This lengthy and final post of 2018 consist of the following sections:
a)
A summary of my returns versus the indices
b)
A review of my investing strategy and what can be
improved on
c)
Observation of the market
d)
A short summary of the “bad news” this year and my
opinions on it.
Looking Back at the Numbers
Vanguard S&P 500 ETF
Start of Year: 247.09
Today: 227.76
Dividends: 8.062
Returns: (227.76+8.062)/247.09 =
-4.56%
SPDR STI Index Fund
Start of Year: 3.48
Today: 3.1
Dividends: 0.113
Returns: (3.1+0.113)/3.48 =
-7.67%
Tracker Fund of HK
Start of Year: 30.05
Today: 25.65
Dividends: 0.95
Total return: (25.65+0.95)/30.05 = -
11.48%
Personal:
4.15%
Compared YOY, dividend payments
increased slightly due to increased capital injection. Yield has increased
slightly, but at this stage, dividend investing is not my main concern.
I glad to have 4.15%; it feels a tad
disappointing to have lost a 20+% lead over the indices to 11%-15%. Looking
forward, if I could seriously have a 10% lead over the indices, I probably make
so much money that I wouldn’t care. But there is no way to tell.
Investing Strategy
My approach is to look for easy
deals, i.e. no brainers. A simple idea takes no more than a paragraph or two to
describe.
***
A word about “easy.” What exactly is
easy? Let me illustrate:
Imagine a hypothetical company that
makes toilet brushes. Revenue and bottom line has been stalling or suffering
slight dips for the past four years. Net margins has never dip below 30% for
the last 9 years. Every year, its net operating cashflow has been over 100m, and capital
expenditure has been only 3 to 5 million for the last ten years.
Insiders has been buying stock. But
the market, in all its collective wisdom values it at 7.7 price to earnings
(PE). Market capitalization stands at 1.14B.
Given that it has a cash hoard of
over 271m and no debts, the company is actually selling for 869m. That means the company is priced at less than
9 times free cash flow.
A casual market observer will point
out that we are in volatile times. Tariffs are imposed between two of the
world’s superpowers. Nobody is certain what would happen in the near future.
But this company does not derive a sizeable revenue overseas.
The overseas opportunities for this
company looks uncertain, but the risk in terms of valuation is
low.
Would you be buying more stock if
the market decides to slash its asking price by 20%? I certainly will!
***
The best companies to buy are
companies with problems, but possessed a wonderful track record, with decent
management and dividends to boot.
The former boost your chances of recovery,
the latter pays you for waiting. The lovely thing about problems is that usually
companies will overcome it, and an investor might be able to assess the
probability of that success with some experience. With problems come
uncertainty and risk. I cannot account for uncertainty, but accounting for
risk, as defined by difference in value versus market pricing, is my job.
Since market is usually efficient, good
deals are usually scarce. I aim to avoid over diversification; having more than
8 or 9 stocks is a crowd.
What I could improved on, was the
amount of transactions made. Transaction cost is reduced from 0.65% to 0.55%
this year, but the number of transactions is 59 vs 54 and 58 the previous two
years. I hope to do better than this next year. The interesting figures are how
many buys vs sells executed in each of those years.
Year
|
Buys
|
Sells
|
Market
Returns*
|
2018
|
39
|
20
|
-7.14%
|
2017
|
31
|
23
|
21.11%
|
2016
|
44
|
14
|
5.03%
|
* SPDR Straits Times ETF (es3)
figures from Stocks.Cafe.
In terms of absolute dollars, I was
a net buyer in 2018 and 2016, and a net seller in 2017. On hindsight, maybe it
is a good thing since the indices are returning negative this year, where one
should be a buyer?
The other lacking effort on my part this year
is the absence of quality special situations investing this year. The Religare
Health Trust (RHT) sale to Fortis wasn’t very well researched, and even with
the information I knew that time, the deal felt like a “50-50,” where the odds
were simply not great. I was lucky to exit the position with small profits.
TBH, I have never seen a deal with so many twist and turns like RHT. It takes a
lot of courage to hold on.
A lack of discipline was also
invested in other “50-50” deals which was subsequently sold at a
small loss/profits. This is disappointing as the lack of discipline will only
result in a huge losses in the long run. Lesson learnt—only initiate a position
when I am willing to put in 10% or more of my net worth into it.
Observations about the market
The number of going-private deals
declined since the start of this year. I believe that a rising number of
going-private deals indicate a cheap market. I will be keenly reading the news
on any trends of such. The dearth of IPOs is another murky indicator too,
although the quality of IPOs coming to SGX is usually poor..
The idea of buying the dips was popular
earlier this year… but all it took was December to vanquish it. Quick rebounds
returns simply halted.
Just for the sake of entertainment,
I reviewed the chart of 2018, Vanguard S&P 500 ETF, and counted the amount
of dips and peaks in which an incredible trader could participate in.
An impossible 51% gain awaits any
trader who, unrealistically I must add, is able to participate in every dips
and recovery. Such a miraculous operation is quite impossible, since it requires
god-like timing. The above trades did not include the deadly December
correction.
What happens if this trader refuse
to stop and carried on till December?
He would have exited 33.9% richer have he sold on Christmas Eve, and 41.8% if
sold just 3 trading days later. Huge difference.
Trading, such an exciting game.
These small, single-digit gains were no results of intelligence but out
of bravado. How can such a method be reliably used? Nobody has an idea what
tomorrow brings. The only endearing fact, which decades of financial academia
has proved, is that equities will return more than bonds in the long run. The
long run is 10-20 years and not 10-20 days periods that buying on the dip
entails.
The market is a tough, mean bastard and there must be a source which participants obtain their mental fortitude from.
Buying the Bad News
There were plenty this year. Some
that I could recall:
- Comfortdelgro “recovering” after the Grab/Uber deal and its
decline after the arrival of Go-Jek
- SingTel and its troubles in Indonesia and India
- Kimly-Asian Story-Pokka deal which got the latter’s CEO
suspended and Kimly directors’ passports impounded.
- Lippo Group-Meikarta senior executives arrest and the
subsequent sell-down of all its listed subsidiaries before and after the news
- Litigation in Top Glove following an acquisition
- Malaysia “Freak” Election results
- The loss of a major customer for Serial Systems (almost a
50% sell down)
- The Datapulse Tech fiasco
Personally, I love bad news. But I
have my own opinions on this.
I think one should avoid buying the
“bad news” on two situations.
1) When the
integrity of the owner/managements is suspect. Who is
responsible for producing the financial statements that we as investors rely
on? There are hundred and one ways for management to profit, but only one way
for small retail investors like us.
2) Avoid
companies who can’t compete with the low-cost competitor. Nobody could
beat Nebraska Furniture Mall with a ferocious Mrs. B. As long as the low-cost
competitor is profitable, this is going to be a long term problem. Likewise on a long-term basis, there can be no way a rationale consumer will choose
something that cost more.
Graham has a point when big enterprises
hit a bad patch, the odds of them overcoming it is good due to the resources
(but human and capital) they have. However, I do feel that we had a huge bull
run—most equities are priced on the high side. As such, these troubled,
unpopular companies are unlikely to be priced at a bargain. There is no substitution
for valuation.
Do not expect the market to be kind-- only wish that it will become sane in the long run. I wish everyone good health.
