When to sell, that is the tough part

NOBY has left a message in my post, “My Portfolio Return, Market Efficiency and Myths, Magic Formula, Diversification, Blah Blah Blah” below:

http://klse.i3investor.com/blogs/kcchongnz/56926.jsp

Posted by NOBY > Aug 3, 2014 09:00 AM | Report Abuse

KC thanks for sharing. Question is how many of these stocks have actually exceeded their intrinsic value at current prices ? Would you have really kept them for 18 months ? In reality one may have sold some of those that have exceeded intrinsic value and added on those that were still undervalued. Would the returns been that high in that case ?This is one of the dilemma I face, selling winners too early. What s your thought.

No, I have not kept the all the stocks for 18 months. To tell you that I am still keeping all the stocks in that portfolio mentioned in the link above, and that I never sell my winners too early, is amounting to telling you a lie.

To be truthful, the stocks in the portfolio which I am still keeping are Pintaras Jaya, Kumpilan Fima, Plenitude and some of Pantech. So I have sold most of the stocks (6/10) from the portfolio.

So why didn’t I walk the talk and keep all the stocks for long term? I think it may be an interesting topic for discussion here.

Outlined below are generally the reasons why I may sell the stock I own:

1. When I realize I am wrong in my appraisal 
2. When the price reaches my appraised intrinsic value 

3. When too many people agree with my appraisal 
4. When the fundamentals of the company has significantly changed. 
5. Change of management or deterioration of management decision. 
6. Competitions creep in and there is significant deteriorating operating numbers 
7.  When we have identified better uses of our capital 

Why did I sell off my shares?
I sold off ECS ICT and SKP Resources because for a number of quarters, their performances have been deteriorating and hence their intrinsic values may have been reduced. SKP Resources has too much concentration of its business with Dyson which was a little uncertain for their expansion in China, so I thought. So the reasons of selling could be classified under point 4 and point 6.

I sold off Jobstreet, some of Pantech and NTPM because I thought their share prices have gone up to their intrinsic values. Their earnings yield (Ebit/EV) are no longer attractive based on the historical earnings then. So the reason of selling could be classified under point 2 listed above.

I did not foresee the power of Jobstreet’s continuous share buyback, and most of all its declaration of the 1 for 1 bonus issues a year plus ago. That really caused its share price to spike up a lot. Its business however remain as very durable with the light assets model and plenty of free cash flows.

I bought Kimlun because of its continuous winning of jobs and the buying of its shares by its major shareholder. It has very good operating efficiencies too with ROE and ROIC above 20% then. Its operating and net margins, however, are very low in single digit compared to more than 30% those of Pintaras which I realized later. Kimlun has considerable amount of debts and they are increasing. The worst are its poor cash flows from operations and free cash flows which I had overlooked initially and the situation was deteriorating. In term of earnings yield, it was trading at single digit and a few times lower than Pintaras, again unaware by me at that time of buying. Hence I thought I had been wrong in my initial appraisal (Reason 1) and that the performance and financial position have also deteriorated (Reason 4). Hence I sold off Kimlun with not much gain or loss. 

Not too long ago I also sold off Prestariang as its share price has risen too steeply in too short time, and that its share price may have exceeded its intrinsic value. Furthermore, its most recent quarterly report was disappointing, giving it a very low earnings yield. I felt like the share price has built in too much expectation.

Owing to the increase in prices of most of the stocks I held, my equity shareholding has increased substantially in relation to my fixed income for the past one and a half year. I decided to take some profit and at the same time rebalance my asset allocation a little bit.

However, the main reason for selling some of the stocks was because I thought I have found better stocks to buy. You know I am just a small time retail investor and the financial resources I have is very limited.

My New Portfolio

My new portfolio of 11 stocks was set up exactly a year ago in i3 on 1^st August 2013 as shown in Table 1 below with the prices adjusted for dividend and bonus and share splits. It is made up of a diversified portfolio in industrial products, consumer, trading and services, construction, property and technology. There are only two similar stocks, i.e. Pintaras and Kumpulan Fima which are common with the previous portfolio.

The main strategy used for their selection was also based on the principle of the Magic Formula of Greenblatt; i.e. buying good companies at cheap prices. Another strategy of Graham Net Current Asset Value was used to purchase one of the stocks of Daiman Development. For those who are interested in these strategies, you can refer to the link below.

http://klse.i3investor.com/blogs/kcchongnz/56884.jsp

This portfolio can also be viewed from the appended link below.  Please note that the prices stated in the link may not have fully reflected with the dividends and bonus issues.

http://klse.i3investor.com/servlets/pfs/21089.jsp

Are the new stocks bought really better than those I have sold to buy them? Let us review its performance as at today, exactly one year after the setup of the portfolio.

My New Portfolio Return

The one-year average return of the portfolio is 85.1% with a median return of 58.3% as compared to the broad market of just 5.5% during the same period. The excess return, or alpha is a whopping 80%. The highest return is from this crazy stock Datasonic of 450% in this one year period with its 1 for 5 share split and 1 for 1 bonus issue. There is only another stock, Homeritz which achieved more than 100%. There are two out of eleven stocks marginally underperformed the broad index; Tien Wah at a loss of 3.2%, and Haio at a small gain of 2.2%.

It is easy to say that if I hold just Datasonic with all my money, I would have made 481%! But what if instead, I am just holding Tien Wah and Haio? Seriously I really did not have this foresight that Datasonic would be performing that well at a gain of 451% when I first started this portfolio, not even one tenth of that.

Is the new portfolio of stocks risky? Is the market efficient? Should we hold stocks for the long term? Is portfolio diversification necessary? We can go on and on all over again like the previous article above.

So is the average return of the new portfolio of 85.1% good enough for the one year holding period? Was it a good or a bad decision to sell off some of the stocks in the previous portfolio for this new portfolio?

K C Chong (3^rd August 2014)

Appendix

Table 1: Return of new portfolio as on 31^st July 2013