The Most Important Thing: Uncommon Sense for the Thoughtful Investor


The Most Important Thing by Howard Marks has changed my perception of risk and made me question my investing style. In it, he espouses second-level thinking and prefers defensive investing to offensive investing. He elaborates on the need to be aware and attentive of cycles and the oscillating pendulum between euphoria and extreme pessimism. He also believes in the appreciating the role of luck in our investments and the importance of knowing what we do not know, and as such avoiding pitfalls. To him, lower returns taken with much less risks is always preferred to higher returns achieved by taking on larger risks. He deems it a success if Oaktree (his fund) keeps up with the market during bull years, but outperforms during the bear years. Oaktree Capital Management specializes in off-the-beaten-path and contrarian investments, and favors companies with tangible assets. The firm’s motto is “if we avoid the losers, the winners will take care of themselves.”

This is a very enlightening book, especially for young investors like myself, who lack the experience in the market. It gives one a new perspective on risk and returns, and I would highly encourage any investor looking to refine their thought process to read it. As a person whom Warren Buffet once said, “When I see memos from Howard Marks in my mail, they’re the first thing I open and read. I always learn something, and that goes double for his book”, I am confident the reader of The Most Important Thing would similarly take back nuggets of wisdom from it. 


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Updates to my Portfolio

During the past few weeks, I have made some updates to my portfolio:

On 10/4/17, I purchased shares of AP Oil at a price of $0.27. AP Oil is a value play to me. Its PE is 12.7, PB is 0.8 and is currently giving me a yield of ~4.6% based on my purchase price. It is net cash, and cash in fact makes up ~86% of its market cap. AP Oil has been looking around to deploy its cash hoard. The CEO frankly mentioned that the company is in a business that has low growth prospects. He also said, “We have grown organically for the past 10 years, and now we are at a stage where we can take risks and not die.” Recently, it invested RMB25 million ($5.1 million) in a joint venture that provides financial leasing services in Chongqing, China. This deal is interesting in that it gives AP Oil downside protection + upside participation. Two key clauses were included in the JV agreement: 1) Put Option: After 1 Jan 2018, AP Oil will have the right to sell-back its stake to Zongshen at an agreed market valuation (determined by an approved valuer) at not less than the initial capital contribution of RMB25m. This creates a sort of capital guarantee for AP Oil. 2) Tag-along rights: That ensures AP Oil is able to participate in the same kind of upside as Zongshen should they decide to sell their stake in the JV to a third party. These are deals which tell us that management is savvy at the negotiation table. Revenues and margins might drop in the coming years due to low growth and volatility in selling prices while management tries to diversify the business. Nevertheless, its huge cash hoard is reassuring.

On the same day, I purchased shares in Alliance Mineral at $0.35. As the company was not profit-making yet, I bought a small amount purely as a speculation play – it is and remains the smallest constituent in my portfolio. To me, the rewards of seeing the company successfully hitting its targets one by one was worth the high risk involved. However, my risk averse nature prevented myself from investing more. Enough has been mentioned about the company online so I will not go into the details. Let’s see how this works out in time to come.

On 19/4/17, I bought more into Spackman Entertainment at a price of $0.152 as I felt that the stock was being unfairly penalised for its CEO’s lawsuit. The tension in the Korean Peninsula did not make things any better. Spackman has issued a positive profit guidance for the upcoming quarter and I believe that the company is slowly making progress forward with its acquisitions. Will its upcoming movie – Golden Slumber be a hit? Only time will tell. What I do know, is that Zip Cinema has a very good track record in its producer – Eugene lee.

Lastly, on 25/4/17, I purchased shares in Bund Center Investment at a price of $0.82. Bund Center Investment is a value-yield play, similar to that of AP Oil. It owns the Bund Center office tower and the Westin Bund Center Shanghai hotel in Shanghai; as well as the Golden Center Shopping Mall in Ningbo. As the company adopts a conservative accounting policy of valuing its properties at cost less accumulated depreciation, the current assets are carried in its books at SGD407m, while the carrying value is around SGD1946m according to an analyst report. This makes my purchase price of $0.82 around 31% of its RNAV of $2.58. It is currently in a net cash of $61 million, and is debt free. It also generates strong cashflows of around $70million a year of which an average of $51million goes to dividends. This is $0.067 a share, representing a yield of ~8.17% at my purchase price.

As my recent purchases have shown, I have been looking more at value stocks, especially now when markets and optimism have climbed. I am currently more averse to investing in growth plays, as I feel my portfolio has enough growth stocks in it. As markets continue to rise, we need to be more careful and cognizant of the risks that lie ahead, one of which I feel is overconfidence – the pride before the fall.

 

 

Disclaimer: The author owns shares in the abovementioned company. The ideas expressed in this blog should not be construed as an enticement to buy or sell the securities, commodities or assets mentioned. The accuracy or completeness of the information provided cannot be guaranteed. Readers should carry out independent verification of information provided. No warranty whatsoever is given and no liability whatsoever is accepted for any loss howsoever arising whether directly or indirectly as a result of actions taken based on ideas and information found in this blog.

Sale of TunePro & Kingboard Copper Foil and Purchase of Micro-Mechanics Holdings

Over the past week, I made a couple of transactions in the market. Firstly, on 30/3/17, I sold off TunePro at 1.41RM, giving me a loss of 12.4%, but as the SGD had appreciated against the RM during this period, I made a total loss of 19.19%. This goes to show how currency risks can potentially affect your portfolio returns. I sold off my shares because I became unsure of the competitive advantage the company possessed after listening to an interview with the CEO. Moreover, I did not like the fact that management expenses increased so much causing its profits to drop substantially in 4QFY16. Currently, the share price has dropped to an attractive level, but I would not be comfortable holding onto it due to the two reasons above.A couple of days later on the 3/4/17, I sold off all my shares in Kingboard Copper Foil at $0.40. This gave me a total return of 23.72% within 5 weeks. I sold off my stake as the appeal went in the company’s favour which was essentially a game changer in my initial speculation. Furthermore, I did not want to wait for the company to buy over my shares just to save on transaction costs as I was eyeing a few counters and wanted to be able to act when the opportunity arose. Overall, I feel it was a very lucky bet which materialized within a short time.Lastly, I purchased a stake in Micro-Mechanics Holdings at a price of $1.05. The company designs, manufactures and markets high precision tools, parts and assemblies for the semiconductor, medical, aerospace and other high technology industries. The industry is competitive, but what attracted me was the quality of the management. There are a few interviews and articles written online about the strength of the management, and this has been clearly shown in the results of the company. The CEO, COO and CFO have been with the company for a long time, and the CFO has shown his prudence in managing the finances of the company by steering away from debt and derivatives. In 2008, he mentioned that, “We understand the semi-conductor industry is not a straight line business. It is one of the reasons why the firm has paid up for its three buildings in Singapore, Malaysia and the United States. If there is downtime, we just pay the salaries. Having no debt is a buffer for the bad times.” He was also quoted saying, “Every week, all sales are sold into forward contracts with the banks. In addition, the company tries to sell in local currencies.‘It’s simple and conservative. We didn’t listen to banks which tried to sell us some derivatives. I tell my boss, forex we can’t earn but we try to minimize the loss,”.

The company is net cash and has been churning out healthy and increasing cashflows throughout the years. Group revenue and net profit has shown a general increase since FY12, although there was a slight dip in FY16. Moreover, gross margins have been increasing while operating expenses have been on a decreasing trend since 2012. These are all indicators of a well managed company. Annualised FY17 ROE is 26.2%, a respectable figure considering there is no leverage being used. At my purchase price, Micro-Mechanics is trading at a TTM ex-cash PE of ~10 and dividend yield of 5.7% based on last year’s dividend of $0.06. This is definitely not a cheap price, but what I would consider as a fair price to pay for a well-managed company.

 

Disclaimer: The author owns shares in the abovementioned company. The ideas expressed in this blog should not be construed as an enticement to buy or sell the securities, commodities or assets mentioned. The accuracy or completeness of the information provided cannot be guaranteed. Readers should carry out independent verification of information provided. No warranty whatsoever is given and no liability whatsoever is accepted for any loss howsoever arising whether directly or indirectly as a result of actions taken based on ideas and information found in this blog.

Purchase of Kingboard Copper Foil, Tai Sin Electric & Best World

kingboard

On 23/2/17, I purchased shares in Kingboard Copper Foil at $0.32. My thesis for this trade is a speculative special situation play as the risk reward ratio seems to be attractive. My hesitation did actually cause me to miss the rally from $0.29, but I still felt its current price was undervalued. The company is currently pursuing an appeal against a court ruling that did not rule in its favour. A further EY report sought by the company has shown findings that are consistent with the court’s ruling. In essence, if the company loses the appeal, there is a possibility that the majority shareholders will have to buy out the shares held by the minority shareholders, at a price to be determined. Currently, the NAV of the company is around $0.67, which might provide an indication of where negotiations might anchor towards. The hearing is set for March, and this is a very short term speculative bet, probably the most speculative trade I am entering into so far.

tai-sin-electric-limitedOn the same day, I also purchased shares in Tai Sin Electric at $0.405. The company produces and supplies materials to the construction industry, like cables, switchboards, electrical products and accessories, along with a test and inspection arm. According to an article on The Edge Singapore, it commands a 30% share in Singapore’s cable manufacturing market and its testing and inspection business is the second-largest in the country. It is a potential beneficiary of increased public infrastructure spending in the region. I have been impressed with Tai Sin’s stability and its management’s ability to grow the business steadily over the years. Revenues and earnings have grown in four out of the past five years. The company was also profitable during the crisis years of 2008-2009. In a 2010 interview with The Edge Singapore, Bobby Lim, who used to run the company and is the father of the current CEO, mentioned that one of his biggest takeaways from investing in other companies is to never over-borrow to expand the business. I am optimistic about their overseas expansion into neighbouring markets in Southeast Asia, especially Vietnam, which is experiencing a construction boom. In the previous year, revenue from Vietnam almost doubled. At my purchase price, PB is around 1.07 and PE is around 7.63. Tai Sin is more of a yield play to me, with dividend yield around 5.8% at my purchase price. The company has also reached a net cash position of $3.2 million as at end 1QFY2017.

best-world-international-limitedMy last purchase of the day was in Best World at $1.995. To be honest, I have been skeptical of Best World’s growth, as the company has just grown tremendously in the past year. A lot of reports have been written online about the prospects of the company, and I shall not go into detail. To me, I feel that buying shares of Best World now may be abit delayed, but I wanted to be sure that its growth in China was materializing, and not just a rosy picture painted by management. The recent earnings release answered my doubts, as China’s quarterly revenue grew tremendously from the previous year, ie. 143%, and FY16 revenue grew 193% yoy. I still feel that the stock could rerate upwards as it obtains more recognition from investors. At my purchase price, shares of Best World are trading at a PE of 15.9, which I feel is not expensive considering its room for growth. Dividend yield is around 2.5% at my purchase price. Best World is a growth stock, but as I am still wary of companies which do most of their business in China, I will be keeping a close eye on this.

 

Disclaimer: The author owns shares in the abovementioned company. The ideas expressed in this blog should not be construed as an enticement to buy or sell the securities, commodities or assets mentioned. The accuracy or completeness of the information provided cannot be guaranteed. Readers should carry out independent verification of information provided. No warranty whatsoever is given and no liability whatsoever is accepted for any loss howsoever arising whether directly or indirectly as a result of actions taken based on ideas and information found in this blog.

Becoming Warren Buffet (2017) Documentary

As I had some free time over the week, I have been catching up on my reading and spending time reflecting. I came across this documentary: Becoming Warren Buffet (2017) and downed the show in one sitting. A very inspirational and enlightening video on one of the world’s richest men. The most important parts of the show though, wasn’t really about how he made his wealth, but rather, how his beliefs and thinking changed along the way, especially the way he viewed money after his wife’s death. That scene was indeed very touching. You might just take home a gem of wisdom or two from this man. Watch it now to see for yourself!

 

A Painful Week

rocky-boxing
Recently, I encountered a setback in my work. The experience was hard and painful and my boss gave me a couple of days off to recover. During this period, my mind was constantly shuttling between regrets over the past and worries about the future. The famous psychologist, Elisabeth Kubler-Ross first mentioned there were 5 stages in grief – Denial, anger, bargaining, depression and acceptance. I experienced all of those emotions with the exception of bargaining. Nevertheless, I accepted my fate and predicament as time passed. The week was an emotional roller coaster but I am glad it is over. It was hard to get over it, but remembering a couple of principles helped:

  • There is a reason why everything happened the way it did. 
    I probably can’t see why now but one day I’ll look back and see that everything did work out for good.
  • Enjoy the ups and downs of life. It’s what makes life beautiful.
    I believe I won’t be able to fully appreciate the peaks of life when I have not tasted the valleys. Failure makes success all the more sweet.
  • I’m still alive and kicking. That’s something to be grateful for.
    The world owes me nothing, everything I have now is a blessing. There is always something to give thanks for, if I only open my eyes and see.

I’m pretty certain that this will probably not be the last time failure hits me hard. Like a boxer who gets used to pain, good to taste it early and learn how to get back up strong now rather than later in life. Press on!

“Everything will be ok in the end. If it’s not ok, it’s not the end.” ~ John Lennon

 

Purchase of AEM Holdings and CapitaMall Trust

aemOn 03/01/17, I purchased AEM holdings at a price of $0.865. I was reading through some of the reports about the company on NextInsight and felt that it presented a favourable risk-reward opportunity. Their sales orderbook has been increasing at a rather strong yet surprising pace, from $24.5 million in Mar 2016, to $45.5 million in Nov, then $66.7 million in Dec, and now $84.5 million in Jan this year. Majority of its sales have been attributed to its equipment sales division, in particular, a new generation of high density modular testers which it also owns the intellectual rights to. Recently, the company has turned around and started to make profits after many years of losses.The company possesses a strong balance sheet as well and is trading a low TTM PE of 4.35. The company has been buying back its shares frequently over the past year, which has greatly pushed up its share price. Its management also has a significant stake in the business. Recent buybacks at $0.85 could indicate that management still thinks the company is undervalued at this price. I will not go into more details as a lot of in depth analysis regarding this stock can be found online.

Note: This is a short-term speculative play, which I do not intend to hold for long as I do not possess the competence to analyse the semiconductor industry deeper. 

 

cmt

On the same day, I also bought into CapitaMall Trust at $1.885. The Reit has always been under my radar for the past few years, as I feel that the management of CapitaMall Trust is one of the best in its line of business, as shown by its strong fundamentals and innovativeness in positioning its malls. The business also owns many heartland malls all over Singapore, which I’m sure have become a daily go to place for many Singaporeans. Although the state of the retail industry has been looking rather bleak in recent years, I believe that all of us will still patronise shopping centres for entertainment purposes, especially the malls under CMT’s charge. In the near future, growth areas would be the repositioning of Funan IT Mall, which is expected to open in 2019. At my purchase price, the PB ratio is 1, and TTM dividend yield is 5.95%. This recent dip in its share price has presented me an opportunity to pick up some shares.

 

Disclaimer: The author owns shares in the abovementioned company. The ideas expressed in this blog should not be construed as an enticement to buy or sell the securities, commodities or assets mentioned. The accuracy or completeness of the information provided cannot be guaranteed. Readers should carry out independent verification of information provided. No warranty whatsoever is given and no liability whatsoever is accepted for any loss howsoever arising whether directly or indirectly as a result of actions taken based on ideas and information found in this blog.