The First Class of Minions

3 years ago, I embarked on a new strategy of placing small, speculative bets into loss-making companies with the potential to make a turnaround. That strategy is now affectionately known as the "minion" strategy. The first class of minions is from the semiconductor sector, which has risen strongly this year. Most of the minions have been sold in the last 1 year, and they have graduated with flying colours.

The triggering point for initiating this strategy is that I realised that although there were many semiconductor stocks listed on SGX, only 2 made good profits and gave out good dividends. The vast majority were not. See the table below, which is based on the financial results for FY2013, which were the latest available results at the time when I initiated the strategy in Mar 2014. Please note that the figures are not adjusted for consolidations and other corporate actions.

Company	EPS	Div	D/E	NTA	Price	P/NTA	NTA/EPS	Max EPS
AEM	-0.92	0.00	2.5%	$0.150	$0.079	0.53	16.3	1.53
ASTI	-2.32	0.00	14.9%	$0.120	$0.057	0.48	5.2	2.58
Ellipsiz	0.86	0.20	4.5%	$0.190	$0.085	0.45	N.A.	3.85
MicroMech	3.69	3.00	0.0%	$0.270	$0.570	2.11	N.A.	4.92
MIT	-2.98	0.00	35.7%	$0.130	$0.072	0.55	4.4	1.74
STATS	-2.50	0.00	93.4%	$0.560	$0.310	0.55	22.4	6.50
Sunright	-1.40	0.00	7.3%	$0.610	$0.125	0.20	43.6	5.00
UMS	8.40	6.50	0.0%	$0.560	$0.655	1.17	N.A.	8.40

The intriguing question I had was why both Micro-Mech and UMS could make money but the rest could not. Some even had fairly large losses. The divergence in performance raised an interesting question, which was that would Micro-Mech and UMS follow the rest into losses, or the rest would follow Micro-Mech and UMS into gains. Thus, I decided to explore placing speculative bets into the loss-making companies, with the hope of them turning around and becoming multi-baggers. These bets were mentally written off the moment they were invested (see Meet The Minions for more info).

Having said that, it is not just anyhow throwing money away. Nobody likes to really lose money. Thus, there are 2 guiding principles in the minion strategy. Firstly, the companies must demonstrate they have the ability to survive at least for the next few years, so that there is sufficient time for a potential turnaround to happen. They should also not have to call a rights issue, else it would be throwing good money after bad ones. Secondly, there must be reasonable probability of a turnaround happening. If either of these 2 conditions are not present, the minions would likely lead to losses.

On the ability to survival, the companies should not have high Debt/Equity ratios and the Net Asset Value should be sufficient to absorb the loss per share for the next few years. Surprisingly, all the semiconductor companies evaluated above had low Debt/Equity ratios, with the exception of STATS ChipPAC. The NTA/EPS ratio for loss-making companies show how many years they could last, assuming they continue to make the same losses every year. Again, in this aspect, all the companies could survive for the next 4 years at least.

On the probability of a turnaround, I really had no insights into this industry (and why Micro-Mech and UMS made money but the rest did not) and was relying heavily on the guess that convergence among the companies (in either direction) was probable. Exactly how long the turnaround would happen was unknown. Based on the earlier discussion, if the turnaround were to happen within the next 4 years, then all the stocks evaluated would rise.

Besides checking whether the companies could survive, I also considered if a turnaround were to happen, how much money could the companies make. This is where the highest EPS in the past 5 years came in. It is not much use if the companies only made small profits at the peak of an industry cycle.

Next, the stocks must be selling at a cheap price relative to valuation. If they are not cheap enough, the profit potential is reduced. This is why even though Micro-Mech and UMS are profitable companies, they do not make good candidates as minions. The Price/NTA ratio shows that most of the companies have low P/NTA ratios of around 0.50, except for the 2 darlings which are Micro-Mech and UMS. In particular, Sunright only had P/NTA ratio of only 0.20.

Finally, diversification is extremely important. Despite all the checks, I cannot tell for sure which stocks would tank or call a rights issue. To manage this risk, I buy more than 1 stock.

Based on the considerations above, I selected ASTI, Ellipsiz, MIT (Manufacturing Integration Technology), STATS and Sunright for my speculative bets in Mar 2014. Each position was a small one, and I had 5 stocks to spread out the risks. Most of these stocks were sold in the last 1 year. The results are as shown below.

Company	Bought	Sold	% Profit	Remarks
ASTI	$0.055	$0.056	2%	Sold in Apr 17
Ellipsiz	$0.283	$0.380	34%	Sold in Sep 16
MIT	$0.066	$0.220	233%	Partially sold in Jul 15
STATS	$0.335	$0.625	87%	Sold in Sep 14
Sunright	$0.125	$0.305	144%	Sold in Mar 17
Average			100%

Among the 5 minions, 1 is a dud, 1 is a 2-bagger and 1 potentially could be a 3-bagger (assuming fully sold at the current price). The average gain is 100%. Many of them rose further after I sold.

So, the above are my first class of minions. They have graduated with flying colours and gave me enough confidence to continue my minion strategy.

Just a final note, in case you go away thinking minions are very profitable, they are actually high risk, high gain positions. Not all will make money. Some will show unrealised losses for long periods of time. Some will be completely wiped out. One of them, Ezion warrants, got suspended the day I bought into it. Do not attempt this unless you fully understand and are prepared to take all the risks.


See related blog posts:

• Meet The Minions
• The Minions (Millions) Mentality
• How to Get a Multi-Bagger?

How Long Would You Hold A Value Stock?

9 years and 11 months! That is how long I held on to a value stock known as Frencken. I recently sold it in Jun at $0.515, having first bought it in Jul 2007 at $0.535 when it was still known as ElectroTech. In between, I averaged down twice, at $0.33 in Jul 2010 and at $0.365 in Jul 2014. The figure below shows the share price performance since May 2005.

Frencken Share Price Performance Since 2005

As you can see, for a very long 9.5 years, the share price never recovered to its previous levels, until only recently. In between, it changed its name from ElectroTech to Frencken and took over not 1, but 2 SGX listed companies (ETLA and JukenTech)! It has been a very long 9.5 years for Frencken shareholders who bought it as a value stock.

In value investing, you are often told that you have to be patient; that the day will come when your value stock will rise significantly and become a potential multi-bagger. The logic is appealing: buy a $1 stock for $0.60 and eventually the market will come to recognise its value and price it at $1 or beyond! However, what is not mentioned is how long do you have to wait for this to happen. And in the case of Frencken, it took almost 10 years for it to recover to its previous levels.

You might ask, did I make a mistake for identifying Frencken as a value stock and for buying it at too high a price? I bought it in Jul 2007, so my assessment was based on the financial statements for Dec 2006. For FY2005 and FY2006, the respective earnings per share were 9.59 cents and 8.65 cents, the book value was 46.0 cents and 52.4 cents, and the dividend was 2.68 cents and 2.60 cents. Based on my original purchase price of $0.535, these translated to P/E ratios of 5.6 times and 6.2 times, P/B ratios of 1.16 times and 1.02 times, and dividend yield of 5.0% and 4.9% respectively. These figures suggest that Frencken was a value stock when I first bought it and I certainly did not pay too a high price for it.

The point I am trying to make is this: value investing does not always work. It is not a case of buying an undervalued stock and eventually it will become a multi-bagger. It is not that simple. As I later figured out, being undervalued is only a necessary but insufficient condition for a stock to rise to its intrinsic value. Some other catalysts must be present for the rise to materialise, such as a bull run, recovery in earnings, asset sales with special dividends, etc. Being undervalued alone is not sufficient.

In the case of Frencken, the recent recovery in share price is due to 2 factors: a bull run in electronics stocks that swept up not only Frencken, but also other electronics stocks such as Hi-P, Sunningdale, UMS, Valuetronics, Venture, etc. The other factor is a recovery in earnings. For the latest quarter in 1Q2017, it reported a 437% year-on-year rise in quarterly earnings. This explains the doubling in share price from $0.24 since the beginning of this year.

If being undervalued is the only necessary condition for a stock to rise, why did I have to wait for not 1, 2, 3, 4, 5, 6, 7, 8, 9, but almost 10 years for it to rise?

I used to be a value investor too. When the value stock that I bought rose, I believed that value investing worked. When the stock did not rise, I told myself to be patient, that one day the market would eventually recognise the stock's value and give it its rightful valuation. When the stock dropped further and turned into a value trap, I thought that there must be something that I missed and should work harder to improve my value investing skills. Seldom did I think that there could be some other factors at work that would determine to a larger extent whether I make money or lose money on stocks. If the value stocks rose, value investing was right (never mind that there could be a general bull market as in the case of 2004). If the stocks did not rise, value investing was not at fault!

It was only around 2011 that I realised that something was amiss with value investing. I found out that the stocks that I bought during the Global Financial Crisis did not rise as much as I expected. It was then that I finally understood that value investing does not always work. Being undervalued is only a necessary but insufficient condition for stocks to rise. From there, I kept an open mind and branched out to other investing strategies, such as growth, turnarounds, dividend, etc. 

Having said the above, value investing did not totally disappear from my investment strategies. The principles of not overpaying for investments have continued to stay with me (see What is My Target Price?). And I am actually very grateful to have learnt value investing back then in 2001. It taught me a scientific method to value stocks instead of using gut feel. But value investing could only bring me this far. To continue my investing journey, I had to understand what worked for value investing and discard what did not.

10 years. That is how long I held on to a stock bought on the thesis of a winning formula. How many 10 years does anyone have in his investing lifetime to realise that his much cherished winning formula does not always work?

See related blog posts:

• Confessions of a Serious Investor
• Investing Is A Life-Long Learning Journey
• An Advice for Myself

Fundamentals of Stock and Bond Picking

You have probably heard of the study in which monkeys throwing darts on a dartboard with stock names on it could produce portfolios that outperform those picked by professional investors. A few reasons were given for the outperformance, such as size of the companies, Price-to-Book valuation of the stocks, etc. I wonder if the same study were to be repeated for bond picking, would monkeys still outperform professional investors?

There is no study on the above, but my answer to it is probably not. When you pick a stock to buy, you are expecting it to change in the future, whether it is the earnings or dividends increasing or the Price-to-Earnings valuation improving. In essence, you are forecasting the future. This can be seen from the various models for valuing stocks. The Dividend Discount Model, for example, estimates the intrinsic value of a stock as the summation of all future dividends discounted to the present. The Discounted Cash Flow Model does so similarly, using free cashflows instead of dividends. The present matters less in stock valuation, and yardsticks based on present assets such as Price-to-Book ratio do not feature much in investors' minds. There are good reasons for this, because if the assets cannot produce good future earnings, the assets have to be discounted from book value. 

The corollary is that, if things are not expected to change in the future, you should not pick the stock (except for dividend stocks, which have similarities with bonds). Also, since nobody can predict the future accurately, it is not surprising that monkeys can beat professional investors in stock picking. Likewise, professional investors underperform their respective stock benchmarks when they carry out tactical allocations according to their outlook for the future.

Bond investment is quite the mirror opposite of stock investment. When you pick a bond (or dividend-paying stock) to buy, you are expecting it to continue paying the same amount of coupons or dividends until they mature. In other words, you are expecting it not to change in the future. Hence, bond valuation starts with present assets and earnings and computes a margin of safety to cater for unexpected changes in the future. While the future is still important, the present plays a bigger role in bond valuation. Thus, bond valuation deals with yardsticks such as the debt-to-equity ratio, interest coverage ratio, etc. which are found in the present income statements and balance sheets.

Hence, when you compare stock and bond valuation methods, stock valuations are more of an art, because it is based on forecasts for the future, which everybody will have different opinions of. Whereas bond valuations are more of a science, because that they are based on figures in the income statements and balance sheets, which people rarely dispute. 

Hence, on the above question on whether monkeys will outperform professional investors on bond picking, my answer is probably not, since monkeys cannot analyse income statements and balance sheets. Also, based on the above argument, more professional bond investors should outperform their benchmarks compared to their stock counterparts. This is true. S&P publishes annual SPIVA (S&P Indices Versus Active) reports on whether active fund managers outperform their benchmarks. In all equities categories, active fund managers underperform their respective benchmarks. In bonds, active fund managers outperform their benchmarks in the investment-grade short and intermediate, global income and general municipal categories on a 5-year basis (see SPIVA report for US Year-End 2016).

Thus, on the question whether you should buy the stocks or bonds of a particular company, it depends on your outlook for the company in the future, summarised as follows.

Company Outlook	Bonds	Stocks	Conclusion
Changes for the Better	Good	Best	Best for Stock Investment
No Change	Good	No Good	Best for Bond Investment
Changes for the Worse	Bad	Worst	Both Investments are Bad

When things do not change in the future, bonds are better investments than stocks. When things change for the better in the future, bonds are good investments, but you can perform better by buying the stock. When things change for the worse, both are bad investments, but stocks are worse than bonds.

The above also has implications on the types of stocks we should buy. If there are no catalysts for changes such as improved earnings or dividends, asset sales or a bull market in the future, an undervalued stock will continue to remain undervalued. A growth stock will be a good investment, but only until the day its growth starts to slow down, from which it becomes a bad investment. A dividend stock is good provided things do not change or change for the better.


See related blog posts:

• What Can We Learn About Stocks From Bonds
• The Lost Art of Bond Investment
• The Investigative Approach to Stock Investments

The Investigative Approach to Stock Investments

There are a couple of quantitative methods for analysing stocks, such as the Dividend Discount Model (DDM). A lot of people use them for stock analysis and investment as they are relatively simple to use and do not require qualitative analysis of the business strategies, competitive environment, corporate governance, etc. For a very long time, I was also a keen user of such methods, looking at only earnings, dividends, cashflows, debts, book value, etc. to identify value stocks. Such an approach has served me well in the past. However, there are times when this approach turned up value traps whose stock price keeps on declining. Over the past 2 years, I have gradually moved away from such quantitative analysis.

Let us use the DDM as an example of the quantitative approach. A simple form of the DDM is:

where P    = Intrinsic value of stock

           D1  = Dividend for the next financial year

           r     = required rate of return

           g    = perpetuate rate of growth in dividends

It is simple to use, as there are only 4 parameters to estimate. A lot of times, in the absence of qualitative analysis, these parameters are estimated from past performance. However, past performance do not necessarily represent future performance. An example of this is Starhub. Since 2010, Starhub has been paying a constant dividend of 20 cents every year. The dividend has been so regular that it is commonly assumed that the 20-cent dividend will continue every year. Last month, Starhub dropped a bombshell by announcing that the dividend will be cut from 20 cents to 16 cents in FY2017. This is the perils of looking just at the financial numbers and extrapolating past performance into the future.

An alternative approach to stock investment is to carry out a qualitative analysis of the company and the industry it is in. One of the best known techniques in this approach is the scuttlebutt technique, which is made famous by Philip A. Fisher in his book "Common Stocks and Uncommon Profits". For the past 8 weeks, I have attempted the use of such an investigative approach in the analysis of telco stocks, looking at the business strategies, competitive environment, (my own) customer experience and industry trends. My skills are still rudimentary compared to the scuttlebutt technique, but the investigative approach does provide a glimpse of where the business is heading rather than extrapolating from past performance.

It is tough work reading through and comparing all the telco price plans, financial results, annual reports, industry statistics and trends, technology news, etc. But the end result is a better understanding of the prospects and risks of the company and whether the money can be safely invested in it. 

So far, 2 industry analyses have been completed, namely, Oil & Gas and Telcos. I hope to complete more industry analyses in time to come.

See related blog posts:

• A Look-Back at My Blog for 2016
• Being A Co-Owner of GLP
• Fundamentals of Stock and Bond Picking

A Look-Back at My Blog for 2016

2016 is drawing to a close and it is an opportune time for me to reflect on my blog for this year. Regular readers of my blog would know that my blog posts this year have tilted towards understanding the business of the industry/ company. This is most clearly manifested in the series of 14 Oil & Gas posts and a couple of sporadic posts in banks and Global Logistic Properties (GLP). This tilt towards business analysis is also reflected in my investments, with selective positioning along the O&G industry chain and a big investment in GLP.

This shift towards business analysis as opposed to financial analysis has yielded advantages. Previously, being trained as a value investor, most of my investments were solely based on analysis of the financial statements, i.e. the company must have good earnings, low debts, strong cashflows, etc. However, the issue with financial statements is that they reflect the past business conditions, not the future business conditions that drive stock prices moving forward. It is like driving with the rear-view mirror. Thus, many times, I would buy into a stock with good earnings but whose price is declining, only to end up with declining earnings and further declines in share price later. This is most clearly epitomised by the misadventures in O&G stocks in late 2014.

With business analysis, past financial statements are only an input for understanding the business of the company and constructing a business model for it. They are a means to understand what factors drive the revenue and costs of the company. Using this model, you can feed prevailing news about the economy in general (e.g. rising interest rates), industry news (e.g. OPEC cutting oil production) and company-specific news into the model and forecast how future financial statements would look like. This way, when the next financial statement is released, you would not be surprised by the earnings report. Also, the next financial statement is used to check how accurate your business model is and make the necessary adjustments. It is also used to check how well management has executed their strategy and business plans and understand what are the potential risks. Financial statements are a means to an end and not the end itself.

Having said the above, I have actually not carried out an in-depth business analysis of any company in my blog. What I have done is broad-level analysis of industry groups instead, as a single industry analysis can provide a quick understanding of many companies in the industry. A blogger who has done in-depth business analysis of companies very well is SG Thumbtack Investor. Looking forward to 2017, I hope to carry out more business analysis for more industry groups.

Thanks for staying tuned to this blog throughout the year. Wishing all readers Merry Christmas and a Happy, Prosperous and Healthy 2017!

See related blog posts:

• The Investigative Approach to Stock Investments
• Being A Co-Owner of GLP
• The Evolution of An Investor

Being A Co-Owner of GLP

It is often said that buying shares in a company means becoming a co-owner of the company. However, what does it really mean to be a co-owner? After my large investment in Global Logistic Properties (GLP), I finally understood what it means. Usually, for any investment, if the company is not doing well, I could simply sell and walk away. But when I initiated the 15% to 20% concentration in GLP, I told myself that there shall be no exits. If GLP sinks, I sink as well. Hence, I have to understand the business very well and monitor the prevailing risks to protect my investment. Such a mentality requires very different actions from the usual mentality in stock investments. In fact, I differentiate GLP as a business investment as opposed to other stocks which are financial investments.

The first difference between a business and a financial investment is the duration of the holding period. After I had overcome my initial jittery over the stock price fluctuations for such a large concentration in GLP (see My Roller Coaster Ride with GLP), I am prepared to hold GLP for 15 to 20 years or more instead of taking profit in the short term. Having understood the business model of GLP, even a 50% gain in the short term will not be sufficient. GLP has the potential to be a multi-bagger if it is given enough time to develop to its full potential according to its business model. It does not matter if the stock market were to close for the next 10 years. Financial investors make money from the markets, but business investors make money from owning and growing the business.

The second difference is in how financial statements, especially quarterly ones, are viewed. For financial investments, I would read the financial statements, possibly discover some concerns, and sell off the investment the next morning. I once sold off a growth stock (Riverstone) after it reported weaker-than-expected quarterly results, only to see the stock doubled in price. But with GLP, the quarterly results are reviewed to monitor how well the company is executing its business model and plans and what are the potential risks. A set of poor quarterly results does not lead to the stock being sold.

An analogy would be the quarterly exam results of your children. If the child only scored 60 marks for one particular quarterly exam, would you quickly give up on the child, or would you look past the score and delve deeper into the exam questions to understand how well the child has mastered the subject syllabus (i.e. followed the business plans) and which areas has the child done poorly (i.e. what are the risks)? Likewise, a business investment focuses less on the actual earnings figures but more on evidence of business model execution and potential risks.

Because of the differences in emphasis, the questions asked by financial and business investors at Annual General Meetings (AGMs) are also different. It is not uncommon to hear questions such as why is the dividend so low or why has the profit margin dropped in AGMs, but these are mostly focused on the short term financial results. Between quarters or even financial years, there are certain to be variations in the results. Sometimes, the variations might simply be a matter of timing, which will reverse in the subsequent financial period. Long term business investors are more concerned about the viability of the business model and the potential risks. For example, if you are a long term shareholder of GLP, would you not be concerned over whether it is at risk of being disrupted by technological innovations or economic trends, or how it is going to manage rising interest rates and declining renminbi value? These are issues that could threaten the viability of GLP and everybody's investment in it if not managed well. In constrast, how low the dividend or profit margin are for one financial year seem less significant compared to these issues. Financial investors ask questions related to the past (e.g. earnings, dividends, etc.), while business investors ask questions concerned with the future (e.g. opportunities, risks, etc.).

There is also a conflict in what financial and business investors want from their investments. As an example, GLP was recently rumoured to be the subject of a takeover by a group of Chinese investors. Financial investors might be satisfied with a gain of, say, 20% over several months if the takeover were to materialise, but business investors would see a great business and a potential multi-bagger over 15 to 20 years being taken away.

In conclusion, the mentality and actions from being a financial investor and a business investor are very different. It might be a lot more risky being a long-term business investor, but also more rewarding if you get it right.

See related blog posts:

• The GLP Story
• My Roller Coaster Ride with GLP
• Bye Bye, GLP!

The Minions (Millions) Mentality

Last week, I blogged about the minions in my portfolio, i.e. small, speculative positions in loss-making companies with reasonable chance of turning around. Although small, they have the potential to become multi-baggers. I also mentioned the advantages of minions, which are: (1) they serve as incubators for further investment should further evidence of the company turning around emerges and (2) "risk-free" positions to counter the high risks involved in investing in some companies and industries, such as the Oil & Gas industry. You can refer to Meet The Minions for more info.

However, the minion strategy goes beyond these 2 advantages. I discovered the mentality of investing like the rich. Because the amount invested in minions are relatively small, typically 1/3 the size of a typical investment in a profitable company, any price changes are fairly insignificant. In fact, as mentioned in my last post, the investment is mentally written off the moment they are purchased. Because of the relatively small size and also because they are mentally written off, there is no emotional attachment to the share price. Whether the price is down 10% or 100%, I could not care less. Contrast this with the largest holding in my portfolio which takes up 15% to 20% of my capital. When I first held such a large position, every 3-cent movement (equivalent to 1.5% price change) was enough to make me feel jittery. There is only 1 word to describe the lack of emotional attachment to share price: liberating.

Because I could not care whether the stock is down 100%, I also could not care whether the stock is up 100%, 200% or 400%! That was the case with MIT, which I originally bought at $0.066 and it went up to $0.285 for a 332% return on the purchase price. I decided that a 332% return was inadequate and held on for a 1000% return. Unfortunately, the price came back down to $0.165, with further drops likely after a series of disappointing results recently. Nevertheless, I had no regrets not cashing in on that multi-bagger and locking in a gain of 332% plus bragging rights for a 4-bagger.

One of my problems in investing is the inability to hold on to winners. This problem becomes more obvious as the stock approaches a 100% gain, which is the threshold for a multi-bagger and comes with bragging rights. Watching the stock price fluctuating just above and below the line is nerve-wrenching. On one occasion, I decided that I had enough of the jittery and sold for a 163% gain, only to watch the stock climb another 118%! In other words, I sold for double my purchase price, and the price doubled again after I sold! It was not a minion position and the amount of "lost profits" was staggering. The stock was Riverstone.

This is why I said that when there is no emotional attachment to the share price, the feeling is truly liberating. When there is nothing to anchor the share price, such as the 2-bagger threshold, the sky is the limit. The minions mindset also gives me a peek into how the rich treat their investments. Whenever there is a stock market crash, newspapers would tabulate how much money the billionaires in the world have lost. Yet, they never seem to want to sell their massive shareholdings in the companies they founded or owned. When the stock market recovers, these billionaires made much more money that they had lost in the crash. They are in the top 10/100 billionaire list for a reason: they never sell. Had they sold at the top of the stock market, they probably would not be in the list for much longer. The dividends from the stocks they own are way more than sufficient to fund their lifestyles. There is no need to sell the stocks to protect the value from dropping in a stock market crash. In constrast, retail investors like myself are always looking to protect the value of our investments. If someone were to tell me with 100% accuracy that tomorrow's stock market would crash, I would sell a majority of my stocks. (Actually, if you read my blog, I do think that a crash is coming, and I'm 50% in cash. Thus, you can see that I am still a very long way from adopting the mentality of the rich).

The minions might be small and insignificant. But they have important lessons on how to make millions. I have certainly learnt a lot from them.

P.S. As I'll be overseas next week, I would not be able to respond to your comments until I return. Appreciate your understanding.

See related blog posts:

• Meet The Minions
• The First Class of Minions
• How to Get a Multi-Bagger?

Meet The Minions

I have a bunch of speculative shares which I affectionately call "the minions". The characteristics of the minions are: small speculative positions in loss-making companies with reasonable chance of turning around. The idea behind the minions came about from a realisation that one source of multi-baggers is loss-making companies that manage to turn around. You can refer to How to Get a Multi-Bagger? for more info. The turnaround multi-bagger I had was Magnecomp, now known as Innotek. It was a chance occurrence because I usually avoid loss-making companies. However, one of the main problems with value investors is that we often buy too early into companies whose share prices are falling but the earnings are still good, without realising that earnings would soon follow the share prices down. In the case of Magnecomp, it reported a huge loss after I bought it and the share price continued to fall. At its lowest point, the unrealised loss on my purchase was as high as 55%. Subsequently, it managed to turn around and I sold it for a 3-bagger. See the price performance of Magnecomp below.

Magnecomp - A Turnaround Multi-Bagger

This multi-bagger is the only turnaround multi-bagger that I have. Due to my preference for profitable companies, it did not occur to me that even loss-making companies could be profitable investments! It was only when I blogged about it in 2014 that I began to seriously consider adding loss-making companies with reasonable chance of turning around to my portfolio. To manage the risk, the amount of money invested in them is relatively small, typical 1/3 the size of a typical investment in a profitable company. Not only that, the amount invested is mentally written off the moment they are purchased. Thus, there are no expectations of them returning an investment profit. In other words, there is nothing to lose on them.

Despite the fact that the amount invested is 100% written off mentally, these minions, as a group so far, have performed beyond expectations! Of the 11 minions, 2 were sold off at profits of 34% to 87% and 2 are unrealised multi-baggers! See the table below for the performance of these minions to-date.

Company	Avg Cost	Current/Sold	%Gain	Remarks
ASTI	$0.055	$0.055	0%
Ellipsiz	$0.283	$0.380	34%	Sold
Food Empire	$0.270	$0.305	13%
Grand Banks	$0.275	$0.245	-11%
Grand Banks	$0.260	$0.245	-6%
Hiap Seng	$0.100	$0.142	42%
Interra	$0.069	$0.068	-1%
Kris	$0.145	$0.149	3%
MIT	$0.066	$0.165	150%
MIT	$0.130	$0.165	27%
Ramba	$0.220	$0.160	-27%
Ramba	$0.200	$0.160	-20%	Rights
Ramba Wt	-	-		Rights
STATS	$0.335	$0.625	87%	Sold
Sunright	$0.125	$0.340	172%
Average			31%

In fact, MIT (Manufacturing Integration Technology) went as high as $0.285, representing a 4-bagger on my original purchase price of $0.066! However, since it was considered a nothing-to-lose speculation, I held out for bigger gains. Unfortunately, it has come down to $0.165, with further drop likely.

The advantages of the minions go beyond returning a profit on the investment. They also serve as incubators for further investment, which is why you seen some minions have twice the amount invested in them. As the probability of turning around increases, a second investment is made, so as to reap bigger gains when the turnaround is realised. The best example of this is MIT, in which a second investment was made at $0.13, even though it had already doubled from the original price of $0.066.

The second advantage of the minions is that they are considered nothing-to-lose. Since there is already nothing to lose on them, it also means that they are technically "risk-free". This characteristic is very useful in making investments in high risk sectors, such as the Oil & Gas industry. From the list above, 4 of them are from this industry and they have performed admirably. When something extremely risky meets a nothing-to-lose mentality, the risk-reward balance tilts in favour of the latter. Minions are a key part of My Oil & Gas Fightback.

It is important to note that the minion strategy works only if the position is small enough to be written off. If it is too large, it is difficult to write off the full amount and adopt the nothing-to-lose mentality. Not only that, there is usually a need to diversify as much as possible to reduce the risk of individual stocks really losing money. However, this also presents one of the challenges of adopting the minion strategy. While $1,000 in 1 stock might be easy to write off, a total of say, $10,000 in 10 stocks might not be that easy to write off.

Moverover, although I talked about writing off the investment, nobody likes to really lose money. Thus, stocks selected under this strategy have some evidence of being able to turn around. If they have no chance of turning around, using this strategy will only mean losing more money.

In conclusion, minions may be small, but do not underestimate them. It is precisely because they are small that they are able to achieve big returns!

See related blog posts:

• The Minions (Millions) Mentality
• The First Class of Minions
• How to Get a Multi-Bagger?

My Investment Trends for 2015

Last week, I blogged about the Changes to My Investment Strategies in 2014. This week, I will share what are the likely changes in 2015. 

Dividend Stocks

Generally, I am not a big-time investor into dividend stocks. This is because I am predominantly a value investor. Value investors seek out undervalued stocks so as to make capital gains when the stocks recover to their intrinsic value. Whatever dividends paid out is a bonus and a side-product of the investment strategy. When I firsted started investing, the dividends collected were very small. However, as my capital grows over time, the amount of dividends also grows, so much that they now form a significant portion of the realised gains.

Although I have dividend stocks in the form of preference shares, REITs, some business trusts (and shipping trusts previously), dividends are not the primary consideration for their purchase. These non-equities primarily serve as reserves to be drawn upon in time of market crises, so the key considerations are capital preservation and liquidity. These non-equities must able to maintain their value and allow conversion into cash with minimal loss for reinvestment into stocks during market crises. Only when these 2 considerations are satisfied will I consider the amount of dividends they are paying. Although I have kept a few REITs and business trusts despite them failing the above considerations during the Global Financial Crisis in 2008, I remain wary of them. You may wish to read REITs Are Not Forever Attractive, Do REITs Overpay for Their Acquisitions? and The Hidden Risks of Buy-and-Leasebacks for Industrial REITs for more info.

So, generally, I do not invest for dividends. However, you can easily find investors who have a lot of success investing in dividend stocks. So, one investment strategy I plan to adopt this year is to invest in dividend stocks. I have actually screened through a list of high-yielding stocks. To my bemusement, there are some stocks on the list that I had sold previously, for reasons such as "they were too boring", "not part of my core holdings", "did not want to stick with them through a bear market", etc. Of course, when I first bought them, it was for their capital appreciation potential, so when they failed to meet those expectations, they were sold off. I wondered if I were to buy into these stocks again, this time for their dividends, would I end up selling them off for the same reasons mentioned above? Thus, for the dividend stock strategy to be succesful, some reconciliation needs to take place first, so that I do not end up selling the stocks when the market turns south. So far, 2 stocks have been bought based on the above strategy.

US Index

In Not All Market Indices Are Equal, I mentioned that some stock indices performed better than others and the US stock index has beaten my expectations since 1995. I mentioned that there could be something right going for the US stock market that I might not be aware of, and I would switch one underperforming unit trust into the LionGlobal Infinity US 500 Stock Index in my Supplementary Retirement Scheme (SRS) account. I would probably be starting a new portfolio comprises 70% in the US 500 Stock Index and 30% in global bonds for my cash account to be consistent with my belief. As usual, the key concern is whether now is a good time to invest given that the US stock market has yet again reached new highs and interest rates are going up. There is an inherent defence mechanism built in such a portfolio, as explained in Possibly The Worst Time to Invest. But still, it might be prudent to spread out the investment over 12 months instead of a lump sum. This way, I could also conserve cash for the dividend stock strategy mentioned above.

Overall Investment Strategies

If you put all the investment strategies mentioned in this post and the last, you would realise that they are very diverse. I am, all at the same time, active in passive investing and passionate about active investing; going after capital appreciation in undervalued stocks as well as dividends in fully-valued stocks; bought the highest-price stock (Keppel Corp) and the lowest-priced stock (turnaround stocks) in my investing history. How do you make sense of all these seemingly contradictory investment strategies? It arises out of a realisation that, after 28 years of investing experience (including the years I was monitoring stocks for my father), all investment strategies work to some extent, but none will work perfectly. See An Advice for Myself for more info. When you let go of a single tree, you will gain a forest.

Donation Policy

This part is not about investments but is more related personal finances. Truthfully speaking, I have not been very generous about giving donations. The main reason is that I am frugal in spending. Secondly, I believe I could grow the money and make a larger donation in later years. Assuming that I invest $1 at 7% for 25 years, it will turn to $5.43. It is better to donate $5.43 than $1.

However, progressively, there has been shifts in my thinking regarding donations. Part of the reasons is that there is some room to relax the purse string after working and investing for 16 years. Secondly, I am beginning to come around to the idea that donation is not about sympathy but a social obligation to help those lagging behind. You can find the shifts in thinking in The Economics of Income Inequality and Capitalism, Consumerism & The Distribution of Wealth.

There is another blog post that I have not written that will complete the picture why the review of my donation policy has taken more urgency. Generally, the idea goes like this: when we see people who are successful, we believe that they are successful because they have worked very hard and took more risks than others. The conventional wisdom is that those who are less successful should then work harder and/or take more risks rather than rely on others for help. However, does it mean that those who are less successful did not work as hard and/or took less risks? Or employees who did not get promoted put in less efforts than those who got promoted, or students who did not get As in their exams are lazier than those who got As? While it may be true that some people who are lagging behind did not work as hard, I believe we also know of instances where we or others have put in a lot more efforts, blood and sweat than those who were eventually successful and still did not get the desired results. Most of us have tasted both success and defeats before to know that efforts do not always commensurate with outcomes. When seen in this light, everyone, both ahead and behind, is really one big community. A member who is ahead should help those who are behind. It is not charity or sympathy, but an obligation because we are all part of the same community. Relatively, we are both ahead of some people and behind others, and we could all lend a helping hand to those who are behind us.

So far, the small steps taken are to increase my monthly contributions to Community Chest and in my expense tracking, to take the "Donations" expenses out of the "Others" category so that it has its own budget rather than share a budget with all other uncategorised expenses. I have also added a link to SG Gives in this blog for readers who might wish to make a donation. For 2015, a review will be carry out to determine how much money should be donated and how should it be donated.

See related blog posts:

• Changes to My Investment Strategies in 2014
• An Advice for Myself
• Charity

Changes to My Investment Strategies in 2014

With the start of the new year, it is good to take stock of the changes made to my investment strategies in 2014 and the likely changes coming in 2015. Looking at the list of changes below, it is amazing that I still have so much to learn despite being an investor for so many years. Here is the list of changes in 2014.

Turnarounds

I seldom invest in companies that are making losses. Most of the time, if they are loss-making, it is because the business conditions turned sour after I had invested in them. However, turnaround companies have been one of the sources of multi-baggers for me. You may wish to read How to Get a Multi-Bagger? for more info. Based on this knowledge, I started to purposely invest (or more correctly, speculate) in loss-making companies. The amount of money invested is relatively small and is mentally written off at the point of investment, so the expectations for them are rather low. So far, these speculations have performed up to expectations, with one of them already graduated (i.e. sold off) with a profit of 87%. Having said that, it is still too early to draw a conclusion and more time is required to review their performance.

Moving forward, due to the small amount of money involved, turnarounds are unlikely to form a big portion of my portfolio. Nevertheless, it is a good training ground to identify which companies are likely to start making a profit. Hence, small speculations in turnaround companies will continue to be made. You can expect to see maybe a few multi-baggers and a lot of salted fishes from this strategy.

High-Priced Stocks

Again, I seldom invest in high-priced stocks. The highest price I ever paid for a stock (excluding preference shares) in my 15 years of investing experience is $2.46 for Keppel Land. It is not that I am prejudiced against high-priced stocks. It is just that when you search for companies with high growth rates, these high-priced stocks usually do not appear high up on the list. So, what made me change my mind with the recent purchase of Keppel Corp at around $8? It is the realisation that while low-priced mid-cap stocks have better growth rates than high-priced large-cap stocks, these growth rates usually do not last. For more sustainable (but lower) growth rates, they can be found in high-priced large-cap stocks. Nevertheless, I am still very much into low-priced mid-cap stocks. The recent purchase of Keppel Corp is a small step towards discarding long-held traditions about high-priced large-cap stocks.

Freehold Stocks

This phrase "freehold stocks" comes from Uncle CreateWealth8888. It refers to stocks for which the intial capital has been recovered, either through dividends or partial sale of the stock at higher prices. Again, my usual practice is to sell all the shares of a particular stock instead of keeping part of them in the hope of higher prices. This practice is for ease of accounting, so that I do not need to adjust my investment cost. Moreover, even when I keep part of the shares, the share price usually goes down, so I usually sell the rest of the shares to protect the profits. However, inspired by Uncle CreateWealth8888's success, I decided to keep a portion of a 2-bagger (Valuetronics) to see what happens.

Frankly speaking, retaining freehold stocks is not as easy as it seems. I initially sold 50% of the stock at $0.485, intending to keep the remaining 50%. However, the price declined further to $0.41. Even though the cost had been recovered, the thought of the profits vanishing should the stock return to the price I bought was too much to bear. So, I sold a further 25%. Currently, the stock is trading at $0.345, but I am more at ease with the remaining 25% of the stock as freehold.

Generally, I do not expect to see a lot of freehold stocks, since I do not have many multi-baggers. A lot will depend on the experience with this freehold stock before deciding whether this should be a part of my investment strategies.

Dissenting Shareholder

Related to the idea of freehold stocks is the intention to become a dissenting shareholder in a privatised stock. This action was taken in response to Capitaland's privatisation of CapitaMalls Asia. To avoid locking up my money in a delisted stock, I accepted the privatisation offer only partially, such that the remaining shares became freehold. I wanted to experience what is it like as a shareholder in an unlisted but profitable company. Unfortunately, Capitaland acquired enough shares to allow it to compulsorily acquire all the shares. So, I had no chance to become a shareholder in an unlisted company. The reasons for taking this stance are further explained in The Last Stand on CapitaMalls Asia.

Nevertheless, I believe I have the chance to become a dissenting shareholder again since another 2 of my stocks have received privatisation/ cash offers, namely, UE E&C and CH Offshore. I will consider my response to the offers carefully.

Annual General Meetings (AGMs)

Prior to 2014, I have never attended an AGM. However, in search of blog ideas, I started to attend AGMs last year. So far, the experience has been mixed. The good side is that some directors are wiling to explain the nature of the business and the reasons for the company's performance as well as future prospects and challenges, while the ugly side includes arrogant directors, angry shareholders and hungry shareholders. Generally, you see more of the good side if the share price of the company is rising and more of the bad side if the share price is languishing. Moving forward, I believe I will still attend a few more AGMs, until the point where there is no longer any benefits in attending AGMs.

Conclusion

It is amazing that despite having 15 years of investing experience, there are still so much to learn. Investing is really a life-long learning journey.

See related blog posts:

• My Investment Trends for 2015
• How to Get a Multi-Bagger?
• The Last Stand on CapitaMalls Asia

Dollar Cost Averaging Works Best with Volatile Stocks/ Unit Trusts

I have 2 unit trusts in my Supplementary Retirement Scheme account. One is an equity unit trust (LionGlobal Infinity Global Stock Index Fund) while the other is a balanced unit trust (UOBAM Growth Path 2040). They are invested regularly on a monthly basis for the past 6 years. The relative performance of the 2 unit trusts since my first investment 6 years ago is shown in the chart below.

Relative Performance of Unit Trusts Since 1st Investment

From the chart, we can see that the performance of the balanced unit trust is more stable than that of the equity unit trust. During the Global Financial Crisis, it dropped to 60% of the initial investment price while the equity unit trust dropped even lower to around 45%. Subsequently, the balanced unit trust recovered to the 80% - 90% level and remained there for 3.5 years until February this year. In contrast, the equity unit trust recovered only to the 60% - 70% level during the same period and rising to the 80% - 90% level only recently. Throughout this period, the performance of the equity unit trust is worse that that of the balanced unit trust.

Yet, guess which of the unit trusts performed better in my portfolio? Surprising, it is the more volatile equity unit trust that performed better. It has returned 26% over the 6-year period compared to only 8% for the balanced unit trust.

The main reason for the better portfolio performance of the equity unit trust is because through regular monthly investment, the plan performs Dollar Cost Averaging (DCA). DCA buys more units when the price is lower and less when the price is higher. Since the equity unit trust has dropped more than the balanced unit trust, more units were accumulated. Hence, when the price recovers, the equity unit trust performs better, even though its price is consistently lower than that of the balanced unit trust throughout this period.

To conclude, Dollar Cost Averaging performs better with volatile stocks/ unit trusts than more stable ones.


See related blog posts:

• Review of My SRS Investments
• Experimenting with Investment Strategies
• All I Want Is To Invest Wisely

Why Warren Buffet's Rule No. 1 Is Not "Always Make Money"

Everybody knows that Warren Buffet's famous Rule No. 1 is "Never lose money" and Rule No. 2 is "Never forget Rule No. 1". However, why is it that his Rule No. 1 is not "Always make money" but "Never lose money"? By right, if you aim to always make money, won't the outcome be the same as never lose money?

Since Warren Buffet is heavily influenced by the teachings of Benjamin Graham, we have to bring in Benjamin Graham's concept of "margin of safety" (MOS) in this discussion. Imagine that the intrinsic value of a stock is $1, if the stock trades at $0.90, it would have a MOS of 10%.

Let's now consider 2 investors, one who subscribes to "Never Lose Money" (LNM) and another who subscribes to "Always Make Money" (AMM). Other than this investment principle, let's assume that both investors have the same investment characteristics, e.g. same amount of capital, same rules in selling, etc.. Given this investment principle, the AMM investor will always go for an investment so long as it has, say, a 10% MOS. On the other hand, the NLM investor will never go for an investment unless it has say, a 40% MOS. 

In terms of investment opportunities, there will be more investments with 10% MOS compared to those with 40% MOS. The AMM investor will be more busy investing compared to the NLM investor. However, the AMM investor will quickly find that he has a shortage of capital to take advantage of all the investment opportunities (with 10% MOS) while the NLM investor will always have sufficient capital for an investment opportunity (with 40% MOS).

Assuming that the stock realises its potential and rises to its intrinsic value, the AMM investor's profit margin will be 11.1% ($0.90 to $1). On the other hand, the NLM investor's profit margin will be 66.7% ($0.60 to $1). On profit margin alone, one profitable trade of the NLM investor is equivalent to six profitable trades of the AMM investor. If we include trading costs, the difference in profit margins will be even greater. Now, let's not forget that the AMM investor have spread his capital thinly across many investments with 10% MOS while the NLM investor can only concentrate on a few investments with 40% MOS. The capital outlay on the stock by the NLM investor will be several times that of the AMM investor. In total, the NLM investor's absolute profit will be many times that of the AMM investor. Having said that, it should be noted that it will take a much longer time for a stock to rise from $0.60 to $1 than from $0.90 to $1.

Assuming that the stock continues to be undervalued and trades around $0.80, the AMM investor would suffer a loss while the NLM investor would not be invested yet.

Finally, assuming that the stock is a value trap and falls to say, $0.40. The loss margin of the AMM investor will be 55.5% ($0.90 to $0.40) while that of the NLM investor will be 33.3% ($0.60 to $0.40). Factoring the larger capital outlay, the NLM investor would probably lose more money compared to the AMM investor. However, to watch a stock falls from $0.90 to $0.40 will be a much larger psychological blow to the AMM investor. This psychological blow may have a greater impact to the AMM investor's investment philosophy. He might lose patience with the stock and sell it off. More seriously, he might even lose faith with the concept of value investing which has proven to work so many times.

In conclusion, the rule of "Never lose money" will lead to less frequent losses, less frequent but much larger gains, and less emotional distress and more faith with a proven investment philosophy. It's no wonder that Warren Buffet's Rule No. 1 is "Never lose money" and not "Always make money". It's just 3 words, but a lot of intelligence packed into it.

See related blog posts:

• Different Tastes for Different Folks
• Behind Every Successful Bear Market Recovery is A Cash-Like Instrument 
• A Comparison of Risk Management Tools & Strategies

The Irrelevance of Time Diversification

Time diversification is the holding of an investment over a long period of time and thereby achieving a diversification of annualised return over time. It is often said that time diversification helps to improve your investment returns. At one point in time, I was an ardent fan of time diversification. However, after thinking further about it, I realised that time diversification, while not totally irrelevant, is quite irrelevant. Let's take a closer look on the case of time diversification.

Using the historical returns of the Straits Times Index from end-1984 till end-2012 as the base data, we can construct the annualised return over different holding periods.

Annualised Returns Over Different Holding Periods

As can be seen in the figure above, the annualised return over a 1-year holding period can vary greatly from +78% to -49%. Anybody holding shares during the worst 1-year period would have suffered a great loss. Over a 2-year period, the worst annualised return improves to -23%. This worst annualised return continues to improve as the holding period increases, eventually reaching a positive figure when the holding period reaches 20 years. This evidence is often used to prove that over long periods of time, share investments can yield positive returns, irrespective of when you start your first investment. The first part of the statement "over long periods of time, share investments can yield positive returns" is true and is where time diversification is relevant. But the second part of the statement "irrespective of when you start your first investment", is one of the reasons why time diversification is irrelevant. I can think of 3 reasons why time diversification is not relevant.

Firstly, consider the worst annualised return of the 1-year and 2-year holding periods. On the surface, the worst annualised return of -23% over a 2-year holding period appears much better than the worst annualised return of -49% over a 1-year holding period. But if you consider the eventual returns for an initial capital of $100,000 at the end of the respective holding periods, it will look as shown in the table below:

Holding Period	1-Year	2-Year
Worst Annualised Return	-49.4%	-23.2%
At End of Year
0	$100,000	$100,000
1	$50,586	$76,810
2		$58,997

At the end of the 1-year holding period, the eventual return is -49%. But at the end of the 2-year holding period, the eventual return is -41%. The annualised return of -23% over a 2-year holding period translates to an eventual return of -41% at the end of the 2-year period. This is not much different from the eventual return of -49% for a 1-year holding period. It is cold comfort to the investor by telling him that the worst annualised return is halved when his holding period is doubled (in the example above). The only comfort he has, if any, is the speed at which the money is lost, over a 2-year period instead of a 1-year period. In essence, time diversification is averaging the eventual return.

Secondly, consider the best case where the worst annualised return is a positive 3.7% in a 20-year holding period. This is just 4.7% off the best annualised return in the same holding period. At the end of the 20-year period, an initial capital of $100,000 would translate to $206,354. This is a very respectable return, considering that this is based on a worst annualised return for the holding period. However, what is the eventual return based on the best annualised return of 8.4%, which is just 4.7% better? The eventual return is $506,421, which is 2.5 times better than the worst eventual return of $206,354. Again, this is cold comfort to the investor that he cannot do worse than $206,354, when he could possibly get 2.5 times more had he made his investment at the best entry time. (The median eventual return is $329,129, which is 59% better than the worst eventual return).

The third and last reason why time diversification is irrelevant is: we only have 1 life; there is ONLY 1 holding period applicable to everyone of us regardless of whether or when you invest.

So, to conclude, time diversification is relevant in the sense that over long periods of time, share investments can yield positive returns. It is irrelevant in the sense that it is the eventual return, not the average annualised return, that counts.


See related blog posts:

• Dollar Cost Averaging Works Best with Volatile Stocks/ Unit Trusts