Investment Mistake Log

Mistakes Log

- 0494.HK (Li & Fung) - what is a strong MOAT?  And buying cheap doesn't mean good buy.  Something that came from $15 to $4 doesn't mean it's a good buy.  Something Martin Lau buys doesn't necessarily mean it's a good buy.  Strong FCF doesn't necessarily mean it's a good buy.  Lesson: (1) when you're ignorant about the industry, do yourself a favor, go for low debt level (or better still net cash).  (2) understand the company's source of  (or lack of) pricing power.  Li & Fung lost their pricing power not only because of weak demand which is cyclical, but also structural due to more transparent pricing from ecommerce and internet (the likes of Alibaba). (3) I read the book about Li & Fung history.  So it followed naturally that I "knew" something about it and fell into that confirmation and/or availability bias.  

- 0902.HK (Huaneng) - Monopoly doesn't mean guarantee straight line upwards.  The microstructure of Power generation sector is different between China and HK.  Just because you made money from HKE doesn't mean you can make money from Huaneng.  In a regulated industry, the company's MOAT can be deceptive given lack of pricing power.  Interest alignment in SOE is dubious as govt uses SOE as policy tool.  SOE is used primarily to drive policy rather than for shareholder return.  Lesson: (1) false sense of security about monopoly and MOAT without good understanding of the different microstructures.  (2) cheap can become cheaper, PE=8 can goto PE=5.  High dividend will come down.  (3) ultimately, high debt is not ideal, judge the company's requirement to raise external capital (placement).  (4) be cognisant about SOE interest alignment.  (5) need to have a basic picture/understanding about supply and demand.  

- 2883.HK/ 0883.HK (CNOOC) / Gazprom - PE=8 doesn't mean it's cheap.  And for cyclical industry, it's a contrarian indicator meaning PE is lowest at cyclical peak.  

- 0603.HK (China Oil & Gas) - Lesson: (1) followed Joe Zhang in his book.  So stop listening to other people.  (2) Sizing - too heavy an exposure in this small cap cyclical name.  (3) Buying laggard - laggard lags for a reason.  (4) failed to act on first red flag - namely the purchase of Canadian oil assets.  (5) Debt - sensitivity to leverage is numbed when all is going well (pay attention!!!).  Only when the tide goes out we'll know who's swimming naked.

- 1083.HK (Towngas China) - this is not HKCG all over again, don't kid yourself! Should always be wary of a story of the next XXX.  Lesson: (1) Lack of understanding of the structure of the company.  The fact that the crown jewel projects are all residing still with HKCG (the mother) and Towngas is just holding the greenfield projects.  Towngas is just a step son.  HKCG always has a higher pegging order.  ALIGNMENT OF INTEREST!!!  The question of holding mother or son, and the bias about buying a "potential" duplicate.  

- 0010.HK (HLG) - a good company doesn't mean a good price.  PB=0.8 doesn't mean it cannot go to PB=0.5.  The key to buying NAV discount names?  When the insider is buying.  Ronnie Chan paid bottom price in 2016.  Lesson (2): the Liking bias.  Just because I liked (used to) Ronnie Chan doesn't mean I should buy his company (at any price).  The switch from Kam Ping Mansion to HLG was flawed without understanding historical PB band and where we are wrt to that band.  (3) Rationality: I wanted to buy something in the bull market and it felt safest to buy HLG due to NAV discount.  It was an emotional decision, not a rational decision.  

- Want Want (00151.HK) - Lesson: (1) didn't buy cheap.  Big absolute PE and PB.  Just because they trade near the lowest of the recent band doesn't mean it's cheap.  Cheapness is measured on an absolute basis, not relative.  (2) Lack of analysis: what was the free cash flow yield?  What's their strength, product / distribution / brand / pricing?  Martin Lau sold it because mgmt wasn't investing in the brands but focused more on cost/efficiency

Investment Philosophy

My Investment Philosophy

I am a value investor, meaning that I am not a momentum trader.  I do not chase hot stock nor hot sector.  The trend is your friend does not necessarily apply to me.   I tend to buy neglected, beaten down companies (often too early) when they receive minimum attention (lower volume than historical average). 

Buffett's word is gospel here: "The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs."  

- LKS has a similar motto.

And

"Speculation is most dangerous when it looks easiest" 

- think how over-confident I was in 2015.....

My primary objective is not to lose money. In tennis terms, i try (am learning) to hit a lollipop just to get the ball back within the lines.  Capital preservation (against inflation) is key rather than chasing maximum return.  

I don't trade a lot.   I want to invest in companies that:

1) Less prone to technology obsolescence and can last a long time with low maintenance. Ideally, if I get knocked down by a bus, my wife doesn't have to worry about what to do with the portfolio.  Another advantage is this type of portfolio can leave me lots of time to read and learn.  I am learning to adhere to the principle of buying assets where time is my friend not enemy (hence i don't like warrants, or net-net in a sunset industry).  I have a tendency to skew to asset that doesn't require thinking too much about exit strategy.  

2) I will allocate a a good portion of the portfolio (say 40%) to deep NAV discount companies with low debt, proven management and high quality assets - the Schloss way. The yardstick there is easier to define, and intrinsic value more objectively observable.  Company like Swire and Jardine are low maintenance if purchased at a good discount.

3) I might allocate a small portion of the portfolio in beaten down well-managed cyclical companies with very little debt.  Exit strategy is needed there.

I do not have a view about market move, nor have a view what's going to happen to the economy.  I am learning not to look at the market.  OK I admit, it's hard. It's like not opening your Blackberry or Facebook page for the social media junkies.

Risk Management Philosophy

Always be mindful that: "One of the most corrosive human feelings is to sit out and watch other people make money" - Howard Marks

My definition of Risk is not market (move) risk, nor the daily up/down movement (volatility as defined by academics). My definition of risk is the probability of permanent loss of capital such as accounting scandal, chairman disappearing, policy risk, technological advancement that makes a company's product redundant etc.

At my current competency level, I tend to focus on bigger cap companies (although research has shown that small caps make better return in the long run), with a good institutional culture, where management incentive is aligned with minority shareholders, good consistent operating and free cash flow, consistent and growing dividend, and some monopolistic features.

At my current competency level, I am likely to hold fewer than 20 companies and have a cap of 10% in any single company.  I might hold ETF as well.

I am aware of the arguments of always fully invested vs holding some cash.  At this stage, I am inclined to the latter - meaning that i might hold a good portion in cash (between 5-25% following the wise words from the Intelligent Investor, and the action from Buffett, Klarman, etc).  I want to put myself in a position where when market is crashing down, I am still emotionally stable and I still have dry powder to buy.  

Always look at the downside first before looking at the upside.  Sizing of positions should be a function of the odds and possible damage on the downside.  Err on undersizing rather than oversizing - think in terms of the Kelly's formula

FOMO and Over-confidence are two of the biggest risks in managing investments.

Cash holdings

Buffett: "Cash, though, is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent. When bills come due, only cash is legal tender. Don't leave home without it."

Some thoughts on cash holdings (cash allocation / cash policy)

Benefit of Cash:

- Cash is an emotional stabiliser. In bad/stressful times, having cash can help with calmer, more rational decisions.

- Cash gives options and flexibility.
- Cash has no volatility (from a non-FX angle)  

Negative in holding cash:

- Cash is like a dead weight, it drags down performance in good times

- Cash is forever eroding slowly due to inflation.  A slow death by a thousand cut.  Time is not your friend there.

- Cash is subject to exchange rate risk

So what's my policy in holding cash?

- mid market cycle - 75%

- high valuation cycle - 50% (sell high)

- low market valuation cycle - 95% (buy low)

Fully invested vs having a cash holding policy.  The sequence of events in a bull bear market makes no difference to P&L if money is not taken out of the system.  But if money is added (reinvested) and withdrew from time to time, then the order of event matters.  Hence having an implicit and disciplined buy low sell high strategy (which is what this cash policy is all about) helps.

Another way to look at appropriate cash allocation is the opportunity universe.  When opportunity is abundant (usually when market is depressed), then go fully invested (95%).  When opportunity is hard to come by (market is likely to be inflated), then reduce gradually to 50%.  

So:

Cash Holdings = 1/F(# available opportunities)

Cash Holdings = 1/F(valuation)

I should not and am not trying to time the market. If i leave the cash holding level as a function of available opportunities, and i always judge that on an absolute basis rather than a relative basis, this plan should work in the long run. A 50% floor is due to the fact that bubble or high valuation can sustain for longer than one can imagine.  US market rallied since 2009 for 8 years now.  I exited US completely in 2015, 2 years too early (still counting).  However, I will always get to the 95% too early in a depressed market and get to 50% too early in an inflated market, but that should still have a positive effect vs not having a cash policy.

Sit out and watching other people make money is one of the most corrosive feelings.  But keeping cash when you don't find opportunity is the precursor for having the cash when opportunities become available again.  

The Importance of Writing

Buffett: "Chain of habit is too light to be felt and too heavy to be broken".

I was never a keen (or good) writer and there was a lot of inertia to find ways around it.  But I've come to the conclusion that writing and reading annual reports are 2 essential ingredients in successful investing.  I need to build a habit in doing so.  After quitting MS, I formed a habit in my diary writing and freestyle kicking.  Both not natural to start with and now i will not do without.  Success breeds success when it comes to building good habits.  When it comes to doing the right thing, delay no more Andy (or I've already delayed for too long)!

The benefit of writing:
- it helps to lay out the logic and assumptions in an organised manner for a specific decision
- writing can help me to become more rational (BRK is the temple of rationality)
- writing (blog) act as an investment journal for record keeping
- most great investors write (think buffett, howard marks, seth klarman, etc), and i believe writing helps them to be a better investor
- writing helps to consolidate the investment process, or it is a crucial part in building that investment process
- it helps with discipline in investing
- blogs can attract constructive criticism
- a checklist is somewhat implicit in the investment write-up and will continue to be refined in this process
- it might (i stress MIGHT again) help with countering over-confidence bias if i am being honest with my writeup
- it is a concrete deliverable with future reference value rather than some wishy-washy random thoughts that cannot be tracked

The downside (or excuses) of writing:
- takes time and effort and discipline (oh well, that's the only way to improve!)
- if published, i may suffer from consistency bias (hence i need to be selective in terms of what to publish to avoid suffering from those bias)
- if i am any good with an idea, i may introduce competition in my investing (imitation is the best complement; and stop flattering yourself Andy)
- blogs can also attract unconstructive comments (life is too short to care about those)
- initially with sub-standard writeup, i will be showing my ignorance

This post is a self-talk in trying to get myself into the good habit of writing, to exploit the consistency bias to motivate myself.  It will take time for me to get to a reasonable standard.  But i gotta start somewhere.  Like my kicking in swimming, despite a late start, if i do it consistently and not giving up, i will eventually get better regardless how long it takes.

Revelation @ Ocean Park

Took Alistair and Ryan to Ocean Park just before Term 4 start on Monday.  Long story short, we tried to beat the crowd and had lunch at 11:30 next to the games area.  While we were eating the crap fast food there (wonder why they never serve decent food in amusement park?), we were watching people pay to play games at the stall to win those soft toys hanging above the stand.  And everytime someone wins anything, they'll ring the bell loudly (Remember 77777? the slot machine in the casino?).  There were many different games, a catapult game to get a frog into the hole; throw a ring into a bottle neck; throwing bean bags at the stacked cubes; basketball; kick soccer into holes; and a softball shooting game to name a few.

Alistair watched as we were eating and he was gagging to try his luck (or skill he thought).  He counted the frogs where people tried to catapult into the hole; he had "experience" with throwing rings into the bottle necks (we had a bucket load last time and got none in); and he knew how hard it was to dismantle the lead cubes with bean bags.  But he was confident that with his super soccer skill, he could kick the soccer balls into the many holes.  The result?

There was this one ridiculous game which i thought was a crime to be allowed in the Park.  The game was simple, just to throw a ball into any coloured squares.  But, listen to this, all the white squares had holes below them that drain the ball out for collection EXCEPT the coloured squares, which had a shallow base so even if you're skillful or lucky enough to land a ball in the square, it would most likely to bounce out.  This game is so deceiving that IMHO is a crime to conn the kids into paying (i mean playing).

I was the sober guy who kept telling Alistair the odds in each game (I wasn't popular to be honest).  But in real life, am I the sober one when it comes to investing in business?  How many times was I being conned into these seemingly easy games?

- Monopoly SOE power generator yet to realise that they don't have pricing power as the government use cheaper pricing from the power generators as a policy tool to stimulate economy
- Oligopolistic Oil company that seemed very cheap but that was trading at the peak of the cycle
- Downstream Gas Distributor with all the reasons to prosper given environmental concerns and monopolistic nature; yet to find out that the majority owner has a different agenda for this vechicle (crown jewel asset in the parent co)?

Other seemingly easy "games" that are known not to be easy that i am reminding myself to never touch:
- Capital intensive, yet extremely competitive sector of Airlines
- the very cyclical ports and container shipping industry
- cat risk prone tech industry (e.g. HCV drug, BMS Opdivo being killed by Merck's Keytruda)

In the end, we played the basketball game (which the odds were well understood) at the other end of the park where the ring was not as high up.  Ryan scored 2 out of 4, Alistair scored 1 out of 6 and I scored 3 out of 6.  We won an air Hammer and a Cookie Monster soft toy.

The lessons here are:
- Understand the role luck plays in a game vs required skills.  Operate within circle of competence (I am relatively more skillful at basketball than catapulting frogs)
- look at all the possible traps in the game (ie the shallow base in the colour squares game)
- operate only in a game where you understand the odds and can foresee the possible outcomes
- play in a "boring" game (vs a glamorous one) which you can almost certainly walk away with a small price at least
- find a stall with a good smiling operator that is happy to give you the price vs those stall operator with a bad attitude that hate to give you a price when you win
- don't get sucked-in by the bells of others' winnings!

Money vs Wealth

This is a piece to remind myself about the meaning of money.  This reminder is important as it provides the big picture to resist the useless emotion of jeolasy (which is the biggest enermy to risk management - i'll write a piece on this topic separately).

I have been reading news on Cheng Yu Tung, third richest man in HK and 57th or so in the Forbe's world richest list. He passed away at 91 after 4 years of coma post his stroke.  Another piece of news is regarding Joseph Lau, who is a shrewd stock market operator, but also a fugitive who has been reported to be suffering from kidney failure which requires dialysis 4 times a week.  This two men's listed entities probably woudn't have made you rich had one invested in them even from a long term perspective.

You can have all the money in the world, and yet, the money is used to prolong a low-quality life. Why would Cheng's family allow him to suffer an extra 4 years of coma? (put me in for NFR/DNR if it ever happens to me pls) And if I was Joseph Lau, i would probably be guessing the incentive of the people around me. The meaning of money for these tycoons is pretty useless at their stage.

What is wealth? Is wealth money?  Or something else?  I reckon wealth is a function of fulfilment, relationships, knowledge and money.  Money in this equation is a mean to facilitate knowledge gathering and fulfilment.

Money is a subset of wealth, and the purpose of money is a tool, a tool to facilitate learning.  To make learning more interesting.  And the learning will in turn make one a better human being.  In my case, to be a better father, and to learn to understand myself better and to remove the biases wired in my character.  Money accumulation, if done properly, is a 修練 (training for logical thinking, rationality, discipline and self realisation).

Reference: Maslow's Hierarchy, HKEJ article

Book list

I never had a good reading habit until i started reading Buffett's letters.  The book that drawn out my reading bug was Tap Dancing to Work (2013?).  The book that helped me to let go and quit Morgan Stanley was The Education of a Value Investor.  These 2 books are worthy of special mention here.

This particular blog is a working document, part of my filing system.

This is my book list, sectioned into
1) WIP - Books I am reading right now
2) Books queued to be read (and prioritised)
3) Books that I've read since 6/2015 after i became a full time dad (hopefully i'll start writing a blog on each book when i complete)

1) WIP - What I am reading right now
- John Neff on Investing (Audio Book)
-

2) Books in the queue to be read (this list is important as it is how books are prioritised to be read)
- The Base Rate Book 
- Quality of Earnings
- Value Investing - from Graham Buffett & Beyond (Greewald)
- anything i can find on Schloss
- Peter Cundill - as he got into Value Investing in his 40's
- 投資中最簡單的事

3) Books that I've read since 6/2015
- 用心於不交易
- 我的職業是股東 5/9
- Randy Kwei bio (7/8)
- 平民資本家 (16/8)
- 證券分析實踐 31/8
- 羅健昌-價值投資大時代
- Paris Value Investing - What they don't teach in Uni
- Snowball
- Party Man, Company Man: Is China State Capitalism Doomed?
- Shadow Banking in China - Joe Zhang
- The Most Important Thing - Howard Marks
- 香港經典并購
- 百年利豐
- 與CEO對話 2006
- Benjamin Franklin Biography (audiobook)
- Munger - the complete investor (audiobook)
- Fooled by Randomness (audiobook)
- 香港股史 1841-1997
- 居安思危
- Influence (Audiobook) 30/4/16
- The Aggressive Conservative Investor 11/5/16 - Martin Whitman
- Thinking fast and slow
- MOATS
- The Little book that still beats the market
- Manual of Ideas
- 黃國英
- A Conversation with Money - Tony Choi
- The Money Master
- The Money Master - II
- Business Adventure
- Vincent Lam - small cap stocks selection 捕捉細價股：市場分析實戰
- 價值捍衛戰 - Vincent Lam
- 步上一億元財富之道 - Vincent Lam
- One Man's View of the World - LKY
- 計論明星股 （16/9/16）
- the intelligent investor - audio book (24/9/16)
- 財經報導實戰手冊 (楊生華)
- *** 破解上市公司易容術 (黃玲)
- Quantitative Value
- What's behind the numbers (audio book)
- More than you know (Moubourssin)
- Why Moats Matter (Audio Book)

- Deep Value

- 郝承林 - 致富新世代二 科綱君臨天下

- Outsiders (Audiobook)