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.