10% Per Annum

'New' Counter: InnoTek Ltd

2018-04-26T02:09:00.002+08:00

It is not everyday that Mr Market offers you a 30% profit on a counter and sells you back the exact same counter for the original buy-in price 2 months later. Strange as it sounds, this was exactly what happened for me with InnoTek.

April 2017 Initiation Thesis

Almost exactly 1 year ago in April 2017, I had purchased InnoTek for S$0.375 a share on a turnaround thesis. While InnoTek continued to generate profits and free cash flow, the turnaround was not as smooth as I hoped for (that is a nice way of describing my misguided optimism) and it soon became obvious that the company needed more time to execute a number of growth drivers.

February 2018 Divestment Thesis

Given that most of the growth drivers will only bear fruits earliest in 2H 2018, InnoTek was fundamentally still on the same turnaround thesis in February 2018 as in April 2017. I therefore considered Mr Market's offer of 30% instantaneous profit a favourable risk-reward trade-off in exchange for not having to wait and undertake the execution risks related to InnoTek's turnaround.

April 2018 Investment Thesis

2 months after my divestment, Mr Market has now offered me the chance to buy InnoTek again at S$0.38 (CD) a share. This is the same company that is still on the exact same turnaround thesis in April 2018 as it was in April 2017. While the same risks that applied to InnoTek remains, InnoTek has a greater margin of safety now from an asset-play perspective.

4 Quarters of free cash flow has swelled the company's cash and investment assets such that the company's non-business value now matches its current market cap of S$85.966M. In other words, we are now getting their core business for free.

Quarter / Year ($'000s)	2016	1H 2017	3Q 2017	4Q 2017	1Q 2018
Investment Property	16,919	19,202	24,971	26,978	27,426
Held for trading financial assets	15,332	15,816	15,404	14,796	13,324
Total Investments	32,251	35,018	40,375	41,774	40,750
Cash and short-term deposit	30,090	31,222	31,959	35,784	45,084
Loans and Borrowings	0	0	0	0	0
Net Cash	30,090	31,222	31,959	35,784	45,084
Non-Business Value	62,341	66,240	72,334	77,558	85,834

This very core business that is "free of charge" is also moving steadily on its execution plan for the following growth drivers:

1H'18: New automotive programs to begin
2H'18: Mansfield Thailand to begin operations
2H'18: Printer programs to begin
FY19: Automotive programs to scale

If the execution is successful, we should see the fruits of InnoTek's labour starting from 2H'18, and especially in FY2019.

Conclusion

I am once again an InnoTek shareholder as Mr Market had offered me the chance to re-establish a position at the very compelling entry price of S$0.38 for which downside risks appear to be mitigated by a strong balance sheet and consistent free cash flow generation.

It remains my belief that InnoTek is a potential multi-bagger should it complete a successful turnaround. This should be a mid-term thesis which I will review in a year - unless of course, Mr Market would like to come up with a crazy offer again.

This is neither a recommendation to purchase or sell any of the shares, securities or other instruments mentioned in this document or referred to; nor can this blog post be treated as professional advice to buy, sell or take a position in any shares, securities or other instruments. The information contained herein is based on the study and research of Dan O (“the Author”); is merely the written opinions and ideas of the Author, and is as such strictly for educational purposes and/or for study or research only. This information should not and cannot be construed as or relied on and (for all intents and purposes) does not constitute financial, investment or any other form of advice. Any investment involves the taking of substantial risks, including (but not limited to) complete loss of capital. Every investor has different strategies, risk tolerances and time frames. You are advised to perform your own independent checks, research or study; and you should contact a licensed professional before making any investment decisions. The Author make it unequivocally clear that there are no warranties, express or implied, as to the accuracy, completeness, or results obtained from any statement, information and/or data set forth herein. The Author, its related and affiliate companies and/or their directors, executives and employees shall in no event be held liable to any party for any direct, indirect, punitive, special, incidental, or consequential damages arising directly or indirectly from the use of any of this material.

Book Review: 6 reasons for businesses to fail from Scott Fearon's Dead Companies Walking

2018-04-22T01:36:00.002+08:00

About the Author:

Scott Fearon is the founder and president of Crown Capital Management, a hedge fund that both longs and shorts stocks. Since its inception in 1991, the hedge fund had only one down year and has averaged an 11.3 percent annual return after all fees, thus outperforming the index.

Interested investors can read more from Scott Fearon on his personal site (here).

About the Book:

This book details 6 key reasons for corporate collapse (apart from fraud) as well as Scott's general investment philosophy. Each reason is illustrated with real-life case studies from Scott's long career as a money manager.

The insights gleaned from this book are useful not only for short sellers but also long-only investors looking for tell tale signs on differences between "turnarounds" and businesses sliding towards bankruptcy. I highly recommend this book to investors who wish to learn tips on spotting companies in permanent decline.

Here are the 6 causes for corporate collapse:

1) The leaders learned from only the recent past

Scott refers to this reason as "historical myopia" where key executives would place excess weight on recent experience and conveniently ignore long-term trends and possibilities. This could result in excessive optimism amongst business leaders, thus leading to poor decision making.

"Historical myopia" is also applicable for investors. While financial statements are important, investors should focus on growth outlook for the companies in order to avoid this trap.

2) Relying too heavily on a formula for success

Scott's recommendation is to use formulas as a guide instead. This is true both for investors and for businesses as qualitative assessment is required as well.

One particularly dangerous formula for businesses is the "hypergrowth" formula - businesses loading up debt to pursue extreme growth targets. Pursuing growth at all costs often results in low-quality growth eventually leading to declines in revenue. Ironically, falling revenue and rising debt form the formula for bankruptcy.

3) Misreading or alienating their customers

Businesses that alienate their core clientele are essentially planning their demise.

One common scenario would be (new) key executives imposing their own taste and preferences on their businesses' clientele. Scott cites JCPenney as a good example for this scenario. While JCPenney's stores are located in middle and working class location, that did not stop new CEO Johnson's push for luxury retail clients instead of their core customers. Johnson lasted only 18 months on the job.

Another common scenario relates to businesses believing they can create niche demand à la Steve Jobs without consideration of real-world behaviour. In actual fact, few businesses succeed in changing consumer behaviour, and businesses whose product or service do not represent an upgrade on client experience have no chance of doing so.

4) The leaders fell victim to a mania

Much has been discussed by successful money managers about manias or asset bubbles given their repeated occurrences in the economy due to human's herd mentality.

Scott cautions against investing in businesses built fundamentally on how a new mania or fad would render older ways of living or doing businesses obsolete.

5) Management failed to adapt to tectonic shifts in their industries

Change is the only constant in life and management living in denial of reality often fail to position their businesses for change. This is especially true for businesses that have been hit hard by disruption - if management do not accept that their business model is obsolete, their business will eventually crumble.

6) The leaders are physically or emotionally removed from their companies' operations

Elitist leaders living unnecessarily luxurious lifestyles on company's expense is a sign that they are out of touch especially if the business is undergoing tough times. Management that routinely chooses to blame external environment instead of facing up to root causes is another recipe for disaster.

These leaders are unlikely to take the necessary steps to fix the core problems at their companies.

This is neither a recommendation to purchase or sell any of the shares, securities or other instruments mentioned in this document or referred to; nor can this blog post be treated as professional advice to buy, sell or take a position in any shares, securities or other instruments. The information contained herein is based on the study and research of Dan O (“the Author”); is merely the written opinions and ideas of the Author, and is as such strictly for educational purposes and/or for study or research only. This information should not and cannot be construed as or relied on and (for all intents and purposes) does not constitute financial, investment or any other form of advice. Any investment involves the taking of substantial risks, including (but not limited to) complete loss of capital. Every investor has different strategies, risk tolerances and time frames. You are advised to perform your own independent checks, research or study; and you should contact a licensed professional before making any investment decisions. The Author make it unequivocally clear that there are no warranties, express or implied, as to the accuracy, completeness, or results obtained from any statement, information and/or data set forth herein. The Author, its related and affiliate companies and/or their directors, executives and employees shall in no event be held liable to any party for any direct, indirect, punitive, special, incidental, or consequential damages arising directly or indirectly from the use of any of this material

FY17 (Apr17 to Mar18) Portfolio Review - A Great Year

2018-03-30T13:40:00.001+08:00

Trading in Hong Kong and Singapore are both closed for Good Friday holiday today, meaning that FY17 has officially came to an end. As a result, it is time for my second full year report since I begun investing in April 2016.

Portfolio Results

Time-weighted returns - 118.96% (+63.53% half-on-half, +84.95% year-on-year)

All-time XIRR - 58.93% (+31.55% half-on-half)

Perhaps it is fitting to begin by congratulating myself after such a great year as my portfolio had reaped amazing returns beyond what the index could have provided. Even if I were to take into account the lack of returns from cash held as part of portfolio, the 0% returns attributed to around 20% of my portfolio would still have allowed me to thrash the index thoroughly.

However, I would like to re-emphasize the following: it is pertinent to note that short run out-performance can be influenced to a large extent by luck. Long run performance is the fairest measure of a value investor's success, and that is what I have to continually work towards.

After all, 2017 was a great year for most investors. This is easily observed from our everyday life. For example, there was a marked increase in "experts" offering courses or paid subscriptions towards the end of 2017. It is especially puzzling to me when "experts" who under-perform the market hold courses to teach others on investing. I struggle to wrap my head around how they convince themselves that their advice is worth the money, and why people would bother paying to learn how to under-perform the market. Either way, I see these developments as tell tale signs that the market in 2017 was one that was very kind to investors, myself included.

Open Positions

March was a rather busy month for me as I added both Hop Hing and Riverstone. I also took advantage of the dip in Hock Lian Seng's share price back to $0.46 to add a bit more of Hock Lian Seng into my portfolio.

My open positions are currently anchored by 3 stocks - AEM, Hock Lian Seng, and Riverstone, whose prospects I am all confident about. SUTL Enterprise is a potential multi-bagger over the long run which I am prepared to keep for some time. My Hong Kong bets are small positions for me to start learning more about the Hong Kong stock market.

All in all, I am very comfortable with my Open Positions set up. With 5/7 of my counters trading Cum Dividends, I am also happily awaiting the upcoming dividends.

Closed Positions

I had closed a total of 7 positions over the past year. Most of the decisions to exit turned out to be pretty good as the counters' share prices have not progressed since my divestment.

In terms of bad decisions, Sapphire stands out as the only loss. I made a mistake with my investment thesis, so I guess there can really be no complaints.

Going Forward

After the transactions made in February/March, and with the addition of my entire bonus into the portfolio, I am now sitting at 30% cash. In the short run, I am constantly on the look out for the right opportunity to deploy this capital.

In the long run, there is still plenty to learn about value investing. I hope to have a better grasp of the Hong Kong stock market over the next year, and to learn more about valuing tech companies. In terms of formal learning, I hope to complete my CFA, and to read more books on value investing.

Appreciations

This blog was originally started as a personal journal to capture the crux of my investment theses so I can hold myself accountable to them. The fact that I have these many readers is an unintended positive consequence of this personal journey for which I am rather thankful about. Today, I count some professional investors as readers of my blog, and am particularly glad to have met those that bothered reaching out.

Over the course of the past year, I have also been thinking about how to set up this site to self-select audience who might be more serious about investing. Given the thought, I have also stopped publicizing my writings on mediums where readers might not have the same appreciation for validated opinions that differ from theirs. After all, my primary purpose of writing is neither to make money off it, nor to convince others to buy or sell.

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New Counter: Riverstone Holdings

2018-03-14T18:34:00.000+08:00

Equity: Riverstone Holdings (SGX: AP4)

Business: Glove manufacturer
Markets exposed: Global
Stock exchange: SGX
Purchase price: 1.03 (including transaction costs)
Purchase month: March

10% per annum thesis:

Riverstone Holdings is a solid fast grower with moat particularly in gloves used in cleanroom environment which commands higher margins.

Introduction:

Riverstone Holdings is primarily a nitrile glove manufacturer that sells its gloves around the world. Gloves sold cater to 2 main segments - cleanroom environment and healthcare.

Considerations:

1) Governance and Management

Founder, CEO, and Executive Chairman Wong Teek Son also doubles up as the largest shareholder with 50.75% of total shareholdings. Co-founder and COO Lee Wai Keong is another who eats his own cooking, holding 11.66% ownership. Given that the lion's share of ownership is in the hands of management, we have definite management-shareholder alignment.

It is also worth highlighting that Riverstone's board consist of 3/6 of the directors as independent directors, and comes in at a very respectable 56th place on 2017's SGTI rankings (here).

2) Fast Grower

Riverstone is a company with a fantastic track record for organic growth.

Source: Compiled by Author

The company produced 7.6 billion gloves in 2017 and plans to produce 10.4 billion gloves by end of FY2019. Given their impressive track record, it appears that the company is well set on executing its grand plan to increase capacity. The fact that the company is growing without leverage also lowers the investment risk of the growth thesis.

From an industry point of view, it is worth noting that listed rivals Top Glove, Hartalega, and Kossan Rubber Industries have all been growing their nitrile glove segment steadily. This is a sign of strong and growing industrial demand likely driven by increased usage of nitrile glove in advanced manufacturing and also in healthcare. Riverstone's optimism that their increased capacity would be absorbed by the market therefore appears to be well-placed.

3) Valuations

Riverstone is undervalued relative to its listed peers.

Source: Compiled by Author

One possible explanation is the size of the company - Riverstone is the smallest amongst the 4 companies. However, Riverstone is not inferior to the other companies in terms of any financial metrics from margins to returns. In fact, the company can also boast of having the highest return on equity amongst its peer group.

Source: Compiled by Author

Given the above, my personal opinion is that Riverstone is relatively undervalued to peers.

At my buy-in price of $1.03, Riverstone trades at a trailing Price/Earnings of around 18. While not exactly cheap, my personal opinion is that this is a valuation that is more than fair considering that the company has been growing net profit at a CAGR that exceeds its Price/Earnings ratio.

Risks:

A) Increasing price of Butadiene, which will raise production costs.

B) Weakening of USD/MYR, thus leading to FX losses.

C) Weakening of demand for both cleanroom and healthcare gloves.

Conclusion

I have taken advantage of weak Q4 results by Riverstone to establish a position in this counter which I had been monitoring for the longest time. I am pleased to announce my first SGX purchase since November last year and have established Riverstone as one of my core portfolio positions.

I remain on a lookout for undervalued counters to add to my portfolio so please feel free to throw up a couple of names!

Portfolio Update: Took loss on Sapphire

2018-03-09T22:33:00.002+08:00

Summary

Well, Sapphire clearly isn't the gem that I thought it was - it is now officially the 2nd counter out of my 12 divestments for which I have lost money.

All divestments made in 2018 by Author, price includes transaction costs

Divestment Rationale - Sapphire

In my initiation report (here), I wrote the following about Sapphire:

"Sapphire Corporation is a turnaround that is now poised to be a fast grower."

1 year on, I think it is about time to admit that they have neither turned their business around nor grown their business. Let us just leave the "fast" part out of the equation in order not to embarrass myself further.

Source: Author's compilation

Divestment is therefore primarily due to failure of investment thesis.

Timing of Divestment

To be frank, I still do believe in the long term prospects of Sapphire. I was also fine with keeping the counter as part of my portfolio. There are 2 main reasons why I chose to divest now instead of holding for another year:

1) Price

I divested while Sapphire was at S$0.215. The price is a big concern as I was worried that Sapphire would experience a free fall should it fall below the important mental barrier of S$0.200.

2) Circumstance

While Sapphire's business fundamentals did not progress as expected, they were also victims of some unfortunate circumstances.

Firstly, Midas, another SGX-listed company primarily involved in China's rail industry, had suspended the trading of their shares. Apparently, the Company had "uncovered a number of previously undisclosed corporations related to certain Group companies incorporated in the PRC" and "cannot confirm information on the shareholdings and businesses on these corporations." Such ridiculous corporate governance is bound to weaken investors' confidence in similar firms

Secondly, Sapphire had negotiated an offer with HKICIM to sell 27.97% of their business at S$0.51 per share. I think the price shows the true intrinsic value and potential of Sapphire's business. Unfortunately, HKICIM is a unit of HNA which is so cash strapped that they are practically selling everything they can sell. In hindsight, the deal was never going to make it given HNA's well documented woes. However, when the deal did fall through, investors' confidence was affected again.

My view was that these unfortunate situations might actually help tip Sapphire below S$0.200.

Conclusion

As mentioned during my (happier) divestment of Micro-Mechanics and Innotek (here), I am already looking forward to deploying some of my cash. From a portfolio point of view, I am actively looking to utilize my cash hoard and have a slight preference to take up positions in companies that might be more recession-resistant in the current economic climate. (do feel free to throw me any good stock tips from SGX or HKex!)

Happy investing everyone!

New Counter: Hop Hing (HKG:0047)

2018-03-05T18:09:00.000+08:00

Equity: Hop Hing (HKG:0047)

Business: Quick Service Restaurants (QSR)

Markets exposed: North-east China

Stock exchange: HKex

Purchase price: HKD 0.198 (including transaction costs, excluding FX costs)

Purchase month: March

10% per annum thesis:

Hop Hing is a well-managed, high-quality F&B business. I see it as a steady slow grower that is currently undervalued by the market.

Introduction:

Hop Hing was started as a business selling edible oils. In 2013, the founders bought out its edible oils business and left the company listed as a Quick Service Restaurant pure-play.

Hop Hing currently operates 2 main brands in North-east China - Dairy Queen for the upper-middle segment, and Yoshinoya for the lower-middle segment. Additionally, they have been expanding their network of Uncle Fong, a Hong Kong snacks shop, since 2016.

Considerations:

1) Management-Shareholder Alignment

Hop Hing is majority-owned by the Hung Family. Current CEO, Marvin Hung, is the nephew of founder and Honorary Chairman Peter Hung.

Souce: HKex, Philips Securities

Hop Hing is therefore essentially a family-owned, family-run business. With the major shareholder doubling up as management, we can be certain of long-term management-shareholder alignment.

As an added bonus, unlike most of the other HKex small caps that I had came across, the company has 4/7 of their board serving as independent directors.

2) Operational Excellence

Since the divestment of its legacy edible oils business, Hop Hing has displayed operational excellence in management of its QSR business. Margins has been growing at every level from 2014 till HY 2017.

Source: Hop Hing's Financial Statements

Apart from improving margins, management had also done extremely well in improving cash flow. Their cash conversion cycle is currently negative - Hop Hing does not even need to expend cash for working capital.

Source: Hop Hing's Corporate Presentation

On a more qualitative basis, I like the management's focus on delivery services which appears to be the top consumer choice in China. I also laud the often swift decision making to close down unprofitable stores or downsize where required to reduce rent and labor costs.

3) Valuations

Despite Hop Hing's operational excellence, its Price/Earnings ratio has been trending down. Given their positive profit alert announcement (here), I forecast that trailing twelve months P/E after 2017 results release will be around 10.7 - the lowest it has been since Hop Hing became a QSR pure-play. This is despite Hop Hing sitting on almost 30% of its market cap in cash and cash equivalents!

Source: Forecast by Author

Using perpetual growth calculations on 2016 Free Cash Flow (FCF)/share, it becomes obvious that the market is currently pricing in negligible or negative growth rates for Hop Hing at a share price of around 0.200.

Source: Calculations by Author

My personal opinion is that the market is overly pessimistic on Hop Hing's growth potential. I also feel that the required discount rate for a F&B firm with negative cash conversion cycle in net cash position should definitely not exceed 12%. My view is therefore that Hop Hing is undervalued both in terms of valuation ratios and based on FCF.

Conclusion:

Hop Hing is the kind of firm I like most - a company with predictable cash flow and strong balance sheet that is trading at a large margin of safety. It also comes with a ~3% dividend yield that I can sit on while waiting for Mr Market to take notice of the counter. Heck, even the name sounds like a typical boring and uninspirational firm that only value investors will check out.

I am happy to add the firm to my list of HKex small bets alongside Dream International and Emperor Capital as I look to learn more about value investing in the Hong Kong stock exchange.

Unfortunately, from a portfolio point of view, Hop Hing is but a small contributor. I continue to be on the look out for a stable portfolio anchor (15% - 20%) to add after the recent divestments and am hopeful on sharing about a big purchase soon.

Portfolio Update: Took profit on InnoTek and Micro-Mechanics

2018-02-23T21:47:00.001+08:00

Summary

I have decided to sell out on my positions in both InnoTek and Micro-Mechanics as they appear fairly valued given the risk-reward stand off at this point of time.

All divestments made in 2018 by Author, price includes transaction costs

However, I continue to like both counters and will continue to monitor them closely on my watchlist.

Divestment Rationale - InnoTek

I last wrote about InnoTek after their mid year results were released in August last year (here). Then, I mentioned that InnoTek was facing a difficult time securing demand for their office automation and consumer products, and that the following growth drivers will be key to their performance going forward:

2H'17: Heat sinks for TV and Computers

1H'18: New automotive programs begin

2H'18: Mansfield Thailand to begin operations

Amongst the 3 growth drivers, the new automotive program and Mansfield Thailand are the bigger 2. However, Mr. Market had raised InnoTek's share price by over 30% even though the company had not yet been able to show any results with regards to these 2 key growth drivers.

While I continue to believe that InnoTek is worth far more should they execute their growth plans flawlessly, I consider a 30% return now a decent deal as I will not need to undertake these execution risks.

With a PE of around 9.2 (5.63 net of cash), InnoTek remains one of the cheaper manufacturing stocks out there. I will keep InnoTek on my watchlist for possible re-entry should execution failures scare investors away.

Divestment Rationale - Micro-Mechanics

At the point of initiation, Micro-Mechanics was trading at a PE below 10 (here). Today, Micro-Mechanics commands an all-time-high PE that exceeds 18 (17.7 net of cash) after displaying strong growth over several quarters.

I have therefore taken the decision to sell Micro-Mechanics now as I consider it fairly valued in light of weaker growth prospects.

Firstly, growth in net profit is likely to slow down due to high base effect following last year's growth spurt. Instead of growing profits at 20% or 50%, 2Q's net profit growth rate of 14.7% should be the new normal for Micro-Mechanics in the near future.

Source: Compiled by Author

Secondly, the current semiconductor up-cycle is 17 months old. The previous 2 up-cycles have lasted 20 and 26 months. While I am no guru and do not know when the current up-cycle will end, I prefer to exit on the top and leave some money on the table rather than be caught out when the tide had well and truly turned.

Lastly, the fact that Singapore's electronic non-oil domestic exports have declined for 2 consecutive months (here) also points to more potential speed bumps ahead.

That being said, although I have divested my position in Micro-Mechanics, I strongly believe that the fundamentals that attracted me to this stock remain intact - a healthy balance sheet, strong cash flow generating ability, management-shareholder alignment, diversified client base, high returns and tight margin controls are all hallmarks of high-quality companies. I will therefore also keep Micro-Mechanics on my watchlist.

Conclusion

To me, taking profit on "fairly valued" counters is something that is perhaps even more challenging than picking good stocks. While some of my sell decisions have been pretty amazing (like Valuetronics), others have proven outright silly (like DBS). InnoTek and Micro-Mechanics should be good lessons for myself as I look to improve my stock selling skills.

From a portfolio point of view, I am actively looking to utilize my cash hoard and have a slight preference to take up positions in companies that might be more recession-resistant in the current economic climate. (do feel free to throw me any good stock tips from SGX or HKex!)

Happy investing everyone!

Book Review: 5 things I learned from Joel Tillinghast's Big Money Thinks Small

2018-02-18T23:19:00.000+08:00

About the Author:

Joel Tillinghast is a protégé of Peter Lynch who has managed Fidelity Low-Priced Stock Fund since 1989. Today, the fund manages over US$40 billion and owns over 900 counters. Despite its massive size, the fund that has outperformed both the S&P500 and Russell 2000 by an average of 4 percentage points per year.

About the Book:

From companies to avoid to stock selection, Tillinghast discusses all his investing philosophies in his book "Big Money Thinks Small". Published in 2017, the book provides both recent examples that younger investors can identify with, as well as the classic long horizon illustrations that value investors look towards.

I highly recommend this book to all intermediate investors.

Here are my 5 learning points:

1) Trade less

Tilinghast cites an interesting study done on Morningstar-listed active equity funds with more than $0.5 billion in assets - the higher the turnover, the worse the fund does. Tilinghast's advice is to take a long term view, estimate the value of stocks and don't trade for other reasons. This minimizes taxes, fees and transaction costs, all of which worsens investment results.

2) Leveraged ETFs are dangerous

With the introduction of popular triple-levered ETF such as the FAANG ETF (here), it is fitting that Tilinghast illustrates the dangers of leveraged investing with a triple-levered ETF:

Assuming that the Index takes a dip of 25% from 100 to 75. The Triple-Levered Bullish ETF will take a corresponding 75% plunge from 100 to 25. A subsequently recovery of 33.3% will leave the Index back at 100. However, a 100% increase will merely double the Triple-Levered Bullish ETF to 50.

This is a wonderful illustration of how the triple-levered ETF magnifies the downside losses which requires multiple periods of excess gains to offset these losses incurred.

3) GDP growth might not flow to stock markets

Tilinghast cites another insightful study which shows that contrary to popular belief, countries with rapid growth in GDP per capita are not the ones with the best real returns to stockholders.

Instead, he suggests that at a horizon of 10 years, the better decision rule for choosing among countries with rule of law has been to favor markets with lower P/Es rather than those with rapid recent economic growth.

4) Share buybacks are not always good news

While share buybacks are often well regarded by shareholders, shareholders will only benefit when the repurchase is done at a discount from intrinsic value. In reality, however, share buybacks might be done when share prices are at its peak and at a premium to the companies' intrinsic value.

A common reason could be to offset the dilution effect from hefty employee stock options which tend to become more in the money as share prices rise. To keep a constant share count, shares will then be bought back most urgently at the peak.

5) Tilinghast's Investing checklist

1) Does the stock have a high earnings yield?

2) Does the company do something unique that will allow it to earn super-profits on its growth opportunities?

3) Is the company built to last, or is it at risk from competition, fads, obsolescence, or excessive debt?

4) Are the company's finances stable and predictable into the extended future, or are they cyclical, volatile, and uncertain?

Some reasons to be bearish that make sense

2018-02-11T22:40:00.001+08:00

I wrote about some reasons to be bearish that don't make sense last week. Since then, the Dow Jones Industrial Index had posted its worst week in two years with 2 days of free fall exceeding 1000 points. In fact, had the Dow lost any ground on Friday, it would have been the index's worst week since the financial crisis in October 2008.

I guess this provides the perfect context for discussion on reasons to be bearish that makes economic sense.

1) Treasury Bond yields are rising

10 year treasury bond yields have accelerated since the start of the year and now sits 0.841% more than it's 1-year low in September. While 0.841% itself is rather insignificant on an absolute basis, it is actually quite a big deal due to September's low 2% base.

Source: CNBC

The major question is what has this got to do with equities?

Bonds are a major alternative investment asset class to equities. Ceteris paribus, rising bond yields makes this asset class more attractive relative to equities. We will therefore see money flow from equities to bonds.

Rises in Treasury bond yields have the greatest impact on overall fixed income as Treasury bonds are seen as the safest investment. Consequently, other fixed income instruments will also see corresponding increases in yields in order to maintain their respective risk premium.

2) Inflation is rising (more than expected)

The US Labor Department reported in early February that wages in January were up 2.9% compared with a year earlier, the best pace since June 2009. Higher wages serve as a leading indicator for higher inflation.

Given the spike in expected inflation, it appears that the pace of wage growth has caught investors out by surprise.

Source: Federal Bank of St Louis

The direct impact of inflation on equities differ between businesses. In general, businesses that can pass on inflation to the consumer tend to fare better. As such, industries where demand is price inelastic might be better placed than industries where demand is price inelastic.

However, the direct impact of inflation is minute compared to its indirect impact. When inflation rises more than expected, so too nominal interest rates:

i ≈ π + r

i = nominal interest rates

π = expected inflation

r = real interest rates

Higher nominal interest rates can impact borrowing costs and discount rates. As such, the impact of unexpected fluctuations in inflation on equities can be rather drastic.

3) Margin calls

Definition of 'Margin Call', as quoted from Investopedia -

A margin call is a broker's demand on an investor using margin to deposit additional money or securities so that the margin account is brought up to the minimum maintenance margin. Margin calls occur when the account value depresses to a value calculated by the broker's particular formula.

An investor receives a margin call from a broker if one or more of the securities he had bought with borrowed money decreases in value past a certain point. The investor must either deposit more money in the account or sell off some of his assets.

TL;DR - When stocks plunge as suddenly as 10% in a week, investors trading on margins might be forced to sell off assets in order to maintain minimum maintenance margin. This worsens the free fall, which might then trigger another round of margin calls. If widespread, such a vicious cycle is devastating for both affected investors and the entire market.

Bull or Bear

Just as writing about some reasons to be bearish that don't make sense is not to be construed as bullishness, this post is not to be taken as an indication of bearishness. Rather, I advocate understanding the arguments for both Bull and Bear. This will help us remain calm and make rational decisions on investing (and divesting).

For those who wish to hear it from someone with more authority on the subject, here is Mark Cuban:

Why some reasons to be bearish don't make sense

2018-02-04T17:33:00.001+08:00

Equity markets are off to a great start in 2018 with stock indices around the world scaling new heights. In fact, January 2018 was not just a good month for stocks, it was a great month even by the average "good" standards - the Standard & Poor’s 500 stock index gained 5.62%, its best January since 1997.

As the bull market runs further and longer, many investors are finding new reasons to be bearish. However, here are some recent ones that don't make sense:

1) Trailing P/E for US indices are too high relative to history

Price to Earnings ratios have been used for the longest time to gauge value; Higher P/E indicating a more expensive stock market can be considered general consensus.

However, in the current context, comparing trailing P/E to historical P/E in the US does not make much sense for 2 key reasons:

1.A) Trailing earnings are hit by tax losses

Many US firms have taken a tax loss this quarter in order to repatriate retained earnings previously held overseas.

As an example, Microsoft reported a loss of $0.82 per share in the latest quarter due to a one time tax charge. Without the tax loss, they would have reported $0.96 profit per share. Microsoft's trailing earnings are therefore significantly hit by this one time tax loss.

If we are to replicate this effect across the American indices, trailing earnings will by default be significantly understated relative to fundamental performance. Trailing P/E would therefore naturally appear to be exorbitant.

1.B) Forward earnings are boosted by the tax cut

Investors invest for a share of the company's future profits and cash flows. Given the tax cut by Trump's government, ceteris paribus, American companies are going to see both future profits and cash flows increase.

While some of these excess profits might be competed away, most companies are still likely to be worth more with the tax cut than without - thus justifying higher trailing P/E compared to the past.

2) Dow falling 666 points is a huge deal

It appears that this week's headlines are dominated by a 666 point fall in the Dow Jones Industrial Index. The truth is that a 666 point fall is not actually a big deal when we look past these sensationalist headlines simply because of how much the Dow had grown.

Source: CNBC

While a 666 point fall in the past would have been a >5% plunge, this week's 666 point fall represented a mere 2.5% correction. If we view it in the context of 2018's bullish run thus far, a correction of 2.5% still leaves us up 2.8% year to date.

Source: Yahoo Finance

Bull or Bear

To be clear, this post is not to be taken as an indication that a bear market is unlikely to occur in the near future. While I do have a background in Macro Economics, I am definitely not an expert in predicting general stock market bull or bear trends.

For those who are looking for some expert advice (by this, I mean real expert advice - not those "experts" who charge subscriptions after one single year of decent returns) on the likely market trend, perhaps I can refer you to one of the best macro investors of all time - Mr Ray Dalio.

Book Review: 5 things I learned from David Einhorn's Fooling Some of the People All of the Time

2018-01-20T14:38:00.001+08:00

About the Author:

David Einhorn is founder and president of Greenlight Capital, a value-oriented hedge fund that returned 16.5% a year from 1996 till 2016. He is best known for correctly identifying Lehman's balance sheet deficiencies ahead of their downfall in 2008 though his track record of spotting accounting fraud extends far beyond Lehman.

About the Book:

This book details Einhorn's struggle to expose fraud at Allied Capital despite his possession of overwhelming evidence.

"But the most troubling material concerns an issue that is bigger than Allied and Einhorn's battle: it's the way criticisms of corporate behavior are received in the marketplace. Many, including the SEC, appeared inclined to shoot the messenger."

- Bethany McLean, Fortune

I could not agree more.

I highly recommend this book to investors who are interested to find out more about the dark underbelly of Wall Street. As plenty of accounting concepts are discussed in the book, basic understanding of accounting principles will greatly aid understanding.

Here are my 5 learning points:

1) Don't trust the brokerage reports blindly

Einhorn details how analysts brush him aside and continue to issue "BUY" calls even when presented solid evidence of accounting fraud. The worst analysts named would not even consider external sources of information and relied solely on management forecasts and communications.

It appears that there is a fundamental conflict of interests as the companies covered can also be clients of the brokerage.

I have previously written a short piece on exercising caution over analyst reports in the Singapore context (here).

2) Don't trust your fund manager blindly

Einhorn was requested to meet the founder of Wasatch, a mutual fund with a large long position in Allied Capital. For a fund that supposedly follows "a disciplined and unique process that utilizes extraordinarily thorough due diligence", it is amazing that they had not even bothered to read up on a very public allegation on their holdings prior to meeting Einhorn.

I cannot imagine being that lazy and irresponsible with someone else's money.

3) Don't trust your regulators blindly

Einhorn had presented evidence of Allied Capital's misdoings to many authorities including the relevant regulators: the Securities and Exchange Commission, the Small Business Administration, and the US Department of Agriculture.

Egged on by Allied, the regulators' swiftest actions were to investigate Einhorn for market manipulation as they refused to investigate his claims. Even when the regulators were finally forced to act by other agencies, the SEC merely validated Einhorn's claims but did not punish Allied.

Such inaction is not unique to the US - remember Iceberg and Noble Group?

4) Insider Purchase =/ no Fraud

While insider purchase can and should be looked at positively, it does not preclude the firm from fraud. As Einhorn pointed out, the size of purchase is the key. Using 1 week's worth of salary to purchase stock does not mean anything to the insider compared to how much they can make from the fraud.

5) Short selling is not evil

The media often portrays short sellers as evil doers looking to bring down companies for their own benefit. In truth, short selling serves a genuine market function especially in managing bubbles. At its best, short sellers also act as the first line of defence against fraud.

The Fall of Singapore Post since 2015

2018-01-07T13:50:00.000+08:00

2017 was a fantastic year for all investors as prices went up across almost all asset classes. This was true for most investors in Singapore's stock market unless you somehow managed to pick up duds like.. Singapore Post.

At S$1.25 per share, SingPost's share price had declined 41.6% from its peak in January 30th of S$2.14. Frankly, it is quite amazing that a company with monopoly in mail management and a hand in logistics and ecommerce can fare this badly in a bull market that had picked up other logistics players like Global Logistics Property (GLP) and Poh Tiong Choon at rich valuations.

This post details the amazing story behind the downfall of SingPost. Lets look back to 2015 to begin the explanation:

8 July 2015 - Alibaba plans to increase stake in SingPost from 10.23% to 14.51% for $1.74/share

15 October 2015 - SingPost acquires US e-commerce business TradeGlobal, valued at S$245M

10 December 2015 - Dr Wolfgang Baier resigns as CEO of SingPost

15 December 2015 - Mak Yuen Teen, NUS Accounting Professor and SingPost shareholder, highlights Corporate Governance lapses in SingPost

22 December 2015 - SingPost claims that lapses were due to "administrative oversight"

23 December 2015 - SingPost seeks Special Audit for Corporate Governance lapses

SingPost's woes started when Dr Baier abruptly resigned as CEO of SingPost in December. In hindsight, it was an amazing decision on Dr Baier's part because any half-decent board would probably have sacked him in light of the events since.

That being said, SingPost did not have a half-decent board. Despite having more board of directors (12 in 2015) than bigger SGX listed Government Linked Firms like major shareholder SingTel, they had somehow managed "administrative oversight" over something as simple as declaring independent directors' interests in acquisitions.

More will be shared on Alibaba and especially TradeGlobal later.

3 May 2016 - SingPost publishes Executive Summary of Special Audit report

11 May 2016 - Mr Simon Israel, chairman of SingTel, comes on board as Chairman

4 July 2016 - SingPost publishes Executive Summary of Corporate Governance Review

10 October 2016 - Ms Fang Ai Lian, accountant with extensive director background, comes on board as Lead Independent Director

10 October 2016 - Ms Kong Sau Wai Elizabeth, lawyer with experience in corporate transactions, comes on board as Independent Director

10 October 2016 - Mr Bob Tan Beng Hai, accountant with links to several government linked firms, comes on board as Independent Director

As expected, the Special Audit was particularly damning on SingPost failing to declare directors' interests in acquisitions. It was revealed that lead independent director Keith Tay had declared his lack of independence to the board on mulitple occasions. Nonetheless, he remained part of discussions. I can only conclude that the board did not deem it a priority to exclude him from discussions and inform shareholders of the same.

The Special Audit was also damning on SingPost's M&A practices. The following statement should be sufficient enough to explain:

"SingPost has no prescribed policy, process or procedure for the evaluation and approval of M&A transactions"

Frankly, this is ridiculous considering the amount and frequency of SingPost's M&A activity.

I would not recommend reading the Corporate Governance Review as it is full of consultant lingo with no value add apart from justifying their fat pay cheques. Professor Mak wrote a post "Deciphering SingPost’s Corporate Governance Review Report" which I recommend interested investors to read instead. Long story short, the review affirmed Professor Mak's initial concerns that corporate governance practices were sub-optimal.

New chairman Mr Simon Israel adopted recommendations from the Corporate Governance Review and began to refresh the board of directors with 3 new faces.

SingPost ranked 14 on 2015's Singapore Governance and Transparency Index. Naturally, they finished 328 in 2016's edition.

11 January 2017 - Alibaba finally raises stake in SingPost to 14.4% for $1.74/share

1 April 2017 - Ms Lim Cheng Cheng, CFO of Singtel, comes on board as Non-Executive, Non-Independent Director

12 May 2017 - SingPost books S$185M impairment on TradeGlobal as part of 4Q2016

1 June 2017 - Mr Paul William Coutts, ex-CEO of Toll Global Forwarding, comes on board as CEO

1 June 2017 - Mr Steven Robert Leonard, SGInnovate CEO, comes on board as Independent Director

17 July 2017 - SingPost issues Summary Report on external review on acquisition of TradeGlobal

Remember the acquisition of TradeGlobal back in 2015? After consecutive and continued losses since the acquisition, SingPost had decided to admit they made a huge mistake and book a massive impairment. The subsequent Summary Report alluded to previous criticism over weak board oversight over M&A deal and detailed how due diligence was poorly conducted. Most importantly, it recommended policy improvements on M&A dealing which were accepted.

SingPost added 2 more new directors and ended the year with 10 directors of which 7 are newly elected since 2015. There is now stronger shareholder alignment with SingTel and Alibaba holding 3/10 seats.

With these developments, it is hoped that SingPost can finally clean up the slate and end it's self inflicted leadership nightmare from 2015 to 2017.

Conclusion

Interestingly, SingPost is not the only postal company struggling with M&A. Japan Post had paid $4.9 billion to buy Toll Group in 2015, and had to take a $3.6 billion write down less than 2 years later in April 2017.

Even more interestingly, if Toll Group looks familiar to you, that is because SingPost's new CEO hails from Toll Group. I guess the bright side amidst all this drama is that having been on the other side of the M&A game, Mr Coutts might be wiser towards not overpaying for acquisitions.

(Author is not vested in SingPost from 2015 till the time of writing)

New Counter: Dream International (HKG:1126)

2017-12-27T10:08:00.002+08:00

Equity: Dream International (HKG:1126)

Business: Toys OEM
Markets exposed: Global
Stock exchange: HKex
Purchase price: HKD 3.159 (including transaction costs, excluding FX costs)
Purchase month: December

10% per annum thesis:

Dream International is an undervalued fast grower. Earnings growth in the coming quarters might serve as a catalyst for revaluation, which in turn has the potential to transfer Dream International into a multi-bagger.

Introduction:

Dream International is a Original Equipment Manufacturer for Toys. They manufacture for companies like Disney, Funko and Spin Master.

In terms of Geography, North America represents Dream International's biggest market. The majority of their production is done in Vietnam.

Considerations:

1) Management-Shareholder Alignment

Chairman and CEO Mr Kyoo Yoon Choi is also Dream International's controlling shareholder with 67.22% ownership of Dream International. With the largest shareholder personally taking care of management, Management-Shareholder alignment is naturally in place.

2) Fast Grower

Dream International has been growing its net profits from 2012 to 2016 at an incredible CAGR of 25.9%. Considering that 1H results are typically weaker than 2H for Dream International, it appears that 2017 might be another record year for profits.

Source: Dream International's Financial Statements, complied by Author

Part of the reason for Dream International's soaring profits is an improvement in margins in an industry where competitors are increasingly squeezed for profits. In my opinion, there are 2 main reasons for this:

2.1) Successfully moving majority of production to Vietnam where operating costs are lower

2.2) Increasing Profitability of the Plastic figures product segment

Revenue from the Plastic figures segment has been growing at an even more astounding CAGR of 65% per annum.

Source: Dream International's Financial Statements, complied by Author

To make matters even more exciting, the Plastic figures segment appears to have stronger margins than their traditional Plush stuffed toys segment.

Source: Dream International's Financial Statements, complied by Author

There are several catalysts to maintain Dream International's streak of growing profits. For one, Dream International is looking to continue expanding production in Vietnam especially in the Plastic figures segment. On the demand side, we also have Frozen 2 hitting the big screens in 2018. This should increase demand from Disney for Plush stuffed toys.

In the longer term, we have other positives like Disney's takeover of Fox's many valuable intellectual property (such as X-men, Deadpool, Avatar). Marvel had admitted in 2015 (here) that they were not pushing X-men merchandise simply because they would have had to share fees with Fox. It is therefore highly likely that Disney will begin pushing for more merchandise sales now. As demand from North America forms the bulk of Dream International's revenue, the US tax cut should also increase discretionary consumption of toys.

3) Valuations

Dream International has been (and still is) trading at a discount to peers.

Source: Compiled by Author

This valuation discount is irrational in my opinion, given the earnings growth and relative out-performance in returns metrics of Dream International. However, seeing that Dream International's share price had risen 50% over the past year, I believe the market is now coming to terms with Dream International's undervaluation.

A revaluation of Price to Earnings ratio to 10 without any further earnings growth will see Dream International trading at HKD 5.

Risks:

A) Corporate Governance

Dream International does not have the best corporate governance structure. 3/9 of their directors are executive and non-independent, and controlling shareholder Mr Kyoo Yoon Choi is both Chairman and CEO.

This might lead to potential abuse of power through poor directors-management delineation of power. That being said, such corporate governance structure appears to be more common in Hong Kong and I have found no such instance of abuse in Dream International thus far in my research. For example, remunerations to directors appear acceptable considering the profitability of the firm.

Conclusion:

This is my 2nd foray into the Hong Kong market after Emperor Capital. As I remain unproven and untested in the Hong Kong market, I have also limited Dream International to below 6% of my portfolio. Hopefully, both these ventures into HKex will prove fruitful.

Christmas has passed so I will end off by wishing everyone a Happy New Year!

Book Review: 5 takeaways from Guy Spier's The Education of a Value Investor

2017-12-23T10:52:00.000+08:00

About the Author:

Guy Spier is perhaps best known for co-bidding with close friend Mohnish Pabrai to win idol Warren Buffett's charity lunch in 2007. As a fund manager himself, Guy Spier is no slouch. His Aquamarine Fund boasts of a cumulative return of 463% from 1997 till 2014 compared to S&P 500's 167%. $1 million invested in the fund would therefore be worth $5.63 million in 2014, versus $2.7 million if it had been invested in the S&P 500 over the same period.

About the Book:

While the book does covers Spier's philosophy towards investing, investing itself is not the main focus of the book. Instead, the nucleus of the book centers around Spier's encounter with the dark side of Wall Street and his turn toward a more enlightened path that brings richer rewards both financially and personally.

This book is a profound yet brilliantly practical guide for anyone interested in the world of investing and for those determined to forge their own path within it. I recommend this book not to individuals who desire to learn about investing, but to value investors looking to improve themselves.

Here are 5 takeaways:

1) Don't buy if the seller has self-interest in you buying

Spier believes that this is a simple application of adverse selection where sellers have information that buyers do not. As with great investors from Benjamin Graham to Peter Lynch, Spier does not participate in IPOs where all the mind-warping sales power of Wall Street is behind them.

2) Discuss your investment ideas only with people who have no axe to grind

Spier suggests for investors to pool knowledge with other investors, particularly individuals who can keep their ego in check. He adds that the goal of these conversations isn't to reach the "right answer" or engage in intelligent debate. It is to simply to share experiences and information, which will in turn allow investors to formulate their own decision.

3) Examine the entire value chain of the business

Spier argues that a company that has control over their destiny is far better than a company that has its destiny determined by forces beyond its control.

That being said, it is also possible to use this mindset to identify some great investment opportunities. The goal is to identify which aspect of the value chain has gone awry, hence dragging down the whole business. The key is to invest only if this problem is temporary, thus allowing for an opportunity to buy the stock at a beaten-down price and benefit once this issue within the value chain is resolved.

4) Absolute Valuation

Rather than thinking about valuation solely in relative terms, Spier reminds investors also to always assess stocks in absolute terms. After all, a stock that had dropped from its recent highs does not mean that it is cheap.

One potential question to ask yourself is "Am I sure that I am paying for the business as it is today - not for an excessively rosy expectation of where it might be in future".

5) Management Assessment

Most investors assess management's credentials and track record. Some also snoop on corporate governance to check if management might be simply self-serving.

In contrast, Spier's suggestion is entirely rational but seldom practiced by investors - He suggests for investors to consider whether key members of the company's management team are going through a difficult personal experience. Such difficult experience might radically affect their ability to act for the benefit of their shareholders.

New Counter: Emperor Capital (HKG:717)

2017-12-19T17:13:00.001+08:00

Equity: Emperor Capital (HKG:717)

Business: Financial Services
Markets exposed: Mainly Hong Kong
Stock exchange: HKex
Purchase price: HKD 0.582 (including transaction costs, excluding FX costs)
Purchase month: December

10% per annum thesis:

Emperor Capital is an undervalued fast grower. Earnings growth in the coming quarters might serve as a catalyst for revaluation, which in turn has the potential to transfer Emperor Capital into a multi-bagger.

Introduction:

Emperor Capital is a boutique financial services firm with the following 4 main segments: Financing, Brokerage, Placing & Underwriting and Corporate Finance.

Its operations are mainly in Hong Kong, where it has 10 branches. The firm also has 3 representative branches in mainland China.

Considerations:

1) Management-Shareholder Alignment

Emperor Capital is currently being led by CEO Daisy Yeung of the Yeung Family. As the family owns more than 41% of Emperor Capital, the largest shareholder is essentially also personally taking care of management. Since the Yeungs have significant skin in the game, it appears highly unlikely for them to jeopardize shareholders' interests.

It is also worth highlighting the well connected shareholders of Emperor Capital. The firm is part of Albert Yeung's behemoth conglomerate Emperor Group, and hence has the potential to tap on their business connections across Hong Kong. Other major shareholders include China Huarong Asset Management and China Taiping Insurance, who each own slightly more than 9% of Emperor Capital. Both are huge firms in the financial services industry (worth more than 100 Billion RMB in market capitalization) with ties to Big Brother in Beijing.

2) Valuations

Emperor Capital is undervalued relative to other financial services firms trading on Hong Kong's stock exchange. This is despite the fact that it generates one of the highest Returns on Equity.

Source: Compiled by Author

It is also undervalued relative to its' own historical valuations.

Source: Compiled by Author

Considering that Emperor Capital had actually improved its Return on Equity over the past 5 years, my opinion is that they should instead be trading above their 5-year average P/E and P/B ratios.

3) Fast Grower

Emperor Capital has been growing its top line at a phenomenal CAGR of 31.5% over the past 4 years. More importantly, they have done so while maintaining their high net profit margins.

Source: Emperor Capital's Corporate Presentation

Following the injection of equity by China Huarong Asset Management and China Taiping Insurance, Emperor Capital has room to leverage its balance sheet even further for growth. Their current Asset/Equity ratio appears to be conservative as compared to the same peer group of financial services firms. For reference, SGX listed Hong Leong Finance and UOB Kay Hian has Asset/Equity ratio of 7.32 and 2.26 respectively.

Source: Compiled by Author

As a financial services firm, growth in the longer term is very much dependent on the performance of the local economy. At the moment, I am rather bullish on the long term outlook for both Hong Kong and China. In fact, Hong Kong's economy is currently doing exceptionally well - the city clocked 3.9% real GDP growth in the 3 quarters to date, a remarkable achievement for an economy more used to growing at 2%. Emperor Capital should therefore do fine as long as they continue to keep a tight watch on both costs and service.

Risks:

A) Corporate Governance

Emperor Capital does not have the best corporate governance structure. 4/7 of their directors are executive and non-independent, and CEO Daisy Yeung sits in both the remuneration and nomination committees.

This might lead to potential abuse of power through poor directors-management delineation of power. That being said, I have found no such instance of abuse thus far in my research. For example, remunerations to directors appear acceptable considering the profitability of the firm.

Conclusion:

I had wanted to venture into the Hong Kong market since last year and have taken advantage of my leave from work to accomplish this objective before the end of 2017. Given that this is my first foray overseas, I have limited Emperor Capital to a mere 5.4% of my portfolio. Hopefully, this investment will prove to be the first of many successful investments made in Hong Kong's stock exchange.

Seeing that the festive season is around the corner, I would like to end off by wishing all readers Merry Christmas and a Happy New Year!

Book Review: 5 types of Moat from Charlie Munger - The Complete Investor

2017-12-13T22:59:00.002+08:00

About Charlie Munger:

Charlie Munger is best known as vice chairman of Berkshire Hathaway and the ever affable partner of Warren Buffett. However, Munger was already well established as an outstanding investor way before becoming Buffett's right hand man - Munger actually ran a partnership from 1962 to 1975 and achieved average annualized returns of 19.8%.

About the Book:

This Book is titled 'The Complete Investor' and author Tren Griffin does not disappoint. From the basics of the Graham value investing system and Munger's pieces on human psychology to important investors' attributes as well as key points to look out for in businesses, this book is indeed a comprehensive guide on value investing. I highly recommend this book to all investors seeking qualitative advice on value investing.

There are plenty of learning points from the book. As a summary, I will simply share my biggest takeaways - the 5 primary elements that can help create a moat:

1) Supply-side Economies of Scale and Scope

If a company's average costs fall when more of a product or service is produced, there are supply-side economies of scale. Wal-Mart was listed as an example of a business with substantial supply side economies of scale through its investments in distributions and its purchasing power.

2) Demand-Side Economies of Scale (Network Effects)

Demand-side economies of scale result when a product or service becomes more valuable as more people use it. Facebook is a classic example of a business that benefits from network effects. The more people connected via Facebook, the more valuable Facebook is in connecting individuals and businesses; the more valuable the service provided by Facebook, the more people would like to utilize its services. The result is a virtuous, reinforcing cycle.

3) Brand

A moat powered by a brand is often a result of intangible values that individuals associate with the product or service. As an example, people are willing to pay more for a Wrigley chewing gum than for Glotz's even though the taste might be very similar.

4) Regulation

Regulations can often end up protecting existing entrenched producers rather than helping consumers. For example, regulators require issuers of bonds to get an opinion from a very small number of bond rating firms, thus providing rating firms like Moody's S&P and Fitch with a moat.

5) Patents and Intellectual Property

Companies that have been granted a patent, trademark, or other type of intellectual property by the government have in effect been given a legal monopoly. This barrier to entry can create a substantial moat for the owner of the intellectual property.

Apart from the 5 main types of moats, Munger asserts that it is also possible for firms to create a moat as a result of a combination of better systems and culture than their competitors. Berkshire is cited as an example with a moat derived from a combination of factors including their low overheads, their low-cost float (cash that comes in from insurance premiums collected well in advance of future insurance claims), and them being the private buyer of first resort.

Divested Cogent for 73.4% annualized returns

2017-12-07T18:05:00.001+08:00

Summary

Following the $1.02 cash offer by Cosco for Cogent on 3rd November (here), I have finally divested my interests in Cogent for $1.01.

All divestments made in 2017 by Author, price includes transaction costs

Divestment Rationale

Reasons for divesting now are primarily twofold:

1) Increased Opportunities (for other investments)

I have been keenly observing the share prices of counters in both my portfolio and my watchlist. It seems that after a protracted bull run, we are finally experiencing a sharp correction amongst mid and small caps on the Singapore Exchange.

1-month share price trends from Yahoo Finance

This is precisely the sort of news that gets me excited as a value investor - as the share prices fall, the margin of safety increases! More importantly, it appears that the current correction might result in a few counters reaching my Target Price.

I have therefore sold Cogent to raise cash in anticipation of capitalizing on these potential bargains

2) Decreased Likelihood of a Competing Offer

I mentioned in my post about Cosco's offer 1 month ago that I am simply delaying the inevitable in the hope of a competing offer. After a month of observation, I conclude that the probability of any competing offer has decreased from 'outside chance' to 'extremely low'. As such, there remains only 2 likely outcomes:

A) Cosco completes the takeover of Cogent

B) Cogent remains listed with Cosco as majority shareholder

For option A, I could sell for $0.01 per share more but I estimate the time taken for deal completion and payout would be at least half a year. In this scenario, the $0.01 per share appears insufficient to compensate for the time value of money.

For option B, I note that while Mr Benson Tan will remain as CEO of Cogent for a period of at least 3 years following the takeover, the element of management-shareholder alignment will no longer be in place. There is a big question mark over how Cosco will make Mr Tan run Cogent and hence I will not be keen to stick around should this scenario play out.

Conclusion

Cosco has prematurely ended my interests in Cogent. Thankfully, this forced divestment came at an extremely opportune time of a share price correction.

I am hopeful that the correction continues - here is to wishing everyone luck with picking up the best bargains then!

New Counter: SUTL Enterprise Limited

2017-11-30T22:01:00.000+08:00

Equity: SUTL Enterprise Limited (SGX: BHU)

Business: Marina Development and Management

Markets exposed: Mainly Asia Pacific

Stock exchange: SGX

Purchase price: 0.701 (including transaction costs)

Purchase month: November

10% per annum thesis:

SUTL Enterprise has the potential to be a fast growing multi-bagger should they execute their business strategy right.

Introduction:

SUTL Enterprise is best known as the owner and operator of ONE°15 Marina Club located at Sentosa Cove, Singapore. Their business expansion model is premised on a two-pronged approach - marina owner-operator and marina manager.

My friend Eric had done some amazing research on SUTL Enterprise which I highly recommend interested investors to read. You may find the article here or look up his profile in InvestingNote @OngEric.

Rather than attempting to rejig Eric's great piece of work (and embarrassing myself in the process), I will simply highlight my twin thesis in this post.

Twin Thesis:

1) High Growth Potential

Eric had written extensively about SUTL Enterprise's undervalued stake in Puteri Harbour ONE°15 Clubhouse. My opinion is that SUTL Enterprise's remaining developments possess of tremendous potential as well.

SUTL Enterprise's existing marina projects

The attached data illustrates clearly that SUTL Enterprise has a strategy of undertaking marina projects mainly in wealthy cities or in areas neighbouring wealthy cities. These cities provide the pool of target clientele - High Net Worth individuals who would actually own yachts and sign up for memberships, or relatively wealthy holiday goers who would visit to enjoy marina life.

Source: Knight Frank Wealth Report

To top it off, these wealthy cities also happen to be amongst the fastest at growing their wealth worldwide. Assuming the same level of interest in marinas, we will still see increased demand for a taste of luxury marina life.

2) Low Downside Risks

With the exception of ONE°15 Marina Club and Puteri Harbour ONE°15 Clubhouse, SUTL Enterprise's remaining marina developments are merely related to branding, consultancy and management. With no need to commit any capital, this asset light approach naturally limits downside risks.

SUTL Enterprise's existing operations at ONE°15 Marina Club displays tremendous free cash flow generating prowess. In fact, SUTL Enterprise had been growing its net cash position since 2015. As of today, 71% of their market capitalization can be attributed to its cash hoard. The strong balance sheet and cash generating capabilities also limits downside risks.

SUTL Enterprise is actually majority owned by conglomerate SUTL Holdings Pte Ltd through SUTL Global Pte Ltd which hold 54.81% of their outstanding shares. SUTL Enterprise can leverage on its parent's connections for developments. As the only listed arm of parent SUTL Holdings, it appears unlikely that they will be allowed any spectacular tumble.

Risks:

Naturally, no investment is perfect. I will briefly share two risks identified with investment in SUTL Enterprise.

A) Low Liquidity

SUTL Enterprise has only 86.5 million shares outstanding. With Parent SUTL Holding taking up 54.81% of those shares, the public is left to contend with around 37 million shares worth roughly S$27 million.

Given the low trading volume, initiating and unwinding a large stake is near impossible. The share price could also see wild fluctuations as a 6 digit investment (divestment) would be sufficient to drive the share price up (down) several percentage points.

B) Management-Shareholder Alignment

Management-Shareholder alignment is normally great for retail investors. However, in this scenario, given that SUTL Holdings is a private company, retail investors have little means to assess the true financial position of the parent company in question.

Should the unlikely scenario of conglomerate SUTL Holdings running into financial trouble occur, there exist a certain possibility of SUTL Enterprise being utilized to plug the gap. However, I would like to stress that this is purely academic and speculative.

Conclusion:

I am rather bullish on SUTL Enterprise's upside potential and see growth on the horizon as long as they execute in line with their plans. My anticipation is that we should see intrinsic performance improve especially in 2019 and beyond.

With this investment, my portfolio's cash position has declined to 21% (~34% assuming divestment of Cogent). Along with the initiation of a long position in SUTL Enterprise, I have once again added more of Hock Lian Seng (further to what I previously shared here).

As a result, SUTL Enterprise now occupies 10% of my portfolio (including cash) while anchor counter Hock Lian Seng takes up 18%.

Here is to wishing myself luck on this investment!

Portfolio Update: Accumulated More of Hock Lian Seng

2017-11-25T15:52:00.002+08:00

Hock Lian Seng is a counter that I have reviewed extensively since my purchase in December 2016. You may read about the write ups here. Despite the counter providing annualized returns exceeding 50% since initiating the long position, I have decided to take advantage of the recent dip in share price to accumulate even more of Hock Lian Seng.

Equity: Hock Lian Seng Holdings Limited (SGX: J2T)

Business: Engineering, Building & Property Development
Markets exposed: Mainly Singapore
Stock exchange: SGX
Purchase price: 0.460 (resulting average cost of 0.404, inc. transaction costs)
Purchase month: November

Considerations:

1) Portfolio Balancing

I had written in June regarding my desire to increase my portfolio allocation to cash to at least 20% (here). Since then, I had indeed managed to raise my cash allocation through sales of Keong Hong and Tai Sin as well as consistent savings. Hock Lian Seng's decision to return $0.125 per share to shareholders as dividends had also contributed to the increased cash hoard.

Following the recent divestment of Valuetronics (here), my portfolio allocation to cash had further risen to 38%. I am cognizant of the fact that if I am to include portfolio allocation to Cogent as cash (as there is a cash offer in place for Cogent), portfolio allocation to cash would be 51%! In view of the current macroeconomic climate, I see no need to sit on 50% cash.

This accumulation decision is therefore triggered in part due to my desire to buy.

2) Stable & Predictable Performance

While I could have bought any counter, the decision to accumulate more of Hock Lian Seng was made as I saw the firm as a stable anchor counter for my portfolio.

In summary, Hock Lian Seng is a simple business with exposure only to Singapore. Unlike competitors like OKP Holdings, Hock Lian Seng also boasts of an impeccable track record and an order book of S$830 million with earnings visibility till 2020.

I have written rather extensively about their performance in the past and so will not elaborate further here.

3) Solid Q3 Performance

Hock Lian Seng reported a very solid Q3 performance.

Source: Hock Lian Seng's Financial Statements

Actual construction work had finally taken off for Hock Lian Seng's mega Changi Airport project. We see a leap in civil engineering revenue recognition as Hock Lian Seng accelerated the draw down of its order book. More importantly, gross margins had also improved and is headed back towards its 2013-2016 highs.

The development of its industrial property in Tuas had also taken flight and its success would serve as a welcomed boost to earnings. My concern is that demand for industrial space in Tuas area is currently soft but this should improve as PSA moves more functions over.

Interestingly, the market does not share my opinion Hock Lian Seng's results as the firm's share price slid. I have therefore decided to take advantage of this opportunity to accumulate more.

Conclusion

The divergence between Hock Lian Seng's intrinsic performance and share price created a unique opportunity to satisfy my portfolio requirement for an anchor counter.

Hock Lian Seng currently occupies 21% of my ex-cash portfolio (14% including cash). If the opportunity arises, I might add more at S$0.46 before the year closes. I will update here if that happens.

As usual, I would like to sign off by wishing everyone success with your investments!

UPDATE:

Have added more of Hock Lian Seng at S$0.46. The counter now occupies 18% of my portfolio including cash. Average purchase price inclusive of transaction costs has now increased to S$0.417.

Divested Valuetronics for 106% annualized returns

2017-11-15T21:35:00.000+08:00

Summary

I have decided to divest my position in Valuetronics as my initial investment thesis of a turnaround made in April (here) has been realized.

All divestments made in 2017 by Author, price includes transaction costs

As the table shows, the divestment of Valuetronics represent my largest realized gain till date.

Divestment Rationale

1) Turnaround is Complete

The key investment rationale was that Valuetronics' twin engines of Consumer Electronics (CE) and Industrial and Commercial Electronics (ICE) were finally both firing concurrently. This had indeed played out perfectly with the firm recording between 7%-10% q-o-q growth in revenue for both segments in the 2 quarterly results since my investment.

However, every party must come to an end and the latest Q2'18 results indicate that momentum for Valuetronics' ICE segment might be stuttering. Revenue from the ICE segment fell q-o-q for the first time since Q4'16.

Source: Valuetronics' Financial Statements

I take the q-o-q fall in revenue for ICE as a sign that the turnaround had been complete. Upon further assessment that the rich y-o-y growth figures are coming to an end with the higher base figures achieved since 2Q'16, I have decided to realize my gains and exit in accordance to the initial investment thesis.

I would like to add that no one can be certain as to whether this q-o-q result is a mere blip or if this is the start of something more serious. Indeed, I can be wrong but I have simply decided to take the safer option and stick to my original investment thesis.

2) Asset Play

Another investment thesis that I discussed in April was Valuetronics as an asset play.

When I purchased Valuetronics, cash and cash equivalent made up 41% of its market capitalization. Today, Valuetronics' share price has increased to the extent where cash and cash equivalent are only worth 25% of its market capitalization. From a PE of 12 (net of cash, 7.07), Valuetronics is now trading at a PE of 13 (net of cash, 9.71).

I consider the current valuations more indicative of Valuetronics' fair value and am pleased that the market is perhaps now taking into greater account the unproductive cash sitting on Valuetronics' balance sheet.

Conclusion

In truth, this divestment is also partially triggered by my desire to reduce my portfolio's exposure to the electronics sector and take some profit off the table on the back of the recent electronics boom.

With increased cash on hand, I am currently considering between a few different investment ideas. I anticipate that the next investment should take place before the close of the year and hope that it will prove as fruitful as this one.

Book Review: 5 takeaways from Edgar Wachenheim's Common Stocks & Common Sense

2017-11-11T20:33:00.000+08:00

About the Author:

Edgar Wachenheim is the founder, chairman and chief portfolio manager of Greenhaven Associates. The fund currently manages over US$6 billion. In the 25 years since the founding of the fund in 1987, Greenhaven Associates had produced market beating returns of 19% per annum on average.

About the Book:

Unlike other books which discuss theories on stock pickings, investment principles or even investing psychology, this book adopts a case-based pedagogy.

Edgar shares details of several investments made by Greenhaven. He illustrates methodologically how each investment thesis surfaced before detailing the probabilistic approach towards assessing these theses and finally discusses how he appraises the target price of each firm in question.

Here goes the 5 takeaways:

1) The first goal of investing is to control the risks of permanent loss

Edgar shares his belief that a shareholder makes money off the income statement, but survives off the balance sheet. Because of his keen desire to minimize risks of permanent loss, the balance sheet becomes a good place to start efforts to understand a company.

Debt-to-equity ratios, liquidity, depreciation rates, accounting practices, pension and health care liabilities, and "hidden" assets and liabilities are all among common considerations of Edgar.

2) We cannot completely eliminate large risks

Investors have to accept that relatively unpredictable outlier developments can sometimes quickly derail otherwise attractive investments.

Investors must be prepared and willing to change their analyses and minds when presented with new developments that adversely alter the fundamentals of an industry or company. In practice, when one becomes aware of adverse changes, one should then sell shares before any loss becomes too large.

3) Other great investors' purchases provide for a good source of investment ideas

Edgar admits a liking towards following sound and successful investors who are particularly knowledgeable about a company or industry they are investing in.

4) High growth rates are unsustainable over time

Over time, the growth rates of almost all technologies, products, and services slow because of saturation, obsolescence, or competition.

It is therefore not advisable to project high growth rates far into the future.

5) Remain fully invested

Edgar advises for investors to remain fully invested as long as their holdings remain reasonably priced and free from large risks of permanent loss.

Sometimes holdings that initially appear to be less exciting eventually benefit from positive unforeseen events and unexpectedly turn out to be a complete winner. The only way to benefit from these events is to remain fully invested.

However, Edgar clarifies that in situations where investors are unable to find a sufficient number of attractive securities to remain fully invested, investors should be willing to hold cash.

Cogent buyout offer - thoughts and (lack of) options

2017-11-04T13:29:00.000+08:00

The spate of buyouts targeting logistics companies on SGX has continued with the latest target - Cogent Holdings. Cogent received a buyout offer from COSCO shipping, another company listed on SGX. Interested investors can read more about the buyout offer here.

Investors would normally thank their lucky stars upon buyout offers as these offers often represent a significant premium over the target company's most recent share price. Unfortunately, I cannot say the same for myself as Cogent's offer packs only a miserly premium.

A comparison with other logistics buyout offer this year illustrates the point. Cogent's offer is by far the smallest premium over the firms' 1 month volume-weighted average price (VWAP):

This is a double whammy as Cogent has consistently provided the best returns among these 4 logistics companies being bought out:

While the motivations of COSCO shipping are clear, I struggle to comprehend the Tan family's decision to sell out on Cogent. Apart from strong returns, the company also boasts of high net profit margins. Cogent has been growing steadily and appears to have a clear strategy for further growth. They should also benefit from PSA's eventual move to Tuas.

Regardless of the reasons behind this decision, the unfortunate truth is that the Tan family had provided irrevocable undertaking to sell all their shares amounting to 84.33% of Cogent Holdings. COSCO has the right to compulsorily acquire all shares once they receive valid acceptances amounting to not less than 90% of total shares.

My personal valuation of Cogent is in excess of $1.03 per share. Philips securities (the only research house currently following Cogent) had also placed a price target of $1.12 (here).

While I am therefore tempted to be a "dissenting shareholder", fact remains that COSCO only requires a mere 5.67% more shares to compulsorily acquire my shares. In that case, I would have lost time value of money putting up what is likely to be a futile resistance.

It therefore appears that as a minor retail shareholder, I do not have much alternatives apart from cashing out on Cogent. Nevertheless, I shall look to delay the inevitable while I hold on to hope for the outside chance of a competing offer.

Micro-Mechanics - time to sell after 146% returns in 13 months?

2017-10-31T00:50:00.001+08:00

The management of Micro-Mechanics has an annoying habit - They seem to enjoy releasing financial statements right smack in the middle of the trading day.

As yours truly is a poor salaried man slogging his life away during office hours, I have always found it tough to follow their fortunes in a timely manner. The management's handling of today's 1Q'18 results release was no different. Imagine my shock when I scrolled through my holdings during lunch time - Micro-Mechanics was up 7%! Needless to say, all was instantly forgiven.

The counter eventually closed at S$2.03, up S$1.18 since my purchase at S$0.85 in October 2016. Total returns (inclusive of dividends) of 146.59% was therefore achieved in less than 13 months! While ecstatic, the value investor in me was instantly triggered to check current fundamentals against my initiation report (here) for potential signs of over valuations.

Here are the 4 most important considerations:

1) Corporate Governance:

Micro-Mechanics continues to ace the corporate governance scorecard.

Source: MM Investors' Presentation

At the 18th Investors' Choice Awards 2017 on 19 September 2017, the Group was conferred the Shareholder Communications Excellence Award (Small Cap) 2017, Singapore Corporate Governance Award (Small Cap) 2017 and Singapore Corporate Governance Award (Information Technology) 2017 by Securities Investors Association Singapore.

2) Shareholder-Management Alignment:

CEO Christopher Borch continues to hold over 50% of Micro-Mechanics' fully paid ordinary shares despite the surging share price.

The only actions he has taken with his shares has been to donate some to his foundation. This should not come as a surprise as Mr Borch has consistently donated shares (OK, more than some - amounting to 4.5 million till date) to his charity The Borch Foundation over the years.

3) Macroeconomic Business Outlook:

I had written previously in July a PMI review on the global manufacturing bull (here). Nothing much has changed since as global manufacturing remain bullish.

Specific to the semi-conductor industry is an even more bullish picture. My view is that the nascent Internet of Things should open vast greenfield opportunities to semiconductor companies. However, I remain wary of the cyclical nature of the industry.

Source: World Semiconductor Trade Statistics

4) Valuations:

I mentioned in my initiation report that I was purchasing Micro-Mechanics when Price-Earnings (PE) ratio was near a 5-year low. The PE ratio now has shot through the roof and now sits at a 5-year high.

However, a 5-year high PE should not automatically trigger a "Sell" call. The current high multiple is bestowed by investors wowed by the company's consistent growth. The key here is whether the company deserves this high earnings multiple.

Source: MM Investors' Presentation

As the current semi-conductor industry boom has lifted many semi-conductor companies, it is important to check Micro-Mechanics' valuations in relation to them. A quick and easy check on SGX provides initial evidence that Micro-Mechanics' valuations do not appear too extravagant amongst comparable listed semi-conductor companies. While their PE ratio might be the highest, they also boast of the strongest net profit margin.

Source: SGX StockFacts

More importantly, while both AEM and UMS might match Micro-Mechanics' stellar growth, neither of them can match Micro-Mechanics' diversified revenue streams. Unlike AEM or UMS, Micro-Mechanics is not dependent on any single major customer for survival.

Source: MM Annual Reports

Conclusion:

Given these evidences, I personally think that Micro-Mechanics deserves to trade at a premium to its peers. It is a company superior on margins, efficiency ratios and management.

Looking at the company in silo, Micro-Mechanics' current PE of 19.1 (net of cash - 17.4) also does not appear high in relation to its >20% net profit growth trajectory. This is also true when considered against their recent net profit margin and return of equity of between 25%-30%.

Most importantly, even if Micro-Mechanics simply maintains its current PE multiple, growth in this macroeconomic environment should still deliver extremely satisfactory returns.

Time to sell? Not yet. Value remains for me.

This is neither a recommendation to purchase or sell any of the shares, securities or other instruments mentioned in this documet or referred to; nor can this blog post be treated as professional advice to buy, sell or take a position in any shares, securities or other instruments. The information contained herein is based on the study and research of Dan O (“the Author”); is merely the written opinions and ideas of the Author, and is as such strictly for educational purposes and/or for study or research only. This information should not and cannot be construed as or relied on and (for all intents and purposes) does not constitute financial, investment or any other form of advice. Any investment involves the taking of substantial risks, including (but not limited to) complete loss of capital. Every investor has different strategies, risk tolerances and time frames. You are advised to perform your own independent checks, research or study; and you should contact a licensed professional before making any investment decisions. The Author make it unequivocally clear that there are no warranties, express or implied, as to the accuracy, completeness, or results obtained from any statement, information and/or data set forth herein. The Author, its related and affiliate companies and/or their directors, executives and employees shall in no event be held liable to any party for any direct, indirect, punitive, special, incidental, or consequential damages arising directly or indirectly from the use of any of this material.

9 stock picking tips from The Essays of Warren Buffett

2017-10-23T14:49:00.001+08:00

About Warren Buffett:

Warren Buffett is a value investing legend. While his purist value investing style might not appeal to everyone, there is no denying its time tested effectiveness. Investors of Berkshire Hathaway, Buffett's investment conglomerate, have seen a 20.8% annualized return in market value over a period of 51 years from 1965 to 2016.

About the Book:

This book is simply a curated and reviewed version of most of Warren Buffett's essays written over more than 20 years. The book touches on topics far beyond stock picking and investment. In particular, Corporate Governance and Accounting both formed insightful components of this book.

I personally would heavily recommend this book to those who are interested to learn more about investment management as a whole. Regardless, here goes the promised 9 stock picking tips:

1) Be leery of CEOs who woo investors with fancy predictions

CEOs who make fancy predictions might resort to uneconomic operating maneuvers, or even accounting shenanigans, in order to meet operating targets they had announced.

In truth, only "a few of these managers will prove prophetic - others will turn out to be congenital optimists, or even charlatans."

2) Eroding fundamentals will overwhelm managerial brilliance

"Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks."

10percentperannum note: In layman speak, Buffett believes that investors will be better served to avoid companies operating in industries that are failing.

3) Do not over diversify

"If you are a know-something investor, able to understand business economics and to find five to ten sensibly-priced companies that possess important long-term competitive advantages, conventional diversification makes no sense to you."

4) Growth is good only when returns on investments are high

"Growth benefits investors only when the business in point can invest at incremental returns that are enticing - in other words, only when each dollar used to finance the growth creates over a dollar of long-term market value"

"In the case of low-return business requiring incremental funds, growth hurts the investor."

"Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return."

5) Invest long term

"If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes"

10percentperannum note: Buffett also writes extensively about how rapid short term trades racks up high and unnecessary transaction costs.

6) Invest in a pessimistic environment

"Investors should try to be fearful when others are greedy and greedy only when others are fearful"

"The most common cause of low prices is pessimism - sometimes pervasive, sometimes specific to a company or industry."

7) Buy good businesses at fair prices

"Buy good businesses at fair prices rather than fair businesses at good prices"

8) Avoid companies with significant post-retirement liabilies

10percentperannum note: There are 2 main types of retirement benefits provided by companies - defined contribution plan and defined benefit plan. For the former scenario, companies have to merely provide the agreed contribution in each period. Buffett refers to the latter scenario where companies have to guarantee the agreed (future) benefit regardless of costs.

9) Avoid turnarounds

Buffett prefers firms that are "simple businesses", and that have "demonstrated consistent earning power" "with favorable long term prospects".

Singapore's Residential Market - Sustainable Recovery?

2017-10-10T21:45:00.001+08:00

I realized that it has been a rather long time since I wrote a macro piece (especially for a self proclaimed macroeconomic focused value investor). As such, given the current hype over Singapore's residential market, it appears high time to review this particular sector's fundamentals.

The Hype

The spotlight on Singapore's residential market was primarily driven by the recent spate of en-bloc deals by different developers. While unlikely to top 2007's en-bloc craze, 2017's en-bloc figures thus far have proven to be the greatest in the past 10 years.

Source: Bloomberg

This was soon followed by news that Singapore's private home prices had increased by 0.5% in Q3'17 - the first rise in 4 years.

Source: URA

The tiny 0.5% price growth brought about great hopes that Singapore's residential market had bottomed out. Such a view would have coincided with my guesstimate last September for residential prices to bottom out as early as 2017 (here).

The main question here is whether such a view is accurate. No one knows for sure, but an examination of recent facts can lend weight towards an educated guess.

Minor Policy Support

The only significant policy change thus far was a relaxation in Additional Seller's Stamp Duty.

For sellers of residential properties that are purchased or saw a change in zoning starting March 11, the SSD rate for holding periods for up to a year will be lowered to 12 per cent from the current 16 per cent.

For holding periods between one year and up to two years, it will be lower at 8 per cent from the current 12 per cent. For holding periods more than two years and up to three years, it will be at 4 per cent, half of the present 8 per cent.

No SSD will be payable for holding periods more than three years. At present, the SSD for holding periods for up to four years is at 4 per cent.

While minor, such a policy change clearly encourages greater speculative demand for housing as investments.

Fundamental Demand

Demand for housing can generally be split into speculative demand for investment, and what I term as "fundamental" demand for homes. Basically, the former is a want while the latter is a need.

The twin engines of fundamental demand are population growth and economic growth. Singapore is a mature economy which generally sees only minor changes in both population and economic growth on an annualized basis.

Indeed, Singapore's population had only grown by only 1% (here) while 2017 GDP growth is estimated at 2.5% (here). Therefore, while also minor, fundamental demand is expected to increase.

Supply

Residential property bulls will be pleased to know that an examination of unsold private residential units in the pipeline provides solid evidence that the supply glut has been slowly wiped out.

Source: URA

The pipeline supply of private residential units and ECs has also decreased year-on-year.

Source: URA 2Q'16 stats vs URA 2Q'17 stats

Supply is thus also well set up for a bottoming of residential property pries.

Conclusion - Sustainable or Not..?

Real Estate Developers' Association of Singapore (Redas) president Augustine Tan warned that the fast rate of recent land acquisitions at high prices by developers is "not sustainable" (here).

In contrast, JP Morgan's analysts believe that the Singapore property market is poised for the start of a "sustainable" three-year en bloc cycle, they said in an Oct 5 research report (here).

I lean towards JP Morgan's analysis - my personal view is that basic demand and supply analysis points towards Singapore's residential market bottoming out. However, as I have always maintained, a rising tide does not float all boats. Similarly, it should not be taken for granted that all developers will do well as home prices increase.

It is important to note that developers are operating in an environment where cost of construction is increasing. I urge investors who are bullish on Singapore's residential developers to examine their cost of land acquisitions as some en bloc deals appear to require a large increase in home prices to maintain profit margins. Such an overly optimistic projection of home prices diminishes investors' margin of safety.

With that in mind, here is to wishing everyone happy investing!