MM2, and the pains of investing

Was reading through InvestingNote and a particular thread-starter wrote that he lost 57% on MM2. Given that I wrote about mm2 last year, I felt enough for the guy to leave a lengthy comment. Hopefully this would be educational to you

I wrote:

Hi @Therone I am so sorry to hear about the amount of losses you incurred as of now. 57% is no small amount.

Please be patient with my answer as I hope I can be of help in some way. I would ask firstly if the amount of capital invested in MM2 Asia constitute a large part of your total net worth. If it is a small part, perhaps you can wait a while. Otherwise, you have to be honest with yourself and ask if you really did your homework and can endure the pain.

If you have a huge holding and you didn't do your homework, I would advise that you reduce your holdings to a point where you don't lose sleep.Unfortunately the stock market is a very cruel place. Assuming you have done next to no homework other than buying based on "story" and not look at the numbers, you are now essentially forced to re-think about your investment.

When the price does rise, the ignorant ones would think that their investment thesis was correct. They remain... ignorant. Luck does not last forever.

If you want long term success in investing, you have to understand basic accounting and do your own valuation. Basic principles: A good company generate good amount of free cash flow, and require low amount of capital expenditure or funds to reinvest into the business. These type of companies are usually priced at a premium in the market, because by and large, investors are not stupid. In the financial world, they would call it "efficient market." Efficiency, by and large, becomes dislocated due to misunderstanding or actual problems. Find out why MM2's price is dropping. And think whether the market is right.

MM2 is a growth stock and to me, it was a high risk, high return stock. What I didn't like about the company was written in a blog post of mine in Sept 2018. https://laymaninvesting.blogspot.com/2018/09/speculative-profits-is-market-fair.html . I hope it would be of educational use. In short, it wasn't generating cash, and subsidaries are getting IPO-ed. By going through the cashflow statements of these IPO-ed companies would suss out whether the mother was casting out its babies because she was desperate.

TBH, I have no idea how much cashflow would the Cathay acquisition give the company. Simply put: if the company acquired cost you 215m, and it brings you 20m of cash, it is a pretty decent investment. If the net result is just 2m, it is a terrible investment. Think about it this way: 215m into SSB yield you more $. I hope you will evaluate the acquisition of Cathay just like how you would for your future stock picks.

I also like to look at companies' ROIC numbers. To me, if a company inherit a huge amount of debt,but the total return based on equity + interest-bearing debt is maybe 12%, it is great.

Compared to a company that returns 5-6% with very little debt, if they are priced the same (based on long term average cashflow multiples), i prefer to buy the former.

One of the comments below suggest that you wait for the annual results to be released. You probably should. Attend the AGM and look out for the tone of the directors.

Money very hard to earn and I feel for you.

Portfolio Commentary: April 2019

STI (ES3) returns: 3.087-> 3.4150,10.63%
HSI (2800) returns: 25.25-> 29.85, 18.23%
S&P Index returns: 2447.89 -> 2945.83, 20.34%
Current Portfolio return: 30.65%

Portfolio return includes only stocks. With bonds included, the return is about 22%.

Transactions made:
-complete divestment of Innotek, at $0.565 and $0.585
-partial divestment of Xinghua Port Holdings, at $1.62
-small amount of Singapore Savings Bonds.

Innotek is now fairly valued at about $0.60 this week. With a low dividend return in mind, it is fair to divest. To be fair, at the price I got, the dividend rate is 4.46%. I believe the dividend would be raise in the future (better profitability and because management has skin in the game). At about 70% capital return, it is fine to sell, I guess.

Xinghua Port is partially divested for a strange but good reason: madness. The price surged from $0.90 to $2.1 at one point. By the time I managed to access my trading website, it was about 1.6-7. Made a mistake in keying in the order (as I was at work, heh) and sold it at $1.62 instead of $1.72. On hind sight, it was a good choice as the price plunged back to 1.2-3 in short order. Estimated capital return was about 55%, and I sold about 2/3 of the stock I had in XHP.

The daily, technical chart explains how crazy it was.

April was an extraordinary month. Never expected it and probably won't not be repeated.

***

Attended the Or Kim Peow (OKP, SGX:5CF) annual general meeting recently. It was a very small affair with less than 20 investors in attendance. A pretty ballsy investor was asking tough questions and the directors did not respond in an overly-defensive manner. Overall, I did not find anything that I have to be worried about.

***

I was surprised to read that S&P has hit an all time, historic high. With the number of worrying news at bay, it was a climb that eluded me. I remember one of my instructors in the past commented that "there is always something to worry about." A proper value investor should never be bothered by the market and just grind away, looking for deals. Some folks at GMO would not subscribe to that, but I do.

Until then..