Category: Boring Investor

Betting Against the STI Component Stock Changes

Buying and holding a stock index is considered as passive investing. However, the STI is not entirely passive. Every quarter, the STI would be reviewed to determine whether certain stocks should be dropped from or added to the index. This can be likene…

The Dogs and Puppies of STI for 2017

The Dogs and Puppies of STI is an annual blog series that I try to update at the start of every year. It can be very time-consuming to crunch all the data and analyse their performance relative to the STI, especially since there is only a very short ti…

A Look-Back at My Blog for 2016

2016 is drawing to a close and it is an opportune time for me to reflect on my blog for this year. Regular readers of my blog would know that my blog posts this year have tilted towards understanding the business of the industry/ company. This is most …

Why Is Protectionism A Concern For Singapore?

After the election of Donald Trump as US President, it has been said that his protectionist stance is bad for open, trade-reliant economies like Singapore. But what is trade? My idea of trade has stagnated since the secondary school days, when we learn…

Making America Great Again and Its Impact to Asia

I delayed writing about the impact of Trump’s victory in the US presidential election, primarily because I wanted more time to observe his policies. However, since US Fed is meeting this week to discuss interest rate rise, I will pen down my current th…

Being A Co-Owner of GLP

It is often said that buying shares in a company means becoming a co-owner of the company. However, what does it really mean to be a co-owner? After my large investment in Global Logistic Properties (GLP), I finally understood what it means. Usually, f…

My Roller Coaster Ride with GLP

There is a Chinese saying for relationships: “You come together because of misunderstanding, and you separate because of understanding”. When it comes to stock investments, I find that this saying applies as well, at least for me. When I am thinking of buying a stock, the stock would tend to look attractive, even though I would study its financial statements carefully before buying. As the saying goes, the grass is always greener on the other side. However, after I have bought the stock, I would follow its announcements closely and realise that I have not understood the stock well enough. This is when I would regret buying the stock, regardless of whether the stock has risen or fallen in price. For Global Logistic Properties (GLP), which is the largest holding in my portfolio, the same pattern holds true.
GLP is a very attractive stock, which I blogged about it last week in The GLP Story. I find it so attractive that I built up a 22% concentration in the stock within weeks! In contrast, my next largest stock concentration is only 2.5%. Stock concentration is something that I have not attempted previously in my 18 years of investing with my own money. However, because I swallowed too much too quickly, indigestion soon followed.
Although I am very used to fluctuations in stock prices, almost all of my stocks are diversified, with concentrations of up to 2.5% only. GLP, with its 22% concentration, is a different matter altogether. Every 3-cent drop (equivalent to 1.5% drop) in the share price was enough to give me jitters. By Dec last year, I had realised that I could not hold on to such a large concentration and planned to reduce it come Jan, when stocks usually rise with the January effect. Unfortunately, stocks dropped in Jan instead, triggered by the meltdown in the circuit-breakers in the Chinese stock market. Furthermore, there were news of heavy capital outflows from China, triggering memories of the Asian Financial Crisis. I decided to reduce my risks and cut my concentration to 16% at a loss. But when the stock dropped further, it was too tempting and I bought back some shares, raising my concentration back to 19%. By this time, after experiencing the stock price dropping by more than $0.50 from my original cost price, I had more or less become accustomed to its stock price fluctuations. My target concentration for GLP (and any single stock) also stablised at between 15% to 20%, rather than going upwards of 20%.
Beside stock price fluctuations, there were other issues that caused concerns. Around the same time as the stock market decline in Jan, it was announced that the CEO had entered into some collar trades on GLP shares in 2012 & 2014 and the trades would be settled in Jan/Feb. A collar trade is a bearish trade, which left me pondering why was the CEO selling his shares. I also checked that when GLP sold a 34% stake in its China subsidiary in 2014, 3.7% was sold to members of the GLP employee team, which included the CEO. Thus, the CEO was selling shares in GLP and buying shares in the China subsidiary, which represents the majority of the company’s net asset value but GLP only has a 66% stake. The interests of the CEO and shareholders are not 100% aligned. 
However, a bigger concern was the fact that GLP seemed to be overpaying for its acquisitions. The table below shows the acquisitions by GLP for the 1-year period from Aug 2015 to Jul 2016, just before its Annual General Meeting (AGM).
GLP Acquisitions from Aug 2015 till Jul 2016
As you can see, some acquisitions were made at Price/Book (P/B) ratios above 2 times. In particular, China X-G Technology was bought at a price of USD21.9 million when its book value was only RMB5,700, representing a P/B ratio of over 25,000 times! 
GLP’s AGM on 29 Jul came at the right time. I took the opportunity to raise the question whether GLP was overpaying for acquisitions and what were the governance and controls in place to prevent overpaying. The CEO explained that the book values were historical values. The accounting rules in China required companies to depreciate the cost of land over time and the book value did not reflect the market value. In its due diligence, GLP had carried out third-party valuation surveys to determine the market value. The CEO further explained that there were independent teams within GLP to review and approve any acquisitions. Depending on the value of the acquisitions, approval might be required from the board. I accepted the explanation. In a subsequent acquisition announcement on 17 Aug in which the P/B ratio exceeded 2 times, the company added a statement to explain that the book value was based on historical cost. The statement read “The book value is based on People’s Republic of China’s Accounting Standards for Business Enterprises, which requires properties to be stated at historical depreciated cost. The consideration paid was based on recent third party appraisal of the value of the property, among other factors.”
The AGM was a good outcome. Besides getting answers for the key concern above, I also got to see the CEO for the first time. Throughout the AGM, he answered most of the questions, demonstrating a good knowledge of the operations of the company. For readers who were not present at the AGM, you can refer to the earnings call transcript for the recent 2Q2017 financial results, which he again answered most of the questions raised by analysts. 
Coming back to the issue of less than 100% alignment in interests between the CEO and shareholders, the issue boils down to this: how much are you prepared to pay for an intelligent CEO? After seeing his handling of the questions raised at the AGM and in earnings calls, the business strategy and directions of GLP, I am prepared to accept that he has direct interests in the China subsidiary outside of his GLP shareholdings. 
Post-AGM, I sold some GLP shares again in Oct and reduced my concentration to 16%, but it was not because of price fluctuations or any of the above-mentioned concerns. The purpose of the sale was to create some headroom for averaging down in the event of any general market crash. But after the recent rumours of a group of Chinese investors planning to take over the company, I bought back what I had sold, using CPF funds.
Like human relationships, there will always be an initial rocky phase where each party understands more of the other. My relationship with GLP has gone past this rocky phase and I look forward to participating in the long-term growth of this company. 
See related blog posts:

The GLP Story

It has been about a year since I started to build a large position in Global Logistic Properties (GLP). The company initially caught my attention when it bought back a large chunk of its shares. For the Financial Year ended Mar 2016, it spent about SGD…

The Minions (Millions) Mentality

Last week, I blogged about the minions in my portfolio, i.e. small, speculative positions in loss-making companies with reasonable chance of turning around. Although small, they have the potential to become multi-baggers. I also mentioned the advantages of minions, which are: (1) they serve as incubators for further investment should further evidence of the company turning around emerges and (2) “risk-free” positions to counter the high risks involved in investing in some companies and industries, such as the Oil & Gas industry. You can refer to Meet The Minions for more info.

However, the minion strategy goes beyond these 2 advantages. I discovered the mentality of investing like the rich. Because the amount invested in minions are relatively small, typically 1/3 the size of a typical investment in a profitable company, any price changes are fairly insignificant. In fact, as mentioned in my last post, the investment is mentally written off the moment they are purchased. Because of the relatively small size and also because they are mentally written off, there is no emotional attachment to the share price. Whether the price is down 10% or 100%, I could not care less. Contrast this with the largest holding in my portfolio which takes up 15% to 20% of my capital. When I first held such a large position, every 3-cent movement (equivalent to 1.5% price change) was enough to make me feel jittery. There is only 1 word to describe the lack of emotional attachment to share price: liberating.

Because I could not care whether the stock is down 100%, I also could not care whether the stock is up 100%, 200% or 400%! That was the case with MIT, which I originally bought at $0.066 and it went up to $0.285 for a 332% return on the purchase price. I decided that a 332% return was inadequate and held on for a 1000% return. Unfortunately, the price came back down to $0.165, with further drops likely after a series of disappointing results recently. Nevertheless, I had no regrets not cashing in on that multi-bagger and locking in a gain of 332% plus bragging rights for a 4-bagger.

One of my problems in investing is the inability to hold on to winners. This problem becomes more obvious as the stock approaches a 100% gain, which is the threshold for a multi-bagger and comes with bragging rights. Watching the stock price fluctuating just above and below the line is nerve-wrenching. On one occasion, I decided that I had enough of the jittery and sold for a 163% gain, only to watch the stock climb another 118%! In other words, I sold for double my purchase price, and the price doubled again after I sold! It was not a minion position and the amount of “lost profits” was staggering. The stock was Riverstone.

This is why I said that when there is no emotional attachment to the share price, the feeling is truly liberating. When there is nothing to anchor the share price, such as the 2-bagger threshold, the sky is the limit. The minions mindset also gives me a peek into how the rich treat their investments. Whenever there is a stock market crash, newspapers would tabulate how much money the billionaires in the world have lost. Yet, they never seem to want to sell their massive shareholdings in the companies they founded or owned. When the stock market recovers, these billionaires made much more money that they had lost in the crash. They are in the top 10/100 billionaire list for a reason: they never sell. Had they sold at the top of the stock market, they probably would not be in the list for much longer. The dividends from the stocks they own are way more than sufficient to fund their lifestyles. There is no need to sell the stocks to protect the value from dropping in a stock market crash. In constrast, retail investors like myself are always looking to protect the value of our investments. If someone were to tell me with 100% accuracy that tomorrow’s stock market would crash, I would sell a majority of my stocks. (Actually, if you read my blog, I do think that a crash is coming, and I’m 50% in cash. Thus, you can see that I am still a very long way from adopting the mentality of the rich).
The minions might be small and insignificant. But they have important lessons on how to make millions. I have certainly learnt a lot from them.

P.S. As I’ll be overseas next week, I would not be able to respond to your comments until I return. Appreciate your understanding.

Meet The Minions

I have a bunch of speculative shares which I affectionately call “the minions”. The characteristics of the minions are: small speculative positions in loss-making companies with reasonable chance of turning around. The idea behind the minions came abou…