Attended the investment sharing I

Today I attended an investment sharing section by a renowned editor in the HKET, where his strength is related to the international relations and some political environment. In terms of investment, he is a practitioner in Graham's style of value investment. He also successfully met Jim Rogers to exchange their point of view in the value investment. His strength is to select some cigarbutt, a word I firstly learned from his article, and grasp the profit through low risk but high return. Of course, to accomplish this, one needs to do lots of homework, absorb much knowledge in many aspects and improve one's psychological stability. Probably, he established the friend's club to firmly secure the above criteria.

During the section, he also distributed 5 previous articles which may be the trend that he thinks it is the most important in his mindset (I guess, and he hasn't mentioned much on these four articles). These articles are relevant to his recently recommended stocks. These articles include the prospect of Vietnam (2 articles), prospect of airline industry in China with comments from Jim Rogers, the crisis of Hong Kong regarding the tourism, and the competitive advantage of Macau. Afterward, many people went to the stage and obtain his signature before the start of his sharing.

In the sharing, it was the time to describe his past recommended stocks and concern their actual valuation. Luks is no longer the cigarbutt. One can buy this but better set the stop loss mechanism, while he has attended the shareholder meeting of Keck Seng investment and gets some insights on the company strategy. Previously he just commented that this company does not intend to add value on the shareholder despite the presence of huge NAV.

Ebon, his recommendation in last year, is still a healthy stock. He just remembered that his recommendation included the assessment of a lawsuit against the ICAC. Finally the ICAC was condemned by the judge because of the unreasonable accusation during the economic recession. Ebon is now gaining much business from many renowned property development firms to design and manufacture the tubs and the kitchen. Although he doesn't regard it as the cigarbutt now, it is still a healthy growth stock with good valuation.

As a value investor with Graham's style, he believes that Hong Kong stock market is not efficient at all. Therefore, he mostly emphasizes on the importance of the NAV as a means to discover the cigarbutt. Usually he considers when the asset can be sold out, how is it actual value? If the stock price is much less than his estimated NAV, which may not be the NAV directly calculated from the financial statement, one can say that stock can be his cigarbutt. Although the NAV is the crux to select the cigarbutt, it is not always easy to buy stocks with stable financial action. Some of them have strange management, which have strange or incredible tactics, thus seriously distort the value of the stocks.

Through my observation on his style, to accurately discover the cigarbutt, we need to do homework on the financial statement and news related to the industrial trend, and even have to go to observe their business activities so that the value investors can get reliable and latest information. Some kind of common sense and imagination are also indispensable to speculate the future actions of the management. Moreover, there is also an important concept that a good company does not equal a good stock, since the valuation is the crux to select the stocks with best performance in return.

Next part I will mention the anecdotes in the Q & A section.

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The cycle of the economic development

Once I have posted the photographs which were taken in Europe. Precisely speaking, these two photos were taken in Denmark when I went to the student exchange program. What Denmark impresses me is, people in Denmark are rich in many aspects. Their preservation in the environment is well-done. Although their economy is basically competitive, their economy relies much on the government's intervention through high tax rate and high subsidy on people's education and medical system. It is well-known that the GDP per capita for Nordic countries is one of the highest and the life-expectancy of Nordic countries is also one of the longest among the countries in the world.

Through this experience, it enables me to have some thoughts on how the countries can evolve through the long run economic growth. This is somewhat like the simulation through my creativity. After this, it would be convenient to draw some implication on the future pattern of China, Hong Kong, ASEAN, and other countries.

- General methods to succeed

The countries get rich since there is the reason of good economic system, low cost or plenty resources (involving the concept of the international trade) or high technological development, such that there can be much more capital invested in the countries to enhance the economic growth*. China since 1979 and Vietnam since 1990s can soar dramatically since its economic system is conspicuously improved. Moreover, their costs in wage and different capitals are still much lower than the world standard. England during the industrial revolution and US during the 1980s are the example of technological improvement.

- From rigid economic system to gain from trade

This is the result of the transition economies such as Russia, China and Eastern Europe, where their original political system is based on the communism, so that there is even no market at all within the countries or between the countries. If there is no any trade, the allocation of the resources will not be efficient despite the presence of equality among different groups of people.

For some of the countries in the Western Europe, they haven't faced this aspect and they have already established good trading environment since the middle age. However, in China, the development in trade was not as swift as what we imagine. As we can see, since Ming dynasty, there had been various rules to ban the people not to have any conquest on the lands and establish trades with the other parts of the world.

- From gain from trade to technological improvement

Even though most of the countries foster the competitive economic system to encourage trade, gain from trade owing to plenty resources or low cost cannot ensure that the growth has enough quality, as this kind of growth may be only imply the growth in the aggregate amount of production but not every people can get improved (or even declined) in terms of income. For example, the low skill workers who are originally employed by the firms become unemployed since their jobs are outsourced to the other countries which have lower cost in the unskilled segments. Therefore, gain from trade is not really the good resort in terms of the social welfare perspective. In the light of this, the technological improvement is a must to make progress in the economic growth so that every people in the economy can improve their income.

- From technological improvement to environmental protection

During the technological progress, there is another serious matter which can deteriorate the quality of growth, where the standard of living may not be improved due to the over-exploitation of the capital and the creation of the negative externality. One of the examples is the pollution. People may live in the environment which is harmful to the health. Moreover, the growth may not be sustainable anymore since the people have overused the capital thus the productivity may actually decline. When the people are aware of this, they may seek certain policy to protect the interest through the environmental protection.

- From technological improvement to education

It is common that the technological improvement is applied to the efficiency of the machine devised by the inventors. However, can't we try to improve the mind of people through the comprehensive education scheme? This is a prospective aspect to teach the young people how to invent better machine, better strategy in business, or better system. In terms of the economics, this is accumulation of the capital thus lead to the larger rate of economic growth**.

- From education to a new age - changing assessment means of living standard

When people can realize how the importance of trade, technological improvement and education, the economy has already entered the stable stage where significant group of people need not worry their source of income. Still, income inequality is still persistent to exist due to the nature of heterogeneity in the economy. The rich at this moment can revalue the measurement of living standard. It is not only the economic growth measured by income or GDP per capita, but the resentment and the pity of the poor may also discomfort the rich.

Therefore, the culture of donation arises and narrows the wage gap, thus further improve the quality of growth. This step can either be facilitated by the rich, or designed by the government. However, it is always better to be designed by the rich or the well-educated people who are involved in the decision.

- Conclusion

From the above description, do you know what stage we are located now? Denmark and its Nordic partners should have reached the final stage. Hong Kong should start to establish the better environmental protection, but I don't think that the education is the well-designed one. For China, it starts entering the technological improvement to certain extent. It is funny that China also wants to adjust its poor environment due to over-exploitation of different capital. This can be seen through the vast inequality in China.

When the inequality is large, it seems that the mixture of the above stages become common. This leads to complex management, governance and development. From my point of view, sometimes the success of the economic growth is due to the nature of the countries (such as size and natural resource), and sometimes, it is due to the fortune (such as US which is excluded from the WWI).

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* The points here are the crucial concepts used in the exogenous growth theory in macroeconomics.

** The point, human capital accumulation, is the focus in the endogenous growth theory in macroeconomics. For the environmental protection and inequality, they can be the growth theory with application of externality in the production function.

Paper Trade (Jun 29, 2007)

Here I would like to update the status of my paper trade.

From this experience, it seems that this is really a valuable opportunity to buy a value and growth stock when it achieves some contrarian criterion. Target C should probably be allowed to evolve to become the long-term stock. But anyway, considering this portfolio, I pursue a special strategy, so that I will not consider any long-term investment. I will find some way to sell the seemingly expensive stocks.

As for the small cap stocks or the penny stocks, it seems it still follows the macro-trend that they can hardly surge when the capital is flowing to the blue-chips, red-chips, H-share, or other large cap stocks.

Now Target B has reached the reference stop loss level. I need to wait for one more day in order to see if it is reasonable to stop loss, since it seems to develop some support at HK$0.53. For target A, it suddenly surged at the closing. I don't know if it can rise higher than HK$4.8. Anyway, since its status is still lose and it seems the dawn came today, I will just let it stay here unless it is near my reference stop-loss level.

Economy and stock market updated I

Here I would like to update some details with regard to the current economy and financial market. First, I would like to record down the US and Japanese side. The interpretation at this part is more relevant to the financial markets in the developed countries. For the financial markets in China and Hong Kong, I will drop down the points in next part.

a I am not optimistic towards the US economy. Trivially, the property market starts having the momentum to push down the price of the turnover. The market seems to react in the weird way that the possible reduction of the interest rate is favorable to the US stock market. The US economy is currently driven by the merger and acquisition and its robust technological sector.

a Moreover, I perceive that the weather in this year is quite abnormal such that this may have possibility to create some unanticipated supply shocks, as shown through the increasing commodity price (The commodity price is also driven by the demand of BRICs) and the already excited import inflation from China and East Asia. Yesterday, the sudden decline of the Dow Jones Index was just the realization on this for fear that this may convert the tendency of decreasing interest rate to increase. This also affects the yield curve in which the long-term interest rate increases significantly.

a Regarding the Japanese Yen, it has already depreciated to the local minimum value while the resistance seems to form at 124. This is also supported by the expectation that the interest rate in Japan may be lifted in mid-August. Not only the Japanese economy may become better to remedy the deflation cycle, but also the global inflation through the commodity shock and weather shock may further increase the risk of the inflation. Needless to say, the stop-loss mechanism of the carry trade may work through the possible appreciation of the Japanese Yen.

We should note that the decrease in the interest rate is the mirage pretending to have good prospect for the stock markets. However, the reason behind this is only due to the weak substitution effect on the value of the cash. In fact, the aggregate economy and the international economy are much more controversial to the open financial market. This point has been shown through the empirical evidence, and also mentioned frequently by Mr Cho.

(Continue)

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- Additional Notes updated on Jul 1, 2007

Regarding the long-term US economy, there is still two opposite forces needed to be discussed. From Wan Sze Zit's commentary, it is an argument on two prevailed concepts, the end of US economy owing to its large twins deficit, versus the contribution of the dark matter, i.e. the intangible asset such as CocaCola, Yahoo, Google, Disney, etc. and the power of the globalization and outsourcing of business.

It is difficult to assess which side is more prevailed. I think the current data shows the short-term worrisome environment, but for the long-term, it is still the uncertainty. The following two commentaries from Wan Sze Zit's blog could help.

- Articles on Jun 8, 2007 (related to Edward Prescott's conference in macroeconomics) and Jun 11, 2007 (Application of Prescott's theory on US economy)

- Previously I also wrote some comments on US economy on April, with the support comments from Mr. Lam through his comments in RTHK. This reveals the optimistic side of the US economy.

Paper Trade updated (Jun 26, 2007)

Today I have bought the target C at HK$25.55.

As for my real portfolio, I also sold some of the stocks. One of the stock is originally not my focus as the reasonable value stocks. However, once I have bought its IPO and it had the recommendation to have good prospect in the 2nd quarter. I kept this and wait for a slight surge. Today I feel that it mostly finished its mission. Moreover, according to its fundamental status, the profit margin and the return on equity are only fair. Therefore I decide to sell this to look for the other opportunities.

As for another stock, I sold half of the total amount belonging to the speculative proportion since it starts reaching the oversold region. I also feel that it is not optimistic to breakthrough the resistance. It is more sensible to grab some of the profit, though finally at the close, it is slightly higher than my closing price. Anyway, at this level, I feel content for this trade.

The remaining portion in my portfolio is mostly the long-term portfolio. I will follow Mr. Cho's strategy.

Currently I have to deal with the affairs regarding the Singapore trip. I have to fix the portfolio later. Now I intend to buy some of the IPOs as the probability to win is much larger. I will write more comments on the economy later if I have time. To conclude this, I do not feel comfortable about the economy.

Paper Trade Updated (Jun 25, 2007)

Today my paper trade includes the following stocks, as explained in the previous essay.

Tomorrow I will also include one more stock, i.e. let me say Target C. Target C is actually a strong growth stock. Once its growth rate is stronger than the China Life Insurance (2628). These two stocks are at the similar price since 2004 so that their return, or growth rate is comparable! Target C is one of the representative of the consumption-based industry in China. I may say that the price for this stock is still reasonable and it can be at the good buy position.

This portfolio is the testing portfolio, as described as the paper trade, so that I HAVEN'T bought these stocks in reality. The purpose to establish this portfolio is to familiarize myself with my thought on the short-term trading and the short-term dynamic of the stock price. I don't care much on the final result. Most importantly I want to do some evaluation and hopefully some fine tuning can be made.

Paper Trade (for Jun 25, 2007)

On Jun 25 (Monday), I will carry out the paper trade for the short-term trading strategy as the experiment.

Target A: (a red chip)

Target B: (an enterprise situated in Shanghai)

Stop loss is set to be 5% of the principal. The amount contributed to this strategy is HK$100,000, which may not be fully utilized.

Target A is only selling its concept related to the expanding consumption in China. With the unreasonably high PE, it is not for investment at all. Target B has the concept in Chinese property (in Shanghai for the luxurious housing and some offices) and it has been achieving low PE and PB ratio since it is just the relatively smaller cap. It also has the value investment angle.

I am not used to recommending people to buy any stocks. For the privacy purpose and some responsibility, I will not disclose the name of the stocks unless you ask me privately.

Busy days again - Devise passive strategies

Perhaps I have to concentrate on my recent works. In July, I will take part in some activities in Singapore, and starting from August, I will study and research hard in order to finish my recent academic studies.

As for the stocks, I am now learning to put it aside. Some passive strategies have to be developed. Here I want to cite two important utilities in investment and speculation.

a For the sake of savoring the benefit of long-term investment, I mainly follow the paradigm cited by Mr. Cho, to cut loss in the appropriate level (say 10% or 15% of the principal) and let it run whenever it goes ahead.

a In order to coordinate the trading rule with the above concept, I have to carry out some training on the contrarian trading strategy.

I intend to divide my portfolio into the long-term and the short-term. I should do this earlier! The stocks chosen for the long-term is based on the fundamental analysis and the above rules. Through the diagnosis of the fundamental analysis, the chance that the stocks in this group dip is probably lesser.

As for the short-term investment and speculation, it is just the rest of my money. I will use this to carry out contrarian investment or speculation. The mechanism here is also based on Mr. Cho's comment on stop loss, yet I do not follow much fundamental analysis and just buy the stock because of the oversold status. As for the selling, I will use the overbought signal. Since this group aims at the short-term benefit, I would like to adopt a stricter contrarian strategy which cannot be found in the conventional technical analysis. It will be my new experiment to test a simple trading rule.

For the long-run, it is trivially passive, while I hope the short-term investment or speculation is more passive than what I expect. Hope it works and minimizes the interruption on my daily works.

Does bad weather matter?

Does anyone believe that this year the weather is somewhat strange?

Firstly, the winter seemed to come a bit late in US and Europe such that the snow finally fell in January and February. Secondly, the tropical cyclone attacking the gulf is also rarely seen by the Arabian. Thirdly, there is thunderstorm spreading across the southern part of China, which is all of the sudden and never seen before. This has caused unprecedented loss towards the villagers in southern provinces.

Someone said that the weather in US will turn bad in July, August or September as some people may forecast that there will be, again, large hurricanes attacking the southern coast of US. Of course, it had better have some evidence to show me about this forecast.

On noting these issues, one can also switch to the investment aspect. To deal with such kind of natural disaster, what kind of investment vehicle can we choose so as to maximize the return?

I just wonder about a guest commentator in RTHK speculating the price of the gold to strike a local high point in July or August without mentioning any reason. Did he refer to the foreseeable bad weather?

In view of this, those stocks related to gold, oil, water, infrastructure are worth investing. Of course, it is only just for the short-term. For the other stocks, perhaps one has to scrutinize the portfolio during July and August for fear that the stagflation environment would be developed again during that period.

(Here I post the link of my past essay about the commodities in the short-run and medium-run, written on March 19, as reference.)

Warlords - Style in Chinese Enterprises

Recently if you have listened the investment program in RTHK 1, you will notice that Mr. Shek emphasizes on a new concept called warlords (Original Cantonese is 山頭主義), since the Door enterprises (窗口公司) located in certain provinces or cities, i.e. the warlords, have their power through the relationship to expand their businesses by injecting assets in these enterprises. Moreover, money and resources from the entrepreneurs around these regions will select their respective stocks as target, thus the stock prices of them will be probably boosted.

Although the above idea is conceivable, there is also another downside risk that some of these enterprises may be risky due to the political relationship and the traditional corporate governance. These are not only limited to the door enterprises controlled by the regional governments, but also for the other enterprises in particular provinces.

I just asked some of my friends from Mainland China to analyze the situation. From their views, they think that the enterprises in Guangdong province and Zhejiang province are more likely to be wise and stable in their businesses and corporate governance, while Shanghai enterprises may be risky in both the corporate governance and the political relationship.

Regarding Zhejiang, they said that the business environment has already been very different from the other parts of China since many decades ago. They think that their business activities and the consumption ability are the best within China. In view of political relationship between Shanghai and central government, the continuous crackdown on Shanghai real estate market and some officials has been a signal that the central government does not agree the status in Shanghai for long period of time.

This idea closely matches my father's idea, where my father mentions that the enterprises in Guangdong are stable and need discretion on plan, and the enterprises in Shanghai are risky in corporate governance. The enterprises in Fujian are aggressive but risky in corporate governance, but he left no comments on enterprises in Zhejiang.

Investing in Chinese stocks, we have to notice many characteristics in the economic structure and the politics. Besides, this also includes the above traditional characteristics of the warlords. I would also like to hear some comments on Beijing, Jiangsu, and also other provinces.

Review before the QDII regime

Recently Chinese government announced that the QDII will be relaxed as a means to alleviate the excess liquidity and reduce the size of stock market bubble developed in China. It is certainly good news for the Hong Kong people.

My portfolio does not do well in the first half of this year, as I do not have much experience to deal with the volatile period. I have several times losing the patience to hold some excellent stocks because of the cunning fluctuation, even if this warning has been told by some analysts. Although some stocks are regarded as the value stocks, they cannot easily get on the surge of the market.

- For example, one is stable and has certain scale, but it is not renowned and does not have much motivation to expand its business through the new regime. This potential is diminished but it still stays at the same PE.

- One certainly has the scale, but from my point of view, it can be hurt easily through the increase of interest rate.

- Except the recent Belle, I kept the IPOs so as to savor the future growth. However, the market does not recognize their track records, and their incredibly expensive pricing is finally not accepted by most investors, so that after the fantastic growth in December last year, there is no more encouraging growth.

- My recent small cap stocks are worthwhile to buy since they have conspicuously less PE, yet their scale of production is not large, and the propelling force of their revenue is largely attributed to the expansion of internal demand of Chinese people, while the brand may not have strong effect to sustain its growth. The fortunate thing is that they sell products mostly instead of paying rental fee towards the owner of the shops. Although their values are lower from my original point of view, it is still a reasonable way to grant the risk premium on the variation of their growth. This underlying risk premium is the barrier affecting their growth in terms of the rate of return and mostly, the variability of return. Prime Success is the recent example.

- Finally, nearly all of them do not achieve the direct advantage through the characteristic points of Chinese economic growth.

Recently I realize some of the critical points in stock-picking, and would like to change the structure of my portfolio in this period of time. To embrace the QDII regime, I have to buy the value stocks or growth stocks with economy of scale, direct advantage through Chinese economic growth. The stock picking mechanism I used before is still useful, but it needs above strengths to support. For those without the above strengths, they should be chosen with smaller proportion, and selected in the later segment of the queue.

Another crucial thing is, to assess the economic situation is not difficult, and to assess whether the stock is good is not difficult though not easy as well, but from my point of view, to maintain the psychological stability is the acute point for me. The psychological aspect is actually the most crucial points to determine the success of investment. I still need more time to experience the world of investment.