Posted by: donmihaihai | December 30, 2007

Reflections on 2007

This is the 3rd year where I started to pen down what I learn, changes in process and most importantly, mistake made. Looking around, I have lost the previous 2 entries.. Writing them down is important but keeping them and making sure that I am able to access to them as and when is important too? Hmm…..

 The focus point for past 2 years were more on mistakes committed, lesser on changes in process and nothing in trying to use crystal ball. It is most likely to be of the same way but changes in process or evolution in process will get more attention. Still unable to figure out how to use a crystal ball so not much attention will be pay on this.

Mistake
2007 is a super bull market or at least if we are looking at local market. Even after the increase volatility after Aug, investor should do well, which mean in the environment of 2007, it is very hard to lose money. Looking backward, I did not commit any operational mistake like holding on to shares that I don’t want or delay in selling. On the analyzing side, there is no key concern as of now but will it stay the same? Time is the important factor as time goes by, mistake will show up.

So let me introduce you the mistake of yesteryear, one what I almost wanted to write it down during last year reflection, I did not, hoping that I was still right but I just can’t hide it anymore in 2007, that mistake was selling Food Empire in 2H of 2005. The easy part 1st. Food Empire was purchased in 1H2002 at price of about $0.19 and sold in 2H2005 at price of about $0.29. Netting a return of 64% which includes dividends in about 3.5 years. Not a bad return I must say but let see what happen after that. Food Empire surge to peak price of $1.19 before settle in around $0.76. If Food Empire was not sold, the return can be in the range of 300% to 500% in about 5.5 yrs rather than 64% in about 3.5 yrs.

Share price is not the sole factor of mistake made or rather it is never a big factor in the consideration or part of the equation. If it is, than Noble Group will feature as 2nd in the mistake made as Noble Group was purchased at $1 and sold at $1.12 in 2006 compare to the current price.

So what went wrong? I did not have the confident to hold on to Food Empire. Why? Not enough homework was being done before the purchase was made, along the way up to the selling part. The financial number is the easy part as they are there and reading them up doesn’t hurt but I did not spend time trying to learn about the environment which Food Empire is in or at least know what kind of environment, where are they selling their products. Making serious error by thinking operating in Russia, Eastern Europe and Middle East is the same as operating in Singapore, Malaysia and Hong Kong. Do not appreciate the history of that big patch of land, the opportunities, commodity especially oil and gas, politics and races. With no confident and lack of conviction and when Russia, Food Empire biggest market reduce the gas supply in beginning of 2005 to Europe, I was shock and followed by import tax which hit Food Empire directly causing them to build production plant in Russia itself. Food Empire was sold off.

What can I get out of it? Homework and knowledge give me the confident and the 2nd one is tricky. Politics in the country, geopolitics and stab liability between the regions is hard to know and predict but do I need to take them in consideration? So far not taking them in is working well for me every other holdings except Food Empire where I trying to be smart to include them. But these are important issue so there is a need to consider them as appropriate with some good understanding rather than running like a panic chicken with some news in the paper.

That all for the mistake part and as an investor, making mistake is unavoidable but I must avoid making mistake that has a serious impair on my capital. Not even once.

Evolution
My stock investment process is always very simple as in looking up for stock with bright future prospect and purchase it at a cheap price. That does not change but after investing for some year, a small portfolio of around 10 to 11 stocks is build up and unlike earlier something is changing due to changes in the external environment and progress in which happen slowly but strongly mould into part of my overall process.

What happened in the past was that when a new stock selling at an attractive price, a purchased will be made and add on if the price decline regardless of the overall attractiveness of the new holdings as compare to old holdings. There was no proper thought given on how many holdings shall my portfolio consist of but it stop somehow at around 10 and what is the quality of each holding as compare to the price they are being traded.

For the past 2 years, especially this year, one of the changes is I start to rank them. Ranking at 1st is Good Company selling at very attractive price. 2nd is Good Company selling at attractive price. 3rd is Average or slightly above average company selling at very attractive price. Lastly, average or slightly above average company selling at attractive price. Because of these, I was not able to achieve what I intent to do for this year which is reduce in portfolio activities. There is two factors involve which is quality of the company and price. The upward movement of share price in the earlier part of the year was one reason of the increase in activities and another reason is purchase of new stock was made too easy.

There are 7 major transactions where 5 holdings were completely sold in the open market; they are Sunray, Zhongguo Powerplus, Food Junction, Stamford Tyres and Aussino. The rest are partial sale of Pfood and accepting takeover offer for First Engineering. 6 new purchases were Stamford Tyres and Aussino which were sold and those still holding on are Jaya, Bright World, Midsouth and Sarin. What worth mentioning is Stamford Tyres were purchased with the partial proceeds from the sale of Zhongguo Powerplus which was subsequently sold after the announcement of FY2007 full year results and use the proceeds to purchase Aussino which was also being sold after attending their AGM. Midsouth was purchased shortly after. These quick buying and selling of securities had never happened before but nevertheless as long as the stock does not fit into any of the 4 rankings will be sold. That includes Zhongguo Powerplus and Food Junction. Will the process lead to unfavourable outcome? I am not sure yet but from all kind of reading and watching, a decision tree kind of thinking/process work better than having non intelligently buying and selling.

2nd changes is beside ranking holdings according to their attractiveness, the amount of money invested in each holding also follow according to their attractiveness. That is to say more money will be use to purchase stock that rank the top 2 rather than the 3rd and 4th. This mean lot of control must put into place where let say using of proceed from a sale of holding does not depend on the new opportunity but the attractiveness of the new opportunity comparing against the current holdings.

Because of this, whenever there are new cash, the 1st I look is current portfolio holdings, follow by list of companies in my watchlist and when a new opportunity ‘pop’ out, weighting whether to take a small position using cash available(if any) or partial sale of current holdings or just wait further if what I had is better the possible new one.

It may sound easy and perhaps it is easy for other, but it come slowly on my side and lastly the results depend very much on me.

Crystal ball
The difficult and serious part is over. What going to happen in 2008? I don’t know but the future is as bright as ever. It can be a seller or buyer market but I wish for a buyer market.

Wits and Wisdom of Warren Buffett and Charlie Munger
2007 is a year to be remembered rather than forget. It is also an another year for Warren Buffett and Charlie Munger not because the share price of Berkshire Hathaway trade  at US$150,000 but rather many of what they said before —just happened.

From WB “Derivative is of mass destruction”. We see the destruction of derivative crushing and still crushing the financial industry from US to Europe to far away land in the east. After saying it for so many years, it finally happens but the magnitude hasn’t reach mass destruction yet. As if not enough, adding on to it, Charlie Munger(I remember is CM rather than WB) actually said he will bet that many CEO of the financial firms does not know the amount of exposure to derivatives that their firms have. It just happened again. One by one, writeoff after writeoff, taking SIV back into their BS, not just one doesn’t know about other exposure, they even not sure about their own firm exposure.

Those who said WB is old and unable to understand modern financial instruments are eating back their words. These 2 wise and old superinvestors not just understood but understand them well.

Beside that the imprudence of lending of the housing industry in US and all the mark to market stuffs turn out to be almost exactly what WB/CM said. For a normal guy like me, I can only appreciate their wisdoms by looking backward not forward. If anyone wants to look backward and appreciate them because there are many more than the few written by me, check out last few years WB shareholder letters and BRK AGM notes written by Whitney Tilson.

2008 is going to be another good year, perhaps much better than 2007 and I am looking forward for it be it a recession or bubbles year with lesser activities.

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Responses

  1. hi boss, a happy new year to you. looks like you are holding to sarin.

    in view of the recent fall, i did some digging and would like to share this with you

    http://timesofindia.indiatimes.com/Diamond_industry_faces_rough_weather/articleshow/2667211.cms

    I believe this could be a reason for the fall, even though last reported report is good.

    regards.

  2. Hi Drizzt,

    Me not boss.. Happy New Year. 🙂

    Perhaps that is one of the reason for the falling share price. Anyway 4Q result is not going to be too good.

    The more the share price of Sarin drop, the more I am possitive about Sarin. Actually I am still cursing Sarin, like to buy more if Sarin drop another 5 to 30% or more because I think there are many current shareholders who is not consider strong hands. They will throw some days in the future if the price keep dropping.

    Unless I am wrong, The future of Sarin does not lay whether Raw diamond is being polished in India, Europe, American, China, Russia or South Afican. If South Afican government want to grow their own polishing industry, where they going to get the equipments?

    Sarin is in a growing industry — a changing from hand skills to little skills. And they are cornering the industry if you notice and now they just need a recuring revenue stream. It is repution, branding and quality.

  3. hi dnhh,

    thats what i get when i discuss with my colleague today.

    question is will the industry still be there? do they have the superior advantage to compete?

    their products are moving towards those necessary for small shops as well if im not wrong. this could be positve if its true. i need to check out this last one.

  4. Hello donmihaihai,

    I’m in my 3rd year in investing. Made many mistakes including the one you mention of not doing enough homework. Base on the countless mistakes I made, I’m fortunate not to make a loss. I see 2008 as a bumpy year but with it comes opportunities.

    Though you don’t post often, your articles are always very informative. Can I have your permission to link your posts to my blog?

    Cheers!

  5. You might wanna check out some comments in my blog.

    http://www.investmentmoats.com/value-investing/sarin-technologies-affected-by-non-systematic-factors/#comments

    got wind of any kinds of evidence to this?

  6. Hi Derek,

    Appreciate your kind words. Despite writing a blog, publicity is not what I seek and I always dislike a sudden surge of viewing traffic. But feel free to link my blog to ur if u like it.

    Drizzt,

    You will get many ans if you read last few quarterly reports, 2006 annual report in details(need to compare numbers with comments) and IPO prospectus for the industry, company history, etc etc.

    Drizzt, actually can u think of what I was thinking after seeing your comment of what u have done on Sarin before writing your comment?

    I dislike writing on stock that I am interested to buy, this grew out of habit and not because my words can move market. Some time later I may write on Sarin as it is interesting.

    About that comment? Well, bold words with no supporting facts have no creditability. I don’t know much about the management but their financial numbers does not show a lousy management or with integrity problem even thou there question marks on various places like their investment.

  7. Hi donmihaihai,

    Thanks for your permission but I will respect your decision. I will visit your blog regularly.
    Keep up the great effort.

    Cheers
    Derek

  8. Hi DNHH, thats a confusing advice, but roughly i get what you meant.

    regards.

  9. Hi Derek,

    What is ur blog add??

    Drizzt,

    Advice? Not sure if i am giving one or whatever. But I like to borrow one advise from Charlie Munger.. something like(dun remember the exact words) “one need to get the few main points right, the rest are secondary.” The question is what are the main points for Sarin? From the stuffs u lookings, ask, etc… dun think u r looking at the main points.

    Dun u feel excited? It is a buyer market right now!!! I am excited when I see my holding selling at 3 to 5 times earning depending on outcome.. It is just wonderful.


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