Review of Current Portfolio – October 2017

20171021 Oct2017 review

The month of October has been marred by lots of divestment on few non-performing counters. Few highlights:

  1. Fully divested San Teh, continuously reduced holdings in Stamford Land and Casa Holdings. Details analysis here
  2. Made small acquisitions in Cache Logistics Trust & Global Investments Ltd to further strengthen dividend returns.
  3. As a result, the war chest balance has increased to 6%.

I’ve always been a fans of football & like to put a comparison between investment world and football world. In the case of my portfolio, there should be a clear understanding on what the game strategy is. There are few well known football formations, such as the 4-4-2, 4-3-3, or 3-5-2. I try to put every counter in its most suitable position:

  1. Goalkeeper – is where we should put our money into the safest instrument, in this case, our war chest.
  2.  Defenders – a combination of strong counters with good history of giving sustainable returns. Just as in a football match, defenders’ task is to prevent the opponents from scoring goal. Of course it would be good if the defenders can score a goal too (i.e. giving high capital gain). But this is a rare case. Most of the time, defenders are acting as a cushion during unexpected recessions.
  3. Midfielders – midfielders act as a bridge between defend and attack. They are a combination of growth players who also give good dividends. Combination of strong midfielders, wingers, and play maker can determine the outcome of the match.
  4. Strikers – strikers are expected to score many goals. As an analogy, those counters who are acting as strikers, are supposed to give above average annualized return.  This is mostly from capital gain.

20171021 football team

By looking at the proportion of each counter in my portfolio, it appeared my portfolio tends to be an aggressive one: 3-4-1-2. Cramming a lot of midfielders in the center of the field, and having enough strikers to increase the chance of scoring goals. While keeping few defenders just enough to hold the fort. Of course having a good goalkeeper (i.e. lots of war chest) can help tide the portfolio during recession & provide us with enough dry gunpowder for counter attack.

Separately, my child’s portfolio has also grown quite a bit this year – mainly driven by higher fair value of investment in Hotung & Guocoland. Guocoland has recently announced its 1Q’2018 result with quarterly net profit grew by almost seven times year on year. The strategy of Child’s Portfolio is rather defensive, focusing on consistent dividend. With more than three quarters invested in high-yielding investments, such as REITS – while the remaining one quarter is invested in growth stocks, such as Guocoland.

20171021 Oct2017 Vio review

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Book Review: The Art of Execution

20171020 book review

The Art of Execution is an eye-opening book written by Lee Freeman-Shor. For those who’re interested to learn about investing, the book unfortunately doesn’t teach the reader about how to pick stocks nor how to do fundamental analysis nor technical analysis. However, the book does help the reader to discover the concept of money management.

Very often beginner investors are fixated so much with doing the fundamental analysis, looking at the financial ratio, analyzing the company prospect, calculating the right entry price. But subsequently when faced with a losing position after purchasing their investment, they just simply don’t know what to do. As Mike Tyson said, “Everyone has a plan ’till they get punched in the mouth.”

The book starts by the author introducing that he has given 45 of the world’s top investors amount of money to invest in their top ten ideas.  Shockingly he found that only 49% of the investments made money. And even more shockingly these legendary investors were only successful 30% of the time. However,  despite some of them only makes money on one out of three investments, almost all of them did not lose money. When in fact, they made a lot of it. This leads to the topic of the book: how did these investors execute their investments?

In the investing world, there are only two positions: when you are winning, and when you are losing. Very often, retail investors like most of us are stunned with dilemmatic options on what to do. When winning, they are too excited to take that 10% profit off the table. When losing, they are afraid to cut loss and move on.

20171020 rabbits hunters 2The book shares with the reader on three types of characters when investors are faced with losing position: the Rabbits, the Assassins, and the Hunters. The Rabbits are basically those who do NOTHING when faced with losing position – neither they sell neither they buy. The Rabbits could have done differently by executing the following:

  1. Always have a plan… know what to do when the stock you’re investing falls or rises by 20%, 50% etc
  2. Sell or buy more… the only solution to a losing position is to sell out or significantly increase your stake
  3. Don’t go all in… always keep some powder dry
  4. Don’t be hasty to jump in, but DO be hasty to jump out… what separates the winner from losers? The winners make small mistakes, while the losers make big mistakes
  5. Seek out opposition … speak to someone with an opposing view to mitigate emotional attachment of a vested interest
  6. Be humble … expect that your ideas may be wrong & invest with that in mind
  7. Keep quiet and carry on

On the other side, Assassins choose to kill losses early by implementing stop loss. The first rule is assassins will kill all losers at 20-33%, knowing that a loss of 33% will require a 50% subsequent return to break even. As the author found out, that only 11% of the winning stocks produced realized return of more than 50%. And only 1% realized return more than 100%. Assassins also choose to kill losers after a fixed amount of time. As the old axiom says: “Time is money.” Assassins fully understand the concept of opportunity cost. And the assassins’ second rule is basically to sell stocks which went down by any amount and showed no signs of recovery after a certain period of time. Majority of the assassins drew the line at six months. However the data shows that 99% of all bad buys were sold within three years.

As opposed to the assassins, Hunters will usually wait a little longer & double down by adding position. Unlike assassins, Hunters did not sell out the losing positions – they buy significantly more shares.Then they sat back and waited for it to recover, eventually selling it for a handsome profit. This is similar to doubling down in gambling. But in well chosen investments, this strategy wins over time. Always invest a lesser amount at the outset and keep some cash on the side – wait for opportunity to buy more at lower price in the future. Hunters are very often contrarian and value investors.

On the second part of the book, the author discussed the scenario when investors are winning. There are two characters here: the Raiders and the Connoisseurs. The author started by providing the data that one of his investors had an incredible success rate – 70% of his ideas were correct but didn’t make any money. It appeared that whenever this investor made a small gain of 10% he would immediately sell the stock and take the profit. The authors also emphasizes how detrimental it is for a manager to take profit when stock was up by 20% or less. 66% of all winning investments were sold at profit less than 20%. Out of these, 61% kept going up and had the investors stuck with them, he would have made more money.

There are few reasons why investors choose to sell too soon (i.e. becoming Raiders):

  1. It feels so good… selling for a profit is a nice feeling
  2. Boredom… getting tired of waiting for action
  3. Frustration
  4. Fear … Investors think they are getting rid of weak winners and replacing them with stronger ones, but in fact it’s the opposite.
  5. Short-termism… too focused on the short term
  6. Risk aversion… when winning, selling is appealing because the certainty of a small victory is better than the uncertainty of a loss or greater victory. When losing, risk is appealing because anything is better than a certain loss.

Finally, come the Connoisseurs. These are the most successful investors discovered by the author. Connoisseurs do the following that lead to their successes:

  1. Find unsurprising companies … identify companies with a view to holding them for ten or more years
  2. Look for big upside potential … given that the average success of an investment idea is 49%, need to make sure that when you win, you win big.
  3. Invest big – and focused… when Connoisseurs were very confident in an idea, they built up big positions. They could end up with 50% of their total assets invested in just two stocks. The author suggested to invest only up to 25% of the money in a single idea. There is no use having a small investment in a big winner – you have to have a large position size to generate big returns.
  4. Don’t be scared … Most people are scared to ride a big winner. One way to avoid this is by taking a small profits as the stock kept going up rather than selling entirely out of the position having made 20% or 50%.
  5. Make sure you have a pillow … must have a high boredom threshold. This is difficult because most of us feel the need to always do something every day.

In summary, the author also reiterated that it takes a lot of nerves and patience to be a Connoisseur. As Stanley Druckenmiller famously said, “The way to build long term returns is through preservation of capital and home runs.”

Lessons Learnt from Recent Divestment

20171014 mistakesPeople learn more from their mistakes than from their successes. This is absolutely true as I just swallowed many bitter pills this month. Recently I divested three of my non-performing stocks in my portfolio: Stamford Land, San Teh Group, and Casa Holdings.

So, what did I learn this time from the recent divestment?

  1. When the initial buying premise is no longer there, decide quickly whether it’s still worth it to keep the investment. In the case of Stamford Land, I purchased it on the premise of expecting regular dividend of 5% while waiting out for investment to bear fruit (i.e. realize its value). The company was definitely undervalued as their hotel portfolio was carried at cost in their balance sheet. At one point of time in 2008, the company received an unsolicited offer of A$850m for eight of its hotels. At that time, had the company chosen to accept it, the share price would have been valued at S$1.15 a piece. Subsequently, since the company rejected it, the 5% yield was hopefully sufficient to cover the opportunity cost of waiting. Apparently they cut the dividend by close to 90% in 2016 in order to spare some cash for the property development. I should have noticed it back then. Subsequently, I found out too that the company doesn’t have a shareholder-friendly management. This is one of the many reasons why market chose not to bid its price higher. While in the case of Casa Holdings, I should have divested it out back in 2014, immediately after the company decided to make a foray investment to develop residential property in Iskandar Malaysia. When I bought it, the company made its money from selling kitchen appliances, consistently dishing out good dividend and with the low P/B ratio, it appeared to be a smart investment back then. So many things have changed since then. Furthermore, on hindsight bias, we knew that Iskandar Malaysia residential property is having oversupply situation and may take longer time to develop into an economically-sustainable city.
  2. Be discipline & stick to your investment rule. Cut the loss quickly and move on. This falls under Regret Aversion Bias, also known as Loss Aversion. People, including myself, are always reluctant to sell losing investment – In dating world, this is similar to the case whereby we tend to stay longer in a ugly relationship with our abusive girlfriend/boyfriend, rather than breaking up and move on. Knowing that we may not be ready to accept the consequence and pain of breaking up. In my investment strategy, I’ve always set 36 months (3 years) as the maximum threshold of investment holding period. Should the investment does not bear fruit as initially planned, my strategy requires me to divest it immediately. Yet it took me 72 months to divest San Teh, 52 months for Casa Holdings, and 40 months for Stamford Land. Perhaps I was still expecting that the situation would turn around. I should’ve divested them earlier knowing the opportunity cost of waiting is not worthwhile. There are two opportunity costs at play here: first is the opportunity cost of waiting for the investment to realize its value & second is the opportunity cost because the capital could have been re-allocated to another investment which yields better return.
  3. Realize that an investment can be a “Value Trap” – sometimes an undervalued company can stay undervalued for a very long time and still market choose not to adjust its price to reflect its fair value. This is the case of San Teh whereby I initially purchased it knowing that they dished out yummy dividend back in January 2012. The company chose to dish out huge dividend after successfully selling their cement business in China. After distributing the dividend, the share price to reflect this and it went down even lower. The market knows that the company’s other business has been performing poorly and is not enough to replace the profits generated from the divested cement business.
  4. P/B (Price/Book) ratio alone is not enough to justify an investment – This is a continuation of point 3 above. Value investors frequently falls into this value trap – expecting their investment will bear fruit but in the end, the waiting takes too long & in most cases, value may never be unlocked. San Teh’s book value, as of June 2017 financial reporting, stands at S$0.55 – much much higher than the share price. It also carries no debts in their balance sheet. Simply speaking, there is no way the company can go bankrupt. While Casa Holdings’ book value stands at S$0.336 – five times higher than it’s share price. This is a situation of deeply undervalued company. Yet looking deeper into its financial result, the company is operating at a loss and close to half of its assets in balance sheet are tied to development properties in Iskandar Malaysia. The market knows that it will take them years to completely sell these properties. Financial ratios such as ROE (Return on Equity), P/B ratio, leverage ratio only uncover initial piece of the story.
  5. The importance of having a catalyst – how high we value about a company doesn’t matter, what matters is how the market value it. If the market perceive that the company does not have good prospect in the future, we may be stuck for a long time waiting for the stock to realize its value. In the case of Stamford Land, Casa Holdings, and San Teh – all of them lack the right catalyst for the market to realize their hidden value.
  6.  The importance of having a target price – immediately set a target sell price right after or better: before we purchase the investment. Without target price, we would not know when to sell an investment. It is important to know what’s our investment style. In some cases, most investors blindly followed what Warren Buffett does: buy-and-hold forever. Hoping that they could find the goose that lays golden eggs. This may not bode well as his situation is different than most other investors: the holding power & the buying power. Having a target price & selling gradually will help investors to lock in the much needed profits.

After all said and done, winning and losing are normal in investment world. I’ll just have to treat these as paying my overdue tuition fees in order to become a wiser investor.

Review of Current Portfolio – September 2017

The month of September is coming to a close & it’s gonna be a busy period for me again in two weeks time. There are only two changes made in September:

  1. Further averaged down Teva Pharmaceuticals – we are faced with two choices when one of our counters is dropping like flies. Either average down the price or exit position. Why not hold and do nothing? We are either confident with our investment thesis, or not, when purchasing the stock. If we are confident, why choose to do nothing? Indeed it could be a double-edged sword if our investment turns out to be a fraud or has a going-concern or management issues or the business turns out to be unsustainable. Hence, the importance of having portfolio management rules. Becoming overconfident and neglecting all the red-flags would be unwise. One of my guidelines is to set a cap of 25% of portfolio cost in one counter.  In the case of Teva, recently we are seeing flows of positive news with the appointment of new CEO, divestment of Paragard product to CooperSurgical, and FDA acceptance of NDA (New Drug Application). My thesis remains the same on the importance of generics drug & Teva as the world’s largest manufacturer of it.
  2. Reduced position in Stamford Land – sometimes we just have to acknowledge if our investment turns sour and then move on. I initiated my first position on Stamford Land back in early 2014 on the thesis that their properties are undervalued in the balance sheet. The thesis is they would maintain their dividend and capitalize some of their hotel properties. Indeed Stamford Land decided to convert one of their hotels in Sydney into a property development called Macquarie Park Village. However in the process, they’ve also decided to reduce dividend. Most of the times, dividend can provide a comfortable buffer in the event we have to wait for the investment value to be unlocked – at least, this will cover our ‘opportunities cost’ during waiting period. However this could be a case on value trap. I’ve decided to reduce position and realized a 15% loss on it.

20170916 Sep2017 review

Book Review: Why Enough is Never Enough

I read an article in CNBC today saying that most Americans live paycheck to paycheck. And this is not people who’s earning below the poverty threshold. These are people who earns beyond $100,000 per annum. The article says these people are struggling to make ends meet and build emergency fund. I wonder if this dire situation is similar in other countries in South East Asia, like Singapore, Malaysia, or Indonesia. I’ll talk more in details about the article in the next article, but meanwhile let’s discuss about this book

20170626 book review

This book that caught my eyes when I visited Church of St Ignatius in Singapore last year. It came into my attention as I realized many people in Singapore are very much attuned (or concerned) towards their financial situation. Living in an expensive city can be a daunting experience if you don’t have enough money. Paying house mortgage, down payment for the wedding, monthly car installment, kids’ childcare fees are just some of the common headaches. Mind you we are yet to talk about living “atas” as high society where fine dining and cafe hopping are involved. Hence, I have always wondered how much enough is ever enough.

The book discusses how do we make peace with money. – from a Catholic perspective. It doesn’t try to teach us on how to pick the next stock investment, nor teach us ways to save money. Firstly it shares 7 scenarios when a person has not made peace with money:

  1. He/she often suffers from pervasive anxiety about their finances
  2. He/she has a predisposition to compare his/her financial status with others
  3. He/she is unwilling to recognize his/her own good fortune
  4. He/she displays greed
  5. He/she has an inability to conceive of something other than money motivating job performance & life’s decision
  6. He/she has a belief that just for the money, we must do things we are not called to do.
  7. He/she feels a great discomfort when asked for alms.

Then the book gives us the prescription: by being generous towards other, and shares the common excuses that hinders us from generosity: “I don’t make enough to give”, “I already give more than others”, and “why should I give more when others give nothing?”

Ultimately, what I learn the most from the book is that by being grateful, learning to trust God, and being generous (to others in need) help us to overcome our worries about money in a spiritual way (Matthew 6:33). By doing these three things, we become more detached towards material possessions and start to appreciate the good things in this finite human life.

We may not make millions of dollars from our job (yet) or win $759 millions from the lottery, but if we instill these three mindsets and combine it with good money management practices (such as rigorous saving, proper planning, buying insurance for protection, and investing the excess) we will end up not with just enough, but abundant.

Review of Current Portfolio – August 2017

In the past month, I have capitalized on the opportunities to divest counter that has reached its target price as well as to add counter that showed some price weaknesses:

  1. Divestment of Shell – With the recent price run-up of Shell, I’ve taken the opportunity to divest my entire holding at US$57.2 and recognized 14% capital gain. Inclusive all dividend received, it would be slightly above 19% return for a holding period of around 12 months. Not bad, Chris. Not bad.
  2. Average down Teva Pharmaceuticals – the recent price drop was unjustified. On August 3rd, Teva has announced an ugly earnings result for second quarter 2017. It has declared EPS of (US$5.94) due to goodwill write-off of its recent acquisition on Actavis. Indeed the company has overpaid its Actavis acquisition (US$33B cash + 100 millions of Teva shares worth approx. US$6B at that time of acquisition). However, the market seems to have overreacted by judging that the entire Teva company is only worth US$17B. Teva’s share price has dropped over 50% this year alone, reaching 10 year low. The company itself is doing fine. It remains the number one generics drug manufacturer in the world, and its products are always in demand. Since I believe generics drug will be doing just fine, I have decided to capitalize this opportunity to add more positions. Teva is now holding the largest share in my portfolio.
  3. Decrease of warchest – With the recent purchase of Teva, my cash level has now dropped below 10%. Will have to look for more opportunities to increase this to at least above 10%.
  4. Acquisition of M1 share – the market seems to be concerned with the upcoming 4th telco company in Singapore. There’ll be some impacts to the pure local players such as M1 and Starhub. We have decided to nibble a bit of M1.

20170817 Aug2017 review

This is one of the rare months where as an investor, I have to make my stand & decide against what the market says. Not an easy feat, because you are swimming against the tide. Warren Buffett himself once said, “Be greedy when others are fearful, be fearful when others are greedy.” Psychologically, when market feels fearful, we also feel that. It is not an easy feat looking at your portfolio being crushed to the extreme. There are only two choices: either you get out or average down. Staying still doing nothing would not cure the misery.

How to grow our money

Recently one of my friends asked me about my opinion on endowment fund and unit trust as she wanted to invest some of her spare cash. I fully understand her concern. I recall myself doing all sorts of things to grow my money too. Cash in bank generates paltry, if not, negligible return. Some expect the return can be big enough to supplement their main income, or perhaps contribute to their retirement savings. While some others who are savvy enough are able to leverage the concept of passive income & use it to fully pay their annual expenditures – in other words: being financially independent. Ultimately, the main goal here is how to make our money work, as hard, or even better, work harder than us.

At this point, I think it’s crucial to introduce several key concepts:

  1. Time value of money & compound interest – Time is money. Albert Einstein once said that compound interest is the 8th wonder of the world.

    “He who understands it, earns it … he who doesn’t … pays it.”

    In short, interest as a double-edged sword. Most people on the streets like to borrow money from banks to purchase consumption goods, such as the latest IT gadgets or HDTV set. Yet, credit card companies encourage us only to pay the minimum sum monthly instead of fully pay our bill. There’re too many stories on people trapped in debt unable to even settle their interest charges. On the other hands, savvy people would know that every $1 invested with 10% annual return compounded would double our investment in 7.2 years. This leads us to the next concept:

  2. Rule of 72 – the rule simply says that in order to double your money, it would take (72/x) years, where x is the compounded annual rate of return (%). If you manage to find an investment that gives you 6% annual return, it would take 12 years to double your money. Ultimate question is how much is your expected return? Also the key here is where to find such investment vehicles. Most importantly, it has to be a safe vehicle. This leads up to yet the next concept:
  3. Risk and assets volatility – risk is generally proportional to the reward. The higher the risk we’re willing to take, the higher the rewards. That’s why fixed deposit generates higher return than regular savings account. And that’s why unit trust is expected to generate higher return than fixed deposit.
  4. Different types of asset class & their corresponding fees – I believe there is no such thing as free lunch in this world., management fees & transaction costs are the expenses that we need to consider when choosing our investment vehicle. Some unit trusts charges as high as 2% for initial fee and between 0.5% – 2% for annual fees. In addition, usually there will be some costs incurred as well for every buying or selling transaction we make. We just need to ensure that our annual return does not get eaten out by these fees.
  5. Differentiate between investment and insurance – There are some products in the market that claim to give us both insurance protection and good investment return. However, most of the time, the reality doesn’t paint the same picture. We have to know what we want to achieve from the beginning.

At the end of the day, we should not delegate our money management to someone else. Fail to adhere to this and we will learn some expensive lessons guaranteed. It is much better that we learn slowly by accumulating sufficient knowledge & then dipping our feet into the market rather than being too rashly aggressive chasing for the highest return available. There is no one else in the world who cares about our money more than we ourselves.