From 10,000 to 100,000, An article by Geoff Gannon

This was an article by Geoff Gannon which I love, and return to read from time to time.

I decided to make a copy on my blog, so that I could find them easily, instead of digging it out from Google searches.

Do you know which specific investments that Buffett made in his early career gave him his biggest returns and generated his initial wealth?

What did he see in these companies that led him to invest in them?

- Ryan

If you read Alice Schroeder's "The Snowball" you can easily find the investments that generated Warren Buffett 's initial wealth.

Here, I'll talk about just the first $100,000 Warren Buffett made investing in stocks.

We'll start after Warren Buffett first read “The Intelligent Investor” but before he started taking Ben Graham's class at Columbia. Buffett already owned Marshall Wells before he took Ben Graham's class. He still owned the stock when he went asked David Dodd (co-author of "Security Analysis") if he could skip Dodd's class and go to Marshall Wells's annual meeting. This is where Buffett first met Walter Schloss.

Let's take a look at Marshall Wells when Buffett owned the stock.

Marshall Wells

· Biggest hardware wholesaler in America

· $200 stock price

· $62 earnings per share

So, the stock was selling for a little over 3 times earnings. The earnings yield - "E" divided by "P" - was about 30%. 

This brings me to the first point I need to make about Warren Buffett 's early investing career. Warren Buffett worshipped Ben Graham. But there's this idea that Warren Buffett started out as a Ben Graham type investor. That's false. Buffett bought some Ben Graham type stocks - like net-nets. Graham had a big influence on which stocks Buffett picked. But Warren Buffett never invested the way Ben Graham did.

More on that later.

For now, the big difference we need to discuss between early Warren Buffett and Ben Graham is that Warren Buffett is, was, and always will be a return on investment investor. He's not a value investor in the sense that he sees some static value and buys at a 50% discount to that. 

Buffett is obsessed with the idea of compounding. 

When Warren Buffett started taking Ben Graham's class there was already a big difference between Graham and Buffett in that Graham was thinking about earning a good return on his investment capital, protecting the safety of his principal, and beating the market over time. Warren Buffett was thinking about compounding wealth. He was interested in getting rich. 

There's a huge difference there. Ben Graham - and later Walter Schloss - made a habit of returning a lot of their partnership's gains. So, if you had $100 invested in Graham-Newman and they earned 15% on your money - the default idea was not necessarily to take that $115 and try to turn it into $132.25 next year. The first idea in Graham's head was: "I can earn 15% on $100 safely". So, he was concerned with how much capital the partnership could operate with and still beat the market while taking less risk. 

Graham was never concerned with compounding the partnership's wealth over time. 

This is a huge difference from Warren Buffett . When Buffett ran a partnership, he took $1 and turned it into something like $27. That was always his goal. To grow wealth. Not just earn a decent return safely. 

This is something Buffett wanted to do even before he knew anything about value investing. Buffett's obsession with compounding wealth over time predates his conversion to value investing. And it was never something he had to "learn" after his time with Ben Graham. He was always obsessed with return on investment as being the key to compounding. That doesn’t mean he was obsessed with the company’s return on its own capital. But, from the earliest days, he thought of stocks in terms of the return they generated for him – not in terms of the discount to some fixed intrinsic value. 

This caused Warren Buffett to invest very differently from Ben Graham - even while he was working for Graham.

It's interesting to note that Buffett managed to invest very differently from Ben Graham even while he bought almost the same exact kinds of stocks Ben Graham bought. In fact, sometimes he literally bought the same stocks Graham bought. But Buffett always got much better results.

Why?

Because he focused. Warren Buffett told Charlie Rose that "focus" was the key to his success. He's repeated over and over again that he doesn't necessarily have more good ideas than other investors - he just has fewer bad ideas. Buffett focuses on his very best ideas and puts as much money as possible into those ideas.

If it sounds like I’m exaggerating when I say "as much money as possible" - check out the next stock:

GEICO

Buffett found out that Ben Graham was the Chairman of GEICO. Graham-Newman bought a huge block of GEICO stock in the past. They got the stock at a Ben Graham type price. But GEICO turned out to actually be a wonderful growth stock. Investors who kept their shares of GEICO when Graham-Newman distributed them made a lot of money over time.

GEICO's headquarters were in Washington. So, one Saturday, Buffett took a train from New York (where he was going to school) down to Washington. You've probably heard this story before. Buffett knocked on the door. The only person there was Lorimer Davidson. Davidson later became CEO of GEICO. He put together the Graham-Newman deal. 

Anyway, he knew a lot about GEICO. There was no better person for Buffett to meet. So, Buffett started asking him questions. And he kept answering them. And this went on for hours. Davidson explained to Buffett that GEICO was the low-cost operator in the car insurance business because they did not use agents. Buffett was sold on GEICO’s future prospects. Here is Buffett’s response as described in The Snowball:

“That Monday, less than 48 hours after he arrived back in New York, Warren dumped stocks worth three quarters of his net worth and used the cash to buy 350 shares of GEICO…GEICO was trading at $42 per share, a multiple of about 8 times its recent earnings per share…(Buffett) thought the stock would be worth between $80 and $90 per share (within 5 years).”

A few points here. One, we can do some math and see that Buffett believed he was going to make more than 13% a year in GEICO. The low end value estimate ($80) and the longest time Buffett expected the stock to take to reach that value (5 years) would have resulted in about a 14% compound annual growth rate.

It’s likely that Buffett believed he would make at least 15% a year for as long as he held GEICO. Because he meant it would be worth $80 to $90 a share within 5 years. Not that it would actually take a full five years and that $80 to $90 was a perfectly accurate estimate. That’s not what he meant. What he meant is that he thought he was buying something that would most likely return at least 15% a year.

GEICO was not a Ben Graham stock at the time. It was an insurer selling for 8 times earnings. In 1951, an insurer selling for 8 times earnings was probably considered cheap (if it had good growth prospects). But it was not that close to Ben Graham territory. And insurers do sometimes trade for 8 times earnings. Maybe not an insurer with GEICO’s future. But that’s not the way Graham thought about companies.

The issue here is that Buffett believed GEICO was a growth company. He believed its earnings per share would keep rising every 5 years or so. Because he thought they would take share from their higher cost competitors. He thought they had a better model. They didn’t use agents.

Ben Graham never approved of Warren Buffett putting 75% of his net worth into GEICO. That’s something Graham would never do with any stock. And GEICO wasn’t even a liquidation value bargain anymore. It was just a moderately cheap insurance company with a long, wonderful road ahead of it.

Here’s Warren Buffett from The Snowball:

“Ben would always tell me GEICO was too high. By his standards, it wasn’t the right kind of stock to buy. Still, by the end of 1951, I had three-quarters of my net worth or close to it invested in GEICO.”

Buffett worshipped Graham. But it didn’t matter. He went ahead and broke two of Graham’s rules:

1. GEICO wasn’t selling for a Ben Graham price

2. Ben Graham would never put 75% of his portfolio into one stock

Why did Buffett do this?

Because Buffett wanted to get rich. He didn’t want to fill his portfolio with 1 great idea (GEICO) and 4 good ideas and then only have 20% of his money in GEICO.

If GEICO rose 50% next year when Buffett had 75% of his portfolio in GEICO he would grow his capital 37.5% just from GEICO’s contribution. If he spread his portfolio evenly over 5 stocks, then a 50% rise in GEICO’s price next year would only increase his capital by 10%.

Buffett wasn’t interested in compounding his money at 10%. He was interested in compounding his money at 30% or 40%. He wasn’t going to buy something in a way that each idea would contribute that little.

From the very beginning of his career, Buffett always felt safer in his best idea (that would compound his money the fastest) rather than spread out over half a dozen slightly lesser ideas.

He would repeat this GEICO pattern over and over again. While Buffett rarely put 75% of his money in one idea – he did try to buy as many shares as possible of his best idea at several points in his first few years investing.

He also borrowed money. Buffett had too many ideas and too little capital. So, he actually got his Dad to cosign a loan for him so he could put more money into his best ideas.

These are things Ben Graham would not have done. Now, Graham did use margin early in his career – everyone did back then. And Graham would borrow against arbitrage positions in the fund. But that’s not what we’re talking about here. Buffett took out a loan from a bank so he could add to the total investment capital he had. 

Why did he do this?

If he had a high degree of conviction in ideas he felt were certain to earn at least 15% a year and might earn something crazy like 50% a year (simply because the stock price rose to meet intrinsic value quickly rather than slowly) then why not borrow money?

If you can get at least a 15% return on your assets, it makes sense to add to those assets by borrowing from a bank at much less than 15%.

If you borrow moderately. From the way the loan is described in The Snowball it was a little hard for me to figure out how big the loan was in relation to Buffett’s portfolio when he took the loan. It was clearly a small amount shortly thereafter – but that’s because Buffett’s capital kept growing really, really fast. 

Greif Brothers Cooperage

We know Buffett owned this stock in 1951. It was a barrel maker. And a net-net.

For those of you wondering if Greif Brothers Cooperage has any relation to Greif (GEF) – yes. It has every relation. It’s the same exact company. And it’s still in pretty much the same business. They used to just make barrels. Now they make all kinds of different drums, containers, etc. That’s not a very big change for a company to make over 60 years or so.

Philadelphia Reading & Coal

This was Warren Buffett ’s biggest position at one point. It was a very cheap company. It actually dropped from $19 a share (when he bought it) to $8 a share. And he bought more after the 50% drop. Philadelphia Reading & Coal went on to be bought by Graham-Newman as a control position. This was a lesson in capital allocation for Warren Buffett. 

If you don’t understand why Buffett started to build an investment company on the ashes of a textile mill, you should learn more about Philadelphia Reading & Coal. Because Buffett was at Graham-Newman when they were using the capital in this business to diversify into an investment company of sorts.

Philadelphia Reading & Coal bought Union Underwear Company which sold underwear under the “Fruit of the Loom” name. And then they also bought the Acme Boot Manufacturing Company. The company also stopped paying a dividend. For 4 and a half years, Philadelphia & Reading (they dropped “coal” from the name) didn’t pay any dividends. But they didn’t pour more money into the lousy coal business either. Instead, as they slipped into losses for 1954 and 1955, they actually went ahead and spent money on buying new businesses. This would be a lesson for Buffett.

It also raises the issue of management and control of capital allocation. As we’ll see, many of Warren Buffett ’s early investments actually had a strong management aspect to them. Especially where Buffett thought capital was going to be used wisely (or returned to him).

In fact, you could say that in Warren Buffett’s mind management “quality” is synonymous with smart capital allocation. He’s not looking for an operational genius. He’s looking for someone with his kinds of ideas when it comes to return on capital. That’s what he wants in a CEO. Someone who thinks like an investor.

Cleveland Worsted Mills

This one was not a smashing success. Buffett “called it Cleveland’s Worst Mill after they cut of paying the dividend.” It was a net-net with a high dividend yield. The yield didn’t last.

Western Insurance

Buffett sold his GEICO stock to buy Western Insurance. It had earnings of $21.66 in 1949 and $29.09 in 1950. In 1951, the stock’s high price for the year was $13. The low was $3. 

“It was the cheapest stock with the highest margin of safety he’d ever seen in his life. He bought as much as he could.” 

National American Fire Insurance

This company was controlled by Howard Ahmanson. It’s a strange story. The original stock was pretty much worthless. It ended up being taken over as part of Ahmanson’s empire. Ahmanson was from Omaha. Although he’s most associated with California. 

I won’t bore you with the whole story (you can find it on the web by searching for “Howard Ahmanson”, “H.F. Ahmanson & Co.”, “Home Savings of America”, and “National American Fire Insurance, Warren Buffett ”.)

Basically, Ahmanson’s father had owned an insurer in Omaha. Ahmanson got started very young (he was a financial services prodigy) and got extremely rich underwriting insurance in California during the Great Depression. He then bought National American Insurance Company (in Omaha) because it was his Dad’s old company. He was retaking control of the family company.

Through this weird coincidence, National American Fire Insurance ended up with some terrific assets. The Ahmansons were very private. And these assets were controlled through different holding companies, trusts, etc.

Anyway, here’s Warren Buffett explaining what he found when he looked into what NAFI really was:

“I found National American Fire Insurance…NAFI was controlled by an Omaha guy, one of the richest men in the country, who owned many of the best run insurance companies in the country. He stashed the crown jewels of his insurance holdings in NAFI. In 1950, it earned $29.02. The share price was $27. Book value was $135. This company was located right here in Omaha, right around the corner from (where) I was working as a broker. None of the brokers knew about it.”

What’s weird about this story is that on the surface the stock looked insanely cheap. It was selling for less than 1 times earnings. And about 20% of book value. But that really understates how cheap the company was. The deeper you delved into the story, the cheaper the stock looked. This was a personal holding company for one of the smartest investors in the insurance business. If you look at the book value and the earnings per share in 1950, you can see the company must have had something like a 20%+ ROE. Why would a company with a 20% return on equity ever trade for one-fifth of book value?

Read The Snowball to find out. Basically, it was a super illiquid stock that had once been worth a lot more. The shares ended up spread thinly across a lot of different individual investors. They remembered when the stock was worth $100 a share. That’s where a lot of them bought. And many of them didn’t want to sell until the stock got back to $100 and made them whole. But, because the stock had burned them so bad, they also had no interest in buying more shares. They just clung to what they had.

Now, what’s really fascinating about this story is what Warren Buffett did. So, the stock was last selling for about $27 a share. At first, he tried buying around $30 a share. Then he went to $35. He went to towns where he knew people owned the stock. He talked in person to people to try to get them to sell to him. 

Eventually, he offered some people $100 a share. Now, think about this for a minute. That’s still a very, very low price for this stock. At $100 a share, Buffett was paying 3.5 times earnings. And he was still only paying about 75% of book value for what he thought were some of the best insurance companies in America. 

But think how many of us would have been unwilling to go up to $100 a share. After all, if you started buying around $27 a share – doesn’t $100 a share seem like too much?

How many times have we thought: “Well, I started buying at $30 a share, do I really want to keep buying at $40 at $50 at…or should I wait for it to come back down to my price.”

Famous last words.

You would probably doubt yourself as you bought and bought and bought at ever higher prices.

But Buffett didn’t. And that’s the difference between Buffett and Graham.

Buffett wanted the highest return on his capital. At $100 a share, he was still going to earn well over 20% a year in this stock. Remember, he was paying less than 4 times earnings and less than 75% of book value for a company that recently earned over 20% on its equity. By either of those measures, you are clearly going to earn more than 20% a year.

So, when you see a clear situation where you will make more than 20% a year in a stock, the right answer is to buy as much of that stock as possible. To compound your wealth, the key is not to focus on whether you are paying $30 or $60 a share or $100 a share. It is to get as much of your money as possible into the stock while it is offering a very high return. 

What matters is how high the return on your investment is at the price you pay. Not how much higher or lower the price you pay today is compared to the price the stock was at when you started researching it.

Rockwood

Buffett talks about this investment in his 1988 letter to shareholders.

Rockwood Chocolate had been shopped around to different buyers. Graham-Newman was given a chance to buy the company. But they passed because Rockwood wanted too high a price. Jay Pritzker ended up in control of the company. And he offered 80 pounds of cocoa for each share of Rockwood stock. The exact reasons why he made this offer are complicated. 

Cocoa prices spiked in the midst of a shortage. Rockwood used LIFO (Last-in-first-out) inventory accounting. As a result, it carried its cocoa beans at much less than they were worth during the current cocoa bean shortage (prices were about 12 times higher than when Rockwood adopted LIFO). So Rockwood had a big gain on its cocoa beans – but this would be taxable of the beans were sold. However, the transaction would be non-taxable if it was used in a partial liquidation of the business. So, Rockwood initiated a coca bean for stock swap. 

Why didn’t they just return beans to shareholders?

Cocoa was tradeable. So why buy back the stock?

Why not just give the beans to shareholders and forget the idea of a stock buyback entirely.

Graham-Newman didn’t ask this question. They, like some others on Wall Street, simply participated in the arbitrage opportunity. Buffett just went ahead and bought Rockwood stock so he could be on the same side of the trade as Jay Pritzker. So, instead of buying his stock, then swapping his stock for beans and then swapping his beans for cash – Buffett just bought Rockwood stock and ignored the offer to sell his shares for beans. Buffett made $58 a share vs. the $2 a share the arbitrageurs made.

At the time of the Rockwood deal Buffett’s two biggest holdings were Rockwood and Philadelphia & Reading. So he was betting on two capital allocation “jockeys” here. Graham-Newman was taking a cheap but misallocated business and turning it into a better business. And Jay Pritzker was taking advantage of high cocoa prices to buy back stock and make remaining Rockwood shareholders rich. 

So, capital allocation was very important to Warren Buffett even very early in his career.

Buffett did a lot of “coat tail” riding in those days. He took a lot of other people’s good ideas. Whether it was Ben Graham or Jay Pritzker or Howard Ahmanson.

That’s a strange wrinkle in the early investments by Buffett. It wasn’t always the case that he was betting on superior capital allocation. At GEICO, he was betting on a growth stock. It just happened to be a cheap growth stock.

And at Marshall Wells it didn’t really matter who was allocating the capital. What he cared about there was that the stock was selling for about 3 times earnings. The same thing is true – to some extent – in the last stock we’ll look at: Union Street Railway.

Union Street Railway

This was a bus company. They had some substantial hidden assets. But the most important asset they had was cash net of all liabilities of more than $60 a share versus a stock price of $30 to $35 a share. Graham-Newman had considered the stock. But did not want to take a huge block. Buffett did. He wasn’t interested in diversifying. 

The company was also buying back stock at the same time. This was a common feature of Buffett’s investments. Ahmanson was slowly buying up stock around $30 a share when Buffett started buying shares of NAFI. Here, the company was buying back its own stock.

Buffett went to talk to Union Street Railway’s CEO. The CEO told him that they were going to return $50 a share.

Here is my best guess of what Buffett’s investment in Union Street Railway looked like:

· Paid $18,700 for his shares

· Got back $28,800 in cash 

· Stock still traded for $11,500 after the special dividend

So, Buffett turned an $18,700 stock purchase into a combination of $28,800 in cash and $11,500 in stock. His return was something like 115%.

Also notice how strange the market’s attitude was toward Union Street Railway’s cash. Before the special dividend it traded at $30 to $35 a share. After $50 a share was paid out in cash, the stock only dropped to $20 a share.

So, even though the company paid $50 in cash, the market only penalized the stock $10 to $15 a share.

The market never gave Union Street Railway full credit for the cash when the company had it. So, it didn’t deduct full value from the stock when the cash was paid out.

From 1949 through 1954 Buffett made his first $100,000. It’s hard to know what his exact annual returns were. That’s because he saved some additional money, paid taxes, took out a loan, etc.

My best guess is that Buffett compounded his money at an annual rate no less than 50% a year and no more than 60% a year. 

This is consistent with his own statements. Buffett told students he did make 50% a year on his own portfolio before starting his partnership.

And he said that his returns were lower each decade. Buffett had annual returns on 30% a year when he ran his partnership. It’s clear he did better than that with his own money in the early 1950s.

It’s likely Buffett earned about 50% a year on his investments in his first 5 years as an individual investor.

And he did it in the stocks we just discussed.

Overall, Buffett turned $10,000 into well over $100,000 between the time he first read Ben Graham’s “The Intelligent Investor” and the time he started his partnership.

June 2021 Portfolio Review

Straits Times Index Fund: +11.07%
Hong Kong Tracker Fund: +8.61%
S&P 500 Index Fund: +15.34%

My Portfolio Returns: +41.57% 

Transactions:
-Sold off a petty amount of Perfect Shape at 9.2$
PS still weighs at 28.4% of the entire portfolio. Results would be release on 30-June. Another announcement made, just this evening, is the reduction of board lot size from 4000 to 1000. This would no doubt increase liquidity (and speculation). The other action that would fuel further recklessness would be to split the shares 1-to-4.

I am still eagerly waiting for the results although I am leaning towards divestment. More on that later. 

-Modest increase of OKP at 0.187-0.189
As I see no other opportunities in the market, coupled with the growing amount of unused cash for my parent's portfolio, I made a modest amount of purchase in this engineering company. 

OKP is my second biggest position, standing at 22.9%

Days Sales Receivables Watch - Perfect Shape

While I am more than grateful for the capital gains (both unrealized and realized) brought about by this company, I am carefully watching the Day Sales Receivable (DSO) for this stock.

DSO refers to the amount of days it takes, with respect to the revenue, to turnover the receivables. A company can increase its revenue unfairly by booking more sales (charging customers on credit). Unpaid sales are classify as receivables.

If a company has 10m in revenue, and 2m in receivables in 2019, and have 50m in revenue (an astonishingly leap in growth), one should look at the corresponding growth in receivables. 

If receivable total to 10m in 2020, it doesn't raise much eyebrows. But should the receivable be 20m?

2019's DSO = Receivables / Revenue * 365 days = 2/10 * 365 = 73 days.

2020's DSO = 20/50 * 365 days = 146 days.

Perfect Shape's DSO is outlined below:

When I first purchased the stock in 2018, I was pretty concern in the jump in DSO. Looking at capital gains of 41% in a matter of 3 months, perhaps I could be forgiven for selling out.

Figures in 2019 abate slightly, and 2020's first half interim report suggest a healthy drop in DSO as well. But I am constantly on my toes for possible financial fraud in this company, especially when the board tends to act like cheerleaders.

But I bought stock on a quantitative basis and was rewarded more than I am deserved. I am very grateful.

Who doesn't wish to hold on to a stock that yields double digit dividends? It is every value investors' dream to buy and never have to sell. I do wish this to be so for Perfect Shape, but at times, the fiduciary pressure of handling my parents money compels me to become a seller.

A short note about banks

Since I have a token amount of OCBC shares, I was able to request for a hard copy of its annual report. Reading off paper allow me to take notes, scribbling comparisons between the local banks. While the reputation across all 3 of our local banks is stellar, they are also remarkably safe based on Basel III. Its CET1 scores hover at 15%, a figure hard pressed to find elsewhere.

No wonder it is common wisdom among local investors, to simply buy the banks during a trough. 

There were unique differences between the banks. OCBC seems to have just a little more income off non-interest income. It has a well known insurance arm in Great Eastern, and also increasing presence in Greater China. 

I had some free time recently and was looking at the big 4 Chinese banks. In terms of ROE figures, ICBC and CCB did best. They, too, held the lowest cost-to-income ratios (about 25%). ABC was the worst at 29%, and BOC did slightly better.  Interestingly, all of them have about same amount of Non-Performing Loans. ABC's CET1 was 11.04%, ICBC 13.18%, CCB 13.62, and BOC 11.28%

Hence the market could be right in marking down the share prices of ABC and BOC, as compared to the other two banks. The former two yields at 8+% in dividend, whereas the latter, 6+%.

All of them are better bets than Credit Suisse, whose CET1 is about 6+%. Or could the figures be trusted? I have no real chance in assessing the quality of a bank's books. Any bets would be modest.

May 2021 Portfolio Review

(re-updated on 26-May)

Straits Times Index Fund: +11.56%

Hong Kong Tracker Fund: +7.01%

S&P 500 Index Fund: +12.44%

My Portfolio Returns: +33.99% (I triggered a recalculation from Stock.cafe end and it went from 41% to 33.99 -_-" no idea what happened)

Transactions:

-Return of capital of I.T. risk arbitrage position

-Increase of Mapletree NAC Trust

-Sold a modest amount of Perfect Shape

While I might have omit to write about the I.T Ltd position, the stock was pretty volatile on voting day itself, falling as much as 8-10% before shareholders accepted the privatisation.

This net a return of 8% within 6 month, which annualised to a 16% return. It is also one of the luckiest one yet, given how little work I put into buying the stock.

At a very unfortunate timing of 1pm two Fridays ago, the Singapore government announced a list of curbs in an effort to calm down COVID infection. This sent the market on a free fall, particularly retail REITs. At one point of time, Lendlease REIT was down by 8 percent, and Mapletree NAC Trust went down by almost 5%.

Lendlease REIT was particularly interesting since about 1/3 of its return is from its Sky Italia rental, and Mapletree NAC even more so, given that its main revenue is from overseas, particular Hong Kong.

Unfortunately, I bid pretty much close to intraday low and did not fill my orders for Lendlease.

Both stock recovered pretty a little so far, demonstrating how jittery markets could be on abrupt announcements. 

***

Portfolio returns is now a staggering 33.9%, surpassing my own expectations and highest ever return in a year. It was bitter-sweet considering that my mum's health dipped a bit during recent weeks, and I wasn't really paying much attention. Needless to say, returns are lead by Perfect Shape. 

TBH, I do not believe I deserve such a high return, and I attribute this to luck on a single holding. The way I pick my stocks, based on value; and my own expectations are that I attain modest, market-beating % which will meaningfully compound over time.

Since I am a strong believer of mean reversion, I expect bad times to come one day. So I am very grateful for what I am getting.

I don't feel encouraged by the rapid rise of Perfect Shape stock prices, which are often accompanied or preceded by "business updates", usually optimistic in nature, of business expansions. The market rewards the risk-taking behaviour of the company by bolstering its stock price to record highs. I sold off a little at 7.4x, and remains a bit undecided with the rest, now that the price is 8.x.

Should I sell? There are 3 sell rules. First is to sell if you need the money, which I don't. I don't have a better idea to allocate the capital to. I do not belong to the "cash-is-trash" camp, and is more liberal with the idea of holding cash than most. I believe that buying a bad stock is going to hurt far more than inflation. 

Secondly, I could sell when it is overpriced, but how do I know for sure? The latest figures are not out. I do see a few flashing, warning signs regarding its Day-Sales-Outstanding ratios, and I want to verify that with the upcoming FY2020 results.

Thirdly, one should sell if he makes a mistake. This is not applicable to my Perfect Shape thesis so far.

A large part of my motivation to hold on to some of the stock is that I simply have no other ideas.

***

I am still waiting for OKP (which was fined a very paltry sum of a million, when you compared that to what it has in its books) to revert to value. It is still very much weigh down by COVID-19-related labour concerns as well as a lack of projects. I would imagine that, in view of rising interest rates, a depressed price, and clarity to its legal woes, the company could take advantage and privatised itself.

I believe that investing as a private business owner would never go out of fashion. But I am still waiting patiently, in a world where tech and growth stock flourishes; and old, dumb, simple companies are disregarded. 

***

As of now, in terms of market value, Perfect Shape is 32%, OKP is 20%, and Centurion is 9.6%. My top 5 positions constitute 76% of my capital so far. 

I am cautiously monitoring the balance sheet of Centurion Corp. The COVID control measures seems to be adequate across the nation so far, which I attribute this to very strict mandates from MOM. Management's tone seems pretty levelled so far, so I am not too worried.

***

My opinion of crypto-currencies does not change: I have no idea how to value these stuff and therefore I shall refrain from them, no matter how tempting it gets. Before I put a single cent in an idea, I ask myself if I would put in more capital if it falls by 20%? Is the idea, "easy"?  The only people getting rich are the ones selling shovels (crypto-mining rigs, GPU card sellers, coin exchanges, etc) and not the prospectors.

Do stocks like Tesla deserve their sky high valuation? I don't think so... but I am no Burry and I won't touch anything related to them. All I could see is that the market is very generous in their valuation of far too many tech companies these days. That generosity doesn't last.

Just avoid stuff that you have no idea of; I am not responsible for the foolishness of others.

-end

Simple Post: Understanding CAGR

My insurance policy just matured today, and I thought it would make a nice example to understand what CAGR is: compounded annual growth rate. 

All investment products should be scrutinised by its returns on a CAGR basis, especially when it spanned across multiple years like this. It offers a perspective on whether the investment had been a great one, or could there be better alternatives around?

Total premiums paid over 18 years: $18441

Total returns: (survival benefits of $500 every year) $8000 + (eventual returns) $13329.01= 21329.01

The CAGR formula is a simple one. (eventual sum / starting sum) to the exponential of 1/number of years.

(21329.01/ 18441) ^ (1/17)

=1.00859

which is actually 0.86% per annum

What a rubbish return really. So it was great I had encashed all the survival benefits and reinvest it into stocks intelligently.

I could have bought a bond ETF and do better.

April 2021 Portfolio Review

(in view of a busy 2 weeks ahead, April update is brought forward)

Straits Times Index Fund: +12.33%
Hong Kong Tracker Fund: +6.93%
S&P 500 Index Fund: +13.7%

My Portfolio Returns: +26.76%

Transactions:
Increase in Centurion for Mum and Dad's portfolio after divesting Emperor Entertainment Hotel.
Increase in Carpenter Tan for Dad's portfolio 
Complete divestment of ES3 for Mum's portfolio

***

Returns increase by over 10% since March, largely due to Perfect Shape Medical, which is now weighted at 31% of the entire portfolio.

Is the price increase fundamentally backed, or was it due to the numerous positive announcements by management? Since April, the company has released 4 different "business updates," ranging from expanding market (China, Australia and Singapore) and operational (hair growth, TCM) coverage.

Is this possibly di-worsi-fication? I get a little uncomfortable when management is too busy putting up favorable PR spins like this, even though it benefits me.

The market as usual, decided to reward risk-taking behavior as it usually result in growth. They do not care about the growth quality. Personally, I would want to look at the FY 2021 numbers. If the dividend yield is reasonably high, it might be tough for me to sell and look for another company, which is the only reason why I am still holding.

I always call myself a value investor, and a classic one at that. There is a popular camp in recent years, known as "Growth-at-a-reasonable-price" or GARP investing. It simply means to pay a fair price for quality growth companies.

Paying reasonably for quality growth company is a no brainer, but everyone's idea of reasonable is different. A price-earning/cashflow multiple of 25x, at a growth of 15% or more, is reasonable to one, or modestly attractive to another. Perfect Shape was frightening cheap at the low 2s dollars. The highest price I paid for my shares is 3.14, and I thought it was high. I am extremely conservative.

One has to be reasonably independent in what they feel is consider a fair price. If a stock has always been selling at 20-30 times multiple, and its peers at maybe 40-50 times multiple, it doesn't mean that it is a bargain. It might be relatively cheaper, but it isn't absolutely cheap. I like stocks in the latter camp, and Perfect Shape was one such idea.

By taking its market cap, subtracting its cash on books, assuming a no-growth figure for its earnings put it at 8-10 multiples. I am not enamoured by its tendencies to pander to the media and speculators. I sold some stock at 4.7. Today the stock is 6.5 or so.

I always tell my friends: I am not responsible for others' stupidity. Looking at companies that are priced at triple digit price to earnings, a lot of things has to go right for investors who just bought. It is the favourite past time of the majority to look for possible problems that can happen. Quite often, the problem comes from places least expected. 

I would never adopt such an approach, and it is in fact advantageous for most people to disagree with me. 

I find companies that already have obvious, but solvable, problems attractive. But the management must not be the problem. 

Activist-investing is near impossible in Asia, due to the low float of OPMIs. Looking through my portfolio of stocks, the smaller companies has a definite family-ownership structure. So it makes sense not to buy into companies controlled by crooks.

***

Carpenter Tan's annual report is out at last. This is an extremely cash generative company, with low capex and frequent positive cash flow, comfortably exceeding dividend payout. Until the last three years, that is.

Unfortunately, this is one company that has very limited to no growth, and its management is not capitalistic in nature. So I am glad that they decided to cap dividends to a more manageable 60+ million in payout, something that is more realistic in terms of their cashflows.

Given that this is a special year, I am not too worried, but I certainly will be paying attention. 

***

April is always a difficult month for me. I have to get my appraisal out of the way. In all honesty, it isn't something I look forward to. I like the work, it is good honest labour and trying to solve people's problems. But having to write documents to prove the work that I did, much less to prove that I deserve a higher rating than my colleagues', is something I will never get comfortable with.

Till next month.