Factors associating with (S-share) duds

In recent months, there is a number of S-shares with suddenly collapsed share price due to non-normal reasons. In this post, I shall highlight a few associating factors on these S-shares.

One, weak balance sheets. S-shares like Ferrochina and China Print & Dye has weak balance sheet. For example, before China Print & Dye collapsed, its current liabilities is greater than its equity. Weak balance sheet increases the probability of the business foreclosure.

Two, to stretch the above further, expansion using lots of debts. For example, Celestial has expanded using lots of debts. While debts do not dilute equity's shareholdings, it increases the probability of the business foreclosure, especially in distressed periods (like now) where refinancing. (This factor also applies to Reits, as a few months ago, people are worrying whether some S-Reits can refinance their loans.)

Three, popular stocks. Interestingly, the S-shares with collapsed share price are more likely to be covered (heavily) by analyst. Notable examples are Ferrochina and Fibrechem. 

Four, founder/majority holder has lower than 40% stake in their businesses. Interestingly out of the 8 S-shares shown below, six out of 8 companies have  founders with less than than 40% stake in the business.

Nonetheless, not all S-shares' prices with any of the above factors will collapse. There are always exceptions. 

Probably, the easiest action one can take in avoiding duds is running away from companies with weak balance sheet. However, it may not be sufficient as one can hardly detect companies with majority holder's shares under mortgage. 

P.S. The above thoughts and figures may be wrong. Read/use with care.

P.P.S. The unscientific thoughts above only look at the dogs that bark. The silent dogs are not examined. 

Re-positioning my holdings

There has been some major changes to my portfolio over the last few months. My present portfolio look like this:

Pfood Fujian Zhenyun (FZ) Sihuan China Ziano First Reit Man Wah

I have been quite active in the past 2 months:

Sold Karin, Sinotech, China Fish, Changtian. 

Bought China Sky due to cash per share higher than share price and possibly low cash outflow in the near future. Sold China Sky after its abysmal fall in cash. [Reason for buying no longer valid]

Added more of China Ziano. Initiated First Reit, Man Wah, PFood. 

I have re-positioned my investing philosophy. That is, to buy and hold high quality businesses with little or no debt. Quality means less cyclical businesses. Little debt means that the business is more likely to survive this recession. 

Karin, Sinotech and Changtian do not meet the quality aspect. China Fish debt levels are too high for my comfort, and it may be affected by the possible risk of falling fish prices. Hence, they are sold. 

FZ may or may not meet the quality aspet, but its cash per share is too alluring for me. And, it seems to be in a positive sector, as pipes are needed in water treatment plants and Sichuan re-building.

Man Wah and Pfood are still showing rising profits. I am hoping that their profit will not fall too much in 2009. 

Lastly, I have bought many First Reit shares (relative to my portfolio). I have looked at a number of S-reits, before making my purchase. Reasons are simple. Non-cyclical business, low debt to asset ratio (15.6%) compared to other Reit, insider purchases, high yield (17%) relative to the risk. Yes, there is re-financing risk, since it has to refinance all its debt by Q2 09. But I guess the re-financing risk is manageable, since Cambridge Reit (has higher gearing) is able to re-finance.  Another bad is limited growth prospect. 

One last reason. First Reit is under the radar. I have not seen any analyst report on this stock since Oct 08. 

Note: Above are just for my record purpose. My thoughts may be wrong. So far, roughly 8 out of 10, I will lose money when I follow other blogger's/forumer's stocks e.g. China Sky 

Painful 2008, and a rude awakening/answer

Well, it's been a painful 2008. I have seen my portfolio dwindle to less than one-third YTD. 

I have stopped blogging for a few months, partly because of the losses, and partly because I am lazy. and busy 

2008 also offers a rude awakening and an answer to my hypothetical question I have often posed to myself. Is my 2007 returns due to skill or luck? 2008 answers "luck". And so, I am the fool. Hopefully, I will emerge smarter.

While I am still surviving and suffering investing pain, I am still investing. In equities. 

Probably I have this belief. 2009 will be a better year for equities. If not, 2010. 

And yes, my portfolio. I have sold Cacalo, C&G and Valutronics. Buys are China Ziano and China Fish ,which may be higher quality businesses than what I have sold. Presently, I am looking to buy a REIT, given the interesting high yield. 

Finally, I have recently read a brillant book. It is "Outliers" by Malcolm Galdwell.

How to be Happier

As an investor, probably you can't help but to feel blue when the market is going down and down. Here, I shall describe a few ways to help an investor feel better.

First, you can try changing your reference point. If you have started investing many years ago, instead of looking at year to date losses, why not look at the total gains since you have started investing?

Next, you can try reviewing or look at your portfolio less frequently, if your portfolio is in loss-making mode now. Each time you look at your losses, you may feel sad. Hence by looking less frequently, you will feel sad less frequently too.

Finally, you can always remind yourself that 'this too will pass'. As stock returns tend to be positive in the long run, sooner or later your portfolio will turn green.

Revisting Randomness

Recently I have been re-reading Nasim Taleb's excellent "Fooled by Randomness". I find a few thoughts surfacing in my mind.

One, Taleb noted that good investing/trading performance can be due to randomness, even if the methodology is unsound. Consider a population of 10,000 unskilled investors who have a 60% chance to under-perform the market. Then at the end of 5 years, we will observe 102 persons out of this group of 10,000 people who have outperformed the market every year. Thinking of this, I wonder if my out-performance prior to 2008 is due to luck or skill. I do not really know.

Two, "Fooled by Randomness" has two analogies whereby both traders, in the analogies, blow up and one of the main causes is that they buy on the dips. This point leads me thinking about Bill Miller. Bill Miller is an investor who is known for buying more of the stock, especially when the stock goes down and Bill Miller still believes in his reasons for investing in the stock still hold. There are also other value investors who buys on the dips too.

If buying on the dips increases the probability of blowing up, won't value investors who buy on the dips subject themselves to higher risks? Of course, one may argue that market prices are not important from value investing and long term/business investing perspective. However, no matter what, value investors are still subject to the risk that their hypothesis is wrong and the possibility that they are unable to get out before their chosen business/stock crash. And buying on the dips may magnify the risk of blowing up. To cut it short, I can only conclude that while the risk of blowing up for value investor is low, the risk is still there.

That's probably why heavy use of leverage may not be advisable for value investors who buy on the dips.

Maybe the advice I can provide to myself is to reduce the risk of blowing up in my chosen investing method, and like what Bill Rempel said, "Traders should execute their chosen methodology. If they don't have one yet, they should find one."

P.S. I ignore the demarcation between trader and investor in this post in the last paragraph.

Hindsight Bias Exemplified

I find Legg Mason Q2 2008 letter very interesting, especially from the hindsight bias perspective.

Bill Miller has noted that many people has stated the obvious (i.e. he should have avoided housing stocks, financial stocks etc and he should have stocked up oil companies) from the events that have passed, but nobody is able to state what is obvious NOW. This implies that most (if not all) people suffers from hindsight bias. We emphasize/over-stress on what should have been.

You may also find the letter interesting too.

2008 Q2 Portfolio Update

Q2 has almost passed. Presently, my portfolio contains:

Sinotech

Fujian Plastics

Sihuan

C&G

Karin

Valutronics

Changtian Cacalo (missed out in the last post)

Transactions made since last update:
Bought: Changtian and C&G

Have added more of Changtian and C&G as both have become cheaper.

Year-to-date, my portfolio returns are negative at around -17.9%, slightly worse than STI (-14.2%).

So far, this year is proving to be quite volatile, with the downside being more pronounced. My portfolio probably will end up on the negative side for year 2008.

Nonetheless, given the present prices, it may be time for me to consider bargain hunting.