Feb 2021 Portfolio Review

Update on 22-Feb-2021

Straits Times Index Fund: +0.43%
Hong Kong Tracker Fund: +11.41%
S&P 500 Index Fund: +4.59%

My Portfolio Returns: +16.41%

Transactions:
-Modest increase in Perfect Shape holdings at the start of this month
-Modest selling in Perfect Shape holdings after it enjoyed a 50% increase in less than two weeks.
-Significant increase of OKP for CPF portfolio
-Complete divestment of Haw Par (29.4% profit)

Comments:
The stock for Perfect Shape went on a tear, shortly after significant insider purchase were observed recently. As I have commented in my previous post, at 3.1x a share, a buyer isn't paying a lot for growth. But that is my opinion.

Perfect Shape is now about 28% of my entire portfolio, and has return over 100% without dividends considered.

OKP would be releasing results this coming Monday (in a matter of two days at the time I wrote this post). I don't expect results to be fantastic, and there shouldn't be anything to worry about as long as its net asset is intact.

Genting Singapore released results recently. Even though earnings are dramatically reduced, it is still cash flow positive. It might sound delightful until the following disclosure:

"During the financial year, the Group fully redeemed its investments in quoted debt securities, which resulted in a decrease in non-current assets. The net proceeds from the redemption have been included in the proceeds of $205.6 million recorded in the Group’s Statement of Cash Flows for the financial year ended 31 December 2020."

Book value has been reduced to 64 from 68 cents. I don't see significant decrease in debt despite the above redemption.

Also noted is that Genting Singapore is still pursuing the IR opportunity in Japan.

"In relation to the Group’s geographical diversification strategy, we are encouraged by the steps taken by the City of Yokohama to launch a formal bidding process for the development of an Integrated Resort (IR) which will transform the City to become a gateway to Japan for inbound visitors and contribute towards Japan’s tourism growth strategy. We remain committed to our vision of creating a world-class IR destination that is uniquely positioned and sustainable, and anchored on strong local partnerships. We will continue to engage the relevant stakeholders in this process."

I had a quick look at the budget announced by our DPM/Finance Minister recently. It seems like the support for wages would be significantly tapered off, even for the worst hit sector: tourism and aviation. This Support will drop from 50% (till Mar 2021) to 30% (Apr-Jun 2021) and then 10% (Jul-Sep 2021). As such, I expect Genting to be close to breakeven or slightly more for 2021.

Given that it will bid for Yokohoma as well as going ahead with the 4.5B expansion in coming years, I am not sure if the book value will hold.

I own only token amount of stock in Genting (for my mum), but should be thinking of liquidating this holding in the coming days.

***

My personal opinion of the market is that it is simply too optimistic now, especially with how many and how high first day IPO performed. There was even a survey on business times, quoting that most investors in America are motivated to take risk with equities. When more and more people are using relative valuation (e.g. coy A in this sector sells for 10x PE, and coy B sells for 5x, so coy B must be cheaper), the worrier I got.

When the crowd swings one way, I am motivated to go the other. Hence, I will pay attention to going-private deals. I have no ideas and plenty of capital to deploy. 

***

Update on 22-Feb: OKP's result appeared to be decent but it was largely bolstered by the Job Support Scheme (COVID-19 stimulus by Singapore government to support wages). Without it, it would be a 4m loss instead. Still, this is enjoyed by the market as a whole and perhaps should not be discounted or pessimistically looked at.

Dividends held steady at 0.7 cents a share, giving it a 3.9% yield based on the last traded price of 0.176.

Divested Haw Par prior to earnings release, as it is about fair value given that UOB had risen by some margin. Results were out just hours ago, it didn't look too great but at least dividend is held. Haw Par is a holding I bought for my dad, and it was based on simple Sum-of-the-Parts valuation.

Jan 2021 Portfolio Review

Hong Kong Tracker Fund: 4.32%
Straits Times Index Fund: 1.62%
SPDR S&P 500 Index: -0.58%
My little portfolio: 1.68%

Transactions:
Increase in Emporer Entertainment Hotel due to lower prices

Comments:
The most talked-about topic in the investosphere is the short squeeze of heavily shorted stocks, particularly Gamestop and AMC. 

Quite often I come across the term “Burn the shortists!” in investing forums, particularly Investing Note. Some of them actually think that stock prices goes down primarily due to short-sellers..I think the anger towards shorting companies are misplaced. Have these people actually pause and consider if the stock they bought were actually overvalued? 

A substantial decrease in stock prices does not always mean that short sellers are responsible. A stock price has to be worth a certain amount, long term. The market could be right or wrong momentarily, but long term, they would always get it right.

Some depicted the situation as sweet justice-- retail guys getting back on institutions—but how can they be so certain that other institutions are not taking opportunity in betting with them as well?

Eventually, there would be casualties on both ends when sanity resumes.

The only detail that piqued me is how certain brokerages could be allowed to suspend trades, allegedly because they have backers with an vested interest in GameStop, possibly in short positions.
The squeeze effect is nothing new. In recent years, Softbank was also accused of having bought tons of call options, artificially bringing up the prices of the many tech stocks late last year. 

For the reddit stock, the effect is stronger because the stock is heavily shorted. Buying of call options would force the brokerages or some authority to purchase stock. A call option gives the buyer the right to buy the underlying, they would realistically need to have the underlying should the option holder wishes to convert. This further limiting supply for these short sellers to cover.

I would guess that this situation should be brought to a stalemate by a dramatic reduction in short interest across the board.

I respect the short sellers-- they usually done tremendous amount of research before hand, and have more than just skin in the game (as some of the bankrupted short seller would attest). They are the most fundamentally sound investors around.

Volatility in the Hang Seng Index

Even though HSI returns a very respectable 4.3% year-to-date, it was as high as 9.5% at the start of this final week. So we were looking at a drop of 5% in as many days...

The charts do not look very great either for the America and Singapore indices. But there were serious amount of volatility, not as much as Hong Kong. Quite a few stocks like IGG and Nexteer were having double digit percentage moves.

However, such volatility does not extend towards my holdings, and as such there were no opportunity.

Interesting Insider Disclosure
The directors of Perfect Shape Medical are very optimistic indeed.

The CFO/Secretary So Hin Lung purchased a total of 140,000 shares, whereas the executive chairman bought 1,644,000. The total transaction value is about 75,000 SGD and 800,000 SGD respectively, which is decent amount of money for a company with 4B HKD market cap (685m SGD).
Personally, I feel that the market price for Perfect Shape is not on the low side, although I would clarify that I am usually overly conservative.

Here are some very simple mathematical figures:

The entire market cap is priced at 3.8B HKD.

There is about 850m in cash, which means you are paying for 3B for the company. There isn't much liabilities in its BS.

Free cash flow has been increasing at an insane CAGR of 16.6% since 2011, net income, 25.58%. as of 2020 first half, it has already earn 341m in cash flow,. Given that sign up during the 11.11 sale was promising ,I think the free cash flow should at least equal 450m of last year's, and that means you are paying for only about 6.6 times for the entire company.

Of course, the price has gone up a good 60% since my last purchase, and it is easy for me to feel bright and cheery. So I would conservatively say that the odds are good that you are not paying a lot for growth here.

Perfect Shape is about 20% of my entire holdings.

See you next month.

#asklbs02: How do you spot when is a good time to buy?

From now until 29-Jan, you could access https://app.sli.do/event/lxmezhxh and ask questions anonymously. 

Question: How do you spot when is a good time to buy?

There are a few schools of thought. 

The CANSLIM camp would feel that, if a stock fits all seven criteria, and if the chart follows one of their many recognized patterns (the most famous of all resembles a cup’s handle), one should buy the stock.

Their idea is that the timing has to be right, and any sell down of 8% means they have to go into cash as they made a mistake. 

The value guys would focus on the price to value gap and ignored the preceding movements. When there is a sufficient discount of price from value, hit the buy button.

The more nuanced parties would argue for a known catalyst before getting involved.

Obviously, I lean towards the value side of things, and would add that the best timing clue offered, legally, is the presence of heavy insider buying. To clarify matters, we are looking at purchase of stock using their own money, not the mandated company buy backs. 

The latter could just be an exercise to purchase enough stock for the treasury, so as to offer to them as stock options to management as incentives. As such, they are less reliable as indicators of value, more probabilistically a sign of whether management pays attention to value.

In other words, there are some merit in what the guys at Spiking are doing when they track insider buys.

I pay a lot of attention to insider buys. If I already have the stock, I usually wait for 10-15% from my last buy price before buying more.

I was extremely fortunate, timing wise, with Cross-Harbour (thanks to a group of friends who are smarter than myself.. it was their idea). I noticed that the owner was buying a huge amount of stock towards the end of 2019, and I bought the stock around August 2020.

Timing is mostly luck.

P.S.: On the less serious side, I do follow a couple of "investors" whom I revered as reverse indicators. Whenever they accumulate a certain stock in my portfolio, I do get very very worried.... and when they start selling, I do have the temptation to buy... haha

#asklbs02: How long do you hold a stock, especially if it didn't move at all (aka value trap)?

From now until 29-Jan, you could access https://app.sli.do/event/lxmezhxh and ask questions anonymously. 

Q:How long do you hold a stock, especially if it didn't move at all (aka value trap)? 

I would disagree that when a stock (price) doesn’t move at all, that doesn’t qualify it as a value trap.

I think it warrants a deeper look into the company's financials and ponder why it doesn’t move.

For e.g., if a toy manufacturer is not doing well, but the other toy companies are doing amazing business (as in P&L wise), perhaps the former is not doing a good job and deserves to be call a value trap.

Company with loads of cash and have no idea how to deploy it for years? Yea, value trap.

What about when the company is not doing very well, but management opt to increase its own salary? Definitely a value trap.

Having said that, I am not that good in investing to avoid them. I have two companies in my portfolio that are not doing so well in terms of prices… and I am inclined to agree with the market that they deserve its current prices. The only saving grace is that the management is not outright incompetent or hostile to shareholders, and they pay a decent amount of dividend.

Could they have do something to increase shareholder value? Definitely… but there is nothing I can do about it.

I am inclined to wait another couple of years and see. I have been holding them for about 2-3 years now, so I guess I would start to think of re-deploying them when the management start misbehaving, or if I find something better to invest and I needed capital. Meanwhile I would just collect dividends and wait it out.

So in short, 3-5 years or when I realize that management is the reason for the value trap.

#asklbs02: What are your thoughts on Bitcoin?

From now until 29-Jan, you could access https://app.sli.do/event/lxmezhxh and ask questions anonymously. 

Question

What are your thoughts on Bitcoin?

Answer:

I don't think I got anything clever to say about Bitcoin (BTC) which people far smarter than me had not.

Simply put I think it is too difficult. 

When you buy a piece of property, you more or less know if you are overpaying based on adjacent properties' sale price, rentals, historic prices, etc.

You know that a particular property price is going to appreciate when this MRT is built, or when it becomes more accessible. Human beings are naturally good at property investing.

But I don't know how that natural ability of logic and reasoning can be extended to something like BTC.

I do have something to contribute to this discussion... and that is my idea of Process and Results. 

I believe that if you follow the proper process, after a reasonable long time, you would invariably get the results you deserve.

I had a friend who knew next to nothing about stocks, but was in a hurry to make money. He simply followed the recommendations made by brokerages, and made a reasonably small fortune. For almost a year, he listened politely to my value investing ideas, but continued betting blindly on brokerages' recommendations. His returns that year was about 20%. Mine? 5%.

What he followed was the wrong process, but it lead him to desirable results. Sometimes we even confuse the result with the process. The sun didn't rise because the rooster crowed.

There is a sad ending to my friend's story, and it has to do with cryptocurrencies. Based on his research, he believed that a certain coin would be widely adopted by banks. He made a small profit at first, but got tempted to buy more.

It ended with an unrealized 90% loss.

(I just check the price and it is still a 90% loss today, I have no idea if he had sold, and I am too afraid to ask)

***

There are too many things in life that cannot be achieved with intelligence and logic. Accept it and move on. Sometimes it is not about doing the right things but avoiding the wrong ones. There is no proper process for BTC.

Stick with the right process. Losing money is fine, but losing the discipline is far more disastrous.

P.S. I have a colleague whose son is a Bitcoin millionaire.

#asklbs02: regarding investment style

From now until 29-Jan, you could access https://app.sli.do/event/lxmezhxh and ask questions anonymously.

Question:

1) How would you classify your investment style? Would you recommend value investing as the base with consideration for growth or the other way around?

2) Do you think investing based on company’s fundamentals are the main way?

Answer:

(1) I am mainly influenced by the Graham-Schloss form of investing, looking at assets first and then earnings later.

I am particularly attracted to companies weighed down with problems that are well protected by its balance sheet, particularly if it comes with a history of sustainable dividend. I don't have special insights to any industry, as such, these companies tend to be "easy bets."

When it comes to earnings, I am also influenced by Paul Sonkin/Tobias Carlisle school of thought-- earnings should be examine from the private owner's perspective. 

So I would personally recommend that one starts off with the balance sheet first and then look at its growth; although I would add (unhappily) that the current market is acutely sensitive and efficient to growth investing. It is going to be tough finding bargains.

To quote someone, "there are too many people out there who have read their Graham-and-Dodd." The market is generally very efficient.

In short, I belong to the school of "I won't lose too much money if I am wrong, but my returns are going to be okay-to-good if I am right."

(2) Personally I would never deviate from my way of investing by value. No single method of investing or trading works incredibly well all the time.

Hence, one should have reasonable expectations. I don't expect to outperform the market by wild margins. I just want to beat it most of the time and then retire after 20 years. 

I am never going to match returns of someone who got it right with wayyyyy-out-of-the-money options.

I like the value way because it suits me like a pair of old jeans. Jeans might not be suitable for every occasion, just like value/fundamental investing isn't going to be vogue most of the time. 

But I think jeans is going to be around for a long time. Value investing will do reasonably well over decades. And because stocks are fractional ownership of businesses, business owners are inclined to act logically and rationally when there are significant value to price gaps.

There is no way in hell Elon Musk would privatize Tesla at current prices. 

But that doesn't mean someone buying Tesla shares today, would lose money tomorrow. And it is very hard to argue with success. You can't convince these people.

So I do understand where the growth investors are coming from. But I stick to my methods. It keeps me sane and sometimes the market can be very cruel.

 

#asklbs02 - Thoughts on Samudera Shipping and Sutl Enterprise? Steep valuations currently?

From now until 29-Jan, you could access https://app.sli.do/event/lxmezhxh and ask questions anonymously. This is one of the questions post.

It is not in my interest to discuss individual companies but I think there is a learning opportunity in discussing Samudera, which I owned for a couple of years. I would refrain from discussing SUTL as I am still vested in the company (I do not think SUTL is very attractively priced atm).

This is a very quick, back of the envelope look which may not appeal to everyone. It is also overly conservative for many people.

(all screen captures are from www.stocks.cafe. It is a wonderful site that I used since I started value investing, and the fees are worth it)

***

Samudera is currently selling at market valuation of about 538m shares multiply by 0.26 SGD = 139m SGD. I going to convert this to USD, because the financials are reported in USD.

Hence, Samudera's market cap is about 104 USD.

Is Samudera attractive from its earnings ability?

over 13 years of cashflow statement, Samudera's total sum of free cash flow is...

-64.3m

That tells you that it is a poor business.

The following details my quirky way of looking at the earnings as a owner, if there is a way to privatize this company (by taking advantage of the stock market's pessimism). I would adjust the market valuation based on its cash net of loans.

 

It has 56.519m cash (USD) and 60.421m trade receivables. Usually I will at least discount 33% off the trade receivables. That sums up to about 100m USD.

Total bank loans are 28.605+7.090= 35.695m.
Its payables, which I will conservatively take at full value, 23.617+22.532= 46.149m

That sums up to about 82m (35.695 + 46.149) USD in "liabilities". When you subtract 100m USD of "cash + receivables", that is about 18m of cash after paying off these quick liabilities.

So to someone who is thinking of delisting this company from the stock market: if it cost about 104m USD (stock market valuation at the moment) to buy over the entire company off the stock market, pay up the entire "debt" with its cash on hand, and still have 18m left in cash. I am actually paying 104-18 = 86m USD for the entire company.

Looking back at the income statement over the last 12 years, Samudera earns about an average of 6.3m USD in profits. Do note that income statements are the least reliable (and yet, ironically, influence stock prices the most). In order words, the numbers is more likely to be worse than better. That means I am paying 86m for 6.3m every year. That is a multiple of 13.5. That is not on the low side.

 

Looking at it assets wise

I tend to be very conservative and be selective in assets I deem as valuable, but would accord liabilities at 100% of its stated value.

The big ticket in asset value is its property, plant and equipment, it has about 115m in USD. At footnotes 12, it stated that it has 28m of freehold land, which is attractive. It has 4m in freehold properties.That makes it 32m. The vessels are stated at 55m, which I have no idea how to value. If we were to halve them, that is about 28m. 

Taking its freehold land and properties (32m), vessels, (28m, which is very unreliably valued, I might add), and cash+receivables (100m), that is about 160m in assets.

There are 93m in total liabilities. 

Net asset is about 160-93 = 67m USD. Compare this to the current market cap of 104 USD, it isn't favourable. Even if we were to value the vessels at 55m, as it was in the books, the net asset is 95m, still lower than the market cap of 104m USD.

(Just to express this value into "per share"...

Since there are about 538m shares, that is about 0.125 USD (67/538) per share of net asset, which is about 0.17 SGD.

I don't think at the current price of 0.26 SGD a share is attractive, assets wise)

Dividend History

Its dividend history is respectable, but I think it would be a mistake to look at dividends here. 

Firstly... it is a cyclical industry and thus unreliable as a dividend payer. Secondly, its cashflow generation is poor, and from the perspective of a business owner, it shouldn't be paying dividends at all!

Summary

Because of its poor cash generation, and that the market is already fairly pricing in its (my opinion) net current assets, it is not attractive at its current price. 

Of course, if the market do sell it at a substantial discount, there is an opportunity. In my opinion, that figure is 0.17 SGD a share.

(the red line marks 0.17 SGD a share, and everything below is a buying opportunity)

For the last 3 years, the biggest margin of safety avail was 0.11 SGD a share, which represent a 36% discount to adjusted asset value. However I feel:

a) On hindsight, this opportunity took place during the pandemic sell down. It would have make more sense to buy companies with decent earning power. 

When you buy and hold a good company, it would reward you with increasing cashflow, increasing asset value which would usually translate to increase stock prices in a sane, rational market. This company did not demonstrate the ability to do either over the decade..

If you had bought Samudera instead, you could have made a substantial profit. But you would have to expend effort and time look for better opportunities. 

b) Its liquidity is low, and as such, you might not be able to buy it easily. Sure, you could buy them in batches, but that would require more effort monitoring the stock market for sellers, and incur higher trading costs.

3-4 years ago, I was holding the share at about 0.18 SGD per share and liquidate at break-even. I thought that it is a cheap company, and dreamt of the potential profits coming my way.

 But I was wrong, and I learned. 

I hope this example of my (very conservative) way of valuing stocks is helpful to you.

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.

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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.