Report Card for the period to 30 September 2013

Freshman in the share market

In 1993 I had a short but bitter fling with the stock market. The tryst ended quickly with the market winning and my pocket lighter. Losses compounded from having one-night-stands with these companies instead of committing to long term relationships. I learnt my first lesson: when you haven’t the faintest idea of what you are doing but do it anyway, it is downright stupid if not reckless.

Still a rookie

Memories are short. In between leveraging up on real estate, technology shares became a short but serious flutter during the dotcom euphoria between mid-1999 and early 2000.

The excitement did not start in 1999, rather in 1996 when I first experienced the Internet. Starting with a 56.6 kbps modem, I was already late to the party, early adopters started with 28.8 kbps. Loading a site was excruciatingly slow and websites were basic. Subscription to a handful of Internet service providers like British Telecoms or AOL was not cheap. And nearly everyone had a Netscape browser on their desktop then. The slow connection speed and lack of content made the whole experience not particularly enjoyable and it could not really be used for any purposeful work or finding actionable/useful information.

Three years later with speeds leaping to 256 kbps and content mushroomed and with Yahoo and Google entering modern lexicon, the Internet moved from being a fancy luxury to a necessity.

My first introduction to technology shares was delivered by a fortnightly investment magazine called Shares launched in 1999.  On the technology side, the novel ability to purchase shares over the Internet with the click of a mouse made trading shares a rather simple process. The two combined made homework and delivering the homework quick and expedient.

In the brave new world of disruptive technologies there were no conventional ways to value these shares. Eye-balls and revenue multiples were the norm. This was my first encounter with cognitive dissonance. I struggled with the eye watering “valuations” (in 100s or 1,000s of multiple of revenue let alone profits) yet fearful of missing out promoters apparent good council.   It was later that I learnt that promoters never had your interest in mind.

Well everything blew up in the spring of 2000. I was lucky to escape with a small but nevertheless painful dent because, luckily, I had trimmed my holdings along the way rather than hung on. The Internet transformed my life and the lives of many. It’s probably one of the greatest inventions of the 21st century. But a great story does not make a great investment.

Some lessons here:

• Buying shares not grounded on tried and tested principles of valuations are a recipe for disaster;
• When it comes to trust, trust your instincts;
• Promoters play on your greed and that is the quickest way to financial ruin;
• The experts don't have the answers and are not answerable to you.

Most important lesson: Steeling your mind against the onslaught of the wisdom of the masses is mental trait worth acquiring.

Aftermath

After stopping my subscription to Shares in the summer of 2000, I never really ventured back into the market.

Western markets bottomed out in 2003 and in Asia markets convulsed with the arrival of severe acute respiratory syndrome.  One of my favourite companies whose chips are now installed in nearly 99% of mobile devices, ARM PLC bottomed out at around 40 pence from a high of £32.  The only shares I purchased in 2003 was a Hong Kong counter called Kingboard Chemicals, a global leader in the manufacture of Printed Circuit Boards (PCBs) which returned handsomely.  It was reading about ARM PLC that led me to invest in this bread and butter of the tech world.

A lot of people that got burned in the share market disturbingly was drawn into the next fad - property investment.  The lull of low interest rates courtesy of the FED and BOE kicked off the bull market in property.  Leverage returns from cheap debt were the new game in town.  In the UK, property prices bottomed out in the early 1990s.  I think it was 1993 and have been rising steadily since then but did not really get going until 2003.  We all know how that went and the current bounce to decade high seems surreal.  Of course we live in the new normal where fiat currency is printed with abandonment.  But that is another story.

Old dog learning new tricks

I started this blog a couple of months ago because I wanted to learn more about my investing style.  It wasn't so much as acquiring technical skills but what were the mental road blocks and pit holes that is preventing me from being even a moderately successful long term investor.

After serious study over the last couple of months I have been able to whittle my learning outcomes to a few critical elements which are essential, not so much to make a killing, but to at least avoid unprofitable ventures.  These are:

• Critical thinking skills - the ability to sort out the noise to get to nub of the matter and critically evaluate it;
• Ability to articulate a coherent investment thesis or why it is a bad idea;
• Ability to switch off (TV, Internet, newspapers) from digesting mindless media outputs;
• Scepticism is good but being overly negative is not;
• Pessimism is a good trait but procrastination resulting from it is not;
• Essential to have an investment framework / philosophy    

Report Card

I have focused my analysis exclusively in the HK stock market.  Below is a table of the shares in my portfolio.  Overall, the portfolio has returned 18.5% whilst the Hang Seng Index have returned minus 1.1% YTD.   

Firstly, I have to give credit to James Choa from Valiant Ocean Capital on some of his recommendations.  For example, the return from Clear Media is 45% including a special dividend of HK$1.32.  James is exceptional in his analysis.  I urged you to get in touch with James to share ideas.

Special mentions:

SASA is a great business and their employees have exceptional knowledge of products that they promote.  I have followed SASA since 2010 but only seriously in past few months.  Since this year, the shares have had an extremely steady run-up and I think the price is too high. 

Sinoref is a good company with decent management, I think the management is pretty frank and detailed having read the MD&A sections of the last three annual reports.  No flowery language, bad news is bad news, good news is good news.  I had read their listing document with interest which I thought had more substance than from larger promoters/listings.  I don't know why the recent run-up in share price has been so dramatic but with the recent run-up, the deep discount have now gone and any increase will have to depend on business improvement which affords no margin of safety.

China Modern Dairy (CMD) is worth mentioning.  The recent listing of Huishan Dairy (6863) has perked up the shares.  I am convinced the mega trend in milk consumption in China has much further to go.  But the current PE 44x valuation of is just too frothy.  In an industry fraught with scandals, over production, food safety, high CAPEX requirements and environmental concerns such as access to clean water, waste disposal and animal feed, the share is priced for perfection.  Food operations in China, I believe, should trade at 20%-30% discount to western peers because of the difficult operating environment.  CMD is a good company with decent western management participation. This reminds me of a recent comment by Marc Faber: "I do not particularly like Chinese companies . The good companies are not cheap, and the bad ones are so bad that I do not want them." 

Cosmos Mach, a plastic injection moulding machine manufacturer is a potential value trap which I have to kick myself. Its overall profitability over the past decade has been uninspiring.  I was seduced by the fact that the cash, received in July 2013 (not reflected in the June 2013 interim) is larger than the market cap which might give cause to management to reward shareholders with a special dividend but I think the prospect of a payout might not materialise given the poor shape of the business.  The company has a consumer goods, PCB and trading business which are all loss making or low profitability. I shall wait patiently for developments in the 2013 annual results announcement.

IT, a collection of boutique outlets needs to streamline its operations and develop a digital platform.  I like the idea that its shops try to promote individuality, a trend that I have observed emerging as the Chinese consumer taste becomes more sophisticated.  Already, heavily branded LVMHs are not being dropped in favour of Botega and Prada which are more understated.  I hope management take a leaf from the very successful online retailer ASOS (a UK listed company) and speed up the launch of their online platform.       

Need to be more focused

I do not have a fully developed philosophy but I guess it is not going to be "wave the wand and hey presto".  It will evolve given time. The more immediate issue at hand is that I think the list have to be narrowed further.  The equal conviction model, i.e. buying shares of equal value in each company in the portfolio, although safe, is not likely to help me overcome emotional issues associated with investing.