Wednesday, February 28, 2007

ValueWiki

Since about October or so I have been contributing to an open source investment research site named ValueWiki. ValueWiki(VW) is trying to implement the "Wikipedia" model to the world of Investment Research. When I joined in October, the site was still in early beta, besides the founders, Jon and Zach, there were barely anyone contributing to the site. However, I got intrigued by their proposition and decided to join and help them grow the site by contributing and spreading the word.

The site has been growing steadily, recently it had its first 1 million pageviews. And it has been gaining traction significantly since the founders started marketing more aggressively January. Just check the Alexa data here. The site has been getting some Buzz in the blogosphere.

While the community is still at its infancy, I believe that an open source investment research platform like ValueWiki can have a dramatic impact on how investors share information and collaborate on research.

There are many reasons I believe in this model. First of all, until recently, sell-side and independent researchers affiliated with the big investment bank and brokerage houses has the biggest influence in disseminating information and form market opinion on stocks. While most of these are subscription based, the advent of internet and message boards have made their analysis and opinion widespread quickly. However, In my opinion, recent development have reduced the influence of these analysts. The bubble burst of early 2000's and fallout of all those conflict of interest cases certainly dented analysts' credibility. Star analysts like Blodgett, Meeker and Grubman fell from grace. Regulations that prevent analysts to get a share of investment banking pot have reduced the motivation of the sell side community. Many of the best analysts are moving to the buy side. Furthermore, regulations FD that was enacted after the bust, limited access of these analysts to "privileged early information" from management. Which means that these analyst has the same information access as other people (like me).

I think there would still be market for paid analysts research. Considering that the analyst community are made up of some of the smartest people around and experienced industry experts. So there would still be good market for their opinions.

On the other hand, I am impressed on how wikipedia with an army of volunteer editors has been able to build an encyclopedia that matches the quality of Britannica, an encyclopedia written by staffs that are experts in their fields. Well, there are debates whether wikipedia is as accurate as Britannica, but wikipedia is certainly more comprehensive. Jon and Zach mentioned in the ValueWiki about page that "Encyclopedia Britannica's paid staff could only write 118,000 articles in 240 years. Wikipedia has written 1.6 million articles in 5 years! So Wiki seems to create a good model for collaborative research." I think ValueWiki can do the same to the world of investment research as wikipedia to encyclopedia. I think the average sell-side analyst can only cover 5-15 stocks (less for complex large cap and more for small cap analysts).

Paid analysts have the incentive to cover more well known stocks that bring some trading business to their brokerage houses. I can imagine that once ValueWiki gets bigger, like wikipedia, it will have broader scope of coverage than the professional publishing analyst coverage universe. ValueWiki could certainly carry more information about small cap stocks and emerging market stocks that don't get much paid analyst coverage, increasing market efficiency and transparencies for those securities.

Well, right now we're starting to see trends that a lot of information are floating around blogs and investment message boards. However, these channels are ripe with problems. There are many popular finance blogs that have gained credibility from public and became quite influential. Here's a list of top 100 blogs ranked by alexa data compiled by Jon. However, information contained in these blogs are quite scattered. While there are some blog aggregators like seekingalpha that help organize these info, it is not purely democratic. SeekingAlpha has a gatekeeper that selectively chooses which blog to be included or not, therefore many worthy entries are not included.

Another place where people collaborate on an investment research is the message boards universe where anyone can say anything, but it is full of irrelevant and inaccurate information that goes unchecked. Consider this kind of interaction I notice at a biotech stock board:

Mr. Fool: This company's drug is in phase 3, but the stock is tanking, I am buying
Dr. X: I am a doctor, I think FDA won't approve the drug, Don't buy the stock
Mr. Fool: Are you really a doctor? you're so stupid, how come you don't know the drug is so hot!!!
Profanity laced interaction continues for the next 1000 posts

In my opinion the community moderated model that ValueWiki and Wikipedia uses can alleviate some of the problem of inaccuracy and incivility in the message boards.

Well, ValueWiki needs to reach a critical mass to work best and deliver all these promised benefits. There have been other investment wikis before like stockepedia and wikistock, however neither of those ever gained as much traction as ValueWiki. I think the founders, Jon and Zach's commitment to the site is the difference maker. I really hope that the site becomes really big and influential like Wikipedia. I can imagine that one day, posts in ValueWiki could trigger an SEC investigation that uncover Enron type schemes or option backdating scandal.


Sudarshan Chakra

OK, some people asked me some questions regarding this blog.

Q: What is Sudarshan Chakra?
A: Ummm I don't think I can explain it better than wikipedia can. Note: it's spelled differently there... well, that's why I never won Spelling bee.
Q: Why picked the name?
A: I dunno... it randomly came up to mind, maybe because of beer, wine, or something harder. I forgot... it happened last year.

Monday, February 26, 2007

Telkom vs Indosat

I was kind of surprised recently when I saw the stock performance chart of Indonesian communication companies PT Telkom (NYSE:TLK) and PT Indosat (NYSE:IIT). As you can see in the chart below, in the past 2 years Telkom has been outperforming Indosat.

Growing up in Indonesia, I didn't have good image of the PT Telkom. It used to have monopoly over Indonesian fixed line telecommunication system. Like other government monopolies, it was fat, slow and bureaucratic. Until now, Indonesia had a pretty sad (plain old style) telephone penetration of only 7%. I t's not that people didn't want/need telephone or could not afford it, but it used to take months or years to get a telephone line from PT Telkom, even in big cities like Jakarta.

Indosat, on the other hand was a little more competitive animal. It was established as a foreign investment company as Indonesia's first satellite operator. It had to compete with foreign satellite operators and global telecommunication giants operating in the region for some of its services, such as international telecommunications services, including international direct dialing telephony, international data network communications, international leased lines and international television transmission services.

Indosat was Indonesia's first major cellular phone service provider, and for a while it had virtual monopoly in this segment before government started deregulating the telecommunications sector earlier this decade. In a few years, Indosat managed to sell more cell phones than Telkom's fixed line telephone installed base. It still takes a few days or weeks to get a conventional telephone service installed by PT Telkom, while it takes only a few minutes to get a cell phone. All one needs to do to get a cell phone is walk into a store, fill a form online, pay and he or she can walk away with a fully functioning phone a few minutes later. So now according to Telkom's presentation, Indonesia's cell phone penetration rate is about 20%, and there are about 3 cell phone for every 1 fixed line.

So after the government deregulated and split Telkom and Indosat completely in 2001 and let them freely whack each other at any segments, I thought Indosat would kill PT Telkom. Nobody would want to use plain old telephone anymore and everyone would snap up Indosat Cell phones like crazy. Well, Telkom was behind in the cell-phone game and their bureaucratic culture would make them move slow. well, I was dead wrong.

When they first introduced cell phones, Indosat focused on the money drenched big cities in Java and Bali, and focused on post-paid subscription based service. Well, this strategy worked pretty well in the beginning.

Telkom's cellular service, telkomsel was created to provide an illusion of competition to Indosat's service. In 2001, Indosat divested all its ownership in Telkomsel and Singapore's Singtel obtained 35% of Telkomsel and became Telkom's new mate in the cellular game.

However, in the past few years, Telkomsel has been aggressively pursuing growth throughout Indonesia, focusing on markets outside of Java and Bali. Telkomsel was the first cellular company to have coverage in all of the country's provinces. the company claimed to have reached 90% of the country's 280 million people. Telkom was utilizing their infrastructure, like using their underwater fiber optic cable to transmit data and signal between islands and using their existing switching stations real estate to place their towers. Telkomsel also used Telkom's Warung telekomunikasi (telecommunication kiosks), where people, especially in remote areas used to make phone calls, receive fax and browse the net, as its distribution channel. This way Telkomsel managed to overtake Indosat's early start, grabbing almost 60% market share in cellular segment, despite the late start. It was a little harder for Indosat to catch up, as their main asset was the satellite operation, therefore they had less local infrastructure compared to Telkom.

The cellular segment is important for both companies. Telkom's old bread and butter fixed line telephone service is being eaten away by cellular, and both companies' long distance and international services have been facing pricing pressure from disruptive technologies like VoIP. The stock market has been rewarding Telkom pretty well, mostly for the success of its cellular segment. However, it is interesting to note that both Telkom and Indosat are trading at roughly same P/E multiples (18.25), which I think is pretty good deal for both company. I think this implies that the market is not expecting one to grow faster than the other significantly in the future.

I am pretty interested to watch the development of the Indonesian telecommunication segment. In the cellular segment, it seems that intensifying competition has translated to heavy pricing pressure. While annual subscriber growth are still in double digit, Average revenue per user (ARPU) for both providers are declining by about 5% annually. Even Indosat has openly touted price cuts as part of its strategy.

I think that broadband internet will be the next big game, and Telkom has a pretty good head start in this game. Because of Indonesia's low fixed line penetration and vast geographical areas, I think most Indonesians will skip DSL and cable. Indonesia won't really have widespread broadband penetration until 3G service becomes readily available and affordable. Wireless based broadband will be the main access method for both static home and office use and for road warriors alike. It seems telkom has pretty good head start with their coverage and the fact that they own the fixed land-line business, so it can enter the DSL market too.
















Disclaimer: I and people related to me don't hold both Telkom and Indosat stocks

Wednesday, February 21, 2007

Resurrecting the Blog

OK after more than a year hiatus, I am resurrecting this blog. I plan to use this to randomly rant about whatever comes into my mind about anything from my stock picks, politics, cooking, golf, and so on. And oh, I even sold out and got adsense plastered to this blog. Enjoy!

Poulet Vallee d'Auge

One of the things I do when I have too much time to spare is cooking. I think I can get better bang for my buck by getting good ingredients at Whole Foods and cook my own gourmet meals rather than paying the premium that restaurants charge. Furthermore, I learn something new every time I cook.

One of my favorite meal is Poulet Vallee d'Auge. There are many recipes for this classic Normandy dish, but my favorite is this one from cooking.com. My fiancee called this my signature dish. Aftercooking this many times, I learned that the secret is using a flat skillet and not to use too much apple cider, because if not the sauce tend to separate easily between the oil based cream and juice and the water based cider. I buy clarified butter from Whole Foods rather than making it myself as described in the recipe.