Skewed Odds

1Q2015

2015-03-14T14:51:00.002+08:00

Hi all, happy to say learning programming does have its benefits; managed to get Google spreadsheet to work now. Go ahead to view the current holdings; sorry to say Im boring...nothing much has changed with the holdings.

1Q2015 is littered with events.

The precipitous drop of oil price from $100+/bbl to currently $44/54 for WTI/Brent followed by re-surfacing of Greek and Spanish woes. Russian issues stemming from 2014 also looks to be a repeat of prior conflicts like the Chechnya wars, rather interesting to note the global political game that revolves the axis of powers and correlation with commodities, in particular energy.

US dollar rose in strength whereas everywhere else ex US has been performing monetary easing, including Singapore.

The Swiss Bank (SNB) also removed a currency cap of 1 Euro to 1.2 Francs that was there since 2011. The cap was to protect Swiss exporters in event of rise in Francs versus Euro (which did occur when people flock to Swiss banks as safe havens in times of crisis). However with a large ECB easing impending with all the old country issues resurfacing, the act of even more buying of the Euro and selling Francs to maintain the peg seems a little out of this world and made everyone in Switzerland alot poorer overnight. Interestingly people in Poland, Hungary and Greece have their home mortgages denominated in Swiss Francs, ouch! SNB has doubled their foreign reserves since the peg started in 2011, making it one of the top 5 largest holders of reserves globally. SND also lowered their interest rate to negative 0.75% levels, i.e. you have to pay interest to deposit in a Swiss bank to avoid a massive influx of foreign assets. Denmark's Krone was also mentioned as a "next target".

Im a bit concerned where US equities and credit markets are heading. It was great a while ago when shale was booming and they turned in a massive trade surplus for a few years. Now that oil is at 40+, marginal cost producers will definitely be sidelined, especially the geared ones. Overall competitiveness of US will be impacted.

Amidst all the craziness, China is still hot on heels of corrupt officials. Gaming stocks were affected, especially those in Hong Kong. Some are looking a little interesting though. Kaisa, 1638 HK: a real estate company also saw a roller coaster ride as their Chairman suddenly left the post, firm went into technical default. Bonds went to 20s at one points and now back to 60s/70s. However a offshore debt swap (with less favorable terms) now pushes it lower. Its white knight Sunac China, another levered real estate company set a 31 July deadline to settle outstanding negotiations with noteholders. There were talks that Chairman Kwok's departure was related to fallen politburo honcho, Zhou Yong Kang. Several Kaisa projects in Shenzhen (largest exposure by land area) were frozen.

Will write more about some ideas Im working on once I have more time on hand. Again drop me a message if you want more discussion(s) on companies.

2013 and 2014 performance.

2015-03-14T13:27:00.003+08:00

Sorry for the delay. Some quick updates.

Work has been crazy and haven't had much time to go through everything on my plate but am still talking and discussing about companies and all so feel free to drop me a note if you have any you wish to discuss about.

2014

#	Name	Business	Listing	Ticker	+/- ex divs	+/- with divs
1	Roxy Pacific	Real Estate / Hotel	SGX	E8Z	-4.42%	8.77%
2	AEI Corp	Aluminium extrusions	SGX	A18	-13.24%	-9.56%
3	World Precsion	Precision Machinery	SGX	B49	-12.00%	-8.67%
4	Nanyang Hldgs	Conglomerate	HKSE	212	42.86%	45.51%
5	Haw Par Corp	Conglomerate	SGX	H02	5.16%	7.62%
6	Real Estate Co	Real Estate	HKSE		3.97%	31.45%

	Negative / Shorts
1	Olam	Agri - commodities	SGX	L28	-37.37%	-37.37%
2	Dapai Intl	Bag makers	SGX	FP1	56.00%	56.00%
3	Eratat lifestyle ltd	Sports goods	SGX	F08	54.55%	54.55%

I exited World Precision in 2014 and added a real estate company in HK. Reason why I bought it was simple:

Owner owns a significant majority and were aggressively buying back
They own a significant portion of land in Macau and stand to benefit from the linkage of HK/Macau/Zhuhai bridges and the lack of hotels around that area
The owners are astute real estate investors and operators and watches cost like a hawk
The only risks are owners do a "take-under" or severe contraction in real estate market of which the latter is already happening but the firm remains resilient.

Olam is interesting. 2014 saw an acquisition from Singapore's sovereign wealth fund and hence the price increase. Im not vested in Olam since 2012 as its not cost efficient to maintain the short. Same goes for the other shorts, so the prices are for display. Eratat went bust despite having a huge cash hoard. See my previous posts here and here.

A quick post on 2013 results as I realized I have not posted it up.

2013 was interesting as I literally sat on things, there was no action on my part for 2013 at all.
Gains were mainly for Nanyang (management did a partial tender, of which I did not tender since it would result in odd lots and these have a discount in the HK market) as well as Haw Par. Haw Par gains were oddly not in line with its portfolio companies, namely UOB, UIC and UOL. Also exited Koon in 2013.

2013

#	Name	Business	Listing	Ticker	+/- ex divs	+/- with divs
1	Roxy Pacific	Real Estate / Hotel	SGX	E8Z	25.00%	28.68%
2	AEI Corp	Aluminium extrusions	SGX	A18	12.40%	20.66%
3	Koon	Mix Engineering	SGX	5DL	-28.57%	-26.19%
4	World Precsion	Precision Machinery	SGX	B49	-7.41%	17.28%
5	Nanyang Hldgs	Conglomerate	HKSE	212	42.42%	44.85%
6	Haw Par	Conglomerate	SGX	H02	34.10%	37.40%

	Shorts
1	Olam	Agri - commodities	SGX	L28	8.93%	8.93%

3Q2014 - I start to see some steam!

2014-09-20T22:07:00.000+08:00

Apologies for the late update and for the fact that its getting less of the numbers and statistics and more of thoughts and dilemmas or confusion if you will. I appreciate more now, the importance of moving away from a more quantitative approach.

Company updates:

Nanyang Holdings started a partial tender offer, started at HKD33/sh up to 8.2m shares (about a fifth of outstanding shares or 40% of free float which has seen share price reached about HKD39+ from the 20s+ when I first wrote about it. Nothing fantastic but still interesting. Price came down to about 35+ but doesnt affect me much. I wouldn't do that if I were the management.

I added a HK listed real estate/ investment holding co to the portfolio. Not cheap but I envision with the opening up of the country to surrounding countries and its massive property portfolio, not to mention a family that has a great track record, its likely some upward movement is overdue. Float is extremely thin, so I'm adding in nibbles from time to time. Not helping that it has since ran up too. I thought I was crazy to buy it at such high levels, but looking not too shabby now. Not that Im smart, Mr. Market has been very active.

SHC Capital (on sgx) is one counter I missed. I have been thumb sucking over the wide spreads and it cost me dearly. Zurich Re took it over at 70%+ premium. I'm no expert in the P&C and reinsurance field but this firm stood out like a nail.

Don't ask me about Alibaba, I have great respect for Jack Ma but that's about it (See http://vulcanpost.com/5407/billionaire-jack-ma-teaches-you-how-to-be-successful-in-life-and-business/). My views are limited on that.

Other randoms..

I chatted over lunch with friends and spoke about humans, their confirmation bias and risk aversion characteristics. The industry, the world enjoys specializing and putting things in fixed buckets. It has far reaching problems and is closely related to how people interact socially and especially in their jobs. I do realize the opportunity in there and the problem is an incredible moat in itself if one could build something out of it.

For example, its always easier to sell a high dividend income yield fund than to say its going to be a opportunistic fund where I cannot guarantee no losses but its going to put money in whichever opportunity that makes the highest returns. People fear losses but more importantly, they dislike the fear of uncertainty and even if it means a false confidence of knowing something that may not be true or real.

A high dividend fund gives the idea of no or low losses with stable income but people dont realize, such a fund will suffer a worse impairment to capital in times of trouble. One would rather trust a specialist investment analyst with a focused 5 years experience in real estate than trust someone with broad experience in various fields and have tried starting an investment business. I have experienced this first hand, it is painful and illogical but I can see where people are coming from. I know a family employs a "consistent high income fund", essentially is a leveraged, income strategy that holds high yielding securities. My repeated concerns fell on deaf ears, since I don't have the experience or "track record". To be honest, I am fairly frustrated and at the same time empathetic. I see many very intelligent talents around getting severely penalized for being generalists and having broad interests.

Similarly, its the reason why there's credit ratings, its a form of a fixed buckets system. People are lazy to accept the fact that there's always the situation where its simply not well defined. Instead of a grid system where one just check the boxes or add scores from a pre-defined scoreboard for easy comparison sake. People are not willing to do the extra groundwork and admit outliers and anomalies. Adding to the complexity is the fact that it is always harder to go against the flow. How would one explain to his bosses that it does not fit in the grid system? What if the boss said it should go into a certain bucket, would one be able to challenge and make the boss look bad? If one runs a investment outfit, would one risk picking oddities and underperforming or to emulate an index and make small tweaks for a slight boost? Reason is that they rather ensure they have similar performance to the index with a smaller variance than to risk a year with mega losses.

The downside is unlimited in such a scenario while the upside is somewhat capped. Its times like this where people start to sweep small systemic problems aside where it snowballs to a massive problem. That's how the global financial crisis happened in the 2007/8s, apart from clear violation of the agency relationships and conflict of interests.

Risk aversion plays a crucial part in how people think. Its also the reason why most people don't start up companies. They appreciate the outsized rewards upon success but are more focused on the extremely low probability. (I mean having a family and a stable career and others etc. are extraneous factors that also affect how one thinks here) When you lose money, it hits you much more than when you make them. When you enjoy that stable income and/or lifestyle, you start to forget that you are also in a system and when there are more factors introduced in a system, changes come fast, and in violent magnitudes. It is more pertinent that one stays in a upwind position where learning and not pay is the key priority.

Its the way people think and many times, people step too deep to realize they are in a hole. I remember a close friend of mine who said, "How can equities ever be safe, fixed income is the way to go. With added leverage, its a sure bet. why would anyone consider equities?" Classic case study example.

Its probably a time to relook at how these will pan out in the next few months again.

3 quotes
“Managing your career is like investing. The degree of difficulty does not count. So you can save yourself money and pain by getting on the right train.”

“Risk comes from not knowing what you are doing.”

“What we learn from history is that people don’t learn from history.”