"Your big opportunity may be right where you are now" Napoleon Hill

I have three portfolios of stocks set up in i3investors for the past two years for sharing purpose. Almost all the stocks chosen were accompanied with their investment thesis as published in i3investor. As we begin with a brand new year, it is good to examine the returns of these portfolios, what have gone right or wrong with the strategies, and what are the necessary actions to be taken for improvement.

You would notice that all stocks in my portfolio are small to medium capitalized stocks. I am a value investor  trying to find good companies trading at cheap price. It is hard to find them in the large capitalized stocks which are closely followed and owned by local and foreign funds and hence would likely to be fully or overvalued. 

My Third Portfolio

Table 1 in the Appendix shows my latest portfolio of stocks, My Third Portfolio, selected for the past one year. My report on each individual stock selected were published in i3investor. It is made up of a combination of investing principles; the Greenblatt Magic Formula (MF) mostly and the Graham Net Current Asset Value (NCAV) for Kuchai, Plenitude and Perak Corporation, and a couple of company warrants as leveraged instruments in MRCB and BIMB based on Black-Scholes Option Pricing Model Valuation.

This portfolio made an average return of -1.3% compared to the loss of 1.5% of the broad KLCI index. The winners outperformed the losers by 8 to 7 with a median return of +5.0%.

The return of the portfolio is skewed by the gain of 45.3% of Latitude Tree, and Pintaras of +31.2%. Thanks for the booming furniture export industry and the booming construction industry. The big losers are the two company warrants of MRCB Wa of -40.0% and BIMB Wa of-34.1%, and the aborted selected capital reduction proposal of Perak Corp of -36.3%.

The lessons here are;

1. Beware of leveraged instrument, invest in company warrants with the mind set of financial risk management, and not hoping to swing for the fence. This article below explains how to use warrants as a financial risk management tool for limited downside rather than speculating.

Invest in company warrants when they are undervalued by using a small amount of money and let the leverage takes care of itself, and not be greedy and punt with big sum of money and risk of getting caught with big losses when the market turns unfavourable. And most of all, understand what you are into.

2. Never place too many chips when there is an offer to take a company private or some other corporate exercises as the deal may not materialized. In fact it often doesn’t. It is still a risky arbitrage opportunity and hence you must have enough margin of safety. It is not worthwhile of risking $10,000 for a potential gain of RM200.

 Am I going to keep any of these stocks for the new year, and if so, which ones? We will have to examine each of them based on the principles of the MF or Graham NCAV.

My Second Portfolio

This portfolio of mine was published in i3investor by the courtesy of Tan KW as “Stock Pick and Trading Challenge 2013 2H”, on 1^st August 2013, some 17 months ago.

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

Please note that the return as shown in the website above has not included some corporate exercises and dividend payments. The stocks were chosen mainly based on the principles of MF; i.e. buying good companies at cheap or reasonable price. I went a step further in examining their income statements, financial health and quality of earnings in cash flow.

http://klse.i3investor.com/blogs/kcchongnz/51631.jsp

All the selections were accompanied with detailed analysis and published in i3investor.

My Second Portfolio returned an average of 54.4% compared to the return of KLCI of 3.4% during the same period 17 months ago as shown in Table 2 in the Appendix. The return is 10.3% higher than the return of 44.1% exactly a year ago on 31^st December 2013, while KLCI retreated by 1.5% during the same period. I am quite happy with this performance.

The good return of My Second Portfolio was highly skewed by Datasonics, which with its split, bonus issue etc, has returned a whopping 275% in the seventeen months. Homeritz is another high performer returning 113%. Thanks to the booming furniture export market and the alert by an i3investor reader (and a student of mine) who has highlighted this stock. I often got good leads from some i3investor readers and participants of my course as I have limited knowledge of the opportunities available in Bursa.

The worst performer is Tien Wah but with a moderate loss of 20%. No thanks to the strict implementation by the relevant authorities for banning the use of labelling in cigarette packet.

Well that is what one needs, a few big gainers and as little losers as possible in your portfolio and you will be doing alright. There are only two out of eleven losers in the portfolio and their losses is minimal. That is the gist of value investing. Thanks to the principles of the Magic Formula. It even works for the short term.

The question is do the stocks still meet the principles of MF and to be kept for the new year?

My First Portfolio

This My First Portfolio, also set up by Tan KW, is the longest as published in i3investor, but just makes it to two years, although I have many stocks there since 5-6 years ago.

http://klse.i3investor.com/servlets/pfs/13147.jsp

Also note that the return of stocks and the portfolio has not included the corporate exercises and dividends as shown in the website. These stocks were also chosen basing on the MF.

All 10 stocks in the portfolio have positive total returns which varies from the lowest of 3.5% for Kumpulan Fima to 171% for Jobstreet for the last two years. There is not even a single loser. The average return is 74.8% compared to 12.9% of the broad market during the same period. The high performers were Jobstreet (171%), Prestariang (164%), Pintaras (151%), and SKP Resources (103%). The only poor performer which lagged behind the index is Kumpulan Fima. The average return since a year ago improves by 22.4% from 52.4% to 74.8%, while the broad market retreated by 1.5%. Hence the excess return, alpha, of the portfolio has widened considerably to 62% (74.8%-12.9%) since the portfolio was first set up two years ago.

Three of those high gainers have gone through a corporate exercises; share split for Jobstreet and bonus issues for Prestariang and Pintaras. But actually it was their good performance with increasing revenues, profits and operational efficiencies which raised their valuations. But what is wrong with Kumpulan Fima regarding its lethargic share price. I have no answer.

Are the high returns of the portfolio accompanied by higher risk as suggested by the efficient Market Hypothesis? Not that I am aware of as shown in my previous analysis here:

http://klse.i3investor.com/blogs/kcchongnz/44336.jsp

http://klse.i3investor.com/blogs/kcchongnz/44334.jsp

Again that is what you need in investment, a few high performers and as little low performers as possible. That is the wonder of the Magic Formula and value investing. It also works well for the middle term.

The more important questions is which are the stocks still good and value stocks? In this portfolio, as many of them have risen in prices substantially, some of them have their business deteriorated, and they are no longer good or value stocks. We will examine them one by one later using the principles of the Magic Formula plus some minor tweaking.

For those who are interested to learn how to identify good companies, and most of all if their stocks are offerred cheap, for a fee, please contact me at 

ckc13invest@gmail.com

Wishing everyone a Happy and Prosperous New Year.

K C Chong on 2015 New Year Day

Table 1: Performance of My Third Portfolio

Table 2: Return of My Second Portfolio

Table 3: My First Portfolio