When the going gets tough, the tough get....going ?

Investors who have stayed with my blog for the entire duration of the bear market (yes, 16 months so far) and have been invested fully throughout will probably be wondering if there is ever any light at the end of the tunnel ! The fact is that market conditions are always dictated by Mr. Market and he follows economic cycles to determine his mood swings, and whether he decides to pay a high price or a very low price for a business. As investors, our job is to evaluate the underlying business and not pay too high a price for it, in order to maintain margin of safety. The bear market and sharp recession has challenged my notion of margin of safety and also afforded me some insights into my investment choices, some of which I would admit to be mistakes which could have been either avoided or mitigated. When the going gets tough, frankly usually the tough get going (i.e. exit the market). But I am not about to succumb to Mr. Market's manic mood swings, even though the psychological effects of his swath of destruction have pummelled many an investor (including myself). A back to basics analysis would tell one if holding on and averaging down is wise; or if one should just cut loss and re-deploy the funds.

A more obvious boo-boo made by yours truly was to purchase companies which leveraged heavily for fast growth. Evidently, this strategy worked well during times of economic expansion and with the availability of easy credit. However, with a severe credit crunch under way and banks being unwilling to lend, these highly leveraged companies became prime candidates for implosion, due to their inability to refinance their short-term debt and also the cash flow burden which they had to bear in the meantime. Companies like Ezra, China Fishery and Swiber which geared up to expand found that the going was very tough over the last 6 months, to the extent that I did perspire quite a bit and went through a few sleepless nights wondering if they could pull through the crisis. Though Ezra and Swiber employed sale and leasebacks, there's no argument that operating lease expenses would still represent a major cash flow drain, while they still have bank loans to service and refinance. China Fishery had to issue senior notes at about 9.25% interest rate (extremely high), and though they are due in 2013, the huge interest expense is eating up valuable cash at an alarming rate. If not for the fact that China Fishery had good net margins and a lot of their debt is collateralized using their own vessels, plants and inventories, I suspect they may face financial problems similar to the ones recently faced by S-Shares.

So it's apparent from the above that my choice of companies with such heavy leverage has been less than exemplary, and my original focus on value investing may have been viewed by some skeptics as little more than a distorted version of Peter Lynch's "Growth Investing"; albeit with high risk ! Since the job of the value investor is to minimize risk in his investments by requiring a good understanding of a business with little or no debt, I am somewhat guilty of violating this rule ! But we live and learn and it's not the end of the world because of these errors of judgement; I take it in stride and will make sure I am more wary of such complex financing schemes and such high leverage when evaluating future potential companies.

With the current bear market reaching new lows in early March 2009, I did take the opportunity to re-balance my portfolio by purchasing more of Tat Hong and Boustead; as they are more established and cash-rich. This has boosted my stake in both companies to levels above that which I own in Ezra and Swiber; and this acts as a buffer in case Ezra and Swiber encounter any critical problems in managing their debt. As for China Fishery, the recently declared bonus issue of 1 for 10 shares will allow me to average down my cost at no extra cash outlay. Just for info, Tat Hong was purchased on March 3, 2009 at 53 cents and Boustead was purchased on March 9, 2009 at 46.5 cents. This has reduced my cost in Tat Hong and Boustead to 68 cents and 55 cents respectively, and will be updated in my month-end portfolio review.

This bear market and unprecendented crisis has taught me a lot about companies, how they operate, risks and valuations. It's a very enriching learning experience though it will probably end up being an expensive one if anything untoward happens to my companies (touch wood !). As we are not out of the woods yet, there is still some potential for trouble though the probability has been greatly reduced since October 2008.

There will be more of such candid admissions in the months to come, and sometimes I feel I could compile my own "mistakes checklist". For readers out there, please feel free to criticize (constructively, please) and give advice. We are all learning as we go along.