June Portfolio Report and Letters 2020

It has came to my attention there are trading programs out in the market, promising of high returns based on a trading algorithm.

Let’s say if you were to buy SIA stocks, you can safely say that you understand the business you invested in. Planes fly, people take planes, the airlines charge a premium on tickets against cost (planes, staff) and the company generates cash.

However when it comes to cryptocurrencies, you generally only make a profit based on price. That’s speculation and not investing.

This is why we must have a mental framework when it comes to investing. We make decisions based on a mental framework unconditionally of short run outcomes.

You can make a short term profit on things like cryptocurrencies, however, it’ll ruin your mental framework. You may do it again, perhaps with larger position than you started. It’s human conditioning. Then it may all crater and you’re ruined.

There are multiple studies that suggest that the majority of market timers do not outperform the market. This is inclusive of the thousands of mutual funds in the US managed by ‘professional managers’.

The likely hood of a random hot shot in Singapore figuring out a perfect algorithm to beat the cryptocurrency market, is statistically unlikely, whether the underlying asset is crypto currency or not.

The underlying point I want to make in this article is to persuade everyone to make capital allocation decisions fun in our daily lives. They can be used widely in management decisions to business decisions.

In our business lives we purchase inventory, hire people and make management decisions based on value, and not speculation. We also know there’s no perfect algorithm that can make a profit in our business lives. To put things simply, an airfreight company cannot be run on an computer algorithm nor can a fishmonger’s stall.

Yet, why shouldn’t our investing lives be treated similarly?

If you were to buy gold, you can argue that gold is a store of value against cash. However, if you were to buy bitcoin, or any other cryptocurrency, can you safely argue that? I don’t see cryptocurrencies adopted as an exchange of value. I only see cryptocurrencies talked as a potential exchange of value

In investing, you want to bet on high probability sure things.

I’m sure that cryptocurrencies are categorised under: ‘far from sure’.

If pointed a gun between two options, I’d rather be speculating on penny stocks. There’s minimally value in penny stocks: an underlying company.

Singapore Portfolio

The Singapore government announced the circuit breaker and I was disappointed. If you had followed my Facebook updates, I was updating the newsfeed like an insane individual on why the government should have had tighter restrictions on immigration and we were heading for disaster.

The penalty for being penny wise and pound foolish? Two months of a complete shutdown.

I don’t agree with the shutdown for reasons I won’t go into detail in this bite-sized article. However, you adapt, that’s life.

The US portfolio sunk. The compounded returns over the years went into negative. However, to quote Rockefella: buy when there’s blood out on the streets. I persuaded more cash to allocated a surmountable amount into the Singapore equities market.

I had to come up with a portfolio in 2–3 days.

1. Let’s bet big on ultra-conservative assets

I know I haven’t been actively picking stocks for years and I needed a rapid manner to scramble a portfolio that made sense. REITs and the major banks came to mind.

REITs… you get prime real estate on a discount, GREAT! I screened through SGX and picked out a couple with positive earnings for the last 5 years that were selling at a discount to book value. Nothing fancy here: I had 7 days to allocate capital.

I’m a sucker for parliament sessions during the COVID 19 circuit breaker. Heng Swee Keat was talking about never letting Singapore go bankrupt (a little dramatized in my opinion) and how the government had a 450m ‘bailout fund’ from the reserves to prevent a bank run on our major banks during the 08 crisis. GREAT!

Let’s bet big on ultra-conservative assets, where the probability of blowing up the account is almost zero.

2. Let’s bet small on ‘high-risk assets’

Let’s take some calculated risks: prevent complete ruin yet leave room for major upside. I allocated around 25% of the portfolio to ‘non-blue chip’ companies. They are your ‘high-risk assets’. I got this idea from Nassim Taleb, who suggested that the philosophy of antifragility is to prevent huge downside at all costs whilst leaving room for a huge upside.

‘Small, independent errors.’

I bet on these counters last. I needed to do more research: yes, all the fancy math.

Company Selection

Let’s start with the probability of not losing money. It takes twice as much money to make back whatever you have lost. The first rule of investing is not to lose money. I believe these were the best choices given the circumstances. The rush to fund the account and make a calculated bet due to the corona virus. Here are the bets I made over the last 22 days, to the best of my abilities and here and the justifications.

Too Big to Fail

  • DBS

DBS was trading around $1 of book to $1 of market price. Hence, we purchased DBS at a price to what they were really worth. I consider this a defensive company in the portfolio, and mainly for dividend yield. You can’t go wrong with DBS. They are too big to fail. Every Singaporean child first bank account is normally a DBS or POSB. They are impossible to fail.

  • UOB

One of our major shareholders of the portfolio (my Mum) was adamant to making this bet. This position was recommended by her colleague: a ‘finance manager’ in the company.

I researched and they were also trading around $1 of book to $1 of market price. I also consider this a defensive company in the portfolio.

Purchasing Prime Real Estate that’s Worth $1 for 80cents

One of the upsides of a drop in the markets is that companies become cheaper to purchase. In the case of Mapletree REITs, their fundamentals are strong with free cashflow year on year and a stable net income growth. This means, they are making improvements (although slight) year on year. They own properties such as Vivocity and many other prime real estate near the CBD. The price dropped to around 80 cents to book value. In layman terms, you can purchase 80 cents worth of prime real estate that’s actually worth a dollar. So why not?

  • Suntec REITS

Suntec REITs, well, owns Suntec, inclusive of partial interest in Marina Bay financial centers. They are all prime real estate. The price dropped to around 70–80 cents to book value. Hence, I entered based on the analogy. Their 5 years, year on year earnings growth were also stable.

Little Monsters

  • Hour Glass

I call these little monsters because they are unpopular stocks, unlike the blue chips I mentioned. However, they offer huge opportunities for capital gains.

Hour glass is a company sell luxury watches with exclusive distribution rights to some luxury brands. Their financial reports showed good year on year growth. They also have substantial inside ownership. The CEO, Chairman of the company owns substantial shares of the company. This is skin in the game.

He or she has a huge incentive to make the right choices for the company. They are aligned with the common shareholder’s interest. Even though I know nothing about the luxury watches sector, other than that people overpay for luxury watches. Their balance sheet and income statement stood out.

They were trading lower than book value with good earnings growth year on year. They also had little tangible assets such as goodwill. If you stripped out the intangibles, they were still trading lower compared to book value.

  • Valuetronics

This is another company I bet on purely mostly from a financial analytical standpoint.

Their company reported great earnings growth over the last 5 years. Even though they weren’t exactly priced at book value. This does not mean we are overpaying for a company. This company was priced at above book value at around 1.2 to 1.3

If you had invested in Apple a decade ago even when they were priced way above their book value, your bet would have paid off.

I know nothing about the manufacturing and engineering industry. However, Valuetronics isn’t just a retailer or a reseller. They are manufacturers with plants in Shenzhen. This provides a competitive advantage, unlike many other resellers or retailers.

To conclude, I made a slightly smaller portioned bets on the little monsters section.

Owning a Piece of Singapore’s Economy

I am never a huge advocate of making money fast in the stock market. If you are overly concerned over the day to day price movements of your holdings, you’ll eventually end with a heart attack. On the contrary, I believe investing can be hugely pleasurable you relate them to day to day commerce. It’s essentially the management of capital and resources

Portfolio Returns End April

I did a valuation on the portfolio end April and the portfolio is valued at 2.59% higher than when I started on 31st March.

Through this process, I took an interest in securities valuation methods, Nassim Taleb’s work outside of skin in the game: fragility, a teeny — tiny bit of Kelly Criterion method, and bits of investing philosophy from Charlie Munger.

Outside of personal academic and business duties, they took up a chunk of my time. I didn’t hit my goal of learning to code during the Singapore circuit breaker.

US Portfolio:

The family had some spare cash lying around and suggested I added them to the US portfolio. They had invested in the last 2–3 years and US index funds had done a great job for them up till the COVID crash.

I also sold put options on certain securities in the US portfolio. However, I held my brakes on allocating more cash in the US markets because I felt that allocating more cash in such a short period of time may be irresponsible and/or foolish, for I haven’t had any track record outside of using index funds.

Hence I’ll like to account for potential bias. I figured it’s better to take the option on the allocation of capital and measure performance over a longer time period before making purchases again.

In our US portfolio, I have not moved much unlike the Singapore portfolio. That’s because when we funded the account, the prices have already recovered to a certain point and weren’t as attractive as compared as when we allocated capital in the Singapore portfolio.

However, the US markets present a financial derivative called an option.

For brevity purposes, we shall be only be discussing the sale of put options, namely: I sell the obligation to own a company at a particular price and collect a premium.

In laymen terms:

If DBS was trading at $20 now and you wish to own it at $17, you can sell an option at $17 and collect a premium. If DBS doesn’t trade below $17 at X given date, you collect the premium. If it trades at or below $17, your option gets ‘exercised’ you now own the stock at your preferred price.

It’s a win-win.

For our US portfolio, I have sold multiple put options contract against two securities that I have no problems owning even at the current price.

If the options get exercised, it is at a further bargain.

If I don’t, I’ll continue to sell put options at an attractive premium against those two securities at a targeted rate of return on capital.

The targeted return on capital is at approximately 1.2% return on capital per month that’ll compound to around 15% return on capital per annum. You can rest assured that if the options get exercised, we’ll end up owning fairly valued companies with steady earnings at a bargain.

To sum it up, the majority of our portfolio is currently in index funds and rightfully so as I dip my toes into active management.

Ultimately, there’s no need to be concerned about the short term price movement of stocks (or any underlying investment) in general. Our horizon needs to be minimally 2–3 years.

I’ll also like to end off by quoting Charlie Munger, sidekick to Mr Buffet, also revered for his wise assery.

‘Bitcoin is rat poison’.

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