2020 Year in Review

Warning: Lengthy post ahead.

Let's get the numbers out of the way. I shall provide screenshots of Stocks.cafe, since they allowed me to compare over the relevant indices.

ES3 = Straits Times Index Fund

SPY = SPDR S&P 500 Index Fund

2800 = Hong Kong Tracker Fund

My little portfolio returns about 20% more, both cumulative and year-to-date, than the toughest and closest rival this year, which is the S&P 500 index fund. No surprise here that over 5 years, this index fund is heads and shoulders above the rest.

Returns are way out of my expectations this year, and it would be tough to repeat this act in the future. In 2018, I was holding about +12% return, but finished 5.55% largely due to losses from PC Partners. It was more so due to luck in 2018 than in 2020 because my portfolio was more diversified.

Dividends

My investing thesis is geared towards capital gains. Dividends are merely payment for my patience. Nevertheless:

• HKEX holdings contributed 63% of total dividends. The rest came from SGX stocks.
• of the 37% that came from SGX, REITs returned only 5.1%. I do not treat REITs as a distinct asset class per se. I have no special attraction or ability towards or with REITs investing.
• None of the HKEX holdings are REITs, though their dividends is certainly REITs-like.
• Dividends was responsible for only 13.5% of my total return.

Capital Gains

Profit (both realized and unrealized; i.e. sold and still holding, respectively) from capital appreciation accounted for 86.5% of my total returns.

Four companies were mainly responsible for these gains. 

1. Cross Harbour Holdings was responsible for 15.3%
2. Xinghua Port Holdings contributed 24.6%
3. Chang Shou Hua represented a measly 9.1%
4. Perfect Shape Medical, which is still in the portfolio, contributed most of the remaining returns.

Unrealized Losses

2 holdings are the main culprits: TTJ (-22%) and OKP (-8%). Both companies are soggy cigar butts and I am hopeful that they contribute positively. TTJ is the most disappointing of the lot, as the purchase started in 2017 December. Position in OKP initiated in July 2018. 

The thesis is different for these 2 companies. TTJ is in a so-so business, and this sector is currently unfavourable. OKP had a major lawsuit which we hopefully would have some visibility soon. Both are impacted by COVID-19, TTJ being more so.

OKP is particularly promising--Its long term track record is not poor. It has about 79m in cash, 26m in borrowings, and about 6m in payables to settle. That means it has about 47m in cash. The company's market capitalisation is only 53.1m. 

So these 2 companies remained the only seeds that has not sprouted. TTJ is a lesson, most of the time you have to pay for those.

Transactions

There are a total of 47 buys and 16 sells this year. I am a net buyer this year, 74% v 26% in number of transaction; in terms of amount of money spent buying stock is 39% more than liquidated.

Buy transactions were 68% buy-32% sold for the previous 2 years.

Concentration & Company types

Top five holdings represented 65.55% of total portfolio. 

Blue-chip companies (companies in the main indices) constituted only 6.2% of total stock portfolio.

33.2% of my invested capital are in companies below 100m in market capitalisation.

In fact, I am a small cap investor, as 84.98% of my money are in companies below 1 billion in market capitalisation.

When I classify them by investment thesis:

43.09% of them are cheap by book value, and have some kind of problem.

32% are cheap by cashflows, and they offer a huge dividend.

4.26% is in risk arbitrage. This is a recent purchase of I.T. ltd, a Hong Kong company going private with a partner call CVC holdings.

After-thoughts

My investing strategy relies on injecting capital in stages, into small, unknown, unpopular or problem-laden companies with manageable debt. The problems, and its resolution, provides the catalyst for value reversion. 

There are obvious disadvantages with this approach.

It is never going to provide one with explosive gains. Returns from value investing is expected to be subdued in good times, but expect to have little downside during famines. 

By investing in small-caps, liquidity is going to be an issue. The spread could be very disadvantageous when it comes to emergency selling.

*************

Out of curiosity, I went through each and every shared portfolio in Stocks.cafe that had a better return than myself this year. Is there someone like myself, doing simple, classical value investing?

There were a total of about 29 investors that had better returns

25 of them invested in tech stocks or exchange-traded funds

2 of them invested in pharma-vaccine stocks.

1 invested in both of the above

and only 1 special guy invested in Boeing. What a brave guy.

Do note that I merely casually clicked and looked-- there might be mechanical mistakes (mis-clicks!) and perhaps these guys sold stuff (I only looked at what is in their portfolio now, not transactions).

Given that an alarming 86% of them have tech in their portfolio, I guess there is not much of my kind out there.

One of my friends had a very unusual slur about the way I invest: "Your thinking is very linear!" He meant that my thinking is simply too simplified, unsophiscated. He seems to suggest that money can be made in many ways.

In view that many growth stocks enjoyed incredible gains, and equally many trumpeting that "value investing is dead!" doctrine, all can be forgiven if one forgot that value investing is never about making gravity-defying gains.

Value investing is about minimising the probability of permanent loss of capital, compounding small but meaningful gains over a long but reasonable future, so as to achieve a comfortable living.

Let that sink in a bit.

Permanent loss of capital commonly comes from overpaying for assets. I can appreciate the idea of buying a quality product at a slight premium. Take for instance: bicycles. There are cheap trashy ones out there who can't outlast a couple years despite one's careful use. There are certainly bicycles who are quality, priced right, and would definitely adequately return, tangibly or intangibly, on the price paid.

But there are bicycles which are priced significantly higher than its marginal gains, or worse, purely for vanity. These are the Teslas and Bitcoins of today.

So when you do value investing, you should not look for explosive gains, but small marginal ones compounded over time.

How much more money could someone made if they have a 2% gain over another, compounded over 2 decades (my idea of long term)?

Lets start with $1000 and work from there. Using screencaps taken off the moneychimp compounded interest calculator:

6 percent is a reasonable return from an index fund, hence 6+2=8.

That is a 45% difference with zero addition every year.

The index fund should and always be the tool you compared against. It is the easiest and cheapest way to gain exposure to stocks. Secondly, it is also the safest; investors avoid mistakes by timing, such as investing on popular sectors at all-time-highs.

*************

Value is a strategy that might pale, as it has, for the last decade. But I am comfortable with it. When market is generally doing very well, I am fine with just a handful percentage lead (this year is really an odd year). When the market is doing poorly, this is where value shines. I am like the slow cyclist that could only outrun a faster cyclist, simply because I do not stop and rest much.

If one could not remain fastidious in her/his investing strategy, she/he would simply float from one popular one to another, and often at the worst timing possible. One thing pretty consistent in the markets is that there is always going to be a popular sector at any one time, but it is never going to stay popular all the time. It was tech this year. The previous year were REITs. You get the idea.

Businesses are what is listed on the exchange. While investors and traders might act in one manner or another from time to time, business owners would only capitalise when it makes sense. Acting like a business owner is never going to go out of fashion.

AMA, #asklbs01, Next Take over target in the sgx?

(I am running a AMA session that you can access via https://app.sli.do/event/jir8c2dq. This will last till 30-Nov)

Question: Next Take over target in the sgx?

(take over, I assume, refers to a party taking over a publicly-listed company in SGX, or what we call going-private transation. It usually involves offering a share price higher than what is last transacted in the market, hence an opportunity for profit)

 

Couple of caveats:

a)     This is not investment advice, and the following is for educational purposes only.

b)    And since this is education, it is going to be a longgggg post.

 

TLDR: There are many reasons why a company privatize. You can statistically find those companies but there are pitfalls. Read on to understand

 

It is anyone’s guess. Even if you have made the right guess on which company to bet on, you might not make money, as it is contingent on the offer price. You could possibly enter the company too early, experienced a general market sell-down and the going-private offer is scarcely any more than your purchase price.

 

Before I go on this subject, companies often get funding from two main sources—debt or equity. Debt would… refer to either bank debt, or bonds. Equity is simply shares, what we call fractional ownership of the company.

 

Getting listed in the stock exchange is one way a company get funds. For some, it is actually the end game. Imagine a tech company that goes through many series of funding, getting seed investments from private equity investors. Eventually, the company might get listed, or what we call an IPO. Usually this IPO price is at a huge premium as compare to what the private equity (PE) investor put in over the years, which enable them to finally realize the profits, i.e. selling the shares in the market.

 

Of course, there are companies like McDonalds, who in the early days secure funding from the stock market in order to grow. But not many companies in SGX are like that. You could tell when they distribute a hefty dividend to the owners, just before they get listed. Sometimes, we call this “cashing out.”

 

So back to funding—which source, debt or equity, should the company owners choose? The cheaper one. They got a nice term for this… “cost of capital.” A sound management should choose a lower cost of capital—that is capitalism.

 

When it is cheaper to borrow money, debt is the better choice. When the owners decided that listing fees, paying dividends, reporting finances to regulators and shareholders is getting too costly, a low interest rate environment is very conducive for de-listing from the exchange.

.

There are 3 main reasons why a company will go private.

 

1)    The share price has become too cheap in the eyes of management.
 

2)    A bigger entity might seek to own tangible or intangible assets in the target, such as a patent, a process, or even establish logistical supply lines. Sometimes these companies (who got took over) aren’t even priced cheaply, and neither are the value of their assets glaringly obvious. It takes an industry insider to spot this.

3)    Oddball reasons, such as:
politics, such as regulation by government (SMRT for example. It wasn’t attractively priced then, and how quickly it happen means only insiders could benefit from the deal); 

fending off hostile take overs, or due to pressure from activist investors;

impending, significant positive changes to the company.
Again, it takes an insider to spot this.

 

Of all these 3 options, a common man on the street could possibly only hit on (1). 

There is a huge problem with finding cheap companies in SGX. By and large, markets are efficient… by that, the market usually price the companies close to fair value.  Any company that is statistically cheap could be under some problems or obstacles 

 

These could include
a) management withholding dividends, or paying a much lower dividend than it is capable of, and henceforth suppressing the stock price indirectly. This can be frustrating, given that most of the smaller companies in Singapore are family-owned, and their majority shareholding prevented anyone from buying up share to wrestle control from them.

Personally, I avoid any companies where management is the root of the problem. It is best to avoid a war.

b) potential law suits

c) unstable political environment

 

You could potentially spend many heart-wrenching years waiting out for a potential take-over, while the share price declines (as the management pays themselves a high salary). And you woke up to news that the company has decided to go private… at a price that is lower than your purchased price.

 

***

Having said that, I would still venture on a short, shortlisting exercise to show you what the cheap companies are:

 

There are a few ways to look for cheap companies

a)     based on earnings

b)    based on assets

The first step is to calculate enterprise value 

For example, if a company has:

 

Number of stocks: 20 million
Stock price: last transacting at $2 a share.

Total market capitalization: $40 million

This company could have cash and debt. So let’s say:
            Amount of cash inside the company: 5 million
            Debt owe to others: 10 million

For someone to take over this company, he/she would have to buy over all the shares
            Market capitalization: $40 million
Pays the debt of 10 million,
            Market Capitalization + Debt: $40 mllion + $10 million = $50 million
Takes the cash inside the company,
            Market Capitalization + Debt – Cash: $50 milllion – 5 million = $45 million.

 

The result is known as enterprise value. This company cost $45 million for someone to take over.

 

Now if the company has been consistently earning $1 million, pre-tax, before paying interest, yearly, this would give it a multiple of 45. In reality, it is hard to find companies that consistently earn a certain sum. This multiple, is what we call enterprise value over earnings before interest and tax (EBIT), or EV/EBIT.

 

A multiple of 45 is not attractive. This means I need 45 years to recoup the cost.

Assuming this company earns $9 million a year, that gives it an EV/EBIT multiple of 5, or five years to recoup cost, which is very attractive.

 

Ideally, I like this figure to be about 5 years or less. 

 

Using a computer screener from Stocks.cafe, this gives me 60 companies.

 

What I would do next is to go through the list and remove the ones with a poor dividend-paying record. I found that this halved the results. Next, I subtract the amount of cash by the amount of debt and compared it to the market capitalization as a percentage. There are a few caveats here: 
1) you have to trust the data. Sometimes, data aggregation services get it wrong. I would follow up with the figures in the annual report. Or, the currency used for financial reporting isn’t the same as the market cap’s.

2) sometimes the cash isn’t real, i.e. there is a fraud going on in the company. 

3) Certain companies require a huge hoard of cash as working capital. For instance, HRNETGroup.

 

Dividend Yield: The last reported dividend yield as provided by Stocks.Cafe

Market Cap: Market Capitalization (number of shares multiply by last known stock price)

Net Cash: Cash subtracted by debt

Net Cash % to Mcap: Net cash expressed as a percentage to market capitalization.

 

There are a few issues with this approach:

a)     Earnings could be inconsistent (volatile, cyclical) and the figure used was the last known earnings.

b)    Most of these companies are micro-cap or small companies. This means they potentially have very low trading volume day to day. This results in a huge spread. 

A scenario: Assuming Company ABC is last transacting at 0.360$. The maximum bid price (price that someone willing to buy) could be $0.32, and the lowest sell price could be $0.39. 

c)     Micro-cap companies are usually family-controlled, which can be difficult to take over (unless they are doing it themselves), and potentially aren’t share-holder friendly (pay little dividends, unwilling to disclose information, etc)

 

Again, this is a quantitative exercise which I enjoyed doing and I hoped you learnt a little from this process. 

November 2020 Portfolio Update

S&P 500 Index Fund 12.29%
Straits Times Index Fund -10.32%
Tracker Fund of Hong Kong -6.5%

My Portfolio +32.41%

Market continues to treat my portfolio pretty kindly. Cummulative time-weighted returns exceeds 100% a few days ago. 

Transactions:

Complete divestment of a small amount of Southwest Airline at a modest gain of 27%.

To be honest, I didn't do a great deal of work behind this idea, so any reward is more than deserved.

Stocks.Cafe gives me the ability to look at my returns versus the 3 ETFs I compared my performance to. Figures as follows:

ES3 = Straits Times Index Fund, SPY = SPDR S&P 500, 2800 = Hong Kong Tracker Fund.

I started my journey late 2015 and started using stocks.cafe in 2016. I believe the only American company that I held was Southwest Airlines and I divested it recently. However, I believe I have the free rein to invest in these 3 markets, and as such comparing my performance to what is available seems.. fair.

As you could see, I underperform badly during my initial years as I am getting my feet wet with the value approach. It was only towards the end of 2015 that I adopt value. It took me many many months before I see a green P/L in my brokerage account. It was red after red for many disappointing months.

The very first profitable stock holding, since I changed my approach, was Sim Lian Holdings. It was an original idea of mine which I found by mechanically screening out companies. I took a weekend course with SGX and during a lunch break with the instructor, I mentioned this stock and I could sense a slight excitement in his voice. I guess the insider (directorship) composition in this company was the key.

Up till 2017, my approach is still with buying cigar butts, buying many of them but only small amounts.

Generally, the market was very merciful, and a dumb quantitative value approach usually give you a small amount of lead over the market, as you could see.

portfolio does ok in terms of drawdown, but who cares?

Things really change starting with 2018. I had the fortune to join a small group of like-minded investors and they freely shared their ideas. It was then I started to concentrate a little more. It also marked the first time I actually broke one of my cardinal rules-- never, ever buy a stock on its way up. The stock was Perfect Shape. I sold it a while later because I spotted some account receivables problems in its books and sold. One can never be too careful with investing. It doesn't help that it got too much attention locally here in Singapore.

I am not bothered with volatility but just in case you are curious...

2019 was a really bad year. The market was too optimistic on REITs, which are largely income-producing and inflation-fighting instruments. The average capital gains on REITS should be at least 20++% at least. It was crazy. The only reason why I did better than the index was because of Innotek and Xinghua Port. The latter had a huge, unexplainable surge intra-day and I sold.

There were a lot of dumb people that year that got very rich because of REITs. I wasn't one of them. All my time investing, I don't recall benefitting from investing in a hot sector-- most of my stocks are unloved, unpopular or, at the very least, unheard of.

I leave the 2020 review for next month's portfolio update; but generally, 2020 was just very kind to me.

Things I Learnt When I started investing

Insider knowledge, or leakage, happens all the time.
The world is indeed an unfair place. Someone who have that special “insight,” has an edge that normal folks like you and I have no access to. Accept it and let it go. These inequality does not have to be right-ed.

Price movement usually happen in sectors, day-to-day.
“Defensive” supermarket stocks during COVID-19? Checked.
Oil crisis when Saudi Arabia decided to flood the world with supply? Checked

These movements demonstrated the clout that institutional investors have. But does it matter? I think not. These actions sometimes provide us with opportunities. During the property crisis, Wheelock did not have the troubles that other property countershave, and it still got sold down.. to me, it was an opportunity...

Value investing is really a test of patience. I have a couple of stocks that I have been holding to close to three years and I am still on a manageable unrealized loss. I have no complaints— sometimes things happen very quickly for me, in a matter of weeks or months. Cross-Harbour (wasn’t my idea), and I got rewarded in a matter of 3-4 weeks. I was expecting to hold it for 3-4 years...

Most people do not believe in value investing, because it is uncomfortable. I tried in vain to convince friends to adopt the value approach ….
This is because value is subjective, but prices shown on your screen isn’t. It is my opinion that you need to enjoy solitude in order to succeed the value way. Most human beings aren’t groomed for that. We all desire that social proof.

There are too many people out there showing off their huge portfolios but most of it was built not from investing returns, but family backgrounds, or from business/salary. 

 
Stock market participants love to look at the price movements and then justify it with a myriad of reasons. They got it backwards.

Rarely is a company cheap without being under some kind of problem(s). Most books does not stress this enough. The book that explained what is uncertainty and what is risk, for me, is Mohnish Prabai’s The Dhando Investor.

Most people are not interested in investing. They are only interested in the money. Treat the market like you are solving a puzzle and perhaps you can handle the emotional side of things easier.

Oct 2020 Portfolio Update

S&P 500 Index Fund 7.7%
Straits Times Index Fund -18.35%
Tracker Fund of Hong Kong -10.23%

My Portfolio +26.26%

The market continues to treat me pretty kindly as we wind down to the final two months of this year.

Notable Transactions:

-Purchase of Emperor Entertainment Hotel due to decreasing prices.

-Funds recycled from 'matured' risk arbitrage position of Xinghua Port Holdings

-Increase in position of OKP Holdings for both dad and my own portfolio

-Substantial increase in position of Perfect Shape Medical for dad and my own portfolio

Some personal opinions:

1) The market continues to appraise medical stocks favorably. All the companies, which enjoyed a meteoric increase in stock price, did report higher revenues (at least) and profits. All figures YTD

Medtecs: 3116% 

Riverstone: 298%

Top Glove: 463%

There are a few possible outcomes for investors:
a) Growth remain on track or stablised, which means that the price will either go sideways or enjoy a more modest climb.

b) Growth, or expectations of growth, disappoints and price falls

The price of a box of mask, during the height of the crisis, cost about 25 to as much as 50. Today, the same mask could be had for $8. One could realistically get only 3 mask for perhaps $10 from some really unscrupulous retails, and one can have a box of 50 for the same price today. 

The prices of these stocks mirrored the prices of mask: when profits escalates, so does competition. There are only 4 ways to increase profits:
1) Acquire companies (inorganic growth)
2) Increase prices/unit
3) Reduce COGS
4) New market/products

As competition increases due to dreamy profits, (1) is likely to be an expensive venture. (2) and (4) are unlikely due to the nature of competition, and it takes seriously capable management to do (3).

I am less than sanguine about the prospects of these stocks.

September 2020 Update

S&P 500 Index Fund 3.27%
Straits Times Index Fund -23.84%
Tracker Fund of Hong Kong -15.36%
My Portfolio +14.19%

Notable Transactions Made:

1) Total Divestment of LHT

I first purchased LHT in May 2019, before selling most of them pre-COVID lockdown in order to secure some gunpowder. My feelings at that point of time is simple: it is always possible to find cheap companies all the time, but it takes a once-in-a-life-time disaster like COVID-19 to bring down the prices for some good companies, particularly Perfect Shape and others.

Nevertheless I would comment that LHT's management are honest folks and tries their best for shareholders.

Part of the reason for divesting LHT is that I have too many companies in my portfolio. Ideally, I want less 15. At the moment, it stands at 16, inclusive of an arbitrage holding in Xinghua Port Holdings.

No matter how big your portfolio is, I have difficulty understanding how you can have 27-30++ holdings, unless you are doing it like Schloss. The Schloss way is to simply buy cheap-by-asset companies and diversify widely. The target is to better the index by small but meaningful percentages yearly. Over long term, these become extremely meaningful. 

 

But is it possible for one to have 27 well thought-out and researched ideas? Does the market seriously throw up such fine opportunities? I have no idea. Combined with serious amount of churning/turnover, it could means huge fees. The amount of fees I incur shocked me yearly, and I dread to be in the 27-30+ camp.

2) Huge increase of Cross-Harbour & Subsequent divestment

Cross-Harbour's selldown reached a 3-year-low this week. No new announcements were made, and the only event was that the stock went ex-dividend.

Again, the rationale for buying this stock is that its liquid assets far outweigh its share price, with little or no value attributed to its current business. Unlike an investment firm like Value Partners (which is selling above its book value), buying into Cross Harbour by asset value is a very comfortable approach. The lower the price goes, the better the odds of price-to-value discrepancy in your favor. Value Partners is after all an investing firm, and the value of the company comes from its earning power and fund returns.

Fortunately for me, in a space of less than 2 months from my initial investment, Cross announced a privatization deal. Given that it has a large amount of holdings in Evergrande stock, I guess it is good to sell out and move on.

Gains are in the region of 40%.

3) Complete Divestment of ChangShouHua

Without having to read through the announcement too thoroughly, it appears that the Bloomberg article is spot on-- the sale of ChangShouHua is to finance payment for its parent's debt. The offer price of 4.19 HKD is not well received by the market in general. Quite honestly, I am fairly disappointed by the price and the market's reaction to reluctance to tighten the spread. IMO, it is better for me to sell out as the odds of a failed deal is higher than normal. 

Sold out at 4.0 HKD recently. 

4) Initial Investment in Emporer Entertainment Hotel, Haw Par and Centurion

A small amount of investment is in EEH for book value reasons. I expect dividends to be paid and this is as much desperate for yield as I can get. This stock has a decent history of dividend payment, and payout % to earnings/cash earnings is not on the high side.

Haw Par is priced cheaply based on book value. Current price reflects a modest discount considering its investment portfolio and the margin of safety is provided by its cash and medical business.

Centurion's debt will come calling in 2 years so I treat this as a LEAP of some sorts. High risk high rewards, so I am not going to put in a huge amount unless I see a "variant perception." Interest Coverage is on the low side, and management's clout will determine if they are able to re-finance. I do believe that if the yield is on the high end, it will get subscribed.

These are cigar butts. One last puff. Don't hold them forever.

5) Huge increase in Perfect Shape Medical

Stock is reasonably cheap on earnings adjusted for cash. It doesn't seem justifiable that the stock should suffer-- reason being that it is a very cash efficient business, and I am not paying for growth.

This stock is currently my biggest holding based on cost.

Investing Dad's Money

Recently, a part of my dad's fixed deposit has matured and it took me a while to convince him to invest in stocks instead. My reasoning is simple: If his long term plan is to re-invest in fixed deposit no matter how the stock market does (which a person like him only heard about the bad news), then a period of 3-5 years means a small amount of it should go to stocks. 

It is to me a pretty decent amount of cash but he is quite worried, constantly reminding me to be careful with it. I could not convince anyone that the approach I used is sound and careful, without forcing the subject to a 1 hour lecture which includes blowing my own trumpet, neither which I am fond of.

So about 50% of the funds went back into fixed deposit, yield a paltry 0.5% for a year. Unfortunately, that is the way risk-free investment goes now. The hunt for yield drives normal folks to take risk. Stocks are inherently risky investment because

- it takes some work to find ideas

- it takes guts to hold on to them during sell-downs

- and you constantly harbor self-doubts during these sell-downs.

For those who are reading, and are frustrated about not having a place to grow your money... may I suggest that you turn your attention off the market itself and concentrate on reading about investing instead. I just bought Value Investing in Asia for fun. It is a truly well-written book.

Softbank's Whale Option issue

The investing community is reeling from the news that Softbank had bought major call options for quite a bit of tech firms. The speculation is that their counter-parties has in turn, bought positions in these tech companies in order to cover their positions, which in turn drives the prices higher. I think this rumour is believable.

Again, I am not impressed by Softbank ever since the days of "blitz-scaling", its boasting of the size of their Vision Fund, and now, the Whale Option saga. Blitz-scaling is truly silly idea-- to scale up the business, no matter how much cash burn it is, in order to monopolize the market, is damn silly. First, you could be underestimating the stamina of your competition. Secondly, the companies that are ordered by Softbank to blitz-scale, couldn't care less if they lose the money (it is another thing if the manager-owners were investing with their own cash). 

If I am given a sum of money to invest, and the only way I am going to earn more is that I spend that money very quickly.... well.... I am sure I would make a lot of stupid decisions very quickly. The Vision Fund is overwhelming in size, but underwhelming in its smarts.

"Disruptive Investing"

Combined with Robinhood traders, the rise in tech stock prices, we are living in a crazy but foolish period of time. We have idiots thinking that companies like Tesla will grow 40% yearly, and no price is too high for it. No PE is too high if their earnings increase-- that is true, but you are depending on too much good things to happen-- and the prices are already reflecting the hope and dreams of far too many people who 'invest' into companies just because they are disruptive.

It is difficult for others to accept my way of thinking: find stocks that are reasonably or attractively priced so that not too many things has to happen for you to make money. I am not looking to make 300-400% in short order-- no amount of intelligence with value investing methodology can give you that. I am aiming to beat the index and profit in a consistent and easy manner.

To play devil's advocate, I do believe in the CANSLIM method. William O'Neil do believe in paying for high PE companies if they are worth it. But I just feel that the CANSLIM way is just too difficult, and I could not convince myself of their belief: that a company is now more attractive because it has become more expensive.

Opinions vs Facts

In your day-to-day life, you're bound to read or hear ideas from others. Quite often, these ideas are presented so strongly and confidently as if they are facts. However, one should think slowly, and critically, if they are actually just strongly-worded opinions.

Consider a little over a year ago, I was involved in a snooker (that is a table-game/sport, for the uninitiated) match with pretty high networth individuals. We were talking about investing in general... and soon we were talking about opportunities.

One of those discussed was First REIT ("First"), which had its stock price fell from 1.4x to 0.9x. This particular individual was quite confident that it was a good idea. My first reaction was that the shareholding changes involving Lippo group/OUE would mean that any future rental arrangement (First is on triple-net lease, and do not have to suffer from currency-risk as all rental is collected in SGD) would tilt towards Lippo's favour. 

His conviction arises that "the price is below book value already, and management would have to acquire income accretive properties for the sake of shareholders."

Let's go through the points very quickly

---My Points---

1. Major shareholding changes in favor of Lippo/OUE - fact.

2. Cash crunch in Lippo group due to problems with overly ambitious development in Indonesia (Meikarta?) - Fact.

3. Rental arrangement that would be less favourable for First, given that Lippo now enjoys a larger shareholding now in the REIT management than before - Opinion (though likely)

--- His Points---

4. Price is below book value- fact. 

5. Management would acquire properties that are accretive- Opinion. 

The key point is #5. There is an obvious conflict of interest between rentee and landlord here.

My view is that when a company is in trouble, the management must not be part of the problem. Management can think of one hundred and one ways to tilt things in their favor.

Today, First's share price is a paltry 0.46 a share. One should be open-minded and evaluate it...It might be an opportunity.

Aug 2020 Portfolio Update

In view of probable higher work commitment in the coming weeks, I decided to update my portfolio review a tad early, 9 days before the end of the month.

S&P 500 Index Fund +5.15%

Straits Times Index Fund -22.16%
Tracker Fund of Hong Kong -9.70%
My Portfolio +7.32%

Transactions made this month:
-Purchase of Cross-Harbour for my mum's portfolio

I understand there is significant earning pressure for this company, but there is little need to worry as the asset value (based on its portfolio and cash net of debt) of this stock should indicate an underpricing of about 30-40%. I plan to increase on weakness. Meanwhile a decent yield of 4% reward one for waiting.

I plan to concentrate heavily on this stock.

-Complete divestment of Colex before XD

Divesting a cigar butt that has rewarded me with a 40% return for a period of 1.5 years. Not a huge holding. This business is cheap on asset value, but I suspect it is used by Bonvest to funds its immediate needs by dividends. It might not be wise to hold a mediocre business such as Colex for long.

I used to joke that Colex often "collapse" due to its price plunges when they lost the bid on the Jurong contract. It was heart-warming to see stocks like these finally rewarding you, often due to outcomes or catalyst you would never expect.

-Light purchase of XHP as a risk arbitrage

Not a huge holding, but the 4% gap would bring some relief in case of market volatility. The key, imo, is not to concentrate on 1 stock for risk arbitrage, but many. I am pretty sure the deal will go through, despite XHP not having the cleanest of balance sheets.

July 2020 Portfolio Update

S&P 500 Index Fund -0.32%
Straits Times Index Fund -15.82%
Tracker Fund of Hong Kong -11.13%
My Portfolio +5.63%

Transactions made this month:
-Complete divestment of remaining shares in Xinghua Port at 2.0 HKD
-Purchase of Comfortdelgro in the CPF account.

------------

Divestment of XHP was taken into consideration that it is currently selling at a high multiple to past earnings. I think it is reasonable to expect that the port business will be resilient but not outstanding enough to warrant a high earnings multiple. The latest result from XHP is out just as I wrote:

Earnings of 7 cents HKD a share, at $2.1 HKD, that is 30 x earnings.
Cash of 161.7m RMB with a debt of 578.8m. Market cap is 1.71B HKD. Translating all to HKD, that is 461.7 HKD of net debt, the enterprise value is 2.171B HKD.

Enterprise Value = Debt - Cash + Market Capitalization

The latest operating cashflow suggest 56m RMB of FCF this half, annualizing bluntly, that is 112m RMB or 123m HKD this year. That is about 17.7 times cash flow, or a cash yield of 5.6%. Not too exciting.

Of course the buyer can be very generous, but I can only deal with that is within reasonable estimates...

Initial Investment in Comfortdelgro. I do not have big mathematical models to tell you why CDG is a sound idea. It is a conglomerate, and earnings are therefore hard to predict. The market pays too much emphasis in the growth of a company. CDG is not a book value play: it is now, imo, selling at a reasonable cash yield of about 8% over a average of the last 10 years or so.

I going to stick my neck out and predict a couple of things:
1) It is likely that the business would not be killed by the likes of Grab.
2) Its dramatic price fall from 1.7x to 1.3x was largely brought about by COVID-19 and it getting dropped from the index, forcing pseudo-funds managers to follow suit.

Looking forward: There is a substantial uptick in ChangShouHua's price in recent weeks. It could possibly mean that the company have found a buyer, or that the market is giving it its due.Regardless, I do not have a huge amount invested in this sum to feel upset if this idea do not work out.

OKP's lawsuits are still on-going. I do not believe the company will be substantially damaged by the outcome due to a couple of reasons, which I am not going to share. I do have a huge amount riding on this idea. Hopefully the dorms will be clear of COVID screening soon and work can resume. It is quite obvious that the grass at my area are not getting cut, which says something.


That is all for now.

June 2020 Portfolio Update

S&P 500 Index Fund -4.52%
Straits Times Index Fund -17.95%
Tracker Fund of Hong Kong -10.96%
My Portfolio +0.81%

Transaction made in June 2020:
For mum's portfolio:
No transaction was made.

For personal portfolio:
Liquidate about 64% of Xinghua Port Holdings
Small purchase of OKP

------------

Earlier this month, rumours abound that the controlling shareholders is looking to sell their stake at about 200m USD.

That worked out, net of debt, to be around 1.1x-1.2x a share. So it was surprising to see the market giving it a sky-high 1.8x valuation just a few days ago, albeit briefly.

Unfortunately, I was not around to see it. Investors are commonly advised not to monitor the market so intimately and closely, but unfortunately this is one of those exceptions. I believe the market was out of wack-- the business, though sound, was not worth the earnings multiple. I have every reason to believe the management is responsible and honest, and the bad news (occupational death of 3 workers a couple of years ago) was the reason why I bet on it.

It wasn't the easiest decision as the balance sheet was not built like a fortress. But I attended the AGM and I believed strongly that my money is in safe hands.

I liquidated my shares at about 1.46-1.49. Optimistically, the take over price should not be anywhere over 1.6x. But that is my opinion.

The purchase of XHP began in 2018 March, and net me 66% in returns. I had the good fortune of buying more stock at 0.73 earlier this year during the COVID-19 selldown. Port business is resilient, having just reported results then. Insider had bought stock at 0.9x, and I trust them.

------------
When it comes to management integrity, Wirecard is right on the other end of the scale.

News this week was that it could not account for over 2B in cash. That is about as much cash in its balance sheet.

The cruel thing is that investors were, just last week, ready to buy that stock at way over 30 PE, given its place in the DAX30 index. When the news broke, the stock was sold down terribly, and traders bought them up. It was (though low probability) possible that someone could have made a quick 60% that day.

Those who depend on the market for guidance would then lost way more. As I write, the market has sold it down 70% from last evening's close. This is incredible.

The ex-management of Wirecard is subsequently arrested.

-------------

There will be no chance in my investment strategy-- look for beaten down stocks which a nice balance sheet. It would be great if they are under a dark cloud of bad news... as long as the management isn't one of them.

A Vulture Looks at the Sembcorp/SembMarine Re-cap deal

Kyith of InvestmentMoat was probably the first prominent blogger to write about the implication of Sembcorp Industries (SCI) and Sembcorp Marine (SMM) deal. I would not repeat his (and many other bloggers' effort here). Kyith did a very good job in his prognosis on how the stock would go. He penned his post a day before trading resume, and the market did respond in line with his numbers.

In the minds of most investors, the jewel is SCI. Having got rid of its loss-making subsidiary, SMM, the earnings would be higher, and therefore deserve a higher stock price based on the same Price-Earnings (PE). Now, PE is subjective to the mercies of the market, but a range between 8-10 would still bring it way above than its pre-announcement of $1.5 a share.

Not only that, SCI's investors would receive 470-ish SMM stock for every 100 SCI stock held. It is clearly a fantastic time to be an SCI investor.

While everyone's attention is on SCI, the vulture (and contrarian) in me is looking at SMM instead. Let me explain why.

Firstly, let's establish that SMM's business is not wonderful. We are not talking about a capex-light-cash-rich company like Perfect Shape. SMM is far from a cheap price-to-book value stock like... ChangShouHua. We have no idea how valuable SMM's assets are, since the profits of SMM is somewhat, in a lagged manner, correlated to oil prices.

SMM's share price is going to be heavily depressed for a few reasons. When the prices are depressed to an unreasonable limit, it might make sense to buy a little. Here is why the prices will decline:

1) Nobody likes right issues to pay for debts. This is not a REIT acquiring a property, where it can be proven mathematically accretive.

2) It is a terrible business

3) Huge dilution

3) SCI's share holders are going to receive 470-ish shares from SCI's management. I believe they would dump the shares. It makes sense. Firstly, nobody likes uncertainty (maybe only value investors). Secondly, the odd number of shares make selling in the future, awkward.

Let's do some guesstimation on the numbers.

SMM shareholders would look at having to cough up $0.20 for every rights they wish to convert. They would receive 5 rights for every stock, which means the dilution is a considerable 1/6.

The existing number of shares is 2090.904569 million shares. Post-event, that would be 12545.427414 million shares.

Looking at the annual reports since 1998, SMM had very good years between 2009 and 2011, where they earned about 700, 860 and 751m in profits. 

Let's not depend on these rosy numbers and be conservative. when the oil prices are in the region of 45-50, SMM is capable of making around 90-120m annually at best. When oil prices were at 70+, it could earn 200m.

I going to make it easy for everyone and value SMM at about 12 PE. If SMM makes 100m a year, 1200m (12 x 100m) spread across 12545.427414m shares is 9.6 cents.

If SMM makes 200m a year, that would be 19.2 cents.

***

As I write (17-June-2020, 1010pm), SMM is selling at 52.5 cents a share. 

In other words, $1.525 would give you six shares of SMM post-rights conversion.

The price of 1 SMM stock, in the eyes of the market, is 25.4 cents a share.

***

Let's assume that it takes 5 years for sentiments to pick up, If you expect a 20% return annualized, then you will be hoping that SMM, post rights, is priced at 12 cents a share. That is if you are expecting a 200m profit/year. It feels optimistic today, but maybe not when times are good.

IMO, the market is not stupid all the time, but just for brief durations. I expect the opportunity to come from possibly SCI shareholders dumping the free shares, another oil crisis, or something else. 

I do not believe too much in forecasting a trigger, but to pay attention to value/price gap. As of now, SMM is not a buy in my list based on my amateurish assumptions/projections, merely on the price itself.

In Defence of Buffett

In recent weeks, Warren Buffett had been criticised for not utilising Berkshire's cash hoard during the March correction, and hence missing out on its rebound. In fact, Ken Fisher (son of Phil Fisher, whom wrote the seminal "Common Stocks and Uncommon Profit." Ironically it was one of Buffett's favourite books) attributed it to Buffett's old age.  Selling all of the airlines holdings was puzzling, especially as he had made purchases on them just weeks prior.

It is true that Berkshire's performance in the last ten years were inferior to the index, and that Buffett, while managing Berkshire, has access to many deals that are not available to retail investors. However, in my humble opinion, Buffett had taught me things which I felt is still commendable and relevant. 

IMO, retail investors have a lot to learn from what Buffett did as an individual investor, and while managing the Buffett Partnership (BP).

1) Concentration, Conviction and Courage
As a young investor working/learning from Benjamin Graham, Buffett studied GEICO, and made a trip to the company to learn more about the business. Convinced that GEICO is a sound idea, he put 75% of his net worth into it. I am not sure if there are many people who can do this.

In buying GEICO, Warren Buffett shown that he is his own man, despite being told repeatedly by his idol and mentor, that "GEICO prices was too high."  

How many of you would have bought a stock at $19, and bought more at $8? This is what he did for Philadelphia Reading & Coal. When the price of a stock goes down after your first purchase, the discrepancy of value and price is now even wider, and your odds and risk is lower. This is what I learnt, but still have difficulty applying, because though the idea is simple, it takes a lot of courage.

2) Thinking Deeply
The Rockwood deal, as described in Alice Schroder's Snowball, was the the perfect example of how one should go beyond the obvious.

Rockwood was a company who had a large inventory of cocoa beans. At that time, the prices of cocoa beans shot up, but selling the beans would incur a huge amount of tax for the company. As such, they sought Jay Pritzker for advice, who spotted a loophole. Rockwood could avoid the tax by liquidating its butter-cocoa business and liquidating the cocoa beans.

Soon after, Jay Pritzker made an offer to all Rockwood shareholders. For surrendering every single share of Rockwood ($34 then), they would receive  $36 worth of cocoa beans. Hence the $2 arbitrage is riskless, and most money managers would settle for the 5.9% return (2/34). But Buffett had other ideas:

3) Avoid Questions that are "Too Hard"

"I don't look to jump over 7-foot bars: I look around for 1-foot bars that I can step over."

Be it managing BP or Berkshire, Buffett avoid purchasing shares of business which he has little to no understanding. Word was that he avoided buying a certain bank just because he could not understand a small portion of its annual report. And banks are supposed to be something within his circle of competence... having such discipline is hard to come by.

With regards to his inaction during the selldown in March, it mirrored his decision not to buy any internet companies during the dot.com boom.

Even in Singapore, there will always be a company in focus, which might be in positive or negative light. It seems like one has to have some opinion of how that company will perform. 

Is SingTel going to recover to its earning ability of 2000s? I don't know.

Is SingTel able to earn sufficiently more than its dividend? I could tell the odds were not great. 

So I avoided the stock.

I have learnt not to be a smart-ass by just saying "I don't know." I will just wait for a simpler puzzle to solve-- and the stock market is not like a school examination. You don't get more marks for solving the harder questions.

4) Alignment with his clients' interest

In setting up the BP, his remuneration was as follows:

How many funds nowadays would do something like that? And how many open-ended funds would liquidate when they were still showing profits? Buffett did that in the 1969 when he felt that the market was overheated, and the opportunity of losing money for his clients is high.

5) Early Years Returns

Recent biases, such as Berkshire's underperformance to the index, is grave injustice to Buffett's ability, particularly when you study his BP's returns. Many of his ideas in BP, while in his own words, are not scalable for Berkshire, is still very much useful for the little guys like myself.

Any portfolio, especially a concentrated one, is capable of making 40+% and upwards of returns in a handful of years, but to do that over a decade, added to the pressures of managing other people's money, is the true hallmark of an investing genius. 

If you are keen to learn about his partnership years, Ground Rules is an excellent resource.

Conclusion

I don't really care if people thinks that value investing is dead-- in fact, it is to my advantage that I have it the room all to myself.

Value investing is simply sensible investing. There are multiple ways to determine the worth of a company, and it is not as simple as just looking at mathematical ratios like price-to-book. Having a sensible framework and an intellectual approach to investing, with a successful, consistent long term track record, is my objective.

I seriously doubt Buffett cares too much about what was said about him recently. A value investor that often seeks validation from others, is probably a poor investor.

May 2020 Portfolio Update

S&P 500 Index Fund -5.18%
Straits Times Index Fund -20.62%
Tracker Fund of Hong Kong -18.21%
My Portfolio -2.31%

Transaction made in May 2020:
For mum's portfolio:
Small initialization in OCBC
Increases in Perfect Shape

For personal portfolio:
Increases in Perfect Shape
Slight increase in Mapletree North Asia Trust

Huge improvement over last month was attributed largely to the price recovery of Xinghua Port and TTJ holdings, and marginal increase of Perfect Shape. Paper losses in Southwest Airline pare in recent days, as domestic travel seems to pick up again. Unfortunately I did not average down earlier: this shows you my conviction in this idea is piecemeal and insignificant.

The SIA Situation

I am sure most local investors are aware of the details of this SIA "rescue package" by now.

There are many local writers and sites whom had put in the hard work to explain to (pitiful) SIA shareholders, of their options, and the various deadline, prices, etc. This post will not attempt to do the same, especially when I am not capable of it.

My objective is to point out whether the rights/MCB will likely make you money, and make some (very) bold predictions on the coming future.

TL:DR:  I think there are better opportunities out there, unless these MCBs are available at very depressed prices.

I am still unclear about the following:

• Will the MCB trade in the market? My assumption is no, which is regretful because I do not think they are attractive at par.
• Should the MCBs NOT get redeemed, what exactly is the conversion rate? Market prices at year 10, or 373 maximum of shares?

It is anyone's guess how much the company is worth in 10 years!


Why I am not looking at the Rights Issue?
Rights issues are basically discounted stock for existing share holders. IMO, one should only subscribe when the company, during "normal times," is profitable, and capable. Based on the numbers since 2007, SIA is an extremely poor business.

In other words, it only makes sense to subscribe to rights if the problem is going to be temporary. Looking at the numbers over a decade, I do feel that the business is poor, or worse, the management is prone to taking huge risk.

So if you were to ask me to buy more stock, abeit discounted, of a company that is not efficient, the odds are poor that it will be profitable, long term (4-years is my perspective of long term).

Pre-crisis, SIA has about 1199.851millions of shares. It was trading at $9, which means its market cap is about 10.8B.

Based on an Enterprise Value approach, it has about

• 3 billion worth of liquid cash/investment,
• 9billion dollars of debt. 
• That translate to a total Enterprise Value of 16.8 billion dollars (market cap + debt - cash). 

It has to be earning 1.1B of Free Cash Flow yearly (15x is fair value imo), which it has never been able to do so consistently. The average over 12 years is a negative value.

I believe SIA to be a lost cause as a shareholder, no matter how much it was priced in the past.

Is present debt the worry for SIA?



I am going to use simple estimates, since nobody knows for sure.


SIA has about 3 billion worth of cash + investments. SIA has about 800m of "Associated Companies" on book. A quick look at SIAEC and SATS reveals that they are not in bargain price category, so it is unlikely to be worth anything more.

It has about 9B worth of debt. Which.... sounds worrying. But it isn't.

This is what I saw in 2018-9's annual report.

If we assume this dark period to last for 3 years (conservatively speaking, since everyone expect a vaccine in 2021), under date repayable,
-500m, to be repaid on Jul 2020
-200m, to be repaid on Apr 2021
-600m, to be repaid on Oct 2023
That is a total of 1.3B in three years time.

What happens if we stretch the timeline to 4 years?
-750m Mar 2024
-300m Apr 2024.
That is cumulative total of 2.15B in four years time.

What about operating lease commitments? The total, after 5 years, is 2.3B.

Inclusive of debt, that total up to about 4.5B. Add in interest payment of about 200m a year, that is 5.3B.

The problem isn't the debt

In short, looking at the total sum needed for 5 years of lease obilgation, 5 years of interest payment, and 4 years of debt maturing, the debt is the least of their problems. This rescue package totaled 8.8B. Furthermore, the company indicated that about 4B in secured financing is available by pledging their unencumbered aircraft (See below screen capture).

IMO, the only easy money-making opportunity was the publicly traded perpetual bonds, and that opportunity had passed.

The bear in the room is the yearly expenditure
SIA has an analyst media presentation , on page 9 whereby the capex is dissected.
The big numbers are coming from fuel hedges, staff cost, and depreciation and lease charges for aircraft.


More worrisome is the fleet renewal on page 18, where it should cost SIA about 5B yearly for the next 5 years.
In their presentation slides for raising rights and MCB, they claim to put aside 3.3B in capex, however, I have no idea how many years of capex is this sum for. I going to assume this will last 1 year at most.

I going to guess that the follow will happen
a) Dividends is going to be withheld for a handful of years. This would save them about 350million yearly.
b) They will issue additional MCBs, in view of the capex requirements and planes on back order. I think it is unlikely for them to issue 6.2B immediately, but the likelihood is it should be utilize within 2-3 years.
c) Increased secured financing, or sales and leaseback of any airplanes available-- but who is going to buy? As mentioned by management, this will net them 4B.
d) Restructuring for staff. I pray for them.
e) The 2nd tranche of MCB might not happen if the current ones are not well-received.

There is a slight chance that SIA might divest part of their associated companies holdings, albeit unlikely.


Conclusion
From the looks of things, it is likely that SIA will be solvent for 3-4 years down the road, with visibility of the future within a year. This is the uncertainty. The capex is the issue


It will benefit the company and MCB holders that the interest rate to remain low for the next 3-4 years.It is common sense that risk-free interest always affect prices, but another 10 years of low interest environment? I don't know how likely is that. But should bank interest rate be substantially higher, it will be logical to utilize cheaper capital.

To make things clear, what I am saying is, given limited cash, one would redeem the more expensive debt. If borrowing from the bank is cheaper (i.e. higher SIBOR), of course they are going to redeem the MCB. Else, it would cheaper to just let the MCB lapsed into equity.

It does not make sense for Temasek/SIA to redeem the MCB just to score political points. A CAGR of 6% for 10 years doesn't make sense, especially when the end-game is share dilution involving a poor business

I will be keeping my eyes peel on the amount of rights and MCBs that Temasek have to back-stop. I suspect SIA would likely get privatized under a stable political climate.

As of now, the lazy-man thinking is that, with Temasek, the MCB will surely be redeemed. But...

I think there are better opportunities out there, unless these MCBs are available at very depressed prices.