What am I doing with my all-equity Portfolio last year?
Standard Rule of Value Investing over your investing lifespan
Charlie Munger said in Daily Journal Annual Meeting 2017 in the following:
That explains why I am focusing on compounders which it will last longer through any marco type crisis and will have its share price higher than pre-crisis in a decade later. I don't know when I will be back for undervalued stocks.
I don't use price multiples to justify my investment purchase
Last year, Robert Shiller has a problem to conclude with CAPE ratio - is the market overvalued or not?
A lot of market participants in the stock markets globally are still using PE ratio to justify how cheap it is. It is important to acknowledge that there is flaw on both price and earnings. On price, it is heavily driven by human sentiments on the short run while on earnings, accountants are human, being capable of making accounting-related error (small or big), and smoothing/manipulate earnings in their work. On the latter aspect, it is very common based on my hand-on experience of preparing profit and loss statement.
It came to me as a surprise when DMX Technologies, SGX-listed stock, has in-house fraud whereby its credit revenue were overstated. I recalled that its price multiples were attractive to be classified it as undervalued stock. Sadly, I invest it based on 'on-going concern' valuation basis rather than liquidating valuation.
It seems to occur in 2008 and 2009 based on the investigative report being done by the major shareholder, KDDI Corporation. It took a change of big 4 auditor from Delottte to PWC before then-CEO and then-CFO were unable to provide evidence for such questionable transaction.
Oddly enough, then-CFO did attended accounting fraud lesson that was organised by respectable gentleman, Kee Koon Boon. I think Kee Koon Boon did a good job sharing his insight of detecting Asian-style/driven frauds through related party transactions. I wonder what then-CFO want to do after attending such course - did she want to make the things more difficult for active investor (as per Benjamin Graham's description) to detect?
Deloitte clearly failed the standard duty of auditor. How can Deloitte not discover which PWC did? Unrelated to DMX, I see the point why Daily Journal Corporation dealt with the changing of many auditors in few years ago back, sticking its own view.
KDDI Corporation seems to be spending too much on auditing the accounts from 2007 to 2018. With cost cutting measures and huge budget to correct the past financials, KDDI didn't protect the value of its shareholding in DMX. Instead, KDDI chooses to liquidate it as a whole this year. It is the most puzzling thing for me. It is disgusting that big 4 auditors charge its clients too high. Surely, there is limit to charge its clients on the basis of materiality size sampling.
I wonder how much per share all the shareholders, including KDDI, get for such liquidating exercise. These events appear that I should spend more time on understanding the key points about the underlying business on qualitative basis to complement the quantitative basis especially investing in a company that is heavy in technology.
Be Wary of Business Cycle
I think we should not take the movement of business cycle so lightly - i.e. invest at the bottom of the business cycle and sell at the top of the business cycle. I don't know who has succeed with more profits of many investment positions and fewer losses of other positions in that way. I do know that I have missed to use the invested amount for other investment position - I now discuss my closed investment position in Emeco Holdings.
I invested in Emeco Holdings (EHL) at AUD0.27 on 4 February 2014. At that time, I conclude that it should be the bottom of the mining market where EHL lease its niche equipment and provide maintenance services to mining companies. Its valuation is modest and we can ride on the recovery state of the mining market. I believed that there should be the limit to the number of year mining industry stays at the bottom.
To my horror, it stayed at the bottom so long that EHL's business strategies implied by then-CEOs failed. I understand that Asian-based value investing fund wanted EHL to cut its cost fast, hence it 'pressured' EHL to reject its acquisition of another company.
Last two years (2016 and 2017) seems to be strange event. With new CEO, EHL went back to the original intention to acquire the same company and then top it up with another company. Finally it continue to acquire 3rd company in few months later. It is so bizarre that its share price rises due to an marked improvement in operating-based financials. I am not sure if the equipment swap and then increase its size of equipment assets through acquisitions of 3 companies are good idea.
Regardless of whether the entry position is right or wrong, if I invest in one year later, i probably made multi-bagger profit with this position. I closed the position at AUD0.275 on 12 January 2018, making miserable absolute profit of 1.3%. As a result, I may have foregone some compounded return of investing different stock. I decided to sell because it has increased its debt, if i recall correctly, for such acquisition of 3rd company.
Rather than trying to be too smart to profit on the movement of the business cycle, it is easier and comfortable to buy compounders instead.
Portfolio Positioning
With DMX and EHL episodes, I decide to buy one investment per year based on the best idea of the year rather than buying the stocks of 1st best, 2nd best, 3rd best stock picks of the year. For now, it seems to work well.
Some people seems to subscribe portfolio rebalancing which I don't do. I find it counter intuitive if you do rebalancing just because of its growing value of a stock and then relocate the sales proceed to another stock that you have to re-learn during your stock holding period. For every stock investment we make, we should know that it is a 50-50 probability of making absolute profit at the start and things may not go in the right direction as you want them to be.
I am glad to know that Mohnish Pabari think likewise - he said at his lecture at Boston College:
And my perspective on that is we are not going to cut the flowers and water the weeds. It is a very stupid gardener who cuts flowers and waters weeds.
Although I do amateur job of position sizing for making an investment in terms of dollars, I still can afford to stomach the nasty short-term price movement of the stock I own for a long time. It doesn't matter if some of my stocks have gain more percentage size of my portfolio.
Charlie Munger said in Daily Journal Annual Meeting 2017 in the following:
The two rules of fishing are to fish where the fish are, and don’t forget the first rule. Investing is the same thing. In some places, no matter how good a fisherman you are, you won’t do well. Life is a long game. Take it as comes and do the best you can, and if you live to an old age, you will get your full share of opportunities, which will be two in total, maybe, but seize one of the two, and you will be alright.I agree this one. Charlie Munger has summarised better than what I have written on my previous article. It is crazy to be keep on investing all the time when the market opportunity is drying, increasing worse odds against you. It is always better than sit out for a some time until they are coming back.
That explains why I am focusing on compounders which it will last longer through any marco type crisis and will have its share price higher than pre-crisis in a decade later. I don't know when I will be back for undervalued stocks.
I don't use price multiples to justify my investment purchase
Last year, Robert Shiller has a problem to conclude with CAPE ratio - is the market overvalued or not?
A lot of market participants in the stock markets globally are still using PE ratio to justify how cheap it is. It is important to acknowledge that there is flaw on both price and earnings. On price, it is heavily driven by human sentiments on the short run while on earnings, accountants are human, being capable of making accounting-related error (small or big), and smoothing/manipulate earnings in their work. On the latter aspect, it is very common based on my hand-on experience of preparing profit and loss statement.
It came to me as a surprise when DMX Technologies, SGX-listed stock, has in-house fraud whereby its credit revenue were overstated. I recalled that its price multiples were attractive to be classified it as undervalued stock. Sadly, I invest it based on 'on-going concern' valuation basis rather than liquidating valuation.
It seems to occur in 2008 and 2009 based on the investigative report being done by the major shareholder, KDDI Corporation. It took a change of big 4 auditor from Delottte to PWC before then-CEO and then-CFO were unable to provide evidence for such questionable transaction.
Oddly enough, then-CFO did attended accounting fraud lesson that was organised by respectable gentleman, Kee Koon Boon. I think Kee Koon Boon did a good job sharing his insight of detecting Asian-style/driven frauds through related party transactions. I wonder what then-CFO want to do after attending such course - did she want to make the things more difficult for active investor (as per Benjamin Graham's description) to detect?
Deloitte clearly failed the standard duty of auditor. How can Deloitte not discover which PWC did? Unrelated to DMX, I see the point why Daily Journal Corporation dealt with the changing of many auditors in few years ago back, sticking its own view.
KDDI Corporation seems to be spending too much on auditing the accounts from 2007 to 2018. With cost cutting measures and huge budget to correct the past financials, KDDI didn't protect the value of its shareholding in DMX. Instead, KDDI chooses to liquidate it as a whole this year. It is the most puzzling thing for me. It is disgusting that big 4 auditors charge its clients too high. Surely, there is limit to charge its clients on the basis of materiality size sampling.
I wonder how much per share all the shareholders, including KDDI, get for such liquidating exercise. These events appear that I should spend more time on understanding the key points about the underlying business on qualitative basis to complement the quantitative basis especially investing in a company that is heavy in technology.
Be Wary of Business Cycle
I think we should not take the movement of business cycle so lightly - i.e. invest at the bottom of the business cycle and sell at the top of the business cycle. I don't know who has succeed with more profits of many investment positions and fewer losses of other positions in that way. I do know that I have missed to use the invested amount for other investment position - I now discuss my closed investment position in Emeco Holdings.
I invested in Emeco Holdings (EHL) at AUD0.27 on 4 February 2014. At that time, I conclude that it should be the bottom of the mining market where EHL lease its niche equipment and provide maintenance services to mining companies. Its valuation is modest and we can ride on the recovery state of the mining market. I believed that there should be the limit to the number of year mining industry stays at the bottom.
To my horror, it stayed at the bottom so long that EHL's business strategies implied by then-CEOs failed. I understand that Asian-based value investing fund wanted EHL to cut its cost fast, hence it 'pressured' EHL to reject its acquisition of another company.
Last two years (2016 and 2017) seems to be strange event. With new CEO, EHL went back to the original intention to acquire the same company and then top it up with another company. Finally it continue to acquire 3rd company in few months later. It is so bizarre that its share price rises due to an marked improvement in operating-based financials. I am not sure if the equipment swap and then increase its size of equipment assets through acquisitions of 3 companies are good idea.
Regardless of whether the entry position is right or wrong, if I invest in one year later, i probably made multi-bagger profit with this position. I closed the position at AUD0.275 on 12 January 2018, making miserable absolute profit of 1.3%. As a result, I may have foregone some compounded return of investing different stock. I decided to sell because it has increased its debt, if i recall correctly, for such acquisition of 3rd company.
Rather than trying to be too smart to profit on the movement of the business cycle, it is easier and comfortable to buy compounders instead.
Portfolio Positioning
With DMX and EHL episodes, I decide to buy one investment per year based on the best idea of the year rather than buying the stocks of 1st best, 2nd best, 3rd best stock picks of the year. For now, it seems to work well.
Some people seems to subscribe portfolio rebalancing which I don't do. I find it counter intuitive if you do rebalancing just because of its growing value of a stock and then relocate the sales proceed to another stock that you have to re-learn during your stock holding period. For every stock investment we make, we should know that it is a 50-50 probability of making absolute profit at the start and things may not go in the right direction as you want them to be.
I am glad to know that Mohnish Pabari think likewise - he said at his lecture at Boston College:
And my perspective on that is we are not going to cut the flowers and water the weeds. It is a very stupid gardener who cuts flowers and waters weeds.
Although I do amateur job of position sizing for making an investment in terms of dollars, I still can afford to stomach the nasty short-term price movement of the stock I own for a long time. It doesn't matter if some of my stocks have gain more percentage size of my portfolio.
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