GlobalStockInvestingToday.com
Billy's Blog

10th August 2015

Due to work and other personal commitments,I now have insufficient time to continue with my journal on my virtual fund and hence after 7 years and a record of a  weighted, compounded annual return of 9.6% navigating the global financial crisis of 2008 and 2009,the European debt crisis of 2011, fears of a hard landing in China and the many mistakes that I made in my investment decisions, I come out ahead of all my peers and benchmarked global equity funds except for Hong Kong's Value Partners.

I never expected to beat Value Partners,Hong Kong's leading investment fund manager though over the years,we overtook each other in terms of investment performance and I expect that would have continued if I had sufficient time to journalise and maintain the record of my fund on the web.

I would like to think that I am a better and wiser investor with a far deeper understanding of risk than when I began this fund in August 2008 but the beauty of investing is that only one's future investment performance over the long term can determine this.My enthusiasm and love of analyzing businesses and industries remains undiminished despite very challenging times for investors and I will continue with my objective of compounding my capital in excess of 10% per annum over the long term. 


26th July 2015

GlobalStockInvestingToday returns 7.45% in calendar year ended 30 June 2015 and 89.89% from when this investment website was launched,significantly exceeding all peers except Value Partners  - Track my stocks webpage updated.

The after tax compounded return in the last 7 years equates to 9.6% per year in capital gains and dividends. I now have even less time to devote to this site but will keep updating with my stock picks and results though it will now be unlikely for me to be able to complete the write ups on my decisions as posts.

7th June 2015
 

Cash dividends received from Standard Chartered,Langham Hospitality,Noble,New Residential and Kingboard Laminates.Shares in lieu of cash dividend received from Santander – Track my stocks webpage updated.



10th April 2015

Sold my remaining position in Value Partners at HKS$10.78 net of charges today.Exited out of Real Nutriceutical at HK$2.26 net of charges on 31st March.Cash dividends received from Prosperity Reit,Bank of America,AIG and Goldman Sachs received – Track my stocks webpage updated.

I sold my remaining position in Value Partners as I view that its current price earnings multiple of around 24 and my 172% gain from original purchase price too good,not to realise.

 I sold out of Real Nutriceutical as I find that its accounts,given my previous experience with another small cap,mainland Chinese company,Chaoda Modern,too suspicious for me to retain after its financial results on 30th March.I struggle to understand why a company in the consumer products market,can file accounts with 70% gross margins and operating profit margins of 42% and not only raise but keep increasing,expensive, short term bank loans to fund its business.Given the company's revenues of circa US$330M,its high profit margins should not only be able to fund its own expansion but also pay a substantial dividend than just 14% of its earnings.

8th March 2015

Added to my position in FMC Technologies at US$38.09 net of charges on 23rd January.Sold part of my holding in Langham Hospitality at HK$3.54 net of charges on 29th January,exited Chaoda Modern at HK$0.33 and HSBC at HK$71.29 net of charges respectively on 9th February.Bonus shares received for Santander on 9th February.Cash dividends received from New Residential and Noble – Track my stocks webpage updated.

 

I will write more about Chaoda Modern and HSBC later when I have time.


18th January 2015

Added to FMC Technologies on 12th January at US$40.99 net of charges and HSBC at HK$70.5 net of charges on 15th January – Track my stocks webpage updated. 

8th January 2015 part 2

Globalstockinvestingtoday.com portfolio increased in value by 4.15% in calendar year 2014 and by 80.9% since the beginning of this website in 2008, outperforming the wider global stockmarket indices and equity funds benchmarked by 53% and 33% respectively– Track my stocks webpage updated. 

8th January 2015 part 1 

Added to Standard Chartered Bank on 19th December at HK$109.7,Kingboard Laminates on 23rd December at HK$2.81 net of charges and Noble on 24th December at US$16.94 net of charges.Dividends received from HSBC,Goldman Sachs,Bank of America and AIG before 31st December 2014 – Track my stocks webpage updated.

7th December 2014

Sold half of my holding in Value Partners at HK$6.72 net of charges on 5th December.Added to Noble at US$16.99 net of charges on 4th December and opened a new position in FMC Technologies at US$46.8 net of charges on 5th December – Track my stocks webpage updated.

The current steep decline in the oil price due to OPEC not reducing supplies,will mean a slow down in the offshore drilling sector.The weaker drillers will likely be shaken out with contracts being awarded to suppliers with a modern fleet of drill ships and jack ups and who have also maintained a strong financial position to withstand the downturn.Noble by spinning off its older jackups and assets in the beginning of August and reducing its debt before the industry crash,is now in a strong position to become one of the winners out of this.Its spin off in hindsight,could not have been better timed nor could the end of its new build capital programme (with one remaining ship to be completed in 2016).Given hedge funds tend to short the whole industry index or nervous investors redeem oil related mutual funds leading to sales of the constituent stocks,Noble to me,is part of this indiscriminate sell off leading to it not being valued on its own merit and distinguished from its competitors.

Once this settles down,the oil price reverses course and demand returns, Noble is highly likely to rebound strongly though this could take two years or more.That is why this fund is only for investors who can keep their investments for at least three years.

For similar reasons,I opened a new position in FMC Technologies to take advantage of the market's current deep pessimism as to the future prospects of the offshore oil services industry.

23rd November 2014

Cash dividend received from Noble.Shares in lieu of cash dividend received from Santander.Added to Standard Chartered Bank at HK$116.8 net of charges on 19th November and at HK$111.2 net of charges on 21st November – Track my stocks webpage updated.

The 25% reduction in share price compared to when I sold part of my holding on 29th June (scroll down to see the blog entry date below) is too much of an overreaction in my view.Standard Chartered is now cheaper from a price to earnings multiple (less than 9) and price to book value (less than 0.8) than it has been in twenty years.Similarly with HSBC,fears of onerous regulatory fines,the current economic downturn in Asia,increase in costs of compliance and with Standard Chartered, a loss of confidence by the market in its management, has led to cheap valuations of both banks with Standard Chartered becoming very cheap.

Standard Chartered's current dividend yield of just below 6% is highly sustainable at its current pay out ratio of just over 50% of net earnings even with its elevated loan loss provisions which its management has assured, will not rise further though will stay at similar levels for the coming quarters.Its Tier 1 capital ratio is also sufficient not to run the risk of a dilutive rights issue.If however, performance does deteriorate further from their representations at the three day investor meetings in Hong Kong last week, it will be difficult for the current management team to remain in their positions.Given the consequences to themselves of misjudgement with the fact that the bad news has already been disclosed, this is a good opportunity to buy and accumulate further in one of Asia's leading banks which still retains strong corporate governance and has its footprint in the biggest growth markets, globally.

Given regulatory requirements to hold more capital,Standard Chartered will not be able to grow its earnings at its previous historical rate but the discount placed on its share price,like with HSBC,is not proportionate to the changes in the banking environment.This reminds me of the tobacco companies 15 years ago where fears of fines and changes in their industry led to Altria and its subsidiary,Philip Morris being valued at similar discounted prices or lower,with dividends greater than 6%.

If both Standard Chartered and HSBC continue to decline greater than 10%,I will continue to accumulate both – just for the dividend return.In fact my fund overall, is increasingly turning into that of a dividend fund.

1st November 2014

Sold out of Commvault Systems at US$41.71 net of charges on 28th October.Cash dividends received from Real Nutriceutical and New Residential Investment Trust – Track my stocks webpage updated.

Commvault's results were below my expectations as well as the management's.I decided to cash out with a small loss since their recovery to their historic growth rates is too uncertain for my investment risk profile.

22nd October 2014

Cash dividends received from Prosperity Reit,Langham Hospitality,Kingboard Laminates,CNOOC,Standard Chartered,Noble,AIG,Bank of America and Goldman Sachs.
Added to my positions in Noble at US$20.12,Langham Hospitality at HK$3.29 net of charges on 21st October and 16th October respectively.Opened a new position in HSBC at HK$77.65 on 20th October – Track my stocks webpage updated. 

25th August 2014

Sold out of China Shenhua Energy at HK$22.87 net of charges.Shares in lieu of cash dividends received from Santander – Track my stocks webpage updated. 

China Shenhua's interim results and forecast for the year that they published last friday, after market hours, were below my expectations.The company is affected by the slowdown in China's economy by more than I anticipated and as a consequence, I decided to cash out with a small profit.

8th August 2014

Sold out of Paragon Offshore at US$10.01 net of charges on 6th August.Dividends from ICBC and China Shenhua received – Track my stocks webpage updated.

5th August 2014

Opened new positions in US real estate investment trust, New Residential at US$5.97 and significantly in Hong Kong hotel business trust Langham Hospitality Investments at HK$3.59 net of charges on 4th August. Noble splits and spins off,Paragon Offshore and assigns shares to its existing shareholders of the new company, which listed on 4th August 2014 – Track my stocks webpage updated. 

The current fear on rising interest rates as well as lack of investment appetite for small Mortgage Reits in the US as well as the unfamiliarity and unfashionableness of Hospitality investment trusts in Hong Kong has led to both New Residential and Hong Kong's Langham to decline to well below their IPO prices last year and for their President,Chairman and CEOs to respectively enter the open market and buy significant amounts of the units over the past several months.

The current dividend yields for these depressed trust prices are 11.7% and 8.36% respectively and are based on good asset bases with management having strong, proven track records in real estate.

Langham Hotels in Hong Kong are recognised as amongst the top hotels in the city with typical occupancy rates between 85% and 95%.The Langham Place Hotel even boasts a two star Michelin restaurant which generates income for the trust.

Over the next couple of years,I expect these trusts to be repriced back to normal valuations while I collect dividends at the above levels.Hong Kong has a scarcity of hotels in comparison to demand and the cost of land is such that it creates a significant barrier to increasing supply.Indeed there is no forecast for things changing fundamentally from the current market dynamics.

It is unusual to have such dividend income shares as part of a long term growth fund but these appear to be the least risk opportunities in the market with disproportionate return ratios.

19th July 2014

Added to my position in Noble Corp at US$32.06 net of charges on 16th July.Dividends from ICBC and CNOOC received– Track my stocks webpage updated

2nd July 2014

GlobalStockInvestingToday.com fund appreciates 12.28% year on year at 30th June 2014– Track my stocks webpage updated with 30th June closing prices.

I have extended my cumulative fund performance compared to Hong Kong's Value Partners since inception, to 12%. The compounded annual growth rate of my fund is near 10% per year over the first 6 years which outperformed the benchmarked leading global equity funds and global stockmarket indices tracked on this website by 32% and 50% respectively.

I feel after 6 years of managing my portfolio on the worldwide web that my track record to date proves that my investing acumen is better than my fund management peers on average, with a rating of "good". I will aspire to improve to "very good" over the next 4 years based on the knowledge I have gained on risk and stockmarket volatility and aim to increase the compounded annual growth rate of my fund to 12%.

I very much doubt that I will end up re-investing the whole of the cash generated in my fund to equities since I would be surprised if the depths of the shocks that was experienced in the stockmarkets in Hong Kong,US and Europe since I began my virtual fund in the summer of 2008 will reappear to the same extreme level as in 2009 globally and 2011 in Europe but if it does, I should have the spare cash to move my fund back to 100% equity capital allocation vis a vis the current cash holding.

29th June 2014

Sold part of Standard Chartered Bank at HK$159.6 net of charges on 27th June after its profits warning.Dividends received from Real Nutriceutical,Goldman Sachs and AIG – Track my stocks webpage updated.

After Standard Chartered's profits warning on thursday that its first half of the year operating earnings will decline 20% year on year,I reduced my portfolio weighting in the stock.

14th June 2014

Sold out of China Agri Industries at HK$2.98 net of charges on 2nd June after its profits warning.Dividends received from Value Partners and Kingboard Laminates – Track my stocks webpage updated.

It is clear that China Agri Industries does not have the earnings power or support from the Chinese government to pass on the cost increases to consumers based on the rises in its cost base.While it holds a very strong position in the Chinese market,it simply is not translating that  into effective returns for shareholders.I now question the point of it being listed. 

18th May 2014

Dividends from Prosperity Reit,AIG,Bank of America,Goldman Sachs received.Opened a new position in Commvault Systems at US$46.36 on 5th May,sold out of Vivendi on 8th May at 26.31 net of charges.Shares in lieu of cash dividend received from Santander on 12th May,dividends received from Noble and Standard Chartered Bank on 14th and 15th May – Track my stocks webpage updated.


24th March 2014

Sold out of DeVry at US$41.36 net of charges on 21st March.Dividend from Noble Corp received – Track my stocks webpage updated.


My analysis on DeVry when I acquired the stock was wrong and given the current high mid teens price earnings multiple,I have decided to exit from the stock.

19th March 2014

Added to Noble Corp at US$29.12 net of charges on 18th March – Track my stocks webpage updated.


18th Feb 2014

 

Opened a new position in China Construction Bank (CCB) at HK$5.48 net of charges on 17th February.Shares in lieu of cash dividend from Santander received  – Track my stocks webpage updated.

 

Current fears with respect to the scale of the shadow banking liabilities in China,the potential impact on future net interest margins due to domestic banking deregulation,declining national economic growth rates from 10% to 7% as well as failures in local government investment vehicles have all come together to reduce valuations of China's national banks to prices where PE ratios are near 5,dividend yields are 6% (net of Chinese witholding taxes on 35% earnings pay out ratios) and valuations are just 1x tangible book value.

 

CCB and ICBC (another long term holding) are now the cheapest major commercial and retail banks in Asia Pacific.Given that they are both majority owned by the Chinese government and that they will both benefit from the clean up of weaker provincial financial institutions where a substantial part of the risks lie, as well as the growth of more regulated and transparent investment and wealth management products,means that their continuing long term growth are likely to remain.

 

Given the sheer size of China's fiscal and trade surpluses,given that the yuan will likely continue to appreciate in value,given that the Chinese population are still net savers,the risks to the Chinese economy and its financial management are far lower to me than any other major developing economy in the world.This with the fact that 7% growth in China's economy is equivalent to the size of France,UK and Germany combined, growing at such rates, means that the overall fundamentals remain still attractive,for the risks priced into the current valuations.

 

Neither bank has issues with its core capital ratios and both banks have developed effective governance and risk management systems (given their “too big to fail” positions in China).Their cost to income ratios and return on equity are also better than that of the global banking industry at large as well as with its peers in the Asia Pacific region.

 

Until the picture become clearer in China with respect to all the fears above,their share prices will remain volatile but I see downside from here of perhaps 10% while the upside to a more normalised valuation ,would be 30% with the 6% dividend to be collected in the summer.

 

Investing in CCB or ICBC is like securing a part of China's Treasury.From my perspective,they remain amongst the best deals for long term investors given the current fears as well as  the current  negative sentiment against China and its institutions in the global financial markets.


9th February 2014

Used over 20% of my long term capital which I had held in cash in my portfolio, to open new positions in Berkshire Hathaway at an average price of US$110.73 on 31st January and 4th February 2014,Goldman Sachs at US$164.14 on 31st January,added to EZ Corp at $11.14 on 31st January, increased my positions in China Shenhua at HK$19.44,Hong Kong's Prosperity Reit at HK$2.20 as well as a smaller addition in Kingboard Laminates at HK$2.84, all net of charges on 5th February 2014– Track my stocks webpage updated.

5th January 2014

Global Stock Investing Today gains 12% in calendar year 2013 and 73.69% to date outpacing global equity funds and global market indices by 33% and 50% on average respectively since the launch of this website more than 5 years ago.

I am still beating the returns of Hong Kong's leading fund manager,Value Partners which I did not expect to do when I started this website in the summer of 2008.

9th December 2013

Added to EZ Corp at US$10.24 net of charges.Cash dividend received from Noble– Track my stocks webpage updated.

16th November 2013

Added to EZ Corp at US$11.94 net of charges on 12th November,ICBC at HK$5.21 on 14th November and Shares in lieu of cash dividend received from Santander on 13th November– Track my stocks webpage updated

20th October 2013

Cash dividends received from Kingboard Laminates,CNOOC,China Agri,Real Nutriceutical,Bank of America,AIG and Standard Chartered Bank – Track my stocks webpage updated.



18th September 2013

Sold out of Akamai at US$52.31 net of charges, dividend received from Prosperity Reit - Track my stocks webpage updated.

Akamai's stock has been re-rated to its former earnings multiple as fear of its prospects has diminished and after the 50% increase in stock price,it is closer to my view of its fair market valuation so consequently,I have sold out of the stock.

9th September 2013

Sold out of Vinda at HK$10.71 and Intel at US$22.88 net of charges - Track my stocks webpage updated.

Vinda's minority shareholder,SCA has made a cash offer at HK$11 to take it private at the end of the year so I decided to cash out today at a 3% discount from the offer price.

I also exited Intel since I view the risk of further margin and earnings dilution due to industry changes in the computer device and server businesses too high for it to retain its current and historical margin position.


My cash position in my portfolio is at an all time high and similar to where I was during the summer of 2008.

6th September 2013

Sold out of MBIA at US$12.10 on 3rd September to further accumulate cash.Cash dividend received from Intel-Track my stocks webpage updated. 

18th August 2013

Shares in lieu of cash dividend received from Santander on 9th August.Cash dividends received from ICBC,China Shenhua,China Agri and Noble – Track my stocks webpage updated.

22nd July 2013

Sold United Health at US$71.89 net of charges and Baidu at US$110.77 net of charges – Track my stocks webpage updated.

Sold United Health since it is closer to being fairly valued at 13 times 2013 expected earnings compared to when I acquired it and sold Baidu since I expect it to mirror Google's earnings problems on lower price rates for clicks per user with the ongoing penetration of mobile from desktop in internet search.

12th July 2013

Sold Xtep at HK$3.17 net of charges, dividends from CNOOC,DeVry and Bank of America received – Track my stocks webpage updated.

Sold Xtep since this is no longer a stock whose earnings is likely to grow over the next couple of years due to the inventory glut in the domestic market in China.

In hindsight,I should have sold much earlier when the oversupply began to impact its competitors and put too much risk into my original investment thesis.Still,given the annual tax free dividends equivalent to 33% of my original weighted purchase price over the last 4 years,this still resulted in a reasonable investment.

30th June 2013

Globalstockinvestingtoday returns 57.39%,compounded 9.5% per year over the first 5 years since inception,significantly beating market indices by 49% on average and benchmarked leading equity funds by 38%– Track my stocks webpage updated with closing 30th June 2013 prices.

I outperformed Hong Kong's leading fund manager,Value Partners by 15% over the period which I did not expect to do, when I started this website.

Am I happy with my performance?No.I have very high standards.

Can I do better?Yes.Have I learnt a lot?Absolutely.
 
Will I forgive myself if I do not learn from my mistakes and experiences over the last 5 years?No.

Do I expect to do better in the next 5 years?I would like to think so but only time will prove it.

29th June 2013

Dividends from Xtep,China Agri,Vinda and United Health received– Track my stocks webpage updated.

27th June 2013

Sold Bosideng at HK$1.84 net of charges – Track my stocks webpage updated. 

Bosideng released its annual results yesterday evening and while its revenues increased at maintained gross margins,its sharply deteriorating control over its expenses as well as poor cash management has led me to exit the stock.

Bosideng should be a free cash flow generator but its business expansion irrespective of the return on such expansion as well as poor cashflows, has led me to lose confidence in senior management and their competence.

25th June 2013

Used over 16% of my long term capital which I had held in cash in my portfolio, to open new positions in China Shenhua Energy at HK$21.98,Value Partners Hong Kong at HK$3.96, increase significantly my positions in Hong Kong's Kingboard Laminates at HK$2.86,China's Vinda at HK$7.68 and Industrial & Commercial Bank of China at HK$4.58, all net of charges.I have also added to my positon in Santander at US$6.39 net of charges yesterday – Track my stocks webpage updated.

The Hong Kong stockmarket has been going through a steep 17% correction essentially due to panic selling.This has been precipitated by the Central Bank of China allowing the interbank lending rates for Chinese banks to go to unsustainably high levels to force the smaller lenders to become more disciplined in risk management and to force them to stop thinking that the Chinese government will bail them out for ill disciplined lending practises. As a result the mentality is that the sky is falling and the detrimental impact on the Chinese economy will now become permanent.

While I measure the performance of my portfolio with the leading Hong Kong fund manager,Value Partners;nevertheless,I view Value Partners like a call option on the Hong Kong stock market ie if the Hong Kong market rebounds,Value Partners as the leading equity fund manager of Hong Kong and China,will rebound even further. 

I also opened a new position in China Shenhua Energy as the company has never been so cheap except for the crazy days of the global financial crash.It is quite unique in terms of it not only producing coal but owning the transportation and port infrastructure as well as having 30% of its business in power generation. This mitigates significantly the margin impact on the decline in the price of coal.It is the 800 lb gorilla of the coal industry in China and even with a worst case 15% decline in earnings this year – with a dividend payout of 40% of earnings,even considering Chinese withholding tax,it will provide a net dividend yield in excess of 4% and is currently valued at a depressed price earnings multiple of around 8.3.

Industrial & Commercial Bank of China's stock price has been hit by what is going on with the smaller players in the banking industry and as a result,its dividend yield which is sustainable,at around 6% even after Chinese withholding tax,makes it an attractive proposition.This is reinforced by its PE ratio of less than 5.2.Its lending portfolio is well managed and is the most conservative of the “big 4” Chinese banks.

Kingboard Laminates price is now 28% lower than its tangible book value which it consistently makes a 10% or higher return on.Even with the risk of depressed earnings and a further dividend reduction to say 15 cents ie even lower than last year,its dividend yield will still be higher than 5%.Even with pessimistic earnings,its PE ratio will be no more than 8.6.


22nd June 2013

Cash dividend from Vivendi,Intel and Real Nutriceutical received – Track my stocks webpage updated.


26th May 2013

Cash dividend from Kingboard Laminates and Noble received – Track my stocks webpage updated.

16th May 2013

Cash dividend from Standard Chartered Bank received,shares in lieu of dividend from Santander received – Track my stocks webpage updated.


7th May 2013

Opened a new position in China's Vinda at HK$10.13 net of charges – Track my stocks webpage updated.

I will explain why I purchased Vinda,a leading consumer products company in China later when time permits.Their brand is known in China including Hong Kong, primarily for toilet paper though they are expanding their products to higher margin tissues as well as baby paper products.


2nd May 2013

Sold out of SK Telecom at US$20.47 net of charges – Track my stocks webpage updated.

I exited my position as I view the stock as closer to being fairly valued after its earnings today and to continue to accumulate cash for my fund for possible stock purchases in future.

1st May 2013

Added to EZ Corp at US$17.47 net of charges – Track my stocks webpage updated.

I added to my position after its Q2 earnings results and presentation yesterday evening, as I now have a higher level of assurance that its business is stablising and that there is a greater likelihood that the company will return to its growth trends, in the second half of the calendar year. EZ Corp is still maintaining its full year earnings per share guidance for its fiscal year end of 30th September,resulting in the company having a price earnings multiple of below 7 at its current stock price. 

30th April 2013

Sold out of Cummins at US$106.89 net of charges, dividend from SK Telecom received – Track my stocks webpage updated.

I sold out of Cummins because my underlying thesis of their continuing growth in revenues and earnings did not play out with their results announcement today.


19th April 2013

Dividend received from Prosperity Reit – Track my stocks webpage updated.

13th April 2013

Added to Akamai at US$34.20 net of charges on 8th April,sold out of Microsoft at US$29.05 net of charges on 11th April – Track my stocks webpage updated.

I sold out of Microsoft as soon as IDC reporting a 14% decline in unit sales in PCs which significantly exceeded the forecast decline of 7%.This together with lower than expected penetration of Windows 8 and Microsoft's lack of succcess in the consumer market with its Surface tablet,indicated to me that Microsoft carries too high a risk in being able to maintain its earnings in future for me to continue to hold the stock.

31 March 2013

Sold out of Tontine Wines at HK$0.578 net of charges on 21st March.Shares in lieu of cash dividend received from Intel,cash dividends received from United Health,Microsoft,Bank of America and Cummins – Track my stocks webpage updated.

I sold out of Tontine Wines since I made an investment mistake on its earnings power.This happens a lot in the investment industry when one simply does a financial analysis,looking at a company's balance sheet cash,its historic business growth and considers the company cheap without fully understanding the sustainability of its business,the competitive position of its products in the industry and the quality of the management.

When I bought the stock, it had surplus cash of HK$0.70 per share and operating cashflow of 9.5 cents per share.Since then it has acquired a majority stake in another wine producer and distributor with no previous management track record of successfully integrating an acquisition,diminishing its surplus cash position significantly,seen a decline in revenues of 21%,gross margin deterioration of 8% and a collapse in annual earnings to little over 5 cents per share.

A self criticism which is all too common with accountants and investment managers,is to focus less on financial analysis (the quantitative side) and more on business analysis (the qualitative side).I have never drank a wine from the company and have no real insights as to its position in the Chinese market so assuming that it could act as a proxy for the growth in the consumption of wine in the Chinese market was wishful thinking.

17th Feb 2013

Opened a new position in Akamai at US$34.99 net of charges on 7th Feb.Shares in lieu of cash dividend received from Santander – Track my stocks webpage updated.

Akamai has been on my target list for sometime and given the 15% price decline straight after its quarterly results,I opened a new position due to what I feel is an overreaction to its conservative guidance for 2013.

Akamai has never been so cheap if its guidance on earnings for 2013 is to be believed.If one deducts its surplus balance sheet cash and its liquid investments after liabilities,its 2013 price earnings multiple would be 15.From my perspective,Akamai's strong technology moat (due to its patents and proprietary software in routing data on the web and in replication of content),combined with global growth of on line video and cloud services,will lead to the company experiencing new multi year secular demand.This should result in continued double digit compounded annual sales and earnings growth for a number of years.

At current annualised revenues of $1.37 billion,Akamai is still at a relatively low revenue base from which to grow (though its hyper growth days of revenue growing in excess of 30% is likely to be behind it).

Akamai is the leader in content delivery on the internet with over 60% market share and has the largest distributed computing platform in the world – a “bridge” which is so vast in scale that it leads to a formidable barrier to entry for any other potential competitor.Given that its per unit costs of service in terms of bandwidth and servers tends to decline over time,it also appears to have significant future protection to its high profit margins.

The CEO,Thomas Leighton who is one of the founding fathers of the company also bought 50,000 shares of the stock at prices slightly higher than $35 since the market reaction to its 2013 guidance.

5th Feb 2013

Opened a new position in MBIA Corp at US$8.57 net of charges on 4th Feb.Dividend from Bosideng received – Track my stocks webpage updated.

For an interesting analysis on MBIA,I recommend that you read Bruce Berkowitz thesis on the stock on google.

The way I look at it is that Bank of America,which is in legal dispute with MBIA regarding reimbursement of insurance paid by MBIA due to misrepresentation of loan securitisation by Bank of America's subsidiary Countrywide,will not delay financial settlement to the point where it will be financially harmful to itself since it is also one of MBIA's largest creditors and would be in a subordinate position in any insolvency in MBIA.Bank of America would gain less than it would lose. 

Nevertheless,due to the current uncertainty as to the legal outcome,MBIA is trading at pretty much its liquidated book value.Given judgement was already given in favour of MBIA,Bank of America's appeal would create a precedent if it is succcessful in overruling the original court decision as well as create significant uncertainty in the US bond insurance market of which MBIA is a major player.The US government and the regulators have little appetite for new convulsions in the financial markets so I view the risk of an adverse judgement to MBIA as low.

If MBIA is successful in recovering half the money owed on insurance payments made,is allowed to transform into two separate entities,National Public Finance Guarantee and MBIA Insurance with no recourse to both units by creditors and recommences writing new insurance policies,its operating adjusted book value is estimated to be closer to $30.

The way I look at it,is that if one of the two “coin tosses” is in my favour (settlement with Bank of America or acceptance by the two remaining banks out of the eighteen originally opposed to MBIA's transformation),then the stock can appreciate 80% by the end of the year.I would have to lose both “tosses” and the lowest that I can see MBIA now declining would be 10%.


7th January 2013

Sold AFLAC at US$53.52 and Guangshen Railways at HK$3.01 net of charges on 27th December 2012.Cash dividends from Bank of America,United Health and DeVry received by 31st December 2012.Calendar year end 2012 stock prices updated on my fund's holdings – See Track My Stocks webpage.

I will comment on my performance for 2012 later but my fund appreciated in value by 24.1% to 55.15% since launch,extending the outperformance compared to global stock market indices and benchmarked global equity funds by 48% and 38% respectively.

17 December 2012

Opened a new position in China's Baidu at US$97.83 net of charges,sold Symetra at US$12.54 net of charges and subscribed to China Agri's rights issue at HK$3.39.Cash dividends from Microsoft,Intel,Cummins,Symetra and AFLAC received – Track My Stocks webpage updated.

In my view,Baidu's stock price correction is largely due to a combination of fears on general Chinese auditor issues,margin impact on growth transition from PC to mobile and competition from local Chinese companies potentially eroding Baidu's market share in search in China.This company dominates internet search in China (70%+ market share) and its moat is as strong in China as Google is in the US.

Baidu does not suffer from corporate governance or audit issues and its leadership team draws its experience from US industry backgrounds particularly with respect to financial management.It has a long track record in the US,listing in 2005 and is now a constituent of Nasdaq- 100 index.

The multiple fears highlighted above has led to a correction of 33% from its stock price high this year while revenues and earnings have grown by 50%.At an annualised revenue of around US$3.5 billion for 2012,Baidu's hyper growth days are likely to be behind it.However given its dominant position in search and online marketing services in China which still has a relatively low penetration rate,together with Baidu's technology moat,Baidu still has the potential for continuing fast growth in excess of 20%+ per year.It is now valued at its lowest price earnings multiple in its listing history,at little more 20 times 2012 earnings.I view it as a good entry point to accumulate stock in this “800 lb gorilla” in China's growing on line market place.

There is certainly risk with this company such as whether it will be able to monetise mobile search as successfully as it has with PCs given that mobile will grow far more signficantly going forward than PC growth as well as in managing the political and regulatory risk in China.However there is simply no other competitor with the financial firepower,resources,incumbency position in search as well as the ecosystem of application partners to be able to make the transition as successfully as Baidu can.This is,as already mentioned,by no means certain and if competitors do erode its market share in search and its operating margins do decline due to its inability to successfully monetise mobile search,its stock price will decline.

This can easily double or halve in price depending on how the next year turns out.I am open to admit that this stock is definitely a far more calculated gamble and not for the faint hearted.

I have sold Symetra since I have too many stocks to manage and to further accumulate cash for likely stock market corrections in future.

22 November 2012

Sold Giordano at HK$7.12 net of charges.Shares in lieu of cash dividend received from Santander on 13th November.Cash dividends from Standard Chartered Bank,Noble,Bank of America,United Health,Giordano,CNOOC,Real Nutriceutical and China Agri received – Track My Stocks webpage updated.

In my view,Giordano is now fairly valued at a PE ratio of 15 and it appears from the company's results this year that its fast growth days are over so I have decided to realise the 40%+ gain since I acquired it,13 months ago. 


22nd September 2012

Dividends from Prosperity Reit and Xtep received – Track My Stocks webpage updated.

 15th September 2012

Added further to AIG on 11th September at US$33.09 net of charges.Cash dividend from Microsoft,Intel,Symetra,Cummins,SK Telecom,AFLAC and Bosideng received – Track My Stocks webpage updated.

12th August 2012

Added further to Santander on 2nd August at US$5.77 net of charges.Shares in lieu of cash dividend received from Santander on 8th August.Cash dividend from Noble received – Track My Stocks webpage updated.

 

31st July 2012

Added to Santander on 30th July at US$6.12 net of charges - Track my stocks webpage updated.

29th July 2012
 

Added to Santander on 26th July at US$5.48 net of charges and ICBC on 16th July at HK$4.04 net of charges.Dividend from DeVry received - Track my stocks webpage updated.

1st July 2012

Globalstockinvestingtoday's virtual fund grows 7.5% in 2012 calendar year to date,declines 9.66% in the last 12 months and returns 34.41% since launch in 2008.This has outperformed the wider global stock markets by 35.7% and all global equity funds benchmarked by this website,by 29%.

Track my stocks webpage updated with 30th June 2012 closing stock prices and fund values.

For the first time,I am now outperforming Hong Kong's and Asia's leading hedge fund Value Partners by 7%.

While it has been a highly challenging if not brutal 4 years in managing equities given the global financial crisis,Chinese stock scandals and European debt crisis,I am nowhere near satisifed with my investment performance.I do not have the time nor is it the objective of this website to be trading in stocks however to maximise returns,it is hard to argue against short term trading around core positions especially if your due diligence and investment research is above that of the industry.

30th June 2012

Opened a new position in Industrial Bank of China (ICBC) at HK$4.21 net of charges on 29th June 2012.Bonus shares received from Vivendi.Dividends received from United Health,Bank of America,Real Nutriceutical,China Agri,CNOOC and Giordano - Track my stocks webpage updated.

I opened a position in ICBC because I still believe that China will over the long term, continue to grow and manage effectively its various political,social and economic challenges.

Investing in ICBC is similar to investing in China incorporated and given its high return on equity of nearly 25%,low cost to income ratio of 30%,current price to book of 1.3 (compared to its long term ratio of 2),Tier 1 capital ratio of 10.07% and its dominance in the local market in China,I find the risk return ratio to invest in the company's shares at current price compelling.At current price ,the dividend yield is 5.8% and price earnings ratio is 5.5.

 16th June 2012

Added to AIG at US$28 on 1st June and Santander at US$6.17 net of charges on 11th June.

Dividends from Vivendi,Aflac,Cummins,Intel,Microsoft,Symetra,Kingboard Laminates,Tontine Wines and Xtep received– Track my stocks webpage updated.

20th May 2012

Added to Santander at US$5.79 net of charges on 16th May and Kingboard Laminates at HK$2.89 net of charges on 17th May.

Dividends from Santander,Noble and Standard Chartered Bank received– Track my stocks webpage updated.
 

 

Given the volatility of today's stock markets compared to the past,it appears that the best way to maximise capital growth for most investors is to trade around core positions provided your due diligence is correct.For example the Hang Seng has declined from peak to trough by 12% every year since I launched this website and gains of up to 30% could have been realised over a matter of months if one picked up Standard Chartered,CNOOC and Industrial & Commercial Bank of China (ICBC) during these times.

Such frequency of activity and its recording would occupy too much time for my website but that is not to deny that this should be performed to take advantage of volatility to generate better returns.

10th May 2012 

Added to my position in AIG at US$31.36 net of charges on 7th May-Track my stocks webpage updated.

The US government keeps selling its shares in AIG at nearly half the insurer's book value and AIG keeps buying its stock back.At such prices,I am quite happy to add to it as well.
See my blog on 24th March about AIG.

One comment about Dolby,less than two weeks after I sold the stock,the company announced that Microsoft has included Dolby back into Windows 8 and the stock jumped nearly 18%.That is what you call sod's law.

26th April 2012

Opened a new position in France's Vivendi at US$16.56 net of charges on 18th April.Sold out of Dolby at US$37.48 on 25th April and added to Santander at US$6.61 net of charges.

Dividends from Prosperity Reit and SK Telecom received– Track my stocks webpage updated.

The current panic over Europe's economies,debt and political situation is leading to valuations of companies being lower than their underlying businesses and assets.For those companies who lead their respective industries and generate strong operating cash flows,it is resulting in very attractive dividend yields at current depressed share prices.Investors can take advantage of this if they can invest with long term capital.

Vivendi is trading at a 30% discount from book value,less than 6.5 times this year's likely earnings and a dividend yield based on an easily sustainable 50% earnings payout ratio,of 7.8%.Its valuation at time of purchase was lower than during the lowest point of the global financial crisis and last seen nine years ago.

To take advantage of such continuing dislocations in the European market,I need to build up more long term capital and this had led to the selling of Dolby.Dolby does not pay a dividend and its growth prospects for the rest of this year and next is likely to remain stagnant by the loss of licensing fees from Microsoft due to its exclusion from Windows 8.While it works to offset this impact on sales and earnings by growth in other segments such as mobile,I expect its price earnings multiple to remain at around 14 as its future earnings growth rates are unlikely to be as high as its past.

I am still adding to Santander as I believe given its global business and its management of risk that it (or for that matter,Spain) still has a low possibility of going bust and the risk premium attached to the stock is very attractive.In the short term,it is a painful transition due to the current state of Spain's economy,high unemployment and adoption of labour reforms but in the long term ie over the next 5 years,I fully expect recovery (the Asian economic crisis of 1997 was far worse).In the meantime,I will continue to accumulate and receive its dividend which even if cut by 20% in future,will still yield around 10%.

 15thApril 2012

Added to my position in Santander at US$6.76 net of charges on 10th April.
- Track my stocks webpage updated.

My opinion of this well run bank has not changed - please see my blog on 7th August 2011.

24th March 2012

Opened a new position in AIG at US$27.84 net of charges on 19th March.
Dividends from Bank of America,United Health,Microsoft,Visa,Intel,AFLAC and Cummins received - Track my stocks webpage updated.

AIG similar to Bank of America,is another unpopular stock which due to previous gross mismanagement,led to its collapse in late 2008.Since then,the division which caused the collapse (financial products) has been separated and cleaned up,AIG's management replaced and the bail out funds repaid to the US government by a combination of free cashflow from AIG's operations and a debt to equity swap.

AIG is back to principally,its core businesses in Chartis and SunAmerica,both which are giants in their respective fields in the insurance industry and generate on average,a combined US$5 to US$7 billion dollars in free cashflows to the parent company.

When one considers that AIG's share price reflects only the equivalent of its stake in AIA (Asia associate listed in Hong Kong),the valuation of its aircraft leasing subsidiary and the revised valuation of its Maiden Lane financial vehicle;Chartis and SunAmerica have pretty much been ignored and discounted to the equivalent of zero.

As a consequence,AIG is being priced at half of its book value.

AIG's capital worries are over.It has been recapitalised and arguments are now made that it is suffering from excess capital (US$15 billion) leading to lower returns on its equity.The other argument is not about AIG's low valuation but more about justifying its low share price due to the fact that the US government is still the largest shareholder with 70% of the stock.I do not have a problem with this as a long term investor since due to AIG's ability through Chartis and SunAmerica to generate billions in free cashflow,they can buy back their stock from the US government over the next few years,if the stock price remains the same,at the equivalent of half of the price that it is really worth and further increase the book value per share of the company.

If you read Warren Buffet's latest annual letter to shareholders,this is exactly the kind of opportunity that long term investors should be praying for!

Speculation as to why Warren Buffet's Berkshire Hathaway has not bid for AIG given the above,is more due to the assumption that given Berkshire's sizeable insurance operations,such an acquisition would lead to anti trust issues (though this is not officially confirmed).

I see very little risk in buying AIG at current levels.Further assurance was provided by the stress tests carried out earlier this month by the Federal Reserve and AIG's Q4 earnings release in February.Similar to Bank of America,a change in market sentiment and appreciation of its underlying business,can lead to a very quick re-rating of the stock.Over the next 3 years even assuming no buy backs,the stock has the ability to be revalued to US$60+.

27th February 2012  

 

Sold out of Visa at US$117.02 net of charges,realising a 56% gain– Track my stocks webpage updated.

Visa is currently valued at nearly 20 times 2012 forecasted earnings.While it continues to project earnings growth per share in the mid to high teens,it is nearer to being fairly valued compared to when I acquired the stock in 2010.From my perspective,most of the stock's rapid capital appreciation from its valuation rerating,is complete so I have decided to sell.

26 February 2012 

Dividends from Santander,Noble and Flowserve received - Track my stocks webpage updated.


21st January 2012

Globalstockinvestingtoday declined 17% in 2011 and appreciated overall by 24.98% since launch in August 2008,outperforming the broader stock market indices and equity funds by 20%– End of year values of equity funds and stockmarket indices updated in Track my stocks webpage.

I expect my portfolio to not only recover the losses in 2011 but to continue to grow and outperform over the next several years.

People have to appreciate that the capital allocated and its management is based on money that is not required for children's education,for buying a home or for any day to day or annual needs.It is very much based on looking at shares as part ownership of businesses with a combination of income returns via dividends and capital growth.There will be times like in 2011 ,late 2008 and early 2009 where valuations make little sense over the long term.Since the website has been launched,there has been no real euphoria,making the markets completely irrational on the high side over the long term,like there was in 1999,early 2000 in the US and in 2007 in Hong Kong.

20th January 2012 

Dividends from DeVry and Bosideng received – Track my stocks updated.

13th January 2012 

Sold out of Hong Kong's Midland Holdings at HK$3.80 net of charges – Track my stocks updated.

Midland's profit warning on thursday evening was worse than I had anticipated and highlights that Hong Kong's property market is still too high given the paucity of buyers.Sellers are simply unwilling to currently sell at a more realistic price and buyers are sitting on the sidelines.

While the market is cyclical,given the low liquidity of Midland's stock (it is a small cap,valued at US$350m),no catalyst for its share price in the short term,the high likelihood that it will drift lower,I exited with a view of of re-entering into the stock at a more attractive price,closer to book value.

This is the first time since the summer of last year that I am now holding long term capital in cash.


10th January 2012 

Sold out of Flowserve at US$103 net of charges on 9th January – Track my stocks updated.

Flowserve is now valued at 14 times trailing twelve month earnings and due to the difficult global economic climate over the past three years,it has been unable to grow its revenues and expand its earnings per share.I am sceptical about analysts' expectations of Flowserve's abilities to expand its operating profit margins if revenues do turnaround this year and the company appears closer to being fully valued than when I originally purchased the stock so have sold.



7th January 2012

Opened a new position in Bank of America at US$5.79 on 5th January – Track my stocks updated.

This opportunity is too good to ignore.

Bank of America can either go to zero or quadruple within three years.It is currently valued at a quarter of its book value,half of its tangible equity and 2.6 times its normalised operating earnings.

Its liabilities from the mortgage mess and its Countrywide acquisition are understood and it has been in the process of clearing its books from disastrous loans over the past three years.

Bruce Berkowitz,one of the most successful fund managers in the industry who is currently suffering from accumulating too much of the stock too early,at too high a price in his fund,wrote an excellent analysis last summer,on the bank linked here

http://www.gurufocus.com/news/139711/bruce-berkowitz-details-his-thesis-on-bac

What really got me to pay attention however,was in late November when another legendary value investor,Mohnish Prabai put 18% of his fund into the stock when he announced his Q3 filing.

Somehow,I doubt that the biggest bank in America with all its liabilities understood and manageable combined with its strong earnings power,will be forced into liquidation due to current court cases.

From my perspective,when one fully studies the major analyses on the bank,it is mainly panic that has driven Bank of America's stock down to such extreme lengths – people have made more money shorting it and few investors plan their investment purchases longer than one or two years.

I now own,America's biggest bank,Europe's biggest international bank (Santander) and Asia's best bank in my view,Standard Chartered,in my portfolio – I fully intend to hold them for at least another 3 years if not forever.

2nd January 2012

Year end 2011 stock prices updated on my Track my stocks webpage.

A more detailed review and outlook for 2012 will be posted later.

22nd December 2011 

Dividends from United Health,Symetra,Microsoft,VISA,Intel,Cummins and AFLAC received– Track my stocks updated.

13th December 2011

Sold part of my holding in Intel at US$23.98 net of charges to reduce my short term capital position – Track my stocks updated.

23rd November 2011
 

Sold out of Alco Holdings at HK$2.58 net of charges – Track my stocks updated.

As highlighted earlier,due to the inability of the European Union's political leaders to get their act together,we are experiencing significant reductions in credit,significant reduction in debt refinancing and frantic deleveraging of bank balance sheets which is leading to contraction in world economies and ultimately to recession over the coming months.Things are going to get worse before they get better.

Exports from China fell 50% year on year last month and while Alco's stock price has not been impacted by the latest news and the stock is cheap in relation to its assets,the fact that they are in an export business with little pricing power and are likely to be impacted in the coming 12 months in a material way,means that I would rather sell and reduce my short term capital for better opportunities in future.


21st November 2011

Added to my position in Santander at US$7.34.Dividend from Noble received – Track my stocks updated.

14th November 2011

Added to my position in Symetra Financial Services at US$8.94.Dividends from Flowserve and Santander received – Track my stocks updated. 

US insurers have been hit hard by the recognition of the market that long term interest rates could remain at record low rates well into 2014 as well as fear for their balance sheets and capital ratios due to the financial crisis in Europe.Symetra clarified what their exposures were to these two issues in their Q3 earnings call and highlighted that these will have a non material impact on their business and operations.Nevertheless the market is taking no chances and has marked down the company's valuation to 0.56 of its tangible net book value.
The company is currently out of fashion with the market but intrinsically,it is sound.

I am taking advantage of its current valuation to average down as such  companies, historically get re-rated over the long term business cycle.


3rd November 2011

Sold Becton Dickinson at US$72.43 yesterday after earnings results and outlook – Track my stocks updated.

Becton Dickinson indicated that its earnings outlook for the next financial year will be less than its revenue growth and an anaemic 5%.Given its price earnings multiple of 13,the stock is fairly valued so no point in holding short term capital in the portfolio with stocks which are fairly valued and do not offer an attractive dividend.

18th October 2011  

Opened a new position in China's Tontine Wines at HK$0.78 – Track my stocks updated.

Not only is it a great time to buy established Hong Kong businesses but if one has the determination to filter the smaller listed companies that raised capital or went to IPO in the last couple of years to expand their business operations,have impeccable accounts,durable products,high profit margins generating significant operating cashflows,one may be able to pick up some bargains which have the potential to double or triple within a couple of years.

In a bear market,everything gets mauled indiscriminately.Weaker investors are either forced to sell due to poor capital management or due to lack of conviction over their investments.

Tontine Wines has surplus cash of around HK$0.70 per share,operating cash flow per share of around 9.5 cents and has just completed the doubling of its production facility for its wines in the first half of this year.It has grown revenues and operating earnings consistently over a number of years and addresses the consumer mass market in China for domestic wines.

It is rare in the private sector to be able to pick up brands for literally one year's cash flow after deduction of the company's net cash,especially ones that have proven to be durable and are growing but that is what is occurring in the mass sell off in Hong Kong.

I noticed this company since it has been consistently buying back small amounts of its stock on the Hong Kong stock exchange during the crash over the past couple of months.Moreover due to the cash generating abilities of its business,it is also paying out one third of its annual operating cashflow as dividends,which at current price,provides a dividend return of 3.8%.

To finance its expansion,Tontine Wines underwent a share placement at HK$2.08 less than a year ago and there has been no fundamental change in its business since then but now due to market fear over the global economy,mass fund redemptions,pull out of global capital from emerging markets,one can buy the stock with its surplus cash for HK$0.78!

 

9th October 2011

Dividends from Real Nutriceutical,CNOOC,China Agri Industries,Standard Chartered and Becton Dickinson received – Track my stocks updated.

3rd October 2011

Added to Hong Kong's Midland Holdings at HK$3.04,Prosperity Reit at HK$1.34 and opened a new position in Hong Kong's Giordano at HK$4.90 with short term capital – Track my stocks updated. 

I wish I could buy Hong Kong real estate at 50% below market valuation and get net rental yields of 9% after management fees,insurance and taxes but that is exactly what I am now getting with Prosperity Reit.

I wish I could buy an established Hong Kong business tied to Hong Kong's real estate market which requires little capital and is valued at just over two times cash flow after surplus cash on the balance sheet after liabilities are removed and can generate an 11% dividend yield – that is exactly what Midland is being valued today.

I wish I could buy a well managed, Hong Kong branded retailer whose brand is getting stronger,taking market share from competitors,tied to the growing consumer markets of China and South East Asia,growing their revenues,earnings and cash flows by 15% to 20%,valued at below ten times earnings,paying a sustainable dividend yield in excess of 6% and continuing to retain surplus cash on its balance sheet- that is exactly what I am getting from Giordano today.

Make no mistake,we eerily appear to be witnessing a very similar global stock market crash that occurred in September and October of 2008 and which did not finish until March 2009.

Any stocks that you buy or hold,be prepared to hold for at least another two years.

To invest in this market requires a willingness to tolerate continuing short term capital declines until market sentiment changes.

Hong Kong is one of the few markets in the world where it can be significantly cheaper to buy an established business or hard assets if they are listed on its stock market than if they were simply privately held.


26th September 2011

Added to Hong Kong's Midland Holdings at HK$3.32 and Kingboard Laminates at HK$3.18 with short term capital – Track my stocks updated.

Chaoda Modern Agriculture gets suspended in Hong Kong.

Given the dramatic sell offs occurring in Hong Kong,particularly with smaller capitalised companies where there appears to be few buyers,magnifying the share price decline of those who are selling,I am quite happy to tap into short term capital that I might need in the next couple of years to buy established Hong Kong companies,which are cash rich,have decades of proven management,experience of managing economic cycles and are currently priced so low,that they will easily sustain dividend yields in excess of 6%.

Midland's future dividend yield at current price is 10% with 60% of its reduced market capitalisation in cold hard cash.Kingboard Laminates future dividend yield at current price is 7% and 30% of its market capitalisation is now in cold hard cash and is also valued at below its tangible net assets.So unless no one will ever buy property in Hong Kong again or no one will ever be interested in buying consumer electronic products again,then the chances of these companies being revalued upwards within the next two years would seem to be quite high.

I plan not to add further to Chinese stocks given that Chaoda Modern Agriculture,a company that has been listed in Hong Kong for over 10 years,has had fully audited financial statements with no qualifications during that time,has had the Prime Minister of China,Wen Jiabao visit one of their production bases last month and has a simple business to understand in growing and selling vegetables,has as of today,just been suspended for a “Hong Kong market misconduct lawsuit” in the week that it is supposed to announce its results and deflect the wave of short selling that had been going on based on,currently unsubstantiated allegations of overstatement of land assets.

If Chaoda Modern Agriculture is discovered to be a fraud,rendering the company worthless,legal action will be taken by shareholders against the auditors BDO as well as serious questions asked about how the Hong Kong Stock Exchange has allowed the company to operate for so long in something as basic as producing and selling vegetables without it being uncovered through its regulatory requirements,as a sham.Moreover given that the company was the authorised vegetable producer at the Beijing Olympics and the Prime Minister of China visited it last month,this will be one of the biggest frauds and hoaxes uncovered in relation to Chinese companies listed in Hong Kong over the past decade,putting also a serious dent into the credibility of China's government in being able to recognise real business enterprises.

We shall see what develops during this period on Chaoda hence why I was not adding to my position as the stock fell to incredibly cheap prices until its financial results are released.Having said that,given that Chaoda's original weighting was 7.38% of my original portfolio,it will have a short term impact on the performance of my virtual fund.

25th September 2011 

Dividends from United Health,Midland Holdings,Xtep and Kingboard Laminates received – Track my stocks updated.

17th September 2011 part 2

Sold out of Esprit at HK$13.2,added to DeVry at US$40.46,opened a new position in Cummins at US97.95 and added to Prosperity Reit at HK$1.58,net of charges yesterday-Track my stocks updated.
 

As I mentioned on my blog dated 8th August 2011 about certain question marks concerning the abilities of Esprit's new management,their announcement on 15th September that they will be reinvesting pretty much their entire profits for the next 3 years into “rebuilding the Esprit” brand with little return for shareholders in terms of dividends was quite frankly a decision beyond belief that has left pretty much all shareholders stunned.

Patient,long term investors were willing to give Esprit's new CEO who has been in the job for more than a year,time to prove his abilities.His poor judgement in this decision along with his belief that investors will accept his plan on not being judged on financial performance until 2014/15,is quite frankly,amazing.

As I have mentioned before,the quality of management is critical in preserving and creating shareholder value and behaving like prudent owner managers.Esprit's CEO who has no background in running a fashion retailer,has been a disaster for the company.A one year reorganisation plan when the company is still maintaining revenues and good operating margins is acceptable,a three year plan with a collapse in operating margins to 1% is no plan.

The dividend policy that Esprit previously had,set a floor to its share price and enabled the company to be valued on its strong cashflow generating capabilities.The CEO has now removed this on his quest to spend the equivalent of Esprit's market value on “promotion and advertising” which means that there is little floor to Esprit's stock price going forward.

My business analysis mistake on Esprit has been compounded by the appointment of a very poor CEO which has led to the stock being one of my worst portfolio investment decisions.

I have added to my position in DeVry due to my view that well managed private sector education companies with strong durable franchises built over decades,will outperform the market over the long term and am averaging down due to my belief that DeVry is one of those companies and will withstand current economic and business difficulties affecting the sector in the US.

I have added to Prosperity Reit to take advantage of the 22% decline in the Hong Kong stock market over the past few months which has led to Prosperity Reit being valued at approximately half of the value of its properties,giving a dividend yield of 7.5%.Given that the US Federal Reserve is committed to keeping long term interest rates at record lows well into 2013 and the fact that the Hong Kong dollar is pegged to the US dollar,means that Prosperity Reit will continue to benefit from extremely low financing rates.

I have opened a new position in US listed, Cummins,a global leader in natural gas and diesel engines and electric power generating systems due amongst other reasons to the proven abilities of its management,the durability of its businesses and technologies over multiple decades,its strong balance sheet and earnings generating power and its expectations that despite current global recession concerns,it is likely to continue to grow and compound annualised revenues by 14% over the next 4 years and as a consequence,due to operating leverage,nearly triple its earnings.

At current trailing twelve months price earnings multiple of 13;for a business in a cyclical industry,the guidance that Cummins announced this week ,indicates significant uplift in valuation for the stock once fear and doubt over the global economy and the debt crisis are cleared.
Its continuing growth is due to continuing power infrastructure development in emerging markets particularly in Asia,the shift in global environmental regulations on fuel emissions,continuing high prices for oil and the truck replacement cycle in developed economies which got delayed due to the financial crisis of 2009.

17th September 2011 part 1

Dividends from AFLAC,Intel,Symetra,Visa,Microsoft,Alco,Bosideng and Prosperity Reit received -Track my stocks updated.

26th August 2011

Added to my position in China's Real Nutriceutical at HK$3.21 net of charges.
Dividends from SK Telecom,Noble,Santander,Flowserve and DeVry received -Track my stocks updated.

22nd August 2011

Added to my position in China's Real Nutriceutical at HK$3.08 net of charges -Track my stocks updated.

18th August 2011

Opened a new position in China's Real Nutriceutical at HK$3.62 net of charges -Track my stocks updated.

I will post my reasons later when I have time.There are some interesting opportunities in China's healthcare sector given the global market sell off.

8th August 2011 part 2

Added to my US positions in Santander at US$8.66,Noble at US$27.97 and opened a new position in EZ Corporation at US$28.53 net of charges -Track my stocks updated.

My view is that the sell off is now overblown and the markets will recover over time.

I have been tracking EZ Corporation for over a year now and was not comfortable with investing in the company during the time of what appeared to be excessive US government regulatory plans across nearly all industries including financial services.This dynamic now appears to be over and EZ Corporation have continued to compound growth in annual revenues and earnings in excess of 15% and 30% respectively due to their business in the US and increasingly internationally through their investments in Canada,Mexico,Australia and the UK.

EZ Corporation operate in one of the oldest professions in the world in speciality consumer finance.They run pawn shops and short term consumer loan stores.As banks become more reluctant to lend,EZ Corporation has been picking up the slack by addressing this market niche.They were actually growing before the financial crisis during the “boom” of 2006 and 2007 but their business has clearly been lifted as a consequence of the financial meltdown and continuing economic dislocation since 2008.

There is now a section of the population whose general distrust of banks,means that despite relatively onerous interest rates that EZ Corporation and its peers charge for short term loans,they actually prefer to deal with them.Meanwhile pawn shops continue to thrive and EZ Corp have been expanding the number of their stores across the US and Mexico as well as experiencing continuing same store revenue growth in the mid single digits.

Their current store count is just over 1000 with 432 pawn stores in the US,155 pawn stores in Mexico,with the remainder being short term consumer loan stores in the US and Canada under their EZ Money brand.They continue to innovate and have created an EZ Corp “change” card,their reloadable and integrated debit card which they have currently rolled out in Texas to their stores and currently have 69,000 cards issued.

Given that EZ Corp operate in a predominantly cash business,their operating margins are very healthy with gross and operating profit margins of 60% and 19% respectively and returns on equity and capital of around 20%.

Their current annualised revenues of US$833 million indicate that their growth rates in excess of 15% will continue particularly given their expansion into Mexico and their investments in Cash Convertors International,which franchises and operates over 600 stores in 21 countries and Albemarle and Bond,one of the UK's largest pawnbroking businesses with over 140 stores.

EZ Corp is valued at 12 times year end September 2011 earnings with likely future annualised earnings growth of 20%.If they continue to execute on their operations,there is a likelihood,when markets calm down, that the company will be rerated to around 15 times 2012 earnings – a 60% uplift from my purchase price.

 

8th August 2011

Added to my positions in Midland Holdings at HK$3.88 and Esprit at HK$18.78 net of charges -Track my stocks updated.

I have decided to add to Esprit since even though the company is going through a turnaround plan with new management,at current prices and with depressed future earnings forecasts,the dividend yield should be stable at around 6%.The company still generates significant cash flow and Germany,its main market,is still economically in good shape without the likelihood of a depression in consumer spending that is perceived by the market for the rest of Europe due to debt problems.

The reason why Esprit's price has declined even further from my purchase price on 15th June (apart from the general market sell off)is due to the fact that Q3 results highlighted a further sharp fall in wholesale revenues which are at higher operating profit margins (27%) compared to retail which is at 13.5%.This after indications from the management team at the interim earnings call that the worst in wholesale was over following a year on year increase in Q2.There is still a lot of uncertainty as to the capacity of Esprit's new management to succeed and when their wholesale channels in Europe decide to increase re-stocking but the stock is being heavily penalised given the strong foundations of its business,its earnings and cashflow generating powers.

I still retain 12.31% in long term capital in cash and am adding very lightly and selectively to my portfolio holdings as markets continue to decline since I have no idea when the crisis of confidence will dissipate but if one can hold over the long term,the market is providing good entry points for well managed companies,particularly in Asia.

 7th August 2011

Santander is being viewed to be all about Spain's sovereign debt.

The continuing decline in Santander is primarily due to the market's fear about the Spanish government's ability to honour its bonds and the potential for default,particularly if its 10 year bonds rise to 7% (they are currently spiking to 6+%). 
In an article in the New York Times on 3rd August,titled "Large Banks in Europe Struggle With Weak bonds",the issues are summarised well,

"The banks own so many bonds issued by their home countries that they are being weakened as the value of those bonds falls, amid concerns that the cost of government borrowing could become too expensive for Italy and Spain to bear.Now there are signs that these concerns are, in turn, making it harder and costlier for the banks to borrow money to finance their day-to-day operations, a troubling trend that, at the worst, could lead to liquidity problems.
Since Europe’s second major rescue package was announced last month — aimed as much at calming fears over Spain and Italy as providing funds to Greece — the yields on Spanish and Italian bonds have hit more than 6 percent, sharply higher than they were paying on new borrowings just a couple of months ago.
In doing so they have entered what analysts refer to as the “danger zone” for 10-year bond yields, with the cost of government borrowing so high that investors become unnerved, as was the case with bailed-out Greece, Portugal and Ireland.
Bearing the immediate brunt of this development are regional banking heavyweights such as Santander in Spain, which traditionally have been reliable financing machines to their home governments and as a result are now saddled with large bond holdings that are losing value by the day.
Many of these banks hold domestic bond portfolios that exceed their capital levels.
According to a report issued on Wednesday by Sanford Bernstein, a research firm,for Spain, the ratios are ...a less alarming 76 percent for the global banking giant Santander (compared to other Italian and Spanish banks).
As a result, the markets have begun to focus on a number of warning signs that some European banks are finding it harder to meet their funding needs, especially in dollars.
Some analysts said perhaps most worrying was that the rate it costs European banks to borrow dollars in the open foreign exchange market, by swapping their holdings of euros, has shot up twofold in the past few days — still far below the levels seen in 2008 when the market virtually froze but the highest since May 2010 when the European debt crisis first started to intensify.
Recent write-offs by French banks over their own Greek bond holdings have compounded fears over the health of Europe’s banks.”

So the key questions are,how sustainable is Spain's debt in relation to its “earnings power” ie GDP (gross domestic product),how likely is it that Spain will default and what is the real business impact on Santander?

Firstly,Spain's government debt as % of GDP is not that of Greece or Ireland or even that of other key European countries.

The report by Eurostat, the statistical office of the European Union, showed that the ratio of government debt to GDP across all 27 member states increased from 74.4% in 2009 to 80.0% in 2010.For the 17 euro zone countries, the debt is even higher, increasing from 79.3% in 2009 to 85.1% last year.Topping the European debt league is Greece with 142.8% government debt to GDP ratio, followed by Italy (119.0%), Belgium (96.8%) Ireland (96.2%), Portugal (93.0%), Germany (83.2%), France (81.7%) Hungary (80.2%) and the United Kingdom (80.0%).”

Spain's government debt while rising,is still manageable and will be around 68% by the end of 2011.Spain also passed an austerity budget for 2011 cutting their demands on the bond market by 16% compared to 2010,to around 80 billion euros.

The government's successful action indicates that they have the means politically to reduce their debts despite the natural unpopularity of such actions domestically (and natural resistance from the labour unions and the provincial governments).

Moreover,Spain is the European Union's 4th largest economy.If the European union and its institutions do not back Spain,then the future of the European union and the Euro will be at stake.If panic sets in then I am calculating that the key leaders of the European Union will act and make sure that Spain (as well as Italy) do not default.China will also likely act to subscribe to Spain's bonds.

So what does all this mean to Santander?First of all,Santander is highly liquid.Its core capital ratio is 9.2% and is currently organically growing its capital at 0.2% per quarter.Based on the albeit,not so stressful,”stress tests” that was carried out this year on European banks,its core capital ratio in the adverse scenario would only decline to 8.4%.It has high discount capacity at central banks to the tune of 100 billion euros and is,as it states “the bank obtaining the highest profits,paying the most dividends and retaining the most profits”.This has been due to a mixture of luck and shrewd management ie staying clear of funding speculative real estate developments in Spain,selling 1200 of its properties in Spain for 4 billion euros during the property boom,picking up quality assets on the cheap globally from its financially distressed peers,during the financial crisis and transforming itself into a global banking powerhouse which now has less than 20% of its profits and 25% of its assets exposed to Spain.

Santander is now one of the UK's biggest banks and Brazil's third largest private bank.44% of its profits are generated in the emerging markets of Latin America.A more detailed analysis can be seen on my blog dated 2nd June 2010.

Clearly if Spain's bonds stay high,Santander's business in Spain will suffer since it will be forced to match it to compete for funds,thus increasing its costs,adversely affecting its lending volumes and hence revenues but Santander is not a proxy for Spain's financial problems as it is being currently viewed by the market.

The quality and diversity of its balance sheet,its global operations and capital generating abilities demonstrate this.I view that the stock is temporarily a victim of traders shorting the entire European banking index of which it is a constituent.

In time,I expect it will rebound significantly but in the meantime,I am quite happy to accept the pre tax dividend of near 9% which I believe is sustainable going forward,at these share price levels.


5th August 2011 

5th August 2011 

Added further to my positions in Banco Santander at US$9.16 net of charges and Hong Kong's Midland Holdings at HK$4.01– Track my stocks webpage updated.

I will continue to accumulate stocks if global stock markets continue to crash. 

 

3rd August 2011 part 2 

Exited my position in Lincoln Education Services at US$14.36 net of charges and added again to my position in Banco Santander at US$9.7– Track my stocks webpage updated.

Lincoln Education reported their second quarter today and revised downwards again their revenue and earnings guidance for 2011 and outlook for 2012.The impact of the education legislation regarding gainful employment and eligibility to Type IV loans has had a far bigger impact on Lincoln than I anticipated and their business results and expectations are not comparable to my expectations when I originally invested in the stock and so I have decided to sell.

3rd August 2011 

Added to my position in Hong Kong's Midland Holdings at HK$4.23 net of charges and opened a new position in Hong Kong's Kingboard Laminates at HK$4.01 – Track my stocks webpage updated.

I will post my reasons for opening a new position in Kingboard Laminates at the weekend but if there is a common pattern in my actions,they are in making investments in well managed businesses with surplus cash on their balance sheets,with durable market positions,being sold at a fraction of their usual values and offering sustainable,future dividend yields of 6% to 8% at current prices.

2nd August 2011

Added to my position in Banco Santander at US$9.80 net of charges – Track my stocks webpage updated.

Please scroll down to see my analysis on the company dated 2nd June 2010.The actual dividend yield at Santander's 60% earnings payout ratio,is actually 6.7% net after tax to Hong Kong investors.

I will provide a more detailed explanation as to why I added to my weighting at the weekend.

1st August 2011

Sold my remaining position in Chow Sang Sang at HK$29.95 net of charges and opened a new position in Hong Kong's Midland Holdings at HK$4.68 net of charges – Track my stocks webpage updated.

Chow Sang Sang is now valued at 25.5 times trailing twelve month earnings and I view the stock's long term earnings growth to be 12% to 15% so from my perspective,the company is fully valued.

This has been my best investment since I launched this website – in less than two years since my purchase,Chow Sang Sang has yielded a weighted capital gain of 263% excluding dividends (which averaged 4.2% per annum).

I have opened my first new position of 2012 in Hong Kong real estate brokerage,Midland Holdings.

Midland Holdings is the second largest established real estate brokerage in Hong Kong and has been operating for 38 years.While Centaline is private,Midland is listed in Hong Kong and has established itself,along with Centaline as the two brokerages of choice for both the primary and secondary markets.

While the Hong Kong market has not reached its peak of property transactions in 1997,Midland has increased market share and expanded operating margins.While the total value of all property transactions in 2010 was still 20% lower than 1997,Midland's revenues have more than doubled.

Midland has been led by the same management as when it was founded and they act as owner managers with a sizeable part of their fortunes in the company's business.

The company has withstood its fair share of property crises in Hong Kong from the bursting of the property bubble in 1997,to SARS in 2003 to the global financial crisis in 2008.

Because Midland is an established Hong Kong company,it has never had any issues with regard to corporate governance,which is increasingly being viewed as a risk with new mainland Chinese,entrepreneural companies.

Given the Hong Kong government's continuous cooling measures since October last year to reduce sky high property prices (Hong Kong has the highest real estate prices in Asia),Midland's stock has fallen by 46%.

Figures for the first half indicate that government measures have led to a decline in property transactions but not to the level to justify such a sharp decline in Midland's stock.

Mr Alva To, DTZ’s Head of Consulting, Greater China, said: “Looking back on the first half of 2011, transaction volume of each quarter dropped compared with a year ago. The H1 number of S&Ps (sales and purchases) was 71,868, down 8.6% from H1 2010.”

When one considers that the actual value of transactions has risen due to a 10% increase in property prices in the first half,I am sceptical that the net impact on Midland will be as great as feared by the market.Moreover,Q4 2010 was quite depressed in terms of transactions due to the introduction of cooling measures,so the year on year decline for the second half of 2011 will also be somewhat offset.

Because Midland is a brokerage,it has few demands on capital and generates significant cash flow.The conservative financial management of the company's leadership team who have withstood severe downturns and property crises before,combined with a very healthy balance sheet means that Midland will remain strong irrespective and will likely take market share from weaker operators who do not have the scale,business relationships and financial power of Midland.

In fact if one deducts Midland's surplus cash and receivables after payment of all liabilities from the company's balance sheet and anticipates a worst case earnings per share decline of 33% compared to 2010,Midland is being valued at less than 6 times 2011's earnings with the company's small investment property portfolio thrown in for free.

While it operates in a cyclical industry where downturns accelerate declines in profit margin due to falling volumes,the impact should not be such as to warrant this kind of valuation for such a durable Hong Kong brand.The company is traditionally used to a higher price earnings multiples.

I expect the stock price to rebound over the long term and in the meantime,at current price,I expect the future dividend yield alone to generate at least 7% per annum.I view the intrinsic value of the stock given its surplus cash,other assets and proven cash flow generating capabilities to be around HK$7.5.

Midland has also been buying back its own stock so I expect that its management team shares my thinking.

Midland is one stock that I will continue to accumulate if the price continues to decline.

23rd July 2011

Sold half my position yesterday in Hong Kong's Chow Sang Sang at HK$25.75 net of charges - Track my stocks webpage updated.

Chow Sang Sang is now valued at 22 times trailing earnings per share which I view as fairly valued and given that I was sitting on a 236% gain not considering the dividends received,I decided to sell half my holding.

18th July 2011

Hedge fund performance

Dow Jones Credit Suisse publish the hedge fund index to compare performance of all types of hedge funds and the results of the year to date,1 year and annualised compound return over the past 7 years are disclosed below. 

Hedge Fund Benchmark Performance 30 JUN 11 YTD 1 Year 7 Year Annualised Compounded Return
Dow Jones Credit Suisse Core Hedge Fund Index -1.10% 7.82% 8.09%
    Convertible Arbitrage 0.42% 10.48% 4.91%
    Emerging Markets 2.38% 12.10% 11.23%
    Event Driven -1.71% 6.03% 7.06%
    Fixed Income Arbitrage 2.38% 7.51% 8.74%
    Global Macro -4.04% 6.68% 7.44%
    Long/Short Equity 0.14% 9.76% 8.15%
    Managed Futures -4.44% 4.67% 9.14%

As one can see from these results,although they are better than the stock market indices,my compounded annualised return of 14.1% was around 75% higher than the annualised return of these hedge fund benchmarks.

10th July 2011

GlobalStockInvestingToday.com returns 48.79% over 3 years comprehensively outperforming stockmarkets by 41.5% - Track my stocks webpage is updated with closing 30th June prices.

My virtual fund provided a compounded annual return of 14.1% over 3 years while equity funds returned on average 2%.Only Value Partners hedge fund which is now the largest and most successful hedge fund in Asia,performed better at 17.4%,returning 62% over the 3 years.
Value Partners is largely concentrated to investments in Greater China so its fund is not as geographically diversified compared to my virtual fund.

While 2011 to date has shown a small decline of 1.6% compared to the beginning of the year,this was largely due to panic selling of one key holding Chaoda Modern which is now valued at less than 3 times earnings and a fraction of its assets and the continued sell down by institutions of Dolby,another key holding,due to its lack of existing licensing agreements with iPad suppliers for its sound technology - something which will be rectified over the coming 6-12 months.

With respect to Chaoda Modern,while it has been constantly accused of overstating its land base in China for its agricultural produce,no one has substantiated these accusations.The company is now taking a Hong Kong magazine to court for false accusations which has led to the company's share price decline.Its auditor,Grant Thornton which has now merged with BDO,is a large,established,international accounting firm and has consistently cleared Chaoda Modern from any material misstatements of its accounts.
Macquarie Group,one of Australia's leading investment firms,has also  cleared Chaoda Modern from the allegations but given the prevailing mood of shorting Chinese small caps in the months of May to June,Chaoda has been impacted.The stock price,given the company's cash position and genuine fruit and vegetable business (the Chinese government named Chaoda Modern as one of its key vegetable suppliers at the Beijing Olympics),should rebound significantly when the mood of the market changes.Either that or shareholders will sue Grant Thornton(BDO) for negligence and breach of fiduciary duty as investors rely on international accounting firms for the integrity of financial information.

I will post soon on what I have learnt from a roller coaster,3 years since I created this very public record of not only my investment and analytical abilities but also of my temperament and ability to act under great pressure against the prevailing wisdom of the time,with my own life savings.I am still waiting to find out the 3 year published performance of hedge funds but while I know that my performance will rank me in the top 25% of fund managers,I will be curious to know exactly where I would fit.

To summarise,as I stated 3 years ago,when I launched this website,this is for people who wish to secure long term capital growth with low risk and did not require their money for at least 3 years.No one could have predicted the volatility and the worst bear market since the 1930s but please do not confuse volatility,which really relates to the emotions of "Mr Market",with risk. 
  
7th July 2011

Dividends received from portfolio companies by 30th June updated on Track my stocks webpage.

Dividends from United Health,Symmetra,VISA,Lincoln Education Services,Microsoft,Intel,AFLAC,China Agri-Industries,Guangshen Railways,CNOOC
and Chow Sang Sang received from 30th May to 30th June,are now credited.

I will update my investment performance for the year ended 30th June 2011 at the weekend.

29th June 2011

Added to my positions in Microsoft at US24.5 and Esprit at HK$26.7 on 15th June - Track my stocks updated.

Apologies but due to work commitments,I was unable to update these latest transactions in real time.

Microsoft is trading at below 10 x earnings with surplus cash on its balance sheet and the market has little expectations on the sustainability of its core Windows and Office franchises in contrast to the company's actual performance.Its dividend is 2.6% based on a 25% payout ratio which can easily be raised and generate demand for the stock from dividend funds.Its search business has been generating losses,diluting the company's existing earnings for a number of years but appear to be reducing.There are minimal expectations built into the stock from its mobile and internet initiatives and the ability and talents of its employees appear to be discounted outside of its Windows,Office and Xbox products.

Esprit is trading at below 10 x current and expected earnings with surplus cash on its balance sheet.At current price and with the dividend policy of 60% of earnings,the stock will generate a dividend yield of 5.6% (tax free to HK residents) on the lowest scale of this year's earnings expectations.
Esprit is known for strong corporate governance and financial management.Its market leadership in its core market of Germany together with its expansion policies in mainland China from its buy out of the China Resources joint venture are now discounted in its valuation.
If retail market conditions improve and Esprit indicate any improvement in business performance,the stock will rebound sharply with a re-rating of its price earnings multiple.In the meantime,the dividend yield remains sustainable at current prices. 

29th May 2011

Dividends from Prosperity Reit,Becton Dickinson,Standard Chartered Bank,SK Telecom,Xtep,Flowserve,Banco Santander and Noble received
- Track my stocks updated.

29th April 2011

Sold out of Superior Energy Services at US$38.15- Track my stocks updated.

Superior's latest results and reduced forecast of earnings per share for 2011 did not meet my expectations.At 21 times the mid point of their revised 2011 earnings per share forecast,the stock appears to fully valued.

1st April 2011 

Sold NasdaqOMX at US$26.77- Track my stocks updated.

I am not in favour of Nasdaq's hostile bid for NYSE and paying over the odds,simply to derail NYSE's tie up with Deutsche Bourse.Opportunistic acquisitions at reasonable prices are fine with me but not ones that will mean taking on significant debt and diluting existing earnings per share.

31st March 2011

Dividends from portfolio companies received for the quarter - Track my stocks updated.

Dividends from Lincoln,United Health,Microsoft,Symmetra,Visa,Intel,AFLAC,Noble,
Santander,Flowserve and Chaoda Modern have been received.

In the quarter,I underperformed the broader stockmarkets and had a slight decline in overall value (by less than 1%) due to declines in stock prices of Dolby,Microsoft,Intel and Chaoda Modern.

The emergence of the Tablet from Apple has led to fears in the market that the PC will be cannibalised and that it will erode the revenues and profit margins of Dolby,Microsoft and Intel.From my perspective,the market is overexaggerating the effect of the Tablet on these companies and that they will be rerated back to their more usual PE multiples.

Chaoda Modern's stock price,given that it is a small cap (US$2 billion) has been pushed down hard by traders to a ridiculous four times earnings multiple.For a cash rich company in a growing market for consumer staples ie food in China,I expect the stock price to bounce back.If my portfolio was not already heavily weighted in the stock,I would have accumulated more.
 
12th January 2011

A change in circumstances.

Due to boredom,I have decided to take on full time employment again so will not have the time and focus on my portfolio as in the past two years.

The last two years were successful in so much as I managed to not only repair the damage caused to the portfolio by the great global financial crash in 2008 but to turn it around to deliver net capital growth of 51%.

The disadvantages that I experienced over the last two years in managing this was the lack of opportunity to question management in company visits (pretty much depending on analyst questions on quarterly earnings' calls) as well as the lack of resources to support financial investigations of debt ridden,potential turnarounds (where spectacular gains were to be made if the work could be performed).

Despite these disadvantages,my returns were in the top decile of all equity funds.If I had the backing of an organisation to have performed what I lacked in the last two years,the boredom element would not have precipitated my decision to accept full time employment.

I will continue with this website since investing is a passion of mine (there are worse interests!).I do expect that my portfolio will suffer somewhat from the lack of attention but given current valuations,I do not expect it to suffer too much.I will more likely miss out on some undervalued opportunities but I still expect even on practically automatic pilot,my current holdings to appreciate by 10% to 20% in this calendar year.

 

11th January 2011

Dividends from Becton Dickinson and DeVry received - Track my stocks webpage updated.

3rd January 2011

Globalstockinvestingtoday portfolio returns 51.17% since launch,17% in 2010 and 119% in the last two calendar years.

The portfolio is significantly outperforming stock market indices worldwide and equity funds by an average of 44% since launch of this website– Track my stocks webpage updated with 2010 closing stock prices.

I am pleased with the performance of the portfolio in 2010.The portfolio outperformed global stock markets by 9.4% this year (based on the basket of the major indices).

I was accurate in my forecast as stated in my blog dated on the 4
th January 2010,
On the whole,I expect my portfolio to return a compounded annual growth rate in the range of 10% to 20% in 2010 even after a potential stock market correction sometime this year.”

Given current valuations of my holdings,their earnings potential and macro economic uncertainty (Euro debt fears,monetary tightening in Asia),I expect this to be repeated again in 2011.

I am now half way through the 5 year public track record on my investing acumen.The results to date are so strong that it would appear safe to state that I have the ability to manage an investment portfolio that will offer superior returns to the market,provided that I am managing long term capital.

The other statement that can be made after two and a half years is that I am not an investment genius.Investment geniuses are few and far between but if I was,my annual returns would have been consistently between 20% to 25% since I launched this website,which has not been the case.

My incorrect analyses on Nokia and Apple further demonstrates the limitation of my abilities.

It is still too early to determine where I sit amongst investment portfolio managers but the current performance would provide a ranking in the top decile of the industry.After 5 years a more accurate picture will emerge.

30th December 2010

Dividends from Bosideng,Alco Holdings and Esprit received – Track my stocks webpage updated. 


28th December 2010

Sold out of Infosys at $74.59 and opened a new position in Lincoln Educational Services at $15.61,net of charges.Dividend from United Health received – Track my stocks webpage updated.

I sold out of Infosys and opened a new position in another US “for profit” education company,Lincoln Educational Services due to my evaluation of the risk and return potential of each company. 

Infosys is now valued at 26 times March 2011 fiscal year projected earnings (once its balance sheet surplus cash per share is deducted from the stock price).The company appears to have little risk discounted in its current share price.While the company is world class in its operations and its management,nevertheless,managing in excess of 100,000 employees and maintaining quality is no easy task.Moreover wage rises and attrition rates continue to be in double digits whilst Infosys' ability to raise prices is limited to the low single digits.The rupee is likely to appreciate further against the Euro and the US dollar (where most of its revenues are denominated in) indicating that further profit margin compression is likely even if Infosys can continue to grow revenues in excess of 10% annually in the forseeable future.

Lincoln Educational Services is another company whose stock has been hit hard by unethical student recruitment practices by peers in its industry.Like DeVry (see blog dated 11th November 2010),it appears to be unjustly punished by the market.Due to Lincoln being a small cap,as traders short the entire for profit education sector,the relative lack of liquidity in its shares,causes a disproportionate decline in Lincoln's stock price.

Lincoln is a proven educator with an ethical operational culture built from its origins in 1946 of helping American GIs from the second world war,retrain with relevant skills to be employed in civilian life.For more on Lincoln's history,its business and mission statement check its website http://www.lincolnedu.com/why-lincoln

Like DeVry all its colleges are accredited and management has stated that its business operations will not be materially impacted by stricter government regulations.

Lincoln is currently valued at 5.9 times 2010 earnings and while there will be a hit to revenues in 2011,even with a 25% associated decline in earnings (which goes beyond what the company expects),Lincoln's price earnings multiple will still be just 8.The company is normally valued at a multiple of 18.

Lincoln has no balance sheet issues and has been operating in the education field successfully for over 60 years in the US.

Lincoln is calling the market's bluff by announcing an annual dividend of US$1 per share payable in installments every quarter.This represents only 37% of its current earnings and less than half of its operating cash flow.Even with significant declines in earnings and cash flow next year,the dividend is sustainable.This means that at current share price,for US investors,the dividend yield is 6.4% while for Hong Kong investors,after tax,the net dividend yield is 4.48%.

Two directors on Lincoln's board believe that the company is mispriced by buying US$2 million and US$2.6 million of the company's shares in the open market at US$15.19.

Lincoln Educational Services is a good company in a business,very much needed in the US .Once government regulation in 2011 is clear and “Mr Market” calms down,Lincoln is likely to be revalued to a more normal multiple.The company is clearly currently priced with a lot of the potential downside risk factored in.Investors can wait,collect the fat dividend and expect to see a turnaround in the company's valuation over time.

 

 

10th December 2010

Reduced my weighting in Superior Energy Services at $34.58,net of charges.
Dividend from Microsoft received – Track my stocks webpage updated.

I reduced my weighting in Superior Energy Services to improve my capital ratio.In the near term,Superior Energy Services is fairly valued at current prices. 

9th December 2010

Sold out of ABB at $20.62 and reduced my weighting in Infosys at $70,net of charges,to open a new position in Symetra Financial Services at $12.29 – Track my stocks webpage updated.

Dividends from Chaoda Modern and VISA received – Track my stocks webpage updated.

My decision to sell ABB was more to do with funding the acquisition of Symetra based on its undervaluation.

Having said that,I was not comfortable with ABB's recently announced acquisition of Baldor Electric for US$4.1 billion dollars (equity and debt) given Baldor's net profit margins of 5% and net annual earnings of US$100 million. 

Even though ABB claims that it will be earnings accreditive in 2011,ABB's tendency to present “non recurring charges” on a quarterly basis indicates that when integration costs are factored in,it is more likely to be earnings dilutive in 2011.

Given the patchy economic growth in its largest market,Europe plus the stagnation of the construction market in the US which is likely to remain flat for the next 18 months,ABB's valuation of sixteen times normalised earnings is a fair valuation of its now limited growth potential.

Symetra Financial Services is a retirement products, life and medical insurer in the US.It was spun off from a consortium involving Berkshire Hathaway at the beginning of this year and was priced attractively at a 4% discount to its adjusted tangible book value.Given how out of favour,insurance companies are in the US with investors,its operating performance to date has led to its tangible adjusted book value increasing by 21% while its share price has barely budged from its IPO price.

Currently Symetra which still retains Berkshire Hathaway as a major shareholder,is now being valued at a 20% discount from what would be considered in the insurance industry as its liquidation value (ie adjusted tangible book value).This is a profitable business with pre tax net profit margins of 10%,surplus capital,risk weighted asset capital ratios of 501% compared to industry benchmarks of 400%,a conservative underwriting practise and investment portfolio and a 50 year track record in its fields of fixed annuities & retirement policies.

Usually A rated life insurers in the US are valued at a 20% premium to its underlying adjusted net assets but given the abnormal environment that the financial industry in the US has experienced in the last two years,fear and uncertainty has caused such companies to be still valued at discounts.

I expect as time goes by and investors are assured that the worst of the financial excesses is either over or has been uncovered,conservative insurers such as Symetra will be revalued to a more normalised price.

Insiders at the company think so too,since the majority of the board acquired shares in the open market at US$12 and at US$10.49 when further panic hit the stock market over the summer.

Given its outlook,business plan and the ageing demographics in the US (77 million baby boomers are approaching retirement age with a further 61 million independent workers primarily funding retirement with their own personal financial plans),Symetra should be able to grow its annualised earnings by 8% to 10% in the next couple of years.This combined with a rerating to a more normal 1.1 x adjusted tangible book value,should lead to a potential increase in share price of 46%. 

3rd December 2010

Performance update

All my company holdings have completed their result announcements and outlooks for 2010.In general,I am pleased with their business performances this year.As a consequence,it is now unlikely that I will make any more changes to the portfolio.

The portfolio has appreciated in 2010 by a compounded annual return of 19% and 54% overall since the summer of 2008,when this virtual fund was launched.

In contrast,the stock market benchmarks in the US,Brazil,Hong Kong,Asia Pacific,UK and Europe have appreciated on average by 7% in 2010.

I expect that market sentiment to the end of December could change the return by as much as + or - 4% but well within the stated objectives of beating the stock market and generating compounded annual returns of 12% (with a three to five year holding period for capital).

I will give my thoughts as to likely performance in 2011 when I publish full year results with year end closing prices on track my stocks webpage,at the beginning of January.

There still appears to be a misunderstanding as to my investment philosophy so I will explain it as follows – globalstockinvestingtoday.com views stocks as business properties.They are assets acquired via share transactions to build long term wealth to shareholders of the virtual fund.

I manage the portfolio as if I was the Chief Investment Officer of a conglomerate made up of these disparate businesses.In its way,the website is a mini Berkshire Hathaway (Warren Buffett's company).

2nd December 2010

Dividends Received from Intel and AFLAC – Track my stocks webpage updated.

30th November 2010

Dividend from Noble Corp received - Track my stocks webpage updated.

15th November 2010

Fully subscribed to the new rights issue by Standard Chartered Bank – Track my stocks webpage updated.

Dividend from Banco Santander received – Track my stocks webpage updated.

Please scroll down to see my blogs dated on 4th March 2010,4th March 2009 and 8th December 2008 as to my reasons for Standard Chartered Bank being my top holding.

The reasons are still valid hence the further addition in weighting and net price adjustment,based on the rights issue.

11th November 2010

Is there money to be made in DeVry's stock? Globalstockinvestingtoday's analysis of its new equity holding.

The for profit education sector in the US has been heavily discounted due to highly questionable recruiting and financial practises by many institutions which set unrealistic expectations on students as to their employment prospects and made profits out of their student loans.

In a widely publicised article by Oliver Scheck,”Is For Profit Education the Next Subprime Mortgage Crisis”,the following comments were made,

Steven Eisman, whose foresight about the subprime mortgage crisis was profiled in Michael Lewis’ book The Big Short,said at a US Senate committee hearing“Until recently,I thought that there would never again be an opportunity to be involved with an industry as socially destructive as the subprime mortgage industry. I was wrong.”

Though students at for-profit schools accounted for less than 10 percent of U.S. higher education students overall, they soaked up almost 25 percent of federal student aid in 2008-2009 and contributed 44 percent of the federal loan defaults, according to both Eisman and an independent report by Senator Tom Harkin, Chairman of the Health, Education, Labor and Pensions Committee.

For the five largest for-profit schools, federal student aid made up 72 percent of revenue, with only half of that money, on average, going to actual education spending, the Harkin report reveals.

The Apollo Group, for instance, parent company of the familiar University of Phoenix and the largest for-profit education company, received $1.1 billion in federal loans and grants in 2009, Eisman said in his written testimony to the committee. However, of that total, only 99 million – or, about 10 cents on the dollar – went towards instructional costs. The rest, Eisman claimed, was spent on marketing and executive salaries.”

Given this background,why on earth would I open a position in DeVry,one of the leaders in this sector?

First of all,the for profit education sector in the US is not going away.There is a critical need for US workers to be skilled in key professions such as healthcare,finance,technology and engineering.As state budgets are significantly curtailed due to their own fiscal crises and public universities have their quotas full or not available to mature candidates,the reskilling and access to mature students of high quality,professional education will come from the,for profit education institutions.

DeVry has been tainted by the same brush that has applied to Apollo and others in contrast to its actual operations.All DeVry's colleges have accreditisation for their respective courses,its admission staff are not remunerated by how many students they enroll (unlike Apollo),89% of their university graduates find employment in their respective fields within 6 months of graduation at average starting salaries of US$43,000 and none of their institutions are at risk of breaking the 90/10 rule which stipulates that colleges can not be dependent on 90% of its revenue from federal student loans.

DeVry is made up of the following institutions,

DeVry University,68,290 students of which 78% are undergraduates and 22% graduates.

The courses include business & management through its Keller Graduate School of Management (34% of its students attend this school);Engineering & Info Science,Arts & Sciences,Media & Technology,Health Sciences

Ross University,4,572 students;Medicine & Veterinarian

Chamberlain College of Nursing,7,108 students

Carrington Colleges,11,000 students;Health care,education

Defry Brazil,11,000 students;Law,business management & engineering

Becker Professional Education,50,000 students;Certified Professional Accountants (CPAs) & Chartered Financial Analysts (CFAs)

Advanced Academics – service to 300 school districts and 60,000 high schools

In terms of revenues,DeVry University generates approximately 67%,Ross University 5%,Chamberlain 8%,Carrington 13%,Defry Brazil & Becker 6% and Advanced Academics 1%.

At its latest earnings conference call,the CEO explained that unlike certain other competitors,the company will not need to alter its operations and its practises given pending changes in regulations.The company is still on a growth curve,though clearly given the economic climate and stricter future rules on access to student loans,its future growth will not be as high as its past.

DeVry has a strong brand,built from its main institution,DeVry which was founded in 1931 and renamed to DeVry Technical Institute in 1953 in dedication to its founder Dr Herman DeVry.It was subsequently acquired by the parent company of the Keller Graduate School of Management in 1987 and the entire group was renamed DeVry Inc.The group has a strong track record of successful acquisition and integration of quality education business franchises such as Becker Professional Review in 1996,Ross University in 2003 and the Deaconess College of Nursing in 2005 which it subsequently renamed Chamberlain.

Becker Professional Education consistently delivers the prize winners in CPA examinations and has the largest and longest serving review programme for CPAs and CFAs worldwide.

Ross University is recognised as one of the most popular private education institutions for doctors in the US and has an average 93% first time pass rate in the US Medical licensing examination.

Chamberlain college of nursing has been training and supplying nurses to US hospitals for 120 years.

Carrington colleges' courses are highly relevant to the demands in the US healthcare industry,ranging from dental hygiene to surgical technology.

DeVry Brazil taps into the growth in the Brazilian economy and the large demand from the private sector for qualified lawyers,engineers and business managers.

Given demand for career orientated education primarily for people over the age of 25,DeVry's revenues in the past 5 years have grown by an annual compounded rate of 18% while its annual earnings per share growth rate has been 44% due to the relatively fixed element of its cost base,leading to increasing volumes going straight into earnings.

Indeed at DeVry University,53% of its students are in the age range of 25 to 39 while students in the age range of 18 to 24 are in the minority at 28%.

I expect that the crackdown by the US government of weaker for profit institutions will lead to DeVry increasing market share,with demand shifting to better quality institutions.

At annual revenues of US$1.9 billion,DeVry still has plenty of room to grow both domestically in the US and internationally such as in Brazil.Once US regulation is resolved and a full picture of the impact on DeVry clarified,I expect the company will be rerated to a more normal price earnings multiple commensurate with its business franchise and earnings power.

Given that it is in the services sector and one of the key education market leaders,its gross margins,pre tax profit margins and free cash flow yields are attractive with 5 year averages at approximately 53%,16% and 10.5%.

It has surplus cash and no debt and its average return on equity is 15.4%.Such superior financial performance along with double digit revenue growth rates,usually leads to multiples in excess of 20 and DeVry's historic,average price earnings multiple has been 25. Due to fear of regulations impacting enrollment for the entire sector,its multiple has declined to less than 12.

I do not expect future regulation to impact DeVry as much as its competitors or to lead to a contraction in its revenues,earnings and cashflow.As a result,I expect its future price earnings multiple will become a more normal 17 as investors refocus on the strengths of DeVry's businesses.Given its continuing earnings growth (as affirmed by the company's earnings call on 26th October 2010),DeVry's stock appears to be currently offered at a 40% discount from its intrinsic business value.

I will look to further accumulate the stock if uncertainty continues to put downward pressure on its price.

9th November 2010

Opened a new position in DeVry Inc. at US$47.55 - Track my stocks updated.

I will post my analysis of this stock by the end of the week.
 

29th October 2010

Portfolio performance update

80% of my company holdings have now announced their Q3 results or given trading updates and from my perspective,their operating results have been sufficiently acceptable for me to continue holding their stock.

The portfolio has appreciated in 2010 by 17% to date and a positive 51% since the summer of 2008.

In 2010,Hang Seng,S&P 500,FTSE 100 and DJ Euro Stoxx 50 have returned on average 4% each,resulting in my portfolio exceeding the broader market indices by 13%.

If one reviews the new purchases that I made in 2010 (as recorded in my blog in real time) and factors in dividends,the below summarises the performance to date of those new purchases. 

AFLAC +20%
Intel +3%
NASDAQ +13%
Prosperity REIT +24%
Banco Santander +30%
Tianda Oil Pipe -7%
Guangshen Rail +15%
Bosideng +73%
Noble +12%
VISA +1%

To summarise,out of 10 stock purchases in 2010,only one was at a small loss (Tianda) and eight are returning 12% or more with 3 returning 20% to 30% and one returning 73% to date.

It appears that I am becoming an even better investor and learning from my investing mistakes during the crash of 2008.

28th October 2010

Dividends from Infosys,Flowserve and Prosperity Reit received -Track my stocks webpage updated. 

13th October 2010

The unbearable cost of living in Britain

For someone in the UK earning 70,000 pounds a year (US$112,000) which is more than 2.5x the country's average and would be considered a good salary,the income tax and national insurance deductions alone would reduce his/her salary to 47,600 pounds (US$76,000).

This excludes indirect taxes such as council tax (1,200 pounds average tax),VAT which works out at 1,000 pounds on average for food alone,a TV license - just for having a TV in the UK costs 175 pounds per year and abnormal gas,electricity and water bills which average 1,200 pounds and is nearly 5 times the typical cost in Hong Kong and most Asian countries.

These hidden taxes and charges would further reduce his/her residual income to 44,400 pounds (US$70,500).

Petrol prices in the UK (GBP 1.20 per litre for unleaded petrol) are amongst the highest in the world with 64% of the price relating to government tax and duties so if the person runs a car (which is essential outside of London,irrespective of job requirements) and fills the car up 30 weeks of the year,his petrol cost would be approximately 1,800 pounds of which 1,150 pounds is petrol tax.

The tax on petrol would lower the residual income to 43,250 pounds (US$69,200) and to 61% of  “gross” income.

The average mortgage in Britain is 8,000 pounds (US$12,800) which with a 25% down payment,would afford a 250,000 pounds small apartment (60 sqm) in outer London or a small apartment in most of the nicer parts of the South of England or a medium sized house in the North of England (ie not a desirable home by any means).

So after direct and indirect taxes and the average mortgage,the “affluent” professional's actual annual income is 35,250 pounds.This equates to just 50% of  gross salary.

A more accurate scenario for someone with such an income would be a higher mortgage with accompanying higher related insurance and be around 10,500 pounds (US$16,800).In reality,the disposable income for such a salary level is more likely to be 32,750 pounds (US$52,400) and 46% of gross income.

T
his assumes that the earner has been prudent with money and has no outstanding loans such as a car loan,student loans or loans for furniture and home improvement.Even with the above higher mortgage scenario,the person's mortgage to salary level is still only 3.4 to 1.

Indeed for graduates leaving university in the UK,the typical student debt due to fees and cost of living is 15,000 pounds.With tuition fees likely to climb steeply,this will likely increase further to around 20,000 pounds in the coming several years(depending on region).

In terms of housing in the UK,to prevent getting punitive mortgage rates and paying surcharges to the banks,a 25% deposit will be required which to get anything reasonable would mean having 60,000 to 75,000 pounds of capital so for a university graduate looking to be a homeowner with an affordable mortgage,with the student loan paid off and money for furniture,he or she would need to generate capital of near 90,000 pounds.
 

So the scenario that I am depicting of an earner on 70,000 pounds with a 25% deposit and no other loans,is likely to be that of a single professional in his or her early 30s with no kids.

Even with such a high end scenario,his/her annual disposable income would likely be only around 32,750 pounds.Given that public transport,eating out and general entertainment and leisure costs in the UK are significantly higher than in most parts of Europe and Asia while the UK's infrastructure and service are generally,terrible - the purchasing power and level of satisfaction that such a disposable income would generate,are significantly below that of many places in the world,particularly in Asia.

From my perspective,the key conditions to achieve financial independence and have control of one's life,are in having no debts,owning your dream home with no mortgage,in a place with good infrastructure and service (good weather helps) and being able to generate significant after tax capital with little risk.

To say that someone in the UK is earning 70,000 pounds (US $112,000) is irrelevant.Measuring what his likely disposable income is (32,000 pounds) and the satisfaction that he is getting on his cash,are the defining criteria from my perspective.

You may have noticed that my blogs have become fewer recently.That is more to do with the fact that I am happy with my holdings and no material change has occurred in any of my companies to warrant action.In the second half of 2010,my portfolio has appreciated 15% and 49% in total but given that we are about to begin the final set of earnings results and outlooks for 2010,the portfolio value is likely to change one more time before the end of the year.

 

5th October 2010

Dividends from Becton Dickinson,United Health,Chow Sang Sang,Standard Chartered and China Agri received – Track my stocks webpage updated.

20th September 2010 

Dividends from Microsoft,Alco Holdings,CNOOC and Xtep received – Track my stocks webpage updated.

15th September 2010

Performance update after interim earnings results of the portfolio's holdings.

All my companies have announced their first half year results and provided their outlooks for the rest of the year except Chaoda Modern which will announce next month.

Given results and subsequent developments,my portfolio has appreciated so far by 11% in 2010 while stockmarkets have pretty much remained at the same level as at the beginning of the year.

Since launch of the website in the summer of 2008,my portfolio has appreciated 41%,still below the peak of 46% which it reached in April 2010 but given first half business results and outlooks for the remainder of the year,I expect my portfolio to continue to appreciate in excess of the market and the
vast majority of capital funds
.
 

5th September 2010

Tianda Oil Pipe sold at HK$2.74 - Track my stocks updated.

Dividends from Bosideng,SK Telecom,Noble Corp,AFLAC,Intel and Visa received - Track my stocks webpage updated.

I exited out of Tianda due to its results indicating that it did not command the pricing power that management was portraying to justify its capacity expansion.While revenues grew in excess of 50%,its earnings declined thus not meeting my expectations and I exited out of the stock.

17th August 2010

Who on earth is advising clients to buy US government bonds?

With 2 year treasury bonds yielding just 0.49% and 10 year treasury bonds yielding 2.56%,US government bond yields are at their lowest for 20+ years (if one excludes the yields during the depth of the financial crisis of 2008/9).

The US bond market is priced as if deflation is going to happen over a number of years.

US government measure of core inflation excludes energy and food which is a bit like valuing a car without the engine or its brakes.Food and fuel are major factors and as everyone knows,can consume 20% or more of people's disposable incomes.

Having had dim sum on sunday,I noticed that prices at my favourite Cantonese restaurant had risen 6.7% so I can confirm that food inflation is not going away anytime soon.

Given that the "factory to the world",China has recently supported 20%+ rises in wages for workers in the manufacturing industry,all those goods in the past 20 years which have been kept historically low to Western consumers due to their outsourcing to China,will soon see rises in their prices.

Given the sheer amount of monetary easing that the US Federal Reserve has made to prevent the US economy from falling off the cliff due to its overleveraged banks,inflation is a pretty safe bet to happen over a multi year period than deflation.

Maybe it is the lemming like behaviour of investors chasing the winners of yesterday,thinking that they will be the winners of tomorrow (bonds outperformed equities over the past decade).

Investing is all about business fundamentals,economics 101 and PRICE!

The same institutions and investors that bought Microsoft 10 years ago at price multiples of 60,is now shunning the stock at a price multiple of 11 despite its annual earnings having tripled during the past decade.The same institutions and investors that bought Intel 10 years ago at earnings multiples north of 50 are shunning the stock with an earnings multiple of 10 and a dividend yield of 3.24%.The same institutions and investors that were happy to pay multiples of 20 in United Health are not willing to pay 10 while the company's annualised earnings have grown nearly 600% in the past decade.

The odds of investors losing money when inflation is factored in on US treasuries compared to making gains in Microsoft,Intel and United Health are odds that I am quite happy to take on (Microsoft,Intel and United Health represent 15% of my investment portfolio).

As per the empirical data on my blog dated 24th March 2010,confirming that the vast majority of investors missed the stock market rally of 2009 due to redemptions in equity funds and subscriptions to bond funds,it appears that investors will repeat the same mistake with large cap US equities in 2010.

 13th August 2010

Dividend from Banco Santander received - Track my stocks updated. 

 

24th July 2010

Opened another new position in Visa at US$74.86 - Track my stocks updated.
Dividends from Flowserve and ABB received - Track my stocks updated.

It is only in markets like these that one gets the opportunity to buy world class businesses at discounts to their intrinsic value.

While I would not say that Visa's current price is a bargain,it is a fair price to pay for a wonderful business franchise whose future growth will exceed that of its past.

Visa is a stock that I would not hesitate to make 12% of my entire portfolio if fear and panic returned to the market and irrational selling re-occurred.

I will not go into too much detail about its business since it is a company most people know.Suffice to say,Visa operates the largest retail electronic payment network in the world and has the largest network in terms of branded credit and debit cards in circulation,in transactions, and in total volume.Visa earns its revenues by providing the information and resources to complete transactions amongst the customer, the merchant and their respective banks, collecting a fee based on the number and dollar value of transactions that it processes.Visa runs a "capital light" business since the banks take responsibility for the credit and potential risks associated with it.

Its appealing characteristics are worldwide recognition of its brand,its total dominance in secular growth trends in cashless transactions,electronic commerce and globalisation of markets,a capital light business model,a "toll" type of business(Visa gets predictable recurring revenues and cashflows for use of its licenses,network and technology),low and relatively fixed operating costs,where growing sales volumes is leading to exponential rises in profits,exposure to the growth of emerging markets banking and domestic consumption which are still in a relatively early,growth stage.

Some analysts view Visa as part of a duopoly with Mastercard but from my experience of living in the UK and in Asia,Mastercard is very much a minor player compared to Visa.Mastercard simply does not have the heft and brand recognition of Visa and is a distant number 2 to Visa outside the US.According to the Nilson Report in April 2010,Visa had 64.79% of the global market share of credit card transactions

During its last fiscal year ending 3oth September 2009,it had the power to raise prices,grow revenues in the double digits and increase net profit margins to 35%.This was during the time of the worst credit crisis since the great depression and deepest global recession since the second world war.Visa is on target to complete its current financial year by a further increase in revenues of around 15% and in earnings per share by over 20% and despite the weak economic recovery,depressed consumer spending in major developed markets and financial and economic risks in Europe,Visa's management feels comfortable with the company's business fundamentals to forecast a further double digit increase in revenues and 20% increase in earnings per share for fiscal year 2011.

Given Visa's financial model,an increase in revenue of 10% is likely to translate to an increase in earnings in excess of 20%.Visa's addressable market combined with secular trends for cashless transactions and electronic payments indicate that Visa can easily double its earnings over the next 5 years,if not earlier.

Given the 22% decline in its share price over the past 3 months,Visa is being valued at a reasonable 20 times earnings (for its financial year end of September 2010).

Visa has settled most of its litigation issues and has made adequate provision for its remaining cases (US$1.6 billion).It has minimal debt and its non US revenues still make up less than half its business.

Given the reorganisation of the management of Visa when it went to IPO three years ago,a greater focus has been given to costs and in addressing underserved markets (both in terms of countries as well as payment services such as prepaid debit cards).This has led to a doubling in sales and a four fold increase in earnings.This hyper growth is behind it but Visa is part of a rare breed of large cap,blue chip companies with little competition,huge and sustainable economic power,serving segments of the market with substantial secular growth still ahead of it.

Visa is a stock that one can hold at current prices,buy more during panics and hold for years,knowing that the probability of double digit,compounded annual returns is high.

Visa would be classified as a Philip Fisher type of growth stock where the qualitative characteristics of the business,influence the investment decision far more than hard,quantifiable tangible assets.

The number of stocks in my portfolio now adds up to 27.It is still a highly concentrated portfolio compared to other portfolio managers but as I said before,my investment philosophy is equally influenced by Peter Lynch as that of Warren Buffett.

 

17th July 2010

Added to my position in Noble Corp at US$30.95 - Track my stocks updated.

Due to the US moratorium in deepwater drilling in the Gulf of Mexico,Noble's share price has declined 25%.

Noble generates 22% of its revenues from US shallow water and deep water drilling in the Gulf of Mexico.While it has no financial exposure to the BP explosion,it is being affected by the 6 month suspension.

30% of the US's oil requirements comes from the Gulf so while regulations and supervision of deep water drilling will be tightened,the US will have little option but to recommence production again in the beginning of 2011,at the latest.

During the sharp decline in offshore drilling company share prices,Noble acquired Frontier drilling and with the Frontier acquisition,concluded new contracts with Europe's biggest oil production company,Shell.

The net effect of this is for Noble to increase its deepwater drill ships by one third (to 24),increase its order book from US$6.9 billion to US$12.9 billion and become the second largest offshore oil driller globally,behind Transocean.

Its acquisition of Frontier will be cash flow positive immediately and earnings per share positive at the beginning of 2011.Given that Frontier was privately held,it is difficult to ascertain how cheap,Noble bought the company for but the fact that it is going to enlarge Noble's cash flows and earnings so quickly,indicates that the US$2.16 billion purchase price represents a very good deal.

Noble was criticised for not taking on debt and doing acquisitions when oil prices were going to US$150 and the oil drilling sector was "hot".It has always been financially conservative which has led it to not only survive but to now become the second biggest company in its industry.Noble has been around for 90 years and due to its discipline in only making acquisitions at the right price,it has been sitting on its cash for a number of years until the right opportunity came.While it could not conclude any deals during the height of the financial crisis,the uncertainty caused by the BP oil explosion,has finally led to the Frontier deal occurring.

Over the last 10 years (except for in the peak of the financial crisis panic),Noble has never been cheaper from a price to earnings ratio and a price to tangible book value ratio.Even with the moratorium and decline in drill rates,2010 price earnings ratio will still be around 6.5.Noble,due to the nature of its business,generates significant cash flows and its annual return on equity has averaged 17.5% over the past decade.After the acquisition,its debt to equity ratio will increase from 11% to 28% but due to Noble's order book,Noble could revert this back to 11% in 3 years if it considers it to be an appropriate use of its cash.

Noble knows how to survive and grow prudently in a highly cyclical business.Its price and valuation reflects a pessimistic time for its industry and the underlying qualities of Noble are simply not being factored in. 

11th July 2010

Opened a new position in China's Bosideng at HK$2.20 with short term capital - Track my stocks updated. 

I continue to focus on China because I expect emerging markets in Asia will outperform North American and European stock markets in the coming years.

Why I expect these emerging markets to outperform are due to the likelihood that their economies will continue to experience higher rates of economic growth with accompanying rises in living standards for their respective populations.

Emerging markets in Asia have been living within their means for the past decade and in general,have healthy fiscal and trade surpluses.It is a complete role reversal with developed economies and with Europe.

With respect to China,its government recognises that it needs to have a better balance between domestic consumption and exports to drive future growth.As a result,the government's policies are now to stimulate consumption by managing wage growth and developing social welfare to foster greater spending by its people.China has the highest savings rate in the world amongst the largest economies (around 30% to 40% of income) and given the size of China's economy (according to the latest GDP figures,it is now the second largest economy in the world),the potential for growth for Chinese companies linked to the country's domestic consumption,remain the most significant.

The trick is to find such leaders whose stocks do not have high price earnings multiples already reflected in their valuations due to their likely,superior growth rates.

I have been tracking Bosideng for 18 months.Even when it was valued at HK$1,the stock did not attract me,due to its business model being akin to a "one trick pony" with little financial proof that its brand had pricing power in the highly competitive and price sensitive,mass retail market in China.Indeed due to inventory mismanagement in late 2008 together with highly aggressive pricing by its competitors,its sales declined 20% and its profits declined by 33% in 2008/9.

Bosideng has been China's leader in winter coats and jackets for 15 years and has consistently maintained market share of 38% (its nearest competitor has around 8% market share).Since its focus had simply been on winter apparel,Bosideng ended up being a highly seasonal and cyclical company which did 70%+ of its business from October to March and pretty much treaded water for the rest of the year.Moreover it was also hostage to the vagaries of the weather.

The reasons why I am now investing in Bosideng are multiple fold.In their latest results
announcement on 7th July 2010,they proved that their brand and their winter products had pricing power as they raised prices without losing market share and increased gross margins from 45% to 50%.Secondly,their strategy of leveraging their brand and diversifying into regular menswear clothing led to new revenue streams with net profit margins of 20% which did not exist before.This currently represents only 7% of their existing revenues today but orders for its menswear are growing fast with another 57% increase in the first quarter of 2010.Bosideng has also launched "Bosideng Vogue",a new metropolitan fashion brand in March 2010 to target China's young upwardly mobile,urban professionals to drive further growth. 

Bosideng is a highly visible and recognised brand in China.It has over 5,600 retail outlets in 65 cities across China.It intends to leverage its network to position its menswear products in 20% of such locations by the end of next year.It has signed up acclaimed Chinese music star and actor,Leehom Wang to be the face of its menswear collection.

Bosideng has also set up a joint venture to manufacture,market and sell,hip hop mogul,Jay Z's fashionwear company,Rocawear,in Hong Kong,China and Taiwan.Bosideng plans to open another 300 outlets by 2013 to support this further growth initiative.

Bosideng is currently undergoing a successful business transformation - for the latest financial year ended 31st March 2010,revenues jumped 34% to US$840m,gross margin expanded 5% to 50%,pre tax net profit margin rose to 22% and its earnings per share increased by 46%.Bosideng has no debt and has surplus cash,the equivalent of HK 59 cents per share.Its return on capital is 15% and its operating cash flow has run at the equivalent of 30% of sales in the past two years.If one deducts Bosideng's net cash per share from its share price,it is currently being valued at 10 times trailing twelve month earnings.

Bosideng's strategy of moving from a "one trick pony" into a mainstream,leading Chinese consumer apparel brand is paying off and if they can continue to successfully execute on their strategy,shareholders will be rewarded with a rerating of the company's price earnings multiple,combined with higher earnings per share.

Due to the cash rich nature of its business,its dividend payout is currently at 90% of its earnings but as long as its earnings growth continues and its capital expenditure is controlled,its current 5.7% dividend yield based on today's share price (net of tax for Hong Kong investors),is likely to be maintained.

I have also deliberately gone into short term capital to make this investment (capital I may need in the next two years), as I expect to exit some of my current holdings in the coming year either due to valuation or likely permanent deterioration in business value (as could be the case with Alco).

6th July 2010

Sold half my holding in Alco at HK$2.48 to open a position in Guangshen Railways at HK$2.71 - a tale of two cheap stocks;Track my stocks updated.

When I opened a position in Alco,I mainly bought it for its balance sheet.Alco is cash rich,has a net current asset per share of HK$2 per share and is valued at approximately its tangible net book value of HK$2.58 per share.This,combined with the fact that its management had successfully steered the company through fiercely competitive environments in the past and continued to make respectable profits (and provided a generous dividend of two thirds of its annual earnings),led me to build a position in Alco of 5.46% of my total portfolio.

The downside to Alco however,which is reflected in its low market valuation,is that it is in the low margin electronics manufacturing industry in China where it does not command pricing power,where most of its business is dependent on consumer demand from the US and its negotiating power with major customers such as Walmart is weak.This combined with recent headwinds such as the future appreciation of the yuan and significant wage rises of 20% or more in its industry,indicate that its earnings are likely to deteriorate unless it can switch its current business strategy to higher value and higher margin businesses.

While labour costs represent only 6% of Alco's cost of sales,the fact that its operating profit margins are only 4% means that such major hikes in wages will have a disproportionate impact on earnings.Time will tell if it can continue to take market share from competitors who do not have the financial strength that Alco does,to drive volume and economies of scale to offset rising labour costs but given that Guangshen Railways has now become even cheaper than Alco from a price to tangible net book value basis,I am switching out of half my position in Alco.

Guangshen Railways is a more sustainable company in a stronger industry,suffering from less competition,commanding operating profit margins of around 15% and benefitting from positive tailwinds in the appreciation of the yuan,China's development of railway infrastructure and high speed trains.

Guangshen Railways is one of China's best managed railway operators and has been listed in Hong Kong and the US since 1996.It owns the tracks and trains connecting Shenzhen and Guangzhou,China's third and fourth richest cities with populations of 12.6 million and 8.3 million people respectively.It is the first,wholly fenced railway in China with four parallel lines which allows passenger and freight trains to run on separate lines.Through its partnership with Hong Kong's MTR,it operates Hong Kong's through train passenger and freight services into mainland China and due to Guangshen's Guangzhou - Pingshi railway link,it also owns and manages the southern link connecting Beijing and the Northen Cities of China with Guangzhou.

Guangshen Railways runs pretty much a monopoly on two of China's top 5 economically, most important railway links and given the market sell off which has been more pronounced in China than other global markets (the Shanghai market is the second worst performing market after Greece in 2010),Guangshen Railways is now valued at a 33% discount from its historical price earnings multiple and a 25% discount from its tangible net book value(similar to that during the peak of the panic in the great crash).Its economic value to EBITDA has shrunk to 6 which is a 35% discount from similar companies listed in North America and its price to book value is now 50% lower than its Hong Kong peer,MTR and 63% lower than its North American peers.

Guangshen Railways share price is similar to that of 2005 while its profits during the past 5 years have doubled.Its current price earnings multiple is 12 while comparable companies in North America are being valued at multiples of 15.Moreover,the company has barely any leverage in contrast to North American railway operators whose long term debt to equity ratios average 60% -Guangshen Railways gearing ratio is just 9%.

Its dividend yield after tax for Hong Kong and US investors at current exchange rates,is 3% and sustainable given that its pay out ratio of earnings and free cash flow after capex, is around 47%.

I expect increases in operating earnings from rises in passenger volumes and freight over the next three years to be somewhat offset by the increase in tax rates from 20% to 25% but this should not discount the fact that Guangshen Railways' growth potential is still higher than its peers in developed economies whose price earnings multiples are all substantially higher.

I view investing in Guangshen Railways a play on the following macro economic trends

1)continued economic growth of China and its most prosperous region,Guangdong province
2)the revaluation of China's currency
3)continued growing demand for infrastructure in China
4)continued favourable economics for railroad transportation,both for freight and passenger traffic
5)further integration of Hong Kong with Guangdong province

Its current abnormal valuation of 25% below tangible net book value combined with the likely appreciation of the yuan of around 22% over the next 5 years,gives the company a likely 63% appreciation in the value of the stock simply from its net assets alone;that together with the 3% annual dividend yield over such a time period,will generate a compounded annual return of 12% on Guangshen's stock.

When Guangshen Railways' monopoly position,successful management track record and strong,predictable cash flows are also taken into consideration,the stock meets my portfolio objectives for long term,compounded,double digit annual returns at low risk.As a consequence,I have rotated part of my capital from Alco into Guangshen Railway.

2nd July 2010

Globalstockinvestingtoday.com's portfolio appreciates 30.7% in two years,outperforming stockmarkets,equity and hedge fund indices worldwide by an average of 39%.  

Track my stocks webpage updated with 30th June 2010 stock prices.

Globalstockinvestingtoday portfolio's compounded gain per year is currently tracking at 14.3%.

According to the Credit Suisse Tremont hedge fund index for long/short equity portfolios,the annual return from hedge funds is a negative 8.5%.For "global growth opportunities" hedge funds,the return is a negative 4.5% annually and according to Eurekahedge's Asia hedge fund index,hedge funds exposed to Asia only,returned a positive 4.7% per annum.  

The result so far indicates that my skills in business analyses,in due diligence and in the allocation of capital as well as my knowledge of Asian companies particularly Chinese companies,exceeds those of my global peers in the market and in the wider fund management industry.

The typical global equity fund manager largely focussed on European and American stocks while a substantial number of Asian fund managers focussed their weightings on financials,commodity related stocks and exporters.In contrast,I focussed my weighting on companies with strong exposure to the global economy with a bias towards Asia,on companies that dominate the technology sector and on companies exposed to the growth of Chinese domestic consumption.

It is still too early to determine my abilities but the fact that only Hong Kong's most respected and most successful fund manager,Cheah Cheng Hye of Value Partners and his investment fund is exceeding my performance after two years (his classic fund's return is 35%) indicates that this website and my investment decisions are definitely worth taking seriously.

Time will tell,where I fit in but the results are encouraging.Stocks over the long term will offer the highest return of any asset class but short term results of any portfolio (6 months to one year) will be driven more by market sentiment than fundamentals of the underlying businesses.

Success is only gained by ability,experience and hard work.Learning from mistakes and intellectual humility are critical values in managing capital -ironic,when one considers the outsized egos that the investment industry tend to attract.

If I was an investing genius,I would not have been sloppy in my analyses on America Movil,Garmin,Esprit and Nokia and would have avoided these stocks.Such avoidance would have improved my performance by 13%.If I was intellectually more disciplined and delved deeper,I should have opened positions in American Express when it was below US$10 and Apple when it was $85 - with 2% positions in each and improved my performance by another 10%.

The fact that I made these mistakes,proves that I am not brilliant.The fact that wealth managers,brokers,hedge funds and mutual funds made far more mistakes than I did,reveal that my comparisons and standards are not with the ordinary.

I still stand by my original target of 12% compounded annual growth over the long term which Bernie Madoff attracted billions of dollars of capital by.The irony is that to achieve such targets over multiple years,the investment performance will likely follow a similar roller coaster ride but with each cycle being higher than the prior one - the idea that 12% can be achieved by a smooth,consistent line up is pure nonsense.

I will write in a separate blog about my outlook for the rest of the year and for future years.

30th June 2010

Dividends from China Agri Industries and Becton Dickinson received - Track my stocks webpage updated.

23rd June 2010

Dividends from United Health and Chow Sang Sang received - Track my stocks webpage updated.

21st June 2010

Value Partners are now Asia's largest hedge fund manager as ranked by Institutional Investors Hedge Fund 100.

Hong Kong's Value Partners have finally emerged as the biggest hedge fund manager in Asia due to the appreciation of its equity funds and further injections of capital by institutional funds,attracted to its track record.

Value Partners deserve this position.

Cheah Cheng Hye,the founder and chief investment officer who I first referred to in my blog on 1st September 2008,does not promote himself,you do not see him on CNBC or Bloomberg,he does not set up marketing events to attract "high net worth" individuals and funds,he does not advertise his products by claiming "gains of 100% in 6 months or less",he is not a trader or use derivatives to appear "clever" and he follows the same old fashioned stock picking skills and capital allocation principles that I follow.

He was a modest financial journalist before he set up Value Partners and his background was not glamorous.His skills lay in superior business analysis.

The irony is that his fund is the most successful in Hong Kong,a market more associated with traders than long term investors.

His flagship Classic Fund is one of the funds that I benchmark my performance to and it will be interesting to see how I compare,when I publish the second year results at the beginning of July.

20th June 2010

Dividends from Infosys and Microsoft received - Track my stocks webpage updated.

5th June 2010

Opened a new position in China's Tianda Oil Pipe at HK$2.93 net of charges and halved my holding in Superior Energy Services at US$20.02 - Track my stocks updated.

Dividend from CNOOC received - Track my stocks updated.

Since BP's oil explosion in the Gulf of Mexico on the 20th April,the entire global oil equipment and services sector have taken a beating whether they are exposed to the Gulf of Mexico and the US market or not.China's Tianda Oil Pipe,largely due to tariffs imposed by the US last year,has little exposure to the US market but its share price has declined 28% while Superior Energy Services which has 44% of its business based in the Gulf of Mexico,has declined 20%.

I am reducing my weighting in Superior Energy and taking a 26% loss from my weighted purchase price to diversify my regional exposure in the oil services and equipment sector from the Gulf of Mexico to emerging markets.

Tianda Oil Pipe was brought to my attention by an ex colleague in Hong Kong when it was priced at HK$4.28 but while it was relatively attractive at that price compared to its future growth,I did not want to increase my portfolio weighting further to energy due to the slow economic recovery.

Given Tianda's subsequent price decline,at HK$2.92,its price earnings multiple based on likely 2010 earnings,has now been reduced to 8. Tianda completed its new production facility at the end of last year which increased its production capacity by 85% and improved its product mix to higher margin,higher grade speciality pipes.

67% of Tianda's sales are to China's domestic oil exploration companies and 33% are exports of which approximately 75% are in emerging markets,such as the Middle East and South East Asia.

Tianda operates a "cost plus" pricing model which greatly reduces its margin risk on the vagaries of steel prices and indicates pricing power in its field.It has been operating for over 17 years and managed to successfully scale the business from producing 15,000 tonnes to 350,000 tonnes last year and to now having the capacity to produce 650,000 tonnes.Tianda have roughly doubled revenues and profits in the last four years and is on course to perform similarly in the next several years.

Given a share placement at the beginining of the year at HK$4,its gearing ratio is 17% and its financial position is strong.

Because Tianda is a small cap (revenues US$300m,market cap US$346m),its shares are not so easily traded and the chairman owns 80% of the stock.The executive board represents just 3 members so again there is the risk of corporate governance issues as well as the risk of the chairman depressing the stock by putting a large tranche for sale.The fact that Templeton Asset Management owns a near 10% stake in the company alleviates to some extent,corporate governance risks.Moreover a number of senior management including the chairman and General Manager have been with the company for 17 years and have not acted in conflict to the best interests of the business and its shareholders.On the contrary,the chairman has been an active buyer of the stock in the past year including at prices similar to that of today.

Given oil well pipes are a speciality business and need to be of a high specification,they are not commodity products.Once Tianda makes a sale,its tends to retain the customer for future sales since reliability is a key priority for its customers and the pipes are used in highly stressful conditions such as under the sea or in the desert.This is borne out by Tianda's results where its net profit margins are consistently in excess of 10% and its average return on equity in excess of 20%.

Indeed,the company appears to backed by China's government by being recognised as a "new and high tech" enterprise which gives it significant tax benefits (15% corporate tax rate compared to 25% in general).It also follows the trend of China's government in trying to stimulate enterprises which offer higher value and move away from the low cost,low value export model that has fuelled much of its growth over the past twenty years.

Given the world wide sell off that is going on,Tianda is currently being valued at 1.3 times tangible book value - in the parameters of a value stock but with good growth prospects in a reasonably strong margin industry.

I expect that it will return back to its placement price of HK$4 this year with good capital appreciation prospects in future as Asia commands more energy exploration and consumption.It pays a dividend based on a pay out ratio of 20% of its diluted earnings which gives a dividend yield of 1.7% but Tianda Pipe is still essentially in its expansionary phase so I would not expect the yield to increase significantly as it reinvests its excess cash back into its operations.

With regard to Superior Energy Services,it has not had much luck since the economic crisis - just when things were turning around,the BP oil disaster in its core market will cause a slowdown in the recovery of its business.It is diversified internationally and in the US land market for natural gas but I expect this to be a dead stock for the next 6 months as the US begins new legislation governing its oil and gas industry.

While I like what I have seen and read about Barack Obama,one can not help but notice how much of the US economy is coming under government control.From the arguably,much needed healthcare reform (which constitutes 18% of the US's economy),to the financial industry (where reform and stronger regulation is clearly needed) to now the US oil and gas industry - these 3 pillars are at least one third of the country's economy and are now open to the vagaries of government policy.

2nd June 2010

Opened a new position in Spain's Banco Santander at US$9.94 net of charges - Track my stocks updated.

Dividends from AFLAC and Intel received - Track my stocks updated.

While Bank Santander may have originated in Spain,it has successfully evolved into a regional European and Latin American banking powerhouse.

Its strong risk management culture has led it to avoid the financial derivatives that caused many of its European counterparts to collapse.Indeed it took advantage of the financial crisis by buying solid banking assets on the cheap such as ABN Amro's Brazilian operations,UK's Alliance & Leicester,Bradford and Bingley and the US's Sovereign Bancorp.

The bank's conservatism and focus on cost management has also made it one of the most profitable and efficient banks in the world with a cost to income ratio of 42% (20% lower than most of its global,developed market peers) and returns on equity in the range of 13% to 15%.

To gain further understanding of its business and financial achievements and management culture,I recommend that you read the Time article,"Santander - the most boring bank in the world" in the enclosed url,
http://www.time.com/time/magazine/article/0,9171,1951914-1,00.html

Latin America now represents 35% of Santander's profits,of which more than 20% is being generated in Brazil where it is now one of the big 4 commercial banks.The UK represents 16% where,due to balance sheet weaknesses of its competitors,Santander is growing and taking market share at strong profit margins.

Only 24% of Santander's profits is now being derived from Spain.Brazil is likely to overtake Spain this year and become Santander's largest profit generator.Santander's subsidiary and its rivals in Brazil,Banco Bradesco and Itau Unibanco,are all valued at 3 times book value.

Historically Banco Santander due to the quality of its operations,market position and management,commanded a price to book value of 1.5 to 2 and a price earnings ratio of 18.I suspect given growth in Europe will be anemic compared to the past,Santander's valuation should now be lower than such historic numbers but given its sizeable exposure to the growing, developing markets of Latin America(particularly Brazil),it should retain some kind of premium such as 1.3 times book or a price earnings multiple of 12.

Given current market fears about Spain,Banco Santander's valuation has declined by 40% this year to 0.97x book value and a price earnings multiple of 8.3.

So the real questions are

1) how much exposure to sovereign debt does Banco Santander have in Spain,Italy,Portugal and Greece?

2)how much exposure does it have to the bombed out construction and real estate industry in its home market of Spain?

3)how much impact will these have on its capital ratios and book value?

Santander's exposure to sovereign debt in Spain,Portugal and Greece is 27.5 billion euros compared to its total assets of 1.1 trillion euros (2.4% of its asset base).Santander has negligeable exposure to Italy.
It only owns 200 million Euros of Greek bonds which is immaterial to its balance sheet but 3.3 billion euros of Portuguese debt and 24 billion euros of Spanish government bonds.
Spain is no Greece and Spain's economy was far worse in 2009 than it is today.Santander not only survived the worst recession in Europe since the second world war in 2009 but generated earnings of 8.9 billion euros.

Santander's core capital is approximately 80 billion euros and its Tier 1 capital ratio is 10.3% so even if Spain and Portugal seek debt rescheduling and its bonds experience a significant decline,Santander's capital ratios should remain strong and within the global banking regulatory requirements.If the above bonds declined by 40% (an extreme scenario),Santander's book value would also only decline by around 13%.Such calculations exclude Santander's continuing earnings from its global operations,which would partially offset such a decline.

Santander's loan exposure to the real estate industry in Spain is 41.4 billion euros compared to total customer loans of 682 billion euros,net of provisions.This represents 6% of Santander's total loans.Its actual real estate problem loans in Spain,due to its conservative lending practises,are far lower than other banks at 8% (the typical real estate default risk in Spain is nearer 16%).

Santander has already assigned 18.9 billion euros as loan loss provisions on its balance sheet including 6.7 billion as a general provision for non specific defaults.2.3 billion euros of the general provision is assigned to Spain and another 1.5 billion euros for the rest of Europe.Given that Santander's foreclosed properties have typically been sold at 28% loss to book value,Santander's existing provisions appear to be sufficient to cover continuing weakness in Spain's real estate market.

So in summary,Santander is well capitalised to withstand the fears of a sovereign debt crisis in its key markets of Spain and Portugal.Its strong management team and conservative risk management culture not only withstood but gained from last year's financial crisis.The current indiscriminate selling of stocks particularly relating to Spain and Southern European banks,is offering Banco Santander stock at a significantly discounted price compared to its fundamentals.

To quote the chairman in Santander's annual report for 2009,"for the third year running,Santander's profit was among the top 5 banks in the world,underscoring the recurrence of its business and the success of our management model."

Based on a sustainable earnings payout ratio of 57%,Santander's dividend yield alone is 7.2% at its current share price (5% yield for Hong Kong investors after taxation,at a Euro/US$exchange rate of 1.2 to 1).Its problem loans and assets are well defined in contrast to the likes of Bank of America,Allied Irish Bank,Fortis and other European and American banks which practically collapsed due to their poor risk management controls over derivatives and sub prime mortgages.

Given fear pervading the market,Banco Santander could continue to decline further in the next couple of months but when rationality returns,I expect a sharp rebound in the stock price to a range of US$13 to US$15.

Banco Santander has been added to the portfolio as a long term holding with a view of further accumulation if prices decline further. 

1st June 2010

How is my portfolio shaping up before results are published at the beginning of July for the second year?

Even with the 10% correction in May,Globalstockinvestingtoday.com's return in calendar year 2010 is still a positive 2% outperforming the global markets which have all declined.

Since launch,the portfolio has currently appreciated by 31.58% while stock markets on the whole have declined by an average of 6% (Europe is down 20%,US is down 10%,Asia Pacific is down 8% while Brazil is actually up 12%).

 

Given stock market volatility,it will be difficult to forecast where my portfolio will stand by the end of this month to make the two year comparison but I believe that the market is too pessimistic on my portfolio holdings given company results and outlooks,their respective competitive postions and the quality of the management.

I believe my portfolio on the whole is still undervalued mainly due to

1)the BP oil spill which has led to all oil services stocks being heavily discounted (I own Noble Corp and Superior Energy Services which are 12% of my portfolio)

2)NasdaqOMX and Prosperity Reit are unfashionable stocks but represent good value in terms of price to future long term growth rate or price to asset value (16% of my portfolio)

3)financial institutions are being discounted again due to European debt fears (Standard Chartered and AFLAC whose businesses are primarily in Asia and represent 15.7% of my portfolio).

4)Intel,Chaoda Modern and SK Telecom are not being rationally valued based on fundamentals (all Korean stocks took a dive in May due to North Korea torpedoing a South Korean ship!) - these stocks represent 16.87% of my portfolio.

I expect most of these stocks to be strongly revalued in the next two to three years if their underlying businesses continue to perform as they have been doing for many years.

Having said that,I expect future stock market growth to be lower than the long term historic average - the concept of 10% annual gains from stock markets in general are unlikely as the developed markets particularly in Europe,experience slower growth than in the past due to massive financial and structural issues and global competition from Asia.

While the US has similar financial issues,it has nowhere near the same fiscal and administration complexities that Europe has,mainly due to the US being a single country.Moreover,the US has a strong track record of adapting to the times and being flexible;its companies and people tend to be highly competitive and transcend a single country mentality - something that many European countries still lack.

Developing Asian stock markets are likely to perform the strongest based on economic fundamentals and strong country financial positions but company corporate governance issues and domestic political risks will need to be tracked.

The performance of my portfolio continues to vindicate my business judgement particularly during times of great stock market stress,not only surviving the great crash of 2008 but taking advantage of it and by allocating a high percentage of capital to companies operating in developing markets in Asia.

Stockpicking now more than ever,will determine the real abilities of fund managers in the industry.Given the unprecedented crashes and corrections since I launched my virtual fund,I suspect that these will continue to be good times to demonstrate my abilities in investment due diligence,business analyses and capital management - my current performance is on a par with the number 1 investment firm in Asia - Hong Kong based Value Partners.  

26th May 2010

"The bet gets raised further - Globalstockinvestingtoday's 2010 portfolio gains are wiped out"

One thing people should realise when all stock prices fall sharply and so quickly is that the vast majority of experienced buyers are not buying but simply waiting on the sidelines to see how crazy things will get - most of them have already built out their core positions with long term capital but will not hesitate to use short term capital and margin if hysteria engulfs the market.

It is a bit like,I pitch the "end of the world" to gullible owners and see how scared and irrational they become so that they will sell their assets for a song.

We are not there yet and we may not get there in 2010 but it is always good to be strongly capitalised to "wait for the fat pitch".

I understand why people prefer to invest in property - it does not have the same volatility,accompanying media hysteria and impact on emotions that stockmarkets have.

22nd May 2010

The current stock market plunge - what to do?

Note that my sales in ABB in April before the sharp market fall this month,means that only long term capital is now tied to my stock portfolio.The overall results and business outlook of my portfolio holdings remain good so I will continue to sit out this sharp market correction and "roll with the punches thrown by the market".

If you are running a large investment portfolio,it is virtually impossible to manage it by selling during corrections and buying back during recoveries.The probability that you can predict when to buy back is near impossible.Instead you are likely to end up being the patsy by selling in the first place,only to see stocks recover and rise ever higher in the future,due to earnings.

This obviously precludes manias when stocks are priced at nosebleed valuations such as the tech bubble in 2000 or when the entire international banking sector goes into virtual "cardiac arrest" such as in October 2008.

This sharp sell off is not quite a scam (sovereign debt is a legitimate worry)but it is more akin to professional poker players who pile on the pressure by raising their bets to see how many weaker hands fold.That is why it is really important to know how your "cards stack up in the game".

The "shake out" that is going on,has pretty much wiped out the compounded gains to my portfolio in 2010 but I view this to be temporary,given business results and outlooks of my portfolio companies.I am still ahead in 2010 while the global markets have all declined,led by Europe and Asia which have all seen falls on average of 10%.

I repeat retail investors who view themselves as "traders" are at a huge disadvantage compared to institutions such as Goldman Sachs.If you have been tracking stocks of companies that you understand,this is likely to be an attractive point to open a position but be mentally prepared for further short term declines.

The only way that I can consistently beat the stock market and play the game where I have an edge is by applying long term capital (so that I can stay in the game far longer than most hands) and in superior business analysis so that I know the value of the cards that I have,better than the majority of the other players and can bet accordingly.

From my perspective,when stocks are valued at between 30 and 40 times earnings and their earnings growth rates indicate 10 % or less,then that is a good time to sell. When stocks are valued at 30% or 40% below their price earnings ratios' historical averages and their underlying long term growth rates remain intact (provided they are not overburdened with debt),then that is a good time to buy.

 18th May 2010

Dividends from Standard Chartered Bank and Xtep International received - Track my stocks updated.     

30th April 2010

Dividend from Prosperity REIT received - Track my stocks updated.

22nd April 2010

Significantly reduced my holding in ABB at US$20.18 net of charges after earnings results today -Track my stocks updated.

ABB has now become a minor holding and my portfolio weighting in industrials has nearly halved in the past month.

ABB's power products and infrastructure related businesses are being hit by pricing pressures from Chinese and Korean vendors.This,combined with a still relatively slow economic recovery in developed markets,is continuing to undermine ABB's profit margins.

Moreover the global economic stimulus packages with a focus on infrastructure have not benefitted ABB to the extent that I expected,largely due to political pressures from countries to buy "local".

16th April 2010

Must watch video interview on investing genius,Mohnish Prabai

http://www.forbes.com/2010/04/09/pabrai-buffett-munger-intelligent-investing-video.html

All the greats say the same thing - it is not about how active you are in the market,it is about how right you are.

Investing is not about the volume of activity,it is about sustainable compounded returns at low risk - volatility is only a risk if you use short term capital.

Interesting comments about technology companies - the biggest losses in my portfolio have come from the technology sector (America Movil,Nokia,Garmin) though I have now broken even on technology companies with the revaluation of Intel,Microsoft,Dolby and Infosys.


15th April 2010

Dividends from SK Telecom,Flowserve,Becton Dickinson and Esprit received - Track my stocks webpage updated. 

9th April 2010

Sold my position in Tsingtao Brewery,realising a 24% gain and added to my position in Prosperity REIT at HK$1.405 - Track my stocks updated.

Based on yesterday's 2009 earnings release,I was disappointed with Tsingtao's operating profit margin performance.

Given their volume increase,I expected a widening of operating profit margin beyond their gross margin improvements and this did not happen.Their distribution,general and admin expenses rose at the same rate as their revenues.

Fast growing drinks companies tend to have exponential rises in profits when volumes increase due to relatively fixed cost structures.Tsingtao's inability to do this given their elevated price earnings multiple (currently 40 times trailing twelve month earnings) is a clear danger sign for investors.

Barley costs from Australia,Canada and France make up nearly 15% of Tsingtao's production costs and the collapse in commodity prices in 2009,which led to a near 40% decline in the price of barley enabled Tsingtao to post strong gross margins .Barley prices however,are likely to rise by 25% over the coming couple of years as demand recovers and economies reflate.If we remove 2% of Tsingtao's gross margin improvement due to the abnormal price decline in the barley commodity market in 2009 together with the share dilution caused by the issue and subsequent conversion of share warrants,Tsingtao's normalised operating profit per share only increased by 10% compared to 2008.

So Tsingtao is in effect growing operating earnings by 10% and being valued in the market at 40 times earnings - too high a multiple for such a disappointing normalised growth rate.Tsingtao also cut its dividend by 45% despite its elevated earnings.Given that its dividend yield was below 1% to start with,raises further questions about their capital management.

Prosperity Reit's 2009 operating performance exceeded my expectations.Three perceived financial risks to their business were proved to be incorrect as gearing declined to 33%,occupancy rose to 97.4% and rentals from lease renewals increased 4.3%.The management has made prudent improvements to its real estate assets enabling further appreciation in the value of the properties which in the long run,will lead to even stronger tenant retention as well as the potential for further rent increases.

An example of how irrational investors are in Hong Kong can be seen by the contrast between property prices (commercial or residential) that are bought outright and those that are sheltered in a REIT.The value of Prosperity Reit's commercial buildings after its property loans are deducted,is the equivalent of HK$2.30 per share.Because property REITs in Hong Kong are still unfashionable and out of favour,the assets are currently being traded on the Hong Kong stock market for the equivalent of HK$1.40 - a 40% discount from its market value.At such a price,even with a further 10% decline in rental yield (worst case),the net annual yield would still be 7%.

So here is the deal,I invest in commercial buildings in Hong Kong at 40% discount to actual market value,have a world class property manager,continuing to enhance the buildings and tenant relationships and I get a net income yield every year of around 7% worst case.The loan to value ratio is 33% so there is little financial risk to the capital structure with the possibility of even better interest rate terms for the loan upon renegotiation later in the year since Hong Kong's interest rate policy is tied to the US.

While I have increased my weighting in Prosperity Reit in my portfolio - the fact that it is not a fashionable stock will likely mean that it will underperform the broader market in the short term but as highlighted before,markets do not stay irrational forever and I expect the stock to be revalued closer to its book value over the next several years.

So I expect a 50% appreciation of the stock while I collect an annual 7% dividend yield over the coming several years - I like that kind of deal! 

7th April 2010

Reduced my weighting in ABB,realising a 9.2% gain at US$22.07 net of charges -Track my stocks webpage updated.

I expect a rather slow economic recovery and am reducing my weighting in industrials as a result.

I expect ABB to generate higher earnings over time during the new multi year economic cycle partly as a result of its stringent cost cutting during the recession.However its exposure to the US construction industry where I now expect flat to no growth until 2012,will limit somewhat,ABB's earnings growth rates this year and next.

ABB will remain a core holding for the very long term (provided it continues to meet my expections of its business)but I have reduced my portfolio weighting on the stock due to valuation.

6th April 2010

The truth about investment website,Motley Fool.

The Motley Fool (www.fool.com) is one of the most widely followed investment websites in the world,claims to follow the philosophies of the investment greats and regularly criticises Wall Street's short term focus as well as the inferior returns and fees of mutual funds.

It has over 100,000 subscribers to its investments and newsletters,charging an annual subscription ranging from US$99 to US$299 depending on newsletter and investment service.

As I hope people appreciate given what has happened to stock markets over the last two years,sustainable investment returns are determined by the quality of business analyses and the depth of one's thinking.Over time,investment returns will correlate to the quality of one's work.

The below are the total returns since the launch of each of Motley Fool's investment services (excluding subscription fees) as at 31/3/2010.

Motley Fool Date of Launch Number of Years Total Absolute Return At 31/3/2010
Stock Advisor March 2002 8 62.8%
Hidden Gems July 2003 6.7 10.6%
Income Investors September 2003 6.5 4.1%
Inside Value September 2004 5.5 9.3%
Rule Breakers October 2004 5.5 24.8%
Global Gains October 2006 3.5 8.2%
Million Dollar Portfolio October 2007 2.5 -16.3%

I leave you to draw your own conclusions based on their low total returns.As is often the case in the investment industry,marketing,promotion and activity have little direct relation to actual investment performance and often obscures the actual abilities of the people involved.

In this business however,the gratifying aspect is that eventually,the market will always reward ability and substance and expose scam artists,"bullshit" artists,promoters as well as well meaning people who just aren't that good.

If you are a very good or exceptional investment analyst,you will be financially rewarded by continuing increases to your wealth though you may not get the recognition of your peers or even be understood by the wider public.

3rd April 2010

Globalstockinvestingtoday.com's portfolio appreciates in value by 12% in the first quarter of 2010 and 41% to date.

My portfolio's accumulated return is now higher than Value Partners' funds including their Classic Fund as well as their High Dividend Stocks Fund (both which have appreciated to 38% for comparable periods - the Classic Fund appreciating 4% in the first quarter of 2010).

Value Partners' High Dividend Stocks Fund was the winner of the Lipper Funds award 2010 in Equity Asia Pacific.

Value Partners is the number 1 investment firm in Hong Kong and has the best performing investment track record of any firm in Asia and my returns are not only comparable but for the first time,exceeding their performance.  

As I wrote when I launched this website in August 2008,this will be a very public record on exactly how good my professional abilities are in business analyses and investments and only time will tell exactly how high I rank in the industry.

So what has led to such an exceptional performance to date given stockmarkets since August 2008 have returned on average zero to 1%?

First of all,I sold China Huiyuan Juice (a gain of 168%) when Coke made an offer for the company and that combined with my exit out of Transocean before the financial meltdown (at no loss),freed up 12.6% of cash reserves for the portfolio (see blogs dated 29th August 2008,3rd September 2008 and 29th September 2008) which along with 8% of my long term capital held in cash,gave me a cash holding of 20% before the beginning of the worldwide bear market.

Secondly,I was willing to realise losses on certain stocks (America Movil,Garmin and Esprit) to free up more cash to the equivalent of 10.5% to accumulate positions in stronger and even more undervalued companies such as Microsoft,Infosys and Zijin Mining.

Thirdly,I recognised the severe undervaluation of the consumer sports goods market in China by buying Anta Sports and Xtep International,making them nearly 11% of my fund- (see blogs dated 26th August 2008,2nd March 2009,20th April 2009,6th May 2009 and 20th July 2009).I finally sold Anta Sports on 28th August 2009 for a 140% capital gain excluding dividends to free up some cash for future investments and I am currently holding a gain on my investment in Xtep International of 109% excluding dividends.

Fourthly,my analyses and actions on Standard Chartered Bank (see blogs dated 25th October 2008,8th December 2008,4th March 2009,5th March 2009 and 9th March 2009),making it my biggest portfolio holding at 11.87% were completely correct - currently Standard Chartered Bank has gained 66% from my weighted purchase price excluding dividends.

Fifthly,my understanding of the resiliency and vibrancy of what I define as the digital society led to my portfolio weighting in Dolby,Intel and Microsoft becoming 18% of the total,which is currently showing a weighted gain of 43% excluding dividends.

Sixthly,I recognised that food producers in giant developing economies such as China were being significantly undervalued given the combined trends of food inflation and consumption led growth.This led to China Agri Industries (see blog dated 14th April 2009) and Chaoda Modern (see blogs dated 21st September 2009 and 14th October 2009) becoming 10.7% of my portfolio -China Agri Industries is currently showing a gain of 136% excluding dividends and Chaoda Modern a gain of 67%.

In the investment industry to do two or three things right while minimising mistakes,leads to above average performance -to do six,leads to exceptional results.

The second quarter and 2010 full year performance will depend largely on the 2010 outlooks of a number of key holdings particularly Intel,Dolby,ABB,Infosys and NASDAQOMX as well as the continuation of general improvements in the global economy.

I stick to my expectation of compounded annual growth of my portfolio of 10% to 20% in 2010 (the actual compounded growth from the beginning of 2010 compared to the end of last year,is currently 9%).

I will update the market prices of my stockholdings on track my stocks webpage half yearly since,as I stated before,this is a long term investment website and not one for short term speculation.

 

31st March 2010

Dividend from Microsoft received - Track my stocks updated.

30th March 2010

Presentation of stockholdings in Globalstockinvestingtoday.com portfolio reformatted -see Track my Stocks webpage 

Hopefully this makes it easier on the eye to see and compare!

24th March 2010

It's official - the vast majority of investors missed the stock market recovery while getting burned during the stock market crash,see table below.

If you took advantage of the panic and fear last year and invested in financially strong companies or in index linked exchange traded funds,well done!You should congratulate yourself on your ability to withstand crowd mentality and in your ability to identify and act on an opportunity.

Unfortunately the vast majority of investors fled stock markets last year after they saw their stock portfolios decline 30%,40% or even 50%.

I hope they fired their wealth managers and brokers if they were advised to switch from stocks to bonds as the majority of investors did,as confirmed in the data enclosed.

 

Year Inflow Into Equity Funds US$M Inflow Into Bond Funds US$M
2007 $91,300 $108,500
2008 -$233,800 $27,100
2009 -$9,300 $376,300

19th March 2010

Top Fund Managers' results for 2008 and 2009 published - see table below.

Only two fund managers in the entire equity industry generated positive returns in both 2008 and 2009 - George Soros and John Paulson and both did this by their expertise in shorting stocks in 2008. While their total actual performance is not included in the list below,most of the major leading portfolio managers are.

Only six managers in the established hedge and mutual fund industry managed to generate a positive total return with both years combined - George Soros,John Paulson,Warren Buffett,Donald Yachtman,David Einhorn and Stephen Cowen.
 
These results excludes bond funds which according to Morningstar,lost an average of 5.1% in 2008 and gained an average of 5.5% in 2009 (though the range was very wide in both years).

Moreover,hundreds of hedge funds were wiped out in the past two years due to their excessive leverage and by taking on far too much risk in their mistaken belief that they were as good as they had marketed themselves to be.

I could use the below data as an excuse if my portfolio was not performing strongly but instead it gives another perspective and context to my performance to date.

Make no mistake about it,when you have most of your liquid net assets in your portfolio,you will basically be running it as a fund with 15 to 30 stocks,broadly diversified,split between equities and cash.

The reasons why most funds are still in the red was due to their portfolios heavy exposure in commodity related stocks and European or American focussed financial institutions when the collapse began in 2008 -both sectors that I either reduced my exposure to or avoided,as people who follow this website,will have noted.

Portfolio Manager Fund 2008 Return 2009 Return Total Return
Donald Yachtman The Yachtman Fund -26.05% 59.31% 17.80%
David Einhorn Greenlight Re -17.60% 32.10% 8.90%
Warren Buffett Berkshire Hathaway -9.60% 19.80% 8.30%
Stephen Cowen SAC Capital International -19.00% 28.39% 4.00%
Bruce Berkowitz Fairholme Fund -29.70% 39.00% -2.30%
Bill Nygren Oakmark Fund -32.61% 44.77% -2.40%
Tweedy Browne Tweedy Browne Value Fund -24.00% 27.60% -3.00%
Brook McConnell Hong Kong Partners -47.55% 83.67% -3.67%
Chuck Royce Premier Fund -28.30% 33.30% -4.40%
John Hussman Strategic Growth Fund -9.02% 4.63% -4.80%
Cheah Cheng Hye Value Partners Classic Fund -47.90% 82.90% -5.00%
Richard Perry Perry Capital -27.00% 25.20% -8.60%
Ruane Cunniff Sequoia Fund -27.03% 15.38% -15.80%
Brian Rogers T Rowe Price Equity Income -35.75% 25.62% -19.30%
US market index S&P 500 -37.00% 26.45% -20.30%
Hong Kong index Hang Seng Index -48.27% 52.02% -21.37%
Richard Aster Jr Meridian Value Fund -34.73% 21.40% -20.80%
Chuck Akre Akre Capital Asset Mgment -42.92% 37.54% -21.50%
Ronald Muhlencamp Muhlencamp Fund -40.39% 31.49% -21.60%
Sarah Ketterer International Value Fund -41.95% 32.01% -23.40%
Dodge & Cox Dodge & Cox Stock Fund -43.41% 31.27% -25.70%
John Keeley Small Cap Value Fund -40.18% 21.67% -27.20%
Hotchkis & Wiley Large Cap Value Fund -47.00% 34.32% -28.80%
Ron Baron Baron Partners Fund -46.67% 28.20% -31.60%
Bill Miller Legg Mason Capital Value -55.00% 43.00% -35.65%
Ken Heebner CGM Focus Fund -48.20% 10.50% -42.80%

 

 

11th March 2010

"Fund Management - where the future belongs to people that you will never hear of "

"Many investors can only look on with envy when Warren Buffett says his investors have seen 20% annualized gains over the past 45 years—even the best mutual funds pale by comparison.

Only two funds are even on the horizon: Fidelity Magellan Fund, which has returned 16.3% a year and Templeton Growth Fund, up 13.4% a year on average, according to investment researcher Morningstar Inc.

The returns covered the 45 years through the end of 2009. During that period the Standard & Poor's 500 was up 9.3% on an annualized basis—$10,000 would have grown to nearly $560,000. There were 145 mutual funds at the start of 1965.

Mr. Buffett has more structural freedom than mutual-fund managers, so comparing their performance isn't apples to apples. But the differences highlight the limits of mutual funds, particularly the short-term pressures many managers face.

The short-term pressures lead many fund managers to busily buy and sell as they seek to gain a short-term edge—the average fund turns over its entire portfolio every year, according to Morningstarthe antithesis of Mr. Buffett's approach.

Templeton Growth uses a deep value strategy, buying stocks when they are cheap, and keeps its turnover low, at just over 10%, Morningstar says

Unlike the Templeton fund, Magellan is a growth-tilted fund. But unlike the other fund, its performance has been unsteady; most of its success came during the record-breaking run of manager Peter Lynch from 1977 to 1990, during which the fund saw annualized returns of 29%. As of March 2, Magellan was losing 2% annualized over the last decade (since he left)-"Its very long-term returns are still living off Lynch's success" said Christopher Davis, fund analyst at Morningstar- MSN Money 9th March 2010

"A lot of the current value investors are stepping back from their roles or will be in the future due to their age.Other than yourself (Paul Sonkin ex Goldman Sachs), who do you see as the current rising stars of value investing to lead the next generation?

Paul Sonkin: I see a lot of great money managers who all run small funds now.
I don’t think these investors will come from big organizations. I think it will be small guys you never heard of, and they will remain below the radar screen for a long time." - Guru Focus 9th March 2010
 

If there is one thing that the last two years has demonstrated,it is that very few investment or wealth managers employed in the industry sufficiently protected your capital either to prevent the losses that occurred in 2008 or to recover the losses in 2009.They were either too optimistic during 2008 or too pessimistic in 2009 and as a consequence went to cash too late during the crash in 2008 and went to stocks too late during the recovery in 2009.

The lifestyles of investment managers and analysts employed by the big banks and mutual funds are also totally dependent on their salaries and bonuses and not on how much of their private wealth is invested in the long term performance of the funds that they manage.

Given the level of rewards and high living standards of many, job preservation tends to be their main priority.This translates into making sure that they perform no worse than their peers and as a consequence they all tend to have the same stocks and outlooks to cover themselves.

Who wins in such an arrangement?It certainly is not you.You will be carrying the burden for the loss of wealth and lack of protection of your capital from inflation for years to come.

Given how much the internet has become a great leveller to perform research on companies and how accessible investing in stocks is,compared to even 10 years ago,the new generation of fund outperformers will come from non traditional mutual and hedge funds where the single biggest capital contribution will be from the person running the fund him or herself.He will have the freedom to make up his own mind on which stocks to own,how much to hold as cash and bonds and ignore peer pressure since his overall motivation is preserving and increasing his wealth and not on retaining a highly paid salary or on commissions from how much business he is generating for his fund.

They will also have little time promoting themselves since most of their time is hunting for new investments and monitoring their existing investments and changes in industry trends.You will find that most of these people will be relatively anonymous and given their knowledge of stock markets display little ego since they know that ego tends to blind investors from accepting mistakes or not acting when they are wrong.They also recognise that if they are managing their fund as a collection of partly owned businesses,it could be at least 3 years before the market recognises its mistake and reprices certain stock holdings or in contrast,prices a stock holding ahead of its short terms earnings but without fully reflecting its long term earnings power -all this assumes that the fund manager is an exceptional stock picker.

By definition,an exceptional stockpicker will not be a conventional thinker or be someone who accepts the need to "fit in".He will from time to time,be either unpopular,derided or simply ignored.He will certainly not feel the need to market subscription based investment newsletters or promote prevailing investment themes of the day.He will definitely have a strong temperament,the ability to withstand significant pressure and stick to his convictions based on the depth of his thinking and quality of his analyses.

Dividends from Noble,AFLAC and Intel received in the fund - Track my stocks webpage updated.

4th March 2010

A tale of two banks - Standard Chartered Bank and HSBC

Both banks announced their full year 2009 results this week and Standard Chartered Bank met expectations and surprised on the strength of its balance sheet while HSBC continued to fail to perform to expectations.

There is a reason why 11.87% of my portfolio is weighted to Standard Chartered Bank (SCB) and I do not own HSBC - it is called MANAGEMENT!

If you listen to the earnings conference calls and hear Peter Sands (SCB's CEO) and Jaspal Bindra (SCB's CEO Asia),you can not help but be struck by their fierce intelligence and contrast it to the almost bumbling,bygone era,British bureaucracy mentality of the senior management of HSBC.When you lose US$29.77 billion of shareholders' money by arrogant ideas that you can enter markets and businesses that you are clueless in (HSBC's acquisition of US subprime lender Household International) and then declare in your annual report "Strength,diversity,resilience",it takes corporate speak and management incompetence to another dimension.

Standard Chartered Bank focuses on its strengths which just happens to be the regions which are economically growing the fastest -primarily Asia.

HSBC spent years ignoring its strengths and undermining its core markets by branching out into geographies that they were weak in with grandoise ideas of being the "world's local bank",destroying shareholder value in the billions of dollars and also upsetting their key profit centres - anyone who has spent time in Hong Kong knows how much HSBC's image and reputation have taken a battering.

The facts don't lie - over the last 6 years,HSBC's earnings per share has declined by 71%,while Standard Chartered Bank's has increased by 64% including a year on year rise in 2009;HSBC's net asset value per share has declined by 7% while in contrast,Standard Chartered Bank's net asset value per share has increased by 95%!

As I have said before,when evaluating a stock for investment,assessing the quality of the management is a critical part of the due diligence process.

9th February 2010

Added to my positions in NASDAQ OMX at US$18.36 and AFLAC at US$46.86 inclusive of charges with short term capital- Track my stocks updated.

It may seem a bit odd that while the market continues its correction and my portfolio holdings' stock prices have been falling,I have been on the whole,pleased with my portfolio due to their earnings results and outlook announcements over the past month.

While NASDAQ has been a laggard in my portfolio and I have to accept that I opened a position at too high a price and too high a weighting in 2008,there comes to a point where the market over reacts on the downside.Given NASDAQ's strong market position,sustainable earnings power and growth opportunities,a valuation of 11 times 2010 conservative earnings forecast in a depressed economic environment,is simply too low a valuation for me to ignore.

US President Obama's intent on curtailing proprietary trading by the investment banks will have little impact on NASDAQ since nearly all of its trades are based on institutional orders.

Its Q4 2009 result was the first quarter when it managed to stop declines in its cash trading business (due largely to "dark" pools) and NASDAQ should benefit from new regulations to control such "off exchange" trading mechanisms,which are currently going through legislation in the US Senate and Congress.

Goldman Sachs recent stock upgrade on NASDAQ to buy,may provide some immediate acceptance and demand for the stock which has become a bit of a stock market pariah over the past 12 months.

I added to my position in AFLAC mainly due to the stock market correction giving me an opportunity to buy more at practically my original purchase price after their strong Q4 earnings results and affirmation of their 2010 outlook.

Why I am still bullish on stocks.

The time to buy quality stocks is always when the market is worried about something or other (provided it is not something as great as a global banking collapse!).Curtailing of bank lending by the Chinese banks and worries about the Euro due to debt levels of certain secondary European countries are not substantial enough to cause worldwide disaster so if the market keeps selling off,I will look to add to some of my existing positions and even consider opening new positions.

While the stock market did get ahead of itself in the beginning of January,I view the current correction as healthy for long term investors as most companies announced earnings results that beat elevated expectations with sound outlooks for 2010.

From my actions,it is obvious that I am still a net buyer than seller.

27th January 2010

Added to my weighting in Intel at US$19.99 inclusive of charges with short term capital - Track my stocks updated.

I am expecting Intel to reap the benefit of the next wave of PC and server upgrades in the corporate sector that got deferred due to the credit crunch last year as well as the continuing rise in consumer demand worldwide for all things digital.Its new atom chip got significant traction in the last quarter and I expect that to continue in 2010.The shift to notebooks is also leading to higher margins for Intel and that should also continue though Intel are masters of reducing prices to increase volumes to improve earnings per share and lock out the competition.

At conservatively forecast 2010 earnings of $1.50,its dividend payout ratio of earnings is approx 40% so is well within the scope of further increases.

The stock even at US$20 has a current dividend yield of 3.1% and price earnings multiple of 13.3 of 2010 earnings.

If the company performs to how I expect,its PE ratio has the possibility of reverting back to its historic multiple of 20 in the next 12 months giving a potential 50% upside to its current share price and 67% upside to my weighted purchase price.Such calculations exclude the dividend returns plus actual 2010 earnings being higher than the conservative estimate of US$1.50. 

15th January 2010 part 2

Cash Dividend and bonus shares from Esprit credited to the fund - Track my stocks updated.

15th January 2010

Dividends from Becton Dickinson,Flowserve and Alco Holdings credited to the fund - Track my stocks updated.


4th January 2010 part 2

Further reduced my weighting in Infosys at $56.04 net of charges to open a position in AFLAC,Japan's largest life insurer at US$46.80 net of charges - Track my stocks webpage updated.

While valuations are always a key decision for a stock purchase or a sale,the quality of management is equally critical in assessing future performance of the business.

If Globalstockinvestingtoday.com was a holding company for various business acquisitions,I would be delighted to accept Dan Amos as one of its business managers.

Dan Amos is chairman and chief executive officer of AFLAC Incorporated. Mr. Amos joined AFLAC in 1973.He was named president of AFLAC in 1983, chief operating officer in 1987 and chief executive officer in 1990. During Mr. Amos's tenure as CEO, revenues have grown from $2.7 billion to nearly $18 billion and normalised earnings per share have been compounded by 15% or more annually.

Today, AFLAC is a top national brand in the US and was named by Fortune magazine in 2009 as the World's Most Admired Company in the Health and Life Insurance category. Mr. Amos was named America's Best CEO for the insurance/life category in 2009 by Institutional Investor magazine, the fourth time he has appeared on the list.Under Mr. Amos’s leadership, AFLAC has been named to the Ethisphere Institute’s annual list of World’s Most Ethical Companies for three consecutive years and the most reputable company in the Insurance Industry for two consecutive years by the Reputation Institute.

AFLAC insures more than 40 million people worldwide. It is the leading provider of individual insurance policies offered at the worksite in the United States and is the largest life insurer in Japan in terms of individual policies in force. The company insures one out of four Japanese households.

The CFO has also been with the company for nearly 20 years and Dan Amos father and uncles actually started the business in 1955 in the small town of Columbus,Georgia (population of 186,000) where it is still headquartered.

In 1974,AFLAC won permission from the Japanese government to be only one of two foreign insurance companies in the country.Cancer is the leading cause of death in Japan and AFLAC quickly attracted subscribers to its cancer insurance policies.Dan Amos took it upon himself to build strong relations with Japanese sales people and with subscribers,improving working conditions and reinvesting part of AFLAC's profits in Japan.When AFLAC built new office buildings in Japan using more expensive Japanese construction companies compared to US ones,he made AFLAC resemble a Japanese business and the reputation of AFLAC in Japan soared.

AFLAC now draws 75% of its income from Japan,25% of households are covered by AFLAC's policies and 96% of publicly held companies in Japan offer AFLAC insurance products as payroll deductions.Moreover,a substantial number offer only AFLAC insurance.

The company's conservative financial management led it to only purchase investment grade bonds in Japan which has now resulted in AFLAC being the strongest insurer in the Japanese market due to its local competitors investing in Japanese real estate and equities during the bubble period in the 1980s which have all subsequently declined in value, significantly undermining its competitors' capital base.

AFLAC's growth is in its ability to identify niches in the market that larger insurers either ignore or do not consider cost effective and innovating,for example by creating cancer insurance policies such as "SuperCancer" which covered all shortcomings in Japanese government assistance.The retention ratio in Japan for its insurance policies is 94% and due to AFLAC's reputation,brand,business model and financial management,its profit margins and returns on equity are the best in the industry.

Its innovations just do not lie in its products – its duck advertising campaign which was launched 8 years ago in the US led to it beating Mcdonalds and other brand icons as the most memorable company ambassador when it was released and led to AFLAC now having a 90%+ brand recognition in the US.

As the population of the US and Japan ages,cancer continues its unfortunate growth as a leading disease in affluent societies,the workforce becomes more mobile and requires to become more responsible for its healthcare and mature economies lack the funds to support its burgeoning aging population,AFLAC's niche will continue to grow and while due to its current revenue size,it expects future earnings per share growth to decline from 15% per annum to the range of 10% to 12%,its current price earnings ratio of 9.5 which is nearly half of its historic multiple is too low for its future prospects,market position and its ability to innovate (in my judgement).

Given the predictability of its revenues,earnings and cashflows due to the recurring nature of its insurance premiums and cost structure (in the US they have a commission only sales force),a multiple of 13 times management forecast of its 2010 earnings would lead to a stock price of $68,a 45% upside to the current share price.Given that management consistently beats its own guidance,indicates the possibility of an even higher upside.

Although it tends to cover its yen insurance liabilities with yen assets, future Yen to US$exchange rates are a potential wild card but AFLAC has shown strong double digit earnings growth even if the Yen to US$ reverts back to its average historic rate.If the Yen continues to be strong,AFLAC's earnings will continue to receive a currency boost.

AFLAC is forecasting earnings per share for 2010 of around $5.28 at a Yen to US$rate of 90 to 95.

The reason why AFLAC is still currently trading at a significantly lower price earnings ratio and its share price has not moved on a year on year basis despite a 15% rise in earnings was due to the financial panic and fears about its capital position ie the need for it to raise new capital and doubts about its asset quality.

While the stock has recovered significantly from its March 2009 lows,the stock has yet to make a full recovery which I believe will happen over time as its investment assets continue to get revalued and fears about its balance sheet continue to recede.Its leverage ratio is still low with a debt to tangible equity ratio of 28% even after various investment writedowns in 2009.

18 month price target US$68.


4th January 2010

Final benchmark Global Equity fund prices updated with 31st December 2009 - see track my stocks webpage

See also the chart below comparing Globalstockinvestingtoday's portfolio performance with global fund managers.

Even though Value Partners Classic fund is performing exceptionally well,please note that it is 75% exposed to the Greater China region and is before hedge fund charges including 15% of the fund gain.Moreover its 3 year fund gain is approximately 40% of which 33% came from the last six months of 2009.

This is just another example of why capital needs to be fully invested in a well managed equity fund for a minimum of 3 years since it may not do much for even two and a half years only for it to be revalued in the last 6 months!

The contrast between my portfolio and Value Partners is that I am only 30% invested in China,20% in rest of Asia,40% in truly global companies (Microsoft,Intel,Dolby,ABB etc) and 10% in companies whose operations are principally in the US/Europe.From a geographical perspective,I am more diversified.Just to give you an understanding of how Value Partners are ranked in terms of their performance in the hedge fund industry in 2009,Thomson Reuters Asia Pacific ranked Value Partners as the best overall Fund Management firm in Asia;Mr Eric Chow,Value Partners fund manager was ranked the leading buyside individual in Asia and Value Partners is ranked the second largest hedge fund manager in Asia.

Value Partners classic fund which is one of the funds that I am benchmarking my portfolio performance in the chart below,was ranked according to Barron's Magazine,19th out of the top 75 hedge funds in the world based on 3 year annualised returns and a minimum fund size of $300m (April 2008).

Value Partners also manages one of the pension fund options for Hong Kong's employers and Ping An Insurance (one of China's largest insurers) is partnering with Value Partners for its investments.

Value Partners are at the highest level and you can see how I am doing not only with them but with other prestigious fund houses.

2nd January 2010

Globalstockinvestingtoday portfolio returns 29.04% since launch,89% in 2009 and 115% since the March 2009 low.

The portfolio is significantly outperforming stock market indices worldwide and equity funds by on average 28% - track my stocks webpage updated with the closing year end prices.

I am moderately pleased with the performance of my holding companies and my results to date.If you followed my analyses over the past 18 months,you will already know about my abilities in financial analyses but what pleases me most from my track record to date,is that it appears to indicate very strong skills in business analyses (compare and contrast your returns from equity funds,broker and analyst recommendations in the last 18 months!).

I called the stock market's bluff correctly more times than I got wrong during the time when all the stock prices of my companies were collapsing.During that intense time,you really needed to have done your homework on your businesses and deep due diligence because the level of pressure that the market put on all stock investors globally,was unprecedented since the 1930s.

"It is when the tide goes out that you can see who is swimming naked".

Self promotion is one thing but ultimately,it is results that count.Bear markets and recessions vindicate strong investment managers and analysts and absolutely savage the weak.In the inital stage everything crashes but when markets return to some sort of rationality,it is only companies with strong fundamentals purchased at fair or cheap valuations that prosper.

Could I have done even better?

I made two unforgiveable and highly unprofessional mistakes - not making myself available to analyse China Agri Industries and Nokia's results on the day of their release.I suspect this cost about 3% to 4% of overall return since I would have added substantially to my position in China Agri on the day of their expansion announcements and would have lowered my weighting in Nokia after the release of their Q1 2009 results.

I was also so preoccupied with getting Standard Chartered Bank right (the biggest weighting in my fund),that I ended up not having the flexibility of mind to expand my due diligence to the Australian banks which were also clean and were also being sold off in blind panic (Australia's big 4 banks' returns on equity/profitability are amongst the highest in the world).

With respect to 2010,given that most companies in my portfolio now have a more realistic business valuation,I do not expect triple digit gains in any of my stocks this year and I expect my turnover of stocks will be lower this year than last which was a highly unusual year (to put it mildly!).I may change some of the weightings depending on results and valuations though fundamentally,I expect most of the companies that I own to come out of the recession stronger which should enable them to outperform in their respective industries.

I am no longer explicitly seeking to outgain Hong Kong's Hang Seng benchmark this year as there are major listed Chinese stocks which I believe run the risk of becoming seriously overvalued if the historic track record of Hong Kong's stock market is anything to go by.I will opt out than risk a permanent loss in capital during this potentially "euphoric" time.

"As he stated to his investors every year, Buffett thought the key to superior investment returns was to lose less than the Dow in bad years at the risk of lagging the market in good years. Using this philosophy, Buffett managed to outperform in both bull and bear markets in every year of his hedge fund operation."

On the whole,I expect my portfolio to return a compounded annual growth rate in the range of 10% to 20% in 2010 even after a potential stock market correction sometime this year.

I wish everyone who follows my blogs and stock actions,a prosperous and healthy 2010!

22nd December 2009

Sold my remaining position in Nokia at US$12.44 net of charges,realising the loss.Dividend from Microsoft received in the fund- track my stocks updated.

Nokia was my biggest business analysis error by far. As highlighted in my blog on 17th July 2009,its failure to execute on its strategy in a timely manner in light of competition is leading to what I now view as permanent declines in gross margin and operating profit margins.

I can not see Nokia recovering its historic 40% market share in the high margin smart phone segment given its inability to compete on mobile services with competitors particularly Apple and I no longer view Nokia's brand loyalty in emerging markets sufficient to maintain pricing power at the low end mobile phone segment.That coupled with its loss making Nokia Siemens joint venture dragging down earnings and management time means that Nokia is at a significant disadvantage compared to more focussed competitors such as RIMM,Apple and Taiwan's Hon Hai.

 

I must admit,I underrated Apple completely - the key thing that I believe that I got wrong was underestimating the power of its apps store in driving adoption of its mobile phones.

A lot of lessons were learnt from my investing mistake in Nokia - significant underestimation of the rising competition in the smart phone segment,insufficient attention to the earnings dilution of its Nokia Siemens JV,failure to recognise danger signals in actions by management highlighting complacency (overpayment on Navteq acquisition,belittling the competition) and opening a position during the time of Nokia's "near perfect" results.

10th December 2009

Dividends from Chaoda Modern,Noble and Intel received in the fund - track my stocks updated.

8th December 2009

The importance of patience and discipline in investing.

In one month from 21st September to 20th October I opened three new positions,doubled my weighting in one of them (Chaoda Modern Agriculture) and halved my weighting in Infosys,thus making 5 actions in my portfolio.Since then,in the last seven weeks,there has been no new actions to my fund.

The burst of activity followed by inactivity is not due to me spending more time evaluating stocks during mid September to mid October compared to November and December but more to do with results announcements and where I uncovered compelling business valuations for investment.

"If buses come in threes while you wait a long time for the first one to arrive" then such an allegory pretty much can be applied to what happened to my portfolio in September and October.

Recently,I have looked closely at American insurers for investment but still find United Health the best price to value business on the market.I have looked at Chinese car manufacturers particularly Geely Automobile that Goldman Sachs has invested in and which is acquiring Volvo but find the valuation no longer compelling to warrant a position.This is part of the crux of being a successful investor,having the patience and discipline to search and wait for months for the right company to be valued at the right price and then acting upon it while vigilantly tracking its business performance and valuation.

Mistakes are made in either premature accumulation ie good company but either fairly valued or overvalued or in poor due diligence where you really did not have a clue about the valuation of the business and are at a loss on what to do as it keeps declining!

Standard Chartered Bank announce their trading update tomorrow and Alco Holdings announce their interim business results.If both companies perform to my expectations,expect no activity to my fund.

18th November 2009

Apart from my experience and ability,what books have I read that has influenced my stock picking and managing an investment portfolio?

I have read the below and re-read most of them on several occasions since one misses or fails to pick up some key points on first or second reading.

The Warrent Buffett way - Robert Hagstrom

The Warren Buffett portfolio - Robert Hagstrom

Warren Buffett,the making of an American capitalist - Roger Lowenstein

The real Warren Buffett - James O'Loughlin

The Winning Investment Habits of Warren Buffett and George Soros - Mark Tier

Rule Number 1 - Phil Town

One Up On Wall Street - Peter Lynch

Beating the Street - Peter Lynch

Common Stocks and Uncommon Profits - Philip Fisher

The Intelligent Investor - Benjamin Graham

The Templeton Way - Templeton and Phillips

Investing Against the Tide - Anthony Bolton

Money Masters of Our Time - John Train

Jesse Livermore, The World's Greatest Trader - Richard Smitten

Trade Like Jesse Livermore - Richard Smitten

Emerging Markets Century - Antoine van Agtmael

Hot Commodities - Jim Rogers

I recommend that you read all of them if you wish to have an edge when investing.

10th November 2009

Portfolio review based on recent earnings results and quarterly business updates.

Nearly all my portfolio companies have released their business results and except for Nokia and NASDAQ,I am pleased with the progress to date.
 
My industrial companies,ABB and Flowserve are experiencing softness in their higher margin order book from the manufacturing and mining sectors but I view this to be only temporary as I expect demand for energy efficient products to rebound in future as economies and credit for capital projects return to normal.

China's Tsingtao Brewery year to date earnings were even better than I appreciated and at my purchase price was trading at 25 times 2009 expected earnings - its lowest multiple that I can recollect,excluding the March low of 20 during the time when the Hang Seng index fell 65% from its all time high. 

Korea's SK Telecom results were very good and the new CEO who has a strong track record in mobile internet services as well as maximising returns on capital has already stopped the capital intensive,loss making international ventures and is refocussing the company on mobile enterprise services for SK's future growth.The company made some sharp price cuts in September in its core business and is expecting volume to rise to compensate.I will wait to see what adverse impact,if any,this has had in Q4 2009 before I consider adding to my position.

I am really surprised given the loss of credibility that the US stock markets and the investment industry at large suffered;that "dark pools",where trading can take place outside the regular stock exchanges of the NYSE and NASDAQ,are still tolerated.This has led to NASDAQ losing trading volume and pricing power and as a consequence,led to a double whammy of declining earnings and a decline in its price earnings multiple.This has caused a 40% decline in price compared to my holding price.NASDAQ's trading initiatives are leading to an arrest in such declines but if the US Securities and Exchange Commission does not tighten regulation,it will pose a permanent weakening of NASDAQ's competitive position.

I am yet to be convinced that NASDAQ will not continue to grow and prosper in future so will wait to see how regulations and its management initiatives play out.

In summary,at current prices,I am happy to hold all my portfolio companies though plan to exit completely out of Nokia to add to other holdings in future.

So far my portfolio has appreciated 78% this year and 21.7% overall.Since 90% of my companies have released or provided results guidance for the rest of the year,I expect little fluctuation in valuation of my portfolio based on fundamentals for the remainder of 2009.However given stockmarket volatility,I expect that my portfolio could easily change by + or - 3% by the year end.  

27th October 2009

Dividends from Prosperity REIT and Infosys received - track my stocks updated.

23rd October 2009

The true cost of investing in hedge funds 


While there are many hedge funds out there,they all tend to have the following charges - 2% annual management fee and 20% "high on high" performance fee.

So irrespective of how their fund performs,they will charge an annual 2% "management" fee and 20% on any gains in its investments by the year end.This performance fee is based on the incremental year on year increase in the fund from the date that you subscribed.Moreover depending on fund,there are also redemption fees further reducing your actual return!

For example if the fund appreciates from $100 to $115 in the first year and then from $115 to $125 in the second year,the fee is 20% of 15 ($115 - $100) in year 1 and 20% of 10 ($125-$115) in year 2.Note that the actual appreciation in year 2 is only 8% (125 divided by 115) but you are charged 20% of the absolute gain ie 10 (125-115).

This means that you would lose 5% of the 25% return in the above example plus pay 4.3% annual fees (2% of 100 in year 1 and 2% of 115 in year 2).

So in summary over a two year period,if the fund appreciates 25%,you would receive 15.7% - only 62.8% of the advertised gain!

Value Partners in Hong Kong who essentially invest in Chinese stocks have a subscription fee of "up to 5%",an annual management fee of 1.5% and "high on high" performance fee of 15% so if their classic fund is up 25% at the end of this year,you will see a return of 19.75% (excluding the one off subscription fee) but if it declines next year,there is no performance penalty reimbursible by the fund manager and you would still have to pay the additional 1.5% of the fund's overall value in management fees!

The payment structure of hedge funds leaves them wide open to excessive risk taking since the manager personally loses nothing from negative returns and gains massively from a high positive return!This also explains partly why the market has transitioned from essentially an investment market place for companies for rational long term capital allocation to one primarily being used by traders chasing short term gains.By definition for one trader to win,one trader has to lose so over the long term,they end up cancelling themselves out since they can't beat themselves!


20th October 2009

Opened a new position in Hong Kong's Chow Sang Sang at HK$7.66 inclusive of charges - track my stocks updated.

Chow Sang Sang is another play on the growth in China's domestic consumption.

Chow Sang Sang is Hong Kong's oldest jewellery retailer whose revenue and earnings growth in the past five years has been largely due to the rise of mainland China's affluent consumers.Why it is experiencing a windfall from this trend is partly due to endemic problems of general counterfeiting in China.When it comes to jewellery,mainland Chinese do not trust local retailers with the quality of their products compared to Chow Sang Sang.

Chow Sang Sang is a famous and well known Hong Kong brand amongst the Chinese for diamond and gold jewellery.

From 2005 it has been a sightholder of De Beers' distribution company,The Diamond Trading Company (DTC) and since 2008,only one of two Chinese jewellers who have had their status retained by DTC.This license (subject to renewal every 3 years,renewal date for current license is March 2011) allows it to cut and polish diamonds from De Beers,in its own factories with De Beers stamp of approval and to act as a De Beers retailer (there are only 79 sightholders worldwide).

De Beers is responsible for nearly 50% of the world's diamond supply.

Chow Sang Sang is also the only retailer allowed to sell the "love diamond" in Hong Kong,Macau,Taiwan and mainland China due to its exclusive agreement with one of Europe's leading diamond cutters,Mickey Weinstock & Co.This is referred to as the "Super Ideal Cut" - meeting the criteria of ideal cut proportion,perfect symmetry and perfect polish and is one of the most renowned premium cut diamonds in the global market.

The company has also won many awards for customer service and if you visit one of their stores in Hong Kong,you immediately get the feeling that it is one classy operation.

It is in a unique position as a jewellery retailer in the China market due to its partnerships with De Beers and in selling the love diamond - both agreements which are extremely hard to get.

The diamond business tends to be a highly traditional business based on trusted relationships.The fact that Chow Sang Sang has a successful 75 year operating history with most of its senior management team having been at the company from between 20 to 50 years;together with its brand reputation and exclusive partnerships,enables it to have a significant competitive edge as it expands its stores in China and grows its business.

This has been confirmed by its financial results.From 2005 to 2008,the company's turnover grew by an annualised compound rate of 15% and its earnings by 25%.Due to the financial crisis and the slump in consumer spending this year,its earnings has declined to date by 18%.

So far,the company has rolled out 125 stores in mainland China and plans another 100 stores over the next 5 years.Given its focus on quality,its strategy is to continue to own all its stores to maintain exclusivity and quality control.

The company is also a nice play on the rise in prices of precious metals such as gold and as a hedge against inflation (jewellery is one retail sector where prices go up in line with inflation!).

The company also owns nearly 5 million shares in Hong Kong's stock exchange (HKex) due to an old historical commercial arrangement and while this is not reflected in its operating income statement (only dividends are recognised),its investment has appreciated 1256% in the past decade and represents around 15% of Chow Sang Sang's current market value.

In fact given the value of its shareholding in HKex and its current balance sheet net of all liabilities,the company's business valuation is barely more than 1.5 times the cost of its existing stock!

Its industry peers in Europe and US such as Tiffany's,have historic PE multiples of 15 to 25.Chow Sang Sang's current and historic PE multiple is around 10 but due to its future growth potential and its balance sheet,I view the company to be one that is still significantly undervalued.

It's strong cash flow generation and dividend pay out ratio policy of 40% of earnings,means that its likely dividend yield based on this year's results at current share price,is 4.2%.

It also runs a niche brokerage business catering for its high end clients and given the rebound in the Hong Kong stock market and number of IPOs happening in the second half,earnings might be lifted further by higher demand from its stockbroking services.

I am also attracted to the fact that Chow Sang Sang has been operating since 1934,has been consistently generating earnings and cash flow and is in one of the most durable businesses in the world - diamonds and gold jewellery!

Its current annual sales is US$1.3 billion,of which retail jewellery sales from mainland China is still only around US$250m,so it has plenty of scope to grow as consumer spending recovers to its normal rate.

Mainland China's jewellery market is currently valued at US$3.9 billion and Chow Sang Sang's current share is 6%.Not only do I expect it to benefit from the ongoing growth in the Chinese market but I expect its sales to be further compounded by increasing market share as it opens more stores.

This is one stock that I intend to further accumulate if the Hong Kong stock market has a correction over the next year and/or if their results beat my expectations.

17th October 2009

Dividend from China Agri Industries received - track my stocks updated.

16th October 2009

What kind of stock portfolio manager am I?

My philosophy of managing my investment portfolio is a mix of Peter Lynch and Warren Buffett (Peter Lynch was the most successful fund manager in the US until he retired).

Peter Lynch was constantly searching for undervalued companies and would not hesitate to rotate stocks if he felt there were stocks that offered better value given changes in stock prices,industry conditions and business performance.

He would have a mix of what he defined as stalwarts (large cap stocks such as Intel) if he felt that they were undervalued at the time of purchase, cyclicals (such as Noble Energy) when he felt that their PE multiple was too depressed given improving conditions in the industry and fast growing small cap stocks (such as Chaoda Modern) which were followed by few analysts or the media but offered the largest scope to double or triple.

Despite the sheer number of stocks he owned and rotated,he was not a trader following technical charts or short term price targets provided by analysts.His methodology was similar to Warren Buffett's except that he was more diverse in his holdings,was happy to own a large number of companies (provided that he understood the business) and would not hesitate to switch if he found better value and growth elsewhere.

Having said that,similar to Warren Buffett,I still intend to hold around 50% of my portfolio permanently in a few holdings that I purchased at discounts to their intrinsic business value,such as Standard Chartered Bank,Intel,Microsoft,Infosys,ABB,China Agri Industries,CNOOC and United Health (unless valuations get so high as to cover all their earnings over the very long term or some extraordinary event occurs which materially and permanently damages their business).

The other change I have made is to essentially have a mix of around 20 stocks (I currently hold 22 in the portfolio) to reduce volatility of fund performance.

My current weightings in various sectors are as follows

1)Technology 27%
2)Energy 14%
3)Industrials 14%
4)Banking 12%
5)Agriculture 11%
6)Consumer
   discretionary 9%
7)Healthcare 7%
8)Miscellaneous 6%

The maximum weighting that I would prefer to hold long term for a small cap is 5% and for a stalwart 10% but temporarily they may be higher (up to 8% and 15%) depending on if there is a significant market overreaction that will need time to play out.

If I also open a new position,the opening position has be at a minimum of 2.2% of my portfolio - the mistake of not doing this,led to gains in CNOOC and Zijin Mining being far lower than my analyses warranted.

I am also concentrating on companies and markets that I am more familiar with - that is the lesson learnt from the mistakes I made with America Movil and Garmin.

The last 12 months has been a great lesson in ignoring the financial media and critically evaluating investment managers as their lack of business acumen was brutally exposed. 

"Jake Van Der Kamp,a former financial columnist says the one question no financial adviser can answer is:if you're so good at making money why are you not doing it for yourself instead of advising others?" South China Sunday Morning Post,10th October 2009

I am actually a living and breathing experiment of answering that question which sets me apart from the industry.The most ironic thing is that people who live simply and below their means tend to exhibit those exact trustworthy qualities required when it comes to managing money.

14th October 2009

Doubled my position in China's Chaoda Modern Agriculture at HK$5.43 net of charges.Amended the net price on Tsingtao Brewery to include full purchase charges. - track my stocks updated.

China's Chaoda Modern Agriculture released another set of impressive results yesterday with revenues growing 22%,gross margins and operating profit margins widening sequentially to 70% and 50% (leading to overall profit margins of 67% and 48% respectively for their financial year).

They also demonstrated more effective cashflow management leading to a free cash flow margin of 22% to sustain their growth plans without requiring further share dilution.

Yep and it is still being valued at book value and a price earnings multiple of barely more than 5!

The other reason for the significant increase in weighting of Chaoda in my portfolio is that while there has been much talk about inflation and the price rises of oil,gold and base metals,the media has yet to jump on the bandwagon of future food inflation.

For sure when the global economy turns the corner and starts to expand,given the doubling of the US money supply over the past couple of years,food prices are going to rise and given Chaoda is a leading food producer it will definitely benefit from such price rises.

I view my high weighting in Chaoda not only due to its significantly undervalued business and strong operating performance but also as an investment hedge against food inflation.

12th October 2009

Opened a new position in China's Tsingtao Brewery at HK$31.83 - track my stocks updated.

I have been tracking Tsingtao the company for a couple of years (while enjoying the beer for 9 years....) and it has always been a great beer,a fast improving business operation,one of China's strongest and most durable consumer brands and an expensive stock!

Its trailing twelve month PE ratio has typically been from 30 to 40 with it peaking at 70 during the top of the Chinese bubble in October 2007 and falling to a shortlived low of 22 when the Hang Seng index was collapsing in March this year.

While China is the world's largest beer consumption market and growing at higher rates than any other major market in the world(compound annual growth rates of 6%+),it is still a fragmented market with ferocious competition.

Irrespective,Tsingtao during the past 5 years,when it battled inflation and then the financial crisis has successfully continued to grow sales in excess of 15%;earnings growth rates in the range of 20% to 40%,increased market share and elevated its brand profile.It experienced bankruptcy in the 1990s and the management in place since then,has successfully transformed the business into becoming one of China's leading branded beverage companies and growth companies.

The reason why I have opened a position in the stock now,is that it is providing me with sufficient evidence that it is becoming a big winner from the financial crisis as it increases its market share from 13% to 15% while raising prices and improving its sourcing,manufacturing,marketing and distribution to expand margins and returns on equity.

Its announcement on friday night that its cumulative profits from Q1 to Q3 2009 were 75% to 85% higher than the pre financial crisis 2008 figures(and when one removes the non recurring deferred tax adjustment,higher by 40%) means that it is now priced at a 2009 PE ratio of 30,the low end of its traditional range.

Its current revenue is still only approximately US$2.6 billion with just 2% being international sales.

Tsingtao is China's oldest (0ver 100 years old) and most popular beer brand (depending on how you define it when compared to China Resources' Snow beer) and most overseas Chinese restaurants stock it with high brand recognition amongst overseas Chinese.Tsingtao has been prioritising more on the domestic market than the overseas market and while international sales represent the most lucrative profit margins,it still has plenty of scope to grow its domestic business before needing to tap international expansion to maintain its earnings growth rates of 20%+ per annum.

This is not a stock to open with a big position but to average in if general market declines lead to better prices provided no deterioration in Tsingtao's operational performance.However given the evidence of the wild swings of China's stock market over the past 4 years,this stock declining at lower than a 25 trailing twelve month price earnings multiple,now appears to be unlikely.

I would classify Tsingtao Brewery as a "Philip Fisher" type of growth stock where judgement of qualitative business factors plays the most important role in assessing business valuation risk and return.

Successful practitioners of Philip Fisher tend to be the greatest stock market investors in the world and Warren Buffett was equally influenced by Fisher as he was with Benjamin Graham (the father of value investing who practised buying cheap stocks essentially by looking at accounting numbers).

Few investing websites or fund managers claiming Buffett style investment techniques,really grasp Fisher's thinking and to have an introduction to Philip Fisher,I recommend that you read "Common stocks and uncommon profits" and then re read it again after a few months!

I would classify Infosys in my current portfolio as a definite Philip Fisher type of investment with possible arguments being made for a few other existing holdings.


8th October 2009

Interim dividend from Standard Chartered Bank received - track my stocks updated.

7th October 2009

Sold 47% of my holding in Infosys,realising a 24% capital gain to build some cash for future stock accumulations - track my stocks updated.

While I intend for Infosys to remain a core long term holding,it was never my intention for it to remain 10% of my entire portfolio and at its current valuation of 22 times operating earnings,I am rotating part of my holding into cash with the view of either adding to other existing positions depending on soon to be released results or potentially opening a new position in future.

6th October 2009

The ever changing definition of short term and long term in investing

I have a traditional view of what is meant by short term,medium term and long term when it comes to investing in stocks which was pretty much how most people viewed such time periods from the 1950s to 1980s.Short term is anything less than 2 years,medium term from 2 years to 4 years and beyond 4 years as long term.Hence why when I opened this website,I stated 3 to 5 years as the minimum period for the availability of capital to be investing in stocks.

When people evaluate house or apartment purchases,they tend to make their decisions on whether they plan to stay in the place for at least 3 years or more likely 5 years.According to many statistics,the average holding period for a home is 5 years.

Since 1990 in direct correlation to the ballooning of the financial services industry and related financial media,the average holding period for a stock has declined from 2 years to 1 year and from 1 year to 6 months since the year 2000!

The article below neatly sums up the dramatic change in the stock "investing" industry.

http://www.businessinsider.com/henry-blodget-youre-an-investor-how-quaint-2009-8

You will also notice how poor the returns were from funds since 1999 in Europe and the US during this dramatic decline in holding periods.For example in the top two financial markets,New York and London,US based equity funds have a negative return of 30% on average and UK based equity funds have a negative return of 20%! This is in sharp contrast to the sheer number of financial commentators,people employed in the investment industry and the consequent rise in trading volume that has occurred!

The picture of fund performance is different in emerging markets due to either their own financial crisis in 1997 which led to a low base in valuations or the rise in demand for commodities lifting markets such as Brazil and Australia and the further integration of developing economies into richer western markets leading to a rise in living standards, foreign investment,exports and domestic consumption.

If you simply bought and held Australia's BHP Billiton including during the massive crash last year,over the last 10 years,you would have seen a 500% increase in the value of your holding.If you bought and held India's Infosys,you would have still more than doubled your money even after it crashed 70% during the bursting of the technology bubble in 2001 and again in the crash last year!

The philosophy of buying world class companies at discounts to its intrinsic value and holding over the long term or even buying index related ETFs on a monthly basis,still outweighs most mutual and hedge fund performance and has outperformed the vast majority of investors and funds whose average holding period now is 6 months,over the past decade!

I now even hear "value investors" define long term as short as two years - I guess the pressure of being involved in the financial industry leads to conformity even with people whose declared investment principles are supposed to be in contrast to traders.

As I said earlier,being a good financial analyst is only 20% of what it takes to be an outstanding stock investor.30% is being an excellent business analyst which the vast majority of financial analysts and fund managers are not and 50% is having the temperament to withstand pressure of the market going against you in what I define to be the short term (ie up to 2 years).

5th October 2009

Dividends from CNOOC and Xtep received,added to my positions in United Health at US$25.48 and Noble Corp at US$36 last week - track my stocks updated.

 

21st September 2009

Opened a position in China's Chaoda Modern at HK$5.15 -track my stocks updated.

It is very rare to find a stock with a clean balance sheet,tangible net book value greater than US$1 billion which can be classified as a gamechanger in its industry and a growth and value stock all at the same time but China's Chaoda Modern can be viewed as all three.

Chaoda Modern is reinventing food production in China with the tacit blessing of the Chinese government.China's agriculture industry is as a whole,fragmented with the vast majority of farmers lacking the capital and scale to modernise farming methods.This combined with the government's need to clean up quality standards as well as rising demand for higher quality food products as domestic consumption and purchasing power rises,has provided the market opportunity for Chaoda Modern's business to flourish.

It is China's largest listed producer and marketer of vegetables.

With local governments acting as a go between;the company rents land use rights from farmers,upgrades the infrastructure and carries out large scale planting using state of the art farming technologies. The farmers in return get paid rent for use of their land and a separate salary for working on it.With Chaoda Modern's comprehensive logistics system and multi tier domestic and international sales network,it cuts out intermediaries and gets its products to wholesale and retail markets far faster and at lower cost and product wastage than any other competitive alternative.

Its sales,production,earnings and cash flow from operations numbers are all highly impressive - consistently growing at rates higher than 25% compounded on an annual basis for the past 5 years.

Its gross margins and net profit margins are all in excess of 60% and 40% respectively,its returns on equity and investment capital are consistently in excess of 15% and while its sales have been tripling every 3 years,at around US$800m,it is still at levels to support compound annual growth in sales and earnings in the double digits over the next 5 years.

Its numbers look more like a successful fast growing technology company or fashion retailer than a food producer and with strong end user demand for its vegetables and fruits in China and North Asia,there is not the risk of over expansion and market saturation that one gets with fast growing fashion or consumer electronics retailers or as was the case of Chesapeake Energy (a former portfolio holding),market saturation of natural gas or in the case of technology companies - product obsolescence!

Indeed the Chinese government made Chaoda Modern the key supplier of vegetables to the Beijing Olympics last year,further enhancing the company's reputation and brand.

Typical price earnings multiples in the food industry like Archer Daniels Midland tends to be in the 10-15 range with the higher end of the range given to companies with particularly strong balance sheets,operating margins and earnings growth.

Chaoda Modern is currently valued at 5.1 times existing earnings and at 1.05 times tangible net book value.

So why is it so cheap?

Chaoda Modern was set up by an entrepreneur in China who for all his brilliant business skills has yet to set up the company with the type of corporate governance that funds like to see.Results although within the time frames issued by the Hong Kong Stock Exchange are late compared to most companies;auditors have been changed twice in the last 6 years (although none was due to impropriety by the management) and like most driven entrepreneurs,his "land grab" strategy of continuously expanding farm production and acreage beyond free cash flow from operations has led to share issues,placements,convertible debentures and senior debt notes which although have led to earnings per share growth and returns on capital in excess of 15%,has caused fear amongst the investment community about the company's financial management.

When the credit crisis late last year was followed by the owners of the convertible notes deciding against converting to equity earlier this year,the stock price more than halved and has yet to recover.Chaoda Modern decided to clean up its balance sheet by making a share placement of US$50m at HK$5 at the beginning of the year which the CEO decided to subscribe to (enlarging his own shareholding in the company to approximately 25%) and by another share issue to pay for the convertible which was successfully taken up at the end of June.

It now has surplus cash when all its liabilities are deducted and with its annual cash flow from operations of approximately US$400m,it has room to meet its land purchase commitments and continue growing its production targets without further share dilution or debt facilities.

Chaoda Modern will be rerated if it continues to execute on its operational strategy and funds its expansion with existing cashflows.Even if it does seek further funds in the future,there is little downside to the stock from a fundamental basis.

This company was brought to my attention by a good friend of mine in Hong Kong on friday for investigation so if anyone has a company that they want to analyse for investment,let me know!

18th September 2009

Another high profile Financial adviser gets exposed for lying about his qualification.

"Stephen Gollop has been reprimanded for using the prestigious 'Certified Financial Planner" title without having gained the qualification.Mr Gollop,the chief executive of Tyche Group,who regularly gives investment advice on Bloomberg,CNBC and RTHK,has used "CFP" after his name for at least three years.Tyche Group advises retail investors,managing about US$40 million of clients' money.Financial advisers to the Hong Kong public do not need any formal qualifications,so Mr Gollop has not flouted any regulations." - South China Morning Post

"A lot of advisers put CFP on their cards without having the qualification it suggests...if you ask,some will say it stands for China Financial Planner" - Sidney Sze,chairman Independent Financial Advisers Association,Hong Kong.

On this website over the last year,I have highlighted a number of high profile investment advisers who were found out to be if not scam artists,then either,very average investors or people who really did not know what they were advising about.This related to people at the senior level of the investment industry nevermind the thousands of "junior" financial advisers and analysts who learnt about an investment "yesterday" and are paid commission to sell it to as many people as they can or are qualified to read a balance sheet and then extrapolate numbers into the future with little understanding about the business dynamics behind the company that they are recommending.

Hong Kong is the fourth largest financial centre in the world and to say that literally anyone can call themselves a financial adviser with no strong qualifications to back them up,is amazing.

Stephen Gollop passed a basic vocational exam in the UK- not a business degree,not a high profile,post university financial qualification from a prestigious Institute,just a basic vocational exam.

Clearly in life you will meet certain people who are highly self confident and have the flair to promote themselves but in reality have little substance behind their abilities and have little integrity about themselves or their actions.They may be self deluded and really think they are who they believe to be or as in the case of Bernie Madoff,truly evil people - unfortunately the investment industry attracts a large number of them.

16th September 2009

Sold Adobe at $33.54 net of charges and added to my positions in Hong Kong's Prosperity Reit and China Agri Industries - Track my stocks webpage updated.

Adobe's announced US$1.8 billion acquisition of loss making Omniture yesterday,is going to be earnings per share dilutive and I view it as no more than a "diworsification".

Adobe's stock price has now fully recovered from its March lows and is being valued at its historic 25 times multiple on its underlying earnings but its overpayment of a webanalytics firm is a danger signal to me that its management team is struggling to figure out how to continue to meet its historic annual earnings growth of 15%.

Adobe insists that this is a "game changer" for its customers but there are less expensive ways of doing this such as creating a partnership with Omniture or taking a minority stake in the company,both of which would have led to credible solutions for its customers as well as met shareholder needs of Adobe.

There are simpler businesses to invest in with less lofty valuations and strong fundamentals so I see no reason to take the risk of keeping Adobe in the portfolio.


15th September 2009

Interested in buying Hong Kong property at 40% less than market value?

Prosperity Reit added to the portfolio at HK$1.30 inclusive of charges.Track my stocks updated.
 

While a significant number of people in Hong Kong love to "invest" in real estate and a lot of residential real estate prices appear at odds with the prevailing economic conditions and people's salaries,there is one segment of the real estate sector that one can buy which is still trading at significant discounts,simply due to the investment vehicle being used. 

Make no mistake,if you had the capital to buy landmark office towers or buildings in Hong Kong,there is no chance that existing owners would be selling these properties at such steep discounts.The irony is that through real estate investment trusts,you can now buy them at such discounts.

Equity based real estate investment trusts are relatively low risk investments for people who are seeking income.They offer an alternative to bonds,treasuries and other fixed income asset investments and operate the same way as if you owned a property and lived off the rental income;expecting over time that your property (if not bought in a bubble) will appreciate.

 In Hong Kong,real estate investment trusts(REITs) began to appear in 2005 and when the Hong Kong government decided to float its own commercial properties at a significantly undervalued price (Link Reit),Hong Kong investors saw significant capital gains from this and consequently,opportunistic property developers decided to realise some capital by floating some of its own property banks in what became a "flavour of the month" investment/speculative frenzy.

The good thing about Hong Kong REITs is that unlike the US,they are all equity based ie the trust owns the actual properties compared to mortgage based real estate investment trusts where they own the mortgages (hence why certain REITs in the US showed amazing yields but then collapsed early this year).

The trouble with equity REITs in Hong Kong and with Hong Kong property in general,is that rental income yield is very poor due to high market sales prices for Hong Kong property.As a consequence,all REITs that followed,made financial arrangements to defer payments of interest on loans and other management fees to artificially raise the income yield in the first couple of years to attract investors.

Such financial engineering meant that investors who bought REITs would have been hit with very low income yields in subsequent years.The masking of poor income yields created very bad publicity for the nascent industry in Hong Kong as well as shook investor confidence in the integrity of the developers behind the REITs.That combined with the general Hong Kong stock market going through its bull run in 2006 and 2007 meant that investments which were income related and not capital growth related,were shelved by the general public.

 Several REITs realised that the deferral of financing and other costs did them no favours so decided to reverse engineer and offer clean ie real income yields on their investment trusts.This also facilitated their ability to look for complementary property acquisitions which would be yield accreditive to the trust,allowing such trusts the ability to expand.

Prosperity REIT,the REIT set up by Cheung Kong (Li Ka Shing's property company),began to offer clean yields late last year but given both the adverse publicity in the REIT industry to its original financial engineering combined with the economic downturn hitting all commercial real estate;has led to Prosperity REIT trading at 40% or more below its net asset value (as valued by Savils in June 2009).

 Prosperity REIT which is more diversified than the other private sector REITs has a number of offices and other commercial buildings such as the landmark Millenia Plaza in North Point and Harbourfront Landmark and Metropolis Tower in Hung Hom.It is managed by ARA asset management who also manage the landmark commercial towers of Suntec in Singapore and is an affiliate of the Cheung Kong group.Cheung Kong as well as Li Ka Shing's Hutchison Whampoa retain sizeable shareholdings in Prosperity (29%) and its future long term success will give Li Ka Shing's property empire a strong reference to enable further opportunities to unlock value by the use of REITs in Hong Kong.

Prosperity REIT is still trading at a discount largely due to the fact that 50% of its current tenants were set to renew their three year leases this year,creating uncertainty as to future occupancy of their buildings and rents.While Prosperity to date has managed to increase its rents from existing tenants by 6.3%,its occupancy has declined from 98% to 93% and may fall to as low as 80% by the end of this year due to excess capacity in industry/office buildings in Kowloon.

In the first 6 months of this year,Prosperity Reit generated an annualised distribution income yield of 8.5% at today's Reit price of HK$1.29 while capital enhancements and property revaluations (due to the gradual recovery from the credit crisis favourably impacting office and warehouse demand)has led to its gearing ratio to decline to 35.7% - the most attractive debt to equity ratio amongst the office REITs in Hong Kong (when one considers that Champion Reit's debt includes a convertible loan,risking future share dilution).

One needs to understand the gearing ratio of REITs since if they increase to 45%,REITs are mandated to make a rights issue diluting the income yield and the underlying value of assets to existing shareholders.

Indeed Prosperity's property portfolio minus loans owed,is valued at the equivalent of HK$2.14 per share and is likely to be further revalued as the economic recovery continues.

 Even if occupancy declines to 80% and 30% of its tenants negotiate a 25% reduction in rent for the next 3 years,annualised rental income yield is retained at 6.5% excluding any future recovery in the coming three years. 

Eventually the REIT will be valued at its underlying net asset value so an annual income yield of 6% to 8% at the current net price of HK$1.30 plus capital appreciation of 60% can be expected.

The wild card is if the management decide on a rights issue to buy new properties in China so that they can expand their empire which will cause dilution in income streams though REITs are supposed to only allow this to happen if it is income yield positive to existing shareholders.

Prosperity Reit should be considered by investors looking for strong income yields and seeking exposure to property in Hong Kong at significant discounts to market value and is added to my portfolio.

 

14th September 2009

Opened a position in United Health Group at US$28.98 - track my stocks webpage updated.

While I am bearish on the long term performance of most companies that are solely linked to the fortunes of the US economy,this is one stock that I am willing to make an exception to the rule.

All US healthcare stocks have been severely punished by the market due to fears of the US President's health care reforms.It is now pretty obvious that whatever reforms will happen,will now be significantly diluted and while I still would not be exposed to pharmaceutical companies,it appears US healthcare services companies and insurers are not going to be impacted as severely as once thought.

The fear and uncertainty plus typical market behaviour of chasing hot stocks in hot sectors,has driven the US healthcare sector to valuations never seen in this decade while the US demographically,is continuing to age.

United Health Group is the leader in healthcare services and insurance in the US with US$84+ billion revenues.It is a well managed and highly efficient company which has traditionally been valued at near 18 times earnings.While such a high earnings multiple is unlikely to be justified given the sheer size of its revenues;its market dominance and sheer economies of scale means that it will continue to prosper and be in a strong position to offer the cost effective services for the 10% of the US population that Barack Obama's reforms seek to address.

Due to the US recession impacting its commercial customers together with the current unfashionable nature of funds investing in the healthcare sector,United Health Group's valuation has nearly halved and is trading at 10 times current and forecast earnings.

Due to its insurance business,it generates huge cashflows from operations and when its capital expenditures are averaged out,United Health is being valued at around 8 times operating net cash flow.This is a health care giant with predictable revenues and cashflows that investors such as Warren Buffett likes.

Indeed by opening a position in United Health Group at current prices I am holding my first stock that both Warren Buffett and George Soros own.George Soros opened his first position 3 months ago at a 14% lower price but if both the ageing trend and demand for healthcare continues to grow in the US and Obama's likely reforms are proven to have minimal impact on United,the stock will significantly outperform the market.

Irrespective,I believe given United's market position,revenue,earnings and cash flow generating abilities,market pessimism is overdone and United's earnings multiples should be 13 worst case giving a short term price valuation target of around US$40 in the next 6 months.

 
14th September 2009

Dividends from Microsoft,Intel,SK Telecom and Anta Sports received in the fund - track my stocks webpage updated. 

28th August 2009

Sold my entire holding in Anta Sports,realised a 140% gain and opened a position in Alco Holdings at HK$2.61- track my stocks page updated.

When to sell and realise the gain is actually one of the hardest things to do.While I view Anta to be fairly valued,the fact that it was a sizeable holding and had more than doubled and is now valued at 20 times trailing twelve month earnings indicates that there is little reason to drive upside in the stock compared to when it was valued at 10 times earnings and growing earnings in excess of 20%.Given the sheer size of my gain in Anta,that gain now ran a higher risk of exposure to market sentiment than fundamentals and given the lack of market buying power after the release of their earnings results last week,I decided to exit the stock and realise the gain.

I was highly reluctant to include Alco Holdings in my fund portfolio given that it is a micro cap (ie company value less than US$500m) which means far less liquidity in its shares but this is one company that I have little problem continuing to accumulate if its price declines 20%,30% or 50% due to market sentiment.

My analysis of the business has to be spot on otherwise I could run the risk of being the only buyer in the market due its lack of size for most funds to invest in the stock!

As Jim Rogers and Marc Faber say,they love buying stocks that pay them to buy it (provided that the fundamentals of the company and its industry remain compelling and there is no risk of operational or balance sheet impairments).Dividend yields of 6% representing the maximum of two thirds on going earnings and being paid out of free cash flow from operations tend to be key buying parameters;tangible net book value of less than 1.3 and net current asset value of 1.5 tend to be others.

In the US and Europe,well managed,cash rich companies that pay out 3% to 5% dividend yield tend to be viewed highly attractive.Smaller,cash rich companies viewed with a higher risk premium are considered sufficiently attractive at 30% higher yields such as 6 to 7%.Anything higher providing the fundamentals of the business have not been impaired,would be viewed as undervalued.

Alco Holdings which is a Hong Kong owned consumer electronics manufacturing business based in China has a tangible net book value of HK$2.58 per share and a net current asset value of HK$1.94 per share.It has surplus balance sheet cash per share after all liabilities are deducted of HK$1.42 plus another HK$0.11 cents equivalent per share of corporate bonds.It also owns investment properties in Hong Kong valued at the equivalent of HK$0.12 cents per share generating rental yields in excess of 13%.

Alco Holdings consistently generates return on investment capital and equity greater than 10% per annum.In its financial year ending March 2009 including the worst period of the financial crisis,it increased its return on investment capital and equity to 12%.In fact including this period,its revenues increased 37%,its operating profits excluding one off non cash items,increased by 32% and its cash flow from operations tripled!

During economic crises,superior companies gain market share as weaker competitors decline.While market pessimism and fear has punished all export orientated Chinese manufacturing companies in the same way,it has failed to distinguish the winners.

Alco Holdings has been in the consumer electronics business for over 40 years and has been listed in Hong Kong since 1992.It is a family run business with the son being CEO and the father,the chairman.The father founded the business 42 years ago and the son has been in the business for the last 24 years.Alco Holdings is well managed and highly experienced in adapting to changes in the consumer electronics business over the past 40 years.Despite all the challenges,they have a successful long term record of growing revenues,equity and cashflows and delivering sustainable earnings irrespective of technology changes in the industry and economic cycles.

Their biggest customer Walmart is increasingly relying on Alco as one of their key Chinese suppliers (Walmart makes up nearly 26% of their revenues and the relationship has become even stronger during the credit crunch due to Alco's financial strength).I expect Alco to continue maintaining their revenues and current earnings at the minimum.

If Alco's net liquid assets are deducted from the company's market value,it is being valued at three times existing earnings (and that is earnings generated during the peak period in the credit crisis when global demand collapsed!).It is also being valued at only 2.5 times normalised free cash flow from operations.

The current undervaluation of Alco Holdings and proper reaction by the management team of responding to its low valuation by providing a dividend pay out ratio of 67% of earnings,gives Alco a sustainable dividend yield of 8.8% based on my purchase price.

Alco Holdings due to its small size,is a classic "buy as a long term business owner" stock and I consider undervalued by at least 30% worst case.In the meantime I will collect its dividends in my fund.

27th August 2009

What does it take to make sustainable,extraordinary returns on stockmarkets?

Extraordinary returns pretty much means consistently increasing fund net value by 20% or more,every year and far exceeding stock market index returns.

I believe that the 3 key qualities in one's make up and their relative importance, are as follows,

1) 20% - being a good financial analyst.

You will find most fund managers and the vast majority of equity analysts in the industry are good financial analysts but this is pretty much their only strength.

2)30% - being an excellent business analyst.

This is where legendary investors like Warren Buffett and Sir John Templeton excel.An excellent business analyst gets 85% of their stock picks correct.This borders on genius and given the track record of mutual fund managers supported by equity analysts,in getting largely,market average returns;demonstrates that there are very few excellent business analysts in the investment industry.

3)50% - ability to withstand crowd psychology.

The ability to withstand mass hysteria,media hype and not only stick to one's analysis but become increasing alone in one's opinion while simultaneously increasing one's purchases in ever larger volumes as stocks fall 20%,30%,50% is not something that one can learn to do,since it is a personality trait that you either have or have not.
Clearly you would be extremely foolish to be doing such a thing unless you have built a track record over a number of years,of a hit rate of 85% accuracy in your business analyses so you know that you only have a 15% chance of being wrong.If you cap your total holding of any one stock to 20% of your total portfolio,invariably the returns on 85% of the times that you make gains from taking such actions,greatly exceeds the losses on the 15% that you get wrong.

Billionaires like Soros and Buffett have realised or have been sitting on hundreds of millions of dollars of losses in their investments in the past but over time they have realised billions of dollars of gains.As long as one's position is capped at no more than 20% of one's holdings,taking such action knowing that more than 4 out of 5 times,you are going to be right,will lead to extraordinary gains.

Why I did not increase my holding on Standard Chartered Bank to 20% of my portfolio when the whole banking sector's share prices were continuing to collapse (see my blog on 4th March 2009) is that while overall,my business analyses to date are better than peers in the investment industry,it is nowhere near 85% hence only relatively small additions were made.

This portfolio over the next several years will be a good judge on my hit rate and I would be delighted to achieve 75%.

22nd August 2009

Today is the first anniversary of this website and my portfolio has appreciated in value by 11.3%.

I was considering updating my track my stocks webpage but I decided against it since the investment philosophy is not of a day trader but a long term investor and giving an update on current stock prices 7 weeks after the annual 30th June one,will only encourage short term judgements.

Nevertheless,since most of the companies (and all the key ones) have announced first half year financial results,the reversal of a loss of 3% to a gain of 11% in the past 7 weeks has been based on solid business results rather than any potential froth in the stockmarkets.

My top holdings continue to perform well and the one spectacular performer both as a business and consequently in its stock price appreciation,Anta Sports shows no sign of making any business missteps.Anta Sports which has appreciated 154% excluding dividends,is now on a par with Standard Chartered Bank as my top holding given the company's stock price appreciation.I was ready to sell Anta Sports this week if its interim results did not meet my high expectations but they exceeded them and this company could turn out to be one of the great Chinese business success stories over the coming years.

Thoughts on today's stock markets.

While I believe a number of the Asian stockmarkets (excluding Japan and Korea) are currently either overvalued or fairly valued,I believe that the US markets still have room to appreciate since its PE ratios are below their historic average.

Asian stockmarkets tend to amplify euphoria and pessimism far more than European or North American markets so it would not surprise me if the Hang Seng,Shanghai,Mumbai and South East Asian markets continue to appreciate higher on the coattails of the US stock market.

Volatility is something one has to live with if one is investing in equities so I can easily see gyrations of 10% up and down on a half monthly basis on my portfolio over the coming two years but I expect the overall trend to continue to be upward.

The thing that did surprise me was how quickly the markets corrected most stock prices which were significantly undervalued.Before it used to take at least two years for markets "to scale the wall of worry" and price back its errors but in the electronic age,it appears that it is more likely to happen within 6 months.

Given my investment technique,one has to use long term capital since the market appears to be governed by traders who will value entire businesses based on the next quarter than normalised annual earnings and who may buy or sell stocks based on chart patterns irrespective of business fundamentals.

I do not believe that I will continue to beat every single global stock market on a semi annual basis since markets such as Hong Kong tend to be highly influenced by sentiment so I can easily see the Hang Seng go up higher than my portfolio in total,only for it to decline far lower than my portfolio at a later date.Secondly at some stage,it is likely that I will be holding a significant part of my portfolio in cash since there is the risk that the market will be materially overvaluing some of my stocks' long term intrinsic values and at that stage,it will also likely be the case that there will not be any stocks available at significant discounts to their true business value that are within my circle of competence.This will impair my portfolio performance as sitting in cash no longer generates any returns!

I am fully weighted even including some of my short term capital, in equities since I believe that stock markets over the next 18-24 months will be very good for investors given the likely earnings appreciation of companies in 2010 and 2011 when compared to 2009;when market fear of the future and uncertainty over company earnings is cleared and when the sheer volume of cash that is still sitting on the sidelines in North America,gets back into stockmarkets around the world.

18th August 2009

Opened a new position in Becton Dickinson at US$66.96 inclusive of charges.

Another sector that the market is fearful about is the medical sector particularly due to Barack Obama's attempted healthcare reforms which would put downward pressure on prices.This had led to compression in price earnings multiples and worries about future sales and earnings results.

The drug industry is one that I typically do not invest in,due to the risks associated with drugs going off patent impacting company margins and drugs in the pipeline either failing clinical trials or simply not replacing successful off patent ones from a financial perspective.

However medical companies who are global leaders in the supply of diagnostic tools and regulatory approved healthcare equipment stand to gain as the world becomes more affluent.

Becton, Dickinson and Company is a global medical technology company based in the United States and is focused on improving drug delivery, enhancing the diagnosis of infectious diseases and cancers, and advancing drug discovery.The company develops, manufactures and sells medical supplies, devices, laboratory instruments, antibodies, reagents and diagnostic products worldwide.Its international sales is currently 55% of its total sales and growing at twice the rate of its US sales in constant currency terms.

Currently Europe accounts for approximately 35% of its international sales and Asia around 14%.I expect revenues from Asia will grow the fastest due to the growth in medical care that will arise as developing economies become richer.

Over the last 10 years Becton Dickinson has more than doubled its sales to its current US$7 billion plus.During that time its per share earnings and book value have consistently grown by an annual compound rate of 15% and 12% respectively.Its price earnings multiple normally is 20 but due to the uncertainty of the impact of healthcare reforms in the US,the global credit crunch impacting its biosciences division and the worldwide stock market crash,its price earnings multiple is currently 13.7.

Its return on investment capital and equity is consistently in excess of 15% and 20% and it has a balance sheet net cash surplus when its liabilities are deducted,of the equivalent of US$5 per share.

From public records,it appears that it is the only new company that Warren Buffett has invested in over the past couple of months citing its "predictability in revenues and cash flows" as a couple of his key reasons.

While I do not view Becton Dickinson to be as undervalued as Noble Corporation,it is less likely to be as volatile and as exposed to general economic cycles.As a result,it offers what Warren Buffet likes with his investments,long term predictability with little risk.

I expect that when the uncertainty over Obama's healthcare reforms is cleared in the US and Becton Dickinson continues its sales and earnings growth,it will be rerated and I have a target price on the stock of US$88 in two years.Its current dividend yield is 2% and likely to go higher as it traditionally raises its dividend every year and its current payout ratio is still less than 3o% of earnings.

Track my stocks webpage has been updated.


14th August 2009

Opened a new position in Noble Corporation at US$35.30 inclusive of charges.

When the US economy comes out of recession and begins to grow and when banks' credit issues get resolved and they begin to normalise lending (which is all likely to happen by this time next year),global demand for oil and the weakening of the US dollar,are both likely to continue their long term trends.

The motivating force behind the purchase of Noble is that it is one well managed,cash rich,oil services business exposed to the growing deepwater oil segment sporting a continuing fire sale valuation of less than 6.Even with its order backlog and a perceived decline in day rates for its shallow water rigs in 2010,Noble's valuation as a multiple of future earnings is at its lowest in ten years.

Noble's debt to equity ratio of 11% is wonderfully attractive in these economic uncertain times and is the lowest gearing of all offshore oil drilling service majors.It prudently did not make any company acquisitions during the peak in the oil cycle and its equity is made up of solid tangible assets (not any flaky goodwill and "intangibles"!).

Its return on equity and investment capital is consistently in excess of 24% and 18% respectively.It has an order backlog of US$10 billion which is greater than its equivalent annual sales for two years,protecting it from any potential risk of drastic declines in the oil services industry.

Well managed oil services companies,particularly those linked to the deep water oil segment generate huge amounts of free cash flow mainly due to labour specialisation requirements,capital intensivity of the industry and the high barriers to entry,minimising the competition.

Noble is no exception in generating such high levels of cash flow and even in the challenging first 6 months of 2009,Noble generated $900 million of free cash flow from operations after deducting for maintenance capex.This is unlikely to change in the second half of this year and even if rigs are idle next year and day rates decline 20% leading to a reduction in cash flow of 33%,Noble should still generate $1.2 billion in annual operating cash flow which I view to be the worst case scenario.

Given its earnings multiple has traditionally been 20 due to its successful growth track record,even in a depressed 2010 oil market,its valuation would now only be,what I calculate,as 7.5 times worst case 2010 operating cash flow.

Noble's rigs and drilling ships have typical useful economic lives in excess of 20 years so the market's pessimism,its short term view,fear of Noble's idle capacity in 2010,risk of penalties for late deliveries of new builds,has led to Noble being offered at a significant discount to its intrinsic business value.

Noble's customers are a who's who in oil producers from Exxon Mobil to Shell to Petrobras to Pemex to Saudi Aramco.

It is the third largest deepwater oil services company in the world behind Diamond Offshore and Transocean and the one with minimal debt on its balance sheet when offset by its cash reserves and liquid assets!

I have a two year conservative target price on Noble of US$50 which may be revised upwards.

Track my stocks webpage is updated with this new addition.

12th August 2009

Dividend from ABB received -Track my stocks webpage updated.

20th July 2009

Added to my position in China's Xtep International at HK$3.68 net of charges -Track my stocks webpage updated.

See my blog on 20th April 2009 as to why I originally opened the position.While Xtep is being rerated and has appreciated 35% in value since I originally opened a position,it still remains cheap.
 
Xtep is still sitting on its IPO cash of HK$1 per share on its balance sheet and when its net cash surplus is deducted from its market value,it is still trading at approximately 8 times trailing twelve month earnings while its revenues and earnings are continuing to grow in excess of 20%.

Its differentiated marketing strategy in creating a trendy Chinese sports casual wear fashion brand still appears under rated by investors.

 

 

 

 

18th July 2009

Today is the first day that Globalstockinvestingtoday's portfolio has recovered all its losses since the crash but what return am I targeting for my investments?

The objective of this website is to provide a living public record worldwide that my skills as an investment analyst and a manager of investment capital will lead to portfolio performance exceeding that of general equity markets but given that 12% per annum returns could attract $billions to Bernie Madoff then I will also target such a similar return for GlobalStockInvestingtoday.com.

The difference between Madoff was that he ran a secret Ponzi scheme while everyone can see my stock picks,prices and weightings on the worldwide web!

Given the holding period of my equity fund is a minimum of 3 years and by the end of the first year,it had declined 3%;the compound annual return required over each of the next two years would need to be 20%.This will lead to a capital appreciation of 40% by July 2011 (net 12% capital growth per annum from August 2008).

I think this is challenging and if accomplished,lead to the website's fund being amongst the leading global equity funds in the world when three year comparisons are finally made.

If held over five years from the launch of the website,a 12% annual capital growth rate would lead to capital appreciation of 75% by July 2013.This will require a compound annual appreciation of 16% over each of the next 4 years - a more achievable scenario compared to generating compound annual gains of 20%.

Despite my sale of Nokia at a loss this week;Intel and Infosys beat expectations when they reported Q2 and in their guidance for the rest of the year.Intel and Infosys are now above my purchase price.

Intel's outlook gave a boost to stock markets worldwide and has lifted my portfolio overall.This combined with my stocks linked to China's domestic consumption continuing to be rerated (due to confirmation this week of China's Q2 GDP rise of 7.9%),has led to the recovery of my portfolio from the stock market meltdown.

It has been a remarkable past 12 months in all senses of the word!

17th July 2009

Sold 87% of my holding in Nokia at US$13.72 after senior management's presentation to analysts yesterday and opened a position in Flowserve Corporation at US$67.98 - Track my stocks webpage updated.

While Nokia's Q2 results were good,senior management's lack of substantive progress of transforming Nokia to a mobile consumer services company,a highly unconvincing plan of future action,guidance for the second half of 2009 of operating profit margins materially deteriorating from Q2 and below its historic threshold of 10%,lack of clear traction of users and developers to their mobile applications strategy,no clear path to deal with its complicated organisation of over 124,000 people,senior management addressing too many diverse businesses,means that I can no longer justify holding such a big weighting of Nokia stock in my portfolio especially when there are still attractive valuations for companies with more focussed businesses such as Flowserve.

I personally cringe when I hear CEOs of large corporations say "we are accelerating the pace of change towards a solution mode of operation" when presenting a poor company outlook and backtracking on commitments.It is also a bit shocking that after 18 months of outlining its strategy,it publicly states that "Nokia must develop new skill sets"!

Few companies of more than 100,000 people have successfully transformed themselves with new skill sets with the same senior management team in place.

Even when large stalwarts such as Coke,GE and IBM successfully transformed themselves,it was with new CEOs who drove changes to the traditional culture.

Flowserve has been on my watch list for a number of weeks.This is a company which specialises in industrial pipes,valves,seals and infrastructure services for the oil & gas,power,petrochemicals and water industries.It is a well managed company that will benefit from the upgrades in infrastructure around the world and derives 63% of its revenues from outside of the US with approx 40% coming from emerging markets.

The new management that was appointed 4 years ago has successfully transformed the company by cutting costs,increasing revenues,improving operating profit margins and returns on equity.From 2005 to 2008,the management has grown revenues and earnings by an annual compound rate of approximately 15% and 57% respectively and with current annual revenues of $4.5 billion,there is plenty of room for further growth.

Flowserve used to be a bit of a stock market darling before the crash with a historic average PE ratio of 22.Given it is classified in the capital goods sector,its stock price collapsed when the availability of credit seized up.When Flowserve released its Q1 2009 results,it demonstrated just how financially strong its business really is with improving pre tax profit margins in the midteens,a 2009 earnings forecast based on its current order backlog (when credit issues were at its peak) highlighting a decline of only 4% to 13% including non recurring charges.

While investor confidence has returned to the stock,Flowserve is still valued at 50% less than it used to be before the recession and at a PE multiple of 10 times 2009 forecast earnings.

If the order book stabilises this year and is confirmed to be mainly due to temporary credit issues facing its customers,its long term PE should be 15 and when the recession is over and credit returns to normal (which should be by the end of this year),Flowserve should be able to consistently grow its sales and earnings in excess of 10% per annum.I have a target price on Flowserve of $100 by mid 2011,a 50% increase from today's price.

14th July 2009

Hopewell Highway Infrastructure,an attractive alternative investment for Hong Kong residents?

Given that there is no dividend tax for Hong Kong listed equities owned by Hong Kong residents,stable income yields of 6 to 7% in monopoly type businesses are very attractive;particularly ones that are also linked to the future currency appreciation of the Chinese yuan!

The initial reason that this company caught my attention was due to the CEO buying millions of shares in the open market at current prices,something that is always an attractive signal for investors provided that it is not to legitimise a rights issue,a cash call or an attempt at credibility to counter a poor management record.

Hopewell Highway is part of Sir Gordon Wu's family of companies.Sir Gordon Wu is a highly respected,far thinking and well known Hong Kong chinese businessman - one of a group of elder Hong Kong business leaders whose foresight and prudent management has led to Hong Kong's pre eminent position in Asia and its successful integration with mainland China.

Hopewell Highway Infrastructure develops and operates expressways linking major cities in Guangdong province,China's biggest economic region.Once the expressways are completed,it effectively runs a toll business whose revenue and profits are dependent on the number of vehicles and the general economic activity of the region.

Approximately 90% of its revenues and profits comes from its Guangzhou - Shenzhen expressway.These two are China's third and fourth richest cities with populations of 8.3 million and 12.6 million respectively.Hopewell Highway's net profit margin after tax has been consistently around 60% since its IPO in 2003.

While exports from China due to the downturn has hit Guangdong province the most,Hopewell Highway's traffic statistics indicate that volume has stablised back to 2006 levels. With China's economic stimulus favouring domestic consumption including cheap loans for cars,traffic volume is likely to rise again annually from these depressed levels on a consistent basis in the future.

There is no real alternative to this expressway so it is a monopoly business generating large cashflows.

Hopewell Highway will soon be extending its other western delta expressway from Guangzhou to Shunde,to Zhongzhan.This is on target to be completed by end of June 2010.These are smaller cities but still in the top 40 cities in China from a GDP per capita basis with populations of 1.1 and 1.3 million respectively.

When the extension is completed,the increase in revenues and profits along with the general rise in traffic volumes across all their expressways,will likely offset the increase in Hopewell's PRC tax rates from 20% to 25% over the next 4 years as tax concessions wear off.

Hopewell managed to sell off their equity stake in one of their ring road projects for US$248M at a book value multiple of 2.2 in September 2007.This ring road represented approximately 10% of Hopewell Highway's revenues and earnings in 2007.

Hopewell is now currently valued at 1.3 times book value and at its lowest share price since its IPO.It has sufficient cash on its balance sheet and with its credit and debt facilities to fund its future expressway developments and claims that it can now target a 100% pay out ratio of its earnings in dividends,in future.

Its lease for Guangzhou - Shenzhen expires in June 2027 and Hopewell Highway Infrastructure is likely to generate stable earnings of 35 to 45 HK cents per share per annum until the expiry of the lease.Its dividend policy has been in the range of 74% to 97% per annum since its IPO.

It has managed to grow its earnings by 80% to its now stable level over the last 6 years,increase its dividend by 50% while it stock price is back to just 4.5% higher than its IPO price six years ago!

At a current price of HK$4.37,a PE ratio of 10.9 for 2009 earnings and a likely dividend yield of 6.5% to 7.8% in future,one can understand why the CEO purchased millions of shares in the open market for this operator of one of China's biggest tollways.

Given current offerings of Chinese yuan denominated bonds have coupon rates of 2.8%,Hopewell Highway Infrastructure appears to be a great way of being exposed to a relatively risk free,yuan investment while generating substantial income yields at current prices.

One for Hong Kong investors who are looking for strong income yields.

5th July 2009

Reflecting on my investing mistakes from the first year's fund performance.

As all great investors say,one learns more from studying mistakes both on stock picks made as well as stock picks that should have been made and at this stage,out of the 22 stocks picked,I recognise making 3 incorrect analyses,2 analyses that I should have been more prudent with,in regard to their ability to execute on strategy or in relation to their competitive threats and 1 analysis where I accept overpaying for the stock irrespective of short term market volatility.

I also recognise 3 stocks that I kick myself for not buying for the fund when the market got totally irrational.

The incorrect analyses will be classified under 3 categories,

1)Financial (F)- not paying sufficient attention to their financial make up

2)Business (B)- incorrect business analysis

3)Management (M) - incorrect analysis of management integrity

So the 3 that I got wrong completely were the ones that I exited,generating losses.

America Movil (F) - Financial.

While I understand the telecom operator business pretty well,I overlooked the fact that America Movil generates the majority of its income in Mexican pesos and as explained in my blog dated 10th October 2008 when I sold my holding,America Movil is more a play on the peso than a play on their wireless business -something I overlooked and consequently realised a loss.

Garmin (B) - Business.

This was a classic "driving a car through the rear view mirror" business valuation mistake.I paid too much attention to Garmin's historically strong business and financial performance and extrapolated it into the future,without paying sufficient attention to the fact that the 800 lb gorillas Nokia and Apple were going to take over the majority of consumer demand for GPS through their introduction on mobile phones.That combined with the fact that Garmin's high margin GPS business was in the ever declining big ticket segment such as cars,boats and private small planes meant that its best days are likely to be behind it.

Chesapeake Energy (M) -Management.

As explained on my blog on the 11th October 2008,the CEO of Chesapeake Energy acted as a classic "pump and dump" promoter who recklessly overleveraged on margin to demonstrate to the market that he was buying into Chesapeake's ever increasing share rights issues to continue drilling its gas discoveries.

When Chesapeake's share price was collapsing and its low valuation made no sense,Aubrey McClendon was forced to meet margin calls by dumping all his 33 million shares(5.2% of Chesapeake's entire share capital) during the time when funds had practically stopped buying into equities (except to cover shorts!).

When I sold,I did not realise that it was him that was killing the stock and when rumours were made that Chesapeake's natural gas price hedges were not going to be honoured and that they had working capital funding issues,I decided to exit due to the unacceptable risk of bankruptcy despite its net asset value greatly exceeding market valuation.

If the CEO was more responsible to his shareholders instead of his reckless promotion and financial mismanagement,it is unlikely that I would have sold the shares since fundamentally Chesapeake has strong assets and its share price would not have gone into such an accelerated freefall similar to that of companies going bankrupt.

The one stock that I accept overpaying for,was Esprit.

It was not very smart to open a position in a retailer being valued at its historic PE ratio of 20 when its main markets of Europe were going to enter a recession!That compounded with the subsequent change of the CFO,the President of the Brand and the appointment of a new CEO unfamiliar with fashion retailers after I bought the stock,means that the original management team which was part of the reason why I invested in the first place,have all practically left!

Of the two current holdings that I should have paid more attention to their ability to either execute on strategy or be impacted from competitive threats and only opened positions at lower prices,were Nokia and NASDAQ OMX.

Nokia - see my blog on 9th September 2008 as to why I have Nokia in my portfolio.While I stand by my holding and recognise the competitive threats posed by RIMM in the smartphone segment and Samsung in the mass market;the issue is that Nokia is struggling to execute on its mobile services strategy.

While Apple has seen its one billionth download from its applications store,Nokia is still far away from getting similar traction with its Ovi store.

Given Nokia's senior management track record in consistently delivering on strategy combined with its global reach,economies of scale,brand and mobile device expertise,I will give Nokia time to achieve its stated goals.While I viewed its subsidiary Nokia Siemens Networks as a drag on its earnings,it appears that it will benefit from the current consolidation in the telecom network vendor space by picking up Nortel's profitable CDMA wireless business and its commercially most attractive technology,LTE (4G wireless)for cents to the dollar,as Nortel gets wound up by its creditors.

NASDAQ OMX - while I still maintain that over the long term,NASDAQ's stock price will recover and its revenues and earnings will continue to grow;it is facing a competitive threat from "dark pools" and new trading exchanges accomodating these requirements such as BATS.

Dark pools are trading volumes created from institutional orders,unavailable to the public and facilitated away from the traditional exchanges.Traders and hedge funds like these platforms so that details of such trades are hidden from the public.One would think given the fiasco of last year's stock market collapse and the overleveraging of hedge funds that such vehicles would be stopped but for some reason they are being allowed to continue and are taking trading business away from NASDAQ.

Given the lack of legislation preventing dark pools,NASDAQ is now addressing this threat by offering new services to accomodate such requirements.

The three stocks that got away

Brocade Communications Systems (BRCD - United States)

I was actively evaluating this company in January and February and when the market fled from mid cap or small cap companies with long term debt during the credit crisis.Brocade's market valuation ended up being reduced to around $1.3billion.Given its long term debt of $1 billion (to fund the acquisition of fast growing data networking vendor Foundry Networks),Brocade's economic value (market cap plus long term debt) ended up being US$2.3 billion.

Brocade is the leading vendor in a duopoly in the highly profitable data storage switch networking space and with its acquisition of Foundry (whose data networking technology will give Cisco a significant competitive threat once it achieves the global distribution scale that Brocade can offer);the company was being valued at around 6 times trailing twelve month earnings.

Brocade has been growing its revenues and earnings at a compound annual rate of 40% and 25% respectively and at current revenues of $1.5 billion with the size of the enterprise ethernet switch market being in excess of $18 billion per annum alone;it can continue to grow its revenues and earnings at compound annual rates in excess of 20% and 15% respectively over the next 5 years.Its PEG ratio (price to likely future earnings growth rate) ended up being 0.4 when 1.3 would have been fair value.

Brocade in the last 4 months has more than tripled in price as the market realised its valuation mistake.

Research in Motion (RIMM - Canada)

For the last several years,Research in Motion,the number 2 smartphone maker,could not be bought at a reasonable price but irrespective of this, RIMM and its management team have built a great business.In the "engaged society" macro economic growth trend that I referred to in my blog on the 10th June 2009,RIMM is likely to continue to be one of the main beneficiaries.

When RIMM's stock price declined to $40 in February,when taking into account its balance sheet net surplus cash and receivables of $4 per share,its valuation was approximately 10 times trailing twelve month earnings.RIMM is likely to continue to grow its earnings in excess of 15% to 20% per annum in the forseeable future.At $40,RIMM had a PEG ratio of only 0.5.

RIMM has risen by 75% in the last 4 months.

Vale (Brazil)

When I bought China's Zijin Mining in November after mining stocks had practically collapsed (see my blog on 18th November 2008),such similar logic should have led me to buy Brazil's leading miner at the same time since Vale also has a strong balance sheet which would have withstood the financial tsunami.

Vale doubled when the market realised the world was not going to end.

Still I got gains in excess of 100% on China Huiyuan Juice,Zijin Mining and Anta Sports;took advantage of the low stock prices of Standard Chartered Bank,Intel and Infosys to build bigger positions and opened new positions in Microsoft,SK Telecom,Xtep International,China National Offshore Oil Corporation(CNOOC) and China Agri Industries.

Although I do not expect that my fund will beat every single major global stock market on a semi annual basis every time my results are published,I do expect it to outperform cumulatively over the three to five year period as stated in the launch of my website.We will also see how the fund managers from the financial institutions compare in managing global equities.

1st July 2009

GlobalStockInvestingToday.com's equity fund declines just 3% after its first year despite the longest bear market and biggest crash in stocks since the 1930s.

My global equity fund significantly outperformed stockmarkets by an average of 16% (see track my stocks webpage) and global equity funds by an average of 24% - how did I do it?

There are 6 key reasons for such major outperformance compared with other investment managers,funds and indices;

1)The correct capital structure - only employed long term capital that can be tied to equities for a minimum 3 years so no use of either leverage,leading to margin calls or use of short term capital resulting in distressed stock sales.

2)No holding of property related companies,banks materially exposed to worthless derivatives,mining companies or shipping companies when commodities were at their peak.

3)Reduction in exposure to energy companies before the crash in oil stocks (the sale of Transocean which originally represented 7% of the equity fund,at no capital loss) - see my blog entries on 26th and 29th September 2008.

4)The identification of severely undervalued Chinese equities which led to capital gains in excess of 130% in the first year of fund operations (Huiyuan Juice,Zijin Mining,Anta Sports) - see my blog entries 26th August,29th August,3rd September,18th November 2008 and 2nd March 2009.

5)Correct financial and business analyses of my largest holding,Standard Chartered Bank leading to a first year capital gain in excess of 15% in the stock.This is in sharp contrast to the permanent declines in value in the banking sector - see my blog entries on 8th December 2008 and 4th March 2009.

6)Rigorous focus on companies with solid earnings,cash flows,sustainable competitive advantages and superior management abilities.

I would be surprised if by the end of this year,the fund does not show a positive return.

Cheng Hye Cheah's Asia hedge fund has had a remarkable recovery in the last 3 months and managed to break even.It would not be a fair comparison to make with my fund since his hedge fund includes bonds,gold and other financial instruments so it is not a pure play equity fund similar to mine.

The striking thing is how poor mutual fund managers appear to be when it comes to managing global equities.It is at times of severe financial distress that the quality of the manager,company valuations and business analyses are exposed.

I will go into further detail on my thoughts to my existing holdings as well as stocks that I did not buy which I should have paid more attention to,during the coming week.



30th June 2009

Dividends from China Agri,CNOOC,Infosys,Microsoft and Intel received in the fund.Funding of SK Telecom purchase now reclassified from margin to short term capital due to capital allocation.
 

16th June 2009

South Korea's SK Telecom,an absolute bargain?

GlobalStockInvestingToday's fund adds an opening position in SK Telecom at US$16 on margin. 

Leading wireless operators are superb generators of cashflow.The risk tends to be whether management behave like owner managers and maximise shareholder value by buying back stock and/or returning excess cash to shareholders via dividend payouts or whether they use the cashflows to go on reckless acquisitions to create expensive empires for themselves and destroy shareholder value at the same time. 

The mistake that I made with my previous wireless operator stock pick,America Movil was that I did not pay sufficient attention to the fact that it generates most of its cash in Mexican pesos - a currency that I am not particularly keen on given that Mexico is heavily dependent on exports to the US (over 50% of all exports) and that 33% of its annual budget and biggest source of foreign currency receipts, are from its ever declining oil reserves.

While America Movil's management did behave like owner managers (Carlos Slim owns the majority of shares in the company) and picked up wireless assets on the cheap,generating cash flows in Mexican pesos is not sufficiently compelling given the scale of economic risks attached to Mexico,from my perspective.

South Korea's currency is also a financial risk that needs evaluating.In contrast to Mexico,South Korea's exports are far more diversified with 27% going to China including Hong Kong,approx 15% to the US and 9% to Japan.South Korea's generation of foreign currency reserves is driven from a far wider industry base with consumer goods to IT to steel to shipping to petrochemicals.Its leading companies,Samsung,LG,Daewoo,Hyundai and POSCO have all become major international companies in their own right,consistently increasing their global market share.

South Korea has minimal external debt of $3.7 billion and holds the sixth largest foreign exchange reserves in the world at $212 billion (in contrast to Mexico's $178.3bn external debt and $76 billion in foreign exchange reserves).While the financial meltdown led to the flight of capital funds back to the US dollar last year,consequently devaluing the South Korea Won from its mean of 1000 to its current 1250 Won,I do not expect the Korean Won to further decline over the long term.Indeed if the US dollar does devalue over the long term due to the US fiscal position,I expect the Won to appreciate as a consequence.

SK Telecom has 50% of South Korea's wireless market and the lowest churn in subscribers (2.3%).Its market share and churn rate has remained remarkably consistent over the past four years.While South Korea does not have the same growth prospects of Latin America,it does not have the same competition either.

Average revenue per mobile user (ARPU) is forecast to continue to decline at a compound rate of 3% per annum over the next 5 years.This is mainly due to the Korean market being advanced in terms of wireless services and mobile penetration and essentially being confined to 3 operators serving a population of 48 million.

All three operators are reluctant to lose margins for the sake of increasing market share thus reducing the pressure on price reductions.South Korea is at the cutting edge of wireless multimedia services and along with Japan,defacto leaders in the world as to next generation mobile consumer services.

The pricing strategy of Korea's operators is to bundle new and an ever increasing range of consumer services on mobile phones to improve margins and further protect prices and returns on investment capital.In contrast,in the similar market of Japan,ARPU declines are in excess of 10% due to Softbank aggressively going after what was essentially,a duopoly of NTT Docomo and KDDI.

SK Telcom's market value is $10.5 billion,it has net liquid assets (surplus cash and investment assets after deducting all net liabilities) of US$2.7 billion.

It intends to spend $700m and take on $500m debt to buy its affiliate network company and reduce $240 million in network leasing costs per annum;improving operating margins by 8% to 28% (when compared to SK Telecom's Q1 2009 earnings report).

SK Telecom's average annual free operating cash flows over the last 5 years (cash flows from operations less capital expenditure) is approx $1 billion to $1.2 billion.

4G capital expenditure due to LTE technologies as well as the severe competition between wireless network equipment vendors is leading to capital expenditures for wireless networks being lower than in previous years (confirmed by SK Telecom's cash flow statements).This combined with the stability in the operator market in Korea,gives me reasonable assurance that SK Telecom can continue to generate $800m to $1.2 billion annually in free operating cash flows in future.

So we have the number 1 wireless operator in the 13th biggest economy in the world with  stable cashflows of $1 billion per year,being given an economic value of around $9 billion (market value of $10.5 billion minus net surplus cash and investments of $1.5 billion after network acquisition).

In contrast Verizon,if one makes a similar calculation of economic value,is valued at 25 times its average annual operating free cashflow;Vodafone at 11 times,NTT Docomo at 10 times and China Mobile (given that it is the only operator in this comparison which has successfully grown cash flow at a compound rate of 15% per annum) at 10 times expected future cash flows.

China Mobile and NTT Docomo have very strong balance sheets with very low debt to tangible net asset ratios (below 0.4) and good return on investment capital (ROIC) ratios at 18.6% and 12.5% respectively.

The risk with China Mobile is that the Chinese government's telecom reorganisation to promote better competition as well as the forced adoption of China's own wireless standard of TDSCDMA, will undermine China Mobile's existing competitive position and that it will not have the same monopoly on wireless services and technology choices that it had in the past (China Telecom has now become a serious competitor in wireless out of this reorganisation).

It is doubtful that China Mobile can maintain its profitability at the same rates as in the past as well as generate the same rate of growth in ARPU.

With respect to NTT Docomo,its ARPU and ROIC are coming under serious pressure due to Softbank's market strategy so the level of its future cashflows compared to its past,also contains significant risks.

No such risks are affecting SK Telecom in Korea and with a strong balance sheet (debt to tangible net assets ratio of 0.55) and average 5 year return on investment capital of 15%,SK Telecom appears to be the most stable future generator of cash flows with the lowest multiple of market value,amongst the leaders in the wireless operator category in the most stable markets of US,Europe and Asia.

Vodafone has US$123 billion of goodwill and intangibles on its balance sheet and given that the market has valued the company at 70% of its balance sheet "book" value,the market is already discounting nearly 33% of such assets as worthless.Given Vodafone's poor ROIC over the last 5 years (actually negative due to write offs caused by poor managment decisions in buying overvalued assets),this is not surprising.

Ironically,Verizon is not much better either.Its goodwill and intangibles are $100 billion and while its average 5 year return on investment capital of 8.6%,demonstrates value in its acquisitions;its balance sheet debt to net tangible assets ratio is 1.46 ie its liabilities are nearly 1.5 times the hard assets it owns.Its balance sheet equity ie net asset value and market value is pretty much made up of someone's interpretation of the current value of their goodwill and intangibles!

SK Telecom's stock price and related market value is back to where it was 6 years ago while it has generated more than US$7 billion in earnings for shareholders in the interim,giving a dividend payout of over 50% of earnings per year and consistently buying back its stock and reducing its debt levels.

It is likely to have a US$dividend yield of 5% to 6% going forward at its current stock price,even with the Won remaining at its relatively weak rate of 1250.

SK Telecom is being accumulated in the fund.

10th June 2009 

What are the key global trends that GlobalStockInvestingToday's fund are invested in?
 

I have referred to Warren Buffett a lot on this website but the fund also follows part of the philosophy of another great investor,George Soros in investing in major global macro and socio economic trends.

So what are the trends that my fund is directly or indirectly exposed to?

89% of the fund is invested in companies that either dominate and/or are sufficiently well managed to gain,from three key trends that I perceive.

The first trend that I see which I believe is irreversible and will continue to rise exponentially,is what I define as "the engaged society".

How economies,businesses,consumers and societies are and will be linked in the 21st century due to the internet,mobile devices,note/netbooks,digitilisation of information and multimedia is a phenomenon that has a significant way to go.

I believe companies that are key players who either dominate areas in this or dominate niches in it,will continue to prosper.

Microsoft,Intel,Nokia,Adobe,Dolby and Infosys are in the fund as a consequence of this trend.

These companies represent approximately 44% of my fund.

The second trend which I believe to be irreversible,is the continuing significant rise of developing economies.

This is partly as a result of the first trend and will lead to significant increases in demand for local banking services,power and infrastructure development and for oil.As a consequence this will also elevate global demand for oil and the value of oil services worldwide.

Standard Chartered Bank,ABB,China National Offshore Oil Corporation and Superior Energy Services are in the fund as a consequence of this trend.

These companies represent approximately 32% of my fund.

The third key trend is the rise of China's consumer society and major growth in China's domestic consumption.

The Chinese government has already expressed that the next wave of growth for China will require domestic consumption at far higher rates than in the past and that a better balance between economic growth from exports and domestic consumption will be required.
China is already beefing up its public healthcare and other social services to better improve confidence of the Chinese consumer and to stimulate increasing consumption.Moreover as China gets richer,its food consumption will also continue to grow.

Anta Sports,Xtep International and China Agri are in the fund as a consequence of this trend.

These companies represent approximately 13% of my fund.

The trouble with investing in Chinese equities (similar to Indian equities) is that there is far more irrational exuberence and pessimism governing these markets compared to the US or Europe and sometimes one has to be more frequent in selling,due to valuation not justifying even long term fundamentals.

For the remaining part of my fund,8% is in NASDAQ OMX as a proxy for the continued growth in electronic trading in an increasing number of asset categories,the growth in trading volumes based on increasing money supply and the preferred listing exchange for emerging companies seeking an international listing.
NASDAQ's brand and technology platform has led to it securing its leadership position as the largest electronic exchange in the world with the capacity of managing more volume per hour than any other exchange.

3% of the fund is miscellaneous and allocated to Esprit,a growing,international fashion retailer.

We will see how accurate my equities' exposure to these trends will play out over the next few years but I feel encouraged about the performance of my fund to date.


7th June 2009

Am I currently evaluating any new investments?

Given that markets and investors are recovering from the sheer panic and fear that took hold from October to the beginning of March and things have got a lot more rational if not exuberant lately,I have not stopped looking at equities for possible investment.

While I will post a blog on 3 equities that got away that I looked at and should have acted upon during the mass sell off (once I release my first year's fund performance in July);I have yet to see something as compelling from a price to value and risk perspective as my last addition, Xtep International in April.

Moreover given that I have exhausted all my long term capital for investment,any new addition would need to be sufficiently compelling for me to either rotate my existing holdings or use margin.

So aside from equities,what am I evaluating?

1)Corporate bonds - given the panic in credit markets,even AA+ rated bonds (the second highest class of bond) from blue chip companies have significantly high interest.For example in Hong Kong,quasi government controlled companies like Kowloon Canton Railway and MTR (Hong Kong's mass transit railway) have bonds paying coupons of 7.5% to 8%.With bonds of this type,you will not get much capital appreciation since they constitute minimal risk but if your profile is that of someone who is seeking guaranteed income with protection of capital from wild volatility caused by speculators and traders,then this type of investment is something one should seriously look at.

At a certain age,depending on financial commitments and temperament,most people with excess cash should hold a mix of bonds and equities.

2)Powershares DB Base Metals Fund - when economies start to recover and western banks begin normalising lending again,given all the money that is being printed,there is a real risk of inflation and as a result,currency devaluation.While I believe that the Chinese Yuan is the most protected of all currencies worldwide from such downside and nearly 14% of my equity fund is pretty much denominated in Yuan through the stocks that I own;hard commodities such as zinc,copper and aluminium are worth considering as an investment as a hedge against inflation.

Unlike bonds,owning zinc,copper and aluminium will do nothing in generating income but if you feel uncomfortable with owning particularly pounds or dollars given monetary policy in the UK and US,then this could be an option since the prices of all commodities will rise as a consequence of economic recovery and substantial increases in money supply.Given the biggest variable cost in the production of aluminium is energy,it is also an indirect play on elevated oil prices as well.

The big question is when will inflation begin to rise significantly?That is worth a separate post in itself but given the world economy is still in negative growth mode and contracted the most since the second world war in the last 8 months,I doubt it will happen in the next 12 to 18 months despite speculators recently driving up commodity prices particularly oil and China taking advantage of low commodity prices by essentially stockpiling and expanding its commodity reserves.

5th June 2009

How the Global Stock Market crash ruined the reputation and credibility of Britain's "Superwoman" fund manager.

"Nicola Horlick, of course, earned the title of Superwoman for her self-confessed ability to juggle serenely the demands of being a hands-on mother to her six children, while performing the role of a perfect wife and maintaining a high-powered City job which earned her vast sums of money and immense respect in her macho work environment.Everything Horlick touched turned to gold. She managed billions of pounds of other people's funds in the City, she fronted advertisements for investment firms, and was considered one of the most influential businesswomen in Britain.Bathing in the media limelight, the glamorous multimillionaire investment banker wrote Can You Have It All? - a manual of domestic organisation for women. The implication was: 'Yes - and I'm the living example.'

Supremely confident in her abilities - one rival once described her as an 'impetuous self-publicist with an ego the size of The Ritz' - she set up a new investment company in 2005, naming it Bramdean...In under 21 months, the company's shares more than halved from 100 pence in value to just 44 p.Then, in December last year, Bramdean announced that £21million of assets (approx 15% of the fund) had been placed with the American financier Bernard Madoff, who had just been arrested for a gigantic £30 billion financial fraud....At one point, Horlick described Madoff as someone who was 'very, very good at calling the US Equity market'.''- Daily Mail 9th May 2009

While most equity funds were sitting at paper losses of 40%  at the bottom of the most ferocious bear market since the 1930s,the most damning judgement on Nicola Horlick was that she gave investors' money that she had no clue on how to invest,to someone else - Bernie Madoff.Irrespective of her being conned by the biggest investment fraudster of the 21st century,the fact remains that she was not honest to admit to her clients that she had no clue on how to invest their money profitably and did not have the integrity to return their money.

Even the greatest investor in the world,Warren Buffett at one point closed his partnership and fund,returning their investments plus 1000% in gains since he could not find a single stock worth investing in,during one of America's stockmarket bubbles in the 1960s.

3rd June 2009

How GlobalStockInvesting's fund is exposed to the Indian market.

The three economies that I believe will continue to show sustainable superior economic growth are China,India and Brazil and while I wish I could access the Indian and Brazilian markets similar to the Hong Kong stockmarket for my fund,I am pretty much restricted to ADRs listed in the US market (ie Brazilian and Indian companies who have secondary listings in the US).

Given the outcome of the Indian elections,the resulting political stability and continuation of leadership by the father of India's economic reforms,Dr Manmohan Singh;India is likely to continue with economic growth in excess of 6% despite overall global economic contraction in 2009 and this has led to a resurgence in investor sentiment in India.

The companies held in my portfolio that will directly benefit from India's continuing economic growth are, in order of impact

1)Standard Chartered Bank - 24% of the bank's operating profit from its wholesale division is derived from India and it is also expanding its consumer banking business in India, benefitting from the growth of the middle class in India as well as the continuing growth and development of Indian enterprises.

2)Infosys - even though this Indian company is a play on the continuing growth and innovation of India's software and services industry as opposed to domestic growth,as funds increase their weighting in the Indian stock market,it will lift demand for all Indian blue chips including Infosys.

From a business perspective,Infosys currently does less than 2% of its revenues in India but has a number of major opportunities in its pipeline from India that did not exist before.

3)Nokia - India is Nokia's second biggest market.According to the Indian Economic Times,Nokia in terms of revenues generated,is the biggest multinational company in India and has 60% market share of the Indian mobile device market.As the Indian consumer prospers,they are likely to transition to Nokia's higher margin devices as Nokia has strong customer stickiness in India and is recognised as India's most trusted brand in the brand equity survey,conducted by AC Nielson in 2008.

4)ABB - due to demand for power infrastructure and growth in India's industrial sector,India is one of ABB's fastest growing markets and soon to become one of its top 5.

5)Esprit - as consumer demand grows from India's young and middle class population,fashion retailers such as Esprit will benefit from demand for quality and stylish clothing at the mid tier price segment and India is one of Esprit's fastest growing markets though currently yet to make a material impact on its earnings.

Again,I wish I could gain access and evaluate some pure play consumer and retail as well as infrastructure Indian stocks but these are not listed as ADRs,restricting the choice for my fund.

2nd June 2009

Real estate or stocks,which is the best investment?

Given the most vicious crash in stockmarkets worldwide in the last 12 months,you might think that if you invested in stocks,this has been far more damaging to your net worth than if you purchased an investment property in a developed economy such as in Europe,US or Hong Kong.You may also think that buying property is a less risky investment but consider this

1)Equity funds in general and stockmarkets are down 25% or more and are from a historic perspective,at relatively low price to company earnings ratios.

2)House prices,depending on country,is down in the range of 10% to 20% but are still at historically high price to owner earnings ratios.

Typically property has grown in price by an annual compound rate of around 6-7% over the very long term in Western economies while from 1998 to 2007,it grew by a historically abnormal 10-20% per annum (which was part of the reason for the credit crisis since such continual annual growth in property prices was never sustainable,particularly since salaries in developed economies grew by less than 5% per annum).

The forecast for house prices pretty much worldwide,is for a further 7% to 10% decline in the coming 12 months.

So in the last 12 months if you had excess long term capital and bought an investment property instead of a low cost index linked equity fund or even better,a well managed,relatively active equity fund,then these are the likely results

1)buying a relatively decent investment property which is likely be rented out 12 months of the year,would require investment in a city property and would have cost depending on city,around 200,000 pounds in the UK or 280,000 euros in Western Europe,US$300,000 in the US or 3 million Hong Kong dollars in Hong Kong.

The transaction cost would have been around 3% of the price of the property and running costs for insurance,management fees and incidentals would be around 0.5% to 1% per annum.

If you had sufficient excess capital to deposit 30% of the purchase price on the property,you would have invested,including transaction costs,66,000 pounds,92,400 euros,US$99,000 or 0.93 million Hong Kong dollars.You are also assuming that you have job or rental income security over the next 20 years to meet debt payments on your asset investment to prevent you from making a distressed sale and can deal with sizeable debts as defined by mortgages both to your emotional wellbeing in times of economic and financial stress as well as to your lifestyle spending needs.

With equities,you just invested with your own long term capital!

Say that currently your property has declined in value by 15% and taking the US dollar property as the example,the value of the property would now be $255,000 while you are still saddled with a debt of $210,000 plus interest and running costs.The equity that you invested in your property has declined to $45,000.

Assuming that you can generate rental income to cover the interest and running costs,your net worth on this asset has actually declined by 54.5% with the likelihood of it being even lower in the coming year (you invested plus charges $99,000 and it is now worth after debt/mortgage is deducted,$45,000).Property prices will potentially revert to their historic average price growth rates of 6% in developed economies over the long term,as banks become more conservative with their mortgages to fix their own balance sheets.

So even with the worst crash in global stockmarkets since the 1930s,your net worth decline in stocks is actually less plus you can consider using judicious use of debt (margin) to take advantage of historically low stock prices if you wish.

The trick was to have set up the correct capital structure (long term cash) in the first place and invested in quality companies at reasonable prices so that any current declines in their stock prices are more cyclical in nature than structural ie when the economy bounces back,they will prosper and their price earnings ratio will revert back to their historic mean.

Having a superior equity fund with capital managed responsibly,will already have led to no more than what is likely to be a 15% -20% temporary decline in net worth though unlike properties,you are not bombarded with the "world is going to end,get out of stocks now!",a daily tickertape of what your fund and your equities are currently selling at or being confronted with a decision of buying stocks when the likelihood is that the price could get temporarily,even cheaper the next day!

Again with stocks,having the ability to do correct due diligence,to recognise quality companies at reasonable prices and the emotional fortitude to withstand inferior financial analysts,investment managers and day traders is not something that is an ordinary skill,as the last year has ruthlessly exposed.


1st June 2009

Xtep International,Nokia,Intel,Microsoft,Standard Chartered Bank and Anta Sports dividends received in the fund.Original cash used to open a position in Xtep reclassified as long term capital.Fund holdings reweighted as a consequence,in Track My Stocks webpage.
 

6th May 2009

Added to my position in Xtep International and Standard Chartered Bank gets a significant valuation rerating by the market.

I have updated the Track My Stocks webpage with my increased weighting in Xtep and revised weighted purchase price.

Standard Chartered Bank,my single largest holding issued their Q1 trading update and as I expected,announced record results and increases in market share.They are now going through a significant revaluation vindicating my analysis on the bank and my comments in my blog entries dated 4th March  2009 and 8th December 2008.

Needless to say,making a written statement on this website as per my entry on the 4th March requesting judgement about my ability as a financial and business analyst on this stock particularly and seeing my analyses being spot on,is deeply satisfying.

Standard Chartered Bank including its divided payment is currently showing a gain in excess of 20% on my weighted purchase price due to my actions in the last eight months.

27th April 2009

How Asia's second largest single manager hedge fund,Value Partners is performing.

On my blog dated 1st September 2008,I mentioned Cheng Hye Cheah,a Malaysian born Chinese ex journalist,who is the founder,chairman and chief investment officer of Value Partners,a company he set up in 1993 with just $3m and grew to become the second largest single manager hedge fund headquartered in Asia,valued at $7 billion (clearly such valuation was derived from a combination of his brilliant stockpicking skills and partly from investors willing to fund his investments).

I have tremendous respect for his talent and share his principles of following the Warren Buffett school of long term investing.

The issue I have and was illustrated by my original underweighting of Chinese stocks when I launched the website in the summer of last year,was how significantly complicated most Chinese stocks had become,either in relation to justifying their earnings multiples or in relation to opaqueness of their balance sheets (how do you value a Chinese bank with contingent liabilities linked to the US subprime fiasco or with regard to their representation of loan book quality - do you really think a junior auditor or the audit partner of the big 4 firm of accountants are seriously going to question ICBC or Bank of China?).

Value Partners mistake was in no longer following their own mantra of " price is what you pay,value is what you get",by being heavily weighted in Chinese equities.

When there is a mania,it works both ways - euphoria leads to irrational valuations;despair and panic leads to the same irrational valuations but in reverse!

May be Cheng Hye Cheah got distracted,particularly given that Value Partners went to IPO during the peak of the Chinese bull run on the Hong Kong stockmarket in 2007 amidst euphoria over his stock picking skills.

In Value Partners annual financial results for 2008 announced on 12th March 2009,Cheng Hye Cheah states,
 

"we have been put through a severe test by the global financial crisis.So far we have passed... in the sense that we should still be able to keep intact Value Partners as a strong and reliable asset-management institution.That said it is rough and difficult.Value Partners classic fund,our flagship fund,was down 47.9% in 2008,and even the Group's top performer,Value Partners Hedge Fund Ltd,lost 21.8%.Assets under management declined to US$3.2 billion from $7.3 billion a year earlier,caused more by market losses than redemptions."

As for the first quarter of 2009,in his latest report dated 24th April,he states that there has been no change in asset valuation.

I expect Value Partners assets to appreciate from the bloodbath of 2008 over time,however the lessons of complacency and sitting on seriously overvalued stocks are the surest way of destroying any fund's value.

As has been famously quoted by Warren Buffett,"it is only when the tide goes out that you can see who is swimming naked".While I certainly would not accuse Cheng Hye of this due to his outstanding long term performance,there are many fund managers such as Paul Pong,Head of Pegasus Fund Managers who operated a stockpicking column for the South China Morning Post in Hong Kong which he subsequently refused to disclose the performance of,in his column (as he continued to realise losses of nearly 75%),blaming the financial tsunami rather than most of his picks bearing ridiculous price earnings multiples combined with his willingness to sell every time someone on the stock market was willing to quote a price 15% below his purchase price!

24th April 2009

Why it pays to think globally in investing

We all know that it has been a brutal 12 months for stockmarkets worldwide.
For anyone who holds or manages an equity fund,the question is not whether your fund declined in value but by how much!

While I am encouraged by the performance of my fund to date (ie the decline is significantly smaller relative to the vast majority of equity funds)when translated in all the key currencies outside of the US dollar,Chinese Yuan and Japanese Yen,the fund is maintaining its asset value.

The Aussie Dollar,the British Pound and the Brazilian Real are all down by approximately 25% in the past 12 months.The Indian rupee is down 20%,the Canadian dollar is down 19%,the New Zealand dollar is down 29% and the Russian Rouble has plummeted 43%.The Euro has escaped relatively unscathed by declining 16%!

A significant number of currency declines is due to the dependency on export of commodities and in a recession,demand for commodities falls,leading to a decline in prices,impacting trade balances,fiscal reserves and domestic asset values.This has ruthlessly exposed Russia as an economy built on primarily its oil and gas reserves.Specific management failures by UK banks has forced the UK government to print money to shore up the capital base of its financial system as well as create a budget deficit of 12.4% of GDP(the worst since the second world war).This double whammy has led to a sharp decline in the pound which is unlikely to improve until the financial situation is made clearer at the next budget in April 2010.

In the vast majority of countries worldwide,holding an equity fund of purely domestic stocks,not only would have led to your net worth being hammered by declines in stockmarkets but also be be compounded by declines in the local currency.

The stock exchange of Australia has declined by 36% but the decline in the Aussie dollar would have led to your fund's value in US dollars falling by 51%.In Britain and France the impact would have been 50%,in Brazil,India and Germany,the decline would have been 48% and in Canada 47%!

While it is highly likely that commodity driven economies will see their currencies improve when economies particularly the US,recovers;thought should have been given of risk diversification by making sure your stock fund was not a "one trick pony" ie all commodity plays or derive all their revenues and earnings from primarily the local domestic market.

If you review my global stock fund weighting,13.2% of stocks are weighted to the domestic economy of China and linked to the Yuan (only sizeable economy that is still growing 6%+ per annum and whose currency is artificially low),12.2% on the future growth of Asia ex Japan (Standard Chartered Bank),2.3% on Europe and the Euro (Esprit),8.7% on the US (Superior Energy services) and 64% on stocks which are truly global companies,deriving more than 50% of their revenues and earnings outside of their domestic markets.

This has mitigated to a significant extent,currency risk from my fund performance.

20th April 2009

Opened a new position in Xtep International at HK$2.71 - is there room for a significant third domestic sportswear brand in China?  

My global stock portfolio is showing an interesting reversal from when I opened it in August 2008 in terms of my weighting to China plays.I have been significantly increasing my exposure to Chinese companies in recent months,particularly to those who will benefit from the long term development of the Chinese consumer market.

From a macro economic perspective,China's economic growth rates are likely to continue to outpace the rest of the world along with the likely continuing appreciation of the yuan.China's Prime Minister,Wen Jiabao at the Asia Boao Forum at the weekend,expressed that the next phase of growth in China will need material increases in domestic consumption and that the government is facilitating such spending by easing credit and loans by its banks.

Given China's consumers already have relatively high savings levels (no western style consumer credit card issues here!) and the demographic trend of urbanisation and increase in spending and purchasing power of the Chinese population in the age range of 18 to 40,a substantial number of favourable factors are in place for Chinese companies with strong knowledge of the domestic retail market,an ability to scale their business and create a strong brand identity,to significantly grow their business profitably in the coming years.

If you read my business analysis on 26th August 2008 when I first opened a position in Anta Sports,you will understand a lot of the reasons that can equally be applied to investing in Xtep International.However from a business risk perspective on Xtep International,the real questions are

1)can Xtep which is the number 3 domestic brand with 18.9% market share sustain or increase its position while maintaining its existing high returns on equity (30%+)?

2)even though Xtep is run by a similarly talented young entrepeneur as Anta Sports,does Xtep have the management team in place to take it to the next level?

I have to be honest and say there are still question marks and hence business risks with regard to these,so why did I use capital which may be required in a couple of years' time to fund an opening position in Xtep International?

The simple answer is that the valuation of the business when compared to their current execution in scaling the business,as illustrated by their results announcement on 31st March,led me to make the investment.

Xtep went to IPO in June 2008 when the Hong Kong and Chinese stock markets were already at depressed levels,raising US$286M.

Its valuation was at 15 times forecast 2008 earnings,a reasonable valuation for a growing sports brand retailer.Subsequent to the IPO and the global stock market meltdown,it has traded well down on its IPO price and has yet to recover to its original IPO share price of HK$4.05,despite beating sales and earnings projections.

The overriding motivation for me to now invest in Xtep International is that it managed to more than double its revenues to US$419M and its earnings to US$74M without needing to use the cash that it raised in its IPO!

Xtep significantly improved its working capital management,a critial requirement for fast growing companies,by reducing its inventory turnover days by 28%,reducing its debtor days by 14% by improving debt collection and credit controls and increasing its creditor days by 45% by getting extended credit terms!

It also aims to complete its distributor resource planning system to cover all its distributors in 2009 further strengthening its working capital management,while it continues to scale its business.

It also raised prices higher than inflation improving gross margins by 4.6% to 37.1%.Its operating profit margin also increased despite the significant one off costs absorbed in 2008 with an IPO listing.

For 2009 despite the challenging economic environment which is also affecting China,it expects sales volume increases in double digits and indicated that it has the capacity to increase prices further by 5%.

It also has a distinctive entertainment marketing campaign for its brand which differentiates itself from Li Ning and Anta Sports by focussing on trendy sportswear associated with star performers in the Chinese pop music industry.This enables it to develop a distinctive image and counteract the significant sports associations that Li Ning and Anta Sports have.

Xtep International has also taken actions to retain the attractiveness of its shares to investors by buying back its shares when it was significantly undervalued late last year when all stocks were collapsing (reassuring investors that the market's valuation was not rational) and by now offering sustainable high dividend payout ratios based on its earnings performance,to long term investors.

I view Xtep International similar to Anta Sports as a cashed up,fast growing branded retail stock exposed to China's consumer market.Given that its current share price,when deducting its net cash on its balance sheet,is less than 6 times last year's earnings with a dividend yield of 6.64%,the potential return from this investment over the next two years currently outweighs its business risk.

14th April 2009

Opened a new position in China Agri-Industries at HK$4.28;
Standard Chartered Bank and Anta Sports goes ex dividend.

China Agri Industries announced their results today with turnover increasing 45% to US$5.36 billion,operating profit margins increasing to 10.8% and earnings per share rising by 127% to HK73 cents per share.
They announced their first dividend of 13.6 cents giving a dividend yield of 3.18% based on an earnings pay out ratio of 19%.

China Agri was spun off from China's government owned National Cereal,Oil and Foodstuffs company (COFCO)and listed on the Hong Kong stockmarket two years ago.Its operations are oil seed processing,rice processing,wheat processing,beer beverage materials production and production of bio fuels.
 

Two thirds of its revenues and operating profits comes from oil seed processing for primarily,food manufacturers including its parent company COFCO and animal feed producers in China.While 90% of its revenues comes from the Chinese market,it is also China's largest exporter of rice,representing 8% and 12% of China Agri's revenues and profits respectively.

Its IPO was largely driven to fund expansion as well as enter the hyped bio fuel business.While its bio fuel business has grown with revenues and earnings more than doubling in the last 12 months,the realisation that agricultural materials are better served supporting the Chinese food industry than being used for fuel has dampened the prospects for this division and consequently the stock price.

Its IPO has led to a cash rich balance sheet which can more than fund its business expansion plans.Currently,China Agri-Industries has a net cash per share of 89 cents.Even if China Agri Industries earnings for 2009 halves due to the current global economic contraction and agricultural destocking,its price to 2009 operating earnings multiple,deducting its net cash, will be 9.
When the world economy recovers,China Agri should continue with double digit growth.

The management team has prudently managed China Agri's balance sheet and operations and at current valuations gives a compelling play on the continued growth in food and beverage consumption in China.

I have now pretty much exhausted my cash position in my stock portfolio ie cash that I do not need for at least 3 years.This time horizon should be sufficient to discover if my fund outperforms the wider stock market indices and funds from various investment banks as well as make a good return.Currently I am outperforming the mutual funds and the global stock markets though having gone through the most brutal global stockmarket crash for over 70 years,no equity fund is in positive territory!

The question in future will now be,do I see compelling investment opportunities to justify using margin.....

1st April 2009

Opened a new position in China National Offshore Oil Corporation (CNOOC) at HK$7.84

CNOOC announced their results yesterday and while they announced  rising revenues and earnings,these were based on an average oil price in 2008 of US$90 while 2009's oil price is likely to be around US$45.

While this will have a direct adverse impact on 2009's financials,the rationale for my purchase is multiple fold;

1)CNOOC is the only one of the big three Chinese oil companies who expect to be able to increase their production by 7%-11% year on year for the next 5 years without costly acquisitions.

2)CNOOC has discovered significant oil reserves in China's offshore territories which would allow it to meet such targets,mitigating the need to make expensive investments in politically volatile regions

3)Its total production cost per barrel of oil is competitive at $19.78,making its production still highly profitable even at low oil prices.

4)China is a net importer of oil so all of CNOOC's production can be met by demand from China's economy.

5)CNOOC is cash rich and does not need to increase debt to expand its production.

6)Once the credit crisis is cleared and economies begin to grow again,combined with the inflationary effects of the easing of US monetary policy,I believe oil prices will jump again (though not to the levels of $100+ as seen during the summer of 2008).

7)If CNOOC's net cash position is taken into account,its price to forecast 2009 operating earnings ratio at current low oil prices is 10.

8)Its dividend payout ratio of earnings is 35% so even for a sharply reduced earnings performance in 2009,CNOOC can retain its dividend of 40 cents giving investors a dividend yield of 5.1% at current prices.

31st March 2009

Added further to my position in Intel.

30th March 2009

Added further to my position in Anta Sports.

24th March 2009

Sold Zijin Mining at HK$5.66 (Net of charges) and realised a 168% gain on the investment.

Zijin Mining is my second stock pick that has generated a gain greater than 150% in less than 12 months.Given how few my stock picks actually are,to have on average more than one in ten stocks picked,more than double, is not a bad start given the biggest global stockmarket decline since the 1930s during the first year of this stock website.

If only the two stocks that generated such handsome gains were not my two lowest weightings in my stock portfolio!

The reason why I sold was that Zijin Mining released its financial results yesterday and while the stock has appreciated sharply over the past 4 months,at 21x operating earnings (if its balance sheet net cash per share of 39 cents is deducted) and with expectations of future revenue and earnings growth of 10-12%,I believe that Zijin Mining is now fairly valued so I realised the profit.

11th March 2009

Added to my positions in Nokia,Superior Energy Services,Microsoft and Intel.

I have been applying a little bit of Jessie Livermore's trading technique for buying long in my stock purchases in the last ten days (see his profile in my blog dated 9th November).

While I believe that all my stocks are undervalued from a fundamental value perspective (with the possible exception of Zijin Mining),I was waiting for buying power to come to the market to develop some positive momentum to the share purchases.


9th March 2009

Added again to my positions in Standard Chartered Bank and Anta Sports

5th March 2009

Added again to my position in Standard Chartered Bank.

4th March 2009


Added further to my position in Standard Chartered Bank after their financial results yesterday and again in Anta Sports.

Standard Chartered Bank now becomes the largest single holding in my portfolio.

My ability as a financial analyst will pretty much stand on how Standard Chartered Bank performs over the next 3 years and beyond that which is a very bold call to be judged on,given the collapse and fear haunting the entire banking sector as well as how unfashionable this industry has now become for fund managers.

Let me make it clear,I would not invest in any other bank on the planet right now outside of Standard Chartered Bank.

I spent the last two days doing further extensive research on Standard Chartered Bank's current financial health,its exposure to toxic assets,its capital ratios,its mortgage and asset portfolio,its currency exposures,its risk to derivatives and how its operations are performing in the current financial and economic crisis and feel very comfortable to be judged by this single company over the long term.

Despite the downturn in exports from Asia,Standard Chartered Bank's wholesale banking business is growing and taking market share from its global competitors who are in severe financial distress and in complete disarray.Not only is Standard Chartered Bank's order book growing in this segment but its margins are also increasing due to the decline in competition and "flight to quality" of corporate customers.

In its consumer banking business,Standard Chartered Bank are receiving record deposits again due to this "flight to quality" as consumers shift their business to Standard Chartered from poorly managed banks.

As Standard Chartered Bank's CEO wrote in the results announcement yesterday,

"We have been running the Bank according to four fundamental tenets.
First, we have stuck to our strategy. We aim to be the world’s best international bank, leading the way in Asia,Africa and the Middle East.We do business in markets we understand intimately, with customers with whom we have longstanding relationships, selling products we understand fully. That way we know the risks we take.
Second, we have been and will remain very focused on the basics of banking. Perhaps because we have always operated in volatile markets, we have never lost sight of such disciplines.Third, we are open for business. We want to support our clients as they navigate the economic turmoil. We want to seize the opportunities arising from the turbulence. Whilst we have taken action in response to the crisis,we have not stopped doing business. We continue to invest for growth.Finally, we have stayed true to our values."

Standard Chartered Bank must be the only international bank in the world right now who not only increased its capital position but also increased its earnings and dividend on a per share basis.Its return on equity ie the money its makes for shareholders remains at 15% despite the meltdown in the financial sector.

 It is so liquid it remains a net lender in the interbank markets which practically dried up last year due to the overleveraged positions of most US and European banks.

While it is likely that Standard Chartered Bank's earnings growth will be hit this year due to the global recession,its focus on Asia ex Japan (which remains financially healthy due to high savings rates,strong government fiscal reserves as well as a young and growing urban middle class) means that any decline will be cyclical and not structural as in the case of Europe and US which will take longer to unwind their overextended debt positions.

Standard Chartered Bank's dividend pay out ratio as a percentage of its current earnings is 30% so even a decline in earnings in the next two years is unlikely to impact the current dividend per share and at a yield of 6.68% on its current share price and 3.53% on my weighted average purchase price,it is a great company to hold,collect the dividend and wait for its stock price to reach its true intrinsic business value as market panic and fear subsides.

I fully intend to accumulate more at such dividend yields if the market continues to punish Standard Chartered Bank's share price for the poor performance and mismanagement of all its international competitors including its biggest rival,HSBC!

Similarly to Anta Sports,if I had the money,given Standard Chartered Bank's severe undervaluation at its current share price,I could own the entire bank for 5 times its current earnings - a bank highly desired by the governments of China,Singapore and the United Arab Emirates and one of the three note issuing banks of Hong Kong!

The most ironic thing is that at 6.68% dividend yield on its current share price,you get a better return for your money buying the stock of this bank than putting your money in a bank!

Standard Chartered Bank will now replace all other UK banks as the leading dividend payer in the UK banking industry and it is a growth stock!The entire reason for UK investors to buy other British banks over the last ten years was that they were stable dividend payers and perceived as less "risky'.How ironic the new position of Standard Chartered Bank as the most financially solvent and stable bank with the highest dividend in Britain!

2nd March 2009

Added further to my position in Anta Sports after their financial results today.

While I expect stockmarkets worldwide to have a brutal March given the US's worse than expected contraction in Q4,dismal earnings results of some major companies and the inability of the US monetary authority to stabilise the banking system;I will still continue to accumulate long term positions where I see compelling value.

Anta Sports announced their second half financial results for 2008 and while the sharp economic downturn and its consequences on China's consumer market is likely to hit their growth in 2009,the valuation of this company compared to their business and financial risk is too compelling not to continue to accumulate.

Like most retail growth businesses,overexpansion of stores funded with debt combined with a sharp rise in inventory can lead to financial calamity but Anta (like Esprit,the other brand apparel retailer that I hold) has net surplus cash of more than US$500m,no debt,an operating cashflow generation of 22 cents for every $1 of sales and a healthy inventory turnover of 6 weeks.

Anta sales increased year on year by 20%,gross margins improved to 40% due to price increases and a better product mix and its earnings per share rose by 40%. The number of retail stores also increased by 9% to 5667.

Like Esprit in Europe,Anta is benefitting from more money conscious consumers moving from the high end luxury retailers to good quality,stylish brand retailers which have a more attractive price range. In fact,a friend of mine visited Nike,Addidas and Anta's retail stores in February and his comment was that Nike and Addidas were quiet and Anta was busy!

Anta's market value due to the current great stock market crash has declined to US$1.1 billion of which 50% is the cash on their balance sheet.The number 2 Chinese sports retail brand growing at 20% a year can be bought at barely more than 3 times the current cash generated from its operations.With that,you would get all of its land,buildings and facilities in China for free as well as a free cash annuity to the continuing growth of China's consumer sports market!

I will likely accumulate again if further general panic stock sell offs take Anta Sports down with it.

Oh I forgot to say,Anta announced its final dividend of 18 cents which based on my weighted purchase price,gives a yield of 4.36%.Together with the interim dividend of 10 cents,the total full year dividend is 28 cents ie a dividend yield of 6.76%!

28th February 2009

Warren Buffett's investment vehicle,Berkshire Hathaway loses nearly 50% of its "value" since December 2007.
 
"Warren Buffett has some explaining to do.Berkshire Hathaway Inc, his insurance and investment company, is in the midst of one of its worst stretches since Buffett took over the company in 1965.Berkshire's shares have lost close to half their value since December 2007. Investment losses have piled up as stock markets tumble. And tens of billions of dollars are at risk on derivative contracts that depend on stocks rising. For now, they are not." - Reuters 26/2/2009

When the world's richest person and greatest investor suffers,don't expect any investor who follows similar principles to stockpicking,not to be impacted by significant short term paper losses.The trick as he has always explained,is

"what will the likely earnings be three to five years out and will the business be stronger than its competitors in such a time horizon?"

Nothing in the great global crash of the past 6 months has changed my mind on the companies that I currently hold as to their future long term prospects hence why I am adding knowing that the price may well go lower tomorrow or next week or next month.There will come a time over the next decade when stocks will become either overvalued or significantly overvalued and we are currently going through a period when stocks are not only undervalued but are valued at depressed levels.

The only stock that I am currently holding where I admit that I might have got wrong in terms of their long term business prospects is Nokia but as per my blog dated 9th September 2008 explained,I am prepared to give the company time to execute its business strategy on mobile consumer services since one of the great global growth trends is mobile consumer applications and  this presents Nokia with a significant growth opportunity given that it accounts for more than one of every three mobile devices sold worldwide.Moreover Nokia's brand scores highly worldwide to its reliability and trustworthiness,critical qualities as all phones become webenabled and consumers generate personally critical content.
 
Compared to RIMM and Apple,Nokia addresses the mass market,creates durable phones with long battery lives and significant digital storage at the lowest manufacturing cost.Its ownership of Symbian operating system,GPS application company,Navteq as well as social networking companies,will also enable it to meet the price points for mass market adoption and generate significant profits and cashflow -something its Korean and Japanese competitors are finding difficult to do.

Time will tell if Nokia can execute on its business strategy - the market currently does not think so.

27th February 2009


Added to my position in Adobe

Similar with Microsoft,I am taking advantage of the economic downturn to add to my stockholdings in companies which I perceive constitute minimal long term business risk and are selling at significant discount to intrinsic business value.

Adobe has the equivalent of US$3 net cash per share and given the pessimism and fear in the market,if its cash per share is deducted from its share price,its price earnings ratio is now down to less than 1o!

Its historic price earnings multiple is 25 and while the downturn may impact its user base and 2009 earnings,it will only lead to a jump in 2010 earnings since Adobe dominate multimedia applications on internet related devices and has a captive user base of software and web developers and designers who are only deferring their upgrades from one year to the next.

Moreover I believe that on line web collaboration,richer web content,internet related mobile devices,note and netbooks are all large long term global growth trends and Adobe's flash video,photoshop,creative solution suite will continue to take advantage of such growth trends as the market leader.

Adobe's applications run on all operating systems and its non proprietary philosophy to interfaces,gives it a customer stickiness that none of its competitors can match.The fact that the majority of web/software designers and developers also have Adobe as their de facto standard,means that it will be difficult for other vendors to compete despite the high profit margins and sales growth that such a business generates.

For more information about Adobe's business,market and financial position,click onto Adobe's 2008 letter to stockholders in the below.

http://www.adobe.com/aboutadobe/invrelations/pdfs/fy2008_lettertostockholders.pdf


25th February 2009


Added to my positions in Microsoft,Intel,Dolby,Infosys and Superior Energy Services yesterday.

Given the sharp fall on monday and having reviewed the Q4 results,outlook and plans announced by 7 of my 13 stockholdings to date,I have decided to add to my holdings of the above.

While Microsoft was the least encouraging of the above,I believe that its share price in relation to its business value and risk is too compelling not to accumulate.

NasdaqOMX will be announcing later this week;Standard Chartered Bank,Anta Sports,Zijin Mining will be announcing next week and Adobe Systems on the 17th March.

Nokia has fallen off a cliff from a market sentiment and price perspective.My opinion of the company has not changed so I intend to keep holding what has now become an unfashionable stock.Their next key announcement will be in mid April.

My long term cash position that can be used to accumulate stocks has also increased.
All changes have been updated on my Track my stocks webpage.

Once the global financial system stabilises,I expect a strong rebound in stockmarkets worldwide as a large number of quality companies' valuations are abnormally depressed compared to their intrinsic business value.When this occurs,I will also consider using margin finance between 7% to 15% of the value of my shareholding to accumulate further positions.

23rd February 2009

 
Economists forecast worst recession since the early 1970s

If one looks at indices,a lot of the major stock markets are now valued lower than twelve years ago while quality companies' cumulative equity (tangible book value) during that time has steadily increased.

This is a fantastic time to accumulate stocks of blue chip companies and I fully intend to add to my positions with cash that I do not need for the next 3 years.

Superior Energy Services,Dolby,ABB,Infosys and Esprit announced their Q4 results when inter bank lending had pretty much stopped and global economies had gutwrenching contractions and still these companies generated excellent profits and cashflow though obviously their growth in earnings and sales will be impacted over the coming 12 months (until the global banking and credit system gets back to operating normally).

Given the stock markets appear now to simply value most companies on this year and next year's earnings rather than a normalised view of cash flows over a decade and most of the capital and funds invested,appear to be of the short term type ie no more than two years and/or used an imprudent amount of margin and leverage,company valuations have now been forced down to near distressed levels.

Make no mistake,if you have cash that you do not need for daily living costs for the next five or ten years,now (and I expect this to remain the case over the next six months),will be a once in a generation opportunity to buy quality,well managed,financially strong,global companies at massive discounts to their true worth.

The rest of my stock holdings will be announcing their Q4 results,outlook and plans over the next two months and this will shape my future actions on potential accumulations and weightings.

20th January 2009

Investment Managers commit suicide,pretend to be dead or attempt to do a runner!

One can tell how bad the global financial market crash was in 2008 when you read reports of a French hedge fund manager committing suicide,the 5th richest German committing suicide by leaping in front of a train,an American investment business owner pretending to have died by deliberately crashing his private plane and parachuting out and perceived pillars of America's fund management society being exposed as frauds and attempting to disappear with $billions of investors' money lost.

Last year's near banking collapse,which is still on the precipice,is leading to the biggest global economic decline since the second world war and companies and people who have not been prudent money managers,will experience the biggest threat to their existence,living standards and welfare for at least the last 37 years.

This is impacting all sections of society and industries across all countries and all professions.

Common consensus is that the economic turnaround will take two years to complete,if current policies of big government spending and recapitalisation of banks are successful.

I can not see the global stock market indices moving more than 10% from the beginning of the year to the end of 2009.However,in the depths of a bear market,begins a global bull market and quality companies with long term sustainable businesses,if they can be held for five or ten years (subject to no new future toxic debts over that time,or poor company management decisions),should lead to handsome gains.

The question is,do you have the liquidity and temperament to support yourself over the next 5 or 10 years and tie the excess capital to good quality stocks?

Singapore versus Hong Kong

I spent last week in Singapore and it really did shock me how poor the air quality has now become in Hong Kong after spending just one day in Singapore.The second thing that struck me was how culturally homogenised Hong Kong is becoming,while Singapore is becoming even more multicultural since I first visited eight years ago.

Singapore has always been defined as "Asia lite" and I was always put off by what was a pretty sterile environment but in the past several years,given the economic boom particularly in India,there has been significant growth of South and South East Asian expats particulary Indians.Moreover many companies have now made Singapore its hub for South Asia operations.

Getting on a subway train in Hong Kong,one may not see a single non Chinese face in the entire carriage while in Singapore,it is likely for up to 50% of people to be non Chinese.

The Indian community in Singapore is flourishing from Little India to the Hindu temples that I visited,while Singapore's Malay roots is also well established through residential areas and mosques.

Unlike in Hong Kong,Singaporeans do not view it a statistical quirk for Singaporean citizens to be someone who is not Chinese.

Although I love Hong Kong and its energy,it is becoming just another major Chinese city with its status by global companies reduced to pretty much supporting China.The filthy air does not help and one does question where Hong Kong will be in the future,given the easing of relations between mainland China and Taiwan,enabling air links and shipping,as well as the continuing development of Shanghai as a port and financial centre.

7th January 2009

The truth about stock investment newsletters

If you want to see the results of so called professional stockpicking experts who make money from gullible people who subscribe to their service,see the results of their stock recommendations over the past two years in the enclosed url.

http://www.stockgumshoe.com/tracking

Click 2008 and click 2007.

Only 2 out of approx 400 stocks recommended,have appreciated more than 100%, 8 more than 50%,while more than 150 stocks have declined by greater than 70%!

Stockgumshoe is an excellent website which uncovers the stock teasers that newsletters such as Motley Fool try to sell as well as cowboy investment gurus.

Even though like everyone else who holds a stock portfolio,my stock picks suffered in 2008 from the biggest stockmarket decline since the 1930s, 2 of the 18 stocks that I picked have appreciated over 100% - China Huiyuan Juice which appreciated 167% (and I realised the gain) and Zijin Mining which currently has appreciated 125%.

My biggest loss is Garmin which I sold at a 55% decline.

I feel confident that my stock portfolio over time will be vindicated but as with my part sale of Esprit and purchase of Zijin,I will rotate the portfolio if I see more compelling valuations or when I feel a stock has reached its intrinsic business price.

8th December 2008

Exercising my rights issue on Standard Chartered Bank

I still believe that Standard Chartered Bank is the "baby that has been thrown out with the bathwater" given the severe declines in all banking stocks.The rights issue to strengthen Standard Chartered Bank's capital structure "in light of uncertainty as to the global economy in 2009" as well as to take advantage of acquisition opportunities given the cheap valuations of all asset classes,is OK by me.

The frequency of my blog entries has declined somewhat mainly due to the fact that my stock portfolio is not a trading portfolio so even though I have made certain changes and rotation given the severity of the market crash,it is not my intent to continue to do so,as I feel that these are the stocks that will perform well over the long term given their competitive strengths in their respective industries.

I am still bullish over the long term on growth in developing economies particularly China,in the energy and power infrastructure sectors,the continuing growth trends in the digitalisation of data,of mobile devices and of notebook PCs,in the strength of India's IT outsourcing sector and in the continuing growth in electronic trading so pretty much all my global stock portfolio is tied to these continuing trends over the next decade!

18th November 2008

Sold just over half of my holding in Esprit at HK$39.9 and opened a position in Zijin Mining at HK$2.11

Given the recession is going to be more severe and likely to be more prolonged than I expected,I have decided to reduce my weighting in Esprit,a leading European retailer and open a position in Zijin Mining,China's leading gold mining stock.

My motivation is mainly that I do not believe that the US dollar's strength is anything but temporary and a significant printing of US dollars to increase liquidity and minimise the impact of the US recession will at some stage lead to a rebound in commodities,particularly when the US signals its economic recovery.Moreover there will eventually be a major rise in inflation.When either of these happen,gold prices will rise,lifting all leading gold mining stocks.

Zijin Mining is also a leading Chinese copper miner which will benefit significantly from China's US$580 billion fiscal stimulus package as announced a couple of weeks ago.

It has US$3 billion in cash,partly from its A share listing in Shanghai earlier this year.It intends to use these funds to make acquisitions and given it is cash rich,it can now take advantage of the global commodities crash and pick up assets on the cheap.It is a well managed company and has significantly grown its sales,assets and earnings over a number of years.

China also has little iron ore reserves and resented BHP and Rio taking advantage of the commodities boom to charge significantly higher short term prices.Zijin also mines iron ore and will look to make acquisitions in this sector as well.Its cost structure is also very competitive given it is a Chinese company.

Its stock price has crashed by 82% since the beginning of the year and 56% in the last 3 months.This is far further than the Hong Kong Stock market or the actual decline in gold prices.Its current PE ratio is 10 and dividend yield 4.8%.I have no clue when Zijin will rebound and will possibly fall further due to the current panic and fear in the market place.I will look to accumulate more if it falls sharply lower,however over the long term,I expect Zijin to recover,along with all commodities when the current dislocation in the financial markets is resolved.

Jim Rogers agrees with Warren Buffett and begins to buy stocks

It is reassuring when you have two of the greatest investment minds in history agreeing that stocks at current prices will now outperform bonds and cash over the next ten years.

Jim Rogers has bought commodities,some Chinese and Taiwanese stocks and "one" Korean stock.He believes we have hit "a bottom" in the current bear market but has no clue (just like everyone else) if we have hit the bottom!

Serious financial dislocation in global stock markets

The reason why I did not set up a 10% or 15% stop loss on any of my stocks is that when I previously did that three years ago,I ended up losing 15% and if I held them instead (given that their long term intrinsic fundamentals were still in place),I would have seen gains of 250% and 500%!

Moreover last thursday on NASDAQ,Microsoft a US$180 billion dollar company had a trading range of 13% within that day and even NASDAQ's stock price traded in the range of 20% from its highest and lowest price!

Again we are talking about multi billion dollar companies whose share prices are US$20+,not penny stocks.

Another comment on how crazy and dysfunctional financial markets have become;oil,one of the most critical natural resources in the world which supports all global economies has had its price move from $150 to $50 in the last four months!

How can economies work properly with this kind of madness?Interesting that OPEC recently announced that it would like to set the tariff range between US$70 to US$90,a bit lower from the US$110 to US$80 that I forecast in the summer.

Seems like "free" markets and unrestricted capitalism American style,is causing its own destruction,ruining countries,companies,savings,pensions and throwing millions of people worldwide out of work.

Every time there is a recession,people talk about another "great depression" but I suspect that this recession will be similar to the recession in the early 1970s which lasted two years.Ben Bernanke studied the great depression before becoming Federal Reserve chairman and he is attempting to put measures in place to prevent this from happening.The election of Barack Obama as President and the election of a majority of Democrats in the Senate and the House of Representatives will eventually ensure that the measures needing to be taken,will happen.In the meantime,we will continue to see stomach churning weakness in global share prices.

My global stock portfolio weightings,weighted purchase prices and current net asset value % due to my purchases and sales,are now revealed on "Track My Stocks" webpage

Given the likely time period that my stocks will need to "heal" from the current financial crisis,I have no intention of putting further cash beyond the small amount remaining as per "Track My Stocks" webpage.I may continue to do some rotation similar to what I did this week with Esprit and Zijin Mining but I will be highly reluctant to put any further cash into a very vicious and unpredictable bear market,given my own short term and mid term cash needs.

9th November 2008

Jesse Livermore - the greatest trader who ever lived

If there is one thing that is clear from the financial crash,one needs to take into consideration crowd and behavioural psychology to maximise profits in stocks beyond simply basing it on business value analysis.Taking this into consideration,over the past several weeks,I have been reading about Jesse Livermore,the greatest trader of them all.

This is the guy who shorted the US stockmarket in 1929 and made $100 million from the crash.In a few weeks,he made the 2008 equivalent of tens of billions of dollars,more than the current foreign reserves of many European countries!

The reason why I strongly recommend that people do not short stock,use margin or cash that they need for day to day necessities is because even Jesse Livermore lost his entire life savings on several occasions,before he mastered the art of trading.

Jesse Livermore became one of the richest men in the world in the height of the great depression in the US.He took no pleasure from his fortune and ironically,he labelled himself a loser.He judged success in his life on his legacy and that of his family and the nadir came when his wife shot their own teenage son during one of his son's increasingly violent drunken incidents.Jesse Livermore when reflecting on his life,committed suicide by putting a gun to his own head at the age of 49.

Business update on the companies I own

In the last couple of weeks,Superior Energy Services,ABB,NASDAQ and Dolby announced their quarterly results.To summarise,all of these companies' business performance and earnings results were good.In fact both Superior Energy Services and Dolby's results far exceeded mine and the market's expectations while NASDAQ and ABB met the market's expectations with consistent operational earnings and sales growth.

This week just ended,I made further purchases to 3 of my stocks.

Barack Hussein Obama wins the Presidency of the United States

One can not help but comment on the historical significance of a man with African ancestry and an Arabic name being elected President of the biggest economy and military power in the world.The United States finally lived up to its promise of the 'American dream" where anything is possible and ethnicity,race and caste are no barrier to its citizens in attaining the highest office in the land and where people with intelligence,drive,determination and perseverance,are not restricted from progressing in life.The culmination of Martin Luther King's "I have a dream" speech and the sacrifices of many of her people during the civil rights movement forty years ago,finally came to fruition in a historical night for America and the world.It is true to say,that no other country in the world,could such a candidate with no family ties to the country's elite,and of such a background, become President.

This week,the United States of America came of age in the 21st century and her image changed dramatically for the better in the eyes of the rest of the world.

30th October 2008

Why global stockmarkets will never be viewed the same again

Global stockmarkets are supposed to be efficient allocators of capital but given how share prices of even large cap blue chip stocks can change by greater than 10% on a daily basis reducing multi billion dollar companies to the equivalent trading status of penny stocks;this makes a mockery of the whole capital market system.

Buying and holding proven profitable companies in the US for ten years between 1998 to 2008,would now have led to no gains whatsoever given the October crash.Moreover unlike the dotcom and technology crash in 2000,where companies which never made a profit were being valued at billions of dollars or blue chips were trading at 50 or 100 times earnings - the severity of this crash was more to do with hedge funds and traders over leveraging and so called financial analysts valuing companies speculatively,on a quarterly basis rather than providing detailed evaluation of likely free cash flows over a ten year period.

The growth of the internet and digital financial content combined with ease of trading from anywhere in the world,with borrowed money such as margin,has compounded the volatility of share prices to record highs.Getting a respectable 10 to 15% growth in a stock portfolio over a year becomes a joke if such stocks could gyrate up and down by a range of 50% within a year and when such an annual gain could be wiped out in an instant by the click of a mouse by hedge funds who have margin calls.

Moreover the pressure on funds not to show underperformance on a half yearly basis,forces many simply to trade irrespective of the fundamentals of individual companies.If one industry sector becomes unfashionable,there is no hesitation to sell all companies even if the fundamentals of certain companies within that industry has not changed but will actually improve given the decline of their weaker competitors.

When Warren Buffett and Charlie Munger pass away,they will leave a legacy that few will be able to practise in future,given the heightened pressure on short term performance and the lack of authority within their industry of individuals to practise such a philosophy.

One thing great investors such as the above,along with Peter Lynch and Sir John Templeton had,was that they cared deeply about people who trusted them with their money.This led to them being very prudent with their investments as well as a demonstration of incredible integrity - compare them with the arrogance,recklessness and high lifestyles of many fund managers,paid for by investors who have seen their life savings decimated.

Managing other people's money requires great responsibility - my personal investments reflect the profile of people in their late twenties to early forties who have no mortgages,no debts,no significant short or medium term financial commitments or dependents.Literally my portfolio is the equivalent of owning businesses which will reward such likeminded investors over time but the abuse of their valuations by traders and the financial industry as a whole,is now leading to wild gyrations in stock prices which will continue, given the temptation to make a quick buck.

This means that such an investment methodology would need to be extended to an even longer time period to guarantee outsized performance as well as actively selling when such companies reach their intrinsic business valuation or have hit too high a risk of permanent business value dimunition.

One thing that Warren Buffett proved is that over time,no trader can defy the growth in profits and cash that such companies generate.However this is also dependent on the maturity of stockmarkets.Given the size of the US market,there is still more logic and maturity to it than stock markets such as Hong Kong and India where growing,cash rich companies can be valued below their cash on their balance sheets or where stock markets can halve every 5 years.There is a reason why Warren Buffett said that he was 100% invested in US stocks.

Another example of the mediocrity of the investment industry is the irresponsibility and incompetency of analysts at Morgan Stanley (another American bank that deservedly should have been made bankrupt by its recklessness).They produced a report which got wide media attention for significantly downgrading Standard Chartered Bank,putting significant downward pressure on its share price.Standard Chartered Bank then published its third quarter trading status exposing the intellectual bankruptcy of this report, leading to its stock price rebounding nearly 40% on the London Stock Exchange in two days.

As promised,I will disclose my weighted average purchase price by the end of the year and weightings of each stock on my global portfolio,however,I will only disclose the current share price of each stock once a year,on the 21st August of 2009,2010 and 2011 since my investment methodology,as I have written on many occasions,is that of a business owner not a chip to be traded in a casino on a daily basis.

25th October 2008

Sold Garmin at $20.50 and further accumulated positions in 5 existing stocks

Selling Garmin was a tough call but as the markets continue to decline,it allows adding to stronger companies such as Microsoft,Intel,ABB which have never been valued at such lows in years,as well as to take advantage of the severe depression in values in Hong Kong,where the market has gone into a tailspin.

You know that markets have become totally irrational when similar to the dot com craze,you hear traders say "PE ratios are no longer relevant".When people start rejecting objective valuations particularly when the wider liquidity issues which created the crisis,are now being resolved,you know that you are near the peak of the frenzy.

So we are now in phase 3 of the market decline where there is all out panic everywhere.

It seems the markets have gone from fears of the credit crisis to fears of emerging markets this week and there has been huge changes in certain currency rates across the world.In case people are worrying about a repeat of the 1997-98 Asian crisis which led to bankruptcies and devaluation of currencies,please note the foreign exchange reserves as indicated in the enclosed url http://en.wikipedia.org/wiki/List_of_countries_by_foreign_exchange_reserves.

Of the 14 countries holding in excess of US$100 billion in reserves,9 are Asian and two of the other five are Russia and Brazil.

China and Japan combined hold 38% of the world's total exchange reserves.

Surprisingly Thailand where the original Asia economic crisis began,holds in excess of $100 billion and has more foreign reserves than the UK and Australia combined!

The fear of emerging markets this week has impacted Standard Chartered Bank whose share price decline is at a record low and at an unbelievable PE ratio of 5.5.The original fear regarding Standard Chartered Bank was its capital adequacy ratio which has now been resolved with statements from the bank and an interview that the CEO made in Singapore on thursday.This has now moved to fears about economic growth in Asia and foreign currencies!

Standard Chartered Bank from my perspective is simply the best managed bank in the world.Unlike HSBC or Barclays,it concentrated on its strengths in Asia,Africa and Middle East and did not diversify into the US and has not had the problems other banks in Europe and US have had with subprime assets.Even with economic slowdown next year,it is expected that 50% of global growth will come from emerging markets in 2010 to 2015 and Standard Chartered Bank is well positioned to capitalise on this with their consistent strategy and powerful banking brand.Note China,India,South East Asia,Africa and Middle East will still witness economic growth in 2009 and 40% of Standard Chartered Bank's profits come from China,Hong Kong and Singapore whose currencies have not been impacted by the current turbulence.There will be some short term currency losses due to Standard Chartered Bank's exposure to the South Korean market but I believe this will be temporary,as the currency markets get back into some sort of balance over the next several months.Given the current hysteria,Standard Chartered Bank's share price may plummet further next week but I will continue to add to my holdings as the markets are now blinded by short term issues.

The market as I remarked before has become so short term focussed that price multiples based on normalised earnings over a 5,10 year period are now being rejected to focus on simply this year and next.Warren Buffett and value investors are now in high heaven!

21st October 2008

Added Microsoft to my global stock portfolio at $24.18

I never imagined that I would end up with opening a position in Microsoft but given the huge sell off in the last 6 weeks,even Microsoft was impacted.I do not need to explain Microsoft's competitive strengths but this cash machine whose return on equity is an outrageous 47%,increasing from a jaw dropping 37.5% over the last 4 years,simply has a vice like grip over its industry and can now be bought at 12 to 13 times trailing twelve month earnings - the lowest price earnings multiple in its history.

Literally every company feeling threatened in the software and wireless space from Yahoo! to Research in Motion,the makers of blackberry,are rumoured to be acquisition targets by this 800 lb gorilla.

The $20 billion of cash on its balance sheet just makes its valuation even sweeter and given the volatility of global stock markets today,this is one company that can be bought at a discounted price,with the knowledge that it will continue to generate tonnes of cash and be around for years to come.

I will add further to my holding if the price falls another 15% in today's uncertain stock market climate.

18th October 2008

Have we hit bottom yet? Warren Buffett says buy!

Another rollercoaster week but there is a growing awareness in Europe and the US that the vast majority of companies impacted by the freeze in bank lending will not now go bust and once Lehman Brothers' liabilities are fully understood which should be by the end of tuesday 21st October,the fear amongst banks about each other's liabilities should finally be cleared.

I suspect the bottom,if it has not already happened in Europe,Japan and US,will happen by mid week,next week.

To be honest,I have yet to see phase 3 of the market meltdown in the US and Europe where investors flee in total panic and prices decline to bargain basement prices.It looks unlikely now that this will happen.However in Hong Kong,we are now in phase 3 of such a state with certain cash rich Chinese small caps and micro caps being sold at ridiculous prices such as at the cash and receivables on their balance sheets,valuing their rising domestic profits at zero!

Anta Sports is now being sold at 4 times their trailing earnings if one deducts the cash from their IPO last year.This is a company whose future earnings will be higher than its past and is one of China's biggest sportswear brands,sponsoring key national sports such as basketball and events such as China's sports personality of the year.

Such irrational valuations in Hong Kong does not surprise me given the lack of credibility of investment analysts and fund managers here.Paul Pong's investment portfolio in the South China Morning Post was wiped out last week and he refused to publish the fact that if people followed his stock picks and strategy,they would have ended up with no stocks remaining and a permanent portfolio loss of 75%.He blamed the US for such a "financial tsunami" without accepting the fact that China's stockmarkets were in bubble territory and accepting responsibility for the stocks and methodology that he recommended.

As for my stocks,given prices did not fall to bargain basement prices (except for Anta Sports),I only ended up adding to two of my existing positions and was not able to open a position in a new stock.

I give the analogy of what happened last week to an airplane which not only went through severe turbulence but literally lost power and was nosediving at accelerating pace.

When one is in such a situation,you have to have full confidence in the capability of the pilot to somehow make it through and that is another reason why I sold Chesapeake Energy - I can not have a reckless pilot (the CEO) in charge of the plane in such an environment.With the sale of America Movil,I give the analogy of having an excellent airplane,excellent pilot and crew but unfortunately the plane is running on fuel which could explode mid air (the Mexican peso)!

13th October 2008

Will the governments suspend the stockmarkets?

If the markets continue their free fall,valuations of companies will become so ridiculous that the governments might step in and stop trading until they fix the interbanking lending issues.We have already seen suspensions in Russia and Indonesia in the past month so this could well happen in the US,Europe and key stock markets in Latin America and Asia.

Such action could happen as soon as wednesday depending on if mass hysteria engulfs the market and people continue to sell in blind panic.If this happens,daily stock price falls could be on average up to 10% per day as there are very few buyers.

That is why it is critical to view your stocks as long term equity owners of businesses and check that they have strong balance sheets and strong earnings so that you do not get caught up in the hysteria and lose your nerve.

Such times are a godsend for Warren Buffett and value investors and if the market falls on monday,you may be surprised at one of the stocks that I will add to my portfolio that I personally never believed that I could own at such a price.

I also misunderstood how much,irrational markets and panic can cause valuations to decline to.

The fall out to this,will be price earnings ratios at historically low levels for an extended period of time due to sharp falls in confidence by investors in stock markets. Companies that pay good dividends will come back in favour.Moreover strong companies will begin to acquire its weaker competitors and become even more dominant in their industries.The market will also now favour long term investors who can hold stocks for at least three years.

Now you know why "being greedy when others are fearful" is such a hard thing to do - things don't become cheap without a reason

11th October 2008 part 2

How to psychologically deal with violent market crashes and reflecting and analysing my mistakes

"In fact, the true investor welcomes volatility. Ben Graham explained why in Chapter 8 of The Intelligent Investor. There he introduced "Mr. Market," an obliging fellow who shows up every day to either buy from you or sell to you, whichever you wish. The more manic-depressive this chap is, the greater the opportunities available to the investor. That's true because a wildly fluctuating market means that irrationally low prices will periodically be attached to solid businesses. It is impossible to see how the availability of such prices can be thought of as increasing the hazards for an investor who is totally free to either ignore the market or exploit its folly."
- Warren Buffett's letter to shareholders,1993.

 

"To me, an investment is simply a gamble in which you've managed to tilt the odds in your favor...In fact, the stock market most reminds me of a stud poker game" - Peter Lynch,"One Up on Wall Street"

Influential perspectives made by two of the most successful investors in US history when approaching investing in the stock market.

So how do you tilt the odds in your favour?

Make sure you have done as much homework in studying the businesses that you have decided to invest in because you are essentially playing a poker game with "Mr Market",a highly emotional person whose mood changes from one day to the next and you don't know when he raises the stakes whether he is bluffing by being unrealistically optimistic or pessimistic or he actually has an ace up his sleeve that you are not aware of,that can blow you out.So you can call him or keep on playing the game because you think he is wrong or raise your bet or you can quit because you have been dealt a card that means you will lose or the stakes get so high,you might not be around to play another game!

So what types of companies should one be willing to play poker with Mr Market and where did I go wrong with Chesapeake Energy and America Movil?

Companies with clean balance sheets,whose PE ratios are below their historic average and whose primary currency is stable is a good start! Secondly, tune out all the so called experts and websites that promote stocks and predict high earnings growth since they are one of Mr Market's personalities and consequently the odds are stacked more in their favour than yours.Some of them might genuinely believe in what they say but do not realise that they are nothing but Mr Market in disguise,promoting flavour of the month stocks.

Some of these "investment experts" may have made an excellent analysis but you need to do your own due diligence and check all the potential risk factors that can lead to the stock declining which they either did not factor sufficiently into the price or where they actually made a mistake in their calculations.Even if you agree with their analysis,the chances are that these companies will be near their intrinsic business value when they are first brought to your attention,so the discipline of being patient and not doing anything for months until something happens to one of these stocks that you like and can understand,is critical to increase the probability of your success.

Given the increased volatility of stock markets today due to the increasing mountains of information and gossip that is being distributed from a proliferation of media devices including the internet,together with the ease of low cost trading means that declines of 30% or 40% or even 50% is more likely to happen and more frequently than ever before,the lows will get lower and the highs will get higher and at faster velocity than ever before,so you can open the game with odds firmly in your favour if you have mastered the discipline of being patient.

Be prepared to start with only 25% of the capital that you are prepared to use in building your shareholding in the company with the intention of adding several more times,depending on whether the company's operating results tilt the odds even more in your favour as well as how much Mr Market is willing to make the game even more attractive for you to play.Do not use capital that forces you to quit because it was only available for a short period of time.

Sometimes you will be thrown a wild card that means you should fold - the recent events on Chesapeake Energy is one example.Sometimes you entered a game without fully understanding the cards that you were dealt - the pressure of the Mexican peso currency devaluing in a credit crisis and its deterioration in a long US recession being another.So spreading your portfolio over twelve to fifteen companies in different industries is important to minimise the risk of a wild card event destroying your wealth.

The most successful investors in history looked at stocks as part ownership of businesses and with that attitude and mental habit,it is far easier to withstand what the market throws at you in terms of price volatility as well as to take advantage of its fears.

However I must confess I was astonished at the reaction to the US and Europe on entering a recession and the ongoing credit crisis on all stock prices.Its response was literally as if the end of the world is going to happen and the lights will go out.I was also astonished by the reaction to Esprit's stock price when it announced that it could not give guidance due to current economic conditions in Europe.Short term mentality seems to be taken to a new level in today's market.It appears that it is now better to exit one's stocks when clearly one is aware of such an event happening and then buying them back once they hit a resistance level such as what happened to Esprit .A trading strategy has to be implemented to optimise wealth creation.If the stock hits close to its intrinsic business value,it must be sold as the risk premium is too high to hold.If one sector such as banking is out of favour and going through a fierce sell off,all banks will be sold regardless of the quality of the business so better to sell and wait for the market to hit a resistance level to reopen a position.

So how do I view my current stocks?

Out of the 12 remaining stocks that I hold,9 have clean balance sheets with surplus cash and minimal or low debt levels - Esprit,AntaSports,Intel,Infosys,Dolby,Adobe,Nokia,ABB and Garmin.

Out of the remaining three stocks,Standard Chartered Bank and NASDAQOMX are such critical institutions with either a near monopoly position or strong competitive differentiation in their respective industries that they should be financialy strong for years to come.

The one remaining stock,Superior Energy services is a key company in the oil well intervention and maintenance segment and without it,the US will have issues with oil production and energy security off its shores in the Mexican Gulf.

If the market crashes further,the one sentence pitch for each company to protect you from being under the spell of Mr Market and selling when you should not is

Esprit - teenagers will still need clothes!

Anta Sports - Chinese consumers will still need sports trainers!

Intel - people will still need computers!

Nokia - people will still need mobile phones!

ABB - people will still need electricity!

Dolby - people will still need sound!

Adobe - people will still need video and PC applications!

Garmin - people will still need GPS!

Infosys - companies will still need low cost,high quality IT services!

NASDAQOMX - people will still use stock exchanges to trade and companies to raise capital!

Standard Chartered Bank -Asia and emerging markets will still need premium banking services!

Superior Energy Services - people will still need oil!

11th October 2008

Sold Chesapeake Energy on friday 10th October at US$12

As I highlighted in my blog yesterday of which companies in my portfolio run the risk of permanent business value dilution,I sold Chesapeake Energy as soon as I discovered last night that they are looking at distressed asset sales due to the current financial crisis.That compounded with the CEO's forced sale of nearly his entire shareholding of the company due to margin calls which was announced today,means I no longer have confidence in the company's management team.

Despite growing the company to become the leading natural gas producer in the US,the CEO's reckless behaviour means I would no longer put one cent of my money in his business.

There is no point in having significant assets,if you do not have the cash to sustain the business since those assets run the risk of being repossessed and sold at fire sale prices.It appears that Chesapeake Energy's working capital is now seriously stretched due to the current financial climate so I have exited the stock.

For the record,my weighted average purchase price for Chesapeake Energy was $19.38 and the stock represented only 2.5% of my portfolio so this loss has not made a material impact to my global stock portfolio.

Reviewing the rest of my portfolio,the only energy services company remaining is Superior Energy Services.Similar to all oil services companies which are taking a significant beating by the stock markets in the last couple of weeks,unless something dramatic happens in the interim,I will hold this stock and listen to their presentation of Q3 and financial outlook.As I highlighted in my blog on 26th September,these guys have been around for years and have seen the cyclical nature of their business so they should be sufficiently experienced to be able to manage the downturn and potentially consolidate their industry in well intervention services and rental tools.Indeed a couple of their senior executives bought shares in the open market which provides reassurance that they feel positive about their company's future.

On Standard Chartered Bank which I mentioned yesterday taking a hit with all the banks in the UK and Hong Kong,it was announced on the 9th October that the Chief Financial Officer,amongst other executives,elected to take his dividends as shares at a purchase price of 14 British pounds (approximately HK$190)so clearly Standard Chartered Bank's management team are not unduly worried about the financial health of their company.

On Sunday,I will reflect on the past week and accept some mistakes that I feel I have made as well as what the ramifications are of the current nature of global stock markets and how this will need to be accomodated in my investing technique.

We are going through a wild card event which has not been seen for nearly 30 years and has hit all investors great and poor over the last couple of months.

10th October 2008

Sold America Movil on thursday 9th October at US$33

While I am still accumulating,I have been analysing which companies in my portfolio now runs an unacceptable risk of being infected by the current financial crisis to cause a permanent dimunition in business value and have now decided to sell America Movil and realise the loss while adding the sale to my cash reserves to accumulate more stock purchases in other companies,particularly given that phase 3 of the global stock market decline now appears likely.

The reason why I decided to sell America Movil is ironically nothing to do with its own business but more to do with the Mexican peso.The Mexican peso runs the real risk of devaluation due to 1)Mexico's exports being less than its imports, 2)85% of its exports going to the US which will be in recession causing Mexico's trade imbalance to deteriorate further, 3)Mexico's biggest foreign exchange earners are oil (whose price has declined sharply from its highs) and remittances from Mexican workers in the US (which is now declining due to the impact of the US economy);4)Mexico runs the risk of speculators shorting the peso if they believe that the Mexican economy is not big enough to withstand the consequences of the current financial crisis,5)Mexico's foreign reserves of approximately $85 billion may not be sufficient to protect it from such a concerted attack,unlike Brazil whose foreign reserves are in excess of $200 billion.

So even if America Movil's earnings and sales continue to prosper and it is a very well managed business with deep financial pockets,when such earnings and sales are translated from pesos to US dollars,it now runs too high a risk of significant currency dilution given the change in circumstances;for me to continue with this investment so I have exited the stock from my global portfolio.

With regard to my other holdings which run the risk of permanent business value dilution,the weighting of my portfolio (which I will disclose at the end of the year) of Chesapeake Energy which has a debt level now scaring off investors,is small enough for me to retain the shareholding and wait for its financial results.The company's net asset value is likely to be around 3 times the company's current market value so the reward of retention is worth the business risk premium.

The other company that I hold,which may also run the risk of permanent dimunition of business value due to the current financial crisis is Standard Chartered Bank which stated on the 8th of October,

"it welcomes and is very supportive of the British government's decision to stabilise the UK banking system as a whole and has been invited to be a participant in the scheme along with all other UK banks.Standard Chartered is well capitalised and is highly liquid, and will participate in the scheme to the extent that it is in the commercial interests of our shareholders.The bank does not intend to issue capital under the recapitalisation scheme."

If this is the case then Standard Chartered Bank is having its share price slashed due to pure market panic over all banks than due to any risks specific to itself.I will wait for Standard Chartered's third quarter results and conference call to confirm that this is true before I add further to my shareholding but I expect a sharp rebound in Standard Chartered once the uncertainty is cleared.Certainly the China Sovereign Wealth Fund and Temasek,Singapore's Sovereign Wealth Fund,along with the UK,would not allow this bank to fail given its prominence in Hong Kong and Singapore but its recapitalisation would lead to share dilution.However given its near 30% decline in share price this week,it appears that the market has already factored this in,without it actually happening!

I will add to my blog this weekend after what could be a very interesting friday in the US,following the panic selling in Asia and Europe today.

7th October 2008

Market decline phase 1

If you read my blog dated 19th September,"buying at the point of maximum pessimism",together with my blog dated 3rd October,"the psychology of investing",you will understand why this week we have entered into the panic selling phase.

There is a lot of cash sitting on the sidelines waiting to see how things play out while the people selling are those who are either forced to sell or because fear has overcome their emotions.

Last night,I added to six of my positions given the market panic depressing valuations.

As I said by the end of the year,I will list my weightings and average prices so comparisons can be made on an annual basis with what the price was at the date I opened my website and my weighted average purchase price.

I will also list at the end of each year,mistakes that I accept I have made when reviewing my investments.

The great thing about the bear market is that if I am successful over a 3 year period,it will be conclusive proof that I am a good stock investor.If not,I will have no regrets since this is one of my passions.I suspect that my portfolio will accelerate in capital appreciation exponentially,if the holding can be extended into further years and I will continue to show its annual performance but the comparison I set myself is 3 years so I will have to abide by my own measurement.


5th October 2008

Paul Pong,Head of Pegasus Fund Managers in Hong Kong

"It is only when the tide goes out that you can see who is swimming naked"

In Hong Kong,there is a highly respected investment fund manager who was invited to host a weekly stock investing column in Hong Kong's leading English speaking newspaper,South China Morning Post,making recommendations on stocks and building a portfolio to be measured against the Hang Seng index.

He published his recommended portfolio in November 2007 and I remember going through every single one of his original stock picks and deciding not a single one was worthy of investment.

The reason why I was so interested was that I had sold my Chinese "red" chip stocks in October 2007 because I thought that they were overvalued and had the cash to reinvest.

Today,I have decided to highlight this guy's performance since he is one of the leading investment professionals in Hong Kong and although performance should be measured over sufficient time for the businesses that have been invested in to show their real intrinsic business value and let share prices catch up with earnings,Paul Pong's failure is that he realises losses as soon as the share price declines 15% by automatically selling the stock.

His investment methodology has led to him realising a cash loss of 43% to date and a total rotation of his stock portfolio with not a single stock that he picked last November,still being held.

Another example of his bizarre investment method is that two weeks ago he picked a stock and then this week,sold it on the basis that it had declined 15%,realising another loss!

This method of investing is a sure way of losing all your capital since it is a bit like buying a property and then when someone offers to buy it from you at a price 15% lower than you bought it,you sell it!Remember,you should have done your homework before investing so that you knew that it was not overvalued in the first place!

Paul Pong should not have recommended any of his stocks last November in the first place or any stocks unless he thinks that they are either undervalued or have very strong growth prospects and are priced at reasonable earnings multiples.He should have thought of his reputation given the very public nature of his column.

Once he makes such recommendations,he should have bought more if he thought his business analyses were still valid.It is clear that his analytical capabilities are lacking as evidence from his weekly column and actions.

His poor stock picking and investment method has exposed him to be another fund manager caught swimming naked when the tide went out.

The most ironic thing,is that two weeks ago,he finally picked one company listed in Hong Kong which is common to my global stock portfolio - Standard Chartered Bank!


3rd October 2008

The Psychology of investing

Now one can understand why from day one,I highlighted that if one invests in stocks,one should approach it with a similar timeframe and attitude to owning properties ie with capital that one is willing to tie up for the next three years,picking stocks of businesses that one likes at a fair or a good price after doing research on the foundations of the company and its industry.

If the environment turns pessimistic and people are selling due to fear of the future or due to forced,distressed sales because of overleverage or due to their own panic;fantastic opportunities present themselves to buy more provided that you have been sensible with your original purchases and not made mistakes with your due diligence.

If you have the temperament not to follow the crowd and you have the skills to conduct accurate due diligence,then there is a strong possibility of being successful.

During the Hong Kong stock market boom and bust,I have seen and heard of old age pensioners,college students and other people who would have needed the money after 6 months or a year,investing in the stockmarket because they thought that it was a one way bet.

There are many people who see stocks going up and feel tempted to buy after reading or watching so called financial analysts or investment experts recommend the stock or a stockmarket,only to see it crash and then not knowing what to do because they did not do any real research on the company itself or the industry it is in.

We are now going through the distressed sales phase in stock markets and because a significant number of hedge funds were caught out by the commodities bust and used large amounts of margin for their positions,combined with retail investors pulling out of mutual funds,most stocks are now being sold at lower and lower prices as forced sales.

The only sector that is being supported is consumer staples on the basis that everyone has got to eat!

I believe that there may be three more major declines over the coming couple of months though it may only be one more,no one can say.My plan is to add to my positions three more times over the coming couple of months.

Given the prices when I opened the website were not my purchase price and that I am adding more as prices get lower,by the end of the year,I will add additional columns so people can track my stocks based on weighted average price as well as the total weighting of my stock portfolio.

For those people who read my website and have confidence in my due diligence abilities;if I am right and you have the cash,you just might be able to make some serious money with my stocks over the next three years!

29th September 2008

Sold Transocean at $119.8

Following on from my comments on friday,the latest developments in the US will mean that the world's largest economy will be going into recession and given it consumes 25% of the world's oil,I expect demand for oil to now fall,leading to declining prices.

Despite the safety net that Transocean has,I am reducing my overall stock portfolio exposure to cyclicals and energy as well as building my cash balance to further accumulate stocks when I feel prices are at bargain basement levels.

26th September 2008

The US banking fiasco will lead to a US recession - what does that mean for investments?

The latest bank to collapse Washington Mutual and the extent of the incompetence of the US banking and credit system will now lead to the US going into recession which may last until the end of 2010.

The cosy relationships that built global economic growth in the past 5 years where leading exporters such as China lent the US the cash to buy its goods will now crack as the US has lived beyond its means for such a length of time,that the entire US financial system has the potential to go into meltdown.

China's huge budget surpluses and cash reserves combined with the government's key policy of maintaining economic growth will lead to an attempt to engineer an increase in consumption by the Chinese population with an easing of monetary policy.However given that the US is still the leading economy in the world (bigger than China,India,Germany,UK,France and Korea put together),it will still lead to a general global economic slowdown impacting all economies.

The sectors that you do not want to be exposed to are the mining and shipping sectors.The US financial sector is an obvious one due to the collapse of its risk management controls and the near bankruptcy of many of its institutions but as the US goes into recession,demand for iron,steel,aluminium,zinc,copper will all continue to decline and as the supply cycle ramps from the commodities boom of the past several years,prices will fall,squeezing margins of all mining companies.

As demand for commodities decline,the sharp falls recently seen in the Baltic Exchange will not reverse and shipping companies will continue to suffer from low day rates,collapsing their margins.

I believe that the "correction" in the commodities markets in Q3 this year will continue as the market recognises that the US has a strong possibility of entering a prolonged recession.

So what does this mean for my global stock portfolio?

Given we are going through deleveraging in the stock market and mutual fund redemptions and switches to cash and bonds,I expect valuations to be depressed well into next year.

For the long term and for the reasons I explained on my analysis on Chesapeake Energy and Superior Energy Services,I will continue to hold these stocks despite the US entering into recession impacting all commodities including energy.

However given that I now expect day rates for rigs of Transocean to decline going forward and the likelihood of a freeze in new builds from oil producers due to the reduction in demand for oil,I see little growth over the next couple of years for Transocean.Its PE ratio of 8 provides a big safety net given 1)its $41 billion order book(which protects it up to the end of 2010) 2)its strong cash position and 3)its market dominance in the offshore deep water oil drilling market.However,if all commodity related stocks continue to decline as the market works out the consequences of a long US recession,I will put a stop limit at $110 on Transocean to build additional cash reserves.

Such additional cash reserves will be used for stock purchases in the coming months since I now believe that there is strong potential for stocks to fall to bargain basement levels given the latest developments in the US.

The other stock I hold which will be impacted by the US going into recession is ABB.

ABB has stated that it expects its earnings to grow between 15%-20% up to 2011 provided there is no recession and given that I now expect that there will be,ABB's stock price will continue to be discounted over the short term.However,I believe that the demand for energy efficiency and power grid infrastructure due to modernisation requirements in developed economies as well as expansion in emerging markets will still be substantial and while its earnings projections may be impacted somewhat,its current PE ratio of 13 is reasonable and I intend to accumulate more if market fear leads to further depression of its PE multiple.

I do not believe that the US entering a recession is the "end of the world" and that is why I intend to continue accumulating positions in stocks.Just like a patient,it needs to clean out its system of sickness so that it can recover and get stronger.

I am a strong believer in the abilities and resilience of the people of the US and like many previous recessions and "crises" in the US,its economy and its financial system will recover.

I have a notable investor who shares the same views by his actions this week - Warren Buffett!

 

 

 

24th September 2008

"The trick is,when there is nothing to do,do nothing" – Warren Buffett

Warren Buffett has always said that he is not paid for activity but for being right so continually evaluating existing companies,industries,economic trends,potential investments and price targets should make up 95% of one’s time.

Over the weekend,I studied three more Chinese companies,one US company and one Korean company but have not acted as I don’t feel they offer bargain basement valuations despite depressed stock markets. I am now waiting for deleveraging to occur in the stock markets as the final stage of the stock market decline when I then intend to continue to add to my existing positions and possibly add new companies.

This final stage may or may not occur.If the market begins rising as investor confidence comes back from the US federal financial bail out plan,then the stockmarkets may not reach bargain basement levels.

Such levels seldom occur – the Asian financial crisis of 1997 was one example.Hong Kong during SARS in 2003 was another,the BJP losing power and the ensuing crash in the Indian stockmarket in 2004 was another.In the US one has to go back to the early 1980s to see blue chip companies hit such low levels. The US tech bust in 2000 was more to do with the deflation of a bubble in a specific sector with little spill over in the global economy and with consumers;in contrast to the impact of today’s bursting of the US credit bubble .

19th September 2008

Buying at the point of maximum pessimism

Typically in every decade there is at least one recession and one bear market and the stock market cycle begins with a correction so prices become fair and then the market factors in a new calculation based on their view of a recession and the market continues to fall so prices become cheap and then either a panic in the market occurs or some other incident happens and prices become very cheap.At this point,investors or funds which were heavily leveraged or had no proper investment plan, sell due to margin calls or mutual fund redemptions and prices complete their decline to bargain basement prices.

So which part of the cycle are we at?

Clearly we are at the stage of prices being cheap or very cheap.

Cheap I define when companies are market leaders in their industries and have a proven track record of growing sales and earnings in excess of 15% annually and are being valued at no more than 12-15 times trailing twelve months earnings.

Prices become very cheap when PE ratios of non cyclical companies are in the range of 10-12 and bargain basement when they fall below 10 and are trading at around 8.

This relates only to quality companies with no balance sheet issues and no fundamental change to their competitive position.

Clearly technology software companies like Adobe and Dolby have different matrices given they are predominantly software businesses whom I believe have far greater futures ahead of them due to global technology changes borne about by the digitilisation of data,changes in media,growth in broadband and wireless and the implied resulting changes to content distribution.

Please note that only a tiny minority of people believe that the stock markets around the world today and related valuations of good quality companies will not be higher in the future.The issue is more to do with whether money invested was based on one’s own cash reserves or debt and whether those cash reserves can be tied up in stocks for at least three years.

People do crazy things when they see prices decline sharply when their only reason for holding stocks was because they saw the stock market going up.

Having a good understanding of the business is absolutely critical in investing so that when one experiences sharp price declines,one either buys more at lower prices or simply holds,knowing that the price will recover to match the company’s business fundamentals.

Out of the 15 stocks that I hold as enclosed which are large enough for fund managers to select,I have added to my positions in 6 of them this week and not sold a single one.

I am not changing the price of each existing stock since this is meant to show the comparison of my stocks in relation to indices and funds on an annual basis and how they track from the date that I opened this website.

Please also note that fund managers and investor websites, charge for their services so I am not going to spend my time highlighting all my additional purchases in existing stocks and at what lower prices.

If in 3 years,my stocks and the analyses as published on this website,outperforms the general market and mutual funds,I will have a public record that I may use for commercial purposes in 2011!

11th September 2008

The 3 energy companies from Texas

The reason why I hold 3 stocks relating to the energy industry is due to three key macro economic trends that I believe are valid.

1)Due to economic growth in emerging markets,demand for oil will be maintained at historically high levels with major new discoveries being largely confined to off shore waters,requiring deep sea drilling such as the Tupi oil discoveries by Petrobras.

2)Due to the decline in the US dollar and the economic boom in the Arab states,fuelled by historically high oil prices,OPEC will try to maintain their oil supplies so that US$80-US$110 per barrel becomes the new price range over the coming several years.

3)Due to its trade deficit and energy security needs,the US can no longer totally rely on foreign oil and will diversify to alternative energies of which natural gas will be the biggest winner.

If these trends play out, well managed companies who offer services to the oil and gas industry will experience high earnings for an extended period of time,beyond analysts current valuations.

Earnings of oil services companies are relatively immune to the daily fluctuations of oil prices since they enter into long term agreements with the oil producers.Oil producers base those contracts on conservative estimates of the weighted average price of oil over a number of years ,which is significantly lower than what the actual daily prices were,over the last 6 months.

Exploration trends and global growth in oil demand has led to significantly higher activity and prices for the services companies in the US.This is due to demand for their services coming from previously non traditional sources such as Reliance in India as well as requirements from Western oil producers for exploration to replace their ever declining reserves or to maintain production at their existing oil wells.

Transocean (RIG) is the market leader for offshore oil drilling services and if the majority of new oil reserves will be offshore in deep waters,it will continue to prosper.

Superior Energy services is a smaller oil and gas services company with an executive management team who have been together for between six and fifteen years in the company and have successfully grown the company’s sales and earnings by 25% and 35% annually for the last eight years.Given the potential for its well intervention services and rental tools division,at current revenues of US$1.5 billion,it still has significant scope for growth, particularly now that it is expanding internationally and given the current boom in gas drilling in the US.

Both companies are currently being valued due to the current crash in all energy related stocks, at a trailing twelve month PE ratio of 7 and 9 respectively and at 8 and 13 respectively from their share price on 21st August - cheap and now very cheap,if my perspective of energy macro economic trends play out.

The third Texan company that I hold is Chesapeake Energy.Built by entrepreneurs into the leading natural gas production company in the US,they are a company with a management team that has the potential to transform the energy needs of the American economy for decades to come.

Aubrey McClendon is my kind of CEO -driven,joined at the soul to his company and his industry,battle hardened,having overcome the hard times in the natural gas industry in the 1990s;puts his money where his mouth is,investing millions of dollars of his own money into the company’s stock on the open market and providing a compelling vision to the US of its economic future with natural gas.

Chesapeake is one of a tiny minority of bellweather oil or gas producers who can increase production year in year out by 15% -20% and not only maintain reserve replacement ratios but actually increase them.

Depending on where natural gas prices will be in several years and Chesapeake has hedged most of 2008 natural gas at US$8.96,49% of 2009 natural gas at $9.37 and 19% of 2010 natural gas at $9.56,the valuation of its assets alone would give it a share price of US$75 to US$120.The fact that its current production cash cost per mcfe is $2.13 provides Chesapeake with sufficient margins to withstand a total collapse in natural gas prices.

Given the sharp falls in gas prices in the last two months and the fears that the market has of overproduction of natural gas in the US,Chesapeake Energy’s share price has fallen 40% in practically two months to US$40.

I believe this is overdone and that Chesapeake will return to a conservative stock valuation of US$75 per share. 


9th September 2008 

Exactly how big can Nokia become?

To outperform over a 3 year period requires amongst other skills,business analysis superior to that which is employed by investment funds and banks as well as a willingness to take short term stock underperformance since picking unpopular or out of favour companies are highly likely to lead to further price declines until the market realizes that it got its business analysis and valuation wrong and the stock rebounds with a vengeance.

I believe the market has got Nokia wrong.

The simple view of Nokia is that it is a handset manufacturer whose high end smart phone market will continue to be rapidly eroded by Apple and RIMM while its low end is now being eroded by Samsung and in the future by Chinese vendors.

"Nokia has had its best days and will be in decline."

I believe this view is a distortion of reality partly because the market and financial institutions are in love with all things Apple and RIMM (if you don’t believe me,check out RIMM’s lofty price earnings multiple).

Wireless internet is one of the great technology trends of the 21st century.

The predominance of and people’s ever increasing reliance on mobile phones for their every day business and social needs is one of the biggest phenomenons of the modern day world.

From school children in Western Europe to the rising affluence in Latin America,South Asia and China,to the entrepreneurs in Africa,all driving mobile phone growth,I believe that the biggest benefactor from this demographic trend will be Nokia,due to its dominant global distribution chain,its economies of scale,variety of mobile phones as well as its global brand recognition.

Nokia has metamorphosised itself in recognizing global changes and capitalizing on them to become the mobile phone maker to the masses and to the world.In the past three years alone,Nokia has sold approximately 1 billion mobile phones.

In its early days,it was viewed in Europe as the hippest and trendiest phone maker to own and while it still retains that image in certain countries and also with a certain part of its product range; its ability to recognize changes in its industry particularly in emerging growth areas,has enabled it to transform itself and its fortunes by developing products to the mass market in spite of effectively,ignoring North American market requirements,where it is currently only a niche vendor.

One example of this,is that Nokia is now viewed as the most trusted consumer brand in the whole of fast growing India according to Brand Equity of The Economic Times, India's largest and the world's second most read financial daily.

Analysts view the mass and developing markets as commodity plays where prices and margins will continue to decline and consequently have marked down Nokia.Given most of the funds are North American based and highly influenced by what they see in North America,they also view that Nokia will lose its market leadership at the high end to Apple and RIMM,so Nokia will be squeezed at both ends.

While Nokia is likely to continue to lose handset market share from its high of 40%,Nokia is already undertaking another transformation due to its deep understanding of the wireless industry to seize leadership of the next wave of mass market adoption where the mobile phone becomes the pre-eminent device for school children (GPS so parents can track their kids),mobile gaming and social networking sites for teenagers and multi media consumer and business applications device for adults.The fact that it also plans to launch touch screen phones to the mass market first,also highlights that it has a strong understanding of where the big profits lie in the next wave of mobile industry development.

This year,Nokia bought Navteq giving it leadership in GPS.It bought out its partners and controls Symbian the dominant mobile computer operating system in the industry.It bought Plazes a social networking site.It has launched nGAGE for gaming and "Comes with music" for digital music downloads,signing up the top 3 music labels.

It will continue differentiating itself by offering a wider range of proprietary and non proprietary services and functionality than its competitors.This should enable Nokia to maintain if not increase market share in future years,while simultaneously increase average revenue and profit per consumer as well as enable the activation of recurring revenues and profits from its existing customer base.

As Olli-Pekka,Nokia’s CEO writes in their 2008 interim report,

"…we believe that the next wave of growth will be driven by devices linked with services."

Nokia’s settlement of its dispute with Qualcomm will also enable it to enter the significant and highly profitable North American CDMA device market which will also drive upside to Nokia’s revenues and earnings in the future.Currently North America represents less than 5% of its current 2008 revenues.

If Nokia can execute on its strategy in becoming the dominant mobile consumer applications company in addition to its current position as the leading mobile device company,then Nokia’s earnings and its stock price will move to ever increasing new highs.

The fact that Nokia has great financial discipline and is not willing to lose money to maintain its handset market share or to win telecom network infrastructure contracts from its Nokia Siemens joint venture,combined with its mass market instincts,highlights that its management is not being misdirected from what it needs to do.

Its end game is to continue to dominate and transform mobile consumer society for years to come.

Given Nokia’s brand,which is one of the top ten in the world,its existing 1 billion plus customers,its proven,world class management;it is arguably,the only company in the world that has the ability to pull this off.

I do not discount that it may make some mis-steps in the short term,that it needs a far more imaginative advertising campaign on its mobile services and also that it needs to resolve its current telecom carrier partnerships particularly in the US but I believe Nokia has simply too much power in the industry and with consumers for it not to be able to make corrective actions and end up as the ultimate winner in this huge and transformative global business.

Currently the market does not rate its capabilities in doing so and is discounting the ability and deep mobile industry knowledge of its management,by giving Nokia a PE valuation ratio in the range of of 8 to 10,similar to a commodity technology business with little earnings growth prospects.

I expect Nokia’s share price to deteriorate further this year due to their warning last week on device market share decline in Q3 as well as the short term earnings dilutive impact of its Navteq acquisition so there is a strong possibility of cheaper prices to be able to buy Nokia at,in the coming months.

I view the conservative fair value of Nokia if it can pull off its mobile applications strategy at US$40.  

5th September 2008

The bear market gets ugly

– Dow falls nearly 3% on Thursday and Hang Seng falls below 20,000

Given that the most obvious way of making money in the stock market is to buy low and sell high,it is amazing how few people can actually do this.

Given the stock market crashes in Hong Kong,China,India and the major declines in the US and Europe,you would think that no one would now sell given markets have now declined from last year's peak by 20% to 60%.

The fact that this is not the case,is largely down to a few reasons

1)Psychology of the crowd

If you are glued to the financial media,stock tickers and take opinions from your friends and colleagues,you lose sight of why you bought the stock in the first place and let fear overcome you,especially if you keep seeing your stocks decline for no valid business reason except for general market panic.

2)You had no understanding of the business when you bought the stock

You just thought a stock would go up without having done due diligence and a proper calculation of a fair valuation on the company.

3)You actually made a business valuation mistake

That is easy to identify for US banks and mortgage companies since their assets have suffered permanent dimunition in value ie their balance sheets are worth only a fraction of what people thought they were worth,due to bad loans.

However for other companies,this is a tough one because you would also need to identify which companies are suffering from temporary business declines as opposed to permanent ones.

Business valuation mistakes are also easy to identify in bull markets when companies have ridiculous price earnings ratios but in bear markets when economies enter a recession and stocks get really cheap,they are far more difficult to recognize as you do not know which ones will recover and achieve higher earnings in the future.

4)Traders

Given how easy it is to buy and sell stock and how this group try to make money by looking at charts,they will always trade regardless of whether from a fundamental view,it makes sense.

Since to complete a trade,50% will be right and 50% will be wrong,over time,results will reflect the market and be no better or worse.

5)Bought on margin,with borrowed money or with short term money

This is where investors become very vulnerable since in bear markets,prices can keep going down and if you have to take money off the table due to a margin call,you end up being forced to sell and make what would otherwise have been temporary paper losses.

Why I believe my stocks will go higher and have no current plans to sell at lower prices.

All my stocks are market leaders in their businesses of which either the long term demographic,macroeconomic or technology trends are such,that I expect their earnings to be significantly higher in two to three years time,than they are today.

They may suffer short term business setbacks due to recession,competition or "acts of god" but I do not believe that such set backs will be permanent and I expect them to continue to report higher profits over the long term and for an extended period of time.

Obviously,if I am proven wrong and the company becomes marginalized in their industry or fails to execute its business strategy effectively,I will take the loss since I made a business analysis error.

Clearly I will also sell when a stock reaches the price that I believe reflects its fair business value as when I sold China Huiyuan Juice this week when Coca Cola announced its proposed takeover.

Investing in the stock market is similar to buying a house or an apartment,if you do not plan to hold or to stay for at least three years,you should not be buying.
 
3rd September 2008

Coca Cola to buy China Huiyuan Juice in all cash offer for HK$12.20

Can you imagine how I am feeling today?

These are the reasons why investing in stocks can be so worthwhile.

When one has the ability to identify undervalued stocks,has the temperament to withstand market hysteria and providing one makes the correct business analysis on the company,its stock will eventually rise to its correct valuation.

This is the most extreme example you can imagine!

Today,China Huiyuan Juice rose 168%.

Coke’s US$2.5 billion all cash offer,is the biggest proposed acquisition of a Chinese company to date by a western company.It is still subject to regulatory approval and so I decided to realize the gain and sold at HK$11.06.

Interesting that from my analysis of Huiyuan’s business,I put a conservative business valuation of HK$10.4 so clearly Coke are using slightly more optimistic assumptions plus its ability to scale Huiyuan’s distribution, to pay a 17% premium.

How ironic that my website does not claim or promise 100% plus gains in several weeks or months and I have made a 168% gain in 5 days!

1st September 2008

Cheng Hye Cheah – Asia’s real Warren Buffett 

This Malaysian born Chinese ex journalist,is the founder,chairman and chief investment officer of Value Partners,a company he set up in 1993 with just $3m and has now grown to become the second largest single manager hedge fund headquartered in Asia,valued at $5.9 billion. 

This guy is a stock picking genius and follows very similar principles to Warren Buffett and the value investing methodology.
 His genius lies in being able to pick turnarounds ie companies who suffer business value declines but where he views such declines to be only temporary,leading to massive gains when his analyses turn out be true,in future company results.
 
One of his funds,the Value Partners Classic Fund is included as a comparison to the results of my stock portfolio. 

29th August 2008

China Huiyuan Juice bought today at HK$4.14

I did say expect some rotation of my global stock portfolio due to earnings season in Hong Kong!

As highlighted with my Anta Sports stock purchase,the big macro economic trend of rising affluence and consumer purchasing power in China,will lead to certain Chinese companies becoming bigger and bigger.

One industry that interests me is the beverage industry as drinks will always be in demand and as a country develops,consumption grows.

China Huiyuan Juice controls 40 percent of China's pure juice market. Unlike Westerners, most Chinese seldom drink juice and it is an emerging trend. Huiyuan says the per capita consumption of juice is currently only 3.4 litres a year in China, compared with 19 litres in Japan, 34 litres in the US and 40 litres in Canada.

Consumption is expected to grow at a compound annual growth rate of 10.1% as Chinese consumers become increasingly aware of healthier diets and as their disposable income continues to rise.

Huiyuan Juice has doubled its revenues in the last two years and quadrupled is profits.Its intention is to quadruple again over the next three to five years and given that its current revenue as the number 1 pure juice brand in China,is still less than US$400m (as per 2007 year end),it has plenty of scope to meet such ambitious targets.

It is highly valued in China and has won many awards.One example was the "2006 Chinese College Students’ Favorite Brand In Fruit Juices" held by the China Business Newspaper in which over 10 million college students from about 3000 universities and colleges in China participated.

In China (unlike in my student days in the UK!),college students are not big alcoholic drinkers.Soft drinks,coffee bars and tea houses are preferred venues for many students.

The market leaders for milk beverages,Mengniu Dairy and alcohol beverages,Tsingtao Brewery have similar market shares in China for their respective beverage segments but unlike Huiyuan Juice,these companies are currently trading at 30x trailing twelve months earnings.

China Huiyan Juice,similar to Anta Sports,is flush with cash given its IPO in February 2007.

Warren Buffett once stated that " you pay a very high price in the stock market for a cheery consensus" and China Huiyuan at its IPO, fell exactly into that category.

During the Hong Kong stock market bull run,when the market fell in love with Chinese stocks,Huiyuan IPO’d at HK$6 which was then at a price earnings multiple of 45.6 times trailing twelve months earnings.Very soon it doubled in price leading to a crazy valuation of 90 times earnings!

Now,due to the current Hong Kong stock market crash,its price has declined to HK$4 in contrast to its continuing significant earnings growth,leading to a current valuation of 10 times trailing 2007 earnings!

China Huiyuan Juice could literally apply to the axiom of "buy low and sell high"!

The compelling reason that motivated me to buy now,apart from 1) investing into the growth in the consumer market for beverages in China with the de facto market leader 2) Huiyuan Juice’s now very attractive price earnings multiple 3)its net positive cash position, was actually 4) the results announcement yesterday evening,of its smaller competitor - Haisheng Juice.

Haisheng Juice announced excellent results with its gross margins not deteriorating since they managed to pass on price rises,to offset the rise in prices of its raw material fruit concentrate imports.

If I have correctly put "two and two" together,this should also lead to Huiyuan announcing strong first half 2008 results on the 10th September – we shall see!

I view the true Price Earnings ratio for this company at 20,a conservative compound annual earnings per share growth rate over the next 5 years of 18% and a target business price of HK$10.4.

Ironically,Value Partners which is the second biggest hedge fund in Asia, took a stake in this company at the IPO price of HK$6 - I add the stock to my global portfolio at a 30% discount today.

28th August 2008

Sold Sinotruk at HK$6.35 today

Given that my global stock portfolio is intended to be held over 3 – 5 years,it may seem surprising that I am already changing the portfolio so soon after announcing it,however this is the middle of the results season for many Hong Kong listed companies so I can gauge performance and how they match my expectations.

To say that I was disappointed with Sinotruk’s half year results is an understatement.

Sinotruk,which the Chinese government spun off incorporating the government controlled heavy truck business late last year and intends to develop to become a multinational company to take on Volvo and Daimler,failed to increase value to shareholders.

Although Sinotruk increased sales and unit volumes by over 50%; management indicated prior to today’s interim results that due to demand exceeding supply,it would be able to raise prices to pass on the increase in cost of raw materials such as steel; however these results highlight that it failed to do so.

This has lead to declining gross and operating margins.Moreover,despite the fact of a low manufacturing cost base in China and its claim that it can make heavy trucks cheaper than western companies by 50%,it could not fully offset its foreign exchange losses by the rise in prices on its exports.

It gets worse!Sinotruk’s receivables nearly tripled and its debtors greater than 90 days,rose seven fold leading to its cash reserves halving.Although the majority of its debtors are Chinese institutions who will pay,Sinotruk is literally using their IPO cash to give extended credit terms which is not the best way to use shareholders’ money.

In effect,the result of Sinotruk’s IPO has led to it expanding its business and profits but not on a per share basis.In every company,management is critical to the success of the business but also in whether they are acting in the best interests of shareholders.While the jury may still be out on Sinotruk given that these are only the first 6 month results since the IPO,I see sufficient deterioration for me to look for value elsewhere – Sinotruk certainly did not meet my expectations.

Given the price of the stock on 21st August was HK$6.20 and I sold at HK$6.35 on 28th August,Sinotruk will have no bearing on tracking my global stock portfolio’s results so will now be deleted and not computed.

Esprit

Now one can understand why a strong stomach is needed in stock investing!
Esprit's stock price declined 18% in one day after disappointing analysts,with their results.
I guess this was on the cards given that I recommended an essentially European retailer as Western Europe enters a recession!The comments yesterday by the CEO of "we see a kind of consumer strike now with people refusing to spend money" also spooked the market,leading to a sharp decline in Esprit’s stock.

So clearly it was not a good call to pick Esprit given economic conditions this year and next in Western Europe but I believe Esprit is the best managed clothes brand retailer on the planet.Its largely German management has successfully grown Esprit through previous downturns and given its base in Hong Kong,it is well aware of the potential of growth in Asia which currently represents only 11% of their turnover.

I also trust the management due to their drive,track record and honesty in "telling it like it is".May be it is the German culture and mentality but they do not gloss over issues and when things are bad,Esprit’s management address them quickly and set up a plan of action.

Heinz Krogner the CEO and Thomas Grote the President of the Esprit Brand have done an impressive job in growing the business profitably without taking on debt and Esprit is flush with cash to withstand any downturn as well as increase market share as weaker European retailers decline and the industry consolidates.

Their marketing plans including sponsoring MTV Europe and MTV Asia with their EDC brand are good and their financial parameters in relation to profit margins,return on equity,return on investment capital are arguably the best in the industry.Even during what has been the toughest conditions for retailers in years in Europe,they still managed to increase same store sales by 7%.

The fact that only 2% of their business is in the US market,where the recession will be more severe due to US mortgage debt issues,means that their group exposure to risks of declining sales and profits is significantly reduced.

Esprit’s revenues are now nearly $5 billion.There is still more growth left in Esprit though its fast growing days of 20% plus may be over,due to its current size.

This will lead to a contraction to its price earnings multiple but over a 3 to 5 year period I still expect earnings growth of at least 10% per annum (though the next twelve months is likely to be flat to single digits).

Esprit provides a good dividend.Based on an average pay out ratio of 60% earnings,this would provide a dividend yield of around 4.1% at HK$75 and 4.7% at today’s closing price of HK$66.Esprit have announced a dividend sweetener this year,increasing the yield to 6.3%.

Given today’s sell off,Esprit’s trailing twelve months price earnings multiple is now reduced to 12.8.

I am prepared to sit out,hold,collect the dividend and suffer the likely stock underperformance over the coming 18 months.

I believe that Esprit is experiencing a temporary decline in business value due to the likely economic recession in Europe but that this will not be permanent.

Esprit’s focus on regularly updating its collections (more so than their competitors) also reduces the likelihood of their clothing becoming out of fashion to their targeted consumer base.So in summary,not a good call to be exposed to retail stocks in Western Europe or North America but Esprit pays a good dividend and I have yet to see evidence that their business will not continue to prosper over the medium term in Europe,with significant upside remaining in Asia. 

 

 

26 August 2008

Anta Sports bought today at HK$5.07

Even though I am based in Hong Kong,my global portfolio does not seem to be weighted with China stocks but that is more to do with me waiting for declines in valuation and evidence of company performance being sufficiently compelling, to have what I would consider a bargain and Anta Sports has now fallen into that category.

Anta Sports is the number two Chinese sports apparel and footwear retail brand in China behind Li Ning.

It has experienced explosive growth (nearly 100% CAGR in revenue and earnings per share in the last 3 years) and likely 25% CAGR over the coming 3 years due to continuing growth in consumer spending in China and Anta Sports' successful marketing and operating retail strategies.

The retail industry in China has grown by an annual compound growth rate of 12.5% over the past decade and the footwear market in China has seen CAGR of 20% in the last 5 years.Moreover in the developed markets of US,UK and Japan,the average number of pairs of shoes that are owned are 6 while in China it is still barely more than 2!

The per capita disposal income of the Chinese urban population is also increasing in double digits per annum and is still only US$2000.

Moreover urbanization of China is still at a low 40% compared to 80% in the US,66% in Japan and 50% globally.

When one considers that China has one of the highest savings rates in the world and the Chinese government has US$1.7 trillion in foreign exchange reserves,all these numbers combined with the still low base of consumption in China is simply staggering and has all global consumer companies salivating as to their continuing growth prospects in China.

So why invest in Anta Sports?

No matter how popular Nike and Adidas become in China,there will be room for two major Chinese sports retail brands due to their unique identification and knowledge of the grassroots and local aspirations of Chinese consumers.

Li Ning and Anta Sports associations in China combined with the entrepreneural skills of the senior management are simply too formidable,regardless of how many highly paid retail consultants,western brands employ on their Chinese sportswear retail strategy.

It did not go unnoticed to the hundreds of millions of Chinese viewers that the final torch bearer who lit the Olympic flame at the Bird’s Nest stadium,by being elevated to the top of the stadium was the founder of Li Ning himself and Li Ning did not pay for the privilege!

Moreover Nike,Adidas and other western brands do not address the sub US$25 sports footwear market which is huge in China.

Anta Sports sponsors a number of key sports including one of the two fastest growing sports in China – basketball.

Along with soccer,basketball has come from nowhere in China in the last ten years to become very popular.The catalyst for this is arguably the most popular and recognized sports athlete in the whole of China – Yao Ming and when he joined the Houston Rockets in the US.

Not only is Anta Sports the sponsor of the Chinese Basketball Association and all its basketball teams but the owner of the Houston Rockets has a 1.78% shareholding in Anta Sports and is helping to promote the popularity of baskeball in China as well as elevating the Anta Sports brand.

Another example of Anta’s brand growing into the mainstream of Chinese society is the annual hosting of ANTA CCTV’s (China’s equivalent of Britain’s BBC) Sports Personality of the Year.

The long term demographics of China for the sportswear and footwear industry is very compelling together with the increasing brand awareness of the top two Chinese brands and their ability to address a wider range of Chinese consumers.

The 37 year old CEO of Anta is one of the top management talents in the whole of China with a glittering 14 year track record of business success with Anta as well as being recognized for his abilities and achievements in China’s industry.While some of the awards that are given in China can be taken with a grain of salt,it is still nevertheless highly impressive to be awarded one of "Top 10 brand talents in China" at 33 years of age,"Top 10 Outstanding Young Persons in China" at 36 and "Business leader of China’s New Economy" by China Business at 37!

He along with his brothers,developed the company from 1994,when it was founded by their father.The family own 60% of Anta Sports and their aim is to make it the leading sports retail brand in the whole of China.

In terms of management drive,track record,ability and "owner manager" behaviour – Anta Sports scores very highly.

Anta Sports' strategies of elevating and segmenting their brand as well as targeting the mass market by having an aggressive strategy in Tier 2 and Tier 3 cities in China where they can dominate,is succeeding with continuing annual volume growth of 40%+ in footwear and 30% volume growth in sportswear.

Their average wholesale price for footwear and sportswear is also increasing (by 7% and 5.5% as per the latest interim results announced yesterday,25th August).

Given their trailing twelve month turnover to 30th June 2008 is still only US$577M with their gross margins increasing from 25% in 2006 to 38.9% and net profit margin continuing to increase and currently at 19.7%,there is still significant scope for growth.

Per annum same store sales per sqm is increasing 9%,average sales floor per store is increasing 15% and the number of stores is increasing 20%+.Currently Anta's number of stores is still only 5193 for an increasingly urbanised population in China of approximately 520 million.

Anta Sports expansion plans are not hindered by debt since during the boom in the Hong Kong stock market last year,they raised US$432m and currently have no debt and net cash of US$480m!

Their ROIC and ROE has been diluted by their current cash balance but is still very healthy,at near 20%.

To summarise,Anta Sports is a fast growing small cap stock (current market cap is US$1.6BN) tied to the prospects of China's domestic sportswear and footwear consumer market.

Unbelievably due to the Hong Kong stock market crash,its stock price has halved since the end of 2007 while its results have exceeded expectations and is now below its original IPO price in July 2007!

It is currently trading at 14.2 x trailing twelve month earnings.Moreover if one deducts the net cash on its balance sheet,its actual PE multiple is 10!

I place a conservative fair value price on Anta Sports at HK$7.5 but will be reluctant to sell for less than HK$10,unless their results deteriorate from a worst case revenue and earnings growth rate of 20%.

I add Anta Sports to my global stock portfolio as a long term hold.

22nd August 2008

Given my background,I always had the tools to become a good stock investor but lacked the methodology.

In 2003 to 2007, I largely invested in funds indexed to India and China and benefitted from the bull market in these countries.

I got nervous about the Chinese stock market mania and sold my Chinese stocks in October 2007 when the Hang Seng hit 30,000 because I believed that they had become overvalued.There are enough people that I know,who I was buying drinks for in Lan Kwai Fong in Hong Kong that night when I sold,who can verify my action!

In October 2006,I stumbled upon a book on investing which led me to study the great investors of the twentieth century - Warren Buffett,Benjamin Graham,Phillip Fisher,Peter Lynch,Jim Rogers,George Soros and Sir John Templeton.Their track records of consistently beating the stock market index over decades,indicate that their methodology and thinking can lead to a steady accumulation of wealth which can easily surpass any other method of wealth creation,whether it is in real estate,buying,managing businesses or in mutual fund investing.

I am now trying to apply similar methodologies to stock investing.

The most successful investors such as Warren Buffett are very patient,focussed on owning a share of a "wonderful business purchased at a fair price" and monitoring its operations so that it meets their expectations.

Warren Buffett is the living testament to the truth that "in the short term the market is a voting machine but in the long term,it is a weighing machine" ie that ultimately,it is not buying "hot’ stocks in "hot" industries or markets that leads to winning in the stock market but buying undervalued and underrated companies whose future earnings are likely to exceed the market’s expectations,with the accompanying re-pricing of the stock in the future,to its true business price.

Given that Warren Buffett is the world’s richest man and that he made his riches through investing in the stock market;it proves that his principles are the simplest and least riskiest ways of accumulating wealth.

Peter Lynch who was the most successful equity fund manager in the US during his ten plus years in running the Fidelity Magellan Fund,followed similar principles as did Sir John Templeton and Philip Fisher. 

Today was an auspicious day to start this website as there was a typhoon in Hong Kong.

 

 

 

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