The Perils of Active Investing

In less than 20 days since the last update:

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

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

Straits Times Index Fund: 9.18% -> 4.36%

My portfolio: -1.96%-> -8.39%

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

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

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

In ascending % of loss in value are:

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

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

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

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

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

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

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

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

Alibaba Group (10% of portfolio) -20.1%

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

Central China Management (9.28%) -27.8%

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

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

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

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

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

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

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

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

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

Didi Chuxing (1.9% of portfolio) -41%

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

Looking Forward

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

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

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