Value Investing: In my own words

The following is an extract of an interview which I prepared for. Hence, the divider might not seem to make sense. Bear with me.

The following is an extract of an interview which I prepared for. Hence, the divider might not seem to make sense. Bear with me.

What is “value investing” in your own words? 
Loosely speaking, there are two general fields of value investing. The contemporary side is to look at growing business at a reasonable price. These can be business of any size, as long as they demonstrate real growth. Mathematically, real growth is not just an increase in revenue but also an increase in cashflows. A true synergy should result not just in bottom line improvements, but also profit margins.

 

So this is what Graham call investing by projection. The pro of this approach is that time is usually a friend. As the business compounds its value over time, even if you have been a little off with your valuation. This is the more well known version of value investing today.  
 
But I think this approach is harder because you have to think about moat, disruption, etc. You also have to assume certain numbers about the growth and discount rates. If you ask a fellow investor of the same company, what the price is worth, it can differ a great deal. You can easily overpay for quality. Just look at Alibaba at the moment. 
 
So you usually hold on to these companies as the value compounds. If you pick the right company, sometimes you don’t ever sell them. That is the best thing about GARP-- you buy one decent company and time compound its value wonderfully. Not 100-baggers were a result of a year or two of brilliance.  

 

The other side of the fence is investing by protection. So you look at the business from liquidation value. You look at its assets, you look at its liabilities. Usually the business quality is average because the market is not that stupid. So there might be problems with the company, but there should not be an issue with it as a going concern*. Investing in cheap companies is where I am comfortable in. 

 

GARP is usually a qualitative bet while investing in cheap companies (“by protection”)is usually a quantitative exercise. It is far easier to tell that a company is cheap than if it is good. 

 

With buying cheap companies, you are more likely to sell when the value-price mismatch has narrowed. I prefer to invest by protection. When the price goes down meaningfully, 15% or more, I feel extremely comfortable to invest even more money… The odds are better when the price is going down. I am not an institutional investor so I can wait for a long time for value to revert. I don’t have anyone to answer to. So I could buy the more reprehensible company imaginable. But there is a lot more churn (buying and selling) than GARP.

 

I think value investing has been unfairly bashed and, the process, over simplified. 

Value investing is more nuanced than just looking at price to books and PE ratios. 

 

I pay attention to news about companies or sectors with problems because I have a healthy respect for EMH (efficient market hypothesis)—again I think discounts only comes with uncertainty and problems. But the management should not be the source of the problem.  

When a company becomes that cheap, as Walter Schloss says, many good things can happen. He called it 3 strings to a bow: first… the company could buy back shares; secondly, if the company is that cheap, it can be bought over; and lastly, the problems could be resolved over time and value can revert. 
 
So the perfect opportunity is when a GARP becomes cheap statistically and it is under a problem through no fault of its own (stock market crash, sector issue). I tend to look at company valuation by enterprise value (market cap + debt minus cash) divided by average earnings, not EBIT or worse EBITDA. I am very conservative. 

 

The typical value investor portfolio usually consist of a mix of these along with special situations as a form of protection. Special situations include arbitrages, spin-offs, and restructuring. These special situation stocks depend far more on corporate action and less on market sentiments… they can be a drag during bull markets but are wonderful buoys during bears. On a long-term basis, participating in only special situation stocks would be satisfactory. 

I have a healthy respect for the efficient market hypothesis. Most stocks are fairly priced, or should I say overpriced given how conservative I am, most of the time. The only time where price falls far from value is when there is uncertainty.  
 
The scope of this uncertainty/problem could range from globally or regionally, or an entire sector, or just the company alone. I find that in the same order, the frequency of this kind of opportunity goes from high to low, and the potential returns are from fair to high. 
 
 

Scope of Uncertainty	Frequency/Incidence	Potential Returns
Global/Regional	Low	Fair
Sector	Medium	Medium
Company	High	High

   

Always look at what the insiders are doing. 

 

I think the key to doing fine in investing is to understand the limits of your ability. The stock market is like stepping into an exam hall that provides you thousands of exam questions, and those with the highest marks are not necessary the ones with the hardest question.  
 
I am a simpleton, so I spend time looking for easy problems. I find my patience tested constantly, both by waiting for the simple problem, and also by the value reversion. Quite often I find myself losing discipline. So I understood what Buffett meant in the introduction of the revised edition of "The Intelligent Investor"

"To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework This book precisely and clearly prescribes the proper framework. You must supply the emotional discipline."

What most value investors would neglect to tell you, is the emotional worry between buying and that very moment where the seed sprouts (if it happens). The state of the mind frequently swings between stubbornness and self doubt.

That, is value investing in my own words.

2021 Year End Review (numbers review, projections, bagholders and indexing)

//I am posting this up ahead of time due to family reasons.

//as of 17-Dec, 11pm Singapore Time, I have sold out of Futu Holdings.

2021 has been an incredible year due to 1 and only 1 stock: Perfect Shape Medical. Returns has been monetarily rewarding but intellectually lacking. I am not proud of the idea as much as perhaps Xinghua Port. Realized P&L from Perfect Shape represented 80% of total returns. 

Here are the numbers, screen captured from Stock.cafe. The portfolio currently has a time weighted returns of more than 10% over SPY, and hopefully should remain this way at the end of the year.

Overall XIRR is 29.89% but largely skewed because of the last two years of returns. The market has been very kind to me.

Interestingly, my portfolio has been far more volatile than SPY, but less so that the Hong Kong Tracker Fund. Volatility is not an important measure for value investors.

Max Drawdown is also higher compared to SPY this year, but it was nothing compared to what Hong Kong investors suffered. On the bright side, I think if you could endure draw downs like this, you could endure almost anything.

Dividends returns % in total returns

Dividend returns is only 8% of my total returns this year.

This is significantly lower (~30%) than last year's returns because of the complete divestment of Perfect Shape /Medical. Perfect Shape Medical is currently yielding 0.427 cents of its 5.94 HKD price. The median price of my holdings back then was about 2.5 HKD, which means it is 15-17% yield had I held on. But could I stomach the loss of 50% opportunity to sell had I held on? 

The answer is a strong no. The management seems to cheerlead its stock far too much, and the other reason for selling the stock is potential di-worse-ification-- it could be spreading its resources far too thin across too many fields. I don't regret selling Perfect Shape one bit.

That doesn't mean that the management is wrong-- perhaps they could pull it off and this article would not age well.

My investment strategy is mainly towards capital gains. Dividend is just salary for the waiting.

Looking Forward to 2022

This is the section which is going to get me into trouble.

In terms of expected returns, I would repeat what I said in 2020's year end review: I pretty much doubt I could do better than what I had in 2021. 2020 was a great year, 2021 was incredible. I would be very happy to beat the index by a meaningful margin, and that is all I wish for.

Some bold hopes and projection for 2022:

OKP

I hope that OKP would value revert soon. The company is back to winning contracts and hopefully earnings will return to pre-accident levels. There are a few ways this can happen, besides increase profitability:

a) Increased share buy back

b) Going private: I would be happy with a 40% premium, although that is actually a good deal for whoever is buying over OKP at this price. Given the Or's majority stake, they are the only possibility of this happening.

c) Acquisition of a more "interesting" business (unlikely)

d) Special dividend (also unlikely)

At this moment, I am looking at my portfolio and thinking about my position sizing. It is unlikely I would increase shareholding in OKP. In the event that a market crash of 30% and upwards, I would likely to purchase local bank stocks and index funds as I am generally out of ideas at the moment. 

China Property Sector

I am not optimistic of the Chinese property market as a whole. There will be casualties. This is a classic case of leverage gone wrong. Yes, one could make a case that the Chinese government is responsible for issuing the 3 red lines policy, hence introducing turbulence in this sector. I would argue that leverage has been adopted too freely, and the G was right to bring this to heel. 

My bets on the Chinese property sector is marked by sizeable and meaningful investments (17% of total portfolio) in Central China Real Estate and Central China Management. The latter is very cheap on cashflow: but if the market does suffer a meltdown, the biggest casualty would not just be the highly-leveraged, but the banks. I would expect the G to inject capital, and perhaps nationalize the debt in some manner. 

Perhaps they could force the companies into some kind of convertible debt issue (i.e. the ones some auto had made with the US Govt in 2008-9), or replace the managements. But as of now, I still believe that in the worst case scenario, CCRE is one of the better ones around, and CCMGT is probably more than priced in, in the event of a meltdown. Both have been backed by adequate insider buying, which is comforting to me. These two companies represent the best chance I got when recovery takes place.

Alibaba

I am going to offend a lot of people in this section.

Returns are likely to be lackluster at best. I do not expect permanent loss of capital. As it stands, I am about 14% down. The market is very generous to growth; and punishing when it doesn't. I think Alibaba as of now is fairly priced, but moderate growth should bring about market-equaling returns. There is a strong possibility of the Ant Group IPO, but that is in the mercy of the markets. Surely during a bear year, no one would be in the right mind to IPO? Would they be so kind of distribute Ant Group in the form of a special situation, such as a spin-off? Unlikely. 

So I am going to put my head out there and value it using my layman understanding:

The e-commerce business, in the latest interim, contributes about 12B USD. The cloud computing and entertainment branch, as well as its "innovation" branch are still loss-making. 

They could possibly spin off the cloud computing branch. The cloud computing segment contributes about 5.6B in revenue for the last six months (or 12B USD annualized). It appears to grow 30%, so let say if we give it a 5x-10x Price to Sales ratio value, that is 60B-120B.

33% of Ant Group belongs to Alibaba. If it had gone through its 35B USD IPO then, Alibaba stake would be worth ~11B USD (~452B HKD). Its latest interim earnings was 1.7B USD

To guess-timate very, very conservatively,

Alibaba current market cap is 339B USD

-E-commerce, if it contribute 24B in annualized earnings, on a P/E of 10-15= 240B-360B

(There were whispers that at current valuation, one is only paying for the e-commerce business and everything else is free. That is only the case if e-commerce is valued highly. I am not sure, going forward, if there is sufficient margin of safety)

-Cloud Computing= 60B to 120B, average it and give it a 90B.

-Ant Group IPO= at 1.7B USD interim, is worth about 3B USD x 15 PE= about 45B. If Ali owns 1/3 of it, that is about 15B.

Sum it up, Alibaba is worth between 315B - 465B.

So very conservatively, we are looking at about fair value for Alibaba. I shall discount the other business segment from Alibaba as they are generally loss-making and prospects are dim. 

What can change the narrative? I believe there has to be a reasonably large growth in the e-commerce sector (which is facing competition), a very blissful valuation for Ant's IPO (more likely since the G has a share in it), and AliCloud...well I have no idea how much AliCloud is worth.

Centurion and TTJ (combined weightage of 17.4% as of writing)

I do not expect anything from these. TTJ could possibly raise dividends if business improves, but not much. Centurion has too much debt but would stand to prosper if COVID is a thing of the past. 

The Rubbish: Pershing Square Tontine Holdings, Futu Holdings, and Didi Global

These stocks are call the rubbish because they are generally so badly hated by existing shareholders. Rightfully so, all of them probably saw losses of 50% and more.

PSTH has little to no down side and I am holding on to it using LEAPs. Every other day, I would log in to Reddit r\psth and look at the despair. I am more optimistic than the typical tontard (term used to self-deprecating Tontine + Retard, I suppose?)

Futu Holdings: I believe that unless regulatory backlash is overly shocking (which will result in cash outflows), Futu is currently fairly priced based on very conservative growth projections. This is a high risk, high reward play, and the G could take its time. Betting with options is risky, and the last time I check, they are costly due to its implied volatility. I am holding a small amount of stock and have written put options. Even if the puts do get converted, it does not represent a huge sum of money on my portfolio.

Sold out of Futu. I think valuation would be severely affected (by possible regulation by China authorities) and hence I am sold out.

Didi Global: I have no idea when the G will decide, and how it will be delisted. As such, a small amount of money is riding on the outcome. As mentioned the previous post, I am holding the stock after the option buyer exercised the put option. I am still holding the stock today. I think it is a bit risky to buy options for this. I do not expect a windfall, probably a modest gain at most. The possibility of a loss is still prevalent as I had mention in my previous post.

Unrealized losses: Which stocks am I bagholding?

In terms of percentages, 3 of my holdings contribute to the most amount of unrealized capital losses are:
-Alibaba Group (-14%)
-Carpenter Tan (-13.2%)
-Fu Shou Yuan (-11.54%)

In terms of absolute unrealized loss, in descending order,
-Carpenter Tan
-Alibaba Group
-Central China Real Estate Limited (CCRE)

Alibaba and Fu Shou Yuan are my only growth at an reasonable price (GARP) stocks. Ironically they are beaten down the most. I have no idea why FSY is down (although 11.5% isn't a big deal). I have already said my piece about Alibaba above.

Carpenter Tan is proof that the market is based on growth and nothing but growth. The top line of this little company has experience little to no growth over the years, but it yields an astonishing returns on invested capital. I think Carpenter Tan would have been valued more kindly if it was privately held.

Net income margin is 28, 33 and 36% for the last three years. The company has not been in red since IPO. 

Free cash flow ranged from worst, 60m to best, 120m. The average is about 96m.

The company is selling at only 892m HKD as a whole in the market. Dividends is on the generous side, and even this year (which is definitely its poorest year) is yield just under 5%. The company bears no debt. Cash position is 78m RMB (~95m HKD), 253m RMB (~309m HKD) in financial assets (mainly in low risk, principal guaranteed financial products). That is almost 400m HKD in liquid assets.

You are paying only 500m HKD for a business that pays you 96m of free cash flow every year. That is a cash yield of almost 20%!? The business would have paid for itself in 4 years.

So the market is betting that the fortunes of this company would only go downhill from here.

Investing in Carpenter Tan as a stock market participant has not been fruitful. Capital loss is evenly covered by dividend returns. The stock market is a funny place. But I do wish Carpenter Tan had not been so generous in its dividend earlier on, else the value would had been very evident today.

Carpenter Tan has a weightage of 10% on my portfolio.

Should I have Index?

I started my investing journey at the rip old age of 36. That is a tremendous disadvantage, since I have lost 10 years of precious compounding. Back then my meagre salary would mean that I could only invest perhaps 600$ SGD every month. If had start passive indexing, assuming a 5% CAGR, back then, would I have done far better than my efforts in the last 5-6 years?

It turns out that I done pretty well investing actively... I would have to index 23 years to get returns like this. But friends have remarked that I aged pretty much these years too. So, I would have to be 26+23 = 49 years old to get returns like this from passive indexing if I started at 26 years old. I saved 8 years of life at least.

I still believe that indexing is the way to go. Firstly... the returns is actually better than 5% long term (I am very conservative). Secondly, indexing consumes less of your time, allowing you to focus on your other cash flows-- your career (salary), or business.

I earn way lesser than the median salary, so I have virtually no choice. You wouldn't be able to tell from reading this, but I am just feeling so grateful now, looking back at my results, that I wasn't punish for starting investing so late in my life.

That is all. Hopefully the rest of the year and next would be kind to us. I am only hoping that my parents be well.

December 2021 Update

As usual, returns first:

SPDR Singapore Straits Times Index Fund (ES3): 17.18% (8-Nov) ->  11.78% (6-Dec)
Comment: I have no idea that the STI went down so much.

Hong Kong Tracker Fund (2800): -5.02% -> -7.64%

SPDR S&P 500 ETF (SPY): 29.19% -> 27.05%
This is a much more modest retracement than it felt from reading the news.

My portfolio returns: 37.70% -> 44.09%.

The increase is attributed to Central China Management prices going way back up.

It went as low as 1.04  last month to 1.67 today. Average price is about 1.4. It is now, on value, my 2nd biggest position alone, without considering CCRE into the picture.

Notable Transactions:
1) Purchase of Didi as the put options I wrote expired well in the money. 

The strike price was 7 and it was set to expire last Friday. It was dumb: I was trying to close the position on Thursday and the bid was only a few cents apart. We all knew what happen on Friday: The SEC did Chinese firm investors no favors with the rule change. The stock went down 22% and the put options went up by 1400%.

Since the IPO price is $14, I suspect there are a few possible outcomes:
a) Delisting at a small discount to $14, followed by a re-listing in HKEX.

This is actually the outcome most bullish investors are hoping for. 

a2) Seamless transition to HKEX/China market without much delay

Without a reasonably long pent up period of uncertainty, the sell down will be less severe than (b).

b) Conversion of shares to HKEX.

This is the least favorable outcome. Most investors (if they have not already) would realize the loss for tax reasons. Investors are likely to sell when they list in HKEX due to uncertainty. If Didi decides to go for this route, the time to buy is after they were re-list.

c) Nothing happens

And CCP friendly officials get elected to the board. This is also unfavorable.

2) Initial investment into Futu Holdings, and wrote a contract of only 1 put option for it expiring Dec 31, strike price 40. I expect the probability of this contract to be exercise to be very, very high.

The plan is to invest more when the price drops from 40-> 30.

3) Increase in Alibaba Group due to lower prices. At the moment of writing, Baba in NYSE lost almost 10% last Friday, and this should carry over to Monday's trading in Hong Kong. I am expected to buy more.

They always say: don't catch a falling knife. My left hand brain tells me to use simple TA to find a bottom (none as of now). But the market turns all the time. If one is to wait for clarity, it is often too late... by the time things are clear, the price would already have moved.

At what price would Alibaba be really a steal? I think it is somewhere around the 80 HKD mark. But I am way more conservative than others... and I don't think others would wait.

Notice the language here? I am thinking about how others would behave: This is already trading.

Having said that, while prices are not great at the moment, it should do OK over time. 5 year horizon.

4) Modest increase in CCRE (832) due to lowering prices

Notes:

I have did an interview with Boon Tee last week and the video was released on Saturday.

The main message was being conservative on investing, hence there were no specifics discussed about my portfolio construction, etc. I think it is great since I write better than I talk (Boon Tee did a great job to convert my mumbling into sensible pieces), and it is quite a dry and technical subject.

I will try to write a year-end review in a few weeks time. 

November 2021 Update

I am posting my November updates early admist a string of bad news. The worst of all is the my mum's health screening report has some worrying numbers, and my portfolio experienced a major sell off in a matter of days. I would probably be spending time quietly for the rest of Nov and most of Dec, getting drenched by the sell down in stocks and fate. I guess.

SPDR Singapore Straits Times Index Fund (ES3): 14.55% (as of 20-Oct-2021) -> 17.18% (8-Nov)
Hong Kong Tracker Fund (2800): 0.33% -> -5.02% (wow, this is shocking)
SPDR S&P 500 ETF (SPY): 23.77% -> 29.19% (shocking as well)

My portfolio returns: 42.95% -> 37.70%

In a matter of less than 20 days, my portfolio plunged 5.2%... we get to why in a moment.

Notable transactions:

-Major increase of 16% shareholding in OKP.

-Divestment of Renrui HR Technology. Since the stock price plunge to less than 10 a share, not a single insider has bought stock. The effort to lure staff in financial sector will only not pay off so soon. 

-Reasonable initial investment in Central China Real Estate (CCRE) and increase in Central China Management (CCMGT).

-Bought modest amount of call options at 18.00 strike, for Pershing Square Tontine Holdings, expiring in June 17, 2022, at USD 2.20. That means I am paying 20 cents for each probable SPARC warrant (IF SEC allows), and enjoy a significant upside if they manage to find a deal before June. Nevertheless, it is expected that the situation would be clearer before we reach June.

***

The PSTH situation can be summarized into the following
1. It is a SPAC that was suppose to be shareholder friendly.

2. It is the biggest SPAC at 4 Billion 

3. It was suppose to acquire a good portion of UMG but was striked out by SEC

4. Stock sold down as the UMG deal was consummated by Ackman's PSH instead.

5. UMG soars due to record profits

6. Lawsuit brought on PSTH-- accusation that they are not suppose to use funds for investments on Treasuries.

7. PSTH is now trying to get permission to allow them to distribute warrants for an entity with no shares, which is not allowed.

Given that a SPAC is suppose to get a deal done in maximum 2 years, it is likely that by June 2022, there will be clarity to what PSTH's future holds.

Firstly, Ackman is still brilliant in finding deals.

Secondly, if the lawsuit get settled, it should be favorable to PSTH's current price, which is 1% under NAV of $20.

Thirdly, I think options is a cheap way to gain more of the upside. Suppose I would to buy 100 shares of PSTH, that would be 2000 USD outlay. I could use the same amount of money to control 700 shares.

Given the long expiry nature and a somewhat known date that something would happen then, I think it make sense to take a little risk to buy those options.

***

Portfolio Concentration

At present, my top five holdings are:

OKP (31.88%)

Carpenter Tan (11.25%)

TTJ (9.69%)

Centurion (9.42%)

CCMGT (8.16%) //CCRE would be 4.61%. Since the fate of both companies are irrevocably linked to the real estate trough, it would be right attribute them together as one. Hence, 12.77%

So my portfolio concentration is now 75% for six or five stocks, the way I see it... volatility is going to spike up for sure.

Both CCRE and CCMGT sees major selldown 25% and 11% respectively. The selldown for CC* stocks is brutal. Portfolio is further dragged by sell down in Alibaba.

Pressure on property developers- A quick look at Central China Real Estate (CCRE)

News of pressure on publicly listed property developers are nothing new. Here are a few choice selects of how badly things are, year to date.

But today, I am going to lightly look at Central China RE, ticker 832, which had fallen a fair bit:

Although I would arguably say that it is a bit misleading, since they had distributed 41 cents of dividend, as well as a 1-to-1 spin off of CC Management, a property project management company. 

Both CCRE and CCMGT suffer dramatic amount of decline which I would not elaborate.

The problem with CCRE might not be with the bank debt.

CCRE's debt/leverage instruments are classified into 4 types:

1) Bank Debt

2) "Other" loans

3) Corporate Bonds

4) Senior Notes.

Data is taken off its interim report.

Assuming that this crisis last for another good 2 years without CCP intervention, the company faces an approximate 15.7B in principal to repay. The best case scenario is that the banks would allow this company to refinance its debts. That would mean a relief of 4.5B. There is still about 11B of senior notes to pay.

Even without the best case scenario, it has about 10.8B in cash, and 5.6B in restricted cash deposits. I think it is probable that debt would not be the problem.

The company is opportunistically reducing the amount of senior notes payable by redeeming them at this moment, but looking at the take up rate, it is not high. I believe only widespread contagion could change this.

Ask prices for some of its bonds are really depressed (from Bondsupermart, 6-Nov)

And while not interest-bearing, of particular worry is its contingent liability of 51.8B, which are made towards customers of their properties underdevelopment. Could this sum be adequately covered by its other assets?

There is another 54B in payables, inadequately "covered" by account receivables of 24B.

In summary, given no support from the G, the situation at CCRE looks like this:

This is given that the worst case scenario that all the mortgage loan holders (customers) defaults (under "contingent liabilities"), which is rather unlikely. Mr Wo Po Sum, the overwhelming shareholder of CCRE, might contribute positively to its liquidity. However, his networth at this moment is uncertain.

The current market caps of its listed subsidiaries could be sold at current prices and potentially tide the owner over. Take note that their prices had declined over the months:

Central China Management, 3.78B HKD (68% shareholding of 3.11B RMB)

Central China New Life, 6.22B (69% of 5.11B RMB)

I have not looked at CCNL, but I believe the valuation of CCRE and CCMGT are not demanding, and insiders has bought a respectable amount of shares using their own money in the recent months.

Central China (832) Insider buying records above. That is about 40m of shares bought in just two months, of the 3 billion shares outstanding.

Central China Management (9982) Insider buying records above. Approx 1.7m shares bought in 2 months, total approx 3.3 billion shares outstanding.

As such, I think CCRE has a good chance of emerging from this crisis, especially if the CCP steps in.

Both CCRE and CCMGT represents a total of 15.2% of my portfolio

"I wish I am rich"

Some of my friends wish so almost every single day. They have a lot of burdens-- nursing homes, baby, and even basic fix expenditures like electricity and water.

I am very, very fortunate and earn enough to not worry about this on a day-to-day basis. Being single and alone, that is not unusual. I will most definitely pay the cost towards my elder years... whether it is in the form of emotional currency, I am not sure. Guess I deal with it when it comes.

The last time I wish I was rich, was when I was out with my mum at the shopping mall. That was some years ago, way before COVID affected our lives.

I could remember exactly the spot which it happen.

As my mum was inspecting the (slightly) overpriced clothings at the bazaar, a distracted elderly woman was struggling to communicate with someone on her Whatsapp. I happen to glance in the direction because I saw a photo of a family, gathered around an elderly man, lying on a hospital bed.

The follow up text she wrote was:

"Doctor say that his prognosis is not ideal"

If I have been very very rich, I would immediately dispense a small fortune to her at will, so as to get her to quit her job and spend more time with, probably, her father. That, was the only episode in my life, that I wish I was rich.

My life has so far been blessed, but sooner or later, I would have to deal with death and difficulties within my own household. And by then, I wish I would have the millions to quit my job on the whim. I hope this good fortune of mine last as long as I deserve.

October 2021 Portfolio Update/General Investors Expectations/Capital Allocation

SPDR Singapore Straits Times Index Fund (ES3): 9.83% (Sep 2021) -> 14.55% (as of 20-Oct-2021)
Hong Kong Tracker Fund (2800): -4.37% -> 0.33%
SPDR S&P 500 ETF (SPY): 21.45% -> 23.77%

My portfolio returns: 40.01% -> 42.95%. Helped by an increase in Alibaba and a bit of volatility from OKP's prices. Not expected to be long-lasting.

Transactions:

Sizable increase in Central China Management

Unfortunately, CCMGT suffer decline after decline, and the earnings-based valuation compels me to make additional purchase. Currently, the company should be priced at single-digit multiples on cashflow. At the worst case scenario, current prices could have already represent a decline in earnings in the upcoming years.

Slight increase in Alibaba.

Given that Alibaba was growing at about 20% yearly, a 10% cash yield represent a pretty attractive purchase. Unfortunately, prices went up significantly in recent weeks. I do not think that the price is extremely attractive now, so I went ahead to write a put contract (worth 500 shares of Alibaba traded in HKEX) at 150 HKD, representing a yield of 1% in 10 days (expiring 28-Oct).

Unfortunately, prices do surge and all I had to console myself with is a little premium. I am not ready to over-leverage (I have way more than enough cash to convert option to stock if buyer does exercise).

***

General Investors' Expectations

Recently, I had the good fortune of joining another telegram group, which opportune me to gauge general investors' sentiment going forward, long term.

I choosen the period of 10 years because I believe that is the amount of time necessary for an investor to prove his ability. 10 years is also good enough to remove the element of luck.

Given we had a riproaring 5 years just by buying flavor of the month investments, it was not surprising that most investors believe they could beat the returns from passive investing. Infact, 34/53 or 64% believe they will exceed by more than 10%.

A good 45% of the total believe they can get 10-20% off their investments (which does not necessary only consist of stocks). 

IMO, the smartest investors could only generate 20-30% long term, and it takes considerable effort to be even in the above average camp of 10-20%. 

Only 25% feels that they will fare close to, or lower than passive investing, which ... does not reflect reality. I am afraid this is a sign of markets being frothy for far too long.

***

My way of capital allocation

It has been a while since I write something educational (instead of self-serving stuff like portfolio updates).

Today, I am going to share how I allocate capital to my ideas. It is not going to be some highfalutin means-- I promise it is very practical and understandable.

Assuming I have 300,000 SGD to invest, and my objective is capital appreciation. I need to grow my wealth so that I could live off dividends. The capital allocation for living off dividends is different (more tilted to protecting against downside/ market level risk).

So when trying to increase capital, ideally I want to have 8-13 ideas. I believe that is the maximum amount of "good" ideas one could get at any time from the market. You are expected as an investor to read the financial reports and announcements from all your companies. So if you have like 50-60 companies, I doubt you could keep up!

So how much $ should we allocate, in terms of percentage, to each idea? Some investors are tempted to divide the cake up in equal amounts. If I have 300,000 and there are ten ideas, then I want a max of 30,000 in each idea.

I am not a fan of this idea. Not all ten ideas are going to be equally good. Now, what is "good?"

An idea is great when the risk is the lowest. Now my idea of risk is the difference between perceived value and price. The lower the price is against the value, the lower the risk.

I am a chicken-little, so I do not believe in allocating the full sum at one go. Instead, I will choose to put in a token amount at first (unless there is overwhelming evidence that the value-price gap is huge). So assuming a share is worth, to me, $1 a share. If the market offers me a price of 0.8, that is a good starting point. I would usually put in a small amount and let the market bring the stock to me.

If the market were to price the stock lower, it would make sense to buy somemore. But there are times where price does go up and I have a very small amount of $ in that idea... I have to accept it and move on.

If the price continues to fall precipitously, as it had for OKP, I would have bought in quite a few times. So I have 30% of my net worth in this idea.. and I would evaluate what kind of stock it is. It had the biggest downside cap in its cash to share price. It has also a decent dividend, and I think the problems it had is temporary. But you can easily find ideas like this from hard work when market is calm. So during broad market sell downs, which happen only once in a while, it is not a good idea to buy a lot of OKPs. You can find cheap companies most of the time, but good companies at a bargain is rare as a full moon.

There are other ideas in my portfolio which aren't so great. Some of their value are based on earnings, and I don't like to bet on earnings since they can be cyclical. Take for instance, a growth stock like Alibaba which was selling at a cash yield of 9% (meaning, you paying 1$ for a 0.09 free cash flow return per year). So the idea is only good if there is growth.

***

A pretty lengthy explanation on why I dislike buying stocks on earnings:

Assuming a growth rate of 15% for the next five years. If you had paid $100 for a stock that has a free cash flow of $9 per year in the past, that is not a bad stock to have.

IF things go according as planned, that cash flow of $9 becomes $10.35 (that is 9 + (9*0.15) ). Your purchase of $100 per share is now giving you $10.35 (or 10.35%) of free cash flow. Generally, the market will price the stock upwards (based on inflation and risk-free interest rates, the lower they are, the better it is for stocks). If you were to hold on to this stock for another year, and the free cash flow grows even more (10.35* 1.15= 11.9), which increases your cash yield even more so.

But what happens, if you were like more investors, excited by the incredible potential in many growth stocks, pay something like 40 times price to cashflow? 

That would translate to you paying $10 per share to a stock that has a free cash flow of $0.25 a share. If the FCF growth disappoints, either through poor execution or more commonly, competition, you could suffer permanent losses. Ultimately the majority of the market will not pay 40-50x for a stock which growth has stalled.

In short, too many good things must happen when you pay a significant premium for a good quality stock.

Now if all these sound too conservative, it really is. I do feel that there are few like-minded investors like myself these days. While everyone's attention is on growth, growth and more growth, I stood alone and ask

"How much could I lose?"

-end

September 2021 Portfolio Update

SPDR Singapore Straits Times Index Fund (ES3): 9.83%
Hong Kong Tracker Fund (2800): -4.37%
SPDR S&P 500 ETF (SPY): 21.45%

My portfolio returns: 40.01%

Transactions made:

1) Complete divestment of SUTL.
SUTL was not a smart investment, and neither was it profitable. I decided to sell it just before ex-dividend because liquidity for this stock is on the low side. Perhaps one thing to learn from this is to never purchase a stock from a RTO. As the Hong Kong market is declining, it makes sense to divest.

2) Large increase of Central China Mangement (9982), a spin-off that should reward me a with modest return. Insiders has been loading up at 1.9, 1.8 and recently 1.4x. The property market is under extreme pressure, with Evergrande and its debt woe, CCP's concern on property prices, there isn't much positives about the property market. Adjust earnings is very modest in the low digits, taking into account of its huge cash reserves.

3) Modest investment in Alibaba (9988). Alibaba is mathematically not a bargain, but on the basis of growth, it is cheap. The stock is now worth 3.34T, 3340B HKD. Ant Group would had been worth 300B USD or 2.3T HKD. Hence the fall of Ant Group was damaging to Alibaba's valuation.

Would Ant Group IPO? I believe it would be valued much lower, but the IPO should still go through because the Chinese govt were part of its earlier investors. They have the incentive to patch the financial risk brought about by its purported leverage, as well as to realize their own investments. The Chinese have enough problems on their hands. So we should have some visibility on this matter soon. 

In terms of cash yield, I think I am looking at 8-9% on my investment. So a business yielding 13-15% ROE is fine with me. Some numbers play at the bottom of this post might interest you.

Alibaba was priced at 176 HKD during its IPO.

Portfolio Weightage

Singapore based holdings is at 66% with the rest invested in Hong Kong. OKP remains the biggest position at almost 31.7%. The other top holdings are Carpenter Tan (12.39%), Centurion (10.9%), TTJ (9.78%) and MapleTree NAC and Central China Management (7.79% and 7.3%)

So 72.5% of my investments are in 5 stocks, and almost 80% is in 6. 

***

Some Numbers Play

The bulk of the interest in Hong Kong's decline is attributed to high tech stocks, which a select few are listed below

Numbers were generated from Stocks.cafe and the declines were referenced from Yahoo! Finance.

Notes:

• There is a column call "PE at 25% net margin". 25% is an assumption that if these companies turn profitable/mature (without so much $ pumped into R&D)...a 25% seems like a fine margin to have, not too high or too low. If a company's margin is already respectable (such as Baba's), the actual margin will be used.
• Xiaomi and JD looks ridiculously cheap, but bulk of its profits and cash earnings were only from recent years. So I am not too sure if this can continue.
• Despite experiencing a 77.7% decline, Kuaishou is trading at 5.56 price to sales, which is already on the high side. Hypothetically, a 25% net margin off its revenue would mean the PE is about 26.34-- which is not super high, but you would feel that growth has to be maintained in order for an investor to profit at current prices. The same goes for Netease.
• Ditto for Meituan, although a 44% decline.
• JD Health seems massively overvalued despite its modest CAGR in revenue.
• Alibaba does not have 5 years of financial data available, so the revenue growth is calculated off 4 years. Same goes for Kuaishou.
• Sunny Optical is the only company that did not experience a dramatic decline, but it is also nowhere near cheap. Its financial performance is wedged in between Alibaba's and Tencent's numbers.
• Given the big 2 (Alibaba and Tencent)'s decline, their PE seems most reasonable compared to the rest. Hence, perhaps the crowd is bet on them is well justified.

Personal Thoughts about Diabetes and Carbs.

[This is another non-investing related post]

I lost count of the number of times where my well-meaning advices went to deaf ears. Consider this: none of the advice I dispense, if accepted and practiced, would benefit me in any form.

Again, if you are a normal human, or you are suffering from type 2 and pre-diabetes. Please. Please listen to what I have to say.

As an Asian, the following is commonly utter when someone tells you that you are on a low-carb diet.

"You can't have so many meals without rice. You will die!"

"How would you have energy if you don't have rice (or any other forms of complex carbs, for the matter)"

If you are not suffering from type-1 diabetes, where the pancreas is no longer producing insulin, please give this blog post a serious thought. I am writing this as my mum register another incredible high glucose reading of 20. A normal human should have 4-6. My mum had ignored my advices since she was only type-2 diabetes. Now... it is too late.

Prolonged high glucose levels in your blood causes blindness, heart attack, stroke and kidney failure. Think of your blood as being overly thick, like a sugar syrup. Blood vessels are incredibly narrow in your retina, and your ability to recover from open wounds reduce dramatically when you have diabetes. That give rise to infections, which subsequently can lead to amputations.

High glucose levels in your blood is a result of ineffective or not enough insulin in your blood. Insulin, is a chemical produced by your body to allow glucose to be adsorbed into your muscle cells to produce energy.

So how does glucose get into your blood? Mainly through carbohydrates. That include rice (any kind, brown or white), noodle, bread, potatoes, yam, etc. Anything that you thought of as a rice subsitute during war years, is a carbohydrate.

Would you die if you do not have rice/bread for your meals? No.

Because otherwise, there is no chance the cavemen could have evolved into the modern man today. Through the miracles of agriculture, we are able to support perhaps a larger population than we are supposed to. But the modern man body is not meant to process so many carbs.

You make the conscious choice of ingesting carbs. The carbs go into your body and get process into glucose, which is transported around your body by your blood stream. Insulin helps adsorb the glucose into your cells to produce energy.

So if your glucose level is high, yes, it could be because your insulin is not effective, or not enough. But why blame the worker when the workload could be simply too high? Isn't it easier to stop ingesting so much carbohydrates?

Too much insulin promotes fat storage around your belly. I know this because I suffer from this. I have slim arms but a very large belly.

***

If you are struggling to pay for an expensive lifestyle, it is not your income that is the problem. it is your lifestyle.

The food that you put into your mouth, is the lifestyle. Your source of income, is the insulin. Your financial well being is your body. Why bet on your pancreas to produce those insulin, day in, day out?

***

I have no disillusions that a low-carb diet is definitely more expensive. But there are alternatives. You can have that cai-png without the rice.

You can have that teh-c without the sugar.

You can live without all that carbs.  

***

I have lost about 2kg and felt a little slimmer around the waist since I started on this again a week ago. There are significantly less uric acid crystals deposited on the sole of my feet. I know this because I went for my foot reflexology session yesterday, and I could tell the difference. It was night and day.

The food pyramid is a lie.

Personal thoughts about COVID-19 situation

[This post is not about investment]

COVID-19 and Vaccination

Every other day, I check on the number of COVID-19 cases detected in a few countries
Israel is one, whose number is unpleasantly high. However this is attribute to reluctance to continue masking. Israel is in the fore-front of all COVID-related measures-- from vaccination, opening up and its measures (passports), and now very unfortunately booster shots. 

The lesson to take away from Israel is that masking is not going to go away anytime soon for Singapore. The world should adsorb this free lesson-- vaccination is not going to be enough.

The second country that I pay attention to is Vietnam. It has low vaccination rates, a rather disappointing effort by both the administration and its citizen to control the disease. Yet the people are known to be very resilient, and I do like the country very much. I hope they will emerge from this terrible ordeal soon. It does look like, from the numbers, that things are not turning for the better.

I have just watched a video from Alabama regarding how COVID-19 is wrecking havoc on the healthcare system. Apparently, a doctor claimed that 95% of the patients in hospital are not vaccinated, and among them, the obese are not doing very well. I guess everyone should read beyond the perplexing headlines of increasing Israelis infections-- the prevailing science of masking and vaccination has not been disproved.  

Vaccination has its risks, but there are certainties and uncertainties. It is certain that for now, vaccination does work. It is also certain for now that there is no good way to cure someone of COVID-19. I think the choice is very clear.

When the infections are low, the motivation to get vaccinated is weak. Singapore does not enjoy any inherent advantage against Delta. We will get the same high numbers that every other nation experiences when we open up.

We have to accept that masking and vaccination is here to stay.

***

COVID-19 reveals a particularly tricky part of human nature-- rational self-interest. When it is clear that the objective of wearing a mask is not to protect the wearer, but those around him, the motivation to don one, drops due to discomfort. I am pretty sure that if masking protects the wearer, the attitudes out there will differ.

Academics argued that there are not enough data to support the need for booster shots, and that the economic losses are severe if the world in general does not get vaccinated together soon enough.. Yet wealthy nations decided to go ahead with booster shots, and the impoverished ones around them could not get enough single doses. Vietnam's rate is about 16% iirc. This is another sign of self interest in play.

Despite the clear advantage of democracy and two-tier system (in toppling regimes peacefully), many nations with such systems struggled to move quickly to control the situation, either through inertia or pure incompetency. 

There was a research about how optimists and pessismist cope in concentration camps, and it appear that the latter actually has a higher survival rate than the former. I think it might be wiser to just live day-by-day... and just do our best.

Aug 2021 Portfolio Update

SPDR Singapore Straits Times Index Fund (ES3): 10.75%
Hong Kong Tracker Fund (2800): -3.04%
SPDR S&P 500 ETF (SPY): 21.61% 

My little portfolio: 41.81%

Transactions Made:
-Wrote 43000HKD worth of ICBC put, 4.3 HKD strike, at a premium of 669.99 expiring 30-Aug. That represents a yield of 1.5% in just over one month.

---

This represent my modest foray into the world of put option writing. I still have mixed feelings about selling puts. It has a touch of "I let God decide" moment... if I really feel that a stock is cheap enough, I should outrightly buy the stock and wait. Of course I could buy the call options but how far out (OTM) or in the money (ITM) should I purchase? 

Timing is impossible. I thought OKP would have recovered by now (it is by far my biggest position), but it was year after year of waiting. So I don't think I have much luck with call options.

If the stock do advance, I got nothing about a theoretically nice annualised yield about 12%. But if the banks were really as cheap as it is, the upside is at least 20%, without dividends considered.

So I still do not understand the lure of options. Perhaps it would make sense to add an OTM call option on top?

Not too sure if I should pursuit this.

---

Other transactions include:

- a pretty dumb trade on Douyu, which was already divested at a slight loss.
It seems cheap on valuation but it isn't selling below cash per share. This is one of my moments of ill-discipline and I am not proud of it. Ironically Douyu sounds like trembling fish, which was exactly what I was (trembling) when I saw the decline in book value.

- small increase in OKP for my mum's portfolio
OKP is cheap. No other brilliant ideas, so I will continue to add a little considering the increasing cash hoard.

- purchase of Central China Management (special situation)

CCM saw a 33.94% decline since IPO on 30-May.

Controlling share holder and its CEO had bought shares around the $2 region. 
They have also announced results recently.

So back the envelope calculation looks like this:
it has 2.2B RMB of cash.

It has about 560m of liabilities, so net cash is about 1.6B RMB (est 1.92B HKD). Market capitalization is 6B HKD. So you are paying for about 4.08B HKD for this company.

Its net profit is about 362M RMB for the first six months, which is 434M HKD.

So it looks quite cheap. Spin-off have a natural sell-off effect during its initial periods of trading.

8.6 cents HKD of dividend representing a yield of 4.7% for 1.83 HKD per share as I am writing.

I think this company is quite cheap.

***

That Tencent vs Alibaba debate

I love how many Youtubers are out there advocating the stock and breaking down the business operations of both companies. Quite honestly, I could never have the patience to look at big conglomerates, and they spare me a lot of heart pain.

All I could offer is my opinion after looking at the numbers plug into my humble little excel worksheet.

BABA offered us 3 years of financial data, whereas Tencent had publish over 10 years of annual report data. I am just going to use the last ten years for the latter, and the following do not consider the recently announced results for both.

Firstly, both are tremendous growth companies based on their revenue. BABA's top line grew at 42.05% (Jesus Christ...) and TC at 36.95% (pretty fantastic considering it was over ten years).

Net margins for both companies are sufficient, although BABA experienced a slow decline from 24.5% to 20% for the last three years, and Tencent's 33.16% last year was good.

My favorite metric is looking at the net working capital and it seems like BABA has a growth of 20.3% over Tencent's 14.53%. BABA is also cheaper than Tencent. My calculations tells me that at today's price, Baba cash yield to a business owner is about 6.354%, whereas Tencent is at 4.7%.

Both are wonderful cash conversion companies. Tencent's CCC is a negative -172 days, versus BABA's -91.3 days.

I think the Ant Financial issue has somewhat died off. It could still be another piece of bad news for BABA. Otherwise, I do feel that Alibaba is cheaper. Alibaba has a greater cash to debt ratio for sure.

I love buying companies when they are in trouble, especially when the trouble isn't from management, but politicians. I am just not sure if I am comfortable buying big growth businesses at an OKAY price. Munger seems to believe it, and so do Bill Miller, Monish Prabai and Guy Spizer. But I am not that kind of investor (I just like to buy cheap stuff).

Stay the Course.

 

“your thinking is too linear, there are many ways to make money.”

“only noobs use book value”