Tuesday, March 30, 2010

Lion Asia Pac (LAP SP) SGX

Apologies for the slow post up, been caught up meeting friends and setting this blog up which I hope in the long run demonstrate my thoughts and share my knowledge. Classic asset play here.
Share # after dilution = 405.930224m
cost is S$0.36, hence mkt cap = S$146m

Financials and factors to purchase Lion AsiaPac
  • Cash S$ 190.174m and debt S$ 0.257m = net cash S$189.917 or S$0.467 per shr
  • NAV = S$0.5393
  • S$ 134m from disposal of automotive business in China (Anhui Jianghuai Automobile Co)
  • 30% upside at least for the cash, rest of operations for free!
  • Profits largely from investment gains, firm operations - limestone, metals trading and PCB pdtn fared poorly
  • 2009 bid for Polaris Metals shows mgmt stance to pursue acquisitions (cash needed)
  • Firm paid S$0.01 pr shr for past 3 yrs, S$0.05, S$0.007 and S$0.005 in 2006, 2005 and 2004

31 Mar - Price hit $0.45 on open and now $0.46 (27% up) on news of special $0.15/shr dividend. Not wise to go in now since everyone is rushing in and pricing as if firm will give out 100% of cash which is impossible.

Now, my first mistake on this blog, I was sure of the position even before the announcement. Ought to have loaded up more in view of such skewed profiles. No wonder Peter Lynch mentioned, stock investing is not so much on intellect but more on guts. Oh well, hindsight is always 20/20.

Monday, March 29, 2010

On optionality, Bob Rubin, value investments and probabilities

This post seeks to address issues on investing methods and decision frameworks, for the benefit of my friends, Pang and Ko.

I get some thoughts from Bob/Robert. E. Rubin's "In an uncertain world". Bob was the guy running Goldman sachs risk arbitrage team, to being the Treasury of Secretary and lastly Citigroup's advisor. His book touched on situations, probabilities and outcomes through his experiences.

Having a wide range of options in any period is crucial as options have value. Investing is about probabilities, magnitude of losses/returns and the resultant expected losses/ returns. By keeping options open till decision time, one is increasing the probability, increasing expected value (Like volatility increases option value).

Moreover, life is not straightforward with expected losses that may reverse to gains and/or vice versa. Magnitude of the swings may also be over/underestimated, most of the time losses under and gains overestimated due to mental bias in analysis. The extra option (with little or no cost) may help to skew return profile in one's favor.

Applying these to learning and to some part of life, optionality also means flexibility. To maintain a broad mindset, not follow blindly and to continually perform research to find one's best fit. For example, value investing does not purely mean low PER/PBR, not touching tech stocks and charts. Similarly, if one embraces value investing while ignoring quantitative or behavioral trends, one may never realize whats good or flawed with that school of thought and that there may exist certain useful components to understand psychology or investing patterns to complement core activities. Its akin to learning the successes but not the mistakes.

The idea is not to pigeon hole oneself and have a mental ceiling to what can/cannot be done. Let curiosity do its work, learn more and challenge ideas. You will be surprised at what you thought you were good in and what you truly excel in.

7 ways numbers can be fudged - Howard Schilit, Financial Shenanigans

Below are some of the way financial statements are represented fraudulently as in the book.
  1. Recording revenue too soon.
  2. Recording bogus revenues.
  3. Boosting income with one-time gains.
  4. Shifting current expenses to a later period.
  5. Failing to record or disclose all liabilities.
  6. Shifting current income to a later period.
  7. Shifting future expenses to the current period.

I think some more can be added now. It seems like besides playing with the P&L which used to be the case, theres also balance sheet plays and cash flow plays, some of which i placed below.
  1. Off balance sheet items, SPVs and the manipulation of JV and associate relationships 
  2. Deferred and accrued items, goodwill
  3. Capitalized items (rate of capitalization, impact on P&L, size versus equity)
  4. Fake cash that ties to the cash flow statements (profits vs cashflows) 
  5. Inventory, receivables and payables (turnovers too high)
  6. Increased depreciation with growing PPE or rapidly depreciation assets 
  7. Mark to "own market" - (Allied Capital case)
The key is to think operationally rather than on the face of the financials and mechanically doing valuations. Further, alot of scuttlebutt needed to confirm financials and to question possible red flags. Last but not least, read the footnotes carefully, understand the trends in the financials and relate to the business. In these days, bank statements can be forged and AR can be un-billed so besides the micro analysis, take a step back and look at the big picture, think logically and simply to spot anomalies.

Feel free to add to the list.

7 point summary courtesy of David Merkel at Seeking Alpha

Others to note:

  • Financials
  1. Low R&D expenses - esp if its a high tech or low asset base firm
  2. Unusually low accounts payables
  3. High quality returns/margins when logically firm should not be capable of generating or when the rest of the industry (esp the market leader) is slumping - watch the magnitudes
  4. High land use rights, weird capex increases 
  5. Fantastic profits but cash flows are an issue
  • Corporate structure and members 
  1. High CFO / auditors turnover with reasons always being unable to pay for the big 4
  2. Dubious backgrounds of management
  3. Resignation of board members
  4. Poor representation by industry personnels and other factors ex. poor website functions
  5. No clear controls or systems in place 
  • Corporate actions

  1. Constantly raises money despite excess abilities 
  2. Capital raising at low ball parks and often foreign only
  3. Non disclosure on transactions and parties in the deals
  4. Firm rejected an IPO in China 

Friday, March 26, 2010

Updates for March 2010

I have started on my search for undervalued securities and will post my write up on them from next week on, hopefully I will get some solid criticisms and feedback. Along the way, from this construct, I hope to achieve absolute performance by first watching the downside risks.

Please do note that I do analyse credit and derivative opportunities wherever I have the chance to, but will not write them on the blog here as that will be a minimal portion of my portfolio. However, do feel free to send in any queries or discussions and I will be more than happy to post and write my 5 cents worth.

My personal portfolio will include suggestions on this blog from next week onwards.
With that, I will end my fruitful week with this quote from Warren Buffet.

"Price is what you pay, value is what you get".

On myself and my journey for value investing

I am a self confessed cheapo, buying things banged out of favor and cheap. My first counter was Keppel Corp (Singapore listed) when i was in secondary school or high school equivalent. The counter was on my parents account. Back then I started with charts and all as I leaned towards the numerical side. It was 1998/9, I was 14, that was before the stock split and it subsequently doubled thereafter. My thoughts on it:
  • Firm is one of the largest rig builders in the world
  • Strong FCF (I did not have that strong a grasp on financial statement analysis yet)
  • Rig cycle was in a uptrend then
  • Strong buffer from non rig businesses such as property, telcos and tech
  • Charts were showing long term up trends
But Alas, I do not have the gift of persuasion/gab and the counter was sold prematurely.
My read on value started a year after, I noticed charts failed to capture certain situations due to the following reasons among many others. 
  • Sudden catalysts (news flow, unleaked corporate information)
  • Special situations (Indexing, spinoffs etc)
  • Quality of management especially when theres a change
  • Poor firms with poor ROI but massively giving dividends or share buybacks
  • Firm Intrinsic value as charting is based on last/relative price (value takes time to unlock)
  • Low float / short-ability of stocks affects the price movements but not the value
I went to read the usual value literature, emptied the libraries for those books. Graham, P.Fisher, Lynch, Seth. After a while, the concepts were more or less similar and I experimented with unconventional literature like Dreman, Oneill, Greenblatt, Fishers, Stark.

From equity, i also went into credit and noting what the professionals were doing or have done in the past. Reverse engineering works but requires enormous amount of effort and the mindset has to be flexible to fit into that certain time frame. I don't know why it is so, but i love to read, to learn and to apply. Somehow, investing provides a fertile ground for this.

One thing i noted is that reading non investment books and leading a life not bent on finding ideas will often lead you to ideas. But the most important takeaway - Learn and share (process is self enforcing).

Current financial market situation

From a value perspective, there should not be much focus on economic trends and predicting the future. However, one still must pay attention to trends as to realize how it will impact values of securities and/or value of individual security based on market developments.

I am surprised the market had the biggest gain in 5 weeks due to a lower than expected fall in home sales in US.
  • Home sales are still falling albeit at a slower rate, rising inventory from foreclosures and still existing credit defaults coming up in 2010/11
  • Europe debt concerns after Portugal got downgraded, other than Spain, Ireland and Greece. Not that we really put 100% faith in the credit raters!
  • Rates are low, only way is up, evident from India's rate hike
  • Concerns on China's excess capacity for materials, office space and frothy residential markets
Is it me or the recovery since March 2009 very rapid and leaving little to do now?
However, with large liquidity and low rates, the market is likely to be well supported in the short run.
The asset cycles are slowly shifting once again, look out for equities!

Confessions of a Value Investor

I just got this good read from a good friend of mine, David Lau. Thanks.
It is a good start to this blog and I shall attempt to summarize what Mr. Sanjay Bakshi has expressed

  • Direct vs vicarious learning (we learn better from extremes)
  • Reflective vs reflexive thinking (former being more logical, slow & less erroneous
  • We should focus on avoiding foolish behavior rather than on being smart
  • The brain tend to work with whats easily available (recent, vivid, measurable experiences).This causes the inability to recall, resulting in memories blocked by certain bias or experiences. Ex focus on price and not value as price is something we see regularly. Buying a stock because its cheap vs. thinking about what mistakes can be made, a value trap? fraud? or bubbly markets?=>Solution? Try to kill you own ideas
  • I let perpetual contrast misguide me High and low contrast. A $5 stock may not be cheaper than a $50,000 stock.An event with low contrast may not mean it is safe, example averaging down when "It has fallen so much"..It can fall more! Low contrast events such as evolution of internet, digital photography can vastly change the way things operate.=> Solution? Be aware of trends of low contrasts
  • Failure to promptly resolve cognitive dissonance Self justification and confirmation bias. Zero based vs. traditional based budgeting. Sunk cost fallacy - I have too much invested to write it off ..."Maybe you can!" Endowment effect - Items once owned becomes more valuable even though nothing has change => Solution? Change your mind in light of new facts which may change the odds
  • I gave into social proof
    Relying too much on people around us for cues on how to think act and feel.
    This is most evident in 2 cases, uncertainty/doubt and in cases of similarity (drawing parallels)
    Herd mentality - bargain prices comes when public is most pessimistic but yet most chose safe and low returns =
    > Solution? Stay away from the herd
  • I became a dope addict
    Exciting new things gives dopamine, IPOs, tech stocks or fake value fads etc
    " Severe change and exceptional returns usually dont mix, but most treat them as if the opposite was true." Warren Buffett
    => Solution? Avoid the fast track
  • I became foolishly overconfident
    optimism leads to one being "larger than life" and "omnipotent".
    "2 types of forecasters, those who don't know, and those who don't know they don't know" - John Galbraith.
    Range of values is more important than an expected, average or over aggregated value.
    "The worst case scenario is often more consequential than the forecast itself" - Nassim Taleb.
    People react to available worst case scenario by overreacting (Ignore frequency, overweight magnitude)
    and to unavailable worst case scenario by neglecting (frequency =0, therefore ignore magnitude)
    => Solution? Focus on frequency, magnitude and expected values. Expect the unexpected
  • I did not think carefully about losses
    Deprival super reaction syndrome - depriving/losing results in super reaction.
    Loss aversion - a $10 loss is more painful than a $10 gain.
    Risk assessment becomes flawed when we have near misses.
    => Solution?
    Embrace failures, sell losers and bet big when the odds are in your favor
  • I became a Parlovian dog
    Mis-association and tendency to connect irrelevant or unrelated objects or thoughts.
    You don't learn how to win by looking and reading about the winners. C
    umulative advantage - people tend to like what others like even though one is only slightly more popular.
    => Solution?
    Learn from the mistakes of others and understand small differences can lead to huge impacts
There are experiments in the article which brings out the errors well when you attempt it.
I would like to also attach this link HERE which happens to be a modified version of the Becklan and Cervone (1983) experiment demonstrating limitations of the human brain when you do not expect the unexpected.