Category: Boring Investor

As A Contrarian, You Will Always Walk Alone

A lot of investors have posted good results for last year. However, if you were like me and had been worrying that the stock market could crash in 2017, a year that ends with 7, you would have missed out on a stock market rally in which the STI rose by 18% in 2017. When everybody else is posting good results online, it does feel depressing occasionally.
I was not totally out of the market last year. Having participated in the stock market for 32 years, I will never be totally out of the market, even though I respect the folklore that the market would experience a crash whenever the year ends with 7. I took a defensive stance, ensuring that I had around 45% to 50% cash to deploy in the event that a crash were to materialise. As I sold stocks that were rising, I continued to invest in stocks that were forgotten by the market. Below are some of the stocks that I bought, did not buy, and sold last year, including the reasons.
Stocks that I Sold
Electronics stocks, especially semiconductors, were the rage last year. Nevertheless, I sold them. Needless to say, they went much higher after I sold them. For the semiconductor stocks, Sunright, sold at $0.305, is now $0.895; ASTI, sold at $0.056, is now $0.084; and UMS, sold at $0.78 on average, is now $1.07. For the electronics stocks, Frencken, sold at $0.515, is now $0.59; and Valuetronics, sold at $0.795, is now $0.93. All these were sold to shore up defence for the crash, if any. On hindsight, they were sold too early, as I did not expect the electronics recovery to be so strong. To-date, I still have not figured out what is behind the strong electronics demand, which will determine whether the strong demand can continue or will fizzle out soon. 
There were also some buying and selling of Oil & Gas (O&G) stocks. A notable sale was Keppel Corp at $6.16, as I was concerned that new orders were not coming in fast enough to replace old orders. Furthermore, existing customers are not collecting their vessels (and paying for the delivery) even though the vessels have been completed. See What Keppel Offshore & Marine’s Order Book Can Tell Us for more information.
Stocks that I Did Not Buy
Other than electronics stocks, banks and properties also rose by a lot last year. I had an opportunity to buy OCBC at $8.56 in late 2016, shortly after the US presidential elections. However, I gave it a miss, as I was concerned that O&G losses were still mounting. Although rising interest rates would increase banks’ profits, there are also risks that their customers could not cope with the increasing interest expenses given the lacklustre business environment. In the longer term, there are also concerns whether fintech would chip away the traditional profits that banks make as financial intermediaries. In short, I had not figured out the banks.
The only major property stock that I had was Global Logistic Properties (GLP). To be honest, GLP made a lot of money for me last year. But with the privatisation of GLP, I had to find a replacement. Potential replacements were Capitaland and Frasers Centrepoint (FCL). Learning the lessons from GLP, I decided that Capitaland at $3.50 was not cheap enough. As for FCL, I was concerned that it had too much debts. I watched it rose from $1.66 before finally buying at $1.92. Still the lingering concern did not go away and I sold it at $2.07.
Stocks that I Bought
If you had read Howard Marks’ famous memo “Yet Again?“, he mentioned 6 options that investors could take in the current low-return investing environment. These options are reproduced below for easy reference (please read his original memo for a complete understanding of the 6 options):

  1. Invest as you always have and expect your historic returns.
  2. Invest as you always have and settle for today’s low returns.
  3. Reduce risk to prepare for a correction and accept still-lower returns.
  4. Go to cash at a near-zero return and wait for a better environment.
  5. Increase risk in pursuit of higher returns.
  6. Put more into special niches and special investment managers.
His preferred options? A combination of no. 2, 3 and 6.
The equivalent of option 6 for me is distressed assets and stocks unloved and forgotten by the market. There were 2 distressed asset plays last year. The first was Triyards, which I tried to take advantage of Ezra’s troubles and potential sale of a controlling stake in Triyards. Unfortunately, this did not pan out and I lost $33K as a result. See Know Your Customers Well! for more information. The second was First Ship Lease Trust (FSL). Unexpectedly, FSL did not manage to refinance its debts and had to seek a moratorium on debt repayment. Nevertheless, it has been selling ships to pay down the debts. If it can successfully liquidate all its ships (or until the debts are fully paid off), there is residual value for shareholders. See Valuation of First Ship Lease Trust for an estimate of the liquidation value of FSL carried out in May last year.
There is actually quite a no. of unloved industries and stocks. The first is telcos, with concerns over whether the entry of the fourth telco would increase competition and erode away the handsome profits and dividends that telcos used to earn. However, my view is that the fourth telco is fairly irrelevant. Already, the existing telcos are competing fiercely against each other through SIM-only plans, data upsize plans and Mobile Virtual Network Operators, etc. See Do Telco Investors Need to Fear the Fourth Telco? I bought into Singtel and M1. 
The second unloved industry is O&G. Here, it is a little tricky, because some parts of the industry value chain are recovering while other parts are still declining. The recovering part is the upstream Exploration & Production sector with the rise in oil price, while the declining part is the ship/rig building sector, as discussed in Is A Recovery for Oil & Gas Shipbuilders Near? The ones in the middle, the Offshore Support Vessel (OSV) sector, is probably entering a trough as new vessels enter the market and increase the supply glut. I decided it was about time to enter the OSV sector, buying CH Offshore, Ezion warrant (it got suspended the day I bought it), Mermaid and POSH.
The third unloved and forgotten industry is the shipping industry. After the bankruptcy of Hanjin Shipping in late 2016, conditions have actually improved a little, with the Baltic Dry Index and World Container Index slightly higher in 2017 than in 2016. I bought Samudera, Singapore Shipping and Uni-Asia.
Another unloved and forgotten industry is hotels. Investors love hotel business trusts that pay distributions regularly, but not hotel companies like GL and Stamford Land. After being alerted to their undervaluation by Mandarin Oriental’s spectacular rise and City Developments’ privatisation of Millennium & Copthorne, my analysis shows that there is hidden value in hotels. I bought GL and Stamford Land. See Some Hotels Could Be Very Valuable! for more information.
Needless to say, these stocks that I bought have not risen much compared to the electronics, bank and property stocks.
Conclusion
As contrarian investors, it is sometimes difficult not to be depressed when the market moves in the opposite direction. However, we are the ones responsible for our own money. We carry out analysis independent of the market and invest according to our beliefs. To all fellow contrarians out there, I will leave you with Benjamin Graham’s advice to Warren Buffett:

“You’re neither right nor wrong because other people agree with you. You’re right because your facts are right and your reasoning is right — and that’s the only thing that makes you right. And if your facts and reasoning are right, you don’t have to worry about anybody else.”

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Is A Recovery for Oil & Gas Shipbuilders Near?

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Some Hotels Could Be Very Valuable!

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Singapore Savings Bonds – 2 Years On

It has been 2 years since the launch of the Singapore Savings Bonds (SSB) in Oct 2015. How have the SSB interest rates changed in the past 1 year and how have SSB performed compared to the more traditional Singapore government bonds, i.e. Singapore Government Securities (SGS)? The comparison for the 1st year (Oct 2015 to Sep 2016) is discussed in Singapore Savings Bonds – A Year On. This post continues the discussion for the 2nd year (Oct 2016 to Sep 2017).
The most important factor for both SGS and SSB is interest rates. In the 1st year, interest rates went down. However, in the 2nd year, interest rates went up, especially during the Nov to Dec 2016 period which saw US Federal Reserve raising interest rates again in Dec 2016 after a 1-year hiatus. Figs. 1 and 2 below show the 10-year interest rates for the 1st and 2nd year.
Fig. 1: 10-Year Interest Rate for Year 1

Fig. 2: 10-Year Interest Rate for Year 2
For the 2nd year, the highest 10-Year SSB interest rate achieved is 2.44%, for the tranche issued in Feb 2017. This is still lower than the all-time high of 2.78%, for the tranche issued in Nov 2015. The all-time low is 1.75%, for the tranche issued in Sep 2016. The current SSB interest rate is 2.07%.
If you have bought the 1st tranche of SSB in Oct 2015, the interest rate for the 2nd year would have stepped up from 0.96% to 1.09% in Oct 2016. The market price of SSB is a constant $100, as it is capital protected by the government. In comparison, the coupon (i.e. interest rate) for SGS is constant while the market price of SGS varies with prevailing interest rates, rising when interest rates fall, and falling when interest rates rise.

How does this 1st tranche of SSB compare with the corresponding 10-year SGS bond? Figs. 3 and 4 show the price performance of the SSB and 10Y SGS for the 1st and 2nd year.

Fig. 3: Price Performance of 10-Year SGS and SSB for Year 1
Fig. 4: Price Performance of 10-Year SGS and SSB for Year 2
In the 1st year, the 10Y SGS went up in price due to the fall in interest rates, resulting in a capital gain of 6.57%. On top of that, investors in 10Y SGS would have pocketed a coupon of 2.375%, which, based on the purchase price of $98.61 in end Sep 2015, is equivalent to a yield of 2.41%. The total gain for the SGS is 8.98%, compared to 0.96% for the SSB. The table below shows the comparison between SSB and SGS for the 1st year.
SSB SGS
Capital appreciation 6.57%
Yield 0.96% 2.41%
Total 0.96% 8.98%
However, in the 2nd year, interest rates went up, especially during the Nov to Dec 2016 period, resulting in a capital loss of -2.53% for the SGS. The yield for the 2nd year, based on the price of $105.09 in end Sep 2016, is 2.26%. Thus, investors who hold the 10Y SGS for the 2nd year would have a net loss of -0.27%, compared to 1.09% for the SSB. The table below shows the comparison between SSB and SGS for the 2nd year.
SSB SGS
Capital appreciation -2.53%
Yield 1.09% 2.26%
Total 1.09% -0.27%
Thus, when interest rates go up, it is better to hold SSB, as they are capital protected. However, when interest rates go down, it is better to hold SGS, as they can generate capital gains. By juggling between SGS and SSB, you can get the best of both worlds. The contrasting performance of SGS and SSB for the past 2 years shows that the discussion in Getting the Best of Both SSB & SGS is correct.
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