Heart of a value investor.

Ouch ouch ouch~It's my 10th mth anniversay of value investing, started since May 2008 when i first started buying equities listed on the exchange. And yes, no doubt like many other value investors out there, i feel your pain. Portfolios have been more or less destoried by the current economic crisis. None of my market gem soo far have exceeded their buying value, some even detoriated to a point that, almost all of its value are gone (drop 80-90%). Soo far, my porfoilio have dropped by a whooping 50-60%, no surpise there of course, since most of my market gems consists of mid-market caps and S-shares. Then MANY people will say, oh you should not have bought into S-shares, S-shares sucks or say something like, you shouldn't have gone into the market too soon, or you should have bought into options to hedge your losses etc.

What i have to say to these people is, you say it best..when you say nothing at all!(In other words shut the hell up!), because your opinions are based on hindsight and by making comments based on events that already happened makes your sound like a hypocrite. I say to you people, if market were to raise drastically or that the recession wasn't as bad as predicted, then the same people with the same comments and opinons will sound like this "Oh you should have bought earlier, why soo fearful? or Damn, S-shares are really super shares, how come you never buy more?"

Nevertheless, what happened, has already happen, now the important thing is what you do now with the time that is given to you? What measures can i take as a value investor?

The first step is to reaffirm my faith in value investing.

I strongly (and will always) believe that value investing is one of the best ways to go about building your wealth. History has already proven it (thru people like Buffet/Filch/Graham), market cycles of upturns and downturns have been going on since the dawn of investing, and no doubt the downside will eventually lead to an upside vice versal.

The second step is to reconfirm the principals i have established with regards to my investing.

I re look at the small piece of parchment i wrote before i bought my very first stock in may 2008. This is what i wrote..

-Buy into good companies at acceptable or low prices
the word "good" is defined by me as companies whose business model is more related to a need and that of a want. The words "Acceptable" or "low" prices is defined as margin of safety relative to it's intrinsic value or Net asset value

-Do not buy into any stocks without doing proper research or understanding regardless of how cheap it is or how many people are talking about it

-Go slow. Do not throw everything into one company and do diversify.

-If mistake are made, write it down, cut loss once fundamentals have changed.

Yourself at 18th May 2008

The third step is probably to go review my investments with my principals have i followed it soo far?

1st Investment made on 18th May 2008
Business: Selling Bull semen, milk process etc. Their business is simple to understand, and its more of a need because milk is a commodity and cannot be substitute easily by soybeans. As long as demand is there for products like yogurt/sweetener/ice cream/dairy products/cheese in China, China Milk's revenue is sustainable of course pending the intrusion of competitors, frauds etc

Research: Have been doing for 1-2mths, studied the industry, its historical ROE/Revenue/Net profit/Margins/PTB/Future plans/Capital structure/Risks involved

Price bought at 0.705 per share, give me a discount of 30-40% below its intrinsic value of $1.20 which i calculated with a conservative approach.

Bought only 2 lots, just in case the share price were to drop.

Soo, these are the thought processes that goes thru my head and when I'm planning to buy a certain company. Of course China Milk's share price have dropped to $0.30 as at 6th March 2009. However I'm not upset because, the fundamentals are still there, their business model as expected is still strong (due to increased in revenue/net profit/sustained margins etc) and paper loss was acceptable because i only bought two lots.

Although i have to admit, i made a few mistakes soo far, like buying into SINO-TECHFIBRE at 0.60 2 lots as an Olympic gift to myself without doing much study on it's industry , which is super competitive and their business model is not much of a need. No surprise, Sino-tech went Olympic on me and drop to a disgusting low of $0.10 per share. Then ppl will ask, how come you never cut loss? Well, because i didn't study the industry it was in, and still not interested in doing so, Sino-Tech's internal fundamentals were still very strong for the whole of 2008, until when it came to it's 4Q results, it shocked me that their net profit/margins have dropped by 24% and 50% respectively. Plus, by the time i know about this, the share price have already fallen to $0.12. Soo i was thinking, if i were to cut loss now, i will lose about 80-90% of my investment capital, which i deem pointless to save that $240 (Bought only 2 lots heng arh), its as good as losing 100% of my capital. I rather keep, in hopes that the company will regain its fundamantal :].

Step 4 is to see if my principals need any adjustments.
Probably nothing much to change, maybe i just add this :

The words "Acceptable" or "low" prices is defined as margin of safety relative to it's intrinsic value or Net asset value. But do take note that intrinsic value has it weaknesses like using past data to discount and Net asset value can change drastically etc: REITs due to high valuation from the pass years, that's why margin of safety is very important.

and maybe this

-If mistake are made, write it down, cut loss once fundamentals have changed. Your cut loss, have to be in detailed, either absolute amount (Must cut if it's drops to 0.45 etc) or by percentage (cut when it drops by 50%)

Step 5, what have i learnt soo far

For the entire investing year 2008, i learnt
-To separate noise from real information. Noise might include friends opinions,rumors and some times even analyst's forecasts and buy calls
-Don't be swayed by movement in market prices
-You can copy your investment idol's holdings and try to mimic them, provided that own research and understanding of the company have to be well established first.
-Study the industries in which the company is in. It's economic moat etc.
-Beacuse of the incidents regarding S-shares, even figures and data cannot be trusted. Although this cannot be applied to all S-shares, a note to myself to be alert about this. Check internal control and Auditor's commentary.
-My process of calculating intrinsic value needs improvement, need to study more on Dividend Discount model and Discount Cash Flow model.
-Fundamentals can change drastically, very good exmaple is Sino-Tech Fibre. Thats why , and again i say, margin of safety, buying slowly, deep reserach will more of less lower this probablity of change.
-To countiously learnt from experience investors, their thought processes, their experiences in past recessions, keep a filterated open mind and humble yourself.

As a young value investor, i think the most important thing now is not how much my portfolio have dropped or have been beaten to a pulp by the market. It is, what lessons where learnt, during the this process, such as my investment thoughts,opinions and valuation and how to apply this experience in the future to avoid mistakes or reason for success that have been made since my journey soo far.


musicwhiz said...

Hi Akatsuki,

An honest post from you no doubt, and good to know you are reviewing your holdings and principles. I am also doing so on a consistent basis and learning something new every day on how companies succeed or implode (in the case of some S-Shares !).

I won't get too lengthy, all I want to say is ignore the noise, stay positive and hold your head high. It's not easy being value-oriented when nearly 98% of the world is trader-oriented or short-term focused (this includes all brokerages by the way). Keep refining your thought processes and challenge your assumptions about a company. Also, learn to assume worst-case scenarios where you might lose everything, so as to create a mental buffer. I've learnt to mentally write off some of my mistakes and if they do somehow recover, it's a bonus.

Good luck and please keep blogging !


Akatsuki said...

Hi Mz. Soo nice to hear your encouragement and view on things.

Yes, no doubt this is my 1st bear market (a rather long and painful one) i strongly believe that things will evenutally get better and value investing is the proper way to go.

With that said, do countiue your work (blogging and Value investing) as it is inspiration not only to me but to many of my friends.


marcus said...

Nice post. I agree fully with your value investing and it is definitely not an easy path to go.

I myself have been investing in S-shares and see my portfolio drop close to 80% and hear many things about lousy china stocks, con job companies etc. But hey, everyone has a mouth and we can't control what they said can't we?

Believe in your research and back it up with actions and all these lessons learn will prove to go a long way ahead.

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