March Update: PC Partner Plunges; Reflection on Investing

March Portfolio Updates
STI (ES3) returns: 3.087-> 3.331, 7.9%
HSI (2800) returns: 25.25-> 30.1, 19.2%
S&P Index returns: 2447.89 -> 2899.45, 18.4%
Current Portfolio return: 16.41%

The reason why the portfolio returns has "become" better (compared to earlier posts this year) is merely because it is telling a lie: I have removed my SSB holdings from the portfolio to look at how well I am doing in the equities side. HSI and S&P remains very difficult to beat. I don't believe I can beat it this year unless there is a surprise.

Recent purchase: SUTL, first tranche. Stock is on a downtrend and balance sheet makes adjusted earnings very attractive as a private owner. Is it cheap? Yes, but dirt cheap? Not really. There are still possible downsides, but when it goes lower, I will not hesitate to add.

***
(The following was written some time back and I hesitate to publish it for certain reasons. 
Please read it with that in mind.)

Just last month, I wrote about divesting PC Partners. They released results last Friday, and I wasn't aware of it (I don't track stocks that closely, much less those that I no longer hold).

And so I was pretty shocked that it fell 30% today at close, largely due to the abscence of a dividend, as well as pretty shocking numbers... inventory within the balance sheet did not reduce, and increased debt and provision means the equity had become smaller. I felt quite sick to the stomach because one of my mates have it.

I take time to pause and reflect on events like these.

What exactly is investing?

Is it the buying of quality stocks at fair prices (or even better, cheap prices)
Or purchasing dirt cheap, unpopular, troubled companies at fire sale prices, preferably way lesser than its adjusted net current assets?
Or concentrating on special situations, such as spin-offs, restructuring, arbitraging?

Maybe it is a bit of everything. Investing is all about capitalizing on the discrepancy of price and value. Price changes, and so does value. Buying a quality company is very much like cycling with the wind behind your back. But such opportunities seldom come by.

The most difficult thing about investing is that one is never certain that he is
a) right, and
b) the question of when the market rewards him. The only exception I can think of is special situation investing.

The easiest thing to do is to look at a company and say it is cheap. I pretty sure OKP is pretty cheap. But when will things work out? I won't pretend to be a genius here. Nobody knows. Maybe something disastrous can happen and my investment will not work out. But I think my odds are good. That is all it is to investing I feel...what are the odds?

Speaking of (a) right price and (b) time element, consider the case of Cowell. The stock was unpopular at the start of the year, trading at 0.91. It has adjusted current assets of at least 1.2 imo. Yet the news was bad: the main customer, Apple, was not doing so well. Cowell had also report a loss for the first half of its financial year. Yet, it can endure 4 years of cash burn in its books. A decent investor can look at a discrepancy of maybe 10% and probably not act. But we are looking at a discrepancy of probably 33%.

Even if one opt to take profit earlier, a 20-25% profit isn't too shabby. Achieving (a) is easy enough. (b) makes Cowell a great investment.

It is a typical example of bad prospects in earnings, but cheap according to assets. The stock market always love a good earnings story. Betting on earnings, and winning the bet, rewards the investor very directly. But it is a hard game to play.

So a typical value investor will look at its balance sheet and think: cool, it has about 50% of upside on adjusted current assets alone. Maybe I buy some. Hence, the investor fulfills (a), right price, but will have no idea when (b) will turn out.

As luck has it, it is trading at 1.41 today. 55% returns in 3 months. What a terrific investment. But...

Let's be honest here. This isn't something that one can foresee with intellect. The best one could do is to determine the gap between value and price and bet on it. The wider the gap, the better. The investment has to be safe-- in terms of the business as a going concern and the downside of the price. The amount of cash-burn per year shouldn't be too frightening that it will deplete the company within a couple of years. The debt and interest payment shouldn't be crushing.

The time value of money is something most investors are familiar with. The time return of investment is very equally relatable yet it would be hypocritical to assume one can foresee with intellect. Buying and selling with 10% gains and pretending to be a value investor is disdainful.

So how should one approach investing? My personal take is to go for the easy ones. But make sure the gap between value and price is large. It makes the "time return of investment" easier.

Let me shamelessly quote an example from my own portfolio.

About two years ago, I invested a small sum in Innotek. Today the total returns stands at 60%. It was a simple book value play, yet I felt the insider's decision to acquire huge amount of stock, and its well-fortified balance sheet makes the investment pretty low risk. So I added a bit more one year later.

So two years of investment, 30% a year, pretty decent. Is it a result of my intelligence? Not really. But I thought the odds are good.

***
Buying a company with a good earnings story, and hoping that it continues to do so, takes courage. Such an act usually borders on naivety.

Buying a company with problems, but accompanied with a strong balance sheet, takes patience.

I think it is easier to have patience.