2021 Review of Portfolio

 This will be a review of my holdings this year.

1)      Performance of Individual Stocks Portfolio

 

My stock portfolio rose 14.7% in 2021, over-performing STI ETF (13.2%). My return was as high as 23% in mid-June 2021, lifted by bullish sentiments in HK small caps. However, it was pulled down in 2H 2022 by China stocks listed in HK

Year	% Returns	STI ETF (incl Dividends)
2019	8.4%	9%
2020	3.6%	-8.6%
2021	14.7%	13.2%

 

Probably, I should not be comparing to STI ETF, as my portfolio has mainly shifted to non-Singapore stocks. (In 2020, Singapore stocks are still half of my portfolio.) I guess that I will stick to the comparison to STI, since I have been comparing to it for many years.

 

 

2)      Position Sizing

 

Excluding odd lots, I have 19 open positions in my individual stock portfolio. Moving forward, I think my stock portfolio will have fewer than 19 position, as I prefer more concentration in stocks that are good businesses.

	Number of Stocks
At end 2016	21
At end 2020	39
At end 2021	19

 

 

3)      SRS, ETF (VWRA) and Non-Stock Portfolio

I have other stuff besides my individual stock portfolio. It comprise

·         SRS account (mainly STI ETF and a few stocks which I don’t trade much)

·         ETF (VWRA)

·         Bonds – mainly Singapore Savings Bond (SSB) and Astrea IV-VI Bonds listed in SGX

·         CPFB accounts

·         Cash

 

4)      Approx 60-40 Allocation

 

I have sticked to approx. 60% stock to 40% non-stock portfolio allocation.

I wanted to reduce my cash allocation to more bonds. However, I do not want to buy into bonds ETF in environment where interest rates are expected to rise in future. I will put more cash into SSB and money market account next year to earn higher interest rates.

 

5)      Net Asset Growth

 

I started keeping track on my net asset since 2014. My net asset has been growing annually.

 

The 2021 increase in net asset is driven by stock portfolio returns and my wages this year.

 

2021 Review Part 1

Strategy Re-set

2021 is a year where I reset my investing strategy. I reset my strategy in 2012 to be more diversified. In 2021, I reset my strategy to buy quality business and own them for many years. This is still works-in-progress, as I still own 20 stocks currently.

My number of stocks owned should continue to decline over-time

Re-Thinking about Losses in Market

I used to fret a lot about losses. Now, I still fret but hopefully lesser, as I re-frame my thoughts. The re-framing is -- If I own a quality business that is growing annually, it does not matter if the business is priced lower or higher today. Because I am not looking to sell it. 

If the business is priced much lower, with no detioriaration to its business quality, the market is offering me a chance to buy more at good price.

Cash/Equity Allocation Matters

I reviewed my allocation from 2014 onwards. My cash allocation were around 20% in 2014-17. If I had invested higher proportion of cash into equities, I will be richer now. Hence, I should strive to lower my cash proportion.

Currently, my cash proportion is still quite high at 14%. Hopefully, I can reduce them to 10% in 2022.

Owning Great Business for many years

I read Nick Sleep's letters recently. The key takeway is on owning great business for many years to let the compounding work. Another takeaway is owning business who are quality capital allocators. 

Extract from the letters: "The biggest error an investor can make is the sale of a Walmart or a Microsoft in the early stages of the company’s growth. Mathematically, this error is far greater than the equivalent sum invested in a firm that goes bankrupt."

"The “super high-quality thinkers” are our best guess of those firms whose shareholders could abdicate their right to trade stock (allocate capital themselves) sure in the knowledge that their capital will be well allocated for years to come within the businesses. This list is a group of wonderful, honestly run compounding machines. We call this the “terminal portfolio”. This is where we want to go. The question is, why is this list not the same as the current Nomad portfolio?

This is not an easy question to answer. But let us return to the church analogy for a moment. When we think about companies, the over-riding analytical consideration is the quality of the business and quality of management’s capital allocation decisions. The longer investors own shares the more their outcome is linked to these two metrics."

Changing Investment Approach

Before 2012, my investing approach is to buy low PE stocks and my portfolio was  concentrated in less than 10 stocks. However, in 2011, I suffer large lossess from S-chips. 

From 2012-2020, I change my investing approach to be more risk-averse. I diversified my portfolio to more stocks. I started buying stocks more for their dividends. I bought bank stocks. 

However, in recent years, I found that my portfolio returns have dampened. I am caught by a few times with large price declines in stocks with high dividend yield. This does not seem to be the direction I should be going.

In 3Q 2021, I started to change my investment approach to the following:

1) Buy growth/quality companies 

-- Buy when their prices are at recent low. 

-- Their business will be growing for the next 5 years, 10 years or longer

-- I will hold them for 5yrs, 10 yrs or longer to benefit from the compounding of their earnings

-- I will hold meaningful position ranging from 7% - 20%

-- As a result, my portfolio will be more concentrated

2) Special Situation

-- These will comprise smaller proportion of my portfolio, maybe up to 20% at most. It depends on whether I can find these stocks

-- The stocks will be kept till the price has run up (i.e. has turned around) or the event has sort-of completed.

-- Such stocks can be companies that suffer from temporarily from external shocks e.g. Covid-19 and may recover in the future. 

3) Stocks to avoid

-- Stocks with low P/B but nothing much else going for it. These are mostly property developer stocks. I find that I don't really make money on such stocks.

-- Stocks with high dividends but nothing much else going for it

It may take 2-3 years to transform my portfolio to the above strategy. My portfolio currently have 

-- small % that are dividend stocks. I will likely keep them, if I do not need the cash to buy other stocks

-- small % of 'Other' stocks. They are not really growth/quality companies, maybe just business growing at 6-7%. I will keep them for now, since I do not need cash to buy other stocks. 

Selling and buying

Selling Shimao and Sinopharm

Sold my position in Shimao (a small stake) due to the following reasons:

a) Price has dropped a lot, causing me to lose confidence. 

b) It could face higher costs of financing, due to Evantgrande and other property developers' issues in making coupon payments

c) China pilot property tax may lower demand for property

d) It is a non-core position. Selling it reduce my concentration in China/HK stocks and reduce the number of stocks I have.

e) Helps to raise cash to buy Intel

Sold my position in Sinopharm (a small stake) due to the following reasons:

a) Price is falling, causing me to lose confidence. 

b) Reduce my concentration in China/HK stocks and reduce the number of stocks I have.

c) Helps to raise cash to buy Intel

Start to buy Intel

Starting to buy Intel, as

a) Reviews suggested that Alderlake is slightly better or at least not worse off compared to Zen 3. This increase my confidence in Intel turnaround

b) Intel CEO has a clear plan to turn around Intel. The key issue is execution. 

Will restrict the position to 3-5%, as it is uncertain if Intel can execute its plan on time. 

Bought Asos (4% position)

Buying Asos during Sep-Oct, as

a) The stock price is relatively low

b) Nick Sleep connection

c) The company has a target to almost double its $4bn revenue to $7bn in next 5 years.

Will not be adding to the position due to the following risks

a) its current CEO has left

b) its earnings will be affected by rising logistical cost in the next few quarters

c) rising competition from similar competitors e.g. Boohoo 

Bought Micron (7% position)

Buying Micron in Oct-Nov, as

a) Its in portfolio of famous investors

b) RAM demand is growing due to digitalisation, EV etc. 

c) Industry is close to oligopoly, which may be more disciplined on its supply and hence reduce the impact of the boom-bust cycle

Will not be adding further, unless price drops. 

China Tech Stock Crash

China tech share prices have fallen heavily in the past week due to investors' fear arising from China government regulations on edu-tech companines and increasing regulations on internet companies.

I have some China stocks. My portfolio have fallen 5% in the past week.

In the past 1 week, I have sold China Feihe (cut loss, as I lack the conviction to hold) and some Singapore shares to raise cash to buy China tech stocks.

I have bought more Alibaba and Tencent. Also initiated position on Autohome and Lufax; they are associated companies under Ping An which I have also have some shares in. 

In retrospect, I am taking the opportunity in this tech crash to veer my portfolio more to China tech stocks. 

In addition, I will add 2 rules when buying shares of new companies

1) Will I sell if the stock fall by 20%? If yes, I should not buy the stock

2) Does the business benefit its customers? If no, I should not buy it. (This is to weed out companies whose fundamentals may be eroded by government regulations.)

On MSCI Returns; Quality Companies akin to DoT

 MSCI Returns

Wiki has a page on MSCI World Index annual returns. I re-produced it in chart form below. 

From 1970-2020, MSCI World Index provides annual returns of 9.8%. The worst drawdown is around -42%, occuring between 3 years of negative returns in 2000-2002. Thereafter, it is till 2006 before the index reach/exceed the previous high in 1999.

Before the 3 years of negative returns in 2000-2002, the index tripled during 1992-1999. Hence, the world index may be quite overvalued in end 1999, leading to 2000-2002 negative returns thereafter.

The 2000-2002 negative returns may imply that those who used MSCI world index as their main investment during retirement may need to have other asset besides equities to avoid drawdown of equity position and also add on to their equities during years of negative returns. This could be also why 60/40 or 70/30 stock-to-bond portfolios are common allocations. 

Buying Quality Companies akin to Damage over Time (DoT)

I played action-rpg games such as Grim Dawn. Certain skills in Grim Dawn have damage over time (DoT) e.g. X damage every second over 5 seconds. 

Buying Quality Companies with growing earnings seem akin to DoT effect, as the investor benefits from growing earnings and hence higher share prices, as time passes. 

On Selling

Today, I want to talk about cutting loss quickly. 

Cutting loss is mentioned in "The Art Of Execution" by Lee Freeman Shor. It is a very short book, but it contains very important ideas. The book talked about Assassins i.e. investors who were quick to cut losses. This is because large losses is harder to earn back e.g. To earn back 50% losses, you need to earn back 100%. 

More info on "The Art Of Execution": http://sanjaymeena.io/books/book_notes_the_art_of_execution/ 

https://gavin-baker.medium.com/lessons-on-winning-and-losing-as-an-investor-from-the-art-of-execution-e6aafe817038 

Personally, I experienced the importance of cutting loss quickly in Eagle Hospitality Reit. 

End 2019: 

-- Held shares in Eagle Hospitality Reit. 

-- Share price started falling in late 2019 due to negative news and large shareholders selling 

Early 2020: Share price fell further Sold ~2/3 of my position in Feb-Mar to cut loss End Mar 2020: Stock is suspended. I had ~1/3 position left in Eagle. 

On hindsight, I should have sold all the shares quickly in Jan-mid Mar. After this incident, when there is losses due to unexpected fundamental reason, I will sell half of position first. Then I can take my time to determine if I should sell the rest. This rule was applied to some stocks lately, although the selling may not be fast enough 

Yuzhou Property 

21 Mar 2021: Announced profit warning. Share price fell from ~$3 to ~$2.70 

25 Mar 2021: Provided more details. 

26 Mar 2021: Share price fell to ~$2.3x. I sold half of my position here. 

31 Mar 2021: Sold the rest, after further thoughts and to deploy the money to other stocks 

 AEM 

End Apr 2021: Started building my stake 

Early May 2021: 1Q 2021 report is out and showed unexpected earnings decline. Sold all my stake in AEM, taking a small 8% loss. 

JD.com 

Early May 2021: Started building my stake 

Mid May 2021: Found an error in my analysis. Sold all my stake in JD, taking a small loss 

In summary, I must continue to cut losses fast. In addition, I will continue to have diversified portfolio, as my stock ideas have significant probability of being incorrect.

A Mistake and Update

A Mistake

Recently, I had bought JD.com, thinking that the price has fallen and the PE ratio is lower compared to other internet stocks

After building a significant stake, I found that the lower PE ratio is due to occurence of one-off earnings. This is my mistake that I did not read the earnings report in advance. (Such a novice mistake.) Nonetheless, I had subsequently sold all my stake at a loss (especially in the current down market for tech stocks.) So the lesson learnt here is that I should always review the company's earnings before investing.

Sticking to Value Stocks

Currently, I own Alibaba. My average price is around $228. So I had a loss of around 10%. I will hold on to this stock and see how it goes.

Meanwhile, I will not be buying any tech stocks, as I don't feel comfortable doing so. Maybe I am more of a low PE investor. I am more comfortable buying low PE stocks with some dividend, so that I can collect dividends while waiting for the market to re-rate the stock. If the stock is not re-rated at end of day, I am not likely to lose much, since the expectation is low.

My feel is that in the next 1-3 years, value stocks may outperform growth/tech stocks, especially since growth/tech stocks may be more affected by rising interest rates. Hence, I should not style drift into growth/tech stocks.

Number of Stock Holdings

I mentioned earlier that I am reducing the number of stocks I hold. Currently, I am holding 27 stocks, 8 fewer than in Mar 2021. The ideal number of stocks to hold may be 21 – 25 stocks. I had good returns during 2016-2017 and I held 21 stocks in end 2016 and 25 in end 2017.

	Number of Stocks
At end 2016	21
At end 2020	39
At 5 Mar 2021	35
At 15 May 2021	27

 

Performance

My year-to-date returns as at 15 May 2021 is 14.0%. The returns have suffered a little from my mistake in JD.com and the drop in Singapore shares after the Phrase 2 (Heightened Alert) was announced yesterday.

Interestingly, more than half of my portfolio are HK-listed stocks. In end Dec 2020, Singapore-listed stocks are around half of my portfolio; now they are less than half. This could be because I find more stocks to buy in HK than in Singapore. And I have been taking profit on Singapore-listed stocks such as the bank shares. (I still own shares of Singapore banks but not as large as in end Dec 2020.)

China Overseas Land, Yanlord and HK Land

[6 Apr: Added HK Land]

Recently, I found China Overseas Land (COLI) and Yanlord to be cheap.

Below are some numbers for my reference. The figures are extracted from Shareinvestor.com

	China Overseas Land	Yanlord	HK Land
	HK$	S$	US$
	2 Apr 2021		6 Apr 2021
Price	20.2	1.24	5
NAV/shr	34.03	3.27	15.3
P/B	0.59	0.38	0.33
	Earnings Per Share
2011	1.84	0.16	2.28
2012	2.29	0.19	0.61
2013	2.82	0.15	0.51
2014	3.39	0.14	0.56
2015	3.61	0.16	0.86
2016	3.64	0.29	1.42
2017	3.72	0.34	2.73
2018	4.10	0.36	1.05
2019	4.31	0.34	0.08
2020	4.48	0.27	-1.13
Average	3.42	0.24	0.90
P / 10 yr Avg E	5.91	5.16	5.57
Net Debt To Equity ((Long Term Debt + Short Term Debt - Cash and Short Term Investments)/(Shareholders' Equity - Other Share Capital))	0.363	0.823	0.128

 

COLI is more expensive than Yanlord and HK Land in terms of P/B and P/E.

HK Land is the least riskly. COLI is less risky compared to Yanlord, as its net debt to equity is lower.

Looking at P/10 yr Avg Earnings, Yanlord is the cheapest, while COLI is most expensive. Nonetheless, COLI is just a tad more expensive at 5.9 while its P/B is higher at 0.59. This suggest that COLI’s earnings power is higher than Yanlord and HK Land.

Dividend-wise, COLI and Yanlord are similar. Nonetheless, COLI has annual increase in dividends, which is a plus point. HK Land has the lowest dividend yield.

	China Overseas Land*	Yanlord	HK Land
	HK$	S$	US$
	2 Apr 2021		6 Apr 2021
	Dividend Per Share
2011	0.33	-	0.16
2012	0.39	0.0186	0.17
2013	0.47	0.0130	0.18
2014	0.55	0.0130	0.19
2015	0.61	0.0152	0.19
2016	0.77	0.0435	0.19
2017	0.80	0.0680	0.20
2018	0.90	0.0680	0.22
2019	1.02	0.0680	0.22
2020	1.18	0.0680	0.22
2020 Dividend Yield	5.8%	5.5%	4.4%
*May have 10% withholding tax on dividends