Bursa Malaysia Beneish M-Score Database

In a previous article (Read more here), Beneish M-Score, a method to detect potential financial manipulation was discussed.  Beneish M-Score was introduced by Dr. Messod Beneish, an accounting professor at Indiana University’s Kelly School of Business in a research paper in 1991.  For M-Score that is smaller than -1.78 (more negative) is classified as non-manipulator.  Whereas for M-Score that is larger than -1.78 (moving towards zero or positive) is classified as a possible manipulation.

M-Score can be calculated using publicly available information such as financial statement from official annual report.  However, to calculate M-Score for all companies listed on Bursa Malaysia requires additional effort such as big data automation.  Firstly, a database of financial statement for every listed company in Bursa Malaysia has to be maintained digitally.  Secondly, an automation script has to be developed to extract the relevant info from the financial statement.  Thirdly, the extracted data will be fed into the M-Score database for calculation.  Lastly, if further analysis is required, the relevant M-Score info will be analysed by financial analysis.

We have built the M-Score database spanning from 2015 – 2018.  2019 database is work in progress as not all companies have published their 2019 financial data.  Below is a sample of three companies listed on Bursa Malaysia that failed the M-Score test for four consecutive years.

Company	Dec – 2018	Dec – 2017	Dec – 2016	Dec – 2015
PASUKHAS	1.738	- 1.363	- 0.842	- 1.661
PESTECH	- 1.564	- 1.146	- 0.921	- 1.737
ACOUSTECH	- 0.034	2.546	- 1.161	0.965

Fortunately, most of the companies listed on Bursa Malaysia passed the M-Score test for 2015 – 2018.  Below are examples of companies which scored well between 2015 – 2018.

Company	Dec – 2018	Dec – 2017	Dec – 2016	Dec – 2015
ANCOM	- 2.579	- 2.380	- 2.254	- 2.701
CBIP	- 2.259	- 1.807	- 2.094	- 2.439
DIGI	- 2.630	- 2.831	- 2.430	- 2.568
FREIGHT	- 2.747	- 2.147	- 2.432	- 2.855
GENM	- 3.059	- 2.264	- 3.034	- 2.286
IOI	- 2.430	-  2.029	- 2.243	- 2.670
KPJ	- 2.979	- 2.689	- 2.395	- 2.363
NESTLE	- 3.143	- 2.412	- 2.953	- 2.974
ORIENTAL	- 2.645	- 2.796	- 2.146	- 2.553
YTL CORP	- 2.317	- 2.623	- 2.295	- 2.690

To access the full list, selected companies, or in-depth M-Score analysis reports, please contact info@mpcap.com.my for pricing information.

5 Risks You Need to Take in Life

Everything about life is a risk. Accident, illness... can happen at any moment. But it is the risks you actively search for that matter most in your life. We know risks are painful, but they make life worth living when they go right.

According to Steve Bloom, the five important risks in life are:

1. Caring about someone else

Getting close with someone and care about them could be a scary thing. We know people around us will not stay with us forever. A break up or a good bye could be heart breaking. But that should not stop you from caring about another person. The beauty behind letting someone get close to you is that you get a chance to know each other deeply and bond together tightly. The feeling can be great.

2. Learning and trying new things

Trying something new sounds risky. If you want to sign up for a new course or start a new business, it is like starting a new hobby like rock-climbing, it could be scary and challenging at first, but a large part of the fun is from overcoming the fear. It is impossible to do these incredible things without accepting new challenge or risk.

3. Following your passions and dreams

Dreams only happen if you plan and follow them. You cannot wait for things to happen to you. You don’t have another life so if not now, then when are you going to do them? The perfect time to take the risk is when you are young, ambitious and have your entire life ahead of you! Sometimes, the biggest rewards demand greater risks.

4. Failing

There is always a chance of failure when you take risks. You fail, then only can you succeed. You will find an alternative route that may lead you to succeed many times when you fail. Remember, failure is not an obstacle. It is a stepping stone to your dreams!

5. Viewpoints

Stand up for your viewpoint. Expressing how you feel can be risky since you don’t know how people will react. But it is normal if someone disagrees with your opinions because everyone has their own view of what’s going on. People who are making the most out of their lives have unique opinions and insights into things.  A big part of living life fully comes in being able to express those points of view.

Life is like a game. Those who really enjoy and have fun till the end win. Take part in the game and search for those risks. The biggest risk you can take in life is not taking one!

Reference:

1. Steve Bloom, The 5 Important Risks You Need to Take for a Full Life http://dosomethingcool.net/

2. Nikita Mukherjee, 7 Risks Everyone Needs To Take In Life www.mensxp.com

American Middle Class: Losing Ground?

About half (52%) of American adults lived in middle-class households in 2016 according to Rakesh Kochhar. This was virtually unchanged from the 51% who were middle class in 2011. But while the size of the nation’s middle class remained relatively stable, financial gains for middle-income Americans during this period were modest compared with those of higher-income households, causing the income disparity between the groups to grow.

From 1971 to 2011, the share of adults in the middle class fell by 10 percentage points. But that shift was not all down the economic ladder but an increase in the share of adults who are upper income. A sign of economic progress.

Financially, middle-class households in the U.S. were better off in 2016 than in 2010. The median income of middle-class households increased from $74,015 in 2010 to $78,442 in 2016, by 6%. Upper-income households (where 19% of American adults live) fared better than the middle class, as their median income increased from $172,152 to $187,872, a gain of 9% over this period. Lower-income households (29% of adults) experienced an income gain of 5%, about the same as the middle class. (Incomes are adjusted for household size, scaled to reflect three-person households, and expressed in 2016 dollars.)

The median income of middle-class households in 2016 was about the same as in 2000, a reflection of the lingering effects of the Great Recession. The median income of lower-income households in 2016 ($25,624) was less than in 2000 ($26,923). Only the incomes of upper-income households increased from 2000 to 2016, from $183,680 to $187,872.

The widening income gap between upper-income households and middle- and lower-income households this century is the continuation of a decades-long trend. In 1970, the first year covered by earlier Pew Research Center analyses, the median income of upper-income households was 2.2 times the income of middle-income households and 6.3 times the income of lower-income households. These income ratios increased to 2.4 and 7.3 in 2016, respectively.

A recent Pew Research Center analysis also found that the wealth gaps between upper-income families and lower- and middle-income families in 2016 were at the highest levels recorded. Although the wealth of upper-income families has more than recovered from the losses experienced during the Great Recession, the wealth of lower- and middle-income families in 2016 was comparable to 1989 levels. Thus, even as the American middle class appears not to be shrinking (for now), it continues to fall further behind upper-income households financially. This mirrors the long-running rise in income inequality in the U.S.

The period from 2011 to 2016 encompasses much of the economic expansion following the Great Recession of 2007-09. But the recovery has been slow. It may help explain the lack of movement of adults into upper-income households during this period. US’ gross domestic product (GDP) per capita did not return to its pre-recession peak (near the end of 2007) until the latter half of 2013. Likewise, the median income of U.S. households took until 2016 to return to where it stood prior to the start of the Great Recession in December 2007.

“Middle-income” Americans are adults whose annual household income is two-thirds to double the national median, after incomes have been adjusted for household size. In 2016, the national middle-income range was about $45,200 to $135,600 annually for a household of three. Lower-income households had incomes less than $45,200 and upper-income households had incomes greater than $135,600 (incomes in 2016 dollars).

Only graduated taxes and other income distribution measures can help change the inequalities of a capitalist system that focuses on “free markets, free trade”. With Trump this reversal will not occur, although he is no proponent of free trade and free markets. It will only happen if Bernie Sanders, Elizabeth Warren or AOC are in leadership of the U.S. system.

Reference:

1. Rakesh Kochhar, The American middle class is stable in size, but losing ground financially to upper-income families, www.pewresearch.org/

2. Todd Bishop, What’s happening to America’s middle class: The numbers behind one of the country’s key trends www.geekwire.com

Business Disasters: Who Is To Blame?

The following are eight infamous business disasters:

1.         British Petroleum

There’s plenty of blame to go around in the massive Deepwater Horizon oil spill that impacted the U.S. Gulf Coast. But British Petroleum is drawing the most ire. BP had to pay for the cleanup and is sued for billions by affected industries (ranging from tourism to seafood farming). How did it happen? Cost cutting measures at BP ended with lowering of standards leading to a massive blow-out!

2.         Merck

Merck’s popular anti-inflammatory drug Vioxx eventually caused more pain than it cured. The company yanked Vioxx off shelves in 2004 after concluding it increased the risk of heart attacks and strokes. Patients and shareholders alike were angered by what they considered Merck’s slow response. The pharma giant paid $4.85 billion in 2007 to settle patient lawsuits. An appeals court in Philadelphia ruled in April 2010 that shareholders can sue for losses incurred during Merck's stock free-fall. The company lost 27 percent of its value after the recall.

3.         Exxon

The 1989 Exxon-Valdez oil disaster was an environmental catastrophe. That the company's response has gone down in history as what not to do didn’t help. The 11 million gallon spill cost Exxon $4.3 billion, which includes both the tab for mopping up the oil and punitive damages. The latter number (around $500 million) would have been higher today. Exxon’s tone-deaf response generated fierce opposition to its merger with Mobil a decade later.

4.         Ford Motor Co./Firestone

When, in 2000, it was discovered Ford Explorers with Firestone tires were prone to fatal rollovers, each corporation blamed the other, and both companies’ reputations suffered.

Firestone recalled 6.5 million tires. Ford recalled 13.5 million cars, a move that cost the automaker $3 billion. The cost of the recall was estimated at $500 million for Firestone.

The backlash got so bad, Firestone’s PR agency threw up its hands and fired its client.

5.         Aventis

            This biotech firm (now called Sanofi-Aventis) admitted in 2000 that some of its Starlink corn was genetically modified and only approved for use as animal feed. Yet it had made its way into the human food supply. Aventis initially spent $100 million buying back the tainted corn, but estimates of the total cost — which included recalls and factory shutdowns for companies like ConAgra and Kraft — are as high as $1 billion.

6.         American Home Products

In 1997, this pharmaceutical company (now Wyeth) pulled its popular diet combo Fen-Phen off store shelves when it was found to cause fatal heart problems. Thousands of lawsuits were filed by victims and their families. AHP settled for a total of about $21 billion over a period of several years. The financial blow was compounded by the PR damage from insensitive employees.

7.         Toyota

The Japanese automaker is still taking stock of the full impact of the massive recall of its vehicles.  The company's vaunted safety and quality-control record have already been damaged. Toyota estimated the cost of the recall at around $2 billion, and that's not counting class-action damages, which could easily climb into the billions as well. More recent news that a Lexus SUV could be prone to rollovers as the result of faulty stability-control equipment triggered a second recall and a fresh round of media scrutiny.

8.         Union Carbide

This 1984 gas leak in an Indian pesticide factory in Bhopal takes the dubious honor of being the worst chemical accident on record. Roughly 4,000 died within days, and authorities estimate the long-term death toll at 15,000, with hundreds of thousands more stricken with health problems. The catastrophe cost Union Carbide (bought by Dow Chemical in 2001) $470 million in restitution payments to the Indian government, but the cost to its reputation was much higher. The anniversary of the leak is still marked by vigils and protests.

Then there are other business “disasters” in more recent years, including Shell (in Nigeria), Goldman Sachs and a host of others.

For 2019, the key (5) ones that damaged well-known brands include:

1.         Facebook

Brand image collapsed in 2019 because of three events:

-security breach in late 2018

-spread of toxic disinformation

-content moderators underpaid

2.         Wells Fargo

Faked sales numbers with fraudulent accounts created without consent. Company was fined USD525m and paid USD15 billion in settlements.

3.         Uber

A poster boy for sexual harassment. Uber is underperforming, underwhelming, and maybe underwater.

4.         WeWork

When its aspirational crap was filed for an IPO, it became clear that the business model was from cuckoo land. The IPO filing was then withdrawn.

5.         Boeing

When two 737 Max planes crashed on takeoff, hundreds of lives were lost. The ensuing massive cover-up was not an answer, especially when the plane was “designed by clowns and supervised by monkeys”. That threatens its existence. Why would any airline buy a Boeing? Or, someone fly in one?

The key issue in all the cases was trust or integrity. Every one of them had a moral deficit! Why? Profit before lives!

References:

1.  8 infamous business disasters, NBC News

2. The biggest business disasters of 2019, Geoffrey James, Inc.com           

Rent-Seeking and Crony Capitalism: Here to Stay?

In an article (11 Feb 2020), we had explained about crony capitalism. Mancur Olson may have misleadingly suggested “crony capitalism” for what could have been termed “corporatism” – the success of firms being tied to government. This is not new – it existed with the Dutch or British East India Company.

Rent-seeking (a term coined by Gordon Tullock) is the process by which interest groups pursue government favours. Tariffs, subsidies, preferential regulation, concession terms do not simply fall from heaven but through concerted effort by interest groups to divert wealth to themselves. Wealth can be created or taken by force (legally or illegally) from someone else.

Rent-seeking can occur in three ways; direct, indirect or rent-extraction. Direct rent-seeking occurs when an interest group is provided with a benefit that directly benefits it. Indirect rent-seeking occurs when a seemingly neutral regulation or law is enacted to favour some people. Rent extraction by politicians is a threat to harm or take away current benefits held by a firm/industry. It may be difficult sometimes to differentiate between rent-seeking or rent-extraction.

In the U.S., crony capitalism is a full blown system of intertwined benefits to big business, big labour and big government and all three have a stake in the maintenance of the system. Modern crony capitalism is best exemplified by bailouts of General Motors and Chrysler. Bank bailouts were another. Multiple studies have shown bailouts (for banks) were positively correlated with campaign contributions. So bailout funds were for those with political clout, not those in need of liquidity. So Lehman had to go down but not Goldman Sachs.

The mantra of free markets, competition and free trade was to benefit select groups. Its dominance is from the Reagan era. Now, it is Bernie’s socialism, where everyone wins at the expense of favoured interest groups. That presumes Bernie Sanders is the next President. Otherwise, Trump and his allies will take crony capitalism to a whole new level.

This is not just an American problem but prevalent in the U.K., Europe, China, India and other parts of Asia and Africa. The degree again will defer. Corruption, level of affluence and education all play a part. So, in Scandinavian countries, the phenomena (crony capitalism) may not arise. To reduce the perception of crony capitalism, one could strengthen the processes, have independent expert estimates as a benchmark and, perhaps use reverse auction to strike the best deal for the nation.

If the so-called “cronies” can deliver within budget and timeframe as determined by an independent expert group, then what’s the real issue?

Reference:

Rent-seeking, Crony Capitalism, and the Crony Constitution, Todd Zywicki, George Mason University School of Law

Counting the Cost of Valentine's Day

Moneytips Infographics for Valentine's Day (2019)

Real Wealthy or Fake Rich?

Look at the people around you, their spending habits and their lifestyle. Some people that look like making a lot of money may only be “fake rich”. We see them at parties, on Instagram, everywhere. How do we know whether someone is really wealthy or is just faking it? Emil Anton wrote an article on 15 signs someone is fake rich and we picked our top 10 from the article:

1. BRAND conscious

They care more about the brand perception than quality. The logo is the thing that makes them happy. When they cannot afford it, they buy fake products. Real wealthy people focus on comfort and quality. That is why some of the higher end brands may look boring to you, because they appeal to a different type of mindset.

2. Name-drop

Public perception is that people with net worth are closely correlated to network. Thus, the fake rich like to mention about people’s names and pretend they know them very personally.

3. Validation

They are in constant need of others’ approval. They show off their wealth on social media, boast about the money they’re making. They want to impress those they think who are less than them. They spend more time trying to be perceived as successful than actually putting in the work to become successful.

4. Talk is about Money

They are boring to talk to. They talk about money, how they earn and where they spend, nothing much. They cannot hold deeper conversation about real wealth. And they seek your advice on how to make more!

5. Brag about their plans

They have so many plans to make millions but never put in the work and be consistent about it. People who are truly wealthy know where they are going and focus on incremental progress.

6. Complicated Job Titles

Today, we have many fancy-pants job titles. Everyone can be a CEO of their own businesses. Yes, fancy title may impress people but it is actually useless. Hard work is always more important than the packaging.

7. Boss over a Boss

Yes, you can get rich by working for someone else, but most people are just building the wealth of others. “People in fancy suits look really successful until you realize they work for people in t-shirts and jeans.”

8. Savings? Nil

They “invest” in their image more than saving the money they have. And when bad things happen they need quick access to capital and resort to borrowing. Some even borrow for purchases. Buying things on credit or instalments does not always mean bad. If you are using that money to acquire an asset that will generate more money, it is a good debt.

9. Car is more expensive than House

We have seen people living in a one-bedroom apartment but owning a Rolls-Royce or staying in a “depressed” part of town with a Mercedes in the garage or porch. A good rule of thumb is the 10-15% law. If you are living in a RM300,000 apartment then you should only buy a RM45,000 car.

10. Excuses for their Failure

We didn’t have enough capital... We didn’t advertise enough... No. You were simply unable to adapt and smart enough to make the correct decisions for the changes. External factors happen all the time.

There are many reasons why people are trying hard to pretend rich. By doing so, some feel better about their situation. Some just want to impress others. But remember, pretending to be rich can make you poor. Learn to live within your means!

Reference:

1. Emil Anton, 15 Signs Someone is FAKE RICH www.alux.com

2. Trent Hamm, Pretending to Be Rich www.thesimpledollar.com