote by Benjamin Graham clearly displayed the influence that he as as Warren’s mentor. As Warren Buffett often said that the critical investment factor is determining the intrinsic value of a business and paying a fair or bargain price. The business focus thinking of Warren is clearly the same as Benjamin Graham’s thinking.

I would safely say that Warren today in 2018 might not be who he is if he had not had Benjamin Graham as a mentor. And going back to the two criterias needed for a mentor,

1. He or she has to be experienced in the particular subject matter at hand
2. He or she needs to have a character and reputation that you trust

Benjamin Graham without a doubt has experience in value investing as he not only ran his own hedge fund before, he is also a professor in Columbia University and wrote two books that perfectly encapsulates the spirit and methodology of value investing — The Intelligent Investor and Security Analysis — evidence that he has a character and reputation that people can trust.

Here’s a video from Youtube to further prove Warren Buffett endorsement on the importance of a mentor — Benjamin Graham:

Conclusion

It is vital to have a mentor. No matter what field you are in — and in the field of investing, it is especially profitable. In the next (3rd and final series of my value investing mentorship report), I will share with you in greater details why I would be a worthy mentor.

Source:

• The Value of Mentorship in the Scientific Field | Lab Manager
• How Management Mentors Utilizes Business's Biggest Asset - CampusTap
• Warren Buffett describes a pivotal moment when he was 20 that changed the course of his career

Value Investing is a stock investing methodology that is practiced by many successful investors and some of the wealthiest people in the world such as Warren Buffett.

Source: Adam Jeffery from CNBC

As of 10 March 2018, Warren Buffett is worth US$87.9 B.

So what exactly is this value investing that led Warren Buffett to be so rich?

In Value Investing, you are essentially buying stocks — which essentially is a part ownership in a business — that is worth $1 for 50 cents (this is just an analogy). There are many reasons why you can buy a stock that is worth $1 for 50 cents.

One of the reason is that many stock investors do not understand what they are buying or selling — they simply buy and sell stocks based on hot tips or based on chart patterns.

That forces them (at times) to sell a good stock at a cheap price.

In which, the practitioners of value investing will take advantage of that by buying the stock they sold.

“Value investing in fundamentally different from stocks trading.While the latter focuses more on price movements and other technical indicators, the former focuses on analysing the business behind the stocks and buying the stocks at a cheap price relative to the business value. This is done by first determining the rough intrinsic value of the business.” – Chris Lee Susanto

Value investing works because simply put, the stock market is not efficient.

That means that the stock market at points in time does not accurately reflect the true value of the business behind the stock.

Someone who practices Value Investing would usually shun away from ridiculously priced stocks, even though the underlying business is good. That is because we should always be reminded that even buying a really good business at an expensive price would still constitute as a bad investment.

Value investing is not without risks.

When buying stocks with the idea that it is selling below its intrinsic value (or also known as the real value of the business that we think should be trading in the stock market at), a lot of personal assumptions and judgments are required to come to that conclusion. There are risks that we may be wrong in our judgement.

Often times, stocks that look cheap via metrics such as price to earnings ratio or other indicators may not be really “cheap”. There are risks that the earnings of the business will continue to drop and as a result, the PE ratio of the business will increase– but the price of the stocks remain the same or drop further. That is a trap that we must look to avoid.

It is a good reminder to myself too, that stocks will not be cheap without any reason.

In Value Investing, we are buying the stocks of businesses that are trading at a price below its intrinsic value.

If the market is efficient as the efficient market hypothesis says, we should not be able to do that.

But the market is not efficient because people are complex creatures and they have emotions — namely greed and fear — which is why value investing can work.

We bank on irrational optimism or pessimism that forces people to sell good businesses at cheap price in the stock market.

In value investing, we should understand the impact of human behavior in the stock market. Hopefully via that understanding, we would be able to invest in good value stock by being patient in focusing on the long term business results instead of short term market fluctuations.

Of course, value investing is not that simple as there a couple of things that we should understand — things like our own investment time horizon, our circle of competence and our understanding of risks and our life goals and needs.

We need to learn the impact of human behavior, more specifically on the fear of people, to use that as a buying opportunity and using the greed of people, use that to sell our stocks at an overvalued price.

The only time frame that matters in investing is the long term– and that no one can predict the future. Therefore, do not be too happy when our stocks go up and do not be too sad when our stocks go down, the truth is we do not know what will happen tomorrow. Focus on our investment process and results will come– over time. That is value investing.

Value investing is essentially buying the stock of a good business with a large enough competitive advantage so that it will not erode easily when going against competitions in the long run.

We have to be very selective about the type of stocks that we buy by analysing their business model as well as the overall industry trends.

When buying stocks, always remember to have a substantial margin of safety in order to minimize our risk by buying it way below their intrinsic value.

“As a value investor, we should have a long-term investing horizon of at least 3–5 years and during bear market, we have to believe in the true worth of the business and be patient — if it is a truly good business, it is only a matter of time before it goes up and while waiting, we are getting dividends (and options premium if you know how to sell options).” – Chris Lee Susanto

I do not believe in buying or selling stocks based on chart indicators but I have no problem with people who do that. Having said that, I’d rather follow the methodology of the world’s most successful investor of all time, Warren Buffett — which is value investing.

“If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.”- Warren Buffett

“The big money is not in the buying and selling…but in the waiting”- Charlie Munger (vice chairman of Berkshire Hathaway, the conglomerate controlled by Warren Buffett)

Here’s 4 questions that we can ponder on about using value investing:

1. What constitute as a truly good business
2. If we think the underlying business behind the stock is a good business, what makes us think that we are smarter than the person on the opposite end selling the stock to us
3. How cheap is cheap for us to buy the stock
4. Will that stock of a good business remain cheap forever- commonly known as a value trap

Here’s two more key to remember in order to be successful in value investing:

Company’s earnings power and whether the stock is selling at a reasonable price.

1. Earnings power

A company’s earning power will depend a lot on the market it is operating in. If it is operating in a highly competitive market like selling IT products, it needs to have a competitive advantage.

If not, they will not survive in the long run.

There is a good reason for a company to do business in a competitive industry.

The reason might be because that industry is lucrative and perhaps there is still a huge market for them to earn money from despite the market saturation.

However once the market becomes too saturated, the company that survives will be the one that has a competitive advantage.

In investing, we are looking to assess whether the company has a competitive advantage that will allow them to have a sustainable earnings power and can fend off competition in the long run.

2. Reasonable selling price

No matter how good the company is, it would not be a good investment if we buy it at an overvalued price.

It never is.

This happens when the market is overly optimistic about a particular stock.

The investors in the stock market will then buy this particular stock and drive up the price super high. This happens simply because they are hopeful about the future of this stock.

However, if the price of the stock has been driven up so high, logically speaking the potential of it going further up is much lower.

In value investing, we always want to buy a stock when it is on sale.

When does a stock go on sale? It goes on sale when there is bad news about a company. There are many types of bad news, it may be because it missed earnings estimate or when there is a scandal.

We look for opportunity like this and we assess whether it causes a temporary or permanent damage to the company. If it is temporary, we go in!

And my friend, that is value investing.

With love & respect,

Chris Lee Susanto

Editor in Chief of Re-ThinkWealth.com

Strategic Thinker (Also Founder and CEO) of RWOA.io

P.S. Value investing is definitely easier said that done. That is what makes it so exciting as every day, we learn new things from our own investment experience in the stock market. The learning will never ends. And there are also a lot of value investing methodologies to learn — and finding value in growth is another important concept to grasp.

P.P.S. The 2nd part of a 3 series write up on my value investing mentorship report will be out in two days. Watch out for the email!

This write up is taken from my blog, Re-ThinkWealth.com.

Having a long-term view is important in stock investing. And the reason is not just because many of the world’s most successful and richest investors such as Warren Buffett and Seth Klarman say so.

“If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes” — Warren Buffett

“The single greatest edge an investor can have is a long-term orientation.” — Seth Klarman

The above two quotes are more profound than it looks. Both of them supports the fact that we need to have long-term thinking as stock investors.

And now, let me explain to you why in my opinion — having long-term thinking is vital for us investors.

Reason #1: If we try to predict which direction the stock price is going to move over the next few weeks or months, that endeavor would most likely end in despair. Why? Think black swan events and think the irrationality of humans that will swing the stock prices up and down in the short term.

Reason #2: Lessening of buying and selling equals to lesser cost of investing through the commission we pay to our broker/platform for executing our buy and sell trade.

Reason #3: A stock equals to a part ownership in a company. And having a long-term mindset complements with the truth that when we buy stocks, we are essentially buying a part ownership in the business. So when we think long-term, we will not be too influenced by the short-term price fluctuations.

Reason #4: Echoing reason #3, price is what we pay and value is what we get. Price and value can diverge over a long period of time. And one being right may still lose money in the stock market — as long as the market never realizes the true value of the business and reflect it in the stock price. So having a long-term mindset teaches us to be patient because price and value will take time to converge — meanwhile, do not be too affected by short-term price movements — as long as the business value is still intact.

Reason #5: Compounding. Warren Buffett often said that there are 3 reasons why he got so rich: being able to live in America, good genes so that he can live long and lastly compound interest. Thinking long-term help us to see that the goal for all of us is truly leveraging on compound interest in order to be rich. Remember, 99% of Warren Buffett’s net worth is achieved after his 50th birthday. Think about that for a second.

There are many other reasons of course why long-term thinking is vital for us as value investors investing in stocks. But hey, I am going to the gym now. Maybe next time I will continue. Till then, you can get my free weekly investment insights by simply signing up at theartofvalueinvesting.com. Chat again soon!

Life can be simple but not easy. There are certain universal truths about life that I felt very strongly about and I wish to share it with you.

Here’s 9 of them:

1. People’s character can hardly change

• Often times, we think that someone may change but they did not. Experienced it? That is because a person’s character can hardly change over time — even if they promised you they will change.
• I think that we can change our habits for the better but the core character, is hard to change.

2. Some people will like you and some people will hate you, so what, move on.

• Not everybody will like us. Let’s face it. It’s the truth of life. Even President Barrack Obama who is such as great leader has lots of haters. I don’t think anyone can live a life with no one hating them at all. Can you?

3. What people do and say to you is more of a reflection of who they are. Not who you are

• This is easier said than done of course. But it is something that we must always remind our self of. Many times we get angry about what people say or do but really, most of the time how they speak and how they act is more of a reflection of who they are and not who we are.

4. Manage who you are mixing around with — as much as possible, only mix around with positive people whom you admire

• They often say that we are the average of five people we spent most of our time with and I think it’s true. So control who we are mixing around with, because we will naturally gravitate towards that direction.

5. It’s a bad day. Not a bad life. Just breathe

• Everyone have their issues or problems. Sometimes when we feel tired, we might feel overwhelmed. Remind ourself that its a bad day not a bad life. Remember to breathe.

6. Don’t make money you didn't want and didn't need by risking the money you have and need

• This is taken from a quote by Warren Buffett from his 2017 annual shareholders letter.
• “Our aversion to leverage has dampened our returns over the years. But Charlie and I sleep well. Both of us believe it is insane to risk what you have and need in order to obtain what you don’t need. We held this view 50 years ago when we each ran an investment partnership, funded by a few friends and relatives who trusted us. We also hold it today after a million or so ‘partners’ have joined us at Berkshire.”
• It basically means that do not be greedy.

7. Sometimes the best thing to do is to do nothing

• Again people generally think that more action = better result. But certain times, more action = worse result. So know which is which.

8. All that we are is a result of what we have thought

• Hence the saying we are what we think. So control our mind. Keep out the negative thought. It takes discipline but it will be worth it.

9. Be here now

• Life is short. Treasure it. Be here now.

Thank you for your time reading!

If you liked this article, please hit the *clap* button a couple of times | I write for my readers, you. It would mean a lot for me if others (such as your friends) to read this as well.

Today I am inviting you to learn more about RWOA.io — A Premium Online Learning Solution for Stock Investing (founded by me).

Re-ThinkWealth.com

https://www.re-thinkwealth.com/part-1-of-3-mobile-telesystems-nysembt-a-solid-bet-on-the-recovery-of-the-russian-economy/ — [Part 1 of 3] Mobile TeleSystems (NYSE:MBT): A Solid Bet On The Recovery Of The Russian Economy — 9 February 2016

https://www.re-thinkwealth.com/part-2-of-3-mobile-telesystems-nysembt-a-solid-bet-on-the-recovery-of-the-russian-economy/ — [Part 2 of 3] Mobile TeleSystems (NYSE:MBT): A Solid Bet On The Recovery Of The Russian Economy — 15 February 2016

https://www.re-thinkwealth.com/part-3-of-3-mobile-telesystems-nysembt-a-solid-bet-on-the-recovery-of-the-russian-economy/ — [Part 3 of 3] Mobile TeleSystems (NYSE:MBT): A Solid Bet On The Recovery Of The Russian Economy — 24 February 2016

https://www.re-thinkwealth.com/edited-here-is-why-i-would-not-buy-comfortdelgro-sgx-c52-si-stock/ — [Edited] Here Is Why I Would Not Buy ComfortDelGro (SGX: C52.SI) Stock — 7 March 2016

https://www.re-thinkwealth.com/do-you-know-how-to-value-dividend-stocks/ — Do You Know How To Value Dividend Stocks? — 7 April 2016

https://www.re-thinkwealth.com/part-1-of-2-do-you-know-how-to-find-the-discount-rates-for-stocks-valuation/ — [Part 1 of 2] Do You Know How To Find The Discount Rates For Stocks’ Valuation? — 21 April 2016

https://www.re-thinkwealth.com/part-2-of-2-do-you-know-how-to-find-the-discount-rates-for-stocks-valuation/ — [Part 2 of 2] Do You Know How To Find The Discount Rates For Stocks’ Valuation? — 27 April 2016

https://www.re-thinkwealth.com/valuing-mobile-telesystems-nyse-mbt-using-dividend-discount-model/ — Valuing Mobile Telesystems (NYSE: MBT) Using H Dividend Discount Model — 23 June 2016

https://www.re-thinkwealth.com/how-i-review-my-stocks-in-a-simple-way/ — How I Review My Stocks In A Simple Way- 28 November 2016

https://www.re-thinkwealth.com/edited-importance-knowing-sell-stocks-cannot-understated/ — [Edited] Importance Of Knowing When To Sell Your Stocks Cannot Be Understated — 21 March 2017

https://www.re-thinkwealth.com/gamestop-corp-nyse-gme-a-cigar-butt-investing-play/ — GameStop Corp (NYSE: GME)– A Cigar Butt Investing Play — 12 May 2017

https://www.re-thinkwealth.com/value-investing-and-behavioral-finance/ — Value Investing and Behavioral Finance — 15 July 2017

https://www.re-thinkwealth.com/heres-my-opinion-on-bitcoin/ — Here’s My Opinion on Bitcoin— 8 December 2017

https://www.re-thinkwealth.com/is-gamestop-doomed-i-visited-their-stores-in-ny-to-find-out/ — Is GameStop Doomed? I Visited Their Stores in NY to Find Out — 14 January 2018

https://www.re-thinkwealth.com/heres-thoughts-gamestops-q417-results-released-28-3-2018/ — Here’s My Thoughts on GameStop’s Q417 Earnings Results (Released 28/3/2018) — 29 March 2018

https://www.re-thinkwealth.com/good-result-yet-stock-fell-10-gamestops-unloved/ — Good Result and Yet The Stock Fell 10+% — GameStop’s So Unloved — 30 March 2018

Medium

https://medium.com/@chrisleesusanto/re-examining-gamestop-as-a-cigar-butt-stock-investing-opportunity-c20cb3a56d0d — Re-examining GameStop as a cigar butt stock investing opportunity — Medium — Chris Lee Susanto — November 7, 2017

https://medium.com/@chrisleesusanto/gamestop-q3-17-earnings-glad-going-against-the-crowd-was-right-701f02e4530e — GameStop Q3 17 earnings — Glad going against the crowd was right — Medium — Chris Lee Susanto — November 22, 2017

The New Savvy

https://thenewsavvy.com/life/relationships/pick-your-partner/ — Girls, Pick Stocks like How You Would Pick Your Partner — August 15, 2016.

Value Walk

https://www.valuewalk.com/2018/05/what-is-value-investing/ — What is Value Investing? — May 2, 2018.

Dollars and Sense

https://dollarsandsense.sg/value-investing-works/ —What Is Value Investing And Why Does It Work? – May 24, 2018.

I did many ‘small things’ in my life like living frugally and saving up, investing with a small sum, and experimenting with a small business that eventually closed down.

Lucky for me because these ‘small things’ would pave the way for me to bigger things like growing my investment from a modest four-figure sum to a six-figure portfolio in less than two years. I also started a successful printing business, serving big-name clients.

How did I achieved all of the above and more at the age of 24?

I attribute my success to the timeless principles from the great philosopher Aristotle.

Aristotle said that “the whole is more than the sum of its parts”. He also said that “we are what we repeatedly do. Excellence, then, is not an act, but a habit.”

That means that the ‘small things’ we do everyday can make a huge difference in time to come. I am so glad I did all those ‘small things’

Just to give you an example of the small things I do, when I was 20 years old, I applied what I learned about managing money from Li Ka Shing (a giant in the business world with a net worth of approximately $20.1 Billion):

He advised that we should put our monthly income into five sets of funds (in which I followed his advice, you can too!):

“Suppose your monthly income is only 2,000 RMB, you can live well. I can help you put money into five sets of funds. The first $600, second $400, third $300, fourth $200, fifth $500.” — Li Ka Shing“Suppose your monthly income is only 2,000 RMB, you can live well. I can help you put money into five sets of funds. The first $600, second $400, third $300, fourth $200, fifth $500.” — Li Ka Shing

Below, I listed the 5 funds that I track using excel sheet on a weekly basis for the past few years. Tracking these 5 funds allow me to have fiscal discipline necessary to have the funds to fuel my passion in stock investing.

1. Fund for Living Expenses — 30%

• This fund is for our daily expenses such as our meals
• Try to spend lesser on clothing when we are young

2. Fund for Making Friends — 20%

• This fund is to spend time with our good and admirable friends
• It includes our phone bills, buying good friends lunches, etc

3. Fund for Learning — 15%

• This fund is to buy books
• This fund is also to attend advanced training courses that will enhance our knowledge and expand our network

4. Fund for Holiday Overseas — 10%

• This fund is to reward ourselves for the hard work we put it the year
• Try to travel at least once a year
• An opportunity for us to recharge and continually have passion for our work

5. Fund for Saving and Investment — 25%

• This fund is for your savings in which the capital can be used to do small business or long-term investment plans and security (like insurance)
• Personally, I further broken down my investment fund into mutual funds and stocks with the majority being in United States stocks followed by Singapore stocks

Get my excel sheet for managing money modelled after Li Ka Shing for free here!

I have used this model since I was the age of 20 (with some minor modification to better fit my personality) and I can attest that simple discipline such as this practiced day in and day out for years have made all the difference in the world.

P.S: Personally I have a higher percentage of funds for my savings and investments in which I can use to compound my returns in the stock market. I can do this because I am still young and not married yet (Hence, lesser commitments).

Here are the other “small things” I did in my life:

1. When I was 20 years old back in Singapore Polytechnic, I started reading many self-improvement books in the hope of becoming a successful businessman.

• I even started a printing business when I was still studying. But I failed to get even one client by the time the business closed down.
• But I did not feel devastated. I am okay. I failed fast, early and most importantly, I failed forward.
• Fast forward to 2017 at the age of 24 years old, I have started another company called IMM Printing, providing paper packaging printing service in Singapore. This time round I did much better than 0 sales.

• Now, dozens of Singapore businesses get their fully customized quality paper packaging supplies from me. One of my Singapore clients is a famous pastry shop called “Annabella Patisserie” as shown in the photo above.

2. When I was 20, I did another “small things”. I attended a course on stock investing using Value Investing methodology by Cayden Chang, who is now a good mentor and friend of mine. The course provided me with the fundamental knowledge to start my lifelong stock investing journey and continual self-learning.

3. Armed with substantial knowledge and personal experience in stock investing, I started writing about my personal investing experience in a Value Investing blog I founded in 2015 — initially with the help of Cheng Kang, a nice person who used to be from Cayden’s company.

Here are some articles that I wrote:

[Part 1 of 3] Mobile TeleSystems (NYSE:MBT): A Solid Bet On The Recovery Of The Russian Economy — 9 February 2016

[Part 2 of 3] Mobile TeleSystems (NYSE:MBT): A Solid Bet On The Recovery Of The Russian Economy — 15 February 2016

[Part 3 of 3] Mobile TeleSystems (NYSE:MBT): A Solid Bet On The Recovery Of The Russian Economy — 24 February 2016

[Edited] Here Is Why I Would Not Buy ComfortDelGro (SGX: C52.SI) Stock — 7 March 2016

Do You Know How To Value Dividend Stocks? — 7 April 2016

[Part 1 of 2] Do You Know How To Find The Discount Rates For Stocks’ Valuation? — 21 April 2016

[Part 2 of 2] Do You Know How To Find The Discount Rates For Stocks’ Valuation? — 27 April 2016

Valuing Mobile Telesystems (NYSE: MBT) Using H Dividend Discount Model — 23 June 2016

Investing Is The Same As Gambling, Or Is It? — 2 October 2016

How I Review My Stocks In A Simple Way- 28 November 2016

[Edited] Importance Of Knowing When To Sell Your Stocks Cannot Be Understated — 21 March 2017

GameStop Corp (NYSE: GME)– A Cigar Butt Investing Play — 12 May 2017

Value Investing and Behavioral Finance — 15 July 2017

4. I grew my stock portfolio from a modest four-figure sum to a six-figure sum in less than two years — through a mix of capital appreciation, dividends, options premiums and additional deposits.

5. Since a lot of my friends benefited from my stock investing articles , I decided to create an affordable andstructured online investing mentorship subscription program for the busy professionals to learn stock investing at their own pace.

The RWOA.io Online Investing Mentorship Subscription Program.

6. Right now, I have 6 other habits (other “small things” in my life) that I am currently implementing such as:

• Analyzing my net worth and expense every week
• 30 minutes of “compound time” every alternate days
• Daily power naps
• Create daily MIT (most important task)
• Thinking and writing articles on Medium, my investing blog and monthly newsletter for my RWOA.io online mentorship program members
• Mentoring my RWOA.io online mentorship program members

Now, the things we do everyday may seem small, but when we add them up, the synergy between all the “small things” create a whole different quality. That is also why Warren Buffett said “I am a better investor because I am a businessman, and I am a better businessman because I am an investor.”

Look how Warren Buffett’s wealth compounds over the years. Note the exponential growth (50 years old onward). Such is the power of compound interest stemming through him doing what he does best, day in and day out. If he had not done the “small things” he did in his 20s and 30s, he would not be where he is right now.

Compounding interest separates the rich from the broke. The great Albert Einstein once said “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

I did not know that when I started my first business when I was still a polytechnic student, I would get 0 customer. But I also did not know that by not giving up and starting another similar company, I would be doing better with clients such as Annabella Patisserie.

Who would have known that 3 years after attending a value investing course, I would be managing a six figure sum and have achieved a 25.13% annualized investment return so far.

Do you think I predicted that one day I will start an online investing mentorship subscription to mentor stock investors? The answer is no. But I never looked down on the small things I did or the failures I had, I just keep moving forward — improving everyday.

Are the “small things” hard to do? I don’t think so. But I guarantee most will not do it because of the inherent risk in it. But those risk are worth taking and those “small things” are worth doing.

And as what my university president Professor Arnoud once told us over a group student lunch, logical incrementalism is important. Don’t look down on the “small things” we do now, it sums up.

“Most people overestimate what they can do in one year and underestimate what they can do in ten years.” -Bill Gates

Thank you for your time reading!

If you liked this article, please hit the *clap* button a couple of times | I write for my readers, you. It would mean a lot for me if others to read this as well.

Today I am inviting you to learn more about RWOA.io — A Premium Online Learning Solution for Stock Investing — That is Affordable for Everyone.

What is Bitcoin?

Bitcoin is a currency that was founded/discovered pretty recently in 2009 by a person (still unknown) using the alias Satoshi Nakamoto.

The good thing about transacting using Bitcoin is that there will be no middleman required to do the transacting.

There is also no fees tagged to transacting with Bitcoin and no requirements to provide our real name. Sounds good right?

Bitcoin’s Price Performance So Far

The performance of Bitcoin is nothing short of spectacular in recent times. There is a lot of hype around it no doubt.

If you did not manage to take advantage of the rally in Bitcoin, do not despair. I did not too.

For those that managed to take advantage of it, my heartiest congratulations to you!

My Opinion on Bitcoin

So, what do I think of it? Will I buy it? Should you buy it? Should you sell it?

Now we all know that Bitcoin is a currency. It is like US$ or SG$, but the difference is that it can be a global currency — backed by the blockchain technology behind it.

Bitcoin being a currency means that it can be used to buy goods and services (provided that more vendors would accept it).

Here’s the thing.

With the recent increase in price, if we are a vendor, will we want to accept bitcoin when we sell our goods and services? Maybe we want, but at how many bitcoin should we priced it at?

The instability of the ups and down in price of Bitcoin makes it hard for vendors to tag a price to the stuff they are selling.

And as a buyer of the goods or services, will we want to give away our bitcoin?

Say the current price of Bitcoin is S$20,000 and we want to sell a house for S$700,000, do you think the seller of the house will want to sell it for 35 bitcoins? Maybe some will but my guess is most won’t. And since most won’t, it is very hard for it to be used as a currency. At least not now when the price is still so unstable.

2 Fundamental Question to Ponder:

1. Why Do People Buy Bitcoin?

If most people buy bitcoin as a store of value like gold because of its limited nature, it will not be a widely used platform for people to buy and sell goods and services. We do not see many people buying and selling stuff with gold, do we?

If most people buy bitcoin to buy and sell goods and services akin to a currency, it will not be a suitable store of value like gold. It is merely like another source of currency like US$ or SG$.

Overall, I think that most people buy Bitcoin as a store of value. The bull thesis hinged upon the fact that Bitcoin’s supply is limited to only 21 million coins.

Hence limited supply and increase in demand and hype resulted in the increase in price.

But my question is that, does something which is limited means that it is worth buying? It has to provide some sort of mass-usefulness (like land) combined with the limited nature to result in the price appreciation over time.

2. Can I Value Bitcoin?

In making a judgment when investing in any assets, I think that we need to know what is the value of those assets. And then we buy those assets below the value that we calculate it to be. That is called investing.

Now, I do not think that we can value Bitcoin.

Bitcoin produces no cash flows, no dividends. It is not a value producing assets. Hence even though I think that most people think they can buy Bitcoin as an “investment,” it is not the case. As Professor Aswath Damodaran, the New York University ‘dean of valuation’ says “Bitcoin is not an asset, but a currency, and as such, you cannot value or invest in it. You can only price it and trade it.”

Bitcoin is a currency, and it does provide certain security.

But then again, it is not that secured isn’t it if we chose the wrong marketplace to buy and sell our Bitcoin? Yesterday hackers stole $64 million of Bitcoin from Cryptocurrency mining marketplace NiceHash [as reported, in Reuters]).

In Conclusion (Summary of My Opinion on Bitcoin)

Most people buy Bitcoin as a store of value like gold. Gold in itself is like Bitcoin, is not a value producing assets but it is historically a popular assets class for people to park their money due to its limited supply. But gold has a certain usefulness too, for jewelry. Why do people buy Bitcoin? For show? For transaction?

Right now my opinion is that Bitcoin is still neither a store of value like Gold nor a type of currency to transact around the world. It is still at quite an early stage to determine.

Either way, right now I do not think that it has the stability of Gold nor it’s usage as a currency as it is not a widely used currency yet (will it ever be? maybe, but most probably not if too many people are dabbling in it making its prices so unstable to do any transaction).

The sky is the limit as to how high the price of Bitcoin will go. And there is nothing wrong with trading Bitcoin. But it is important to know the difference between trading and investing. Do not assume that we are investing in Bitcoin when there is no way to derive a value from it as it is not a value producing asset. We can only trade Bitcoin and make lots of money from it — if we are good — but we cannot invest in it (because we cannot value it as it is not a value producing assets).

We can always ask ourselves this first before buying Bitcoin: why do we buy Bitcoin?

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