The Perils of Active Investing

In less than 20 days since the last update:

S&P 500 Index Fund: -4.13% -> -7.59%

Hong Kong Tracker Fund: 6.02% -> -2.44%

Straits Times Index Fund: 9.18% -> 4.36%

My portfolio: -1.96%-> -8.39%

The portfolio suffered a heart-wrenching battering in less than 20 days. If I were a professional fund manager, I would no doubt be questioned and face redemptions. However, I face a fate much worse-- I return home at the end of the day, guilt-stricken that perhaps I have placed my parent's fund in jeopardy. 

More so, the self-doubt gets ever louder. I felt more like an imposter each day. The fog of war became unbearable as suspicions if management were not disclosing information. Most of my holdings are downright underpriced, and yet the sell down was relentless. 

Recent days seen some relief for growth and even cryptocurrencies, but, mercy, was not forthcoming on my holdings.

In ascending % of loss in value are:

Capenter Tan and Fu Shou Yuan (10.8% and 3.99% weightage) -15%
I have no idea what to make of this decline, except that FSY is a good business at a fair price. As such, I could accept the market's valuation of such a stock. The market should be worried about price controls by the CCP on living expenses. 

Fu Shou Yuan's board will convene on 18-March and the full year result would be announced.

Market cap: 13.38B HKD
Cash/Eq: 1.3B, and in addition of invested (mainly structural deposits, which capital are NOT guaranteed)  worth 332m. That works out to be about 1.98B HKD

Free Cashflow in the last decade or so
2012: 153m
2013: 85m
2014: 221m
2015: 259m
2016: 405m
2017: 525m
2018: 552m
2019: 615m
2020: 715m
2021-1h: 400m

Let's assume that going forward, this company generates, at a no-growth basis of 600m, that would means a private owner is paying at 18 times free cash flow. This would imply that growth have to continue for the market to price it higher, and that the multiple would be maintain. 

What I mean is that a low-growth company, even with a steady cash flow (e.g. Carpenter Tan), is assigned a very low price multiple. My numbers suggest to me that FSY's ROIC is between 13-16% in recent years. Not a low number, but not a overly promising one. 

So this investment yields about 7% last year. If an investor looks at long term inflation of 3%, a equity risk premium of 4% might not be so tempting. You can replace inflation rate with anything, such as government bonds, and think if investing in this business make sense.

As such, it might not be a great idea to go big on Fu Shou Yuan. As such, I deserve to go 18% down on this company, and perhaps it was great that I didn't put too much capital in it.

Alibaba Group (10% of portfolio) -20.1%

Much have been written about Alibaba. I would not add more.

Central China Management (9.28%) -27.8%

Joel Greenblatt would have been shock that a spin off, with a balance sheet as clean as this, could be sold down so heavily.

It has 2.2B RMB (2.72B HKD) of cash, and 560m of liabilities. This equates to 2B HKD worth of cash.

The market capitalization is a paltry 3.32B HKD. This means a private owner is only paying for 1.32B HKD.

Even at 100m of free cash flow per year, this company is not excessively expensive. The company earns 500-600m RMB (620-742m HKD in the last three years. 

The worries is with the parent, and the earning of this company's earning is still pretty dependent on it (much of it is in Henan). 

I am not too sure what else to add on this.

It is not as if the insiders were not trying. They bought a huge amt of stock, and also did share buy back from company's fund.

Central China Real Estate (3.01% of portfolio) -36%

This would have been more painful if not for the trimming I did some weeks ago. The crushing amount of debt looms large on this company.

Didi Chuxing (1.9% of portfolio) -41%

Unfortunate case of put options been exercise, this is now a sad reminder of my folly, and would probably remain so.

Looking Forward

The portfolio is expected to underperform all indices, especially Hong Kong, and to a lesser degree, Singapore's. There is a lot of value in Hong Kong, and recovery to my holdings will usually means a greater degree, likewise, to the index stocks. Whereas for Singapore, the prices of the banks had already advanced far out of expectation, and that profit margins had to be extraordinary to warrant further increases.

One thing for sure, is that I would not change my investing strategy in order to get a better result.

I would put up an article about Centurion in the next few weeks, following the disappointing amount of dividend.

Feb 2022 Portfolio Updates

S&P 500 Index Fund: -7.61% (Jan)-> -4.13%
Hong Kong Tracker Fund: +3.63% -> 6.02%
Straits Times Index Fund: +2.92% -> 9.18% (amazing +6 in a matter of weeks)

My portfolio: -2.64% -> -1.96%

Notable Transactions:

1. Significant Reduction (>50%) of Central China Real Estate (CCRE) (HKEX:832)

The motivation to reduce positions comes from knowledge that promissory / IOU notes between subsidiaries are not paid timely or not being paid. When asked, IR replied that they do not wish to respond to unverified news. I guess I have to make a judgement call and reduce position. 

Losses incurred is about the region of 20%.

I have not added nor reduced positions in Central China Management (HKEX: 9982) as of now, and there is no plans to do so.

***

Comments

Cutting loss in CCRE is the latest of a series of loss making trades which unfortunately I have to endure since divesting Perfect Shape/Medical.

Significant losses were also incurred earlier on ,selling out Futu Holdings and there is also a huge amount of unrealized losses in Didi Global (50%)

I am extremely humbled and ashamed, and my confidence has taken a backseat these days. It does feels like I have been taking on too many 50-50 bets, whereby the outcome and probability is about the same. 

I would like to apologize if you had taken and followed some of my ideas.

It was heart wrenching to take these losses because the capital is not just my own.

All that is left is a time for self reflection; and unfortunately these mistakes does not provide enlightening lessons-- only reminders. At best, I could only chalk it up to inexperience and a lack of emotional control-- I was committing capital into half-bucket, difficult ideas far too easily. Perhaps I could not contain my contrarian urges to bet. I should have emphasize heavily on risk, and control my capital discipline.

At worst, perhaps I am not suitable to play this game, and that I was just plain lucky for the last two years.

Coupled with the fact that my mum would have to go through more tests, as well as my knees deteriorating significantly these days, my mood is now as gray as the skies. Frankly, I am craving some kind of good news desperately.

***

The top 5 positions of my portfolio is still largely the same. I would try my best to briefly state the risk in these positions

1. OKP (34%)

OKP went nowhere for 5 years.

In terms of valuation, OKP bears the lowest risk of the portfolio. Arbitration between the PIE viaduct designers and OKP will commence in Sep and OKP stated that its outcome will be material. Only God knows whether it will be contribute or negate.

2. Alibaba Group (11.6%)
Besides unforeseeable political risk, there is a good to fair chance of bearable losses due to overvaluation. Current price is not a bargain. I just have far too little ideas, and usually giant cap companies do revert in value pretty quickly. Moderate growth with (low) probability of surprise special situations (IPO/spin off of Ant Group/Cloud) could bring about satisfactory profits.

3. Carpenter Tan (10.9%)

The 1 year chart for Carpenter Tan. It wasn't kind.

I am paying attention to its inventory and I am not very positive of this counter. Market feels likewise, and hence the stock is down moderately since the last time I looked at it. I do not expect much, and at best there will only be a humble little dividend. Which is great, since the climate nowadays demands some level of prudence.

4. Central China Management (10.2%)

Spin offs are usually rewarding, but CCMGT had been punishing. The balance sheet is definitely not as ugly as this chart.

Business is slowing and stemming the decline would be great news. With the declining earnings, I think the price is definitely not overvalued, but market pricing is, as always, not predictable.

5. Centurion (9.7%)

Centurion trades at as high as 70 cents in the past 10 years, 50 in the last 5.

I do not expect any surprises, but I do believe this stock would probably perform better than others in my portfolio.

***

Selling out due to market cycles

Criticism usually involves a very public, successful figure getting stick from low-lifes who may never amount to a fraction of what the former had achieved

Unfortunately this section is going to be representative of such.

Hence, the low-life (me) is going to keep this short, since I am not doing terribly well these days.

There is a lot of talk in town about this extremely prominent Youtube figure call MeetKevin, who had sold out of his 20-million (?) portfolio. His 35 minute video, which I will embed below, explains his rationale.

a) He believes that we are at the top end of the market cycle and he interprets earnings reports as well as Fed actions to signal that it is turning down. His decision is enforced by his experience in real estate.

b) Feels that the market is in for a huge decline, possibly lengthy.

c) Emphasize that he eventually have to hop back onto "Train America" if he sees signs of reversal.

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So for people following MeetKevin in his footsteps, they are attempting to answer the following questions:

(1) When is the storm going to happen (they think it is soon)
(2) How long would it last (even harder to predict) since (c)

I believe most of us observed that the market is getting unstable. Volatility in the popular growth stocks aside, it appears that inflation numbers are gapping up. So I could at least agree that the market seems to be edging towards a cliff.

I am not a sophisticated investor, so I focus on what I can do (bottom up investing), but how many macro investors could really trade in and out of crisis? 

More often than not, the market can be very humbling, and for most of the time, the market (my opinion) is a leading indicator of public opinion. It could be right or wrong, but one thing is for certain, by the time it is obvious, it is usually too late. How many of us thought the end of the world in March 2020, only to see the market gains ATHs shortly?

I can accept that the market could be in pain for the next 4-5 years, but my job is to pick companies and that is how I try to generate my alpha. I try to look for businesses that are cheap, and if they were cheap today, I am not going to forsake them just because an economic storm seems to be brewing. The idea of selling out is more rationale for someone who is trading on indices. 

If a company is trading cheaply today, and it is down 30% in the near future, in the absence of debt and issues that can cause a company to be insolvent, one should bet more. Buying stocks is all about believing in market eventually regaining sanity; not betting on when it will lose or regain sanity(pricing assets too highly or low). 

If there is a need to raise cash, the right course of action is to reduce positions in unfavorable bets in the portfolio, such as (1) companies that are over-leveraged and has unstable cashflows (2) richly valued or even fairly valued (3) thesis has diminishing chance of playing out. I have stocks in my portfolio that could meet these criteria. But to liquidate the entire portfolio.... is suggesting to me that this guy has no interest in business valuation, the total essence of what the stock market is about.

Note: If the smartest value investor (Buffett), that has been fighting this war for decades, is holding significant amount of cash (Berkshire), then yes, the market is definitely not in bargain basement levels. But to sell out everything is a different matter altogether.

I bet Buffett have a list of companies in which he would snap up if there is a 40-60% discount off today's prices.

There was a book call 100 Baggers: The take-away I had is that none of the companies did it in a matter of 4-5 years and certainly most companies need decades, which is exactly the same duration which MeetKevin fears the market pains could last.

We should focus on the easy stuff.