Some thoughts

Video on Reits Investing

There is a brillant video on Reits investing by Sven Carlin: https://www.youtube.com/watch?v=b-07Qlh-iO0

It offers a perspective not commonly seen in Reits investing

Thinking on Investing

Recently, I am thinking that I should raise by hurdle rate i.e. wait for fatter pitches and act less. 

My investing results will be better that I wait for fatter pitches and swing harder at these fatter pitches. 

On hated asset

I like to ask myself: "What is the most hated asset now?"

Hated asset implies pessimistism and thus higher probablity of profit in future when things turn. Vice versa.

The most liked assets seem to be Magnificant 7 in US markets and short term T-bills.

The hated assets are still China/HK stocks (for most part of past 2 years, except Nov 22 - Feb 23). 

SG-Reits are in this hated group last month (i.e. Oct 2023), but they rose recently after US 10-year interest rate eases. I think that buying reits now is betting on US interest rate cut in the next 6-18 month. 

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. 

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.

Never lose money?

Many roads lead to Rome. I don't believe in "Never lose money".

I don't do much downside assessment, I don't aim for minimum losses. Losses to me is ok.

For me:

If the probable profit is much higher than probable loss, I buy. Else I don't buy.

If probable loss is higher than probable profit, I sell.

Do not fight the Trend

I used to think that I can invest in turnarounds. That is, buy stocks that are beaten down and wait for the eventual recovery.

Recently, I think otherwise.

I find that it is quite difficult for companies to turnaround, especially in a down cycle. And I do not know when the down cycle ceases or when the down cycle will turn into an up cycle.

For example, oil related stocks. I bought Sembcorp and Pacific Radiance in end 2014 and early this year, thinking that oil price should recover in 3Q-4Q 2015.

I subsequently sold Pacific Radiance in late Feb 2015, after reading analyst reports that the down cycle will last quite some time. This is because even if oil price recover to $60-$80 in end 2015, the oil major will still tighten their budget and lower their expenditure. If most oil major lower expenditure, the pie for oil supporting companies will shrink, lowering both revenues and profit.

I did not sold Sembcorp then, thinking that its other non-oil businesses should cushion the impact of falling oil price. I was wrong. Its non-oil businesses did not help to cushion the impact of falling oil price in its 1Q 2015 earnings. I sold Sembcorp in May 2015.

Pacific Radiance was $0.745 in late Feb 2015. Now it is $0.405
Sembcorp was $4.35 in May 2015. Now it is $3.57.

I learnt that I should not fight the trend.

It is probably better for me to buy when the down trend turns up. By then, the stock price may have recovered to a certain extent.

I will not catch the bottom, but I also will not buy too early.

Secret to Investing Success!?

It's interesting to see a thread on secrets to investing success in Next Insight. And in that thread, you'll see people advocating value investing, quoting Buffet, asking for high dividend stocks etc.

It's interesting because I disagree.

I disagree because I feel that there is no one secret to investing success.

I think that each starting investor has to find their own path, and that path will be their own secret to investment success.

First, the investor should find the suitable investment philosophy i.e. whether technical or fundamentals, short-term or long-term, diversified or concentrated etc. A suitable investment philosophy should fit his own psychological traits.

Next, the investor has to consistently refine or expand his strategy. For a value investor, it may be starting with low P/E stocks and then moving to low P/B stocks. Or starting with quantitative ratios and moving on to qualitative measures.

In between, the investor also has to learn his own psychological traits, and either change the investment methods to fit his psyche or change his psyche to fit the investment methods. Personally, I think the former is easier, since Jesse Livermore chose the latter and died a pauper.

And when does an investor know that this investing philosophy is suitable? When the investor feels that he needs not search for another philosophy.

And when does an investor know that this investing strategy is right for him? Through his experiences and investing results over a full market cycle.

And what is one essential trait that most successful investors share? Obsession. He must be, to some extent, obsessed about investing. I do not mean about being crazy about the money. I mean being crazy about the philosophy, the strategy. For example, if you read Buffett's biography, when Buffett and Gates meet each other, you will know that they will talk about what makes a successful business. They do not talk about money.

For more information on finding an investing path, you may find Mark Tier's book "The Winning Investment Habits of Warren Buffett & George Soros" extremely useful.

And what if one does not wish to pay the price to become a successful investor. There are a few alternatives here. One, buy index funds or exchange-traded fund on stock indices. Two, find a good financial advisor. Three, earn very high pay.

Factors associating with (S-share) duds

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

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

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

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

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

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

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

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

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

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.

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.

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.

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.

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.

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.

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.

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.