Saturday, September 20, 2014

3Q2014 - I start to see some steam!

Apologies for the late update and for the fact that its getting less of the numbers and statistics and more of thoughts and dilemmas or confusion if you will. I appreciate more now, the importance of moving away from a more quantitative approach.

Company updates:  
Nanyang Holdings started a partial tender offer, started at HKD33/sh up to 8.2m shares (about a fifth of outstanding shares or 40% of free float which has seen share price reached about HKD39+  from the 20s+ when I first wrote about it. Nothing fantastic but still interesting. Price came down to about 35+ but doesnt affect me much. I wouldn't do that if I were the management.

I added a HK listed real estate/ investment holding co to the portfolio. Not cheap but I envision with the opening up of the country to surrounding countries and its massive property portfolio, not to mention a family that has a great track record, its likely some upward movement is overdue. Float is extremely thin, so I'm adding in nibbles from time to time. Not helping that it has since ran up too. I thought I was crazy to buy it at such high levels, but looking not too shabby now. Not that Im smart, Mr. Market has been very active.

SHC Capital (on sgx) is one counter I missed. I have been thumb sucking over the wide spreads and it cost me dearly. Zurich Re took it over at 70%+ premium. I'm no expert in the P&C and reinsurance field but this firm stood out like a nail.  

Don't ask me about Alibaba, I have great respect for Jack Ma but that's about it (See My views are limited on that. 

Other randoms..
I chatted over lunch with friends and spoke about humans, their confirmation bias and risk aversion characteristics. The industry, the world enjoys specializing and putting things in fixed buckets. It has far reaching problems and is closely related to how people interact socially and especially in their jobs. I do realize the opportunity in there and the problem is an incredible moat in itself if one could build something out of it.

For example, its always easier to sell a high dividend income yield fund than to say its going to be a opportunistic fund where I cannot guarantee no losses but its going to put money in whichever opportunity that makes the highest returns. People fear losses but more importantly, they dislike the fear of uncertainty and even if it means a false confidence of knowing something that may not be true or real. 

A high dividend fund gives the idea of no or low losses with stable income but people dont realize, such a fund will suffer a worse impairment to capital in times of trouble. One would rather trust a specialist investment analyst with a focused 5 years experience in real estate than trust someone with broad experience in various fields and have tried starting an investment business. I have experienced this first hand, it is painful and illogical but I can see where people are coming from. I know a family employs a "consistent high income fund", essentially is a leveraged, income strategy that holds high yielding securities. My repeated concerns fell on deaf ears, since I don't have the experience or "track record". To be honest, I am fairly frustrated and at the same time empathetic. I see many very intelligent talents around getting severely penalized for being generalists and having broad interests.

Similarly, its the reason why there's credit ratings, its a form of a fixed buckets system. People are lazy to accept the fact that there's always the situation where its simply not well defined. Instead of a grid system where one just check the boxes or add scores from a pre-defined scoreboard for easy comparison sake. People are not willing to do the extra groundwork and admit outliers and anomalies. Adding to the complexity is the fact that it is always harder to go against the flow. How would one explain to his bosses that it does not fit in the grid system? What if the boss said it should go into a certain bucket, would one be able to challenge and make the boss look bad? If one runs a investment outfit, would one risk picking oddities and underperforming or to emulate an index and make small tweaks for a slight boost? Reason is that they rather ensure they have similar performance to the index with a smaller variance than to risk a year with mega losses. 

The downside is unlimited in such a scenario while the upside is somewhat capped. Its times like this where people start to sweep small systemic problems aside where it snowballs to a massive problem. That's how the global financial crisis happened in the 2007/8s, apart from clear violation of the agency relationships and conflict of interests.

Risk aversion plays a crucial part in how people think. Its also the reason why most people don't start up companies. They appreciate the outsized rewards upon success but are more focused on the extremely low probability. (I mean having a family and a stable career and others etc. are extraneous factors that also affect how one thinks here) When you lose money, it hits you much more than when you make them.  When you enjoy that stable income and/or lifestyle, you start to forget that you are also in a system and when there are more factors introduced in a system, changes come fast, and in violent magnitudes. It is more pertinent that one stays in a upwind position where learning and not pay is the key priority.

Its the way people think and many times, people step too deep to realize they are in a hole. I remember a close friend of mine who said, "How can equities ever be safe, fixed income is the way to go. With added leverage, its a sure bet. why would anyone consider equities?" Classic case study example.

Its probably a time to relook at how these will pan out in the next few months again.

“Managing your career is like investing. The degree of difficulty does not count. So you can save yourself money and pain by getting on the right train.”

“Risk comes from not knowing what you are doing.”

“What we learn from history is that people don’t learn from history.”