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Choivo Capital

Author: Choivo Capital   |   Latest post: Sun, 13 Jan 2019, 02:51 AM

 

(CHOIVO CAPITAL) Surviving Market Volatility as well as Economic Recessions and Depressions.

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Talk about an interesting six months.

This year, the ACE Index, hit a peak of 7,041 on 10th January 2018, before hitting a low of 4,884 on 4th April 2018 (sei sei, haha) before settling at 5,050 today. That’s a peak to trough swing of 30.6% and a to date drop of 28.3%.

The KLSE index on the other hand, appeared much less volatile. Starting the year at 1,775 points, before hitting a high of 1,895 points due to pre-election support by funds, and falling to 1,756 points today due to the incredible outflow of roughly RM4.312 billion since the elections.

However, I think for most of us, the ACE index is likely to better mirror our experience, compared to the KLSE index, as that index only tracks 30 of the largest companies in the BURSA by capitalisation, most of the overpriced, and most of them not owned by the average investor.

On a personal level, my 2018 Stock Picks are currently in unrealised loss of 9.82%. While my personal portfolio, which is very different, is currently at negative 18% loss. Granted, I still beat the index, at least the ACE Index.

However, I compared my previous year performance to the KLSE index (I definitely lost to the ACE Index last year, which gained 50% while I only gained 14%), and the only person I’ll be lying to by changing the goalpost, is myself.

In addition, as I’ve only been truly active in the market since September 2016, its safe to say, all my gains thus far has been wiped out. For all we know, I may actually not possess alpha and should just put everything into the S&P index.

Judging by the numbers, I should perhaps stick to trading used audio equipment, electronics and luxury watches. My record there is definitely way way better!

However, money is just a number on a screen. And I definitely enjoy the process of investing, and studying companies.

I also happen to have this possibly irrational belief that I’m actually good at this, so ill just keep sticking with it. Not like I have anything else to do with the money anyway. I live cheap.


 

So, how do you cope with this volatility, and potential Recession / Depression ?

US is raising rates, which results in money is flowing back, interest rates around the world such as Europe and Canada is also increasing, and overleveraged companies are find it harder to service debt.

As most borrowings is in USD, due to the lower rates, many companies may now want to pay it back in view of the rising rates and increasing strength of the USD.

And the act of wanting to repay USD denominated debt creates a demand for the USD and results in the currency rising which the further increase the debt, and thus further motivate repayment and repeats ad nauseum.

What we have now may only be a taste of the consequences of prolonged zero to negative interest rates. As Warren Buffet (everyones favourite investor to quote) says,

“You can read Adam Smith, you can read John Maynard Keynes, you can read anybody and you can’t find a word to my knowledge on prolonged zero interest rates—that is a phenomenon nobody dreamed would ever happen

That doesn’t mean I think it’s the end of the world when it ends, but I don’t think anybody knows exactly what the full implications of negative rates will be. I hope to live long enough to find out.”

Things may very well much more interesting!

So how does one survive this?

 

For the traders.

If you’re a trader, especially one in KLSE. I’d suggest you pack up your bags and put your money in FD. You cannot short for any meaningful amount of time in the KLSE, nor buy options. In addition, in times where uncertainty and fear seems a little heavier than greed.

Things that used to work in the past does not really work anymore. Gambling on one or two quarters does not work anymore as a good quarter does not result in increased prices, or only increase prices in an insignificant manner, while any bad news send the prices tumbling.

Traders do well in bull markets, and get murdered in bear markets. It is in bear markets, when the tide rolls out, do you see who is the swimming naked. And these people don't tend to stick around.

Notice how OTB and KYY is still around. They are very good traders. 

I’m not going to talk about those on margin, as they are likely to have margin called until bankrupt and at the current point, don’t even want to see anything on KLSE.

In addition, for those who stick very closely to cut loss, you are likely to keep cutting loss, and thus cutting your base capital like salami slices, until you are left a tiny bit of the sausage at the bottom of the market. Leaving you unable to properly take advantage of the potential subsequent boom.

For those who don’t cut loss, I hope you don’t mistake yourself for an investor. The intrinsic value of a company is far beyond the next quarter result or the results of the next 3 quarters. You may think you know what you own and its value.

But you don’t, unless you can see 3 red quarters in a role (that does not result in deterioration in fundamentals) and still hold.

Or you could start investing!

 

 

For the Investors

Make sure you know exactly what it is your buying, its intrinsic value, and make sure you really understand it.

The easiest is buying valuable assets at prices far below book value. For this one, you can listen to calvintaneng, and make up your own mind. The man is like a bloodhound for super undervalued companies in terms of NTA. But remember, because a lot of them are there due to bad management etc, you MUST diversify very widely. Walter Schloss and Benjamin Graham who practiced this diversified very very widely. I personally hold about 30% of portfolio is a diversified group of net asset companies.

The next part is buying earnings. Which is the hardest thing, as earnings have a way of evaporating suddenly. And its orders of magnitude harder in determining its value. As you now have to understand the business, the management and life. All of which you can spend your whole life and never finish learning.

You need to now identify the resilience of the earnings, which part of the cycle you are in, and the intrinsic capability of the business and management. All of which do not have easy answers.

As Howard Marks says, you only need 3 things to be successful in investing,

  1. The ability to determine the intrinsic value of a company
  2. The ability to hold and buy more as prices drop
  3. To be right.

You need to be making your money when you buy the stock not when you sell. And for this case, it’s far far easier to purchase high NTA stocks selling for prices far far far below book value.

Make sure you are using long term money only. For the only real advantage one can really have is patience, assuming you did your research.

 

Conclusion

Thank you for reading this piece by a greenhorn, unexperienced investing young ciku, who still drink mother milk. I wrote this mostly for myself as a way of crystallizing my thoughts. I hope it was of some enjoyment and help to you.

Let me know below, what other things you think I should take note off, key factors I failed to identify and also any investment ideas you have!

====================================================================

Facebook: Choivo Capital
Website: www.choivocapital.com
Email: choivocapital@gmail.com

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  3 people like this.
 
Sslee Dear Jon Choivo,
Thank you for sharing your thoughts on investment, I appreciate your writing a lot.
Malaysia needs people like you (generation Y) to make Malaysia great again. Wish you a Happy and Enlightenment investment.
Thank you.
02/06/2018 08:25
AlfredHui Thanks for the article keep up the good work
02/06/2018 08:35
Fabien Extraordinaire why comparing your performance aganst ACE index? you can used FBMEMAS as a benchmark, more reflective of your portfolio i guess
02/06/2018 09:40
3iii >>>The easiest is buying valuable assets at prices far below book value. For this one, you can listen to calvintaneng, and make up your own mind. The man is like a bloodhound for super undervalued companies in terms of NTA. But remember, because a lot of them are there due to bad management etc, you MUST diversify very widely. Walter Schloss and Benjamin Graham who practiced this diversified very very widely. I personally hold about 30% of portfolio is a diversified group of net asset companies.<<<<



1. In theory, this approach is fine and can be profitable for those who are disciplined and stick with it. In practice, it is not so easy. Yes, you buy the stock so cheap that you have virtually a free puff. "But remember not to hold on to these stocks for too long: there is an opportunity cost."

2. Many stocks are selling below NTA for obvious reasons. These are companies with lousy businesses or businesses with deteriorating fundamentals. You are essentially trying to find a gem among the pile of rubbish. You must have this ability to profit from this technique.

3. Benjamin Graham and Walter Schloss employed these methods with success. However, they did diversify over many stocks and on the basis of probability had more winners than losers, thus, growing their portfolios. Selecting and owning these stocks were half the equation, the other being managing their portfolios of many stocks successfully. (You may need to elaborate your ability to manage such a portfolio in your next article.)

4. Yet rather surprisingly, Benjamin Graham made a lot of money not from this strategy which he preached and held widely. His gains from one stock (GEICO) overshadowed and exceeded all the gains from all his other above transactions by a wide margin. For GEICO, he bought a company with great business and potential at a fair or undervalued price and he held this for a long term, enjoying the gains derived from its growing earning power. Warren Buffett was using Graham strategy in the first 20 years of his investing and changed to the Philip Fisher / Charlie Munger / Graham's GEICO strategy subsequently. For those with the right temperament, philosophy and strategy, the latter in my opinion is a better strategy to grow long term wealth ... steadily, confidently and with a high degree of probability of a good outcome.
02/06/2018 10:12
3iii >>>>>The next part is buying earnings. Which is the hardest thing, as earnings have a way of evaporating suddenly. And its orders of magnitude harder in determining its value. As you now have to understand the business, the management and life. All of which you can spend your whole life and never finish learning.

You need to now identify the resilience of the earnings, which part of the cycle you are in, and the intrinsic capability of the business and management. All of which do not have easy answers.

As Howard Marks says, you only need 3 things to be successful in investing,

The ability to determine the intrinsic value of a company
The ability to hold and buy more as prices drop
To be right.
<<<<<



When Buffett buys, he is looking for a company with earning power. This earning power must be sustainable and thus, he looks at its businesses and the durable competitive advantages it enjoys.

Buffett has shared very generously how to identify such companies with durable competitive advantage. You will need to pick those with honest managers.

It is then a matter of buying them at fair or undervalued prices.

When do you sell? Usually never, unless there is permanent fundamental deterioration in its business.

Using the above technique, you can concentrate on a few highest quality stocks.

Do you think this method is more difficult than the deep value method of Benjamin Graham? Perhaps, it is your mindset.

Set this free, use both methods initially, and I will guarantee you that in the end one of this method gives you a better and superior return than the other.
02/06/2018 10:23
tecpower PHLX Semiconductor Sector was up 2.34% on Friday.

Semiconductor rally is coming.
02/06/2018 10:26
3iii Many value investing strategies to employ in the market place:

Stocks

1. Net-net of Benjamin Graham eg. Poh Kong in 2009

2. Deep value investing in secondary issues (but beware of value traps). eg. KAF before 2014

3. Buying blue chips at bargain at certain market sell down period. eg. 1998, post SARS, 2008/2009

4. Buying growth stocks at reasonable price (GARP). eg. PetDag in 2005

5. Special situations: Arbitrage, M&A, turnarounds, bankruptcy restructuring. e.g. turnarounds HaiO in 2005/6, GCB in 2009, Latexx in 2008, acquisition of MOX

6. Joel Greenblatt magic formula investing: Screen for stocks with high ROIC and high EY


Bonds

High quality bond with good yield sold at below par value.

Low quality (junk) bond with good yield available at severely discounted value. eg. Plus Bonds before being redeemed by the government bailout, RBS bond yielding 8% available at a discount to par.


Cash

Stay with cash if you have nothing better to buy. Your default mode.
02/06/2018 10:40
3iii Blog: BENJAMIN GRAHAM NET NET VALUE APPROACH TO SHARE INVESTMENT by Calvin Tan | Posted on November 30, 20

Aug 8, 2017 04:20 PM | Report Abuse

I tried this method of Graham's net-net. Very difficult. Firstly, very few such companies exist. Secondly, those that are in this situation, they are so horrible, you just do not wish to own them. Not easy strategy to use profitably for the long term. In fact, Walter Schloss at the end of his long successful investing career gave up his fund managing because he could not find many of these stocks to invest into.

However, it is nice to learn this net-net concept of Graham just to understand the concept of buying below a certain intrinsic value and margin of safety. But I am in agreement with Charlie Munger that Graham has a great intellectual mind, but his method is not superior and may not be the best to give you the most returns safely for the long term. Buffett was a young student of Graham and was awed by his teacher whom he has great respect. I think he too realise he has to move onto another investing philosophy., though still sticking strictly to his margin of safety principle.
02/06/2018 10:51
3iii Blog: HOW TO ESCAPE A FINANCIAL TSUNAMI by Calvin Tan

Aug 8, 2017 04:28 PM | Report Abuse

calvintaneng You have the general idea of investing. You have the general idea of value investing and its concept of margin of safety. However, Grahamian type value investing is only profitable if you can find great companies trading at a discount to its intrinsic value. For those who forage among the down and trodden lousy companies hoping to uncover a gem, in most instances, they ended with lousy companies.

If calvintaneng can reframe his thinking. Instead of being attracted to the lesser quality companies, and he focus on the high quality great companies, he may do much better.

This is just my observation. Perhaps, he is doing very well too using his present method. I would not know.
02/06/2018 10:52
3iii Stock: [HENGYUAN]: HENGYUAN REFINING CO BHD

Aug 12, 2017 10:40 PM | Report Abuse

Certain companies are difficult to value.

Companies with very volatile revenues and earnings can be difficult to value. Those with very erratic free cash flows can be difficult to value too.

Due to the volatility and uncertainty of their cash flows, these companies can be impossible to value accurately using the discounted cash flow method.

Maybe using P/NTA is a better way. However, you have to be certain of what make up the NTA number.

Benjamin Graham preferred to use NTA as an approximation to intrinsic value. He then advised to buy at a discount to the NTA.


Stock: [HENGYUAN]: HENGYUAN REFINING CO BHD

Aug 12, 2017 10:34 PM | Report Abuse

Certain companies are easy to value.

These companies have consistent and growing high quality earnings and free cash flows.

Intrinsic value of an asset is the discounted present value of all its future cash flows (Warren Buffett).

e.g. Petdag is an easier company to value.
02/06/2018 10:58
3iii Stock: [HENGYUAN]: HENGYUAN REFINING CO BHD

Aug 13, 2017 12:05 AM | Report Abuse

Don't use PE ratio

EPS is easy to manipulate.

EPS says nothing about the quality of the profits.

EPS may not resemble true cash profits.

EPS may be based on profits that are unsustainably high or temporarily low. (This means that the PE ratio could be misleadingly low # or high. This is a particular problem for cyclical companies.)


# like Hengyuan. The low PE maybe misleading due to the unsustainably and/or temporarily high profits.
02/06/2018 10:59
3iii Stock: [HENGYUAN]: HENGYUAN REFINING CO BHD

Aug 14, 2017 10:36 PM | Report Abuse

>>>Eh? Calvintaneng still alive? I tot you already run road because chasing by ALONG due to your big lose in

Bjcorp
Mulpha
Mui
Pmcorp
Alam
Perisai
Kbunai
Etc

Alamak. Low life<<<

Can I attempt at guessing Calvintaneng's investing philosophy?

He is a follower of Graham's deep value investing.

From my understanding of Graham's teaching, I am not sure if he would have bought into these stocks at all.

Here is a
Ben Graham Checklist for Finding Undervalued Stocks

Criterias

Risk
1. Earnings to price (the inverse of P/E) is double the high-grade corporate bond yield. If the high-grade bond yields 7%, then earnings to price should be 14%.
2. P/E ratio that is 0.4 times the highest average P/E achieved in the last 5 years.
3. Dividend yield is 2/3 the high-grade bond yield.
4. Stock price of 2/3 the tangible book value per share.
5. Stock price of 2/3 the net current asset value.

Financial strength
6. Total debt is lower than tangible book value.
7. Current ratio (current assets/current liabilities) is greater than 2.
8. Total debt is no more than liquidation value.

Earnings stability
9. Earnings have doubled in most recent 10 years.
10. Earnings have declined no more than 5% in 2 of the past 10 years.
02/06/2018 11:02
Choivo Capital This is very true. About 60% of my portfolio is great companies. 24% is good companies at fair price, about 28% is great company at cheap price.


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4. Yet rather surprisingly, Benjamin Graham made a lot of money not from this strategy which he preached and held widely. His gains from one stock (GEICO) overshadowed and exceeded all the gains from all his other above transactions by a wide margin. For GEICO, he bought a company with great business and potential at a fair or undervalued price and he held this for a long term, enjoying the gains derived from its growing earning power. Warren Buffett was using Graham strategy in the first 20 years of his investing and changed to the Philip Fisher / Charlie Munger / Graham's GEICO strategy subsequently. For those with the right temperament, philosophy and strategy, the latter in my opinion is a better strategy to grow long term wealth ... steadily, confidently and with a high degree of probability of a good outcome.
02/06/2018 13:29
qqq3 https://klse.i3investor.com/blogs/qqq3/159254.jsp
02/06/2018 13:37
qqq3 And for those who want more diversification than KYY, you can read about my portfolio and how to built a portfolio by reading my posts here.

https://klse.i3investor.com/servlets/forum/600157964.jsp
02/06/2018 13:42
qqq3 "Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions. "

hahahaha......that reminds me of OTB and his stock selection criteria......always looking to buy shares at the peak of their economic cycle when the company just reported maximum profits and always low PE stock about to come crashing down............
02/06/2018 14:20


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