Well, what an eventful month it has been to say the least.
This was something I’ve been thinking about writing and reflecting on for the last few days, but I could never really put my finger on what I should write about. Especially since there is that possibility where i may publish this.
Should I talk about my fund falling by almost forty percent before recovering somewhat?
That odd feeling of utter calmness, as I watch my net-worth fall by the equivalent of almost 2 years’ salary, and instead of feeling despair, i’m just sitting there wondering what should i be buying , when should i be buying and how aggressive should i be in buying?
Should I talk about the frantic drawing down my credit lines to about 40% – 50% of my equity size then to pour them into foreign equities for the first time? And the trepidation i felt wondering if i drew down too much, and if i’ve left enough buffers to prevent margin calls or forced selling?
Should I talk about some of the most amazing deals I have ever seen and bought?
AER Capital at USD10.5 (The best aircraft leasing company in the world at 1.5PE). Park Resorts & Hotel Inc at USD4 (The company holds the hotel portfolios of Hilton, with low leverage and 20% dividend yield at that price). BOC Aviation, Synchrony Capital, Credit Acceptance, Booking Holdings, Google, Facebook, Ulta Beauty, Dart Group etc ?
And the stress I felt buying them, as I could only do a quick analysis before buying them in order to not miss the opportunities.
Should i talk about the moment right after i first used my excess cash and initial credit lines, when prices decided to instantly dive down by another 50%?
Should i talk about those sleepless, restless nights, as i pour over the accounts, desperately trying to read thousands of pages, or at least 5 years worth of annual reports for each company and any accompanying research, whilst the Dow Jones nosedived another 12%, representing both an increasingly attractive opportunity and a chance this opportunity will no longer exist.
To be torn between the urge to study more and be prudent, whilst looking at what was already a wonderful deal become so much more incredible, that i wondered if i would ever see one like that again?
Should I talk about that moment when i was infected by the mood of a Malaysian Value Investing Whatsapp Group I co-founded, the inevitable outcome of discussing about COVID-19 with a group of people desperately trying to get our doctorate in epidemiology within a few days.
Should I talk about the 2 days, where i went from from emulating my heroes Warren Buffet, Charlie Munger etc, to desperately trying to divine the trading and timing secrets of Victor Niederhoffer (a two time bankrupt) and Jesse Livermore (who died bankrupt), constantly wondering how to time the exact bottom, in order to dive into it with nothing but my underpants, and make enough to retire after these few months?
To in those 2 days, momentarily turn back into a market addict, watching the markets every 30 minutes and reading market analysis done by idiots (tend to be market talking heads, journalists or economists), instead of tuning all the market noises out and focusing solely on the fundamentals.
And then going cold turkey from any exposure to market news, returning to my center, and focus on staying at that safe balance between greed and fear.
Should I talk about yesterday? When I found out that it was that precise moment, where I made the correct decisions to not to throw all caution to the wind, and jump in with nothing but my underwear left, was the absolute bottom? (My thesis was that margin and forced sales are over, and its time to buy, it appeared to be accurate).
And that if I had done so, i would likely not need to head back to the office come the end of the movement restriction, with so many of my high conviction purchases up by 200-300%.
Should I instead talk about how i find myself now writing this piece, to better reflect over the hectic and dramatic occurrences over the last few days and my actions during that period?
Well, I guess, I’ll talk about 3 things.
- COVID-19, The Market & This Recession
- A few companies I find compelling given current valuations.
- How i plan to move forward.
COVID-19, The Market & The Economy/Recession
Much has been said about COVID-19, and so I don’t intend to elaborate too much on it, as i imagine that is all everyone have been reading about the last few days.
However, I would just like to raise two points, especially to people comparing it to the Spanish Flu (1918-1920) which killed roughly 100 million, or the Bubonic Plague, Cholera, Black Death etc.
Antibiotics were only really discovered in 1929 (Penicillin – For Bacteria) and Antivirals (For Virus’s) was only properly understood in the 1980’s.
Such tools were not available previously. Humans had two options, either survive long enough for herd immunity to take root, or die.
Having said that, based on the statistics below, this virus is significantly worse than H1N1.
|R0 – Basic Reproduction Number*
*How infectious it is. The higher the number, the more infectious it is
(Depending on treatment available, age, blood type, and any preconditions)
By the end of H1N1, about 1.4 billion people were infected with 200-500 thousand deaths. Given the above numbers, it appears that COVID-19 will be much much worse.
And given the initial response, especially in countries like America, Europe, India, Pakistan, Africa etc, things could have definitely been much worse, especially if we handled it the way we handled H1N1, which really only affected Asia.
However, when thinking about the future, we need to do more than just extrapolate the “Now” into the future.
We must also account for natural feedbacks.
The more serious and drastic the situation, the more serious and drastic the response.
Couple that with the fact, we are much more connected these days when compared to 2009 due the sheer proliferation of the internet and the sheer size of our amygdala’s which is especially attuned to danger and threats, this resulted in the the entire world (other than a few countries) quickly taking very drastic actions.
As of today, more than 101 countries have closed their borders, or implemented movement restrictions / lockdowns.
1-27. 27 members states of EU
28. United States
36. Cape Verde
40. Costa Rice
46. El Salvador
67. New Zealand
80. Saudi Arabia
84. South Africa
86. Sri Lanka
91. Trinidad and Tobago
97. United Arab Emirates
More countries are expected to start closing borders, and existing countries with closed borders will extend those travel ban until May, especially now that Boris Johnson as well as Prince Charles are both victims to the disease.
I don’t think anybody expected governments to just shut down. Never in the history of the world have humanity just shut down like this.
Even during the Spanish Flu that killed 100 million, people still went on with their lives, albeit in extreme fear.
It also helps that it took China only 42 days to map the COVID-19 Genome (versus 3-4 months for H1N1), and that there is this incredible global urgency pushing the FDA to quickly approve testing etc.
Having said that, I think that China will be the first to come out with a vaccine, and whether the FDA gives approval for it, the rest of the world will be using that vaccine.
We will be entering a new age where people take medicine manufactured in China.
My own opinion is that peak infections should be within the next 2-4 weeks, with subsequent increases mainly due to more testing being done and updating the numbers.
Don’t take my word for it though, i have not passed my epidemiology exams yet.
During this period, as many would have noticed (you’d be one hell of an investor if you hadn’t), and repeated ad-nauseum throughout, the market has fallen by about 35-40% (depending on which market you mean), at a record pace not even seen during the 2008 Great Financial Recession.
Why is this so, there are probably as many opinions as they are words in this article, but i can’t help but take a stab at it too.
I think it is due to a confluence of various factors, all of which were operating in the same direction, at the same time, while feeding off each other, that caused, as what Charlie Munger would call, a Lollapallooza effect.
The factors are as below.
- COVID 19
- Oil Price crashing from Saudi Arabia going on a price war with Russia.
(This is the external view. I don’t think this is really the case.
I think this is more of Saudi Arabia and Russia taking the only logical route of crashing oil prices when demand are at an all time low to try and either bankrupt US’s oil production companies, or bring US to the bargaining table.
What’s the point in supporting prices, if it only results in subsidizing the US shale industry, which continues to pump increasingly larger amounts?
And what point is there in attempting to control oil prices, when the US is the biggest producer of oil in the world right now, and pumping however much they want?
It’s a lose-lose situation, and this is the most logical outcome.
- The Saudi’s pulling out money from the biggest hedge funds (Bridgewater, Citadel, 2 Sigma, AQR and Renaissance) in the world to fund themselves while prices are low.
And these hedge funds are all running risk parity strategy, which requires significant leverage, and the resulting sells off’s created dramatic moves across all asset classes; Gold, Equities, Bonds and Forex.
Imagine this, even Gold went down, and this was supposed to the safe hedge.
- Volcker rules, which were reenacted post 2008, that requires risk limits to be cut significantly when volatility increases.
This means, when you have a large position with a limit of say USD500mil, when volatility happens and you intend to prove your liquidity, the Volcker Rules now says your limit is USD100mil.
Instead of now proving liquidity, you now must reduce position size.
- Increased volatility means, that banks have to now increase lending rates to compensate for higher risks, from say Libor +35 to Libor +90 for Secured Treasury Repurchase Agreements (“Repo’s”)
(This is where people currently borrow through a process called sponsored Repo, in which they ask a large bank to act as a middleman, pairing their government bonds with money-market funds willing to lend cash.
The bank then guarantees that the parties will fulfill their obligations — repaying the cash or returning the securities.
Firms trading through the FICC contribute to a fund that would cover a borrower’s default. This is also known as Repo’s).
Most hedge funds rely on Overnight Repo’s for funding. Except this time there is was not enough cash, and with COVID-19 resulting in much of the world going risk off in terms of investments, and increasing demand for cash, liquidity instantly dried off.
- And here is where it gets interesting. Corporate borrowing also gets screwed up.
When a bank borrows money to a corporation in the US, due to regulations, the must hedge this by shorting the stock, or buying Credit Default Swap (CDS).
Now CDS’s are essentially insurance on the bonds of a company against default. And it is calculated taking into account the price of the Bond and volatility.
The price of a CDS’s also affect the price of a bond somewhat.
Now, when you had the situation 2-3 weeks ago, where volatility was so high that there was no offers in Singapore Bond Markets, you get very interesting scenarios when it comes to the prices of the CDS’s.
And as banks continually hedge by shorting the stock and buying CDS’s, it increases pressure on the market.
- As prices fall and sovereign funds around the world see this, they too start pulling out funds and running from the hills, cause even more pressure and more sell down.
- And as prices even fall further, the rich get hit first, as they are usually far more leveraged given their access to the “valuable” advice of private wealth consultants.
The sheer amounts of margin calls in Singapore Private Banking 2 weeks ago will boggle your mind. These forced selling and margin calls result in prices falling even faster.
- As all these is going on, the retailers themselves see prices falling, and catches the first red herring they see, COVID-19 and its increasing infection counts, they themselves start selling, and as prices fall further everyone is now getting margin called.
- And through this all, we have algorithm funds, which by some estimates contribute about 50-80% of the daily transaction volume in the stock market, giving rise to greater volatility.
And so, we now have the situation from 23 March 2020, where it hits the absolute bottom at 30% – 40% down. Whoever is supposed to get margin call and have their shares forced sold, have been called and their shares sold, or collateral provided, resulting in selling pressure being greatly diminished.
Before long, markets start shooting up as they see the sheer discounts available, and positive news become available, which indicated that the markets priced in a depression, while it appears that we are only in for a recession.
As a friend said,
“When I was stocking up on food due to COVID-19, it never struck me that, if I actually needed to eat this food, chances are I would not want to be in the market then”.
Me too bud, me too.
And so, comes the question, what does this mean for the economy. How would these shutdowns affect it?
Well, not good, at least for the short to mid (maybe) term.
But long term wise, we are right on track. This is a recession and not a depression.
One thing about the economy, is that significant parts of it are due to the emotional response of the participants on hand.
A prolonged depression/recession happens when sentiment becomes so bad, that people quite simply do not want to spend money, instead all they can think about is saving money or paying back debt (if the world consisted of people like me, we would be in for a permanent depression).
There are a few key things that are very different in the previous recessions and depressions.
- Governments (it really applies a lot more to reserve currency type countries) often did not really know how to handle it.Instead of printing money or jump starting the economy by taking on huge infrastructure projects, they decided to take on austerity measures, which destroys the sentiment even further, and may even make it a semi-permanent mode of mind, resulting in what is either a depression, or a balance sheet recession.
And for those that wanted to print money/give liquidity but couldn’t/shouldn’t, well hyperinflation till you die lah, but that’s another story.
- This time, the key fear of all recessions is simply not there anymore. There is quite simply, zero fear of bankruptcy in the markets now, as the governments around the world have simply agreed to cover some of your losses and provide all the liquidity needed to ensure your survival.
What does this all mean?
Well it means that short to mid-term, you are fine, and what you see in the markets now is pretty close to the deals of a decade (especially since there isn’t any right issue kind of deals, especially in the US, instead it’s a flat out loan).
It may go down another 10-15% from the economic numbers being worse than expected, but this is very close to the bottom.
But what does it really mean, long term wise in terms of inflation? Well that is a question for another day.
And is the current bailout/stimulus enough?
No idea, but whatever additional stimulus or bailout needed, it will be done. I do wonder a bit more about consumer credit’s and how it will be affected if people do not pull a salary for two weeks and instead lived off handouts, but we will see I guess.
The bigger question for me now is this, will this experience cauterize the experience of this generation to start saving money a lot more, and thus slowdown the recovery?
“Growth in consumer credit has stalled. In February, China’s short-term loans to households dropped 450.4 billion yuan ($64.5 billion), the biggest monthly decline since February 2007. Longer-term household loans, including mortgages, added just 37.1 billion yuan, the weakest growth since February 2012, according to data from Wind Co.
The coronavirus epidemic has caused “China’s first credit demand disruption in history,” said Richard Xu, a Morgan Stanley analyst. While the disruption is expected to be temporary, he said, its duration is uncertain and will depend on income growth. Still, China’s overall credit demand could start to rebound in the second quarter assuming the virus is contained, he added.
Zhang Yu, a property-firm employee in the central Chinese city of Zhengzhou, said he stopped taking taxis after he returned to last month work and walks instead.
Vanessa Hu, a 31-year-old brand manager for a condom maker, said she would splurge on several overseas trips a year. She sometimes took out short-term consumer loans offered by Chinese mobile payments giant Alipay to cover costs. Not anymore.
“My generation has never been through a major crisis before and most believed China’s economy will only keep growing,” she said.
She plans to skip all trips abroad this year and canceled her private Thai boxing and yoga classes. “Even when the coronavirus pandemic is over, I have no interest in overspending,” she said. “I want to save like crazy.”
It does appear that demand growth will not be as V shaped as we would like. I guess we’ll find out soon enough.
A few companies I find compelling given current valuations.
- Petron Malaysia Refining & Marketing Berhad – I wrote about it before and I don’t think I need to explain further.
- Magni-Tech Industries Berhad – (ROE excl Net Cash: 40%), (EV/Earnings: 3 times)
- Favelle Favco Berhad – (ROE excl Net Cash: 15%), (EV/Earnings: 2.3 times)
- Lii Hen Industries Berhad – (ROE excl Net Cash: 28%), (EV/Earnings: 3.2 times)
- Poh Huat Resources Holdings Berhad – (ROE excl Net Cash: 16%), (EV/Earnings: 3 times)
- Hong Leong Industries Berhad – (ROE excl Net Cash: 30%), (EV/Earnings: 3 times)
- Homeritz Corporation Berhad – (ROE excl Net Cash: 30%), (EV/Earnings: 2.5 times)
- Uchi Technologies Berhad – (ROE excl Net Cash: 250%), (EV/Earnings: 10.5 times)
These are companies who i think their earning power will not be diminished after this virus blows over, and have a strong history of paying out earnings, and have good/decent capital allocation abilities (ie no unnecessary ventures).
They are others I did not include in this list, such as RCECAP, ALLIANZ, AEONCR, TIMECOM, MUHIBBAH, LCTITAN, GKENT, PCHEM etc.
This is mainly because I don’t find them as attractive given the current opportunities in the market.
And as for TIMECOM, despite me thinking it has one of the best business models in Malaysia, given the current opportunities, its just too expensive.
At 25 times earnings (what I think its priced now after adjustments for tax), they are better businesses at better prices with better growth rates out there.
- Tianyun International Holdings Ltd
China based Processed food and jam maker. Listed in HK, 20% growth topline and bottomline for a long time. Net cash, 4.5PE, pays dividends.
- IGG Inc
Maker and owner of some of the most popular android games. Net cash, 5PE, pays dividends.
- Shanghai International Airport Co. Ltd.
Only airport in Shanghai. This company is net cash and grew topline, bottomline and traffic at 15-20% per annum for the last 3-4 years.
Very simple question. Right now china is building an unbelievable amount of goodwill with the rest of the world by giving aid during this COVID-19 crisis.
This country also turned a 71 Billion GDP in 1970 to 14.3 Trillion in 2019 (a 200X / 200,000%) gain in 49 years or a compounded growth rate of 11.5%.
It also happens to be packed full of Chinese who love to make money and ruled by a system engineered to create competent and preferably benevolent dictators.
10 – 20 years from now, do you think China will be much richer than today?
Do you think more people will be going to Shanghai?
Do you think similar growth rates can be maintained for passenger growth?
I think yes for all three.
Especially since the major shareholder is the Shanghai Government, who has every incentive to make sure traffic growth, revenue and profitability increases. Its very rare to have a Government who wants the same thing as you.
And this is Shanghai, some of the most expensive piece of land in the world, do you think you can find another big patch of land to build airport?
And if you do, do you think it will be more convenient than the current one?
I think not for both.
And what is the valuation given for this wonderful business that can grow 15% to 20% per annum comfortably for the next 10 years at minimum?
Enterprise Value/Earnings: 21 times. And its in Renminbi too, not Ringgit Malaysia.
Why do people (more accurately, why did i) even bother with KLSE.
This company literally forms the backbone of the internet and has more than 97% market share in every country except for China (China Wall), Japan (75% Market Share, Yahoo Japan 21%) and Korea (60% share Market Share, Naver 20%).
Maybe I’m stupid, but after studying it for quite a while, i noticed that in the last two they are taking a lot of initiatives to stop giving free organic results to businesses that survive mostly on Google.
Look at Tripadvisor, Trivago etc, their profit dropped like a rock in 2018 and 2019, why?
Google created google hotels, a better of tool to present paid ads, which make people much more inclined to click on paid ads instead of organic ads, instantly driving up cost for people who rely on google for their business.
This is also the backbone of the internet.
There is a saying I remembered.
To keep a loyal and great follower, you must spend gold and silver. But to find a great person and have them follow you, gold and silver is not enough.
It is far far far easier for Google to maintain their market position, than for you to displace it.
Right now Google has a market capitalization of USD750 billion, if someone gave me USD1 Trillion and asked me to replace Google, i wouldn’t even know where to start, and the money is not even close to being enough.
I may be a bit stupid for this, but honestly, for many businesses, give me enough money, and I know how to replace it.
It may not be profitable or as profitable as the previous one, but I think I can get very significant market share given enough money, but when it comes to Google, I honestly have no idea how to even go about.
The only idea I can think of is, somehow get a product as good as Google’s, and it needs to pervade every part of the internet.
And instead of having people pay you to put ads, you now pay people to put ads on your search engine, and you also pay people for using your search engine etc. And you pray to god, however much money you have is enough to burn google out and gain enough market share, to enable you to start charging.
I wonder if there is even enough liquid cash to in the world to make this happen.
And the price for this wonderful business that doubled earnings in 3 year, and grew 15% year on year for 5 years.
Enterprise Value/Earnings: 17 times.
Honestly, don’t even need to think.
10 years from now, I guarantee at minimum 80% of ad revenue will flow through Google and Facebook.
There is only one way to beat Google, which is too have people know your site name directly and visit it directly.
And Facebook is number 1 on this.
There is quite frankly no better aggregator of information than Facebook.
I don’t know how to make this any clearer.
You want a place to be able to keep updated with friends, family, news, articles, hobbies, whatever it is, as long as its not illegal or too damn controversial, this is it. You really only need just Facebook and Instagram.
Facebook is also the reason why new YouTuber’s are getting a lot less these days, with many of them operating directly on Facebook. They are now the Kings of Short Videos, with Youtube focusing on the long ones.
With the gigantic wealth of information of they have on your life (and the fact they use your Whatsapp chats to identify what your interested in at this moment in time), they can deliver perfectly targeted ads to you.
In South East Asian countries, ads on Facebook actually give way better returns than ads on Google. Literally the only scenario where Google loses on ads.
And the price of this great business that grew topline and bottom line at 20% per year for 5 years?
Enterprise Value/Profit: 17 times (excluding 5bil one off legal cost in 2019).
Don’t need think so much.
Honestly with this kind of prices for these kinds of businesses, I don’t know why we even need to bother with KLSE markets. Our glove-makers cost 3 times more than Facebook or Google, and the business is nowhere near as good, look at Hartalega’s (amazing management) profit margin go down every year.
- Berkshire Hathaway
Warren Buffet’s company,
Enterprise Value (exclude investment portfolio)/Earnings: 10-13 times.
Why bother with KLSE really.
How I plan to move forward
Last year, I decided to slowly start the process of moving most of my portfolio to foreign markets over time.
I estimated that I could move maybe 20-25% to foreign markets in 2020, by unwinding some of the positions that I expected to go up (joke of the year), and moving in all new cash to it directly.
However, the events that transpired in the last month, resulted in me drawing down credit lines and additional cash very quickly and pouring it all into the foreign markets.
Today, it is currently 35% plus of my portfolio and growing quite swiftly I would think.
Malaysia as a country, that will forever be beholden to religious, racial and royal considerations, which will slow its economic growth.
Nice place to live, cheap cost of living if you’re earning foreign currency, but not a good place to make or invest money.
I want to invest my money, in a place where it is packed with people who are very focused on making money, pragmatic, logical and very hardworking in this regard.
This means China, Taiwan, Hong Kong (mostly China companies that are listed in HK), Vietnam, Korea, Japan and Singapore.
And in terms of currency, i do not see any future increase in demand for our currencies, nor do the size of our debt give me any comfort (we are not reserve currency of the world, so any increase in debt is not a good thing).
Long term wise, I would rather keep my money in Singaporean Dollars.
Singapore runs a fiscal surplus every year except in special situations and have more than USD 1 trillion in reserves. To overcome this COVID-19 recession, they merely needed to dip a little into that reserves.
Malaysia on the other hand, probably need to increase government debt by at least 15%.
And in terms of investment, I think I’m going to be much pickier about the companies I invest in.
Coming into this recession, I had about 15% of my portfolio in net-nets etc. They did not hold up in price, nor was I inclined to top up given the other opportunities on hand, which speaks volumes.
I would have rather they had been cash.
Its probably time for me to get a “You’re not a Liquidator” tattoo, to really carve this into my brain.
There is little point in buying net-nets, especially property companies (where you will likely get privatized at far below RNAV or even Net Asset), unless you know you can hold at least 30-50% of the votes and get your own Board of Director seat, and liquidate / financialize the company.
Well, as I said earlier, i had a real struggle with this, trying desperately to time the bottom for a grand total of 2 days before coming to my senses.
In the end, I managed to calm my head down by remembering that knowing where markets will go to, is important, but unknowable.
The goal is to know what is important and knowable, and to work on that.
Then, I proceeded to take Charlie Munger’s advice and invert.
I decided to find out, what would I regret 3 years from now about these few weeks / months, and to avoid doing that.
What i know is this, 3 years from now, i will regret 3 things.
- I did not buy enough or aggressively enough.
- I bought too much, over-leveraged and ruined myself.
- I was extremely wrong about my analysis, that even such depressed prices were not enough to prevent a permanent loss of capital.
I’ll just try and avoid all 3.
And if this recession turns out to be a depression, and it lasted for 3 years along with the virus.
Well, I don’t think cash is what I wish I was holding, it would be a basement full of food.
And so, I’ll buy a bit more canned food or dried food than usual each time, sharpen that big parang, and exercise more so that I’m not useless and can defend myself, my family and my food during a zombie apocalypse.
Probably should find a way to buy a gun if I see even a hint of a semi-zombie.
I kid, i kid.
I paraphrased the title of this piece, with the title of a book from John Brooks.
It was called “Once in Golconda” and was about the rise and fall of the 1930 Great Depression.
John Brooks also happened to have written “Business Adventures”, which Warren Buffet and Bill Gates called the best business books they have ever read.
Its pretty good, here is a link to a copy.
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