Wednesday, December 31, 2008

December 2008 Portfolio Review and FY 2008 Year-End Summary

December 2008 was a very quiet month in terms of corporate activity as none of my companies announced any corporate developments or updates. Of course, the quiet was balanced by the continued turmoil in the financial markets and economy, which has threatened to blow up into the biggest financial crisis since the Great Depression. Japan, Germany, USA, Hong Kong and Singapore are now officially in recession, and many countries may be set to follow. Even giants like India and China are likely to report muted growth for 2009, way below originally projected targets, as the global financial maelstrom blows all over the world.

In terms of bailouts, the latest is by way of a capital injection of about US$5 billion into GMAC to ensure the auto-maker has enough liquidity to operate at least for the next 3 months. The term “bailout” is probably the most popular word for 2008 and has become almost synonymous with the current recession and economic malaise. Rumours are rife that the next wave of companies to ask for bailouts may be real estate companies, as sales of homes fall to new lows amidst the worst housing crisis USA has experienced since the 1930’s.

Amazingly, we have not even started talking about potential collapses of even more banks, as the global financial landscape is irreversibly changed. With more writedowns expected for credit card and student loans in the coming months, perhaps the crisis is still far from over ? With massive liquidity injections from the Fed and other central banks around the world, this has helped to prop up ailing sections of the economy for now. Whether these measures are sufficient to provide a fiscal boost remain to be seen. In Singapore, the Government has plans to boost infrastructure and construction spending by bringing forward deferred projects so as to ensure constant demand, and to ensure unemployment does not surge too high.

It’s been one piece of bad news after another, to add to the almost endless barrage of about 10 consecutive months of terrible, pessimistic news. Just flip open the nearest newspaper and be greeted by more doom and gloom, with doomsayers predicting anything from a total collapse in the economy to dire predictions of a Second Great Depression. So it’s no wonder that my general mood is that of extreme pessimism as I too have been affected by all this doom and gloom. Of course, this is the perfect environment to be purchasing shares of solid companies and part of my brain knows this, therefore I am trying to detach my objective brain from my emotional one. It’s not easy but in order to prosper in 4 to 5 years time, it has to be done.

The only significant update was Ezra’s AGM which I had already summarized in a previous post. Other than this, there is almost nothing to report for each of my companies. Therefore, I will not be doing a summary by company until the next month-end review in January 2009, as Ezra, FSL Trust and Suntec REIT should be releasing their results in the following month.

Portfolio Comments – December 2008

December 2008 saw a period of relative calm and stability in stock markets, which were devoid of wild swings and volatile periods. My portfolio improved from a total loss % of 34.5% as at end-November 2008 to 25.0% as at end-December 2008. Part of this loss was offset by additional dividend from Boustead.

There were no further purchases made this month either as market prices of the companies I am eyeing did not fall to sufficiently attractive levels to warrant purchases. I am also building up more cash reserves in view of the deepening recession and the threat of job cuts, pay freezes and pay cuts.

Portfolio Review for Financial Year 2008

During the entire year of 2008, I had made no sales of shares at all. Since Mr. Market was content to go on a manic-depressive roller-coaster ride, it made more sense to purchase from him rather than sell to him. A summary of purchases made for 2008 are as follows:-

i) January 2008 – Purchase of First Ship Lease Trust
ii) July 2008 – Purchase of more Pacific Andes
iii) September 2008 – Purchase of more China Fishery, also purchased Tat Hong
iv) October 2008 – Purchases of more Ezra, Swiber, China Fishery, Boustead and Tat Hong

A total of S$67.5K was pumped in to make the following purchases, with the effect of increasing my cost from S$58.3K (as at end-December 2007) to S$125.8K (as at end-December 2008). As a result of the global financial crisis causing severe depression of market prices, the year ended with a -33.5% unrealized loss to portfolio. This was partially offset by total cumulative dividend gains of S$10.7K, which resulted in total unrealized loss of -25%.

During 2008, total dividends received amounted to about S$6.5K. Taking this amount as a % of total cost as at year-end 2008, the dividend yield is approximately 5.16%, which arguably is still much better than leaving your money in a bank account or in fixed deposits ! My expectations for dividends in 2009 is somewhat tempered though, as companies are very likely to retain more cash as a result of the global financial crisis. Hence, I have factored in a 50% reduction in dividends received, for a total yield of about 2.58% for 2009 (still much better than a bank account !). Moving forward, dividends are expected to continue to form a critical role in providing passive income and for improving the overall performance of my portfolio.

My role as an investor is to continue to seek investments in solid companies at a margin of safety, for the long-term; and I will adhere to my value investing philosophy as we move into a possibly even more turbulent 2009.

My next portfolio review will be on Friday, January 30, 2009 after market close.

Wishing all readers a very Happy New Year and may 2009 bring good health, good fortune and greater prosperity !

35 comments:

MakeTraffic said...

Happy New year, MW!

May 2009 be a better year for us all. Thanks for your posts again. It has been enriching. Keep it up.

Cheers to good health and prosperity!

Maketraffic

Ricky said...

Yea, always a pleasure to read your posts. Keep writing, keep learning and keep investing! :)
Happy New Year!

Khiat Han Hwee Adrian said...

Hi MW,

Thanks for your postings. Look forward learning more from you in 2009.

Happy New Year...

Akatsuki said...

Wishing you a Happy and BULLISH new year 2009 :)

PanzerGrenadier said...

Dear Musicwhiz

A return of -25% has beaten the STI which returned -49% for 2008 almost double! You have done very well considering most portfolios are bleeding -50% on average! ;-)

May your investments huat for 2009 and more importantly near the time of your retirement or when you want to cash out.

Be well and prosper.

Anonymous said...

PG,

I am referring to the post above. It is actually very inaccurate to say that the return is -25% versus -49% for STI.

If MW really want to compare, then it should be the price of HIS INDIVIDUAL STOCKS at the start of the year versus their current pricing now. You can see that stocks like Swiber had tanked almost 80%-85% last year.

I am not picking on anything, just wanted everybody to be on the same page if you want to compare apples to apples.

Cheers,
ZZ

Anonymous said...

not sure if we will arrived at anything different in that way... from what is stated, swiber will be down 80 to 85%... the entry price make the real different a person can make, and if you suffer lesser than the index at any given period, you should have done better.

Anonymous said...

PG,

STI was 1,999.14 on Dec 9 2004, the earliest date which a stock was bought in his current portfolio. I would use that number as the baseline if we were to compare against the -25% figure. Don't you think so?

If we do that, then the return for STI is -12%. "Almost double" should be in the opposite direction.

Anonymous said...

Hi MusicWhiz,

Looking at your calculations for your portfolio's gains/ losses, do you use your dividends received for additional purchases? or keep them in cash in a separate account?

PanzerGrenadier said...

ZZ January 3, 2009 10:49 AM

You have a point, i.e. you've got your facts right, but the main point is whether MW feels he has beaten/not beaten his own benchmarks.

Would be interested to know how you track your own portfolio? :)

For me, my tracking of portfolio gains/losses is using average cost but point of purchase is using the earliest, so my own worksheet is not 100% accurate, neither do I make claims that it is. The point is, I get some idea of whether I'm doing okay, not okay etc.

Sometimes, we can get too carried away by being too exact, i.e. miss the forest for the trees. It's fine to point out flaws in computation methods etc, but I'm really not sure what is the value-add except to show that you have a meticulous eye and are very accurate about information.

Beyond that, do you share how you yourself perform or are you even into stocks? :-)

musicwhiz said...

Hello Maketraffic,

Thanks for visiting too and have a Happy New Year and a great 2009 !

Cheers,
Musicwhiz

musicwhiz said...

Hi Ricky,

Happy New Year and best wishes to you for 2009 as well !

Regards,
Musicwhiz

musicwhiz said...

Hi Adrian Khiat,

Thanks so much for visiting and your well-wishes. Have a Happy New Year yourself !

Regards,
Musicwhiz

musicwhiz said...

Hi Akatsuki,

Thanks, same to you too ! May you find many more Market Gems. :)

Cheers,
Musicwhiz

musicwhiz said...

Hi Panzer and to ZZ and others who commented on my portfolio,

There is actually no reasonable way in which I can benchmark my portfolio performance to the STI, as the measures are different and I have added positions throughout the year 2008. Even if I were to take a very rough gauge of performance, I would conclude that I have severely under-performed the index for 2008. However, this does not really matter to me as for 2007 I out-performed the index, so it's somewhat of a reversion to the mean.

What's more important to me is whether I can generate a decent return on my investment over a long period of time (i.e. 5 to 10 years), and since my portfolio is only slightly more than 1.5 years old (in terms of when I first started value investing), this is too short a time horizon to conclude anything.

My aim, as always, is to invest in well-run companies which will continue to grow their business 3-5 years down the road. The portfolio will naturally be able to do well if this is achieved by the companies I own.

Thanks for all your contributions.

Cheers,
Musicwhiz

musicwhiz said...

Hi Anonymous @ Jan 5,

For dividends, what I do is that I channel them to a savings account with higher interest rates than a POSB account, to act as emergency fund as well as opportunity fund. For emergency fund, I keep 6 months of expenses as a buffer in case contingencies or emergencies occur.

For opportunity fund, this amount can be utilized anytime to purchase shares of companies when I spot good valuations. Thus, I would say yes, I do reinvest the dividends over time eventually when I see good opportunities to do so. I do NOT circulate the dividend income into my normal spending bank account.

Regards,
Musicwhiz

Anonymous said...

Hi Musicwhiz,

Considering that you do reinvest your dividends in the purchase of your stocks, shouldn't your unrealized gain/ loss be the final figure?

Since the purchase price is updated accordingly, and should not add in the dividends again as realized gains?

musicwhiz said...

Hi,

Nope, I do not offset the dividend received against my purchase price, but instead consolidate it as a separate "realized gains" portion.

Example if I purchased 10,000 of Company X at $1.00 and got dividend of $0.05, this means I still state my cost as S$10,000. Let's say market price is now $0.97, this means my unrealized loss is $300 while my realized gain is $500. My purchase price remains at $1.00 (I did NOT reduce it to $0.95 even though I received the dividend). By right, if I reflect the dividend received, then cost should be $0.95 (10,000 shares); and at a market price of $0.97, net total gain (realized + unrealized) is $200 ($500 dividend less $300 unrealized loss).

Hope this explains it more clearly.

Regards,
Musicwhiz

Anonymous said...

Hi Musicwhiz,

What I meant was, say you use $970 of your dividends to buy 1000 more Company X shares at $0.97

So your purchase price would be ($10,000+$970)/(10,000+1,000)=$0.9972

In this case, since the purchase price has been updated, should we still add in the dividends as realized gains?

musicwhiz said...

Hi,

Assuming I had used the dividend to purchase more shares, and the market price remains constant (at $0.97), my net position should remain the same (i.e. still a total net gain of $300 as per my previous example).

So if you take the new average cost of $0.9972 and minus market price of $0.97, multiplied by 11,000 shares [11,000 X ($0.9972-$0.97)], I still get an unrealized loss of $299.2 (about $300 due to rounding error). Thus, I should still count the dividend received of $500 to ensure my total net gain remains at $200.

So my new purchase cost will be $0.9972 yes, but this is because I did not use $0.95 as my adjusted cost after receiving dividend. If I took that into account, my new adjusted cost by buying one more lot at $0.97 will be $0.952 instead ($970 + $9,500 divided by 11,000 shares). Hence, my net gain is still [11,000 X ($0.97-$0.952)] = $200 (adjusted for rounding error).

I feel it's merely a matter of how I present the information on the portfolio, but the realized gains from dividends represent a return ON investment (I do not count it as a return OF investment); thus I still count it in separately.

Regards,
Musicwhiz

Anonymous said...

"There were no further purchases made this month either as market prices of the companies I am eyeing did not fall to sufficiently attractive levels to warrant purchases."

Why then were they attractive when the prices were higher?

musicwhiz said...

Hi Anonymous,

You'll have to be more specific on your question, I don't really understand what you are trying to ask.

The companies I am eyeing are companies I already own. My policy is not to average up on my purchases, thus if the price is higher than my purchase price I will do nothing, as I would prefer to preserve my margin of safety.

As for the companies being attractive, you may also wish to know that I am referring to the businesses itself, and not the share price (in case there was any confusion).

Regards,
Musicwhiz

Anonymous said...

For example Suntec REIT, Swiber, Pacific Andes, China Fishery, FSLT, Tat Hong.

You had bought them at higher prices.

Why you say "did not fall to sufficiently attractive levels to warrant purchases"??

musicwhiz said...

Hi Anonymous,

There are 2 aspects to making further purchases to average down my costs even though market prices are significantly lower than my original purchase price.

1) Cash Holdings - I will always leave some cash holdings as emergency fund and will not sink everything into purchasing shares. Thus, I am constrained by available funds I have to make more purchases to average down my cost.

2) Prospects of the company in question in light of current conditions - I will assess the companies in my portfolio to see which are the most suitable to averaging down based on their debt level, prospects and growth plans. I will thus make the most efficient capital allocation according to my assessment.

As market prices of the companies I own did not fall to levels seen in Oct 2008, and because I was constrained with cash flow, I did not attempt to make further purchases.

Hope this explains more clearly.

Regards,
Musicwhiz

Anonymous said...

Do you think you are committing the investing sin of anchoring? On Oct prices that is.

You also seem to emphasize a great deal on growth or growth prospect, and by comparison, lesser on the margin of safety as witnessed by the debt levels that you had tolerated. A value investor would prefer to do just the opposite.

I apologize if I sounded harsh but please do not take my words as criticism and start to be defensive. I really hope that your blog represents a true value investor because that's the title and the intro of this blog. You are on the right direction I must say.

On a value investor scale of 1-10, you have already attained 3.5...so please continue this journey and I am sure you will be greatly rewarded. Keep learning and keep your mind open, even to an anonymous because you never know he has to offer.

musicwhiz said...

Hmm, interesting comments I get here, whenever I post my portfolio review. Sin of anchoring ? Yes I believe most of us do, and I cannot say I am free from this sin. However, to go into detail on why I did not choose to average down will take another separate post, so I won't go into that. I will give a very simple example to illustrate: Suppose I am vested at 20,000 shares of $0.60 each. If the market price was $0.50, this means I would have to purchase another 20,000 to average down my cost to $0.55, which is not even 10% below my purchase price. In addition, I will also have to spend S$10,000 and funds may be constrained, therefore I will choose not to do anything and hold instead. Only when prices are far below my original purchase price will I do something (e.g. Tat Hong @ $1.055 and then @$0.375). In the case of PAH and CFG, debt levels and uncertainty of re-financing of short term debt led me to hold back on investing further, if you really wish to know the reasons.

As an investor, I know I had "tolerated" too high debt levels in the companies I invested back in 2005 and 2006, without much regard to FCF. This I admit and it is one of the mistakes I seek to correct for future investment decisions. That said, please note that for companies like PAH and CFG with high debt levels, there is still good prospects for growth and CFG has a net margin of >20% as well, so please look at other qualitative factors as well.

It's not a matter of being defensive, but I have to explain some of the decisions I made and why I made them, as well as the mistakes I made so far. It would be easier to explain to you face to face instead of typing in a comments box (so tedious), but I choose to do so to clarify my decisions and to help myself learn from my errors too.

Frankly, I am not sure you are qualified to "rate" value investors, unless you profess to be one yourself (and a very excellent one at that). Every investor has their own set of criteria and knowledge base for investing in companies, but this does not make one "better" than another. If you purely use portfolio results alone, then I am afraid the time horizon is too short to make any meaningful conclusions, plus market prices are not always the best way to judge if a business is worth investing in for the long term.

Let me ask you this: do you judge whether an investor is "good" or "bad" based on growth in the book value of the companies he owns (as WB does) or the market value (as everyone else does) ? Just a thought.

Cheers,
Musicwhiz

Anonymous said...

the anonymous rate MW low and yet caution MW not to brush off anonymous remarks ?! sense? sorry maybe account not setup!

the q from MW is easier - WB is good, the rest bad. this judgement offensive, MW?

Anonymous said...

You probably interpreted the scale as a performance scale when I actually referred to it as a time scale, a journey scale.

As for your question, my answer is both and yet neither. A good investor gets more cash than he had put in. A bad investor gets lesser. How much more cash an investor eventually gets depends on the intrinsic value and the price he paid. WB taught his shareholders "intrinsic value as the discounted value of the cash that can be taken out of a business during its remaining life." I view the phrase "taken out" very strongly. Do not confuse cash flow out of the business with the free cash flow generated by the business, unless the investor has control over that business.

It is true that WB reports his result as "increase in per share book value". He also said, "We regularly report our per-share book value, an easily calculable number, though one of limited use." It has limited use but not totally useless.

Lastly, my apologies to everyone here if my comments upset you and your readers. We are all in this journey. Some gave up half way when they encountered the rough patches. I am glad to see you continue on.

Anonymous said...

arithmetically, if we assume 43 years as 10, i.e. for wb investment journey since 1965, every 4.3 years should score 1 point. musicwhiz investment started 2004, 5 years give and take will earn him at most 2 points, 3.5 scale has a very high rating indeed!

if we view wb core holdings, his 'taken out' has little meaning other than increasing his net worth, as he don't sell those shares and nothing was taken out. it takes a genius like him to know what intrinsic value really mean and which year in the future is the remaining life for that biz..

enjoy your thoughts anonymous

musicwhiz said...

Hi Anonymous,

Guess it would be easier for everyone if you just left a simple nick, instead of everyone being "Anonymous". It gets hard to reply specifically to comments.

Thanks for your reminder of taking out cash versus just the concept of free cash flow in an enterprise.

Cheers,

Musicwhiz

musicwhiz said...

Hi Anonymous,

I really don't see investing as a numerical scale. As long as one gets a decent return, that has achieved the objective of investing. No point gunning for superior or superlative performance when it is so hard to achieve since it might be a little pompous to assume one can invest even half as well as WB.

Cheers,
Musicwhiz

ucypmas said...

MW, just a comment by you on WB's use of book value. He often deems it to be inaccurate, but he has this to say about his use of Berkshire's book value

"Inadequate though they are in telling the story, we give you Berkshire's book-value figures because today they serve as a rough, albeit significantly understated, tracking measure of Berkshire's intrinsic value. In other words, the percentage change in book value in any given year is likely to be reasonably close to that year's change in intrinsic value"

As the various businesses return cash to the holding company, the cash retained and deployed appropriately, will result in a growth in net worth on a year-by-year basis.

musicwhiz said...

Hi ucypmas,

Thanks for the info !

Regards,
Musicwhiz

Anonymous said...

"Frankly, I am not sure you are qualified to "rate" value investors, unless you profess to be one yourself (and a very excellent one at that). Every investor has their own set of criteria and knowledge base for investing in companies, but this does not make one "better" than another." - MusicWhiz.

For one thing, Debt was never rated highly by ANY value investors. But you took highly levered companies under your wings. Are you a value investor?

musicwhiz said...

Hi Anonymous (why can't you guys leave a nick at least ?),

Debt is a necessary evil for a company to grow, and I can justify my purchases over the years with the leverage that my companies' Balance Sheets are carrying.

As it is, the credit crunch has highlighted new ways for me to look at debt, and to balance this against the potential growth of a company and its generation of FCF is a great challenge.

I am still learning, and never said I was perfect in practising value investing techniques. Acceptance of mistakes is part and parcel of investing, wouldn't you agree ?

Cheers,
Musicwhiz