Ongoing Inflation...

Investment: Meade Instruments Corp (MEAD)

I bought MEAD at US$3.36 per share on 26 September 2011. Finally, we sold at US$3.45 on 21 May 2013. Consequently, we make no loss, making decent profit of 2.12%. 

Rationale of Investment in MEAD

I was brought to the attention to this stock by Canada-based value investor (he wrote it on his blog). At first, I investigated it and was not interested due to unattractive valuation. In few months later, after MEAD reverse split its shares (as in decreasing the number of outstanding shares, not affecting shareholders’ wealth), I was interested as there is sufficient margin of safety and attractive upside.

The investment protection in MEAD is probably enhanced by Paul Sorkin, who took directorship in MEAD. I know that it is in the most boring industry where it is selling sophisticated telescopes. The most interesting thing is that it was able to shuffle the positions in the balance sheet to the point that it can withstand the most extreme situation. The most extreme situation is when it fails to sell its sophisticated telescopes as hoped.

After the purchase, it was sure enough I am sitting a cushion of 10-15% profit for quite some time for given its illiquidity. With limited numbers of news about MEAD, I am not sure how it fares in the profit position. It did disappoint me with poor showing of sales in last two quarters. That value investor resigned the position of director. As a result, its share price drop to mid and late US$1, wiping out the paper profit.

In fact, I am not worried about these happening because its fundamental is so solid that it can last long enough as a going concern company. It is a kind of stock that I can hold while sleeping soundly. Just that, it is unfortunate that we are at the wrong side.

Few days before I sold MEAD shares, a company named Jinghua Optics announced publicity that it intended to acquire MEAD shares at US$3.45 per share. This enables me to exit peacefully.

With proven patience and sound investment philosophy, our time has come to get back our initial investment amount intact. That is the quality of insisting on margin of safety on every investment we make.

I think that I successfully protect our investment, rather than losing foolishly due to uncontrollable emotions which 99% of market participants do. However, I do think I may have let tiny element of emotion to affect my buy and sell decisions. Capital protection comes first before making profit. It matters the most.

Conclusion

I am probably disappointed not to realise early enough about the main attribute of the value investing. I once heard from Li Lu who gave the speech at Columbia Business School that Benjamin Graham’s investing method cannot make a lot of money as much as current Buffett’s investing method. Now, I can see what he is trying to say.

To be specific, in the normal situation where stock experience negative news about itself, I can make decent profit which should be in the range of less than 20%-50%. Please take note that the traditional value investing legacy left by Benjamin Graham does make respectable profit, which is still attractive to many average person.

That is what I should have sold MEAD early in 2012, taking around 15%-20% profit. There is an exception when the value investing can yield you 50% and above profit when the countrywide problems like sub-prime crisis affect all stocks. MEAD is actually in the former category!

Postmortem of MEAD investment

I am surprised that there are other interested parties taking over MEAD with higher price bid. Am I not being patient enough? I think not - it is probably due to lack of my hindsight. My hindsight is that it is in unattractive industry where no profit-making firms want to be in. Such events amaze me.

Investment: Miyoshi Precision Limited

I made 12.410% and 34.86% profit for two batches of purchases ($0.054 and $0.045 purchase respectively). In aggregate, I made 32.45% profit.

Firstly, I nearly made a blunder in the first investment as I forgot to include additional zero next to the point ($0.54 instead of $0.054). Subsequently, I got it right by placing large order of $0.045.

It is in the industry where it makes plastic molding items for its customers who are in automobile industry. I am very familiar and experience in this industry and so I have no problem investing this unknown firm with such low share price. I came across of this firm when I noticed it in ‘top 20 low’ list during the period when everything is bad in the market. 

There is decent margin of safety created by temporary problems such as Thailand flood affecting its factory at Thailand and fraud related to an employee stealing money. It has been hiring Big 4 firm to investigate the fraud and provide better internal control recommendation. Thus, it is almost Benjamin Graham classic type investment. These are not a problem as I can sleep properly while managing our monies for purely investment purposes.

When it reached $0.7x last year, I thought I should let it to sell at intrinsic value, which is above $0.7x. This year, with respect to Maeda investment and my understanding on why Li Lu said that Benjamin Graham method will never bring large profit as much as current Buffet’s investment method for Berkshire Hathaway, I sold it at $0.61. The rationale is that I want to downside the Singapore portfolio and invest large sum of cash including the proceeds into one or two foreign stocks. When I find suitable one, the future purchase will offer better upside than and similar downside protection as Miyoshi. As it is illiquid stock, it took me 5 months for the sell order to be realized.

Postmortem of Miyoshi

I made the right decision to sell since I would need cash to purchase for next stock investment which may be more attractive.