The Leadership Code

Five Rules to Lead (by Dave Ulrich, Norm Smallwood and Kate Sweetman)

1. Shape the future: be a strategist
2. Make things happen: be an executor
3. Engage today's talent: be a talent manager
4. Build the next generation: be a capital human developer
5. Invest in yourself: work on your personal proficiency

Semi-free market

There is just one point I'd like to mention here supporting the idea of a semi-free market. There is obviously no free market in Vietnam, at least in the stock exchange. If you own a stock by buying it, it is called 'long'. People buy thing at a discount and sell them at premium. That's where you can make profit by expecting that price goes up. Short sell works vice versa. So if you expect/ bet price go down, you borrow stock from lender (i.e., broker) and when price go down, you buy stock to cover the position (to pay back the lender). As there has been no short sell in the Vietnamese stock exchange, the idea of expecting stock going down is set a barrier in the beginning. That is a part that I suppose contributing for the hike of stock price in the end of 2006 and the beginning of 2007. Thus, if somebody betted that the stock exchange would go down, he could not do anything. That is what makes the market inefficient. The market is efficient when it can incorporate information, both good and bad from the market, the industry and the company. If there was information that a company did not operate very well, its price could still go up because there is no sign as a short sell to know that it was not run well. Stock is a zero-sum game (there are anomalies and they are all famous for beating the market) so in this period of the Vietnamese stock market, the title on newspaper as such "the price of stock is still going down though company is making profit" is not very attractive. It is not contradictary because the market has been inefficient.

Coming back to short sell, if it had been in existence, the VNI index couldn't hike that much to go down at this level. I'm not sure if it's proper to make the analogy between the index and your mood. But imagine if your mood graph goes up and down days by days, the standard deviation would be less than the standard deviation of the mood that is extremely happy. Because you simply can't stay extremely happy for a long time horizon! The forbidding of short selling, in my opinion has driven up the herding pshychology. Or in another word, it discourages the contrarians. This forbidding makes a lot of sense, given that the Asian culture and mindset is already collectivistic and people tend to follow the swarm, the majority is always right! One reason explains for the absence of short sell is to protect the market from the Vietnamese point of view. The Vietnamese is afraid of foreign investors driving the market down. It's partly come from the fact that we do not want to be 'colonised', do not want the foreigners have great impact on price. Yet, what can be observed on newspaper everyday is the amount of stock foreign investors buy in and sell out. That kind of information is hard to find if you follow the FTSE, NYSE ( I know they are mature but wonder if the Chinese and the Indians do want what foreigners do that much.) Thus, when there is information that foreigners sell out, what would be the reaction of the domestic investors given that they have been following the foreigners?

Georges Soros recently has an opinion of the speculators, the main reason he thinks that drive up oil price. It is because oil contract is bought as an equity, (from investment firms, pension funds,...) instead of should be bought as a commodity by companies that use oil (aviation, manufacturing,...). Speculators make the market unbalanced, unsecure and it is the act of a speculator. This may explain for the absence of short sell in Vietnam since its inception.

Recently there have been many discussions about regulations for the banking industry and the financial market. The need of restricter regulations on a global scale has been raised from the Americans and the British, where market has been acknowledged as free. There is no such credit crisis in China or in Russia as you can imagine of high regulations there. Those guys from the Central of Bank of China argue that the western should learn from the Chinese in that sense. The westerns are learning from the easterns. But in my opinion, it's just time to merge between borders, borders of countries and borders of thinking. Again, there comes the fact, knowing the weakness to fullfil while keeping the strength (or even improve it).

I just wonder the fact that police's interference in the forex market (to be precise, at the jewelery stores, forbidding buying greenbacks) discourages or encourages Vietnamese's pshychology, I mean the herding pshycho. Will it reduce the buying and drive down the demand? It is very contradictary to the the loosing rule of Vietnam in two years in the permission of banks and brokerage companies' opening (which some of them are going to get the permission to close?). However, I believe that people think and act rationally ony if there is freedom. It will take time is all we can say. The question is how long will this 'mean' time last and what is your plan for this 'mean' time?

Portfolio Management

1. Asset allocation
2. Weighting shifts across major asset classes
3. Security selection within asset classes

Key theories:
- Portfolio Theory
- Capital Market Theory
- Security Valuation
- Market Efficiency
- Derivative valuation

Portfolio Management Process:

1. Planning
2. Execution
3. Feedback
   

Planning:

• Identify/specify investor's objectives and constraints
• Create Investment Policy Statement
• Form Capital Market expectations
• Create strategic asset allocation (combine IPS with capital market expectations to determine target asset class weights; max/min; single or multi-perspective)

Execution:

• Specific asset allocation
• Portfolio optimization
• Tactical asset allocation (responds to changes in short-term capital market expectations rather than investor circumstances)

Feedback:

• Monitoring/rebalancing
• Performance evaluation

Portfolio Management: CFA

• CFA level III thinks in terms of Investment Policy Statement
• IPS is client-specific summation of circumstances, goals and objectives, constraints, and policies that govern the relationship between the Advisor and the Client.
  
• Components could include:

- Background/Goals (use situational and psychological profiling)
- Return objective (sufficient to meet goals; don't forget inflation)
- Risk Objective/Tolerance (driven by Willingness and Ability to take risk; also has to be in line with Return Objective)
- Constraints (TTLLU = Time Horizon, Taxes, Liquidity, Legal/regulatory, Unique circumstances)
- Asset allocation (driven by risk/return profile - diversify, optimize return for given risk level, maximize likelihood of achieving goals, etc.)
- Portfolio Monitoring/Rebalancing/Evaluation

Risk
- Measured: Variance (volatility), Standard Deviation, Value at Risk
- Willingness
- Ability
- How much risk can investor bear?
Return
- Measured: Total Return - price appreciation plus income, Nominal (unadjusted for inflation) vs Real (inflation adjusted), Pre-tax vs After-tax
- How much does investor want?
- How much does investor need? Required Return
- Specific Return Objectives? Combine return desired, needed and risk objectives into measurable total annual return specification.

EMT

Most of these blogs from now are for my courses and my love : Portfolio Management, Financial (Equity market). Sentences are from books and from my professors'. (Ed Harding)

Finance Quote of the week:
"Diversification serves as protection against ignorance. If you want to make sure that nothing bad happens to you relative to the market, you should own everything. There is nothing wrong with that. It's a perfectly sound approach for somebody who doesn't know how to analyze businesses. Modern Portfolio Theory will tell you how to do average. But I think almost anybody can figure out how to do average in the fifth grade."
(Warren Buffet, Outstanding Investor Digest, August 8, 1996.)

Efficient Market Theory (EMT)
Eugene Fama
Fama's message: Stock prices are not predictable because the market is too efficient. In an efficient market, as information becomes available, a great many smart people ('rational profit maximizers') aggressively apply that information in a way that causes prices to adjust simultaneously, before anyone can profit. Thus, predictions of the future have no place because share prices adjust too quickly.

EMT = Random Walk Theory

Reason EMT not defensible:
- Investors are not always rational.
- Investors do not process info correctly
- Short-term yardsticks dominate (How are managers evaluated? If you are focused on short-term, how can you outperform in the long term?)

Warren Buffet on EMT: "With each investment you make, you should have the courage and the conviction to place at least 10% of your net worth in that stock."

EMT disproved
1. John Keynes
From 1927 to 1945, Keynes had responsibility for Chest Fund at King's College in Cambridge. He was a focus investor - relied on fundamental analysis to select a few stocks to buy and hold - focused on high quality companies to manage risk. Average return of 13% vs UK market return flat. Standard deviation of 29% vs UK market 12%.
2. Buffet Partnership, Ltd
3. Charles Munger Partnership
4. Sequoia Fund (Bill Ruane)
5. Lou Simpson (Geico)

Other EMT 'anomalies'
- Super Bowl effect
- Mark Twain effect ('October effect')
- January effect
- Halloween indicator (sell in May and go away)

On APEC event

From FT:

Vietnam’s economy last year grew at 8.4 per cent to $53bn, ranking it as the second-fastest growing only to China among the Asia Pacific Economic Cooperation forum’s 21 members.

“Vietnam is an exciting place. It’s a place with an enormous future,” said Mr Bush, even as the House of Representatives slowed that progress this month by failing to pass a bill to approve permanent normal trade relations with Vietnam.

Mike Green, senior adviser at the Center for Strategic and International Studies, said: “Other than Singapore, Vietnam is probably the Southeast Asian nation with the clearest vision of their own strategic position and national interests – particularly vis-a-vis China. It makes them an increasingly important partner for Washington.”

He added: “While Vietnam is far from being a democracy, they are taking important steps on religious freedom and economic reform.”

From AP (Yahoo Finance):

HANOI, Vietnam (AP) -- Top business leaders attending a Pacific Rim economic conference on Friday praised communist Vietnam for its stunning progress in reforming its economy a day after U.S. companies struck a flurry of investment deals worth more than $1.6 billion.
"Vietnam has demonstrated to the world its capacity for quantum leaps," said Craig Mundie, chief research and strategy officer for Microsoft Corp.

"It's clear that the government has recognized that broad-based reform and economic liberalization are essential to Vietnam's integration into the global economy," Mundie told more than 1,000 participants at the Asia-Pacific Economic Cooperation forum's "CEO Summit."

Hanoi's role as host to the annual APEC summit, which brings together President Bush and 20 other leaders for a weekend meeting, gives Vietnam a rare chance to showcase its transformation from a war-ravaged backwater to a fast-growing exporter.

More than 20 years of "doi moi" market-oriented reforms have made Vietnam APEC's fastest expanding economy after China, with growth racing ahead at a 7.5 percent clip.

The CEO gathering comes fresh on the heels of two of the biggest business developments to hit Vietnam in years -- its approval for membership in the World Trade Organization and Intel Corp.'s announcement last week that it will invest $1 billion in a chip plant in Ho Chi Minh City.

More deals were announced Thursday. Energy company AES Corp. signed an agreement with state-owned Vietnam Coal & Minerals Corp., or Vinacomin, to build a coal-fired power plant at a cost of $1.4 billion, Vinacomin said. Arlington, Va.-based AES will contribute 90 percent of the capital, with the Vietnamese partner providing 10 percent.

In another deal, state-owned Vietnam National Shipping Lines, or Vinalines, agreed to form a $100 million container terminal joint venture with Seattle-based SSA Marine.

And Vietnam's Truong Thinh Co. said it had sealed a US$140-million contract with California-based NRG Resources Inc.

Executives lauded Vietnam's effort to amend its laws to conform with WTO rules as it prepares to join the Geneva-based trade group next month.

"We see great growth potential in this market," said Michael Ducker, president of FedEx Express International.

Joining the WTO "represents the emergence of Vietnam towards an economy that is very competitive," said Scott Price, chief executive of DHL Express Asia-Pacific, which on Thursday said it was investing US$14 million in Vietnam through a joint venture to upgrade its facilities and vehicles in the country.

Salvaging the current Doha round of negotiations toward a global agreement on dismantling trade barriers has been a major focus of the APEC gathering, with the 21 members pledging to consider concessions on farm trade that left the talks in a deadlock in July.

The former head of the World Trade Organization, Supachai Panitchpakdi, on Friday urged trade negotiators to lower their demands and take small steps in a bid to break the deadlock.

"I don't think the (world) can afford to stand by and let the Doha round go down the drain," Supachai, now heads of the U.N. Conference on Trade and Development, told the more than 1,000 business executives.

"So let's do quiet diplomacy. Let's achieve a little bit and then move on, achieve a little bit and then move on," he said. "Development is the middle name of the Doha agenda, so don't shortchange the whole round of negotiations of development."

Spurred by exhortations from APEC, the WTO's 149 members met Thursday in Geneva for the first time in four months to discuss the possibility of resuming talks.

"Clearly, business and industry want the removal of obstacles, so with the Doha round, business is saying, 'Yeah, we're ready. We're just waiting for governments to get their act together,'" said DHL's Price.

While executives say regulations still slow down business in Vietnam, foreign investment is growing as the economy opens up.

Vietnam's thinnest times came after the Vietnam War ended in 1975 and the communists united the country. Cut off by an economic embargo, the economy stagnated under a rigid, centrally planned system. People lined up to wait for rice and other goods and faced police action if they sold anything on the free market.

The country still faces daunting obstacles, however, in building up infrastructure and training its workers for the newly capitalist-style economy.

"New challenges from terrorism, pandemics, natural disasters and technological inequality threaten the sustainability of regional prosperity," said Vu Tien Loc, president of the APEC CEO summit and chairman of the Vietnam Chamber of Commerce and Industry. "We believe that worldwide prosperity can only be achieved through shared opportunities and shared development."