Final 2007 Portfolio Update

As the year closes in a week time, this post will provide a final update to my portfolio. My current holdings are:

Cacola
China Precision
Fujian Plastic
Hongwei
Valutronics
Two HK stocks

Transactions made since last update:

Sold: Hengxin
Partial Sold: China Precision, Hongwei, one of the HK stocks
Added: Valutronics
Newly added: Cacola

The selling was done partially to fund the purchases and partially to reduce positions that are subjectively less desirable compared to other holdings.

Overall, my year-to-date returns (based on unit value method) is similar to year-to-date Sesdaq returns.

Book Review: The Panic of 1907

"The Panic of 1907", by Bruner and Carr, depicts the monetary panic in USA during 1907, where lack of monetary liquidity, trusts and bank runs come after one another. Due to the lack of liquidity, the stock market has also crashed severely during this period. The liquidity shortage was so severe that the brokerages have to borrow from Mr JP Morgan and the banks such that the brokerages can pay their counterparties and the stock exchange can continue to function.

Overall the book is a very interesting read, especially for those who are interested in monetary economics or the markets. The book is available in NLB.

A short summary of the lessons from the Panic of 1907:

1) For a panic like 1907 to occur, there must be a system-like architecture in place that allows troubles to spread and probably also allow the amplification of these troubles (e.g. self-reinforcing loop). Also, the system may be complicated in the manner that it may be difficult to know the location and the nature of the trouble in the first place.

2) Bouyant growth should occur before the trouble. Bouyant growth lead to excessive optimism and create a demand on the liquidity that may cause strains on the financial system.

3) Inadequate safety buffers are also present as crashes or panics may not occur if there are shock absorbers in place to prevent the trouble from spreading. For example, deposit insurance has prevent bank runs from spreading. (But the point is that we do not know if the shock absorbers are sufficient or even necessary until a crash. There is a cost in setting up and maintaining shock absorbers.)

4) Adverse leadership may be present during shocks/crashes. The book explains that the actions of political and economic leaders may increase the risk of crisis.

5) There is a real economic shock to the system for a 1907-like crash to occur. The shock should be large and costly, unambiguous and surprising.

6) Excessive fear, greed and pessimism are in place.

7) The failure of collectivism or the simultaneous actions by individuals in choosing to run from the crisis (selling stocks and withdrawing money from banks) so as to save one's wealth first may lead to decreased overall net worth for all and increased chances of a crisis. The book further explains this point through the use of a prisoner's dilemma example.

The above points seems to be present in the current subprime issues (except for pt 4, depending on how you look at it). Would the subprime incident lead to a liquidity crash? I don't know.

Book Review: Super Crunchers

This is a review on the book "Super Crunchers" by Ian Ayres. "Super Crunches" is available in NLB at 519.5 AYR

Super Chrunchers describes how regression and randomization has been applied in reality. For people who are studying or have studied statistics or econometrics, the book will show you how these statistical stuff are applied in reality. Overall, I find that this is a fascinating book. However, if you do not understand regression/randomization or if you hate numbers, you may not like this book.

Some interesting points:
1) Companies are using algorithms or super crunching to exploit the long tail. In other words, super crunching may help companies to sell the same product to different customers closer to the customer's reserve (maximum price that the customer is willing to pay).

2) On the other hand, super crunching also helps customer to discern price differences better. Examples are Priceline etc.

3) Randomization (Real-life small scale experiments using randomization principle) may shape government policies as government can test-run certain policies in reality and observe whether the intended policies are beneficial or not baased on the experimental outcomes.

4) Equations (aka regressions, randomization etc) is more likely to outperform a group of experts in predictions. This is especially so if the underlying database is relatively free of errors.

5) Standard deviation can be thought in the following way. That is, 95% of the outcomes roughly fall in between 2 standard deviations of the mean. (assuming that the event belongs to a normal distribution.)

The book also discuss how Larry Summers reasoned out very roughly why hard sciences tend to have more male academics than female academics. (The reasoning is logical and very smart but it is also very sketchy.)

The author, Ian Ayres, has also some interesting prediction tools (weblinks) on this website. (http://islandia.law.yale.edu/ayers/predictionTools.htm)

Downward Volatility exist in Value Investing

Recently, as my portfolio bleeds day by day, I am reminded of, besides Graham's sayings, the observation that downward volatility exist in value investing.

In my opinion, value investing should minimize the risk of total capital losses in the long run. Unless unexpected and very adverse events occur. However, value investing may not imply low volatility in portfolio value in the short run.

A simple (unscientific) example can be found in Warren Buffett's famous speech "The Superinvestors of Graham-and-Doddsville" (Can be found in "The Intelligent Investor"). The speech contains performance records on several value investors which show large negative returns between 30-40% negative returns in 1973-4, in addition to the excellent overall compounded returns. This example indicates that large downward volatility exist in real-life value investing.

Hence, I do expect downward volatitlity to happen from time to time. But it is nevertheless painful for me to stick to sitting-in and trying not to sell during these downward volatitlity periods.

Recent Trades

I have done quite a bit of trading over the past weeks due to the quarterly annoucement of results:

Pared down my position in Hongwei to raise cash to buy others.

Bought and sold Shanghai Turbo, to raise cash to buy others and also due to its disappointing 3Q results. Originally bought as a turnaround play, but its 3Q results shows that the turnaround is not that certain.

Bought Hengxin at a higher price than its current price. I am thinking that the market may be undervaluing the stock given its higher sales, its significant market share in co-axial cables and future expansion in capacity. However, Hengxin seems to lack pricing power and its lower than FY06 net profit margin seems to show weakness in cost-control. Nonetheless, my assumption is that the low price may have more than compensated for its weakness.

Bought Valuetronics. This is quite an undervalued stock going by its PER of less than 5.

All in all, stocks have been going for bargain prices recently. If the oncoming quarters prove to be no more than a slight slowdown, then probably my buys will make good money. If it is going to be a fierce global recession, then probably I will be in for some lessons and significant losses.

Some thoughts on the market

I am penning my thoughts here, in case I would want to refer to them a months later. This would prevent me from recalling the wrong thoughts.

First, the market is getting more dual-tracked. While I guess that both the blue chips and the small stocks would dive in coming week (or weeks), I can see some value in the small stocks. So much so that I am currently fully invested in the market. I have tried to see whether I can sell any of my position, but somehow, I find my positions too inexpensive to be sold. Maybe I may sell if I can spot much better bargains in the coming weeks.

Second, I see that some of the high-flying China stocks may be in for a bad time due to poorer than expected results. Hopefully, this does not happen to the China stocks that I hold. Anyway, if it happens to the stocks that I hold, the damage may be contained, given that these tend to be low PE stocks. (Note: A low PE ratio alone may not imply positve expected returns.)

Third, I am guessing that the broader market, STI, is in for more volatile sessions due to the subprime negativity. Up to now, I am still wondering how the subprime can affect non-financial firms (ie China firms).

Book Review: Pop! : why bubbles are great for the economy

I have recently read the book Pop! : why bubbles are great for the economy, by Daniel Gross. The book can be borrowed from NLB (332.6 GRO). Overall, the book is short and interesting as it presents the positive aspect of bubbles, instead of the negative sides (ie the losses sufferred by investors etc).

Some learning points are:
1) Economic bubbles are good in the sense that they provide positive externalities to the other sectors/people. For example, bubbles can help to hasten the construction of the neccesary infrastructure for businesses and the general public. The US railroad building bubble has lead to lower cost and faster transport of goods and people in a shorter timeframe compared to the Eurporean countries where railroad building bubble does not exist.

2) For investors, during bubble period, avoid the acquisitors. Instead, aim for those who are supplying the raw materials. After the bubble period, aim for the acquisitors who are on the brink of bankruptcy and they are holding valuable assets. Also, aim for those business who get to enjoy the positive externalities.

3) In reading the book, I tend to get the idea that government somehow, indirectly or directly, is involved in the creation of the bubble. For example, the recent housing boom can be linked to partly to the low Fed rate (in 2002 onwards) and US pro-housing policies.

While the book gives me an impression of how bubble may be formed (ie a great revolutionary idea, prominent event) or can be recognized, I would think that the book, The Tipping Point, would provide a better understanding on how bubbles are created.

How lucky. I will not be the next WB.

The Interative Investor Blog (IIB) has discussed a controversial article by Mark Sellers.

Mark Sellers is a hedge fund manager (using value investing) and writer (he contributes for FT). Mr Seller has just released an article highlighting the seven traits for a successful value investors (ie investors like Warren Buffett, Bill Miller who can compound at 20-25% over their careers.)

Mr Seller penned that successful investors should have the seven traits. And interestingly, he defined these seven traits as either you have it by twelve years old or you don't have it.

Well, as I am a pre-dominantly left-brainer and an abysmal painter, I would have fail his six trait (having a good two-sided brain). And this implies that I would not be the next Warren Buffett or a successful value investor. How lucky.

Mad Selling in a Over-Cautious Mood

Well, I guess I may have done it again. I may have succumbed to the falling market and my over-cautious mood last week.

I have sold C&G, Techcomp, Tuan Sing and UE at low prices and even loss-making prices. On hindsight, my portfolio may have performed better if I have not sold them.

On hindsight, I do not even have to sell most of them in the first place if my margin of safety is larger. Since I may not own them in the first place. Hence, I decide to increase my required margin of safety before I should buy a stock. A higher margin of safety should also help in lowering number of trades.

Well, let's hope that a higher margin of safety works out for me.

Porfolio as at Mid-Oct

My portfolio:

C&G
China Precision
Fujian Plastics
Techcomp
United Engineers
Hongwei
Tuan Sing
1 HK Stock
1 Hk Stock

Over the past few weeks, I have been paring the Techcomp stake since Techcomp has announced a placement of shares. The Techcomp proceeds are used to purchase United Engineers, Tuan Sing and 1 HK stock.

The purchase of United Engineers is mainly due to a NRA research report (seen in SGX website). The report states that United Engineer is trading at a XX% discount to its sum-of-parts valuation. Furthermore, upon a look at the Annual Report, it seems that United Engineer may have the intention of disposing of non-core business which may help to unlock some of the asset value. Hence this is more of an asset play to me, where the catalyst lies in the possible unlocking and further enhancement of asset value. (Despite the fact that Unitied Engineer is trading at 1.3 NAV.)

The purchase of Tuan Sing is also more of an asset play to me, where the catalyst lies in the re-valuation of its two CBD office blocks at end of year and sale of its developed China Property in perhaps 2008. However, as my knowledge in properties is limited, my stakes in both United Engineers and Tuan Sing are smaller than usual.

And perhaps, I may end up selling them someday to raise cash for other more undervalued stocks. But then, I do not see any undervalued stocks recently. Hence I shall wait.

Measuring Portfolio Performance

How can we measure portfolio performance? Do you know that the returns that are seen in the blogs or newspaper may be imprecise?

Recently, Interative Investor Blog (IIB)has two posts that cover them. I find them quite interesting and relevant. The posts:
http://blog.iii.co.uk/2007/10/08/249/
http://blog.iii.co.uk/2007/10/12/returnagain/

Prior to reading the posts, I use unit value method and monthly time-weighted method to compute my portfolio performance. The unit value method is used to give me a weekly price of my portfolio, while I use the monthly-weighted method for a real-time returns. The returns are year-to-date returns.

IIB's posts introduces XIRR (a form of internal rate of return computation) method. I have tried out the XIRR. XIRR measures the yearly internal rate of return. Hence, it would give me a higher percentage return (compared to the returns I am already computing) This is becasue XIRR would adjust the year-to-date 2007 return to an annual return. Or a higher return in a shorter period would translate to a higher annual return.

Hopefully, IIB will have a one more post to round up the discussion on measuring portfolio returns.

Book Review: The markets and The media

This post is a review on 'The Markets And The Media' by Thomas Schuster. It can be borrowed from NLB (at 332.63222).

The book has three chapters, a afterword and tons of references since the three chapters are drawn from many sources: academic papers, books and articles etc.

Basically, if you are interested in how the media may influence the market, you may want to read the book. And perhaps if you have read Nassim Taleb's book(s), you may better understand why Taleb prefers to read literary stuffs than to be exposed to the media after you have read 'The Markets And The Media'.

Learning points:
1) The book explains that stock recommendations by the media (tv shows, newspaper, internet forums) tend not to outperform the market (indices). The stocks mentioned in the media may have moved before their appearance in the media. Hence any news on the stocks may have already reflected in the prices.

2) It is difficult to explain stock price movements using media as the main reason. There are times where significant news occur with little market movement and times where significant market movement occurs with little significant news.

3) The media tend to emotionalize the news due to the competition in the media industry as emotionalized news would grab more attention. Certain news may also be repeated in several media at different times.

4) The emotionalized news and its repetition may be part of the reasons why media can lead to increased feedback effects, further amplified market movements and thus adding to the boom/burst cycle in the market. Hence the media can be a destablizing factor to the market.

5) Due to the reflexive interaction between the media and the market, an upmarket would tend to lead to increased optimistic news in the media. An optimistic media may lead to a more optimistic outlook on the market. These cyclic influences may play a role in the formation of the market euphoria. Similarly, pessimistic cycle may play a role in market crashes.

Another fall into my behavioral biases

My past posts in June and July suggest that I am having a separate view of my investments and of the general market. In late June, I have a dim view of the market but a optimistic view of my own holdings. Hence, I have been too over-confident about my stocks and suffer from the disparity between intellect (on the general market) and emotions (on my own holdings).

This few days, I have been feeling my behavioral biases again. And I have succumbed to these biases. For the past few days, I have been (too) eagerly searching for stocks to buy, since I have disposed of my holdings in China Print & Dye due to my gradual dislike in its huge leverage.

I have looked around and today afternoon, having chance upon a NRA report of United Engineers. The report states that UE is trading at around 39% of sum-of-parts valuation. Due to a combination of time constraints (lunchtime about to end), desire to add to property sector and the eagerness to use the cash to buy something, I decide to buy in UE after less than 10 min in looking at the report.

While I do not know whether UE would turn out to be good or bad, I recognize that I have been too hasty in buying UE. That’s anther fall into my behavioral biases.

My portfolio as at 16 Sept

My portfolio currently are:
Hongwei
Techcomp
China Precision
China Print & Dye
C&O Industrial
A HK stock

Currently, my portfolio is around 10% below its July peak. I did not have any trades except adding to the HK stock for the past week.

In the subprice downturn, I have added to or re-initiate (for Techcomp) all my positions. Perhaps, I do feel a tinge of regret that I did not buy Metro at 0.85-0.89, even though I have pointed out to a few friends and my family that Metro can be bought at that level.

I have also looked at my past post in June and July. It seems that I have been too over-confident about my stocks, while I feel pessimistic about the market. In future, I shall try to view my dissonance between my over-confidence in my stocks and my pessimism about the market as a contrary indicator. This implies that I will start to go into cash when I am quite pessimistic about the euphoric market, perhaps in a bid to reduce downward volatility if the correction comes in future.

Book Review: Trade with Passion and Purpose

This post is a review on Trade with Passion and Purpose by Mark Whistler. The book is recently published in 2007. Mark Whistler, as he mentioned in the book, is a staitisical arbitrage trader.

Basically, the book belongs to trader psychology literature. However, it brings about a slightly different dimension when compared to other trader psychology's psychology book as its chapters are arranged by charactor traits: Honesty, Humble, Courageous, Fear, Adversity and Anxiety; and followed by EQ, gratitute, relaxation and a last section on developing a game plan. Developing a game plan touches on trading plan and risk understanding.

Some interesting points:
1) The book starts by having a mission statement and using Morita therapy: acknowledging and accepting your own feelings as they arise. For example, if you feel worried about a trade, you should acknowledge and accept your feeling. Personally, I do find that acknowledge and accept my own feelings would help me in investing as well as other matters.

2) The book does encourage one to express gratitute often. It even cites an academic study that suggest the act of frequently find things to thank for in life would help a person to be more happy.

3) Surprisingly, the book also covers a few breathing technique to help a trader or person to relax. For example, a breathing technique is to breathe in while counting to 10. Hold the breath for 15 seconds. After that, breathe out until you are out of air. Then repeat.

4) Interesting, the author puts up a list of items he is willing to risk in terms of trading and writing under the "Understanding Risk" section. When you are at a bookshop browsing through, you may want to look for this book and go through the author's list of riskable items. Maybe it would remind you, as I am being reminded, that it is not easy to be a competent full-time trader (or for me, a part-time investor).

All in all, the book will be useful for people who actually puts their money in the market. I cannot speak for traders as I do not really trade. However, if you are wondering why you are feeling this and that during market downturn or how you can better manage your emotions, you may wish to take a look at this book and see if it helps.

Book Review: SuperMoney

This post is a review on SuperMoney by Adam Smith. The book is first published in 1972 and re-introduced in 2006. The NLB does not seem to have the book.

The book is a description of financial markets in the period roughly around 1965-1975. Supermoney is interesting to me in a few aspects.

1) Supermoney has a chapter on Benjamin Graham and Warren Buffett, even before Warren Buffett becomes famous. The author conducts his interview at around the time where Buffett no longer manages money (somewhere after 1969) but rather working as an owner of Bershire. And it seems that Buffet's famous Rule of 'Don't lose money' comes from Benjamin Graham. I shan't say much here, since it will spoil the joy of reading that chapter.

2) Another interesting event is the Penn Central bankruptcy. The event is a bit similar to the subprime fallout now. I shall briefly describe what happen from my understanding from the book.

At that point of time, Penn Central files for bankruptcy and its commercial paper (or bonds) naturally will become worthless. And at that time, not only Penn Central but also other corporations with similar credit-worthiness are having the commercial papers out in the market too.

The financial circle become worried that the Penn Central incident would spread to other commercial papers from similar corporations. People may become scared to own commercial papers due to Penn Central incident. Corporations may not be able to sell their commercial papers or they have to issue their commercial papers at a much lower price. And when price becomes lower, the yield becomes higher. Note that this may indirectly affect the stock market as money may flow from stock market to purchase higher yielding commercial papers.

To cut the story short, Penn Central incident's final impact is reduced due to actions by the Fed. The corporations who are unable to sell their commercial papers go to the banks. The banks then go to the Fed and borrow money to lend to the corporations. A potential large fallout was averted.

In conclusion, Super Money is interesting to read, especially if you are interested in US financial history.

Book Review: A Demon Of Our Own Design

This post is a review on A Demon Of Our Own Design: Markets, Hedge Funds, And The Perils Of Financial Innovation' by Richard Bookstaber. Website: http://rick.bookstaber.com/

I have bought this book during the recent subprime Credit Debt Obligations (CDOs) meltdown, so as to better understand how the subprime leads to market meltdown. Essentially, from what I understand from the book, the recent market meltdown is due to liquidity crunch, wherely hedge funds simultatneously sold their equities position and the market is not able to absorb. This transpire to lower prices for the equities and with the momentum traders further shorting action to pre-empt and in the process profiting from the selldown, the market meltdown was exacerberated.

Other interesting points from the book are:
1) Correlation of different assets is likely to converge to 1 during liquidity crunch.
2) There are liquidity demanders and liquidity providers in the market. Interestingly, value investors tend to be liquidity providers, while technical traders tend to be liquidity demanders.
3) A cockroach with its simple strategy of fleeing when uncertain is able to survive in different environments. However,the fugu fish which has evolve to many different fishes with different kinds of survival techniques become extinct when a new type of fish (predator) was introduced to their environment.
... The book contains other points besides the above.

Overall, the book is quite a good read, especially for those who have studied economics. Or if you have enjoyed books like 'Fooled like Randomness', you would enjoy this book too.

Not Much Activity

I did not have much activity this week given that I have expended most of my funds. What I have done is to add a bit more to one of my position and to wait for a lower price in China Precision.

In the last post, I have expressed that Hongwei is my best pick now. Let me explain why.

First, it has low price to conservative valuation. Assuming no growth, a discount rate of 10%, lifteime annual profits per share at 2x of its HY07 EPS, Hongwei's valuation will be at 52 cents.

Second, Hongwei is likely to worth much more than 52cents as its EPS is growing. Hongwei's new synthetic cotten factory would be completed in 3Q2007,which will double its synthetic cotten production from 8000 to 16000.

Hence, at the currect price, you are getting below no-growth valuation, a freebie onlikely growth in eps. There may be possible future expansion and interesting R&D results. It seems low-risk and high reward pick in my view. Of course, I may be wrong. But it is a good value bet to me, just like CG Tech in June 2006.

Well, well, an underestimation of market panic

I conceded defeat. I have underestimated the extent of selling panic, so much so that I keep buying and buying. Yes, I have somehow reached my target of being more than 100% invested. Probably in the weeks to come, I will put my tiny bit of savings year-to-date into this lowly valued market.

It is interesting to note that my portfolio has fallen around 33% from its highest point in mid-Jul. And this is worse than the 25% fall I suffered last year. However, emotionally wise, I seem to feel less pain compared to last yaer. Is this a form of adaption to extreme volatility or am I not out of dreamland of thinking that the stocks will recover? Or perhaps I do not see money as important as before despite my portfolio having grown larger. As usual, I do not know.

Anyway, my portfolio has 30% in Hongwei. And none of the 30% is bought at the current low price of $0.305. I think that Hongwei is my best pick of this correction, similar to my pick of CG Tech in the 2006 June correction. However, as always, my views may be wrong (or dead wrong). Its really up to you to decide what you want.

In closing, I shall recall Graham's Mr Market analogy. That one should treat the market as an offerer of prices and ignore him until you wish to trade with Mr Market. And for the past two weeks, I am happy to buy from the pessimistic Mr Market. I suppose that extreme volatility is bread and butter (or even honey) to a value investor.

Note: Mr Market analogy may harm you if you are playing with excessive short-term leverage.

Costly Mistake

I have discovered that I have made a blunder in my valuation of Hongwei and Contel. That is, I did not take into account of their newly issued shares. Newly issued shares would lower eps and lead to lower valuation. The blunder is due to not reading or taking into account of every announcement carefully.
Given that I prefer less uncertainty, I may feel that the growth achieved from the equity raised by issuing of shares may not make up for the eps fall.

I have sold off all my Contel and one-third of my position in Hongwei. This may be regardless of valuation. It may be more to smooth my nerves and reduce possible negative consequences later. I do not really understand Contel's rationale in doling out convertible bonds continuously. Do they need the money for expansion or is it because it is due to cashflow problems? I can't tell, so I have to sell.

The Contel and Hongwei mistake seems rather severe as it has at least contributed to half of the losses (-17.35% from the highest point). A costly lesson.

Meanwhile, I have added on to my position in China Printing & Dye. I have also bought back or re-initiate positions in C&G Industrial, China Precision, Star Pharm and one more stock.

If you are a reader of my blog or my post in other forums, please note that my post is only indicative of my thoughts at that moment. My thinking may change or reverse (as in the case of Contel from bullish to bearish) anytime after my post. And I may not post any reversal of my earlier decisions. Therefore, do your own research and do not follow me.

A great time to buy stocks

This is a great time to buy small caps. To buy when people are selling without any view with respect to the fundamentals. This is a high probability for long term gains but with high uncertainty and high probability for short term losses.

Despite seeing some pessimism around the forums, I am feeling quite optimistic or happy. I guess this is because my opportunities for bargain hunting may increase considerably from now on. This is also despite my 13% losses in my overall portfolio. Maybe it may accumulate to 25% losses as in June last year. I don't know.

However, I will buy more as stocks become cheaper. I have bought more of Hongwei and Contel today. Sadly I have also disposed my position in Techcomp, my last saleable stock to raise cash. My remaining holdings, besides Hongwei and Contel, are China Print & Dye, GMG, a HK stock anda newly initiated position today. They are most likely to remain unsaleable unless their incoming results contain unpleasant surprises.

I still have some cash left, which will come in handy from now onwards. Let see whether Mr Market will turn more pessimistic and offer me more bargains.

Book Review: Don't Believe Everything You Think

This post is a review on 'Don't Believe Everything You Think: The Six Mistakes We Made in Thinking' by Thomas Kida. It can be borrowed from NLB (at 153.42 KID).

As explained in the title, the book highlights six thinking mistakes:
1) We prefer statistics to story.
2) We seek to confirm
3) We rarely appreciate the role of change and coincidence in life
4) We can misperceive our world
5) We oversimplify
6) We have faulty memories

Overall the book is quite interesting. It touches on the above six points and also other aspects such as the use of science (eg hypothesis testing in statistics) to overcome our thinking mistakes. It is rather readable to me and I do detect certain overlapping materials with Taleb's "Fooled by Randomness" and "The Black Swan". This is not surprising given that Taleb draws a lot of materials from psychologists.

Before I end this post, maybe I can briefly share how these points can be relevant to investing. Pt 1) explains why listed companies nowadays announce their results with a press release. The press release is to satisfy our desire for stories. For pt 2), it is commonly known that Soros seek to avoid this bias by searching for disconfirming evidence. Pt 3) is linked to my older post on rear-view or restropective thinking.

Pt 5) is interesting as we may oversimplify in our investment hypothesis. It leads me to question whether if Monish Pabrai's view is correct. Pabrai's view is that in looking at stocks, only a few variables are important. I am not sure if he has fallen to oversimplification but then again, his hedge fund performance is supporting Pabrai's view.

Well, pt 6) is one of the reasons that I started a blog. The blog will hopefully prevent me from having faulty memories.

Been Raising Cash

Last week, I have quite a number of trades. Besides buying Hongwei and one other stock before the selldown, I have also disposed two other positions on Friday so as to raise cash.

I have sold my positions in China Precision, C&G Industrial and SP Chemical. Even though China Precision and C&G Industrial are considered to be still undervalued by me, the degree of undervaluation is lower compared to my other positions, in my opinion. Also, I sell them to raise cash, which I have started to do since the last Mar selldown.

The act to raise cash serves a psychological purpose, which is to show that I have taken action to reduce losses in case the market corrects further. In other words, the act to raise cash is to reduce regret aversion. Or in chess terms, you can call it a prophylactic move to avert regret.

The act to raise cash may also help if the market corrects more. I will have the cash to purchase more undervalued stocks. Nonetheless, this may backfire at times if the market recovers, while I am not fully in stocks. In other words, there is a trade-off.

SP Chemical was a sale because of its 3Q 2007 profit warning. As I am not familar with how China's export rebates work for its chemicals, and with the market correction, it becomes one of the really candidate for sale.

Interestingly, I can observe retrospective thinking (or rear-view reasoning) in these market correction. A lot of pundits have been attributing the correction due to US subprimes, market aversion to risks and even yen-carry trade. While I do not know whether these reasons are correct or sufficient to explain the market selldown, I know that the reports often will state these reasons without much support or proof.

As for me, I will try not to theorize so much regarding the causes of market selldown this time. Rather, I will concentrate on buying cheap stocks if market selldown continues. Or maybe even sell a bit more. Let's see how the marlet develops.

What is your motive for investing / trading?

Buffett has mentioned that an investor should be animated by greed but not be controlled by it. Van Tharp, in Schwager's Market Wizards, said that movitation in making money is not an important trait in expert traders. Martin Pring, in Investment Psychology Explained, noted that great investors and traders invests/trade because they love the investing/trading, and not because of the money.

What is your motive for investing / trading? Is it because of the money or is it because you love investing? If you have not examined your motives thoroughly, you may wish to examine it again.

Personally, I started to invest due to the motivation to make more money. However, slowly and slowly, I realise that investing allows me to profit from ideas. I can expose myself to (new) ideas, synthesize or combine a few ideas, test them through the markets and in the process, gain feedback from the maket. This process of coming up with new ideas, testing the new ideas by staking one's money on it and getting feedback from the market is very interesting to me.

So much so that money, while important, may not be the sole motivator for my investing. If one day, assuming that I am lucky not to have money worries anymore, I expect myself to continue to search for new ideas and stake my money on these ideas. How fun the process can be.

Insights from The Black Swan: Pt1

At present, I am re-reading some chapters of The Black Swan (TBS) by Nassim Taleb. In my first reading of TBS, I find it more philosophical than Taleb's last book 'Fooled by Randomness'. Which is why I did not dare to give a review. I do not want to review something I do not fathom.

I find TBS more provocative than other books. TBS may, at some point, trigger some thoughts of mine which will link TBS concepts to my real life investing.

In a previous post, I mentioned that TBS highlights the rear-view mirror or restrospective problem. That is, humans tend to theorize the past based on ex-post results. For example, historians may use the actual occurance of World War I (WWI) to highlight that the events before WWI can be used to predict WWI. This is a form of rear-view mirror theorizing as one looks for possible explanations for something that have happened, and one likely would dismiss randomness as one of its causes. (Research using bond prices indicates that the market did not expect WWI to happen.)

How does rear-view mirror theorizing relate to investing?

Upon stumbling on the idea of rear-view mirror (retrospective) theorizing, I find that I also fall into the rear-view mirror theorizing at times. For example, when Shanghai Asia run up to 27c -30c recently, I lamented that I should have seen the rise of Shanghai Asia occuring sooner or later. I should not have sold Shanghai Asia at 21.5c. But I later realize that at the time of sale, I would not have possible known that Shanghai Asia would run up 30-40% a month later.

Knowing the problem of rear-view mirror theorizing may help me to avoid blaming myself too hard in future when results show unexpected losses or omissions.

Rear-view mirror (retrospective) theorizing may also highlight the problem of linear thinking. That is, we may extrapolate past trends into the future and underestimating the uncertainty of the future. My example and past observations would tell me that due to the strong run-up in Sesdaq recently, people are getting very interested in penny stocks and expects more gains from penny stocks. I am thinking that these people may have fallen for the rear-view mirror (retrospective) theorizing trap. However, I also understand that the uncertainty of the future may prove me wrong and these people right if Sesdaq keeps on increasing.

In this case, awareness of rear-view mirror (retrospective) theorizing may only help one to be less confident in one's prediciton of the future and allow more margin of error. Hopefully, the additional margin of error may bring better results in the long run. However, it is difficult in practice that one will turn the awareness into some checking tool due to a few reasons. Possible reasons are recency bias, the herding tendency and the overconfidence tendency.

I would not be surprised if I fail to turn this awareness into a checking tool and remain as a over-confident investor (or more harshly, fool).

Acheiving Competency in Investing (and maybe, trading)

How can one acheive competency in investing?
1) Read
2) Think
3) Practice
4) Repeat 1), 2) and 3) every week, every month, every quarter and every year

The above four steps, in my personal view, are the basic steps to acheive competence. This is also what I have been doing for the past few years to improve my investing skills.

While it is amazing how much I can learn by doing the four steps, I am amazed by the commitment one needs to do the four steps. You can always try out these steps and see if I am lying on the commitment required.

To get you started in step 1), I shall list down a few books that are important, regardless of whether one is an investor or a trader. Just ignore the titles and read them.
1) The Winning Investment Habits of Warren Buffett & George Soros by Mark Tier
http://marktier.com/Main/index.php
2) Trade Your Way To Financial Freedom by Van K. Tharp
3) Way of the Turtle by Chris Faith
http://www.wayoftheturtle.com/2007/03/22/the-four-maxims-of-trading/
4) Enhancing Trader Performance by Brett Steenbarger
http://www.brettsteenbarger.com/

Read the above books for the psychology of being a trader or investor. From my personal experience, the psychology is always the hardest part in investing. Unless you are lucky to have a brain suitable for investing, you will find that the other aspects of investing are not as important as the psychology.

The Government giving a Black Swan?

The government has given us a black swan today. The markets falls cascadingly when the development charges increase from 50% to 70%. And the most badly hit was the Sesdaq.

It's a pity that there is no put warrants on Sesdaq, else I may have bought some yesterday. I was looking at STI warrants yesterday, but I did not buy.

Euphoria turns to pessimism. Contel drop back to my purchase price. I do hope it drop further, so I can bear to buy more. I also hope some of my targeted stocks drop, so I can also buy more.

While I am fully vested in the market now, I do have spare funds and borrowed funds left unused. I do use a little leverage which is less 15% of my funds. This leverage has been lying in the bank some months back as I cannot find many bargains since the last Feb/Mar drop. Probably the leverage can be put to use soon. Maybe I should see if I can get more leverage. I don't know.

In the more deeper June correction last year, I manage to find better bargains such as CG Tech at 26c or China Sky at 80c. Not sure if I can find better bargains this time. But bargains come at a cost. My portfolio declines my 25% during the last June correction. I did feel quite upset during last June drop.

I am re-reading The Black Swan this morning, hoping to instill a bit more pessimism in my market outlook. Surprisingly, the market or the government decides to join in to give me more pessimism too.

The Black Swan mentioned that we always don't learn that we do not learn. Probably that's quite correct given my euphoria and the market yesterday. The book also mentioned on human's fondness for retrospective thoughts, or looking at the rear-view mirror. Which is also interesting, as the rise in Sesdaq may be due to retrospective thoughts. And lastly, I read that we are poor predictors of the future.

Given this knowledge, I can only know that I dare not predict where the market may go next. But I being human, I can't help but predict that the market may go down some more.

Yet, I am feeling more happy than unhappiness now. Probably that's due to I not holding any Sesdaq stock or not holding any property stocks. A more certain reason may be that the market and my declining portfolio may not be most important. Another matters more to me.

Deja Vu Again

Today os a day where most stocks went up a lot. Today is the day where Sesdaq hits 300, giving a year-to-date return of 111.5%!

Today is perhaps a lucky day for me too where I just bought Contel at an average 0.242 and it has hit 0.275 in two days. My last purchase was at 0.285 today. Contel is a stock that I have missed out. I should have bought it earlier. It was an ommission mistake

Interestingly, I have also corrected a mistake by doing a one-day contra or selling what I had mistakenly bought yesterday. The mistake is due to faulty analysis.

But I think tomorrow or the morrows after that may be worse. The optimism is a bit too high, too high for my comfort. However, I suffer from over-confidence. I do not really want to sell, as the stocks I am holding are not near my valuation yet.

I do not know whether this is a bad move in not selling. However, I know that I am 100% in the stock market now. I am also underperforming Sesdaq by around 25%. Probably my returns will be better if I have invested in property or construction stocks. But I didn't except for the brief holding period in Orchard Parade. I do not really understand or value property plays.

I am probably a bit too conservative in trying not to buy what I cannot value. Not sure if I can change. So far, I have listed 3 mistakes and it seems that the bullish market is able to tolerate my mistakes.

Nonetheless, I am in a cognitive dissonance now. I am persimmistic about the market but I am optimistic about the stocks I am holding. I am not surprised at my over-confidence. Perhaps I should not be surprised at my failure to held back my over-confidence too. However, stocks and stock market are not the most important to me.

Another is more important but similar to the market, it is out of my hands.

A Regret and some trades

I shall post some of my recent trades here. However, first I will state a regret or maybe an error of mine.

Recently Shanghai Asia has rose to near $0.30. As I have posted sometime ago that I have sold Shanghai Asia and thus I have missed the run from low $0.2x to near $0.30. This is my error in not being able to be more patient.

My impatience or psychological weakness may have shone again as I sold Jardine Strategic when the STI drops around 50+ on a certain day. On the other hand, the sale was made as my strategy is to raise cash when market starts to fall. The cash raised will be handy to pick up bargains if market fall becomes a market correction. So far, Jardine Strategic has risen above my selling price. I am not certain whether I am willing to buy it back at the current price given my caution for high margin of safety. I would prefer to buy when it's at below $13.

Besides selling Jardine Strategic, I have also sold part of my Global Testing position. The sale of Global Testing position may be another potential mistake as semicon recovery may be in place now. Nonetheless, as I have retained part of my Global Testing position, I will continue to gain if Global Testing rise in future.

I have meanwhile used the receipts from the sale and some cash to buy China Lifestyle, C&G Industrial and SP Chem as the market recover slightly from the bearines (or STI 50+ drop).

However, I have kept some cash in reserve. While my portfolio is still underperforming Sesdaq (Sesdaq YTD is over 90%!), I am glad that one of my holdings, Techcomp, has risen to $0.65. My cost price for Techcomp is slightly less than $0.30. Despite the small sale by Techcomp director, I am still quite optimistic of Techcomp given its positioning in the scientific instrument industry.

Firstly, scientific instrument industry is less affected to recession. Secondly, Techcomp is introducing new products (new distribution contracts), having new capacity and developing new line of products (consumables). Thirdly, if Westcomb recent report of Techcomp's competitors is true, then Techcomp is in a sort of sweet spot as it may not face fierce local competition as it is in the mid-market segment and most local competitors are in low-range segment. Finally, my own valuation of Techcomp, based on Westcomb and Kim Eng's estimated earnings growth rates, would be just slightly lower than Westcomb TP of $0.97. Which means that Westcomb TP of $0.97 is still reasonable given its estimated earnings growth rates.

Shout out: A dangerous time to be in Singapore market

I can't resist myself. I can't resist shouting that the Singapore small caps market is dangerous now. It has risen 60+% last year and now, it has risen 82% year-to-date.

Currently many small caps stocks are moving upwards, especially those that have some properties element. Also, small caps with funny fundamentals are also starting to move. I think the small cap market is showing quite an exuberance now, similar to the China Spore-listed stocks at start of 2006.

History almost never repeats. But most servere corrections come after a period of extreme exuberance. We are currently in exuberance stage, perhaps in extreme exuberance stage. I don't know. Likewise, I do not know when the small caps market may crash or correct.

But my guess is someday sometime the crash or correction will come. The only question is time.

Book Review: Happiness Lessons from a New Science

I have just finished reading the book “Happiness: Lessons from a New Science” by Richard Layard. This book has a few controversial points, which people may find them disagreeable. However, I shall start with the more agreeable points first. Before I start, I shall state that this content in this book is lighter than most non-fiction books and it is not a bad read. The book can be found in NLB under 302.5 LAY.

1) We (humans) tend to seek happiness. That is, we would want to feel better.

2) We tend to prefer to be with company most of the time than to be alone. This is supported y research that friendship and marriage tend to improve happiness. Unemployment, on the other hand, lead to unhappiness as one of the reasons is that it cuts away the social ties one has with one’s former colleagues.

3) We will be happier if we can trust people more. For example, if you can trust your family, friends or colleagues, you tend to worry less and enjoy their company more.

4) We are attached to status quo. In other words, we hate losses more than we like gains (prospect theory). In addition, we would demand a higher price for an item that we owned compared to the price that we would pay for the same item if we do not own it (endowment bias).

5) We are status conscious. That is, we prefer to be among the winners and the elite compared to being among the losers and the weak. A personal example. Although I may have higher absolute portfolio return year-to-date compared to last year, I am feeling worse than I felt last year. This is because I am outperforming both STI and Sesdaq last year and I am underperfomring Sesdaq this year.

6) We are very adaptable to new situations. This is both good and bad. It is good as we may be happier than we thought if something bad happen to us. At the moment, the complaints about higher GST seem to die down and most people are adjusting themselves for the GST increase in July. This is unlike the scenario early this year, where complaints on GST and unhappiness on the GST increase are seen. Being adaptive is bad because we will get use to a happier situation such that the increase in happiness will slowly die off. For example, newly married couples would tend to feel happier than couples who had married for a few years.

7) Additional income increases happiness less and less when people become richer. For example, an additional $1 million may lead to more happiness in poor countries compared to the same additional amount in rich countries.

8) Finally, individuals have the means to increase their happiness. For example, more religious people or people who practices mediation tend to be happier.

Now I shall talk about the controversial points.

9) The author opines that the best society is the happiest. That implies that public policies should aim for higher overall happiness rather than the result of making more people happy. If a poor person gets more happiness when they receive an additional $1 compared to the loss of a $1 to the rich person, public policy should tax the rich for that $1 and distribute it to the poor person. This would increase overall happiness in the society, assuming that there is no distribution cost. Somehow this view runs counter to the prevalent view that we should lower income tax and tolerate higher income inequality so as to attract more talents and investments.

10) As mentally ill people tend to be more depressed compared to patients suffering from other illnesses, the author suggests devoting more resources to treat mentally ill people. This point is a bit controversial as the overall happiness criterion is used as the basis for resource distribution. Although I would support devoting more resources to treat the mentally ill patients, I also realize that the use of overall happiness criterion may not be the agreeable criterion for some people.

Oak Value Fund Manager Interview

Have just read this informative interview of Oak Value Fund Managers at Motley Fool.

http://www.fool.com/investing/value/2007/06/20/oak-value-interview-meet-the-managers.aspx

Here are some excerpts. Happy reading.

>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

But I will tell you, one of the things we have wrestled with often is when you find a good company,if you find a great company -- and in many ways youhave talked about your interest in eBay, and I thinkwe would all probably agree, it really has many of thecharacteristics of a great company.

Valuation is the hard part. We run a worst case, abest case, and a base case. We do our work using abase case of what we think is a very reasonable,rational, and what we usually find to be a veryconservative thought process of what will unfold. Therisk to us is that if we find a really great one, andthere are not that many really great ones, we have tospend lots of time on the maintenance part of ourresearch to understand and make sure we are properlyvaluing it. We want a good understanding what itreally is worth, because we don't want to sell tooearly. But when it does get to our intrinsic value, wedo move on even if it is a great company.David Carr: One of the reasons we always demand themargin of safety is we have been through severealligator-biting times, and we have seen our rear endshanging out there, and we have the bite marks to proveit. That experience is valuable, and I am not sure itcan ever be passed on without having been experienced.

Final thoughts

DM: You get one final parting shot here. If peoplewant to become better investors, what do you think isthe first thing they should focus on?DC: I think the service that you all provide and theeffort that you make is important in trying to educatepeople, because there are so many people saying youmust do something now and time is going away quickly,and I think the ability to be able to think long termand to understand is a nice perspective. So I wouldsay, maintain perspective.

LC: There is a quote by Ben Graham where he says,"Investing is most intelligent when it isbusinesslike." And so, have the same perspective whenyou look at investing in businesses, even though youare only buying a hundred shares or a thousand sharesor a million shares, or whatever you are buying.Recognize that you are buying a piece of a business,and pursue it with the same diligence and thoughtprocess and analysis that you would if you were goingto buy the entire business.

A book on America Fringe Economy

This post will present a short review on a book ”Shortchanged” by Howard Karger. Next, a personal niggling thought on the stock market is posted.

”Shortchanged” is a book depicting the financial life and debt in the fringe economy in America. It tries to show how financial companies (e.g. pawnshops, credit card, cash cashiers) do business with the low-income as well as debt-ridden consumer (which is the fringe economy). As these low-income or debt-ridden consumers are usually deemed as high-risk borrowers, they are not able to borrow funds at the normal interest rate. Neither do they have the funds to purchased discounted white goods without the use of installments. As such, the financial companies would levy higher interest rate (too high, in fact, as the book describe some interest rate charged is around a few hundred percent a year!) on the loans given to these group of people.

Of course, these low-income consumers are likely to lack the financial education or time to read through the conditions or understand what they are getting into. Even though they understand, sometimes the lack of alternatives for emergency loans may lead them to take up these high-interest loans. The book also discuss on plausible solutions to alleviate the predicament in the fringe economy.

When I am reading “Shortchanged”, I often think whether Singapore will follow the footsteps of America’s fringe economy. We have already seen the impact of credit cards where banks try to offer consumers cash advances at double digit interest rate and the probable scenario that more people are getting into debt-mire with credit cards. In the recent years, we have also seen companies like James and Ezycash offering loans to low-income individuals with high interest rates. While I am not certain of the Singapore fringe economy future, I wonder whether the low-income group will become more debt-laden or whether they will be even be in more dire circumstances in future. Nonetheless, the book ‘Shortchanged’ will be worth reading if one is interested in the fringe economy.

Recently, I have been thinking on the strong run-up seen in Sesdaq. From Jan to the current date, Sesdaq has returned 74%. I guess that Sesdaq will probably advance in the near future. However, what I am concerned about is the future Sesdaq correction. I am guessing that the future correction in Sesdaq would be dire in magnitude. Given that many common people are currently playing the stock market and the strong run-up Sesdaq is having, the correction period may not be far-off (maybe in a year’s time? I dare not predict a narrow timeframe).

Meantime, I will be under-performing Sesdaq for the current year. The under-performance is getting worse. Sigh. This is perhaps not surprising as I am more of a low-PE shooter (ie recent purchase of China Power Print) rather than a growth investor. Therefore, my performance would lag (seriously) behind growth investors when growth stocks are soaring high. Well, happy for the growth investors and hibernation for me.

P.S. I have sold all my positions in Shanghai Asia and Shanghai Turbo recently.

The Power of Diversity

I have recently read the book “The Difference” by Scott Page. It is a book on how diversity can create better groups, firms, schools and societies. Similar to previous post, I would recommend you to buy the book and read it. I am not sure if the local bookstores have it as I got mine from Amazon.com

I shall list the learning points I gathered from the book below. However, these points may not be correct or may not be complete as it depends on my understanding from my first read of the book.

1) Diversity helps to solve difficult problems given certain assumptions. The assumptions are that the group of diversified people can coordinate well, the diverse group has different skills and the group must be smart.

2) Why diversity helps. Given that a smart person in a diverse group may get stuck at a sub-optimal solution to a difficult problem, another person in the diverse group may be able to start from the sub-optimal solution to get to a better solution using different skills and knowledge from the first person. In a diverse group, the more diversity there exist in the set of skills, the more likely the group solution can get to the best solution, given all other things remain constant.

3) How diversity comes. Different people have different perspective or viewpoints, different heuristics or rules-of-thumb, leading to different interpretation of events. The different perspective, heuristics and interpretations may then lead to different solutions to the same problem.

Read the book for more learning points.

An Engine, Not a Camera

The following are my notes (or what I have learnt) from the book, ‘An Engine, Not a Camera'. It is written by a sociologist. I would recommend those who are interested in financial theories and its effects on the market to read it. My notes may not be self-explanatory if one lacks the context behind the book.

The notes are:

1) Financial theories may be performacity or counter-performacity. Performacity are theories that act to make the markets to conform more towards the theory. For example, B-S options model when known actually help the option prices to converge to B_S model. But after 1987, B-S model becomes off-the-mark as traders become more risk-averse (introduction of volatility smile). Efficient market hpothesis (EMH) lead to index funds which may have the counter-performacity effects. Shares that are announced to be included in the S&P index may have an increase in prices of these shares. The announcement of shares being removed from an index would lead to a decrease in the prices of these shares. As such, such price movements due to inclusion or exclusion of shares in index are anti-EMH.

2) Levy distribution, as recommended by Mandelbroit, may be used in options models to take care of fat-tails or Black Swan problem after the 1987 crash.

3) The fall of LTCM is due to the feedback mechanism and the size of the fund. The feedback mechanism in the markets may cause the correlation of seemingly uncorrelated financial productions to increase sharply (ie when investors’ risk aversion has increased sharply due to adverse events). The size of the fund may lead to the speculation that the fund may be in trouble and if the fund being seen as large as the market, traders may converge to cause a negative feedback effect on the fund’s products. This is what has caused the fall of LTCM where first, investors’ risk appetite has fallen due to some external events. LTCM start to lose money and it become known to investors and outsiders. Outsiders speculate that LTCM is large and thus would have impact on the market if it starts to dispose its positions. So funds and traders start to converge by acting like anti-LTCM positions. As LTCM is a leveraged fund and it has recently returned cash to investors, it is not able to withstand the onslaught and thus a liquidity crisis has formed.

Buying and Selling

I have been selling and buying over the past week. Out goes my position in SP Chem, and in comes a HK stock, additional positions in Global Test and China Precision, and a new stake Shanghai Turbo.

SP Chem was sold mainly to finance my purchases. Maybe I may buy it back again if it falls to $1. Earlier on, I have also sold my largest holding, C&O Pharm as it seems to have recovered fully from the inventory problem.

I shall not reveal the HK stock as the stock idea is not mine. The addition of Global Test was more of an emotional reaction to the rising price of Global Test. Despite the knowledge that I wa reacting to the price rise when I am buying, I did not cancel my purchase as I did not wish to suffer any regret if Global Test continued to rise. However, I did know that my purchase price of Global Test was still at an acceptable range and Global Test, to me, is a play on semiconductor recovery. Recently, I have seen reports that the semiconductor sales recovery this year may not be as strong as predicted. I may have to wait longer for my stake in Global Test to bear fruit.

My addition of China Precision was due to the price fall to around 6.9 historical P\E. Besides the sufficiently low valuation, this addition was done partly also due to my preference for stock to cash.

My new stake in Shanghai Turbo is rather speculative as it is done more based on gut feel than valuation. My purchase of Shanghai Turbo was prompted by a Westcomb report hinting at the likely recovery of Shanghai Turbo sales. Shanghai Turbo produces vanes for steam turbines used in power plants. Its business was badly hit last year as its main customer decided to in-source the production of vanes and the expansion of power plants in PRC was reined in by the government. In buying Shanghai Turbo, I am betting on the odds that Shanghai Turbo sales would recover due to its expansion into new products (vanes \ components for gas turbines) which would be sold to international customers.

I suppose that international customers would tend not to in-source outsourced components as they would not enjoy the same cost advantages if these customers do not have production in PRC. Nevertheless, as the odds of a recovery in Shanghai Turbo sales remain uncertain, my stake in Shanghai Turbo remains small relative to other stocks. In the worst case scenario, I may lose up to one-third of my stake in Shanghai Turbo. Whatever the outcome is, my stake in Shanghai Turbo will be a good learning experience for me.

Looking for blind spots

“You can get away with more than you deserve in life by being slightly more rational.”
-- Charlie Munger

I am back to urban lifestyle after a week of national reservist. Back to reading and blogging. First, I shall blog on looking for blind spots

One can be more rational by knowing that blind spots (or more technically, unknown unknowns or known unknowns) always exist. And one should try to look for these blind spots, especially in financial stuffs. Hopefully, not much important stones are not left unturned.

Why do I say so? Just look at this article on poverty business. http://www.businessweek.com/magazine/content/07_21/b4035001.htm The articles show that people may have been outsmart by lending corporations because they do not look for blind spots before they decide. They may forget to read the clauses or ask how the other party benefits when they do business with you. Or perhaps, they didn’t know to ask the salesperson to convert the interest rates into effective interest rate per annum.

In another blog, I read that a lot of people are unaware of the high managerial fees in Cityspring. And the fees are clearly shown in the ipo prospectus of Cityspring. This is another case to illustrate why one should detect for unknowns to avoid negative surprises.

Charlie Munger may be right that you can benefit more than you deserve by being more rational. And you can be more rational by first trying to look for blind spots.

Been Reading

My ordered books from Amazon have arrived two weeks ago. Currently, I am spending my time reading on “The Three Questions that count” by Kenneth Fisher and “The Black Swan” by Nassim Taleb.

“The Three Questions that count”, as described by Fisher, are three questions that can be used to answer one question.”What is it, that you know and others do not know, which gives you the advantage over others in the market?” The book is thick but worth the time reading. I have not finished the book. However, I can give you the three questions here. You will learn much more by reading the book to know how these three questions can be applied. For more details, you can refer to www.onlythreequestions.com/ or the Jan –Feb articles in http://www.wallstraits.com/main/index.php

The three questions are:
1) What do you believe that is actually false?
2) What can you fathom that others find unfathomable?
3) What the heck is my brain doing to blindside me now?

The other book “The Black Swan” discuss on the topic of extreme events that are of high impact and low frequency. It is much more philosophical than the author’s first book “Fooled by Randomness” (2nd ed). So far, I have read around half of the book but it seems insufficient to provide a review here. However, I do envy the author having the financial freedom to live by thinking about philosophical stuffs.

Nonetheless, extreme events do deserve our attentions; especially since they do happen in the field of finance. For example, the collapse of LTCM is caused by extreme event(s). For more details on the book or on Nassim’s thoughts on extreme events, you can refer to http://www.fooledbyrandomness.com/. Or for a complete and long review of the book, see http://econophysics.blogspot.com/2007/05/black-swan-well-thats-life.html (too long for me to finish at one go).

Nothing to post

I guess I have nothing to post for this weekend. I see that people are posting their portfolio in channelnewasia. Maybe I will do the same here. My portfolio is as followed:

C&O
China Preci
SP Chem
Techcomp
Shanghai Asia
China Printing
Jardine Strategic
Global Test

In value terms, it is just a small and poor portfolio. That's all, it is a short post this weekend.

Which is more undervalued: Jardine Strategic or Jardine Matheson?

I have bought into Jardine Strategic (JSH) this week. In my opinion, I think that JSH is undervalued as it trades at around 70% of its end 2006 market net asset value (MNav). I define MNav at valuing the company’s net asset at market value. This opinion has been addressed in my previous post.

In this post, I will attempt to illustrate another opinion. That is, I think JSH is more undervalued than Jardine Matheson (JMH). In my previous post, I have stated that JMH and JSH have cross-holdings in one another. JMH owns 80% of JSH and JSH owns 53% of JMH. After I has attempted to remove the cross-holdings, I find that JMH’s annual report uses the net number of shares after accounting for cross-holdings to compute its Nav and EPS (earnings per share).

The table below shows my finding on MNav of JSH and JMH. My finding show that JSH may be trading at a discount of 30% to its MNav, while JMH trades at a discount of 5% to its MNav. Again, this finding may be wrong as there are some assumptions behind the findings.

First, the total number of shares is derived by taking its Issued & Paid-up Capital divided its par value per share. Next, the net shares after cross-holdings are derived mathematically by accounting for JMH and JSH cross-holdings. JSH’s MNAV is taken from its 2006 annual report. However, JMH’s MNAV is derived mathematically by roughly taking 2/3 of the JSH’s MNAV and adding back the JMH portion not owned by JSH. (You may have to refer to the Market Value Net Asset Basis portion in JSH 2006 annual report for better understanding.)

The 2/3 proportion is obtained by taking the remaining JMH’s stake in JSH after deducting away JSH’s share of JMH’s share of JSH. To illustrate, given that JSH owns 53% of JMH and JMH owns 80% of JSH, JSH owns around 40% of its total shares on paper. Therefore, JSH’s net shares after cross-holdings are roughly 60% of its total shares, of which 40% belongs to JMH and 20% belongs to the public. Therefore, JMH’s MNav excluding the companies not owned by JSH is 2/3 (or 40% over 60%) of JSH’s MNav.

I repeat that my finding is dependent on the above assumptions being plausible and representative of the actual situation. As I may make mistakes in my fact-findings or in my computation, it would be best if one does one’s own research.

In any case, the present market does not seem to be interested in JSH. The market seems more interested in penny stocks. However, I have observed that Aberdeen Spore trust has JSH in one of its top 10 holdings in its factsheet. Furthermore, a renowned value fund management, Tweedy Browne, has JSH in its 20 largest holdings of its Global Value Fund as shown in its Q1 2007 commentary. I guess I can sleep soundly given this information.

What is the true NAV for Jardine Strategic?

Looking on page 5 of its 2006 Annual Report, Jardine Startegic (JSH) at US$13.40 may be trading at 70% of its net asset value (NAV) of US$19.38, which is calculated based on market price of its holdings and excluding 455 million shares held by Jardine Matheson (JMH).

JSH excludes JMH's 455m shares due to cross holdings. JMH owns 80% of JSH and JSH owns 53% of JMH. JSH has a total of 1072m shares. As such, JSH effectively owns the 455 shares out of the JMH's 858m shares in JSH, which may mean that there are effectively 617m shares, instead of the 1072m shares on paper.

If we use the full 1072m shares to compute JSH's NAV, the undervaluation disappears as the NAV will then be at around US$11.15 per share using the figures in its 2006 AR.

JSH owns, besides 53% of JMH (note: JMH owns 80% of JSH),
- 64% of Jar C&C
- 78% of Diary farm
- 74% of Mandarin Oriental
- 47% of HongKong Land (HK Lands owns 70+% of MCL Land and is also one of the three partners for Marina Biz Fin Centre and the recently built One Raffles Link) You can find this information in its 2006 Annual Report too.

Another good question to ask may be what the difference is between JSH and JMH and why they need the cross holdings. This is something that I have yet to figure out.

What is the true NAV for Jardine Strategic? I don't know. I have just posted in www.shareowl.com to ask the professor there. Maybe he may be able to provide an answer there. If you wish to know his answer (supposing that there will be an answer), you may have to subscribe to it. It is not right for me to post his answer in my blog.

As usual, please do your own research and do not simply accept my thoughts here. Only recently, I have discovered again another mis-calculation in my excel spreadsheet. I am rather prone to error now and then.

Pain from Investing Process

I have mentioned that investing (or more precisely, DIY investing) is a painful process to me. I shall elaborate on why investing is painful in this post. However, I shall start with what I enjoy about investing.

I do enjoy certain aspect of investing. I enjoy the ideas generation and the merging of ideas in investing. For example, you will encounter the idea of expected value in statistics. Simply put, expect value is the sum of the multiples between the probabilities and its outcomes

Expected value is quite dry to me in terms of statistics until I see it taking place in the field of stocks investment. In stock investment, your expected returns on a stock can then be derived in a similar manner, by taking the sum of subjective probabilities multiplied by the respective outcomes. If one invests using value-investing approach, one is basically buying below stocks at prices below one’s subjective expected value of a stock.

Why is investing painful? One, it is painful because investing, when done correctly, is boring. Or some famous value investors put it as “it’s like watching your paint dry”. I guess I am already quite bored presently. Investing seems to worsen my boredom.

Furthermore, it is no fun that I have to restrain myself constantly from acting or trading too much. Often, it is only after my trades that I can detect if my (numerous) trades turn out to be fine or plain silly.

Probably investing in stocks is painful because I have to endure the uncertainty in stocks. Almost everyone hates uncertainty; else there will be no such thing as risk premium. Enduring uncertainty is painful. I may have to ignore the present volatility in the stock prices. I may have to think about whether the stock at its current price is still offering a sufficient margin of safety for me to hold or for me to have the current large position. Such thinking about uncertainty is perhaps what I am doing around once every week.

Finally investing is painful when one encounters a correction. I will, by instinct, panic in a correction. Overtime, the panic feeling may lessen when I experience more and more corrections. However, panic is not a nice feeling to have. And it clouds my thoughts; especially when my thoughts are trying to get me to act differently from what my emotions require. Acting differently or in a way opposed to your emotions is painful.

Given the pain in investing, my view is that I will continue to invest in DIY manner if I am confident of achieving market beating performance. Else, I should consider buying more unit trusts or ETFs. If my holdings solely consist of unit trust, I can always blame the fund managers, instead of blaming myself, for the poor performance.

Unfortunately (or fortunately), the pain will have to continue since my returns are currently better than the market. Maybe, pain from investing stocks can help to relieve boredom. I don’t know. I don’t know which is more preferable, pain or boredom.

Short Review on my Disposed and Added positions in March Correction

The market has recovered and soared since the March correction. Perhaps it is a good time for me to look at the positions I have disposed or added during the March correction.

During the late February and early March, I have disposed two positions, CG Tech at around 0.71 and Sunray at around 0.22. CG Tech is quite profitable to me as I have last bought it at late 2006. Sunray is a loss for me as my average price is around 0.27.

At that period, I have also added three new positions. They are China Precision, Techcomp and Orchard Parade. I have discussed Orchard Parade in my earlier post.

So far, all these three new positions are profitable and I have not cut down on any of my positions in these three stocks. Techcomp was more of an undiscovered stock when I bought it, so it may be luck that its price has reached 0.40 in around a month.

China Precision was a stock that I have bought much earlier at 0.40 and sold it at a slight loss before its poor 2006 FY announcement. Thus I have been following China Precision all this while and started buying at 0.285 when I observe that an independent director have started to accumulate the stock. Its current price at 0.28 is also a minor surprise to me as I do not expect such fast price recovery from its low.

At their current prices, these three stocks have not reached my target price. I suppose I will continue to hold on to these three stocks given no adverse news or better stock buys. Nonetheless, please do not ask me on my target price or my views on these stocks. It may be better for one to do their own research and act according to one’s own convictions.

In my opinion, the recent profits from these three stocks are mostly due to luck. I should not be too optimistic regarding the future. Instead, I must remind myself that any adverse event may happen and, I should be cautious and hope that I can obtain above market returns in the long run. Investing, to me, is a painful process after all. I should adopt passive investing if I cannot get above market returns despite my efforts.

Under-Reaction to Property Plays

If investors has certain biasness to over-react to certain situations like a single bad quarter, investors may also have some biasness to under-react to other situations. And recently, I discover my own biasness to under-react to a property play as I bought smaller stake in that property stock than I would buy if it is some other stock.

I do not normally buy property stocks due to my lack of understanding to value them in the long run. Or in other words, it is difficult for me to apply discounted dividends or cash-flow method to property stocks. In most local research reports, they would use a RNAV (Realized Net Asset Value, if I’m not wrong) to value property stocks. I recognize that I lack the understanding in properties to do an estimate of RNAV, so I generally do not buy property stocks until two weeks ago.

Around two weeks ago, I bought into Orchard Parade at $1.10 as I think that it may be a rare case of a property stock that I recognize as low-risk with good gains. There are two main reasons behind my thinking. One, Orchard Parade’s price is around two-thirds of its net asset value at $1.64 in its latest annual earnings announcement. This provides a certain margin of safety.

Second, I can see several factors that may lead the market to close up the gap between the stock price and the NAV. The most obvious factor is the very positive sentiments towards property stocks, especially property stocks with buildings in the city area. Orchard Parade owns a freehold hotel near Tanglin Mall. Another factor may be the possible further increase in the NAV of Orchard Parade due to increasing prices of properties in the city area.

Perhaps with Orchard Parade’s price rising to its current level, I may be suffering from a hindsight bias when I lament that I should buy more of Orchard Parade at that time. However, when I look at my average position size in my portfolio which is larger than my Orchard Parade’s holdings, I realize that I may have under-reacted or under-purchased Orchard Parade due to my biasness against property plays.

Nonetheless, I am unlikely to make any more purchase of property stocks due to lack of cash. Perhaps even though I recognize my biasness to under-react in property plays, I have not corrected fully for my biasness. In most cases, property plays will still be quite alien to me.

Market Crying Wolf (or Bear)?

As this week passed, many people judged that the market correction is finally over. The STI has recovered to 3205 as at Friday 22 Mar 2007.

I am, of course like many investors, glad that the market has recovered. In this episode, I have hopefully learnt to withstand market volatility better and not to panic when disaster strikes again.

And as I have said before, it is quite fortunate that I returned to the market much faster than I would have thought, after disposing around 50% of my holdings. Yet, I have not fully recovered from the peak before the correction. Last year, it took around four to five months from the May-June correction before my portfolio return to the peak during April 2006. Maybe this year’s recovery may come sooner or it may not come. I don’t know.

When I look at the 2006 and 2007 correction, it may seem like a correction on hindsight. Or metaphorically, it is like the market crying wolf. Yet, as the story goes, sooner or later the wolf appears but when it appears, it is most likely at the most unlikely time. At a time when people think that the market is crying wolf again. And then maybe the wolf appears out of nowhere.

This happened before in the 1999-2000 US market, where after the 1998 recovery, investors believes that any dip is a buying opportunity. Until the bear strikes in Mar 2000 and then it takes quite a bit of time before people realize that the wolf has finally come.

As I review the current market recovery, I realize that I become more prone to believe in buying on dips and therefore, more prone to the market crying wolf trap. That is, failure to recognize the wolf when it appears or before it appears. On second thoughts, perhaps I have a better chance to recognize the wolf as I adopt a bargain value investing style.

Due to my bargain value investing style, it is possible that I may run out of stock positions or stocks to hold when the market is getting very expensive or bubbly. This may enable me to be better prepared when the wolf comes. Yet this hypothesis hinges on the bear striking when the market is at a very expensive stage, Else, I will be equally likely to be unprepared for the wolf.

Well, let the market takes its course. As at now, I am fully invested and it may be time for me to hibernate till May, the release of quarterly results.

An put warrant loss, solace in Graham philosophy

On a certain day during last week, I have purchased a put warrant on STI when STI drops around 80 points. The original intention of the purchase is to hedge my portfolio. At the end of that day, I feel like a genius as my put warrants show a significant profit.

And in the next day, I was made to feel like a fool when I disposed my put warrants at a significant loss. As the US markets had recovered overnight, the STI on the following morning followed the US markets and jumped around 40-60 points. To cut the possibility of further losses as well as to remove the hedge, I dispose of my put. This experience or hedge set me back by around 800 dollars.

On further post evaluation of the put warrant incident, I figure that I am bounded to have expected losses in warrants if I am to invest or speculate in warrants. This is because I lack a strategy to derive positive expected profits in warrants. Assuming that the market is close to random and warrants are priced at a premium, my probability of wins would be around 50%. Losses are almost certain if I continue to persist in warrant operations. And given the leverage inherent in warrants, it would not be surprising if the warrant operations bankrupt my portfolio in due time.

This unprofitable warrant trade also shows me realistically that hedging may be costly. And it leads me to re-think on whether I need to hedge my concentrated portfolio or not, if my portfolio consist of no leverage. At this moment of time, I think that I may not need the hedge, after considering that my portfolio is based on value investing philosophy.

Furthermore, a re-read of a chapter in Benjamin Graham’s book “The Intelligent Investor” reminded me that a value investor would lose his significant advantage if he is to let the market prices dictate or affect his investing decisions. As such, according to Graham’s philosophy, an investor should ignore the market prices and at an opportune time, take advantage of the distressed or over-optimistic market prices.

On hindsight, I will suffer fewer losses in my portfolio at the present moment if I adhere to Graham’s philosophy when the market corrected two weeks ago. It may not be too late for me to adopt his philosophy now. Yet, I guess that if I have a heavily leveraged portfolio, Graham’s philosophy has to be abandoned.

Perhaps Too Panicky?

After a week, the market seems to have recovered with the STI at 3182. On hindsight, I may have made silly decisions to liquidate around 50% of my portfolio into cash. If I have not sold during the crash, probably my current portfolio would look better when the market recover.

At the end of last week, I have taken steps to re-build my portfolio by buying into the stocks I am still holding and a new stock holding. This somewhat relieves the pressure of underperformance when the market is or seems to be recovering. And today, I have further added on to my holdings. I’m not sure if buying now will be correct in the coming days or weeks.

It is very difficult to act on foresight and easy to evaluate on hindsight. I do not mind the heavy liquidation done last week as I would not have known if the market would continue to correct or not.

Furthermore, I do not believe in technical investing. Or to put in another way, there is no solid logical ground showing that technical investing will outperform the market over time. In any case, any brilliant performance in one period may just mean that the investor may be very lucky in that period or the investor’s strategy is very well-suited in that period. In the long run, however, it may be a different story altogether.

Perhaps, I am being to kind to myself in not re-examining my liquidation decision last week. And most likely, I would not liquidate as severely as I did last week when the next correction appears. Nonetheless, I believe that I should at least liquidate a little during corrections so as to take advantage of the low prices in other stocks if the situation arises. In addition, the liquidation would also help me in re-positioning my portfolio.

Yet, liquidation is costly as one can miss out the unexpected market recovery with certain transaction costs. Therefore, perhaps it may not be ideal to do heavy liquidation but a little liquidation may not be that useless or bad, after all.