My Investment Journey

[KnowThePast]

Congrats on your first year.
Most people that start a blog stop posting after a very short time which shows their lack of commitment. You have shown us all that you are committed to making this work. Well done and I think you'll get many helpful suggestions. Generally when the results don't match the anticipated outcome it will be either a faulty process or a poor application of the process. I'm unable to tell which it is in your case as my approach is mostly chart based. I'll bet you have an idea which it is.

I hope your analytical process for identifying "value" stocks is written down and you know the difference between which info is essential and what's desirable as you'll rarely find a stock that is perfect. The main benefit of a written process is consistency. I've noticed that many of your stock selections seem to be discretionary and perhaps reactive rather than proactive. Buying after bad news is reactive unless you've been waiting for a lower price and have assessed the bad news as only temporary and you take the opportunity to add.

An observation: stocks going down in price when the market is going up or sideways shows that there is something seriously wrong within the company as the longer term investors are slowly bailing out (LYL). Only a very small % of these unwanted companies will be "valuable". Can your analysis identify these gems or are you better off buying those companies that are above your "value" price but are going up.

I hope that you identify what needs to improve and have the courage and motivation to change either the process or your application of the process. All the best for the new FY and remember that one year may not be long enough for your edge to appear.

ps: I'm pleased to see you refer to the XAOAI rather than the XAO.

Thanks Peter,

I fully agree on the written down process. Even if you don't have a specific set of buy/sell rules, having a written down philosophy of your investment process help greatly.

I found that the best thing I get out of this forum is that it forces me to write things down. There were so many cases where I made up my mind to do somthing, start drafting a post about it, read what I wrote, and realise that I made a decision that I can't justify.

In his book, 'Thinking fast and slow, Daniel Kahneman talk about fast thinking, which is dominated by quick mental shortcuts, and slow thinking, which is logical, analytical, and very difficult for humans to do, especially for long periods. I feel that writing things down forces me to apply this slow thinking.

If anyone ever asks me for an unqualified and unproven advice, it will be to write down the justification for all your decisions in as much detail as possible.

I've been guilty over the last few months of not writing in as much detail as I should have. In part this was due to the fact that most of my decisions were automated, but I will still try and do better this year.

 

[KnowThePast]

And if it helps
I am not sure the comparison you make with the XAOI is very fair on you;
basically the XAO(AI or not) is "The banks", TLS and RIO/BHP
Ok not 100% but not that far;
if you compare your results, compare them to the pool of company you work with;And you will see that small cap or the market in Oz without these few big names was actually running at a loss last year.
Correct me if I am wrong as I did not check the final figures for EOFY;
There is currently a huge gap in perf between these monster stocks and the overall market;
If you add the fact that mining is the key player in term of numbers/capitalisation for the smaller fry, well you probably did not underperformed by much;
And if you learn something about it, might be your best investment ever: an educational fee..
PS: I lost a lot as well: all my T/A and value choices returned a fair value but I invested big for a crash in april (options) which did not occur;
the options lapsed, i lost 50k on those; And gains elsewhere did not make up so at a loss EOFY.
I got my lesson, not on the "educated bet" but on the tool to use.An expensive course.
If it helps to cheer you up...

Ha, I didn't realize it was all smalls, not just value ones.

I've started on my automated strategy with a purchase of BOL on 23/10/2014, which was juts about the highest point for XSO, which has subsequently lost 5.5%. Subtracting my high brokerage costs, I'm doing reasonably well in comparison.

In reality, given my capital allocation approach during the first two years, there's no right index to benchmark against. XAOAI seems most logical to me, as that's what I could do by investing in a general index fund.

Thanks for putting a positive spin on my results

Sorry to hear about your losses - I've heardsomeone say that the more money you lose, the quicker you learn.

 

[LionTurtle]

Good read!

Your portfolio seems pretty high risk? and all your stocks are around $1 or less each? is this related?

 

[KnowThePast]

Good read!

Your portfolio seems pretty high risk? and all your stocks are around $1 or less each? is this related?

Thanks LionTurtle.

All stocks around $1 - I've never noticed that, you are quite right. This wasn't intentional.

As for high risk, I have to disagree. While many of my individual stocks a higher risk than normal, on a portfolio level, I am almost too defensive. 50% of my capital is currently in cash, the rest spread out over 16 stocks.

Furthermore, value stocks that I tend to buy, tend to be lower risk as a group, especially in the long run.

Of course, it all depends on your definition of risk

 

[LionTurtle]

Thanks LionTurtle.

All stocks around $1 - I've never noticed that, you are quite right. This wasn't intentional.

As for high risk, I have to disagree. While many of my individual stocks a higher risk than normal, on a portfolio level, I am almost too defensive. 50% of my capital is currently in cash, the rest spread out over 16 stocks.

Furthermore, value stocks that I tend to buy, tend to be lower risk as a group, especially in the long run.

Of course, it all depends on your definition of risk

Oh true, I didn't really think about you cash, maybe in your monthly updates in the table you could add the cash, and the interest on that, might also get you passed the red for the last year?

And yeah I guess you have good risk management threw diversification

 

[KnowThePast]

Oh true, I didn't really think about you cash, maybe in your monthly updates in the table you could add the cash, and the interest on that, might also get you passed the red for the last year?

And yeah I guess you have good risk management threw diversification

I've thought about it, but decided against it. My interest is mainly to measure the return on capital I get from my investments, ie. I want to measure ability more so than performance.

Next year, once my capital is fully committed, this will stop being an issue.

This is certainly another factor, however, that makes it very difficult to put a precise figure on my return the first two years.

 

[KnowThePast]

Bought SBB, 16,618 @ $0.073.


This is an interesting one. A Chinese clothing company, recently floated, that is moving into owning its own stores and expanding. Which would normally be of no interest to me, but for the current situation.

As it stands, the company is now one of the cheapest companies on ASX by almost any metric. By while others in the same price bucket are normally severely distressed, this one produces excellent returns, and is set for growth in the future.

The official theory is that some minority owners who hold 190 million shares, got their shares out of the escrow and immediately started selling on market. Which is perfectly plausible. Those holders probably wanted to turn their investment into cash for some time, and listing was the means to do that. Even at these low prices they are making a great profit on their original investment. And if that is, in fact, the whole reason for the drop in price, this one is greatly undervalued.

There’s two main unknowns/risks with this one that everyone is worried about (just read hotcopper), and one that I’ll add myself:
1. Risk of fraud. From what I can tell, this is mainly a worry because it is a Chinese company and Chinese companies had a less than stellar history of accounting purity. From my research I did not uncover anything that raised definite red flags. It’s been hugely helpful to read posts from members here and HC, who have done a lot of the leg work in checking things out. Thank you. The tipping argument for me was that the CEO/Founder, who owns 55% of the company, has his shares in escrow for another 18 months. If fraud is going to be committed, now is an unlikely time.
2. Why are minority holders selling out? I don’t know. But insider buying is a much more important indicator than selling. While they could be selling due to knowledge of terrible secrets, quite possibly they just want to cash out at a profit. Given the number of shares they own and the size/liquidity of the company, it would have normally taken them years to unload it at more reasonable prices.
3. The amount of ramping this now receives on forums is noteworthy. There’d be few institutions buying and perhaps the retail holders are finding it difficult to absorb 190 million shares even with all the publicity. But I generally feel more comfortable when everyone thinks it’s hopeless.

The risk/reward here, however, I think is very good. The interesting thing about this situation, I find, is that there’s only a few factors to consider and you can assign a percentage chance to each. Risk of fraud, and risk of insider selling. And while both are very real risks that could totally wipe out my investment, I think the market is currently mispricing those odds, and to a great degree.

 

[galumay]

The risk/reward here, however, I think is very good.

Will be interesting to see, for once our views are very divergent, i found the risk to be overwhelming with little chance of reward. The more I looked into the company the more fishy it looked to me, the existing shareholders are bailing out enmasse at a price that is very cheap. Fact is they are bailing out at the first real opportunity due to the escrow on their holdings. This is exactly the opposite of what you would expect if the company is really a profitable concern going forward. Lots of hype and spin from the pump and dumpers on HC etc which is always a warning sign for me!

I suspect this is a train wreck coming, we have already seen considerable fraudulent auditing and accounting with various US listed Chinese companies and this may be one for us.

I very much hope I am wrong, KTP, and it turns out to be a missed opportunity for me and a multi bagger for you!

 

[agumby]

looks like your portfolio has received a boost today KTP after BYL updated the market on its position, nice jump in share price and hopefully a rise in dividend and guidance to go with it when they announce their results in august

 

[McLovin]

The official theory is that some minority owners who hold 190 million shares, got their shares out of the escrow and immediately started selling on market. Which is perfectly plausible. Those holders probably wanted to turn their investment into cash for some time, and listing was the means to do that. Even at these low prices they are making a great profit on their original investment. And if that is, in fact, the whole reason for the drop in price, this one is greatly undervalued.

Does that really seem plausible to you? That these investors would sell an asset for less than the cash at bank, on 2x earnings and with an implied dividend yield of 10-15% just because they couldn't possibly wait any longer to get out? IMO, that takes a fairly large leap of faith.

 

[skc]

Those holders probably wanted to turn their investment into cash for some time, and listing was the means to do that.

Have you worked out how long have these minority owners been holding?

Even at these low prices they are making a great profit on their original investment.

Does that really make sense? Why would they only look backwards on how much they paid? Shouldn't they look forward on what the share is worth and how much dividends would be paid etc? This company, according to the reports from the last few years, has been an absolute cash cow. They would have got their original investment back many times already. The financials are suggesting one thing, the behaviour of the holders are suggesting something completely different.

A single distressed holder selling out? It's more than plausible.
A group of minority holders cashing out after being locked in for a long time, and doing so in a rational manner? gain plausible.
Almost all holders selling aggressively in unison at the first available opportunity? You have to ask... what's the rush?

The risk/reward here, however, I think is very good. The interesting thing about this situation, I find, is that there’s only a few factors to consider and you can assign a percentage chance to each. Risk of fraud, and risk of insider selling. And while both are very real risks that could totally wipe out my investment, I think the market is currently mispricing those odds, and to a great degree.

I keep reading the risk/reward is very good on this. But I just don't see how. Given the uncertainty, one has to assume a 100% loss. If it is not a fraud and it goes back up towards the IPO price, you've made something like 3R. A 3:1 reward to risk is not particularly outstanding, imo.

You may choose to assign a probability of it being a fraud, but sizing a binary outcome on probability should only be done if you have the opportunity to do so over a large sample size (e.g. you are a fund buying distressed bond). It shouldn't be done on a single position.

Anyway, not saying I am definitely right, but I believe there is much more to this story. I will post a bit more on the SBB thread tonight for you to consider.

P.S. CFO just resigned. Ooops.

 

[McLovin]

P.S. CFO just resigned. Ooops.

Not that I want to start second guessing things, but "personal circumstances" I call BS. He's 28 and has been given a pretty plum job of being CFO of a, albeit, small publically listed company when his only real experience was in audit and assurance (employed by SBB's auditor no less).

Even more hilarious is he will stay with the company until the 4th of August to "assist with the transition". Is there some sort of all night supermarket that sells CFOs?

 

[KnowThePast]

Will be interesting to see, for once our views are very divergent, i found the risk to be overwhelming with little chance of reward.

Does that really seem plausible to you? That these investors would sell an asset for less than the cash at bank, on 2x earnings and with an implied dividend yield of 10-15% just because they couldn't possibly wait any longer to get out? IMO, that takes a fairly large leap of faith.

Have you worked out how long have these minority owners been holding?

Does that really make sense?

P.S. CFO just resigned. Ooops.

Not that I want to start second guessing things, but "personal circumstances" I call BS. He's 28 and has been given a pretty plum job of being CFO of a, albeit, small publically listed company when his only real experience was in audit and assurance (employed by SBB's auditor no less).

Even more hilarious is he will stay with the company until the 4th of August to "assist with the transition". Is there some sort of all night supermarket that sells CFOs?

Thanks everyone for your feedback on SBB. A big thank you in particular to McLovin and skc, your previous posts on the company have been extremely helpful.

And I have to say that I fully agree with everything you say, the odds of losing money is very high here. What I disagree with is a risk/reward ratio. SKC proposed 3/1. That would mean that as long as the company has greater than 33% chance of being legitimate, the odds are good. Plus margin of safety, of course.

A very good point that this only works when investing in a group of such companies - but that's exactly what I'm doing. Most of my portfolio is in stocks that are depressed for various reasons and I expect a high failure rate. Because I buy companies at such low prices, all of them have very good reasons for concern and most times I have to close my eyes to them and trust in the average outcome.

Keep in mind that my approach is different from most - I don't really pick individual companies. I invest in all the ones that meet my criteria, but I allow for manual overrides for situations where a fully automated strategy may lead me into trouble. SBB fits perfectly well in my buying criteria. And so, I ask myself - is this a situation where a manual override is necessary?

There are 3 things that are concerns with this stock:
1. Minority holders selling out at any price.
2. CFO resigning.
3. A bunch of small things that essentially add up to - It's Chinese, and there been frauds with Chinese companies before.

All 3 are warnings flags, but none add up to odds of 67% looking at hard data. That's where my manual override analysis stops - it's there to prevent overloading risk and obvious traps, nothing else.

The 3 things listed above happen all the time, and ideally I would have statistics from previous cases so that I could calculate odds properly. I don't, but I am confident the odds are in my favour.

While not part of my decision, for the discussions sake, I will go on further, in reverse order:
3 - yes, there's been Chinese companies committing fraud. I haven't seen anything that definitely proves it. Almost any company can be made to look suspicious with enough effort and I haven't seen anything beyond that. Assigning a base rate risk to it makes sense, I don't know what it is, but I suspect it is less than 10%. This is a standalone risk, however. 1, 2 and this should not be treated together - it doesn't make other factors more suspicious, as this company will always be Chinese. 1 & 2 together are more alarming than on their own, but not 3.

2. Happens all the time. Often followed by profit downgrades/writedowns. Occasionally by bankrupties. Most of the time, it's just a person moving on to another job.

1. Happens as well, but not often in these quantities and for an illiquid stock. There's many explanations, good and bad. I won't try to guess which one, but I will tell a tale of a friend of mine. He owns a private company, incidentally deals a lot with China. Very profitable. He wanted to sell it for a very long time, but finding buyers is difficult. He recently sold a small percentage of it (<10%) to another private investor, at a price roughly equals to a PE of 2. There was no market for his shares and he wanted/needed the money. He could either sell at that price or wait two years, but he made this "illogical" decision, because he had no choice.

His company is a little smaller than SBB and he spent the last 4 years trying to take it public on a major stock exchange. A major one, because he would likely get a higher valuation on it. Certain rules and regulations and his company's individual circumstances has made it a very long process. I am sure that once he lists, he would be happy to sell out at a very cheap price quickly, because he is sick and tired of doing the same thing for the last 20 years.

While this is obviously not the same scenario with SBB, it rhymes. So in my mind, I can very well see a scenario where holders sell out at such prices.

I don't think it is possible to fully trace who the real owners/benefitors of the minority holders are. SKC, did you find something? Looking forward to your upcoming post.

 

[KnowThePast]

looks like your portfolio has received a boost today KTP after BYL updated the market on its position, nice jump in share price and hopefully a rise in dividend and guidance to go with it when they announce their results in august

Yep, that was a brilliant result.

SDI, KKT, BYL and DTL have all announced good guidances this month.

BOL release results I was expecting.

Waiting for others, it is most certainly not going to be all good news.

 

[skc]

And I have to say that I fully agree with everything you say, the odds of losing money is very high here. What I disagree with is a risk/reward ratio. SKC proposed 3/1. That would mean that as long as the company has greater than 33% chance of being legitimate, the odds are good. Plus margin of safety, of course.

Your position sizing on SBB although small in absolute terms, is significantly larger than your other positions in risk terms. Putting $2k on a company that could go to zero vs putting $2k on a company that is in a cyclical downtrun is very different.

But I am sure $2k isn't life changing to you one way or the other so it's really not that big a deal. I am more interested in making sure that no one goes "back up the truck" (to borrow a term popular on HC) on this one thinking that they can generate 3:1 reward:risk.

I will respond to the specifics on SBB on the SBB thread.

P.S. Good stuff on BYL (a good calculated bet) and KKT (a well spotted unknown).

 

[KnowThePast]

Your position sizing on SBB although small in absolute terms, is significantly larger than your other positions in risk terms. Putting $2k on a company that could go to zero vs putting $2k on a company that is in a cyclical downtrun is very different.

But I am sure $2k isn't life changing to you one way or the other so it's really not that big a deal. I am more interested in making sure that no one goes "back up the truck" (to borrow a term popular on HC) on this one thinking that they can generate 3:1 reward:risk.

I will respond to the specifics on SBB on the SBB thread.

P.S. Good stuff on BYL (a good calculated bet) and KKT (a well spotted unknown).

Thanks skc,

My position on SBB is actually $1250, less than normal. I think I got position sizing/risk/reward ratio about right here.

And I agree with the disclaimer, this is a high risk bet that is not suitable for most people, I'd say.

 

[KnowThePast]

Year 2, month 1.



A big month. My portfolio value increased by $4,137, or 15.27%.

This brings my total return closer to the indexes, I now include two to measure against. XSOAI is where pretty much all of my holdings are, and that is a more relevant one to measure investment ability. XAOAI is what I could achieve without active management, and is an important benchmark as well.

A few of my holdings announced trading updates during the months, so far they have all been favourable. It's been very good to see some of my holdings improve from fundamental perspective. I now feel that some of these gains are justified, whereas previous price movements were just noise, based on no fundamental changes.

My once a month rule has hurt me once again. I wanted to top up CKF around $2, but by the time I got around to it, it went up to over $2.40. But no complaints, with that spare money I picked up SBB, and if things stay as are, it should provide a nice boost to my August performance.

I'll be on holidays through most of August and will try to minimize my time at the computer. Probably not a bad thing, considering the usual information overload during the reporting season.

 

[KnowThePast]

Bought BYI 1050 @ $1.24

Beyond International is an Australian-based producer of television content and distributor of television programs, feature films and home entertainment.

Revenue/EBIT for 2013 is divided as such: (I’ve roughly estimate the allocation of corporate expenses)
Production – 44.1% / 82.9%
Home Entertainment – 22.5% / 9.5%
Distribution – 22.1% / 14.4%
Digital Marketing – 11.3% / -6.4%

And so, despite make less than half of revenue, production segment is responsible for the majority of profit. And
this is the biggest concern, while they record a number of different programs, their profitability depends on landing a ‘hit’ that will run for many seasons. They have some at the moment, but how much certainty should one place on them being able to continue repeating it? Judging by the quality and originality of many of the TV shows, it doesn’t appear a daunting task, but that may be just my taste.

On the brighter side, some of their current shows are likely to be running for a few more seasons, giving some stability to earnings.

Directors own over a third of shares, there’s no debt, and the business seems to be well managed by all indicators.

This is not an easy decision, there’s plenty to be worried about with this business. Question is whether it is cheap enough to offset that. Numbers are:
PE ~ 9
EV/EBIT ~ 6.6
Price/Book ~ 1.69
Price/Sales ~ 0.70
Dividend yield ~ 6.9%.

It is cheap, but only if the profitability does not continue falling. And long term, this business has less certainty of earnings than most others.

Looking at their ROC and EBIT margin, they’ve been higher the last few years than before. The big question is whether the business now has a competitive edge that will see it maintain these kind of margins, or whether it will revert back to old averages. If it reverts, than the profitability will roughly halve. And, assuming that half of 2013 earnings is the long term profitability to be expected from this business, numbers become:

PE: 15
EV/EBIT: 10.86
Dividend yield: 3.45%

Of course, the current director estimate is for 15-20% drop in 2014 and then growth again in 2015, a very different outcome from 50% drop. But realistically, this is what I think the worst case scenario is for this business, assuming it remains in roughly its current state.

 

[galumay]

Bought BYI 1050 @ $1.24

I had these on my watch list for a while KTP, the thing that put me off was their reliance on Mythbusters - which I believe they have lost/or is not being continued - either way a big hit for them.

 

[KnowThePast]

I had these on my watch list for a while KTP, the thing that put me off was their reliance on Mythbusters - which I believe they have lost/or is not being continued - either way a big hit for them.

Agreed galumay, that's the biggest risk. Long term, the success of the business relies in great part on producing hits.

With the number of shows that they produce, I think they will find success with one sooner or later, and in the meantime, they have some other income to get them through tougher times.