Due to the US moratorium in deepwater drilling in the Gulf of Mexico,Noble's share price has declined 25%.

Noble generates 22% of its revenues from US shallow water and deep water drilling in the Gulf of Mexico.While it has no financial exposure to the BP explosion,it is being affected by the 6 month suspension.

30% of the US's oil requirements comes from the Gulf so while regulations and supervision of deep water drilling will be tightened,the US will have little option but to recommence production again in the beginning of 2011,at the latest.

During the sharp decline in offshore drilling company share prices,Noble acquired Frontier drilling and with the Frontier acquisition,concluded new contracts with Europe's biggest oil production company,Shell.

The net effect of this is for Noble to increase its deepwater drill ships by one third (to 24),increase its order book from US$6.9 billion to US$12.9 billion and become the second largest offshore oil driller globally,behind Transocean.

Its acquisition of Frontier will be cash flow positive immediately and earnings per share positive at the beginning of 2011.Given that Frontier was privately held,it is difficult to ascertain how cheap,Noble bought the company for but the fact that it is going to enlarge Noble's cash flows and earnings so quickly,indicates that the US$2.16 billion purchase price represents a very good deal.

Noble was criticised for not taking on debt and doing acquisitions when oil prices were going to US$150 and the oil drilling sector was "hot".It has always been financially conservative which has led it to not only survive but to now become the second biggest company in its industry.Noble has been around for 90 years and due to its discipline in only making acquisitions at the right price,it has been sitting on its cash for a number of years until the right opportunity came.While it could not conclude any deals during the height of the financial crisis,the uncertainty caused by the BP oil explosion,has finally led to the Frontier deal occurring.

Over the last 10 years (except for in the peak of the financial crisis panic),Noble has never been cheaper from a price to earnings ratio and a price to tangible book value ratio.Even with the moratorium and decline in drill rates,2010 price earnings ratio will still be around 6.5.Noble,due to the nature of its business,generates significant cash flows and its annual return on equity has averaged 17.5% over the past decade.After the acquisition,its debt to equity ratio will increase from 11% to 28% but due to Noble's order book,Noble could revert this back to 11% in 3 years if it considers it to be an appropriate use of its cash.

Noble knows how to survive and grow prudently in a highly cyclical business.Its price and valuation reflects a pessimistic time for its industry and the underlying qualities of Noble are simply not being factored in. 

11th July 2010

Opened a new position in China's Bosideng at HK$2.20 with short term capital - Track my stocks updated. 

I continue to focus on China because I expect emerging markets in Asia will outperform North American and European stock markets in the coming years.

Why I expect these emerging markets to outperform are due to the likelihood that their economies will continue to experience higher rates of economic growth with accompanying rises in living standards for their respective populations.

Emerging markets in Asia have been living within their means for the past decade and in general,have healthy fiscal and trade surpluses.It is a complete role reversal with developed economies and with Europe.

With respect to China,its government recognises that it needs to have a better balance between domestic consumption and exports to drive future growth.As a result,the government's policies are now to stimulate consumption by managing wage growth and developing social welfare to foster greater spending by its people.China has the highest savings rate in the world amongst the largest economies (around 30% to 40% of income) and given the size of China's economy (according to the latest GDP figures,it is now the second largest economy in the world),the potential for growth for Chinese companies linked to the country's domestic consumption,remain the most significant.

The trick is to find such leaders whose stocks do not have high price earnings multiples already reflected in their valuations due to their likely,superior growth rates.

I have been tracking Bosideng for 18 months.Even when it was valued at HK$1,the stock did not attract me,due to its business model being akin to a "one trick pony" with little financial proof that its brand had pricing power in the highly competitive and price sensitive,mass retail market in China.Indeed due to inventory mismanagement in late 2008 together with highly aggressive pricing by its competitors,its sales declined 20% and its profits declined by 33% in 2008/9.

Bosideng has been China's leader in winter coats and jackets for 15 years and has consistently maintained market share of 38% (its nearest competitor has around 8% market share).Since its focus had simply been on winter apparel,Bosideng ended up being a highly seasonal and cyclical company which did 70%+ of its business from October to March and pretty much treaded water for the rest of the year.Moreover it was also hostage to the vagaries of the weather.

The reasons why I am now investing in Bosideng are multiple fold.In their latest results announcement on 7th July 2010,they proved that their brand and their winter products had pricing power as they raised prices without losing market share and increased gross margins from 45% to 50%.Secondly,their strategy of leveraging their brand and diversifying into regular menswear clothing led to new revenue streams with net profit margins of 20% which did not exist before.This currently represents only 7% of their existing revenues today but orders for its menswear are growing fast with another 57% increase in the first quarter of 2010.Bosideng has also launched "Bosideng Vogue",a new metropolitan fashion brand in March 2010 to target China's young upwardly mobile,urban professionals to drive further growth. 

Bosideng is a highly visible and recognised brand in China.It has over 5,600 retail outlets in 65 cities across China.It intends to leverage its network to position its menswear products in 20% of such locations by the end of next year.It has signed up acclaimed Chinese music star and actor,Leehom Wang to be the face of its menswear collection.

Bosideng has also set up a joint venture to manufacture,market and sell,hip hop mogul,Jay Z's fashionwear company,Rocawear,in Hong Kong,China and Taiwan.Bosideng plans to open another 300 outlets by 2013 to support this further growth initiative.

Bosideng is currently undergoing a successful business transformation - for the latest financial year ended 31st March 2010,revenues jumped 34% to US$840m,gross margin expanded 5% to 50%,pre tax net profit margin rose to 22% and its earnings per share increased by 46%.Bosideng has no debt and has surplus cash,the equivalent of HK 59 cents per share.Its return on capital is 15% and its operating cash flow has run at the equivalent of 30% of sales in the past two years.If one deducts Bosideng's net cash per share from its share price,it is currently being valued at 10 times trailing twelve month earnings.

Bosideng's strategy of moving from a "one trick pony" into a mainstream,leading Chinese consumer apparel brand is paying off and if they can continue to successfully execute on their strategy,shareholders will be rewarded with a rerating of the company's price earnings multiple,combined with higher earnings per share.

Due to the cash rich nature of its business,its dividend payout is currently at 90% of its earnings but as long as its earnings growth continues and its capital expenditure is controlled,its current 5.7% dividend yield based on today's share price (net of tax for Hong Kong investors),is likely to be maintained.

I have also deliberately gone into short term capital to make this investment (capital I may need in the next two years), as I expect to exit some of my current holdings in the coming year either due to valuation or likely permanent deterioration in business value (as could be the case with Alco).

6th July 2010

Sold half my holding in Alco at HK$2.48 to open a position in Guangshen Railways at HK$2.71 - a tale of two cheap stocks;Track my stocks updated.

When I opened a position in Alco,I mainly bought it for its balance sheet.Alco is cash rich,has a net current asset per share of HK$2 per share and is valued at approximately its tangible net book value of HK$2.58 per share.This,combined with the fact that its management had successfully steered the company through fiercely competitive environments in the past and continued to make respectable profits (and provided a generous dividend of two thirds of its annual earnings),led me to build a position in Alco of 5.46% of my total portfolio.

The downside to Alco however,which is reflected in its low market valuation,is that it is in the low margin electronics manufacturing industry in China where it does not command pricing power,where most of its business is dependent on consumer demand from the US and its negotiating power with major customers such as Walmart is weak.This combined with recent headwinds such as the future appreciation of the yuan and significant wage rises of 20% or more in its industry,indicate that its earnings are likely to deteriorate unless it can switch its current business strategy to higher value and higher margin businesses.

While labour costs represent only 6% of Alco's cost of sales,the fact that its operating profit margins are only 4% means that such major hikes in wages will have a disproportionate impact on earnings.Time will tell if it can continue to take market share from competitors who do not have the financial strength that Alco does,to drive volume and economies of scale to offset rising labour costs but given that Guangshen Railways has now become even cheaper than Alco from a price to tangible net book value basis,I am switching out of half my position in Alco.

Guangshen Railways is a more sustainable company in a stronger industry,suffering from less competition,commanding operating profit margins of around 15% and benefitting from positive tailwinds in the appreciation of the yuan,China's development of railway infrastructure and high speed trains.

Guangshen Railways is one of China's best managed railway operators and has been listed in Hong Kong and the US since 1996.It owns the tracks and trains connecting Shenzhen and Guangzhou,China's third and fourth richest cities with populations of 12.6 million and 8.3 million people respectively.It is the first,wholly fenced railway in China with four parallel lines which allows passenger and freight trains to run on separate lines.Through its partnership with Hong Kong's MTR,it operates Hong Kong's through train passenger and freight services into mainland China and due to Guangshen's Guangzhou - Pingshi railway link,it also owns and manages the southern link connecting Beijing and the Northen Cities of China with Guangzhou.

Guangshen Railways runs pretty much a monopoly on two of China's top 5 economically, most important railway links and given the market sell off which has been more pronounced in China than other global markets (the Shanghai market is the second worst performing market after Greece in 2010),Guangshen Railways is now valued at a 33% discount from its historical price earnings multiple and a 25% discount from its tangible net book value(similar to that during the peak of the panic in the great crash).Its economic value to EBITDA has shrunk to 6 which is a 35% discount from similar companies listed in North America and its price to book value is now 50% lower than its Hong Kong peer,MTR and 63% lower than its North American peers.

Guangshen Railways share price is similar to that of 2005 while its profits during the past 5 years have doubled.Its current price earnings multiple is 12 while comparable companies in North America are being valued at multiples of 15.Moreover,the company has barely any leverage in contrast to North American railway operators whose long term debt to equity ratios average 60% -Guangshen Railways gearing ratio is just 9%.

Its dividend yield after tax for Hong Kong and US investors at current exchange rates,is 3% and sustainable given that its pay out ratio of earnings and free cash flow after capex, is around 47%.

I expect increases in operating earnings from rises in passenger volumes and freight over the next three years to be somewhat offset by the increase in tax rates from 20% to 25% but this should not discount the fact that Guangshen Railways' growth potential is still higher than its peers in developed economies whose price earnings multiples are all substantially higher.

I view investing in Guangshen Railways a play on the following macro economic trends

1)continued economic growth of China and its most prosperous region,Guangdong province
2)the revaluation of China's currency
3)continued growing demand for infrastructure in China
4)continued favourable economics for railroad transportation,both for freight and passenger traffic
5)further integration of Hong Kong with Guangdong province

Its current abnormal valuation of 25% below tangible net book value combined with the likely appreciation of the yuan of around 22% over the next 5 years,gives the company a likely 63% appreciation in the value of the stock simply from its net assets alone;that together with the 3% annual dividend yield over such a time period,will generate a compounded annual return of 12% on Guangshen's stock.

When Guangshen Railways' monopoly position,successful management track record and strong,predictable cash flows are also taken into consideration,the stock meets my portfolio objectives for long term,compounded,double digit annual returns at low risk.As a consequence,I have rotated part of my capital from Alco into Guangshen Railway.

2nd July 2010

Globalstockinvestingtoday portfolio's compounded gain per year is currently tracking at 14.3%.

According to the Credit Suisse Tremont hedge fund index for long/short equity portfolios,the annual return from hedge funds is a negative 8.5%.For "global growth opportunities" hedge funds,the return is a negative 4.5% annually and according to Eurekahedge's Asia hedge fund index,hedge funds exposed to Asia only,returned a positive 4.7% per annum.  

The result so far indicates that my skills in business analyses,in due diligence and in the allocation of capital as well as my knowledge of Asian companies particularly Chinese companies,exceeds those of my global peers in the market and in the wider fund management industry.

The typical global equity fund manager largely focussed on European and American stocks while a substantial number of Asian fund managers focussed their weightings on financials,commodity related stocks and exporters.In contrast,I focussed my weighting on companies with strong exposure to the global economy with a bias towards Asia,on companies that dominate the technology sector and on companies exposed to the growth of Chinese domestic consumption.

It is still too early to determine my abilities but the fact that only Hong Kong's most respected and most successful fund manager,Cheah Cheng Hye of Value Partners and his investment fund is exceeding my performance after two years (his classic fund's return is 35%) indicates that this website and my investment decisions are definitely worth taking seriously.

Time will tell,where I fit in but the results are encouraging.Stocks over the long term will offer the highest return of any asset class but short term results of any portfolio (6 months to one year) will be driven more by market sentiment than fundamentals of the underlying businesses.

Success is only gained by ability,experience and hard work.Learning from mistakes and intellectual humility are critical values in managing capital -ironic,when one considers the outsized egos that the investment industry tend to attract.

If I was an investing genius,I would not have been sloppy in my analyses on America Movil,Garmin,Esprit and Nokia and would have avoided these stocks.Such avoidance would have improved my performance by 13%.If I was intellectually more disciplined and delved deeper,I should have opened positions in American Express when it was below US$10 and Apple when it was $85 - with 2% positions in each and improved my performance by another 10%.

The fact that I made these mistakes,proves that I am not brilliant.The fact that wealth managers,brokers,hedge funds and mutual funds made far more mistakes than I did,reveal that my comparisons and standards are not with the ordinary.

I still stand by my original target of 12% compounded annual growth over the long term which Bernie Madoff attracted billions of dollars of capital by.The irony is that to achieve such targets over multiple years,the investment performance will likely follow a similar roller coaster ride but with each cycle being higher than the prior one - the idea that 12% can be achieved by a smooth,consistent line up is pure nonsense.

I will write in a separate blog about my outlook for the rest of the year and for future years.

30th June 2010

Dividends from China Agri Industries and Becton Dickinson received - Track my stocks webpage updated.

23rd June 2010

Hong Kong's Value Partners have finally emerged as the biggest hedge fund manager in Asia due to the appreciation of its equity funds and further injections of capital by institutional funds,attracted to its track record.

Value Partners deserve this position.

Cheah Cheng Hye,the founder and chief investment officer who I first referred to in my blog on 1st September 2008,does not promote himself,you do not see him on CNBC or Bloomberg,he does not set up marketing events to attract "high net worth" individuals and funds,he does not advertise his products by claiming "gains of 100% in 6 months or less",he is not a trader or use derivatives to appear "clever" and he follows the same old fashioned stock picking skills and capital allocation principles that I follow.

He was a modest financial journalist before he set up Value Partners and his background was not glamorous.His skills lay in superior business analysis.

The irony is that his fund is the most successful in Hong Kong,a market more associated with traders than long term investors.

His flagship Classic Fund is one of the funds that I benchmark my performance to and it will be interesting to see how I compare,when I publish the second year results at the beginning of July.

20th June 2010

Since BP's oil explosion in the Gulf of Mexico on the 20th April,the entire global oil equipment and services sector have taken a beating whether they are exposed to the Gulf of Mexico and the US market or not.China's Tianda Oil Pipe,largely due to tariffs imposed by the US last year,has little exposure to the US market but its share price has declined 28% while Superior Energy Services which has 44% of its business based in the Gulf of Mexico,has declined 20%.

I am reducing my weighting in Superior Energy and taking a 26% loss from my weighted purchase price to diversify my regional exposure in the oil services and equipment sector from the Gulf of Mexico to emerging markets.

Tianda Oil Pipe was brought to my attention by an ex colleague in Hong Kong when it was priced at HK$4.28 but while it was relatively attractive at that price compared to its future growth,I did not want to increase my portfolio weighting further to energy due to the slow economic recovery.

Given Tianda's subsequent price decline,at HK$2.92,its price earnings multiple based on likely 2010 earnings,has now been reduced to 8. Tianda completed its new production facility at the end of last year which increased its production capacity by 85% and improved its product mix to higher margin,higher grade speciality pipes.

67% of Tianda's sales are to China's domestic oil exploration companies and 33% are exports of which approximately 75% are in emerging markets,such as the Middle East and South East Asia.

Tianda operates a "cost plus" pricing model which greatly reduces its margin risk on the vagaries of steel prices and indicates pricing power in its field.It has been operating for over 17 years and managed to successfully scale the business from producing 15,000 tonnes to 350,000 tonnes last year and to now having the capacity to produce 650,000 tonnes.Tianda have roughly doubled revenues and profits in the last four years and is on course to perform similarly in the next several years.

Given a share placement at the beginining of the year at HK$4,its gearing ratio is 17% and its financial position is strong.

Because Tianda is a small cap (revenues US$300m,market cap US$346m),its shares are not so easily traded and the chairman owns 80% of the stock.The executive board represents just 3 members so again there is the risk of corporate governance issues as well as the risk of the chairman depressing the stock by putting a large tranche for sale.The fact that Templeton Asset Management owns a near 10% stake in the company alleviates to some extent,corporate governance risks.Moreover a number of senior management including the chairman and General Manager have been with the company for 17 years and have not acted in conflict to the best interests of the business and its shareholders.On the contrary,the chairman has been an active buyer of the stock in the past year including at prices similar to that of today.

Given oil well pipes are a speciality business and need to be of a high specification,they are not commodity products.Once Tianda makes a sale,its tends to retain the customer for future sales since reliability is a key priority for its customers and the pipes are used in highly stressful conditions such as under the sea or in the desert.This is borne out by Tianda's results where its net profit margins are consistently in excess of 10% and its average return on equity in excess of 20%.

Indeed,the company appears to backed by China's government by being recognised as a "new and high tech" enterprise which gives it significant tax benefits (15% corporate tax rate compared to 25% in general).It also follows the trend of China's government in trying to stimulate enterprises which offer higher value and move away from the low cost,low value export model that has fuelled much of its growth over the past twenty years.

Given the world wide sell off that is going on,Tianda is currently being valued at 1.3 times tangible book value - in the parameters of a value stock but with good growth prospects in a reasonably strong margin industry.

I expect that it will return back to its placement price of HK$4 this year with good capital appreciation prospects in future as Asia commands more energy exploration and consumption.It pays a dividend based on a pay out ratio of 20% of its diluted earnings which gives a dividend yield of 1.7% but Tianda Pipe is still essentially in its expansionary phase so I would not expect the yield to increase significantly as it reinvests its excess cash back into its operations.

With regard to Superior Energy Services,it has not had much luck since the economic crisis - just when things were turning around,the BP oil disaster in its core market will cause a slowdown in the recovery of its business.It is diversified internationally and in the US land market for natural gas but I expect this to be a dead stock for the next 6 months as the US begins new legislation governing its oil and gas industry.

While I like what I have seen and read about Barack Obama,one can not help but notice how much of the US economy is coming under government control.From the arguably,much needed healthcare reform (which constitutes 18% of the US's economy),to the financial industry (where reform and stronger regulation is clearly needed) to now the US oil and gas industry - these 3 pillars are at least one third of the country's economy and are now open to the vagaries of government policy.

While Bank Santander may have originated in Spain,it has successfully evolved into a regional European and Latin American banking powerhouse.

Its strong risk management culture has led it to avoid the financial derivatives that caused many of its European counterparts to collapse.Indeed it took advantage of the financial crisis by buying solid banking assets on the cheap such as ABN Amro's Brazilian operations,UK's Alliance & Leicester,Bradford and Bingley and the US's Sovereign Bancorp.

The bank's conservatism and focus on cost management has also made it one of the most profitable and efficient banks in the world with a cost to income ratio of 42% (20% lower than most of its global,developed market peers) and returns on equity in the range of 13% to 15%.

To gain further understanding of its business and financial achievements and management culture,I recommend that you read the Time article,"Santander - the most boring bank in the world" in the enclosed url,
http://www.time.com/time/magazine/article/0,9171,1951914-1,00.html

Latin America now represents 35% of Santander's profits,of which more than 20% is being generated in Brazil where it is now one of the big 4 commercial banks.The UK represents 16% where,due to balance sheet weaknesses of its competitors,Santander is growing and taking market share at strong profit margins.

Only 24% of Santander's profits is now being derived from Spain.Brazil is likely to overtake Spain this year and become Santander's largest profit generator.Santander's subsidiary and its rivals in Brazil,Banco Bradesco and Itau Unibanco,are all valued at 3 times book value.

Historically Banco Santander due to the quality of its operations,market position and management,commanded a price to book value of 1.5 to 2 and a price earnings ratio of 18.I suspect given growth in Europe will be anemic compared to the past,Santander's valuation should now be lower than such historic numbers but given its sizeable exposure to the growing, developing markets of Latin America(particularly Brazil),it should retain some kind of premium such as 1.3 times book or a price earnings multiple of 12.

Given current market fears about Spain,Banco Santander's valuation has declined by 40% this year to 0.97x book value and a price earnings multiple of 8.3.

So the real questions are

1) how much exposure to sovereign debt does Banco Santander have in Spain,Italy,Portugal and Greece?

2)how much exposure does it have to the bombed out construction and real estate industry in its home market of Spain?

3)how much impact will these have on its capital ratios and book value?

Santander's exposure to sovereign debt in Spain,Portugal and Greece is 27.5 billion euros compared to its total assets of 1.1 trillion euros (2.4% of its asset base).Santander has negligeable exposure to Italy.
It only owns 200 million Euros of Greek bonds which is immaterial to its balance sheet but 3.3 billion euros of Portuguese debt and 24 billion euros of Spanish government bonds.
Spain is no Greece and Spain's economy was far worse in 2009 than it is today.Santander not only survived the worst recession in Europe since the second world war in 2009 but generated earnings of 8.9 billion euros.

Santander's core capital is approximately 80 billion euros and its Tier 1 capital ratio is 10.3% so even if Spain and Portugal seek debt rescheduling and its bonds experience a significant decline,Santander's capital ratios should remain strong and within the global banking regulatory requirements.If the above bonds declined by 40% (an extreme scenario),Santander's book value would also only decline by around 13%.Such calculations exclude Santander's continuing earnings from its global operations,which would partially offset such a decline.

Santander's loan exposure to the real estate industry in Spain is 41.4 billion euros compared to total customer loans of 682 billion euros,net of provisions.This represents 6% of Santander's total loans.Its actual real estate problem loans in Spain,due to its conservative lending practises,are far lower than other banks at 8% (the typical real estate default risk in Spain is nearer 16%).

Santander has already assigned 18.9 billion euros as loan loss provisions on its balance sheet including 6.7 billion as a general provision for non specific defaults.2.3 billion euros of the general provision is assigned to Spain and another 1.5 billion euros for the rest of Europe.Given that Santander's foreclosed properties have typically been sold at 28% loss to book value,Santander's existing provisions appear to be sufficient to cover continuing weakness in Spain's real estate market.

So in summary,Santander is well capitalised to withstand the fears of a sovereign debt crisis in its key markets of Spain and Portugal.Its strong management team and conservative risk management culture not only withstood but gained from last year's financial crisis.The current indiscriminate selling of stocks particularly relating to Spain and Southern European banks,is offering Banco Santander stock at a significantly discounted price compared to its fundamentals.

To quote the chairman in Santander's annual report for 2009,"for the third year running,Santander's profit was among the top 5 banks in the world,underscoring the recurrence of its business and the success of our management model."

Based on a sustainable earnings payout ratio of 57%,Santander's dividend yield alone is 7.2% at its current share price (5% yield for Hong Kong investors after taxation,at a Euro/US$exchange rate of 1.2 to 1).Its problem loans and assets are well defined in contrast to the likes of Bank of America,Allied Irish Bank,Fortis and other European and American banks which practically collapsed due to their poor risk management controls over derivatives and sub prime mortgages.

Given fear pervading the market,Banco Santander could continue to decline further in the next couple of months but when rationality returns,I expect a sharp rebound in the stock price to a range of US$13 to US$15.

Banco Santander has been added to the portfolio as a long term holding with a view of further accumulation if prices decline further. 

1st June 2010

How is my portfolio shaping up before results are published at the beginning of July for the second year?

Even with the 10% correction in May,Globalstockinvestingtoday.com's return in calendar year 2010 is still a positive 2% outperforming the global markets which have all declined.

Since launch,the portfolio has currently appreciated by 31.58% while stock markets on the whole have declined by an average of 6% (Europe is down 20%,US is down 10%,Asia Pacific is down 8% while Brazil is actually up 12%).

Given stock market volatility,it will be difficult to forecast where my portfolio will stand by the end of this month to make the two year comparison but I believe that the market is too pessimistic on my portfolio holdings given company results and outlooks,their respective competitive postions and the quality of the management.

I believe my portfolio on the whole is still undervalued mainly due to

1)the BP oil spill which has led to all oil services stocks being heavily discounted (I own Noble Corp and Superior Energy Services which are 12% of my portfolio)

2)NasdaqOMX and Prosperity Reit are unfashionable stocks but represent good value in terms of price to future long term growth rate or price to asset value (16% of my portfolio)

3)financial institutions are being discounted again due to European debt fears (Standard Chartered and AFLAC whose businesses are primarily in Asia and represent 15.7% of my portfolio).

4)Intel,Chaoda Modern and SK Telecom are not being rationally valued based on fundamentals (all Korean stocks took a dive in May due to North Korea torpedoing a South Korean ship!) - these stocks represent 16.87% of my portfolio.

I expect most of these stocks to be strongly revalued in the next two to three years if their underlying businesses continue to perform as they have been doing for many years.

Having said that,I expect future stock market growth to be lower than the long term historic average - the concept of 10% annual gains from stock markets in general are unlikely as the developed markets particularly in Europe,experience slower growth than in the past due to massive financial and structural issues and global competition from Asia.

While the US has similar financial issues,it has nowhere near the same fiscal and administration complexities that Europe has,mainly due to the US being a single country.Moreover,the US has a strong track record of adapting to the times and being flexible;its companies and people tend to be highly competitive and transcend a single country mentality - something that many European countries still lack.

Developing Asian stock markets are likely to perform the strongest based on economic fundamentals and strong country financial positions but company corporate governance issues and domestic political risks will need to be tracked.

The performance of my portfolio continues to vindicate my business judgement particularly during times of great stock market stress,not only surviving the great crash of 2008 but taking advantage of it and by allocating a high percentage of capital to companies operating in developing markets in Asia.

Stockpicking now more than ever,will determine the real abilities of fund managers in the industry.Given the unprecedented crashes and corrections since I launched my virtual fund,I suspect that these will continue to be good times to demonstrate my abilities in investment due diligence,business analyses and capital management - my current performance is on a par with the number 1 investment firm in Asia - Hong Kong based Value Partners.  

26th May 2010

One thing people should realise when all stock prices fall sharply and so quickly is that the vast majority of experienced buyers are not buying but simply waiting on the sidelines to see how crazy things will get - most of them have already built out their core positions with long term capital but will not hesitate to use short term capital and margin if hysteria engulfs the market.

It is a bit like,I pitch the "end of the world" to gullible owners and see how scared and irrational they become so that they will sell their assets for a song.

We are not there yet and we may not get there in 2010 but it is always good to be strongly capitalised to "wait for the fat pitch".

I understand why people prefer to invest in property - it does not have the same volatility,accompanying media hysteria and impact on emotions that stockmarkets have.

22nd May 2010

Note that my sales in ABB in April before the sharp market fall this month,means that only long term capital is now tied to my stock portfolio.The overall results and business outlook of my portfolio holdings remain good so I will continue to sit out this sharp market correction and "roll with the punches thrown by the market".

If you are running a large investment portfolio,it is virtually impossible to manage it by selling during corrections and buying back during recoveries.The probability that you can predict when to buy back is near impossible.Instead you are likely to end up being the patsy by selling in the first place,only to see stocks recover and rise ever higher in the future,due to earnings.

This obviously precludes manias when stocks are priced at nosebleed valuations such as the tech bubble in 2000 or when the entire international banking sector goes into virtual "cardiac arrest" such as in October 2008.

This sharp sell off is not quite a scam (sovereign debt is a legitimate worry)but it is more akin to professional poker players who pile on the pressure by raising their bets to see how many weaker hands fold.That is why it is really important to know how your "cards stack up in the game".

The "shake out" that is going on,has pretty much wiped out the compounded gains to my portfolio in 2010 but I view this to be temporary,given business results and outlooks of my portfolio companies.I am still ahead in 2010 while the global markets have all declined,led by Europe and Asia which have all seen falls on average of 10%.

I repeat retail investors who view themselves as "traders" are at a huge disadvantage compared to institutions such as Goldman Sachs.If you have been tracking stocks of companies that you understand,this is likely to be an attractive point to open a position but be mentally prepared for further short term declines.

The only way that I can consistently beat the stock market and play the game where I have an edge is by applying long term capital (so that I can stay in the game far longer than most hands) and in superior business analysis so that I know the value of the cards that I have,better than the majority of the other players and can bet accordingly.

From my perspective,when stocks are valued at between 30 and 40 times earnings and their earnings growth rates indicate 10 % or less,then that is a good time to sell. When stocks are valued at 30% or 40% below their price earnings ratios' historical averages and their underlying long term growth rates remain intact (provided they are not overburdened with debt),then that is a good time to buy.

 18th May 2010

Dividends from Standard Chartered Bank and Xtep International received - Track my stocks updated.     

9th April 2010

Sold my position in Tsingtao Brewery,realising a 24% gain and added to my position in Prosperity REIT at HK$1.405 - Track my stocks updated.

Based on yesterday's 2009 earnings release,I was disappointed with Tsingtao's operating profit margin performance.

Given their volume increase,I expected a widening of operating profit margin beyond their gross margin improvements and this did not happen.Their distribution,general and admin expenses rose at the same rate as their revenues.

Fast growing drinks companies tend to have exponential rises in profits when volumes increase due to relatively fixed cost structures.Tsingtao's inability to do this given their elevated price earnings multiple (currently 40 times trailing twelve month earnings) is a clear danger sign for investors.

Barley costs from Australia,Canada and France make up nearly 15% of Tsingtao's production costs and the collapse in commodity prices in 2009,which led to a near 40% decline in the price of barley enabled Tsingtao to post strong gross margins .Barley prices however,are likely to rise by 25% over the coming couple of years as demand recovers and economies reflate.If we remove 2% of Tsingtao's gross margin improvement due to the abnormal price decline in the barley commodity market in 2009 together with the share dilution caused by the issue and subsequent conversion of share warrants,Tsingtao's normalised operating profit per share only increased by 10% compared to 2008.

So Tsingtao is in effect growing operating earnings by 10% and being valued in the market at 40 times earnings - too high a multiple for such a disappointing normalised growth rate.Tsingtao also cut its dividend by 45% despite its elevated earnings.Given that its dividend yield was below 1% to start with,raises further questions about their capital management.

Prosperity Reit's 2009 operating performance exceeded my expectations.Three perceived financial risks to their business were proved to be incorrect as gearing declined to 33%,occupancy rose to 97.4% and rentals from lease renewals increased 4.3%.The management has made prudent improvements to its real estate assets enabling further appreciation in the value of the properties which in the long run,will lead to even stronger tenant retention as well as the potential for further rent increases.

An example of how irrational investors are in Hong Kong can be seen by the contrast between property prices (commercial or residential) that are bought outright and those that are sheltered in a REIT.The value of Prosperity Reit's commercial buildings after its property loans are deducted,is the equivalent of HK$2.30 per share.Because property REITs in Hong Kong are still unfashionable and out of favour,the assets are currently being traded on the Hong Kong stock market for the equivalent of HK$1.40 - a 40% discount from its market value.At such a price,even with a further 10% decline in rental yield (worst case),the net annual yield would still be 7%.

So here is the deal,I invest in commercial buildings in Hong Kong at 40% discount to actual market value,have a world class property manager,continuing to enhance the buildings and tenant relationships and I get a net income yield every year of around 7% worst case.The loan to value ratio is 33% so there is little financial risk to the capital structure with the possibility of even better interest rate terms for the loan upon renegotiation later in the year since Hong Kong's interest rate policy is tied to the US.

While I have increased my weighting in Prosperity Reit in my portfolio - the fact that it is not a fashionable stock will likely mean that it will underperform the broader market in the short term but as highlighted before,markets do not stay irrational forever and I expect the stock to be revalued closer to its book value over the next several years.

So I expect a 50% appreciation of the stock while I collect an annual 7% dividend yield over the coming several years - I like that kind of deal! 

7th April 2010

I expect a rather slow economic recovery and am reducing my weighting in industrials as a result.

I expect ABB to generate higher earnings over time during the new multi year economic cycle partly as a result of its stringent cost cutting during the recession.However its exposure to the US construction industry where I now expect flat to no growth until 2012,will limit somewhat,ABB's earnings growth rates this year and next.

ABB will remain a core holding for the very long term (provided it continues to meet my expections of its business)but I have reduced my portfolio weighting on the stock due to valuation.

6th April 2010

The Motley Fool (www.fool.com) is one of the most widely followed investment websites in the world,claims to follow the philosophies of the investment greats and regularly criticises Wall Street's short term focus as well as the inferior returns and fees of mutual funds.

It has over 100,000 subscribers to its investments and newsletters,charging an annual subscription ranging from US$99 to US$299 depending on newsletter and investment service.

As I hope people appreciate given what has happened to stock markets over the last two years,sustainable investment returns are determined by the quality of business analyses and the depth of one's thinking.Over time,investment returns will correlate to the quality of one's work.

The below are the total returns since the launch of each of Motley Fool's investment services (excluding subscription fees) as at 31/3/2010.

I leave you to draw your own conclusions based on their low total returns.As is often the case in the investment industry,marketing,promotion and activity have little direct relation to actual investment performance and often obscures the actual abilities of the people involved.

In this business however,the gratifying aspect is that eventually,the market will always reward ability and substance and expose scam artists,"bullshit" artists,promoters as well as well meaning people who just aren't that good.

If you are a very good or exceptional investment analyst,you will be financially rewarded by continuing increases to your wealth though you may not get the recognition of your peers or even be understood by the wider public.

3rd April 2010

My portfolio's accumulated return is now higher than Value Partners' funds including their Classic Fund as well as their High Dividend Stocks Fund (both which have appreciated to 38% for comparable periods - the Classic Fund appreciating 4% in the first quarter of 2010).

Value Partners' High Dividend Stocks Fund was the winner of the Lipper Funds award 2010 in Equity Asia Pacific.

Value Partners is the number 1 investment firm in Hong Kong and has the best performing investment track record of any firm in Asia and my returns are not only comparable but for the first time,exceeding their performance.  

As I wrote when I launched this website in August 2008,this will be a very public record on exactly how good my professional abilities are in business analyses and investments and only time will tell exactly how high I rank in the industry.

So what has led to such an exceptional performance to date given stockmarkets since August 2008 have returned on average zero to 1%?

First of all,I sold China Huiyuan Juice (a gain of 168%) when Coke made an offer for the company and that combined with my exit out of Transocean before the financial meltdown (at no loss),freed up 12.6% of cash reserves for the portfolio (see blogs dated 29th August 2008,3rd September 2008 and 29th September 2008) which along with 8% of my long term capital held in cash,gave me a cash holding of 20% before the beginning of the worldwide bear market.

Secondly,I was willing to realise losses on certain stocks (America Movil,Garmin and Esprit) to free up more cash to the equivalent of 10.5% to accumulate positions in stronger and even more undervalued companies such as Microsoft,Infosys and Zijin Mining.

Thirdly,I recognised the severe undervaluation of the consumer sports goods market in China by buying Anta Sports and Xtep International,making them nearly 11% of my fund- (see blogs dated 26th August 2008,2nd March 2009,20th April 2009,6th May 2009 and 20th July 2009).I finally sold Anta Sports on 28th August 2009 for a 140% capital gain excluding dividends to free up some cash for future investments and I am currently holding a gain on my investment in Xtep International of 109% excluding dividends.

Fourthly,my analyses and actions on Standard Chartered Bank (see blogs dated 25th October 2008,8th December 2008,4th March 2009,5th March 2009 and 9th March 2009),making it my biggest portfolio holding at 11.87% were completely correct - currently Standard Chartered Bank has gained 66% from my weighted purchase price excluding dividends.

Fifthly,my understanding of the resiliency and vibrancy of what I define as the digital society led to my portfolio weighting in Dolby,Intel and Microsoft becoming 18% of the total,which is currently showing a weighted gain of 43% excluding dividends.

Sixthly,I recognised that food producers in giant developing economies such as China were being significantly undervalued given the combined trends of food inflation and consumption led growth.This led to China Agri Industries (see blog dated 14th April 2009) and Chaoda Modern (see blogs dated 21st September 2009 and 14th October 2009) becoming 10.7% of my portfolio -China Agri Industries is currently showing a gain of 136% excluding dividends and Chaoda Modern a gain of 67%.

In the investment industry to do two or three things right while minimising mistakes,leads to above average performance -to do six,leads to exceptional results.

The second quarter and 2010 full year performance will depend largely on the 2010 outlooks of a number of key holdings particularly Intel,Dolby,ABB,Infosys and NASDAQOMX as well as the continuation of general improvements in the global economy.

I will update the market prices of my stockholdings on track my stocks webpage half yearly since,as I stated before,this is a long term investment website and not one for short term speculation.

Hopefully this makes it easier on the eye to see and compare!

24th March 2010

If you took advantage of the panic and fear last year and invested in financially strong companies or in index linked exchange traded funds,well done!You should congratulate yourself on your ability to withstand crowd mentality and in your ability to identify and act on an opportunity.

Unfortunately the vast majority of investors fled stock markets last year after they saw their stock portfolios decline 30%,40% or even 50%.

I hope they fired their wealth managers and brokers if they were advised to switch from stocks to bonds as the majority of investors did,as confirmed in the data enclosed.

 

19th March 2010

Only two fund managers in the entire equity industry generated positive returns in both 2008 and 2009 - George Soros and John Paulson and both did this by their expertise in shorting stocks in 2008. While their total actual performance is not included in the list below,most of the major leading portfolio managers are.

Only six managers in the established hedge and mutual fund industry managed to generate a positive total return with both years combined - George Soros,John Paulson,Warren Buffett,Donald Yachtman,David Einhorn and Stephen Cowen.
 
These results excludes bond funds which according to Morningstar,lost an average of 5.1% in 2008 and gained an average of 5.5% in 2009 (though the range was very wide in both years).

Moreover,hundreds of hedge funds were wiped out in the past two years due to their excessive leverage and by taking on far too much risk in their mistaken belief that they were as good as they had marketed themselves to be.

I could use the below data as an excuse if my portfolio was not performing strongly but instead it gives another perspective and context to my performance to date.

Make no mistake about it,when you have most of your liquid net assets in your portfolio,you will basically be running it as a fund with 15 to 30 stocks,broadly diversified,split between equities and cash.

The reasons why most funds are still in the red was due to their portfolios heavy exposure in commodity related stocks and European or American focussed financial institutions when the collapse began in 2008 -both sectors that I either reduced my exposure to or avoided,as people who follow this website,will have noted.

11th March 2010

Given how much the internet has become a great leveller to perform research on companies and how accessible investing in stocks is,compared to even 10 years ago,the new generation of fund outperformers will come from non traditional mutual and hedge funds where the single biggest capital contribution will be from the person running the fund him or herself.He will have the freedom to make up his own mind on which stocks to own,how much to hold as cash and bonds and ignore peer pressure since his overall motivation is preserving and increasing his wealth and not on retaining a highly paid salary or on commissions from how much business he is generating for his fund.

They will also have little time promoting themselves since most of their time is hunting for new investments and monitoring their existing investments and changes in industry trends.You will find that most of these people will be relatively anonymous and given their knowledge of stock markets display little ego since they know that ego tends to blind investors from accepting mistakes or not acting when they are wrong.They also recognise that if they are managing their fund as a collection of partly owned businesses,it could be at least 3 years before the market recognises its mistake and reprices certain stock holdings or in contrast,prices a stock holding ahead of its short terms earnings but without fully reflecting its long term earnings power -all this assumes that the fund manager is an exceptional stock picker.

By definition,an exceptional stockpicker will not be a conventional thinker or be someone who accepts the need to "fit in".He will from time to time,be either unpopular,derided or simply ignored.He will certainly not feel the need to market subscription based investment newsletters or promote prevailing investment themes of the day.He will definitely have a strong temperament,the ability to withstand significant pressure and stick to his convictions based on the depth of his thinking and quality of his analyses.

Dividends from Noble,AFLAC and Intel received in the fund - Track my stocks webpage updated.

4th March 2010

Both banks announced their full year 2009 results this week and Standard Chartered Bank met expectations and surprised on the strength of its balance sheet while HSBC continued to fail to perform to expectations.

There is a reason why 11.87% of my portfolio is weighted to Standard Chartered Bank (SCB) and I do not own HSBC - it is called MANAGEMENT!

If you listen to the earnings conference calls and hear Peter Sands (SCB's CEO) and Jaspal Bindra (SCB's CEO Asia),you can not help but be struck by their fierce intelligence and contrast it to the almost bumbling,bygone era,British bureaucracy mentality of the senior management of HSBC.When you lose US$29.77 billion of shareholders' money by arrogant ideas that you can enter markets and businesses that you are clueless in (HSBC's acquisition of US subprime lender Household International) and then declare in your annual report "Strength,diversity,resilience",it takes corporate speak and management incompetence to another dimension.

Standard Chartered Bank focuses on its strengths which just happens to be the regions which are economically growing the fastest -primarily Asia.

HSBC spent years ignoring its strengths and undermining its core markets by branching out into geographies that they were weak in with grandoise ideas of being the "world's local bank",destroying shareholder value in the billions of dollars and also upsetting their key profit centres - anyone who has spent time in Hong Kong knows how much HSBC's image and reputation have taken a battering.

The facts don't lie - over the last 6 years,HSBC's earnings per share has declined by 71%,while Standard Chartered Bank's has increased by 64% including a year on year rise in 2009;HSBC's net asset value per share has declined by 7% while in contrast,Standard Chartered Bank's net asset value per share has increased by 95%!

As I have said before,when evaluating a stock for investment,assessing the quality of the management is a critical part of the due diligence process.

9th February 2010

It may seem a bit odd that while the market continues its correction and my portfolio holdings' stock prices have been falling,I have been on the whole,pleased with my portfolio due to their earnings results and outlook announcements over the past month.

While NASDAQ has been a laggard in my portfolio and I have to accept that I opened a position at too high a price and too high a weighting in 2008,there comes to a point where the market over reacts on the downside.Given NASDAQ's strong market position,sustainable earnings power and growth opportunities,a valuation of 11 times 2010 conservative earnings forecast in a depressed economic environment,is simply too low a valuation for me to ignore.

US President Obama's intent on curtailing proprietary trading by the investment banks will have little impact on NASDAQ since nearly all of its trades are based on institutional orders.

Its Q4 2009 result was the first quarter when it managed to stop declines in its cash trading business (due largely to "dark" pools) and NASDAQ should benefit from new regulations to control such "off exchange" trading mechanisms,which are currently going through legislation in the US Senate and Congress.

Goldman Sachs recent stock upgrade on NASDAQ to buy,may provide some immediate acceptance and demand for the stock which has become a bit of a stock market pariah over the past 12 months.

I added to my position in AFLAC mainly due to the stock market correction giving me an opportunity to buy more at practically my original purchase price after their strong Q4 earnings results and affirmation of their 2010 outlook.

Why I am still bullish on stocks.

The time to buy quality stocks is always when the market is worried about something or other (provided it is not something as great as a global banking collapse!).Curtailing of bank lending by the Chinese banks and worries about the Euro due to debt levels of certain secondary European countries are not substantial enough to cause worldwide disaster so if the market keeps selling off,I will look to add to some of my existing positions and even consider opening new positions.

While the stock market did get ahead of itself in the beginning of January,I view the current correction as healthy for long term investors as most companies announced earnings results that beat elevated expectations with sound outlooks for 2010.

From my actions,it is obvious that I am still a net buyer than seller.

27th January 2010

15th January 2010 part 2

15th January 2010

See also the chart below comparing Globalstockinvestingtoday's portfolio performance with global fund managers.

Even though Value Partners Classic fund is performing exceptionally well,please note that it is 75% exposed to the Greater China region and is before hedge fund charges including 15% of the fund gain.Moreover its 3 year fund gain is approximately 40% of which 33% came from the last six months of 2009.

This is just another example of why capital needs to be fully invested in a well managed equity fund for a minimum of 3 years since it may not do much for even two and a half years only for it to be revalued in the last 6 months!

The contrast between my portfolio and Value Partners is that I am only 30% invested in China,20% in rest of Asia,40% in truly global companies (Microsoft,Intel,Dolby,ABB etc) and 10% in companies whose operations are principally in the US/Europe.From a geographical perspective,I am more diversified.Just to give you an understanding of how Value Partners are ranked in terms of their performance in the hedge fund industry in 2009,Thomson Reuters Asia Pacific ranked Value Partners as the best overall Fund Management firm in Asia;Mr Eric Chow,Value Partners fund manager was ranked the leading buyside individual in Asia and Value Partners is ranked the second largest hedge fund manager in Asia.

Value Partners also manages one of the pension fund options for Hong Kong's employers and Ping An Insurance (one of China's largest insurers) is partnering with Value Partners for its investments.

Value Partners are at the highest level and you can see how I am doing not only with them but with other prestigious fund houses.

2nd January 2010

I am moderately pleased with the performance of my holding companies and my results to date.If you followed my analyses over the past 18 months,you will already know about my abilities in financial analyses but what pleases me most from my track record to date,is that it appears to indicate very strong skills in business analyses (compare and contrast your returns from equity funds,broker and analyst recommendations in the last 18 months!).

I called the stock market's bluff correctly more times than I got wrong during the time when all the stock prices of my companies were collapsing.During that intense time,you really needed to have done your homework on your businesses and deep due diligence because the level of pressure that the market put on all stock investors globally,was unprecedented since the 1930s.

"It is when the tide goes out that you can see who is swimming naked".

Self promotion is one thing but ultimately,it is results that count.Bear markets and recessions vindicate strong investment managers and analysts and absolutely savage the weak.In the inital stage everything crashes but when markets return to some sort of rationality,it is only companies with strong fundamentals purchased at fair or cheap valuations that prosper.

Could I have done even better?

I made two unforgiveable and highly unprofessional mistakes - not making myself available to analyse China Agri Industries and Nokia's results on the day of their release.I suspect this cost about 3% to 4% of overall return since I would have added substantially to my position in China Agri on the day of their expansion announcements and would have lowered my weighting in Nokia after the release of their Q1 2009 results.

I was also so preoccupied with getting Standard Chartered Bank right (the biggest weighting in my fund),that I ended up not having the flexibility of mind to expand my due diligence to the Australian banks which were also clean and were also being sold off in blind panic (Australia's big 4 banks' returns on equity/profitability are amongst the highest in the world).

With respect to 2010,given that most companies in my portfolio now have a more realistic business valuation,I do not expect triple digit gains in any of my stocks this year and I expect my turnover of stocks will be lower this year than last which was a highly unusual year (to put it mildly!).I may change some of the weightings depending on results and valuations though fundamentally,I expect most of the companies that I own to come out of the recession stronger which should enable them to outperform in their respective industries.

I am no longer explicitly seeking to outgain Hong Kong's Hang Seng benchmark this year as there are major listed Chinese stocks which I believe run the risk of becoming seriously overvalued if the historic track record of Hong Kong's stock market is anything to go by.I will opt out than risk a permanent loss in capital during this potentially "euphoric" time.

On the whole,I expect my portfolio to return a compounded annual growth rate in the range of 10% to 20% in 2010 even after a potential stock market correction sometime this year.

I wish everyone who follows my blogs and stock actions,a prosperous and healthy 2010!

22nd December 2009

Sold my remaining position in Nokia at US$12.44 net of charges,realising the loss.Dividend from Microsoft received in the fund- track my stocks updated.

Nokia was my biggest business analysis error by far. As highlighted in my blog on 17th July 2009,its failure to execute on its strategy in a timely manner in light of competition is leading to what I now view as permanent declines in gross margin and operating profit margins.

I can not see Nokia recovering its historic 40% market share in the high margin smart phone segment given its inability to compete on mobile services with competitors particularly Apple and I no longer view Nokia's brand loyalty in emerging markets sufficient to maintain pricing power at the low end mobile phone segment.That coupled with its loss making Nokia Siemens joint venture dragging down earnings and management time means that Nokia is at a significant disadvantage compared to more focussed competitors such as RIMM,Apple and Taiwan's Hon Hai.

I must admit,I underrated Apple completely - the key thing that I believe that I got wrong was underestimating the power of its apps store in driving adoption of its mobile phones.

A lot of lessons were learnt from my investing mistake in Nokia - significant underestimation of the rising competition in the smart phone segment,insufficient attention to the earnings dilution of its Nokia Siemens JV,failure to recognise danger signals in actions by management highlighting complacency (overpayment on Navteq acquisition,belittling the competition) and opening a position during the time of Nokia's "near perfect" results.

10th December 2009

8th December 2009

In one month from 21st September to 20th October I opened three new positions,doubled my weighting in one of them (Chaoda Modern Agriculture) and halved my weighting in Infosys,thus making 5 actions in my portfolio.Since then,in the last seven weeks,there has been no new actions to my fund.

The burst of activity followed by inactivity is not due to me spending more time evaluating stocks during mid September to mid October compared to November and December but more to do with results announcements and where I uncovered compelling business valuations for investment.

"If buses come in threes while you wait a long time for the first one to arrive" then such an allegory pretty much can be applied to what happened to my portfolio in September and October.

Recently,I have looked closely at American insurers for investment but still find United Health the best price to value business on the market.I have looked at Chinese car manufacturers particularly Geely Automobile that Goldman Sachs has invested in and which is acquiring Volvo but find the valuation no longer compelling to warrant a position.This is part of the crux of being a successful investor,having the patience and discipline to search and wait for months for the right company to be valued at the right price and then acting upon it while vigilantly tracking its business performance and valuation.

Mistakes are made in either premature accumulation ie good company but either fairly valued or overvalued or in poor due diligence where you really did not have a clue about the valuation of the business and are at a loss on what to do as it keeps declining!

Standard Chartered Bank announce their trading update tomorrow and Alco Holdings announce their interim business results.If both companies perform to my expectations,expect no activity to my fund.

18th November 2009

I have read the below and re-read most of them on several occasions since one misses or fails to pick up some key points on first or second reading.

The Warrent Buffett way - Robert Hagstrom

The Warren Buffett portfolio - Robert Hagstrom

Warren Buffett,the making of an American capitalist - Roger Lowenstein

The real Warren Buffett - James O'Loughlin

The Winning Investment Habits of Warren Buffett and George Soros - Mark Tier

Rule Number 1 - Phil Town

One Up On Wall Street - Peter Lynch

Beating the Street - Peter Lynch

Common Stocks and Uncommon Profits - Philip Fisher

The Intelligent Investor - Benjamin Graham

The Templeton Way - Templeton and Phillips

Investing Against the Tide - Anthony Bolton

Money Masters of Our Time - John Train

Jesse Livermore, The World's Greatest Trader - Richard Smitten

Trade Like Jesse Livermore - Richard Smitten

Emerging Markets Century - Antoine van Agtmael

Hot Commodities - Jim Rogers

I recommend that you read all of them if you wish to have an edge when investing.

10th November 2009

Portfolio review based on recent earnings results and quarterly business updates.

Nearly all my portfolio companies have released their business results and except for Nokia and NASDAQ,I am pleased with the progress to date.
 
My industrial companies,ABB and Flowserve are experiencing softness in their higher margin order book from the manufacturing and mining sectors but I view this to be only temporary as I expect demand for energy efficient products to rebound in future as economies and credit for capital projects return to normal.

China's Tsingtao Brewery year to date earnings were even better than I appreciated and at my purchase price was trading at 25 times 2009 expected earnings - its lowest multiple that I can recollect,excluding the March low of 20 during the time when the Hang Seng index fell 65% from its all time high. 

Korea's SK Telecom results were very good and the new CEO who has a strong track record in mobile internet services as well as maximising returns on capital has already stopped the capital intensive,loss making international ventures and is refocussing the company on mobile enterprise services for SK's future growth.The company made some sharp price cuts in September in its core business and is expecting volume to rise to compensate.I will wait to see what adverse impact,if any,this has had in Q4 2009 before I consider adding to my position.

I am really surprised given the loss of credibility that the US stock markets and the investment industry at large suffered;that "dark pools",where trading can take place outside the regular stock exchanges of the NYSE and NASDAQ,are still tolerated.This has led to NASDAQ losing trading volume and pricing power and as a consequence,led to a double whammy of declining earnings and a decline in its price earnings multiple.This has caused a 40% decline in price compared to my holding price.NASDAQ's trading initiatives are leading to an arrest in such declines but if the US Securities and Exchange Commission does not tighten regulation,it will pose a permanent weakening of NASDAQ's competitive position.

So irrespective of how their fund performs,they will charge an annual 2% "management" fee and 20% on any gains in its investments by the year end.This performance fee is based on the incremental year on year increase in the fund from the date that you subscribed.Moreover depending on fund,there are also redemption fees further reducing your actual return!

For example if the fund appreciates from $100 to $115 in the first year and then from $115 to $125 in the second year,the fee is 20% of 15 ($115 - $100) in year 1 and 20% of 10 ($125-$115) in year 2.Note that the actual appreciation in year 2 is only 8% (125 divided by 115) but you are charged 20% of the absolute gain ie 10 (125-115).

This means that you would lose 5% of the 25% return in the above example plus pay 4.3% annual fees (2% of 100 in year 1 and 2% of 115 in year 2).

So in summary over a two year period,if the fund appreciates 25%,you would receive 15.7% - only 62.8% of the advertised gain!

Value Partners in Hong Kong who essentially invest in Chinese stocks have a subscription fee of "up to 5%",an annual management fee of 1.5% and "high on high" performance fee of 15% so if their classic fund is up 25% at the end of this year,you will see a return of 19.75% (excluding the one off subscription fee) but if it declines next year,there is no performance penalty reimbursible by the fund manager and you would still have to pay the additional 1.5% of the fund's overall value in management fees!

The payment structure of hedge funds leaves them wide open to excessive risk taking since the manager personally loses nothing from negative returns and gains massively from a high positive return!This also explains partly why the market has transitioned from essentially an investment market place for companies for rational long term capital allocation to one primarily being used by traders chasing short term gains.By definition for one trader to win,one trader has to lose so over the long term,they end up cancelling themselves out since they can't beat themselves!

20th October 2009

Chow Sang Sang is another play on the growth in China's domestic consumption.

Chow Sang Sang is Hong Kong's oldest jewellery retailer whose revenue and earnings growth in the past five years has been largely due to the rise of mainland China's affluent consumers.Why it is experiencing a windfall from this trend is partly due to endemic problems of general counterfeiting in China.When it comes to jewellery,mainland Chinese do not trust local retailers with the quality of their products compared to Chow Sang Sang.

Chow Sang Sang is a famous and well known Hong Kong brand amongst the Chinese for diamond and gold jewellery.

From 2005 it has been a sightholder of De Beers' distribution company,The Diamond Trading Company (DTC) and since 2008,only one of two Chinese jewellers who have had their status retained by DTC.This license (subject to renewal every 3 years,renewal date for current license is March 2011) allows it to cut and polish diamonds from De Beers,in its own factories with De Beers stamp of approval and to act as a De Beers retailer (there are only 79 sightholders worldwide).

De Beers is responsible for nearly 50% of the world's diamond supply.

Chow Sang Sang is also the only retailer allowed to sell the "love diamond" in Hong Kong,Macau,Taiwan and mainland China due to its exclusive agreement with one of Europe's leading diamond cutters,Mickey Weinstock & Co.This is referred to as the "Super Ideal Cut" - meeting the criteria of ideal cut proportion,perfect symmetry and perfect polish and is one of the most renowned premium cut diamonds in the global market.

The company has also won many awards for customer service and if you visit one of their stores in Hong Kong,you immediately get the feeling that it is one classy operation.

It is in a unique position as a jewellery retailer in the China market due to its partnerships with De Beers and in selling the love diamond - both agreements which are extremely hard to get.

The diamond business tends to be a highly traditional business based on trusted relationships.The fact that Chow Sang Sang has a successful 75 year operating history with most of its senior management team having been at the company from between 20 to 50 years;together with its brand reputation and exclusive partnerships,enables it to have a significant competitive edge as it expands its stores in China and grows its business.

This has been confirmed by its financial results.From 2005 to 2008,the company's turnover grew by an annualised compound rate of 15% and its earnings by 25%.Due to the financial crisis and the slump in consumer spending this year,its earnings has declined to date by 18%.

So far,the company has rolled out 125 stores in mainland China and plans another 100 stores over the next 5 years.Given its focus on quality,its strategy is to continue to own all its stores to maintain exclusivity and quality control.

The company is also a nice play on the rise in prices of precious metals such as gold and as a hedge against inflation (jewellery is one retail sector where prices go up in line with inflation!).

The company also owns nearly 5 million shares in Hong Kong's stock exchange (HKex) due to an old historical commercial arrangement and while this is not reflected in its operating income statement (only dividends are recognised),its investment has appreciated 1256% in the past decade and represents around 15% of Chow Sang Sang's current market value.

In fact given the value of its shareholding in HKex and its current balance sheet net of all liabilities,the company's business valuation is barely more than 1.5 times the cost of its existing stock!

Its industry peers in Europe and US such as Tiffany's,have historic PE multiples of 15 to 25.Chow Sang Sang's current and historic PE multiple is around 10 but due to its future growth potential and its balance sheet,I view the company to be one that is still significantly undervalued.

It's strong cash flow generation and dividend pay out ratio policy of 40% of earnings,means that its likely dividend yield based on this year's results at current share price,is 4.2%.

It also runs a niche brokerage business catering for its high end clients and given the rebound in the Hong Kong stock market and number of IPOs happening in the second half,earnings might be lifted further by higher demand from its stockbroking services.

I am also attracted to the fact that Chow Sang Sang has been operating since 1934,has been consistently generating earnings and cash flow and is in one of the most durable businesses in the world - diamonds and gold jewellery!

Its current annual sales is US$1.3 billion,of which retail jewellery sales from mainland China is still only around US$250m,so it has plenty of scope to grow as consumer spending recovers to its normal rate.

Mainland China's jewellery market is currently valued at US$3.9 billion and Chow Sang Sang's current share is 6%.Not only do I expect it to benefit from the ongoing growth in the Chinese market but I expect its sales to be further compounded by increasing market share as it opens more stores.

This is one stock that I intend to further accumulate if the Hong Kong stock market has a correction over the next year and/or if their results beat my expectations.

17th October 2009

16th October 2009

My philosophy of managing my investment portfolio is a mix of Peter Lynch and Warren Buffett (Peter Lynch was the most successful fund manager in the US until he retired).

Peter Lynch was constantly searching for undervalued companies and would not hesitate to rotate stocks if he felt there were stocks that offered better value given changes in stock prices,industry conditions and business performance.

He would have a mix of what he defined as stalwarts (large cap stocks such as Intel) if he felt that they were undervalued at the time of purchase, cyclicals (such as Noble Energy) when he felt that their PE multiple was too depressed given improving conditions in the industry and fast growing small cap stocks (such as Chaoda Modern) which were followed by few analysts or the media but offered the largest scope to double or triple.

Despite the sheer number of stocks he owned and rotated,he was not a trader following technical charts or short term price targets provided by analysts.His methodology was similar to Warren Buffett's except that he was more diverse in his holdings,was happy to own a large number of companies (provided that he understood the business) and would not hesitate to switch if he found better value and growth elsewhere.

Having said that,similar to Warren Buffett,I still intend to hold around 50% of my portfolio permanently in a few holdings that I purchased at discounts to their intrinsic business value,such as Standard Chartered Bank,Intel,Microsoft,Infosys,ABB,China Agri Industries,CNOOC and United Health (unless valuations get so high as to cover all their earnings over the very long term or some extraordinary event occurs which materially and permanently damages their business).

The other change I have made is to essentially have a mix of around 20 stocks (I currently hold 22 in the portfolio) to reduce volatility of fund performance.

My current weightings in various sectors are as follows

1)Technology 27%
2)Energy 14%
3)Industrials 14%
4)Banking 12%
5)Agriculture 11%
6)Consumer
   discretionary 9%
7)Healthcare 7%
8)Miscellaneous 6%

The maximum weighting that I would prefer to hold long term for a small cap is 5% and for a stalwart 10% but temporarily they may be higher (up to 8% and 15%) depending on if there is a significant market overreaction that will need time to play out.

If I also open a new position,the opening position has be at a minimum of 2.2% of my portfolio - the mistake of not doing this,led to gains in CNOOC and Zijin Mining being far lower than my analyses warranted.

I am also concentrating on companies and markets that I am more familiar with - that is the lesson learnt from the mistakes I made with America Movil and Garmin.

The last 12 months has been a great lesson in ignoring the financial media and critically evaluating investment managers as their lack of business acumen was brutally exposed. 

I am actually a living and breathing experiment of answering that question which sets me apart from the industry.The most ironic thing is that people who live simply and below their means tend to exhibit those exact trustworthy qualities required when it comes to managing money.

14th October 2009

China's Chaoda Modern Agriculture released another set of impressive results yesterday with revenues growing 22%,gross margins and operating profit margins widening sequentially to 70% and 50% (leading to overall profit margins of 67% and 48% respectively for their financial year).

They also demonstrated more effective cashflow management leading to a free cash flow margin of 22% to sustain their growth plans without requiring further share dilution.

Yep and it is still being valued at book value and a price earnings multiple of barely more than 5!

The other reason for the significant increase in weighting of Chaoda in my portfolio is that while there has been much talk about inflation and the price rises of oil,gold and base metals,the media has yet to jump on the bandwagon of future food inflation.

For sure when the global economy turns the corner and starts to expand,given the doubling of the US money supply over the past couple of years,food prices are going to rise and given Chaoda is a leading food producer it will definitely benefit from such price rises.

I view my high weighting in Chaoda not only due to its significantly undervalued business and strong operating performance but also as an investment hedge against food inflation.

12th October 2009

I have been tracking Tsingtao the company for a couple of years (while enjoying the beer for 9 years....) and it has always been a great beer,a fast improving business operation,one of China's strongest and most durable consumer brands and an expensive stock!

Its trailing twelve month PE ratio has typically been from 30 to 40 with it peaking at 70 during the top of the Chinese bubble in October 2007 and falling to a shortlived low of 22 when the Hang Seng index was collapsing in March this year.

While China is the world's largest beer consumption market and growing at higher rates than any other major market in the world(compound annual growth rates of 6%+),it is still a fragmented market with ferocious competition.

Irrespective,Tsingtao during the past 5 years,when it battled inflation and then the financial crisis has successfully continued to grow sales in excess of 15%;earnings growth rates in the range of 20% to 40%,increased market share and elevated its brand profile.It experienced bankruptcy in the 1990s and the management in place since then,has successfully transformed the business into becoming one of China's leading branded beverage companies and growth companies.

The reason why I have opened a position in the stock now,is that it is providing me with sufficient evidence that it is becoming a big winner from the financial crisis as it increases its market share from 13% to 15% while raising prices and improving its sourcing,manufacturing,marketing and distribution to expand margins and returns on equity.

Its announcement on friday night that its cumulative profits from Q1 to Q3 2009 were 75% to 85% higher than the pre financial crisis 2008 figures(and when one removes the non recurring deferred tax adjustment,higher by 40%) means that it is now priced at a 2009 PE ratio of 30,the low end of its traditional range.

Its current revenue is still only approximately US$2.6 billion with just 2% being international sales.

Tsingtao is China's oldest (0ver 100 years old) and most popular beer brand (depending on how you define it when compared to China Resources' Snow beer) and most overseas Chinese restaurants stock it with high brand recognition amongst overseas Chinese.Tsingtao has been prioritising more on the domestic market than the overseas market and while international sales represent the most lucrative profit margins,it still has plenty of scope to grow its domestic business before needing to tap international expansion to maintain its earnings growth rates of 20%+ per annum.

This is not a stock to open with a big position but to average in if general market declines lead to better prices provided no deterioration in Tsingtao's operational performance.However given the evidence of the wild swings of China's stock market over the past 4 years,this stock declining at lower than a 25 trailing twelve month price earnings multiple,now appears to be unlikely.

I would classify Tsingtao Brewery as a "Philip Fisher" type of growth stock where judgement of qualitative business factors plays the most important role in assessing business valuation risk and return.

Successful practitioners of Philip Fisher tend to be the greatest stock market investors in the world and Warren Buffett was equally influenced by Fisher as he was with Benjamin Graham (the father of value investing who practised buying cheap stocks essentially by looking at accounting numbers).

Few investing websites or fund managers claiming Buffett style investment techniques,really grasp Fisher's thinking and to have an introduction to Philip Fisher,I recommend that you read "Common stocks and uncommon profits" and then re read it again after a few months!

I would classify Infosys in my current portfolio as a definite Philip Fisher type of investment with possible arguments being made for a few other existing holdings.

8th October 2009

While I intend for Infosys to remain a core long term holding,it was never my intention for it to remain 10% of my entire portfolio and at its current valuation of 22 times operating earnings,I am rotating part of my holding into cash with the view of either adding to other existing positions depending on soon to be released results or potentially opening a new position in future.

6th October 2009

I have a traditional view of what is meant by short term,medium term and long term when it comes to investing in stocks which was pretty much how most people viewed such time periods from the 1950s to 1980s.Short term is anything less than 2 years,medium term from 2 years to 4 years and beyond 4 years as long term.Hence why when I opened this website,I stated 3 to 5 years as the minimum period for the availability of capital to be investing in stocks.

When people evaluate house or apartment purchases,they tend to make their decisions on whether they plan to stay in the place for at least 3 years or more likely 5 years.According to many statistics,the average holding period for a home is 5 years.

Since 1990 in direct correlation to the ballooning of the financial services industry and related financial media,the average holding period for a stock has declined from 2 years to 1 year and from 1 year to 6 months since the year 2000!

The article below neatly sums up the dramatic change in the stock "investing" industry.

http://www.businessinsider.com/henry-blodget-youre-an-investor-how-quaint-2009-8

You will also notice how poor the returns were from funds since 1999 in Europe and the US during this dramatic decline in holding periods.For example in the top two financial markets,New York and London,US based equity funds have a negative return of 30% on average and UK based equity funds have a negative return of 20%! This is in sharp contrast to the sheer number of financial commentators,people employed in the investment industry and the consequent rise in trading volume that has occurred!

The picture of fund performance is different in emerging markets due to either their own financial crisis in 1997 which led to a low base in valuations or the rise in demand for commodities lifting markets such as Brazil and Australia and the further integration of developing economies into richer western markets leading to a rise in living standards, foreign investment,exports and domestic consumption.

The philosophy of buying world class companies at discounts to its intrinsic value and holding over the long term or even buying index related ETFs on a monthly basis,still outweighs most mutual and hedge fund performance and has outperformed the vast majority of investors and funds whose average holding period now is 6 months,over the past decade!

I now even hear "value investors" define long term as short as two years - I guess the pressure of being involved in the financial industry leads to conformity even with people whose declared investment principles are supposed to be in contrast to traders.

As I said earlier,being a good financial analyst is only 20% of what it takes to be an outstanding stock investor.30% is being an excellent business analyst which the vast majority of financial analysts and fund managers are not and 50% is having the temperament to withstand pressure of the market going against you in what I define to be the short term (ie up to 2 years).

It is very rare to find a stock with a clean balance sheet,tangible net book value greater than US$1 billion which can be classified as a gamechanger in its industry and a growth and value stock all at the same time but China's Chaoda Modern can be viewed as all three.

Chaoda Modern is reinventing food production in China with the tacit blessing of the Chinese government.China's agriculture industry is as a whole,fragmented with the vast majority of farmers lacking the capital and scale to modernise farming methods.This combined with the government's need to clean up quality standards as well as rising demand for higher quality food products as domestic consumption and purchasing power rises,has provided the market opportunity for Chaoda Modern's business to flourish.

It is China's largest listed producer and marketer of vegetables.

With local governments acting as a go between;the company rents land use rights from farmers,upgrades the infrastructure and carries out large scale planting using state of the art farming technologies. The farmers in return get paid rent for use of their land and a separate salary for working on it.With Chaoda Modern's comprehensive logistics system and multi tier domestic and international sales network,it cuts out intermediaries and gets its products to wholesale and retail markets far faster and at lower cost and product wastage than any other competitive alternative.

Its sales,production,earnings and cash flow from operations numbers are all highly impressive - consistently growing at rates higher than 25% compounded on an annual basis for the past 5 years.

Its gross margins and net profit margins are all in excess of 60% and 40% respectively,its returns on equity and investment capital are consistently in excess of 15% and while its sales have been tripling every 3 years,at around US$800m,it is still at levels to support compound annual growth in sales and earnings in the double digits over the next 5 years.

Its numbers look more like a successful fast growing technology company or fashion retailer than a food producer and with strong end user demand for its vegetables and fruits in China and North Asia,there is not the risk of over expansion and market saturation that one gets with fast growing fashion or consumer electronics retailers or as was the case of Chesapeake Energy (a former portfolio holding),market saturation of natural gas or in the case of technology companies - product obsolescence!

Indeed the Chinese government made Chaoda Modern the key supplier of vegetables to the Beijing Olympics last year,further enhancing the company's reputation and brand.

Typical price earnings multiples in the food industry like Archer Daniels Midland tends to be in the 10-15 range with the higher end of the range given to companies with particularly strong balance sheets,operating margins and earnings growth.

So why is it so cheap?

Chaoda Modern was set up by an entrepreneur in China who for all his brilliant business skills has yet to set up the company with the type of corporate governance that funds like to see.Results although within the time frames issued by the Hong Kong Stock Exchange are late compared to most companies;auditors have been changed twice in the last 6 years (although none was due to impropriety by the management) and like most driven entrepreneurs,his "land grab" strategy of continuously expanding farm production and acreage beyond free cash flow from operations has led to share issues,placements,convertible debentures and senior debt notes which although have led to earnings per share growth and returns on capital in excess of 15%,has caused fear amongst the investment community about the company's financial management.

When the credit crisis late last year was followed by the owners of the convertible notes deciding against converting to equity earlier this year,the stock price more than halved and has yet to recover.Chaoda Modern decided to clean up its balance sheet by making a share placement of US$50m at HK$5 at the beginning of the year which the CEO decided to subscribe to (enlarging his own shareholding in the company to approximately 25%) and by another share issue to pay for the convertible which was successfully taken up at the end of June.

It now has surplus cash when all its liabilities are deducted and with its annual cash flow from operations of approximately US$400m,it has room to meet its land purchase commitments and continue growing its production targets without further share dilution or debt facilities.

Chaoda Modern will be rerated if it continues to execute on its operational strategy and funds its expansion with existing cashflows.Even if it does seek further funds in the future,there is little downside to the stock from a fundamental basis.

This company was brought to my attention by a good friend of mine in Hong Kong on friday for investigation so if anyone has a company that they want to analyse for investment,let me know!

18th September 2009

"Stephen Gollop has been reprimanded for using the prestigious 'Certified Financial Planner" title without having gained the qualification.Mr Gollop,the chief executive of Tyche Group,who regularly gives investment advice on Bloomberg,CNBC and RTHK,has used "CFP" after his name for at least three years.Tyche Group advises retail investors,managing about US$40 million of clients' money.Financial advisers to the Hong Kong public do not need any formal qualifications,so Mr Gollop has not flouted any regulations." - South China Morning Post

"A lot of advisers put CFP on their cards without having the qualification it suggests...if you ask,some will say it stands for China Financial Planner" - Sidney Sze,chairman Independent Financial Advisers Association,Hong Kong.

On this website over the last year,I have highlighted a number of high profile investment advisers who were found out to be if not scam artists,then either,very average investors or people who really did not know what they were advising about.This related to people at the senior level of the investment industry nevermind the thousands of "junior" financial advisers and analysts who learnt about an investment "yesterday" and are paid commission to sell it to as many people as they can or are qualified to read a balance sheet and then extrapolate numbers into the future with little understanding about the business dynamics behind the company that they are recommending.

Hong Kong is the fourth largest financial centre in the world and to say that literally anyone can call themselves a financial adviser with no strong qualifications to back them up,is amazing.

Stephen Gollop passed a basic vocational exam in the UK- not a business degree,not a high profile,post university financial qualification from a prestigious Institute,just a basic vocational exam.

Clearly in life you will meet certain people who are highly self confident and have the flair to promote themselves but in reality have little substance behind their abilities and have little integrity about themselves or their actions.They may be self deluded and really think they are who they believe to be or as in the case of Bernie Madoff,truly evil people - unfortunately the investment industry attracts a large number of them.

16th September 2009

Adobe's announced US$1.8 billion acquisition of loss making Omniture yesterday,is going to be earnings per share dilutive and I view it as no more than a "diworsification".

Adobe's stock price has now fully recovered from its March lows and is being valued at its historic 25 times multiple on its underlying earnings but its overpayment of a webanalytics firm is a danger signal to me that its management team is struggling to figure out how to continue to meet its historic annual earnings growth of 15%.

Adobe insists that this is a "game changer" for its customers but there are less expensive ways of doing this such as creating a partnership with Omniture or taking a minority stake in the company,both of which would have led to credible solutions for its customers as well as met shareholder needs of Adobe.

There are simpler businesses to invest in with less lofty valuations and strong fundamentals so I see no reason to take the risk of keeping Adobe in the portfolio.

14th September 2009

While I am bearish on the long term performance of most companies that are solely linked to the fortunes of the US economy,this is one stock that I am willing to make an exception to the rule.

All US healthcare stocks have been severely punished by the market due to fears of the US President's health care reforms.It is now pretty obvious that whatever reforms will happen,will now be significantly diluted and while I still would not be exposed to pharmaceutical companies,it appears US healthcare services companies and insurers are not going to be impacted as severely as once thought.

The fear and uncertainty plus typical market behaviour of chasing hot stocks in hot sectors,has driven the US healthcare sector to valuations never seen in this decade while the US demographically,is continuing to age.

United Health Group is the leader in healthcare services and insurance in the US with US$84+ billion revenues.It is a well managed and highly efficient company which has traditionally been valued at near 18 times earnings.While such a high earnings multiple is unlikely to be justified given the sheer size of its revenues;its market dominance and sheer economies of scale means that it will continue to prosper and be in a strong position to offer the cost effective services for the 10% of the US population that Barack Obama's reforms seek to address.

Due to the US recession impacting its commercial customers together with the current unfashionable nature of funds investing in the healthcare sector,United Health Group's valuation has nearly halved and is trading at 10 times current and forecast earnings.

Due to its insurance business,it generates huge cashflows from operations and when its capital expenditures are averaged out,United Health is being valued at around 8 times operating net cash flow.This is a health care giant with predictable revenues and cashflows that investors such as Warren Buffett likes.

Indeed by opening a position in United Health Group at current prices I am holding my first stock that both Warren Buffett and George Soros own.George Soros opened his first position 3 months ago at a 14% lower price but if both the ageing trend and demand for healthcare continues to grow in the US and Obama's likely reforms are proven to have minimal impact on United,the stock will significantly outperform the market.

Irrespective,I believe given United's market position,revenue,earnings and cash flow generating abilities,market pessimism is overdone and United's earnings multiples should be 13 worst case giving a short term price valuation target of around US$40 in the next 6 months.

When to sell and realise the gain is actually one of the hardest things to do.While I view Anta to be fairly valued,the fact that it was a sizeable holding and had more than doubled and is now valued at 20 times trailing twelve month earnings indicates that there is little reason to drive upside in the stock compared to when it was valued at 10 times earnings and growing earnings in excess of 20%.Given the sheer size of my gain in Anta,that gain now ran a higher risk of exposure to market sentiment than fundamentals and given the lack of market buying power after the release of their earnings results last week,I decided to exit the stock and realise the gain.

I was highly reluctant to include Alco Holdings in my fund portfolio given that it is a micro cap (ie company value less than US$500m) which means far less liquidity in its shares but this is one company that I have little problem continuing to accumulate if its price declines 20%,30% or 50% due to market sentiment.

My analysis of the business has to be spot on otherwise I could run the risk of being the only buyer in the market due its lack of size for most funds to invest in the stock!

As Jim Rogers and Marc Faber say,they love buying stocks that pay them to buy it (provided that the fundamentals of the company and its industry remain compelling and there is no risk of operational or balance sheet impairments).Dividend yields of 6% representing the maximum of two thirds on going earnings and being paid out of free cash flow from operations tend to be key buying parameters;tangible net book value of less than 1.3 and net current asset value of 1.5 tend to be others.

In the US and Europe,well managed,cash rich companies that pay out 3% to 5% dividend yield tend to be viewed highly attractive.Smaller,cash rich companies viewed with a higher risk premium are considered sufficiently attractive at 30% higher yields such as 6 to 7%.Anything higher providing the fundamentals of the business have not been impaired,would be viewed as undervalued.

Alco Holdings which is a Hong Kong owned consumer electronics manufacturing business based in China has a tangible net book value of HK$2.58 per share and a net current asset value of HK$1.94 per share.It has surplus balance sheet cash per share after all liabilities are deducted of HK$1.42 plus another HK$0.11 cents equivalent per share of corporate bonds.It also owns investment properties in Hong Kong valued at the equivalent of HK$0.12 cents per share generating rental yields in excess of 13%.

Alco Holdings consistently generates return on investment capital and equity greater than 10% per annum.In its financial year ending March 2009 including the worst period of the financial crisis,it increased its return on investment capital and equity to 12%.In fact including this period,its revenues increased 37%,its operating profits excluding one off non cash items,increased by 32% and its cash flow from operations tripled!

During economic crises,superior companies gain market share as weaker competitors decline.While market pessimism and fear has punished all export orientated Chinese manufacturing companies in the same way,it has failed to distinguish the winners.

Alco Holdings has been in the consumer electronics business for over 40 years and has been listed in Hong Kong since 1992.It is a family run business with the son being CEO and the father,the chairman.The father founded the business 42 years ago and the son has been in the business for the last 24 years.Alco Holdings is well managed and highly experienced in adapting to changes in the consumer electronics business over the past 40 years.Despite all the challenges,they have a successful long term record of growing revenues,equity and cashflows and delivering sustainable earnings irrespective of technology changes in the industry and economic cycles.

Their biggest customer Walmart is increasingly relying on Alco as one of their key Chinese suppliers (Walmart makes up nearly 26% of their revenues and the relationship has become even stronger during the credit crunch due to Alco's financial strength).I expect Alco to continue maintaining their revenues and current earnings at the minimum.

Alco Holdings due to its small size,is a classic "buy as a long term business owner" stock and I consider undervalued by at least 30% worst case.In the meantime I will collect its dividends in my fund.

27th August 2009

Extraordinary returns pretty much means consistently increasing fund net value by 20% or more,every year and far exceeding stock market index returns.

I believe that the 3 key qualities in one's make up and their relative importance, are as follows,

1) 20% - being a good financial analyst.

You will find most fund managers and the vast majority of equity analysts in the industry are good financial analysts but this is pretty much their only strength.

2)30% - being an excellent business analyst.

This is where legendary investors like Warren Buffett and Sir John Templeton excel.An excellent business analyst gets 85% of their stock picks correct.This borders on genius and given the track record of mutual fund managers supported by equity analysts,in getting largely,market average returns;demonstrates that there are very few excellent business analysts in the investment industry.

3)50% - ability to withstand crowd psychology.

The ability to withstand mass hysteria,media hype and not only stick to one's analysis but become increasing alone in one's opinion while simultaneously increasing one's purchases in ever larger volumes as stocks fall 20%,30%,50% is not something that one can learn to do,since it is a personality trait that you either have or have not.
Clearly you would be extremely foolish to be doing such a thing unless you have built a track record over a number of years,of a hit rate of 85% accuracy in your business analyses so you know that you only have a 15% chance of being wrong.If you cap your total holding of any one stock to 20% of your total portfolio,invariably the returns on 85% of the times that you make gains from taking such actions,greatly exceeds the losses on the 15% that you get wrong.

Billionaires like Soros and Buffett have realised or have been sitting on hundreds of millions of dollars of losses in their investments in the past but over time they have realised billions of dollars of gains.As long as one's position is capped at no more than 20% of one's holdings,taking such action knowing that more than 4 out of 5 times,you are going to be right,will lead to extraordinary gains.

Why I did not increase my holding on Standard Chartered Bank to 20% of my portfolio when the whole banking sector's share prices were continuing to collapse (see my blog on 4th March 2009) is that while overall,my business analyses to date are better than peers in the investment industry,it is nowhere near 85% hence only relatively small additions were made.

This portfolio over the next several years will be a good judge on my hit rate and I would be delighted to achieve 75%.

22nd August 2009

I was considering updating my track my stocks webpage but I decided against it since the investment philosophy is not of a day trader but a long term investor and giving an update on current stock prices 7 weeks after the annual 30th June one,will only encourage short term judgements.

Nevertheless,since most of the companies (and all the key ones) have announced first half year financial results,the reversal of a loss of 3% to a gain of 11% in the past 7 weeks has been based on solid business results rather than any potential froth in the stockmarkets.

My top holdings continue to perform well and the one spectacular performer both as a business and consequently in its stock price appreciation,Anta Sports shows no sign of making any business missteps.Anta Sports which has appreciated 154% excluding dividends,is now on a par with Standard Chartered Bank as my top holding given the company's stock price appreciation.I was ready to sell Anta Sports this week if its interim results did not meet my high expectations but they exceeded them and this company could turn out to be one of the great Chinese business success stories over the coming years.

While I believe a number of the Asian stockmarkets (excluding Japan and Korea) are currently either overvalued or fairly valued,I believe that the US markets still have room to appreciate since its PE ratios are below their historic average.

Asian stockmarkets tend to amplify euphoria and pessimism far more than European or North American markets so it would not surprise me if the Hang Seng,Shanghai,Mumbai and South East Asian markets continue to appreciate higher on the coattails of the US stock market.

Volatility is something one has to live with if one is investing in equities so I can easily see gyrations of 10% up and down on a half monthly basis on my portfolio over the coming two years but I expect the overall trend to continue to be upward.

The thing that did surprise me was how quickly the markets corrected most stock prices which were significantly undervalued.Before it used to take at least two years for markets "to scale the wall of worry" and price back its errors but in the electronic age,it appears that it is more likely to happen within 6 months.

Given my investment technique,one has to use long term capital since the market appears to be governed by traders who will value entire businesses based on the next quarter than normalised annual earnings and who may buy or sell stocks based on chart patterns irrespective of business fundamentals.

I do not believe that I will continue to beat every single global stock market on a semi annual basis since markets such as Hong Kong tend to be highly influenced by sentiment so I can easily see the Hang Seng go up higher than my portfolio in total,only for it to decline far lower than my portfolio at a later date.Secondly at some stage,it is likely that I will be holding a significant part of my portfolio in cash since there is the risk that the market will be materially overvaluing some of my stocks' long term intrinsic values and at that stage,it will also likely be the case that there will not be any stocks available at significant discounts to their true business value that are within my circle of competence.This will impair my portfolio performance as sitting in cash no longer generates any returns!

I am fully weighted even including some of my short term capital, in equities since I believe that stock markets over the next 18-24 months will be very good for investors given the likely earnings appreciation of companies in 2010 and 2011 when compared to 2009;when market fear of the future and uncertainty over company earnings is cleared and when the sheer volume of cash that is still sitting on the sidelines in North America,gets back into stockmarkets around the world.

18th August 2009

Another sector that the market is fearful about is the medical sector particularly due to Barack Obama's attempted healthcare reforms which would put downward pressure on prices.This had led to compression in price earnings multiples and worries about future sales and earnings results.

The drug industry is one that I typically do not invest in,due to the risks associated with drugs going off patent impacting company margins and drugs in the pipeline either failing clinical trials or simply not replacing successful off patent ones from a financial perspective.

However medical companies who are global leaders in the supply of diagnostic tools and regulatory approved healthcare equipment stand to gain as the world becomes more affluent.

Becton, Dickinson and Company is a global medical technology company based in the United States and is focused on improving drug delivery, enhancing the diagnosis of infectious diseases and cancers, and advancing drug discovery.The company develops, manufactures and sells medical supplies, devices, laboratory instruments, antibodies, reagents and diagnostic products worldwide.Its international sales is currently 55% of its total sales and growing at twice the rate of its US sales in constant currency terms.

Currently Europe accounts for approximately 35% of its international sales and Asia around 14%.I expect revenues from Asia will grow the fastest due to the growth in medical care that will arise as developing economies become richer.

Over the last 10 years Becton Dickinson has more than doubled its sales to its current US$7 billion plus.During that time its per share earnings and book value have consistently grown by an annual compound rate of 15% and 12% respectively.Its price earnings multiple normally is 20 but due to the uncertainty of the impact of healthcare reforms in the US,the global credit crunch impacting its biosciences division and the worldwide stock market crash,its price earnings multiple is currently 13.7.

Its return on investment capital and equity is consistently in excess of 15% and 20% and it has a balance sheet net cash surplus when its liabilities are deducted,of the equivalent of US$5 per share.

From public records,it appears that it is the only new company that Warren Buffett has invested in over the past couple of months citing its "predictability in revenues and cash flows" as a couple of his key reasons.

While I do not view Becton Dickinson to be as undervalued as Noble Corporation,it is less likely to be as volatile and as exposed to general economic cycles.As a result,it offers what Warren Buffet likes with his investments,long term predictability with little risk.

I expect that when the uncertainty over Obama's healthcare reforms is cleared in the US and Becton Dickinson continues its sales and earnings growth,it will be rerated and I have a target price on the stock of US$88 in two years.Its current dividend yield is 2% and likely to go higher as it traditionally raises its dividend every year and its current payout ratio is still less than 3o% of earnings.

Track my stocks webpage has been updated.

14th August 2009

When the US economy comes out of recession and begins to grow and when banks' credit issues get resolved and they begin to normalise lending (which is all likely to happen by this time next year),global demand for oil and the weakening of the US dollar,are both likely to continue their long term trends.

The motivating force behind the purchase of Noble is that it is one well managed,cash rich,oil services business exposed to the growing deepwater oil segment sporting a continuing fire sale valuation of less than 6.Even with its order backlog and a perceived decline in day rates for its shallow water rigs in 2010,Noble's valuation as a multiple of future earnings is at its lowest in ten years.

Noble's debt to equity ratio of 11% is wonderfully attractive in these economic uncertain times and is the lowest gearing of all offshore oil drilling service majors.It prudently did not make any company acquisitions during the peak in the oil cycle and its equity is made up of solid tangible assets (not any flaky goodwill and "intangibles"!).

Its return on equity and investment capital is consistently in excess of 24% and 18% respectively.It has an order backlog of US$10 billion which is greater than its equivalent annual sales for two years,protecting it from any potential risk of drastic declines in the oil services industry.

Well managed oil services companies,particularly those linked to the deep water oil segment generate huge amounts of free cash flow mainly due to labour specialisation requirements,capital intensivity of the industry and the high barriers to entry,minimising the competition.

Noble is no exception in generating such high levels of cash flow and even in the challenging first 6 months of 2009,Noble generated $900 million of free cash flow from operations after deducting for maintenance capex.This is unlikely to change in the second half of this year and even if rigs are idle next year and day rates decline 20% leading to a reduction in cash flow of 33%,Noble should still generate $1.2 billion in annual operating cash flow which I view to be the worst case scenario.

Given its earnings multiple has traditionally been 20 due to its successful growth track record,even in a depressed 2010 oil market,its valuation would now only be,what I calculate,as 7.5 times worst case 2010 operating cash flow.

Noble's rigs and drilling ships have typical useful economic lives in excess of 20 years so the market's pessimism,its short term view,fear of Noble's idle capacity in 2010,risk of penalties for late deliveries of new builds,has led to Noble being offered at a significant discount to its intrinsic business value.

Noble's customers are a who's who in oil producers from Exxon Mobil to Shell to Petrobras to Pemex to Saudi Aramco.

It is the third largest deepwater oil services company in the world behind Diamond Offshore and Transocean and the one with minimal debt on its balance sheet when offset by its cash reserves and liquid assets!

I have a two year conservative target price on Noble of US$50 which may be revised upwards.

Track my stocks webpage is updated with this new addition.

12th August 2009

Dividend from ABB received -Track my stocks webpage updated.

20th July 2009

Added to my position in China's Xtep International at HK$3.68 net of charges -Track my stocks webpage updated.

See my blog on 20th April 2009 as to why I originally opened the position.While Xtep is being rerated and has appreciated 35% in value since I originally opened a position,it still remains cheap.
 
Xtep is still sitting on its IPO cash of HK$1 per share on its balance sheet and when its net cash surplus is deducted from its market value,it is still trading at approximately 8 times trailing twelve month earnings while its revenues and earnings are continuing to grow in excess of 20%.

Its differentiated marketing strategy in creating a trendy Chinese sports casual wear fashion brand still appears under rated by investors.

18th July 2009

The objective of this website is to provide a living public record worldwide that my skills as an investment analyst and a manager of investment capital will lead to portfolio performance exceeding that of general equity markets but given that 12% per annum returns could attract $billions to Bernie Madoff then I will also target such a similar return for GlobalStockInvestingtoday.com.

The difference between Madoff was that he ran a secret Ponzi scheme while everyone can see my stock picks,prices and weightings on the worldwide web!

Given the holding period of my equity fund is a minimum of 3 years and by the end of the first year,it had declined 3%;the compound annual return required over each of the next two years would need to be 20%.This will lead to a capital appreciation of 40% by July 2011 (net 12% capital growth per annum from August 2008).

I think this is challenging and if accomplished,lead to the website's fund being amongst the leading global equity funds in the world when three year comparisons are finally made.

If held over five years from the launch of the website,a 12% annual capital growth rate would lead to capital appreciation of 75% by July 2013.This will require a compound annual appreciation of 16% over each of the next 4 years - a more achievable scenario compared to generating compound annual gains of 20%.

Despite my sale of Nokia at a loss this week;Intel and Infosys beat expectations when they reported Q2 and in their guidance for the rest of the year.Intel and Infosys are now above my purchase price.

Intel's outlook gave a boost to stock markets worldwide and has lifted my portfolio overall.This combined with my stocks linked to China's domestic consumption continuing to be rerated (due to confirmation this week of China's Q2 GDP rise of 7.9%),has led to the recovery of my portfolio from the stock market meltdown.

It has been a remarkable past 12 months in all senses of the word!

17th July 2009

While Nokia's Q2 results were good,senior management's lack of substantive progress of transforming Nokia to a mobile consumer services company,a highly unconvincing plan of future action,guidance for the second half of 2009 of operating profit margins materially deteriorating from Q2 and below its historic threshold of 10%,lack of clear traction of users and developers to their mobile applications strategy,no clear path to deal with its complicated organisation of over 124,000 people,senior management addressing too many diverse businesses,means that I can no longer justify holding such a big weighting of Nokia stock in my portfolio especially when there are still attractive valuations for companies with more focussed businesses such as Flowserve.

I personally cringe when I hear CEOs of large corporations say "we are accelerating the pace of change towards a solution mode of operation" when presenting a poor company outlook and backtracking on commitments.It is also a bit shocking that after 18 months of outlining its strategy,it publicly states that "Nokia must develop new skill sets"!

Few companies of more than 100,000 people have successfully transformed themselves with new skill sets with the same senior management team in place.

Even when large stalwarts such as Coke,GE and IBM successfully transformed themselves,it was with new CEOs who drove changes to the traditional culture.

Flowserve has been on my watch list for a number of weeks.This is a company which specialises in industrial pipes,valves,seals and infrastructure services for the oil & gas,power,petrochemicals and water industries.It is a well managed company that will benefit from the upgrades in infrastructure around the world and derives 63% of its revenues from outside of the US with approx 40% coming from emerging markets.

The new management that was appointed 4 years ago has successfully transformed the company by cutting costs,increasing revenues,improving operating profit margins and returns on equity.From 2005 to 2008,the management has grown revenues and earnings by an annual compound rate of approximately 15% and 57% respectively and with current annual revenues of $4.5 billion,there is plenty of room for further growth.

Flowserve used to be a bit of a stock market darling before the crash with a historic average PE ratio of 22.Given it is classified in the capital goods sector,its stock price collapsed when the availability of credit seized up.When Flowserve released its Q1 2009 results,it demonstrated just how financially strong its business really is with improving pre tax profit margins in the midteens,a 2009 earnings forecast based on its current order backlog (when credit issues were at its peak) highlighting a decline of only 4% to 13% including non recurring charges.

While investor confidence has returned to the stock,Flowserve is still valued at 50% less than it used to be before the recession and at a PE multiple of 10 times 2009 forecast earnings.

If the order book stabilises this year and is confirmed to be mainly due to temporary credit issues facing its customers,its long term PE should be 15 and when the recession is over and credit returns to normal (which should be by the end of this year),Flowserve should be able to consistently grow its sales and earnings in excess of 10% per annum.I have a target price on Flowserve of $100 by mid 2011,a 50% increase from today's price.

14th July 2009

Given that there is no dividend tax for Hong Kong listed equities owned by Hong Kong residents,stable income yields of 6 to 7% in monopoly type businesses are very attractive;particularly ones that are also linked to the future currency appreciation of the Chinese yuan!

The initial reason that this company caught my attention was due to the CEO buying millions of shares in the open market at current prices,something that is always an attractive signal for investors provided that it is not to legitimise a rights issue,a cash call or an attempt at credibility to counter a poor management record.

Hopewell Highway is part of Sir Gordon Wu's family of companies.Sir Gordon Wu is a highly respected,far thinking and well known Hong Kong chinese businessman - one of a group of elder Hong Kong business leaders whose foresight and prudent management has led to Hong Kong's pre eminent position in Asia and its successful integration with mainland China.

Hopewell Highway Infrastructure develops and operates expressways linking major cities in Guangdong province,China's biggest economic region.Once the expressways are completed,it effectively runs a toll business whose revenue and profits are dependent on the number of vehicles and the general economic activity of the region.

Approximately 90% of its revenues and profits comes from its Guangzhou - Shenzhen expressway.These two are China's third and fourth richest cities with populations of 8.3 million and 12.6 million respectively.Hopewell Highway's net profit margin after tax has been consistently around 60% since its IPO in 2003.

While exports from China due to the downturn has hit Guangdong province the most,Hopewell Highway's traffic statistics indicate that volume has stablised back to 2006 levels. With China's economic stimulus favouring domestic consumption including cheap loans for cars,traffic volume is likely to rise again annually from these depressed levels on a consistent basis in the future.

There is no real alternative to this expressway so it is a monopoly business generating large cashflows.

Hopewell Highway will soon be extending its other western delta expressway from Guangzhou to Shunde,to Zhongzhan.This is on target to be completed by end of June 2010.These are smaller cities but still in the top 40 cities in China from a GDP per capita basis with populations of 1.1 and 1.3 million respectively.

When the extension is completed,the increase in revenues and profits along with the general rise in traffic volumes across all their expressways,will likely offset the increase in Hopewell's PRC tax rates from 20% to 25% over the next 4 years as tax concessions wear off.

Hopewell managed to sell off their equity stake in one of their ring road projects for US$248M at a book value multiple of 2.2 in September 2007.This ring road represented approximately 10% of Hopewell Highway's revenues and earnings in 2007.

Hopewell is now currently valued at 1.3 times book value and at its lowest share price since its IPO.It has sufficient cash on its balance sheet and with its credit and debt facilities to fund its future expressway developments and claims that it can now target a 100% pay out ratio of its earnings in dividends,in future.

Its lease for Guangzhou - Shenzhen expires in June 2027 and Hopewell Highway Infrastructure is likely to generate stable earnings of 35 to 45 HK cents per share per annum until the expiry of the lease.Its dividend policy has been in the range of 74% to 97% per annum since its IPO.

It has managed to grow its earnings by 80% to its now stable level over the last 6 years,increase its dividend by 50% while it stock price is back to just 4.5% higher than its IPO price six years ago!

At a current price of HK$4.37,a PE ratio of 10.9 for 2009 earnings and a likely dividend yield of 6.5% to 7.8% in future,one can understand why the CEO purchased millions of shares in the open market for this operator of one of China's biggest tollways.

Given current offerings of Chinese yuan denominated bonds have coupon rates of 2.8%,Hopewell Highway Infrastructure appears to be a great way of being exposed to a relatively risk free,yuan investment while generating substantial income yields at current prices.

One for Hong Kong investors who are looking for strong income yields.

5th July 2009

As all great investors say,one learns more from studying mistakes both on stock picks made as well as stock picks that should have been made and at this stage,out of the 22 stocks picked,I recognise making 3 incorrect analyses,2 analyses that I should have been more prudent with,in regard to their ability to execute on strategy or in relation to their competitive threats and 1 analysis where I accept overpaying for the stock irrespective of short term market volatility.

I also recognise 3 stocks that I kick myself for not buying for the fund when the market got totally irrational.

The incorrect analyses will be classified under 3 categories,

1)Financial (F)- not paying sufficient attention to their financial make up

2)Business (B)- incorrect business analysis

3)Management (M) - incorrect analysis of management integrity

So the 3 that I got wrong completely were the ones that I exited,generating losses.

America Movil (F) - Financial.

While I understand the telecom operator business pretty well,I overlooked the fact that America Movil generates the majority of its income in Mexican pesos and as explained in my blog dated 10th October 2008 when I sold my holding,America Movil is more a play on the peso than a play on their wireless business -something I overlooked and consequently realised a loss.

Garmin (B) - Business.

This was a classic "driving a car through the rear view mirror" business valuation mistake.I paid too much attention to Garmin's historically strong business and financial performance and extrapolated it into the future,without paying sufficient attention to the fact that the 800 lb gorillas Nokia and Apple were going to take over the majority of consumer demand for GPS through their introduction on mobile phones.That combined with the fact that Garmin's high margin GPS business was in the ever declining big ticket segment such as cars,boats and private small planes meant that its best days are likely to be behind it.

Chesapeake Energy (M) -Management.

As explained on my blog on the 11th October 2008,the CEO of Chesapeake Energy acted as a classic "pump and dump" promoter who recklessly overleveraged on margin to demonstrate to the market that he was buying into Chesapeake's ever increasing share rights issues to continue drilling its gas discoveries.

When Chesapeake's share price was collapsing and its low valuation made no sense,Aubrey McClendon was forced to meet margin calls by dumping all his 33 million shares(5.2% of Chesapeake's entire share capital) during the time when funds had practically stopped buying into equities (except to cover shorts!).

When I sold,I did not realise that it was him that was killing the stock and when rumours were made that Chesapeake's natural gas price hedges were not going to be honoured and that they had working capital funding issues,I decided to exit due to the unacceptable risk of bankruptcy despite its net asset value greatly exceeding market valuation.

If the CEO was more responsible to his shareholders instead of his reckless promotion and financial mismanagement,it is unlikely that I would have sold the shares since fundamentally Chesapeake has strong assets and its share price would not have gone into such an accelerated freefall similar to that of companies going bankrupt.

The one stock that I accept overpaying for,was Esprit.

It was not very smart to open a position in a retailer being valued at its historic PE ratio of 20 when its main markets of Europe were going to enter a recession!That compounded with the subsequent change of the CFO,the President of the Brand and the appointment of a new CEO unfamiliar with fashion retailers after I bought the stock,means that the original management team which was part of the reason why I invested in the first place,have all practically left!

Of the two current holdings that I should have paid more attention to their ability to either execute on strategy or be impacted from competitive threats and only opened positions at lower prices,were Nokia and NASDAQ OMX.

Nokia - see my blog on 9th September 2008 as to why I have Nokia in my portfolio.While I stand by my holding and recognise the competitive threats posed by RIMM in the smartphone segment and Samsung in the mass market;the issue is that Nokia is struggling to execute on its mobile services strategy.

While Apple has seen its one billionth download from its applications store,Nokia is still far away from getting similar traction with its Ovi store.

Given Nokia's senior management track record in consistently delivering on strategy combined with its global reach,economies of scale,brand and mobile device expertise,I will give Nokia time to achieve its stated goals.While I viewed its subsidiary Nokia Siemens Networks as a drag on its earnings,it appears that it will benefit from the current consolidation in the telecom network vendor space by picking up Nortel's profitable CDMA wireless business and its commercially most attractive technology,LTE (4G wireless)for cents to the dollar,as Nortel gets wound up by its creditors.

NASDAQ OMX - while I still maintain that over the long term,NASDAQ's stock price will recover and its revenues and earnings will continue to grow;it is facing a competitive threat from "dark pools" and new trading exchanges accomodating these requirements such as BATS.

Dark pools are trading volumes created from institutional orders,unavailable to the public and facilitated away from the traditional exchanges.Traders and hedge funds like these platforms so that details of such trades are hidden from the public.One would think given the fiasco of last year's stock market collapse and the overleveraging of hedge funds that such vehicles would be stopped but for some reason they are being allowed to continue and are taking trading business away from NASDAQ.

Given the lack of legislation preventing dark pools,NASDAQ is now addressing this threat by offering new services to accomodate such requirements.

I was actively evaluating this company in January and February and when the market fled from mid cap or small cap companies with long term debt during the credit crisis.Brocade's market valuation ended up being reduced to around $1.3billion.Given its long term debt of $1 billion (to fund the acquisition of fast growing data networking vendor Foundry Networks),Brocade's economic value (market cap plus long term debt) ended up being US$2.3 billion.

Brocade is the leading vendor in a duopoly in the highly profitable data storage switch networking space and with its acquisition of Foundry (whose data networking technology will give Cisco a significant competitive threat once it achieves the global distribution scale that Brocade can offer);the company was being valued at around 6 times trailing twelve month earnings.

Brocade has been growing its revenues and earnings at a compound annual rate of 40% and 25% respectively and at current revenues of $1.5 billion with the size of the enterprise ethernet switch market being in excess of $18 billion per annum alone;it can continue to grow its revenues and earnings at compound annual rates in excess of 20% and 15% respectively over the next 5 years.Its PEG ratio (price to likely future earnings growth rate) ended up being 0.4 when 1.3 would have been fair value.

For the last several years,Research in Motion,the number 2 smartphone maker,could not be bought at a reasonable price but irrespective of this, RIMM and its management team have built a great business.In the "engaged society" macro economic growth trend that I referred to in my blog on the 10th June 2009,RIMM is likely to continue to be one of the main beneficiaries.

When RIMM's stock price declined to $40 in February,when taking into account its balance sheet net surplus cash and receivables of $4 per share,its valuation was approximately 10 times trailing twelve month earnings.RIMM is likely to continue to grow its earnings in excess of 15% to 20% per annum in the forseeable future.At $40,RIMM had a PEG ratio of only 0.5.

When I bought China's Zijin Mining in November after mining stocks had practically collapsed (see my blog on 18th November 2008),such similar logic should have led me to buy Brazil's leading miner at the same time since Vale also has a strong balance sheet which would have withstood the financial tsunami.

Still I got gains in excess of 100% on China Huiyuan Juice,Zijin Mining and Anta Sports;took advantage of the low stock prices of Standard Chartered Bank,Intel and Infosys to build bigger positions and opened new positions in Microsoft,SK Telecom,Xtep International,China National Offshore Oil Corporation(CNOOC) and China Agri Industries.

Although I do not expect that my fund will beat every single major global stock market on a semi annual basis every time my results are published,I do expect it to outperform cumulatively over the three to five year period as stated in the launch of my website.We will also see how the fund managers from the financial institutions compare in managing global equities.

There are 6 key reasons for such major outperformance compared with other investment managers,funds and indices;

1)The correct capital structure - only employed long term capital that can be tied to equities for a minimum 3 years so no use of either leverage,leading to margin calls or use of short term capital resulting in distressed stock sales.

2)No holding of property related companies,banks materially exposed to worthless derivatives,mining companies or shipping companies when commodities were at their peak.

3)Reduction in exposure to energy companies before the crash in oil stocks (the sale of Transocean which originally represented 7% of the equity fund,at no capital loss) - see my blog entries on 26th and 29th September 2008.

4)The identification of severely undervalued Chinese equities which led to capital gains in excess of 130% in the first year of fund operations (Huiyuan Juice,Zijin Mining,Anta Sports) - see my blog entries 26th August,29th August,3rd September,18th November 2008 and 2nd March 2009.

5)Correct financial and business analyses of my largest holding,Standard Chartered Bank leading to a first year capital gain in excess of 15% in the stock.This is in sharp contrast to the permanent declines in value in the banking sector - see my blog entries on 8th December 2008 and 4th March 2009.

6)Rigorous focus on companies with solid earnings,cash flows,sustainable competitive advantages and superior management abilities.

I would be surprised if by the end of this year,the fund does not show a positive return.

Cheng Hye Cheah's Asia hedge fund has had a remarkable recovery in the last 3 months and managed to break even.It would not be a fair comparison to make with my fund since his hedge fund includes bonds,gold and other financial instruments so it is not a pure play equity fund similar to mine.

The striking thing is how poor mutual fund managers appear to be when it comes to managing global equities.It is at times of severe financial distress that the quality of the manager,company valuations and business analyses are exposed.

I will go into further detail on my thoughts to my existing holdings as well as stocks that I did not buy which I should have paid more attention to,during the coming week.



30th June 2009

Dividends from China Agri,CNOOC,Infosys,Microsoft and Intel received in the fund.Funding of SK Telecom purchase now reclassified from margin to short term capital due to capital allocation. 

16th June 2009

The mistake that I made with my previous wireless operator stock pick,America Movil was that I did not pay sufficient attention to the fact that it generates most of its cash in Mexican pesos - a currency that I am not particularly keen on given that Mexico is heavily dependent on exports to the US (over 50% of all exports) and that 33% of its annual budget and biggest source of foreign currency receipts, are from its ever declining oil reserves.

While America Movil's management did behave like owner managers (Carlos Slim owns the majority of shares in the company) and picked up wireless assets on the cheap,generating cash flows in Mexican pesos is not sufficiently compelling given the scale of economic risks attached to Mexico,from my perspective.

South Korea's currency is also a financial risk that needs evaluating.In contrast to Mexico,South Korea's exports are far more diversified with 27% going to China including Hong Kong,approx 15% to the US and 9% to Japan.South Korea's generation of foreign currency reserves is driven from a far wider industry base with consumer goods to IT to steel to shipping to petrochemicals.Its leading companies,Samsung,LG,Daewoo,Hyundai and POSCO have all become major international companies in their own right,consistently increasing their global market share.

South Korea has minimal external debt of $3.7 billion and holds the sixth largest foreign exchange reserves in the world at $212 billion (in contrast to Mexico's $178.3bn external debt and $76 billion in foreign exchange reserves).While the financial meltdown led to the flight of capital funds back to the US dollar last year,consequently devaluing the South Korea Won from its mean of 1000 to its current 1250 Won,I do not expect the Korean Won to further decline over the long term.Indeed if the US dollar does devalue over the long term due to the US fiscal position,I expect the Won to appreciate as a consequence.

SK Telecom has 50% of South Korea's wireless market and the lowest churn in subscribers (2.3%).Its market share and churn rate has remained remarkably consistent over the past four years.While South Korea does not have the same growth prospects of Latin America,it does not have the same competition either.

Average revenue per mobile user (ARPU) is forecast to continue to decline at a compound rate of 3% per annum over the next 5 years.This is mainly due to the Korean market being advanced in terms of wireless services and mobile penetration and essentially being confined to 3 operators serving a population of 48 million.

All three operators are reluctant to lose margins for the sake of increasing market share thus reducing the pressure on price reductions.South Korea is at the cutting edge of wireless multimedia services and along with Japan,defacto leaders in the world as to next generation mobile consumer services.

The pricing strategy of Korea's operators is to bundle new and an ever increasing range of consumer services on mobile phones to improve margins and further protect prices and returns on investment capital.In contrast,in the similar market of Japan,ARPU declines are in excess of 10% due to Softbank aggressively going after what was essentially,a duopoly of NTT Docomo and KDDI.

SK Telcom's market value is $10.5 billion,it has net liquid assets (surplus cash and investment assets after deducting all net liabilities) of US$2.7 billion.

It intends to spend $700m and take on $500m debt to buy its affiliate network company and reduce $240 million in network leasing costs per annum;improving operating margins by 8% to 28% (when compared to SK Telecom's Q1 2009 earnings report).

SK Telecom's average annual free operating cash flows over the last 5 years (cash flows from operations less capital expenditure) is approx $1 billion to $1.2 billion.

4G capital expenditure due to LTE technologies as well as the severe competition between wireless network equipment vendors is leading to capital expenditures for wireless networks being lower than in previous years (confirmed by SK Telecom's cash flow statements).This combined with the stability in the operator market in Korea,gives me reasonable assurance that SK Telecom can continue to generate $800m to $1.2 billion annually in free operating cash flows in future.

So we have the number 1 wireless operator in the 13th biggest economy in the world with  stable cashflows of $1 billion per year,being given an economic value of around $9 billion (market value of $10.5 billion minus net surplus cash and investments of $1.5 billion after network acquisition).

In contrast Verizon,if one makes a similar calculation of economic value,is valued at 25 times its average annual operating free cashflow;Vodafone at 11 times,NTT Docomo at 10 times and China Mobile (given that it is the only operator in this comparison which has successfully grown cash flow at a compound rate of 15% per annum) at 10 times expected future cash flows.

China Mobile and NTT Docomo have very strong balance sheets with very low debt to tangible net asset ratios (below 0.4) and good return on investment capital (ROIC) ratios at 18.6% and 12.5% respectively.

The risk with China Mobile is that the Chinese government's telecom reorganisation to promote better competition as well as the forced adoption of China's own wireless standard of TDSCDMA, will undermine China Mobile's existing competitive position and that it will not have the same monopoly on wireless services and technology choices that it had in the past (China Telecom has now become a serious competitor in wireless out of this reorganisation).

It is doubtful that China Mobile can maintain its profitability at the same rates as in the past as well as generate the same rate of growth in ARPU.

With respect to NTT Docomo,its ARPU and ROIC are coming under serious pressure due to Softbank's market strategy so the level of its future cashflows compared to its past,also contains significant risks.

No such risks are affecting SK Telecom in Korea and with a strong balance sheet (debt to tangible net assets ratio of 0.55) and average 5 year return on investment capital of 15%,SK Telecom appears to be the most stable future generator of cash flows with the lowest multiple of market value,amongst the leaders in the wireless operator category in the most stable markets of US,Europe and Asia.

Vodafone has US$123 billion of goodwill and intangibles on its balance sheet and given that the market has valued the company at 70% of its balance sheet "book" value,the market is already discounting nearly 33% of such assets as worthless.Given Vodafone's poor ROIC over the last 5 years (actually negative due to write offs caused by poor managment decisions in buying overvalued assets),this is not surprising.

Ironically,Verizon is not much better either.Its goodwill and intangibles are $100 billion and while its average 5 year return on investment capital of 8.6%,demonstrates value in its acquisitions;its balance sheet debt to net tangible assets ratio is 1.46 ie its liabilities are nearly 1.5 times the hard assets it owns.Its balance sheet equity ie net asset value and market value is pretty much made up of someone's interpretation of the current value of their goodwill and intangibles!

SK Telecom's stock price and related market value is back to where it was 6 years ago while it has generated more than US$7 billion in earnings for shareholders in the interim,giving a dividend payout of over 50% of earnings per year and consistently buying back its stock and reducing its debt levels.

It is likely to have a US$dividend yield of 5% to 6% going forward at its current stock price,even with the Won remaining at its relatively weak rate of 1250.

SK Telecom is being accumulated in the fund.

10th June 2009 

What are the key global trends that GlobalStockInvestingToday's fund are invested in? 

I have referred to Warren Buffett a lot on this website but the fund also follows part of the philosophy of another great investor,George Soros in investing in major global macro and socio economic trends.

So what are the trends that my fund is directly or indirectly exposed to?

89% of the fund is invested in companies that either dominate and/or are sufficiently well managed to gain,from three key trends that I perceive.

The first trend that I see which I believe is irreversible and will continue to rise exponentially,is what I define as "the engaged society".

How economies,businesses,consumers and societies are and will be linked in the 21st century due to the internet,mobile devices,note/netbooks,digitilisation of information and multimedia is a phenomenon that has a significant way to go.

I believe companies that are key players who either dominate areas in this or dominate niches in it,will continue to prosper.

Microsoft,Intel,Nokia,Adobe,Dolby and Infosys are in the fund as a consequence of this trend.

These companies represent approximately 44% of my fund.

The second trend which I believe to be irreversible,is the continuing significant rise of developing economies.

This is partly as a result of the first trend and will lead to significant increases in demand for local banking services,power and infrastructure development and for oil.As a consequence this will also elevate global demand for oil and the value of oil services worldwide.

Standard Chartered Bank,ABB,China National Offshore Oil Corporation and Superior Energy Services are in the fund as a consequence of this trend.

These companies represent approximately 32% of my fund.

The third key trend is the rise of China's consumer society and major growth in China's domestic consumption.

The Chinese government has already expressed that the next wave of growth for China will require domestic consumption at far higher rates than in the past and that a better balance between economic growth from exports and domestic consumption will be required.
China is already beefing up its public healthcare and other social services to better improve confidence of the Chinese consumer and to stimulate increasing consumption.Moreover as China gets richer,its food consumption will also continue to grow.

Anta Sports,Xtep International and China Agri are in the fund as a consequence of this trend.

These companies represent approximately 13% of my fund.

The trouble with investing in Chinese equities (similar to Indian equities) is that there is far more irrational exuberence and pessimism governing these markets compared to the US or Europe and sometimes one has to be more frequent in selling,due to valuation not justifying even long term fundamentals.

For the remaining part of my fund,8% is in NASDAQ OMX as a proxy for the continued growth in electronic trading in an increasing number of asset categories,the growth in trading volumes based on increasing money supply and the preferred listing exchange for emerging companies seeking an international listing.
NASDAQ's brand and technology platform has led to it securing its leadership position as the largest electronic exchange in the world with the capacity of managing more volume per hour than any other exchange.

3% of the fund is miscellaneous and allocated to Esprit,a growing,international fashion retailer.

We will see how accurate my equities' exposure to these trends will play out over the next few years but I feel encouraged about the performance of my fund to date.

Given that markets and investors are recovering from the sheer panic and fear that took hold from October to the beginning of March and things have got a lot more rational if not exuberant lately,I have not stopped looking at equities for possible investment.

While I will post a blog on 3 equities that got away that I looked at and should have acted upon during the mass sell off (once I release my first year's fund performance in July);I have yet to see something as compelling from a price to value and risk perspective as my last addition, Xtep International in April.

Moreover given that I have exhausted all my long term capital for investment,any new addition would need to be sufficiently compelling for me to either rotate my existing holdings or use margin.

So aside from equities,what am I evaluating?

1)Corporate bonds - given the panic in credit markets,even AA+ rated bonds (the second highest class of bond) from blue chip companies have significantly high interest.For example in Hong Kong,quasi government controlled companies like Kowloon Canton Railway and MTR (Hong Kong's mass transit railway) have bonds paying coupons of 7.5% to 8%.With bonds of this type,you will not get much capital appreciation since they constitute minimal risk but if your profile is that of someone who is seeking guaranteed income with protection of capital from wild volatility caused by speculators and traders,then this type of investment is something one should seriously look at.

At a certain age,depending on financial commitments and temperament,most people with excess cash should hold a mix of bonds and equities.

2)Powershares DB Base Metals Fund - when economies start to recover and western banks begin normalising lending again,given all the money that is being printed,there is a real risk of inflation and as a result,currency devaluation.While I believe that the Chinese Yuan is the most protected of all currencies worldwide from such downside and nearly 14% of my equity fund is pretty much denominated in Yuan through the stocks that I own;hard commodities such as zinc,copper and aluminium are worth considering as an investment as a hedge against inflation.

Unlike bonds,owning zinc,copper and aluminium will do nothing in generating income but if you feel uncomfortable with owning particularly pounds or dollars given monetary policy in the UK and US,then this could be an option since the prices of all commodities will rise as a consequence of economic recovery and substantial increases in money supply.Given the biggest variable cost in the production of aluminium is energy,it is also an indirect play on elevated oil prices as well.

The big question is when will inflation begin to rise significantly?That is worth a separate post in itself but given the world economy is still in negative growth mode and contracted the most since the second world war in the last 8 months,I doubt it will happen in the next 12 to 18 months despite speculators recently driving up commodity prices particularly oil and China taking advantage of low commodity prices by essentially stockpiling and expanding its commodity reserves.

5th June 2009

How the Global Stock Market crash ruined the reputation and credibility of Britain's "Superwoman" fund manager.

"Nicola Horlick, of course, earned the title of Superwoman for her self-confessed ability to juggle serenely the demands of being a hands-on mother to her six children, while performing the role of a perfect wife and maintaining a high-powered City job which earned her vast sums of money and immense respect in her macho work environment.Everything Horlick touched turned to gold. She managed billions of pounds of other people's funds in the City, she fronted advertisements for investment firms, and was considered one of the most influential businesswomen in Britain.Bathing in the media limelight, the glamorous multimillionaire investment banker wrote Can You Have It All? - a manual of domestic organisation for women. The implication was: 'Yes - and I'm the living example.'

Supremely confident in her abilities - one rival once described her as an 'impetuous self-publicist with an ego the size of The Ritz' - she set up a new investment company in 2005, naming it Bramdean...In under 21 months, the company's shares more than halved from 100 pence in value to just 44 p.Then, in December last year, Bramdean announced that £21million of assets (approx 15% of the fund) had been placed with the American financier Bernard Madoff, who had just been arrested for a gigantic £30 billion financial fraud....At one point, Horlick described Madoff as someone who was 'very, very good at calling the US Equity market'.''- Daily Mail 9th May 2009

Given the most vicious crash in stockmarkets worldwide in the last 12 months,you might think that if you invested in stocks,this has been far more damaging to your net worth than if you purchased an investment property in a developed economy such as in Europe,US or Hong Kong.You may also think that buying property is a less risky investment but consider this

1)Equity funds in general and stockmarkets are down 25% or more and are from a historic perspective,at relatively low price to company earnings ratios.

2)House prices,depending on country,is down in the range of 10% to 20% but are still at historically high price to owner earnings ratios.

Typically property has grown in price by an annual compound rate of around 6-7% over the very long term in Western economies while from 1998 to 2007,it grew by a historically abnormal 10-20% per annum (which was part of the reason for the credit crisis since such continual annual growth in property prices was never sustainable,particularly since salaries in developed economies grew by less than 5% per annum).

The forecast for house prices pretty much worldwide,is for a further 7% to 10% decline in the coming 12 months.

So in the last 12 months if you had excess long term capital and bought an investment property instead of a low cost index linked equity fund or even better,a well managed,relatively active equity fund,then these are the likely results

1)buying a relatively decent investment property which is likely be rented out 12 months of the year,would require investment in a city property and would have cost depending on city,around 200,000 pounds in the UK or 280,000 euros in Western Europe,US$300,000 in the US or 3 million Hong Kong dollars in Hong Kong.

The transaction cost would have been around 3% of the price of the property and running costs for insurance,management fees and incidentals would be around 0.5% to 1% per annum.

If you had sufficient excess capital to deposit 30% of the purchase price on the property,you would have invested,including transaction costs,66,000 pounds,92,400 euros,US$99,000 or 0.93 million Hong Kong dollars.You are also assuming that you have job or rental income security over the next 20 years to meet debt payments on your asset investment to prevent you from making a distressed sale and can deal with sizeable debts as defined by mortgages both to your emotional wellbeing in times of economic and financial stress as well as to your lifestyle spending needs.

With equities,you just invested with your own long term capital!

Say that currently your property has declined in value by 15% and taking the US dollar property as the example,the value of the property would now be $255,000 while you are still saddled with a debt of $210,000 plus interest and running costs.The equity that you invested in your property has declined to $45,000.

Assuming that you can generate rental income to cover the interest and running costs,your net worth on this asset has actually declined by 54.5% with the likelihood of it being even lower in the coming year (you invested plus charges $99,000 and it is now worth after debt/mortgage is deducted,$45,000).Property prices will potentially revert to their historic average price growth rates of 6% in developed economies over the long term,as banks become more conservative with their mortgages to fix their own balance sheets.

So even with the worst crash in global stockmarkets since the 1930s,your net worth decline in stocks is actually less plus you can consider using judicious use of debt (margin) to take advantage of historically low stock prices if you wish.

The trick was to have set up the correct capital structure (long term cash) in the first place and invested in quality companies at reasonable prices so that any current declines in their stock prices are more cyclical in nature than structural ie when the economy bounces back,they will prosper and their price earnings ratio will revert back to their historic mean.

Having a superior equity fund with capital managed responsibly,will already have led to no more than what is likely to be a 15% -20% temporary decline in net worth though unlike properties,you are not bombarded with the "world is going to end,get out of stocks now!",a daily tickertape of what your fund and your equities are currently selling at or being confronted with a decision of buying stocks when the likelihood is that the price could get temporarily,even cheaper the next day!

Again with stocks,having the ability to do correct due diligence,to recognise quality companies at reasonable prices and the emotional fortitude to withstand inferior financial analysts,investment managers and day traders is not something that is an ordinary skill,as the last year has ruthlessly exposed.

6th May 2009

Added to my position in Xtep International and Standard Chartered Bank gets a significant valuation rerating by the market.

I have updated the Track My Stocks webpage with my increased weighting in Xtep and revised weighted purchase price.

Standard Chartered Bank,my single largest holding issued their Q1 trading update and as I expected,announced record results and increases in market share.They are now going through a significant revaluation vindicating my analysis on the bank and my comments in my blog entries dated 4th March  2009 and 8th December 2008.

Needless to say,making a written statement on this website as per my entry on the 4th March requesting judgement about my ability as a financial and business analyst on this stock particularly and seeing my analyses being spot on,is deeply satisfying.

Standard Chartered Bank including its divided payment is currently showing a gain in excess of 20% on my weighted purchase price due to my actions in the last eight months.

27th April 2009

How Asia's second largest single manager hedge fund,Value Partners is performing.

On my blog dated 1st September 2008,I mentioned Cheng Hye Cheah,a Malaysian born Chinese ex journalist,who is the founder,chairman and chief investment officer of Value Partners,a company he set up in 1993 with just $3m and grew to become the second largest single manager hedge fund headquartered in Asia,valued at $7 billion (clearly such valuation was derived from a combination of his brilliant stockpicking skills and partly from investors willing to fund his investments).

I have tremendous respect for his talent and share his principles of following the Warren Buffett school of long term investing.

The issue I have and was illustrated by my original underweighting of Chinese stocks when I launched the website in the summer of last year,was how significantly complicated most Chinese stocks had become,either in relation to justifying their earnings multiples or in relation to opaqueness of their balance sheets (how do you value a Chinese bank with contingent liabilities linked to the US subprime fiasco or with regard to their representation of loan book quality - do you really think a junior auditor or the audit partner of the big 4 firm of accountants are seriously going to question ICBC or Bank of China?).

Value Partners mistake was in no longer following their own mantra of " price is what you pay,value is what you get",by being heavily weighted in Chinese equities.

When there is a mania,it works both ways - euphoria leads to irrational valuations;despair and panic leads to the same irrational valuations but in reverse!

May be Cheng Hye Cheah got distracted,particularly given that Value Partners went to IPO during the peak of the Chinese bull run on the Hong Kong stockmarket in 2007 amidst euphoria over his stock picking skills.

In Value Partners annual financial results for 2008 announced on 12th March 2009,Cheng Hye Cheah states, 

"we have been put through a severe test by the global financial crisis.So far we have passed... in the sense that we should still be able to keep intact Value Partners as a strong and reliable asset-management institution.That said it is rough and difficult.Value Partners classic fund,our flagship fund,was down 47.9% in 2008,and even the Group's top performer,Value Partners Hedge Fund Ltd,lost 21.8%.Assets under management declined to US$3.2 billion from $7.3 billion a year earlier,caused more by market losses than redemptions."

As for the first quarter of 2009,in his latest report dated 24th April,he states that there has been no change in asset valuation.

I expect Value Partners assets to appreciate from the bloodbath of 2008 over time,however the lessons of complacency and sitting on seriously overvalued stocks are the surest way of destroying any fund's value.

As has been famously quoted by Warren Buffett,"it is only when the tide goes out that you can see who is swimming naked".While I certainly would not accuse Cheng Hye of this due to his outstanding long term performance,there are many fund managers such as Paul Pong,Head of Pegasus Fund Managers who operated a stockpicking column for the South China Morning Post in Hong Kong which he subsequently refused to disclose the performance of,in his column (as he continued to realise losses of nearly 75%),blaming the financial tsunami rather than most of his picks bearing ridiculous price earnings multiples combined with his willingness to sell every time someone on the stock market was willing to quote a price 15% below his purchase price!

24th April 2009

We all know that it has been a brutal 12 months for stockmarkets worldwide.
For anyone who holds or manages an equity fund,the question is not whether your fund declined in value but by how much!

While I am encouraged by the performance of my fund to date (ie the decline is significantly smaller relative to the vast majority of equity funds)when translated in all the key currencies outside of the US dollar,Chinese Yuan and Japanese Yen,the fund is maintaining its asset value.

The Aussie Dollar,the British Pound and the Brazilian Real are all down by approximately 25% in the past 12 months.The Indian rupee is down 20%,the Canadian dollar is down 19%,the New Zealand dollar is down 29% and the Russian Rouble has plummeted 43%.The Euro has escaped relatively unscathed by declining 16%!

A significant number of currency declines is due to the dependency on export of commodities and in a recession,demand for commodities falls,leading to a decline in prices,impacting trade balances,fiscal reserves and domestic asset values.This has ruthlessly exposed Russia as an economy built on primarily its oil and gas reserves.Specific management failures by UK banks has forced the UK government to print money to shore up the capital base of its financial system as well as create a budget deficit of 12.4% of GDP(the worst since the second world war).This double whammy has led to a sharp decline in the pound which is unlikely to improve until the financial situation is made clearer at the next budget in April 2010.

In the vast majority of countries worldwide,holding an equity fund of purely domestic stocks,not only would have led to your net worth being hammered by declines in stockmarkets but also be be compounded by declines in the local currency.

The stock exchange of Australia has declined by 36% but the decline in the Aussie dollar would have led to your fund's value in US dollars falling by 51%.In Britain and France the impact would have been 50%,in Brazil,India and Germany,the decline would have been 48% and in Canada 47%!

While it is highly likely that commodity driven economies will see their currencies improve when economies particularly the US,recovers;thought should have been given of risk diversification by making sure your stock fund was not a "one trick pony" ie all commodity plays or derive all their revenues and earnings from primarily the local domestic market.

If you review my global stock fund weighting,13.2% of stocks are weighted to the domestic economy of China and linked to the Yuan (only sizeable economy that is still growing 6%+ per annum and whose currency is artificially low),12.2% on the future growth of Asia ex Japan (Standard Chartered Bank),2.3% on Europe and the Euro (Esprit),8.7% on the US (Superior Energy services) and 64% on stocks which are truly global companies,deriving more than 50% of their revenues and earnings outside of their domestic markets.

This has mitigated to a significant extent,currency risk from my fund performance.

20th April 2009

Opened a new position in Xtep International at HK$2.71 - is there room for a significant third domestic sportswear brand in China?  

My global stock portfolio is showing an interesting reversal from when I opened it in August 2008 in terms of my weighting to China plays.I have been significantly increasing my exposure to Chinese companies in recent months,particularly to those who will benefit from the long term development of the Chinese consumer market.

From a macro economic perspective,China's economic growth rates are likely to continue to outpace the rest of the world along with the likely continuing appreciation of the yuan.China's Prime Minister,Wen Jiabao at the Asia Boao Forum at the weekend,expressed that the next phase of growth in China will need material increases in domestic consumption and that the government is facilitating such spending by easing credit and loans by its banks.

Given China's consumers already have relatively high savings levels (no western style consumer credit card issues here!) and the demographic trend of urbanisation and increase in spending and purchasing power of the Chinese population in the age range of 18 to 40,a substantial number of favourable factors are in place for Chinese companies with strong knowledge of the domestic retail market,an ability to scale their business and create a strong brand identity,to significantly grow their business profitably in the coming years.

If you read my business analysis on 26th August 2008 when I first opened a position in Anta Sports,you will understand a lot of the reasons that can equally be applied to investing in Xtep International.However from a business risk perspective on Xtep International,the real questions are

1)can Xtep which is the number 3 domestic brand with 18.9% market share sustain or increase its position while maintaining its existing high returns on equity (30%+)?

2)even though Xtep is run by a similarly talented young entrepeneur as Anta Sports,does Xtep have the management team in place to take it to the next level?

I have to be honest and say there are still question marks and hence business risks with regard to these,so why did I use capital which may be required in a couple of years' time to fund an opening position in Xtep International?

The simple answer is that the valuation of the business when compared to their current execution in scaling the business,as illustrated by their results announcement on 31st March,led me to make the investment.

Xtep went to IPO in June 2008 when the Hong Kong and Chinese stock markets were already at depressed levels,raising US$286M.

Its valuation was at 15 times forecast 2008 earnings,a reasonable valuation for a growing sports brand retailer.Subsequent to the IPO and the global stock market meltdown,it has traded well down on its IPO price and has yet to recover to its original IPO share price of HK$4.05,despite beating sales and earnings projections.

The overriding motivation for me to now invest in Xtep International is that it managed to more than double its revenues to US$419M and its earnings to US$74M without needing to use the cash that it raised in its IPO!

Xtep significantly improved its working capital management,a critial requirement for fast growing companies,by reducing its inventory turnover days by 28%,reducing its debtor days by 14% by improving debt collection and credit controls and increasing its creditor days by 45% by getting extended credit terms!

It also aims to complete its distributor resource planning system to cover all its distributors in 2009 further strengthening its working capital management,while it continues to scale its business.

It also raised prices higher than inflation improving gross margins by 4.6% to 37.1%.Its operating profit margin also increased despite the significant one off costs absorbed in 2008 with an IPO listing.

For 2009 despite the challenging economic environment which is also affecting China,it expects sales volume increases in double digits and indicated that it has the capacity to increase prices further by 5%.

It also has a distinctive entertainment marketing campaign for its brand which differentiates itself from Li Ning and Anta Sports by focussing on trendy sportswear associated with star performers in the Chinese pop music industry.This enables it to develop a distinctive image and counteract the significant sports associations that Li Ning and Anta Sports have.

Xtep International has also taken actions to retain the attractiveness of its shares to investors by buying back its shares when it was significantly undervalued late last year when all stocks were collapsing (reassuring investors that the market's valuation was not rational) and by now offering sustainable high dividend payout ratios based on its earnings performance,to long term investors.

I view Xtep International similar to Anta Sports as a cashed up,fast growing branded retail stock exposed to China's consumer market.Given that its current share price,when deducting its net cash on its balance sheet,is less than 6 times last year's earnings with a dividend yield of 6.64%,the potential return from this investment over the next two years currently outweighs its business risk.

14th April 2009

Opened a new position in China Agri-Industries at HK$4.28;
Standard Chartered Bank and Anta Sports goes ex dividend.

China Agri Industries announced their results today with turnover increasing 45% to US$5.36 billion,operating profit margins increasing to 10.8% and earnings per share rising by 127% to HK73 cents per share.
They announced their first dividend of 13.6 cents giving a dividend yield of 3.18% based on an earnings pay out ratio of 19%.

China Agri was spun off from China's government owned National Cereal,Oil and Foodstuffs company (COFCO)and listed on the Hong Kong stockmarket two years ago.Its operations are oil seed processing,rice processing,wheat processing,beer beverage materials production and production of bio fuels. 

Two thirds of its revenues and operating profits comes from oil seed processing for primarily,food manufacturers including its parent company COFCO and animal feed producers in China.While 90% of its revenues comes from the Chinese market,it is also China's largest exporter of rice,representing 8% and 12% of China Agri's revenues and profits respectively.

Its IPO was largely driven to fund expansion as well as enter the hyped bio fuel business.While its bio fuel business has grown with revenues and earnings more than doubling in the last 12 months,the realisation that agricultural materials are better served supporting the Chinese food industry than being used for fuel has dampened the prospects for this division and consequently the stock price.

Its IPO has led to a cash rich balance sheet which can more than fund its business expansion plans.Currently,China Agri-Industries has a net cash per share of 89 cents.Even if China Agri Industries earnings for 2009 halves due to the current global economic contraction and agricultural destocking,its price to 2009 operating earnings multiple,deducting its net cash, will be 9.
When the world economy recovers,China Agri should continue with double digit growth.

The management team has prudently managed China Agri's balance sheet and operations and at current valuations gives a compelling play on the continued growth in food and beverage consumption in China.

I have now pretty much exhausted my cash position in my stock portfolio ie cash that I do not need for at least 3 years.This time horizon should be sufficient to discover if my fund outperforms the wider stock market indices and funds from various investment banks as well as make a good return.Currently I am outperforming the mutual funds and the global stock markets though having gone through the most brutal global stockmarket crash for over 70 years,no equity fund is in positive territory!

The question in future will now be,do I see compelling investment opportunities to justify using margin.....

1st April 2009

Opened a new position in China National Offshore Oil Corporation (CNOOC) at HK$7.84

CNOOC announced their results yesterday and while they announced  rising revenues and earnings,these were based on an average oil price in 2008 of US$90 while 2009's oil price is likely to be around US$45.

While this will have a direct adverse impact on 2009's financials,the rationale for my purchase is multiple fold;

1)CNOOC is the only one of the big three Chinese oil companies who expect to be able to increase their production by 7%-11% year on year for the next 5 years without costly acquisitions.

2)CNOOC has discovered significant oil reserves in China's offshore territories which would allow it to meet such targets,mitigating the need to make expensive investments in politically volatile regions

3)Its total production cost per barrel of oil is competitive at $19.78,making its production still highly profitable even at low oil prices.

4)China is a net importer of oil so all of CNOOC's production can be met by demand from China's economy.

5)CNOOC is cash rich and does not need to increase debt to expand its production.

6)Once the credit crisis is cleared and economies begin to grow again,combined with the inflationary effects of the easing of US monetary policy,I believe oil prices will jump again (though not to the levels of $100+ as seen during the summer of 2008).

7)If CNOOC's net cash position is taken into account,its price to forecast 2009 operating earnings ratio at current low oil prices is 10.

8)Its dividend payout ratio of earnings is 35% so even for a sharply reduced earnings performance in 2009,CNOOC can retain its dividend of 40 cents giving investors a dividend yield of 5.1% at current prices.

31st March 2009

Added further to my position in Intel.

30th March 2009

Added further to my position in Anta Sports.

24th March 2009

Sold Zijin Mining at HK$5.66 (Net of charges) and realised a 168% gain on the investment.

Zijin Mining is my second stock pick that has generated a gain greater than 150% in less than 12 months.Given how few my stock picks actually are,to have on average more than one in ten stocks picked,more than double, is not a bad start given the biggest global stockmarket decline since the 1930s during the first year of this stock website.

If only the two stocks that generated such handsome gains were not my two lowest weightings in my stock portfolio!

The reason why I sold was that Zijin Mining released its financial results yesterday and while the stock has appreciated sharply over the past 4 months,at 21x operating earnings (if its balance sheet net cash per share of 39 cents is deducted) and with expectations of future revenue and earnings growth of 10-12%,I believe that Zijin Mining is now fairly valued so I realised the profit.

11th March 2009

Added to my positions in Nokia,Superior Energy Services,Microsoft and Intel.

I have been applying a little bit of Jessie Livermore's trading technique for buying long in my stock purchases in the last ten days (see his profile in my blog dated 9th November).

While I believe that all my stocks are undervalued from a fundamental value perspective (with the possible exception of Zijin Mining),I was waiting for buying power to come to the market to develop some positive momentum to the share purchases.

9th March 2009

Added again to my positions in Standard Chartered Bank and Anta Sports

5th March 2009

Added again to my position in Standard Chartered Bank.

4th March 2009

Added further to my position in Standard Chartered Bank after their financial results yesterday and again in Anta Sports.

Standard Chartered Bank now becomes the largest single holding in my portfolio.

My ability as a financial analyst will pretty much stand on how Standard Chartered Bank performs over the next 3 years and beyond that which is a very bold call to be judged on,given the collapse and fear haunting the entire banking sector as well as how unfashionable this industry has now become for fund managers.

Let me make it clear,I would not invest in any other bank on the planet right now outside of Standard Chartered Bank.

I spent the last two days doing further extensive research on Standard Chartered Bank's current financial health,its exposure to toxic assets,its capital ratios,its mortgage and asset portfolio,its currency exposures,its risk to derivatives and how its operations are performing in the current financial and economic crisis and feel very comfortable to be judged by this single company over the long term.

Despite the downturn in exports from Asia,Standard Chartered Bank's wholesale banking business is growing and taking market share from its global competitors who are in severe financial distress and in complete disarray.Not only is Standard Chartered Bank's order book growing in this segment but its margins are also increasing due to the decline in competition and "flight to quality" of corporate customers.

In its consumer banking business,Standard Chartered Bank are receiving record deposits again due to this "flight to quality" as consumers shift their business to Standard Chartered from poorly managed banks.

As Standard Chartered Bank's CEO wrote in the results announcement yesterday,

"We have been running the Bank according to four fundamental tenets.
First, we have stuck to our strategy. We aim to be the world’s best international bank, leading the way in Asia,Africa and the Middle East.We do business in markets we understand intimately, with customers with whom we have longstanding relationships, selling products we understand fully. That way we know the risks we take.
Second, we have been and will remain very focused on the basics of banking. Perhaps because we have always operated in volatile markets, we have never lost sight of such disciplines.Third, we are open for business. We want to support our clients as they navigate the economic turmoil. We want to seize the opportunities arising from the turbulence. Whilst we have taken action in response to the crisis,we have not stopped doing business. We continue to invest for growth.Finally, we have stayed true to our values."

Standard Chartered Bank must be the only international bank in the world right now who not only increased its capital position but also increased its earnings and dividend on a per share basis.Its return on equity ie the money its makes for shareholders remains at 15% despite the meltdown in the financial sector.

 It is so liquid it remains a net lender in the interbank markets which practically dried up last year due to the overleveraged positions of most US and European banks.

While it is likely that Standard Chartered Bank's earnings growth will be hit this year due to the global recession,its focus on Asia ex Japan (which remains financially healthy due to high savings rates,strong government fiscal reserves as well as a young and growing urban middle class) means that any decline will be cyclical and not structural as in the case of Europe and US which will take longer to unwind their overextended debt positions.

Standard Chartered Bank's dividend pay out ratio as a percentage of its current earnings is 30% so even a decline in earnings in the next two years is unlikely to impact the current dividend per share and at a yield of 6.68% on its current share price and 3.53% on my weighted average purchase price,it is a great company to hold,collect the dividend and wait for its stock price to reach its true intrinsic business value as market panic and fear subsides.

I fully intend to accumulate more at such dividend yields if the market continues to punish Standard Chartered Bank's share price for the poor performance and mismanagement of all its international competitors including its biggest rival,HSBC!

Similarly to Anta Sports,if I had the money,given Standard Chartered Bank's severe undervaluation at its current share price,I could own the entire bank for 5 times its current earnings - a bank highly desired by the governments of China,Singapore and the United Arab Emirates and one of the three note issuing banks of Hong Kong!

The most ironic thing is that at 6.68% dividend yield on its current share price,you get a better return for your money buying the stock of this bank than putting your money in a bank!

Standard Chartered Bank will now replace all other UK banks as the leading dividend payer in the UK banking industry and it is a growth stock!The entire reason for UK investors to buy other British banks over the last ten years was that they were stable dividend payers and perceived as less "risky'.How ironic the new position of Standard Chartered Bank as the most financially solvent and stable bank with the highest dividend in Britain!

20th January 2009

One can tell how bad the global financial market crash was in 2008 when you read reports of a French hedge fund manager committing suicide,the 5th richest German committing suicide by leaping in front of a train,an American investment business owner pretending to have died by deliberately crashing his private plane and parachuting out and perceived pillars of America's fund management society being exposed as frauds and attempting to disappear with $billions of investors' money lost.

Last year's near banking collapse,which is still on the precipice,is leading to the biggest global economic decline since the second world war and companies and people who have not been prudent money managers,will experience the biggest threat to their existence,living standards and welfare for at least the last 37 years.

This is impacting all sections of society and industries across all countries and all professions.

Common consensus is that the economic turnaround will take two years to complete,if current policies of big government spending and recapitalisation of banks are successful.

I can not see the global stock market indices moving more than 10% from the beginning of the year to the end of 2009.However,in the depths of a bear market,begins a global bull market and quality companies with long term sustainable businesses,if they can be held for five or ten years (subject to no new future toxic debts over that time,or poor company management decisions),should lead to handsome gains.

The question is,do you have the liquidity and temperament to support yourself over the next 5 or 10 years and tie the excess capital to good quality stocks?

I spent last week in Singapore and it really did shock me how poor the air quality has now become in Hong Kong after spending just one day in Singapore.The second thing that struck me was how culturally homogenised Hong Kong is becoming,while Singapore is becoming even more multicultural since I first visited eight years ago.

Singapore has always been defined as "Asia lite" and I was always put off by what was a pretty sterile environment but in the past several years,given the economic boom particularly in India,there has been significant growth of South and South East Asian expats particulary Indians.Moreover many companies have now made Singapore its hub for South Asia operations.

Getting on a subway train in Hong Kong,one may not see a single non Chinese face in the entire carriage while in Singapore,it is likely for up to 50% of people to be non Chinese.

The Indian community in Singapore is flourishing from Little India to the Hindu temples that I visited,while Singapore's Malay roots is also well established through residential areas and mosques.

Unlike in Hong Kong,Singaporeans do not view it a statistical quirk for Singaporean citizens to be someone who is not Chinese.

Although I love Hong Kong and its energy,it is becoming just another major Chinese city with its status by global companies reduced to pretty much supporting China.The filthy air does not help and one does question where Hong Kong will be in the future,given the easing of relations between mainland China and Taiwan,enabling air links and shipping,as well as the continuing development of Shanghai as a port and financial centre.

7th January 2009

If you want to see the results of so called professional stockpicking experts who make money from gullible people who subscribe to their service,see the results of their stock recommendations over the past two years in the enclosed url.

http://www.stockgumshoe.com/tracking

Click 2008 and click 2007.

Only 2 out of approx 400 stocks recommended,have appreciated more than 100%, 8 more than 50%,while more than 150 stocks have declined by greater than 70%!

Stockgumshoe is an excellent website which uncovers the stock teasers that newsletters such as Motley Fool try to sell as well as cowboy investment gurus.

Even though like everyone else who holds a stock portfolio,my stock picks suffered in 2008 from the biggest stockmarket decline since the 1930s, 2 of the 18 stocks that I picked have appreciated over 100% - China Huiyuan Juice which appreciated 167% (and I realised the gain) and Zijin Mining which currently has appreciated 125%.

My biggest loss is Garmin which I sold at a 55% decline.

I feel confident that my stock portfolio over time will be vindicated but as with my part sale of Esprit and purchase of Zijin,I will rotate the portfolio if I see more compelling valuations or when I feel a stock has reached its intrinsic business price.

8th December 2008

I still believe that Standard Chartered Bank is the "baby that has been thrown out with the bathwater" given the severe declines in all banking stocks.The rights issue to strengthen Standard Chartered Bank's capital structure "in light of uncertainty as to the global economy in 2009" as well as to take advantage of acquisition opportunities given the cheap valuations of all asset classes,is OK by me.

The frequency of my blog entries has declined somewhat mainly due to the fact that my stock portfolio is not a trading portfolio so even though I have made certain changes and rotation given the severity of the market crash,it is not my intent to continue to do so,as I feel that these are the stocks that will perform well over the long term given their competitive strengths in their respective industries.

I am still bullish over the long term on growth in developing economies particularly China,in the energy and power infrastructure sectors,the continuing growth trends in the digitalisation of data,of mobile devices and of notebook PCs,in the strength of India's IT outsourcing sector and in the continuing growth in electronic trading so pretty much all my global stock portfolio is tied to these continuing trends over the next decade!

18th November 2008

Given the recession is going to be more severe and likely to be more prolonged than I expected,I have decided to reduce my weighting in Esprit,a leading European retailer and open a position in Zijin Mining,China's leading gold mining stock.

My motivation is mainly that I do not believe that the US dollar's strength is anything but temporary and a significant printing of US dollars to increase liquidity and minimise the impact of the US recession will at some stage lead to a rebound in commodities,particularly when the US signals its economic recovery.Moreover there will eventually be a major rise in inflation.When either of these happen,gold prices will rise,lifting all leading gold mining stocks.

Zijin Mining is also a leading Chinese copper miner which will benefit significantly from China's US$580 billion fiscal stimulus package as announced a couple of weeks ago.

It has US$3 billion in cash,partly from its A share listing in Shanghai earlier this year.It intends to use these funds to make acquisitions and given it is cash rich,it can now take advantage of the global commodities crash and pick up assets on the cheap.It is a well managed company and has significantly grown its sales,assets and earnings over a number of years.

China also has little iron ore reserves and resented BHP and Rio taking advantage of the commodities boom to charge significantly higher short term prices.Zijin also mines iron ore and will look to make acquisitions in this sector as well.Its cost structure is also very competitive given it is a Chinese company.

Its stock price has crashed by 82% since the beginning of the year and 56% in the last 3 months.This is far further than the Hong Kong Stock market or the actual decline in gold prices.Its current PE ratio is 10 and dividend yield 4.8%.I have no clue when Zijin will rebound and will possibly fall further due to the current panic and fear in the market place.I will look to accumulate more if it falls sharply lower,however over the long term,I expect Zijin to recover,along with all commodities when the current dislocation in the financial markets is resolved.

It is reassuring when you have two of the greatest investment minds in history agreeing that stocks at current prices will now outperform bonds and cash over the next ten years.

Jim Rogers has bought commodities,some Chinese and Taiwanese stocks and "one" Korean stock.He believes we have hit "a bottom" in the current bear market but has no clue (just like everyone else) if we have hit the bottom!

The reason why I did not set up a 10% or 15% stop loss on any of my stocks is that when I previously did that three years ago,I ended up losing 15% and if I held them instead (given that their long term intrinsic fundamentals were still in place),I would have seen gains of 250% and 500%!

Moreover last thursday on NASDAQ,Microsoft a US$180 billion dollar company had a trading range of 13% within that day and even NASDAQ's stock price traded in the range of 20% from its highest and lowest price!

Again we are talking about multi billion dollar companies whose share prices are US$20+,not penny stocks.

Another comment on how crazy and dysfunctional financial markets have become;oil,one of the most critical natural resources in the world which supports all global economies has had its price move from $150 to $50 in the last four months!

How can economies work properly with this kind of madness?Interesting that OPEC recently announced that it would like to set the tariff range between US$70 to US$90,a bit lower from the US$110 to US$80 that I forecast in the summer.

Seems like "free" markets and unrestricted capitalism American style,is causing its own destruction,ruining countries,companies,savings,pensions and throwing millions of people worldwide out of work.

Every time there is a recession,people talk about another "great depression" but I suspect that this recession will be similar to the recession in the early 1970s which lasted two years.Ben Bernanke studied the great depression before becoming Federal Reserve chairman and he is attempting to put measures in place to prevent this from happening.The election of Barack Obama as President and the election of a majority of Democrats in the Senate and the House of Representatives will eventually ensure that the measures needing to be taken,will happen.In the meantime,we will continue to see stomach churning weakness in global share prices.

Given the likely time period that my stocks will need to "heal" from the current financial crisis,I have no intention of putting further cash beyond the small amount remaining as per "Track My Stocks" webpage.I may continue to do some rotation similar to what I did this week with Esprit and Zijin Mining but I will be highly reluctant to put any further cash into a very vicious and unpredictable bear market,given my own short term and mid term cash needs.

9th November 2008

If there is one thing that is clear from the financial crash,one needs to take into consideration crowd and behavioural psychology to maximise profits in stocks beyond simply basing it on business value analysis.Taking this into consideration,over the past several weeks,I have been reading about Jesse Livermore,the greatest trader of them all.

This is the guy who shorted the US stockmarket in 1929 and made $100 million from the crash.In a few weeks,he made the 2008 equivalent of tens of billions of dollars,more than the current foreign reserves of many European countries!

The reason why I strongly recommend that people do not short stock,use margin or cash that they need for day to day necessities is because even Jesse Livermore lost his entire life savings on several occasions,before he mastered the art of trading.

Jesse Livermore became one of the richest men in the world in the height of the great depression in the US.He took no pleasure from his fortune and ironically,he labelled himself a loser.He judged success in his life on his legacy and that of his family and the nadir came when his wife shot their own teenage son during one of his son's increasingly violent drunken incidents.Jesse Livermore when reflecting on his life,committed suicide by putting a gun to his own head at the age of 49.

In the last couple of weeks,Superior Energy Services,ABB,NASDAQ and Dolby announced their quarterly results.To summarise,all of these companies' business performance and earnings results were good.In fact both Superior Energy Services and Dolby's results far exceeded mine and the market's expectations while NASDAQ and ABB met the market's expectations with consistent operational earnings and sales growth.

This week just ended,I made further purchases to 3 of my stocks.

One can not help but comment on the historical significance of a man with African ancestry and an Arabic name being elected President of the biggest economy and military power in the world.The United States finally lived up to its promise of the 'American dream" where anything is possible and ethnicity,race and caste are no barrier to its citizens in attaining the highest office in the land and where people with intelligence,drive,determination and perseverance,are not restricted from progressing in life.The culmination of Martin Luther King's "I have a dream" speech and the sacrifices of many of her people during the civil rights movement forty years ago,finally came to fruition in a historical night for America and the world.It is true to say,that no other country in the world,could such a candidate with no family ties to the country's elite,and of such a background, become President.

This week,the United States of America came of age in the 21st century and her image changed dramatically for the better in the eyes of the rest of the world.

30th October 2008

Global stockmarkets are supposed to be efficient allocators of capital but given how share prices of even large cap blue chip stocks can change by greater than 10% on a daily basis reducing multi billion dollar companies to the equivalent trading status of penny stocks;this makes a mockery of the whole capital market system.

Buying and holding proven profitable companies in the US for ten years between 1998 to 2008,would now have led to no gains whatsoever given the October crash.Moreover unlike the dotcom and technology crash in 2000,where companies which never made a profit were being valued at billions of dollars or blue chips were trading at 50 or 100 times earnings - the severity of this crash was more to do with hedge funds and traders over leveraging and so called financial analysts valuing companies speculatively,on a quarterly basis rather than providing detailed evaluation of likely free cash flows over a ten year period.

The growth of the internet and digital financial content combined with ease of trading from anywhere in the world,with borrowed money such as margin,has compounded the volatility of share prices to record highs.Getting a respectable 10 to 15% growth in a stock portfolio over a year becomes a joke if such stocks could gyrate up and down by a range of 50% within a year and when such an annual gain could be wiped out in an instant by the click of a mouse by hedge funds who have margin calls.

Moreover the pressure on funds not to show underperformance on a half yearly basis,forces many simply to trade irrespective of the fundamentals of individual companies.If one industry sector becomes unfashionable,there is no hesitation to sell all companies even if the fundamentals of certain companies within that industry has not changed but will actually improve given the decline of their weaker competitors.

When Warren Buffett and Charlie Munger pass away,they will leave a legacy that few will be able to practise in future,given the heightened pressure on short term performance and the lack of authority within their industry of individuals to practise such a philosophy.

One thing great investors such as the above,along with Peter Lynch and Sir John Templeton had,was that they cared deeply about people who trusted them with their money.This led to them being very prudent with their investments as well as a demonstration of incredible integrity - compare them with the arrogance,recklessness and high lifestyles of many fund managers,paid for by investors who have seen their life savings decimated.

Managing other people's money requires great responsibility - my personal investments reflect the profile of people in their late twenties to early forties who have no mortgages,no debts,no significant short or medium term financial commitments or dependents.Literally my portfolio is the equivalent of owning businesses which will reward such likeminded investors over time but the abuse of their valuations by traders and the financial industry as a whole,is now leading to wild gyrations in stock prices which will continue, given the temptation to make a quick buck.

This means that such an investment methodology would need to be extended to an even longer time period to guarantee outsized performance as well as actively selling when such companies reach their intrinsic business valuation or have hit too high a risk of permanent business value dimunition.

One thing that Warren Buffett proved is that over time,no trader can defy the growth in profits and cash that such companies generate.However this is also dependent on the maturity of stockmarkets.Given the size of the US market,there is still more logic and maturity to it than stock markets such as Hong Kong and India where growing,cash rich companies can be valued below their cash on their balance sheets or where stock markets can halve every 5 years.There is a reason why Warren Buffett said that he was 100% invested in US stocks.

Another example of the mediocrity of the investment industry is the irresponsibility and incompetency of analysts at Morgan Stanley (another American bank that deservedly should have been made bankrupt by its recklessness).They produced a report which got wide media attention for significantly downgrading Standard Chartered Bank,putting significant downward pressure on its share price.Standard Chartered Bank then published its third quarter trading status exposing the intellectual bankruptcy of this report, leading to its stock price rebounding nearly 40% on the London Stock Exchange in two days.

As promised,I will disclose my weighted average purchase price by the end of the year and weightings of each stock on my global portfolio,however,I will only disclose the current share price of each stock once a year,on the 21st August of 2009,2010 and 2011 since my investment methodology,as I have written on many occasions,is that of a business owner not a chip to be traded in a casino on a daily basis.

25th October 2008

Selling Garmin was a tough call but as the markets continue to decline,it allows adding to stronger companies such as Microsoft,Intel,ABB which have never been valued at such lows in years,as well as to take advantage of the severe depression in values in Hong Kong,where the market has gone into a tailspin.

You know that markets have become totally irrational when similar to the dot com craze,you hear traders say "PE ratios are no longer relevant".When people start rejecting objective valuations particularly when the wider liquidity issues which created the crisis,are now being resolved,you know that you are near the peak of the frenzy.

So we are now in phase 3 of the market decline where there is all out panic everywhere.

It seems the markets have gone from fears of the credit crisis to fears of emerging markets this week and there has been huge changes in certain currency rates across the world.In case people are worrying about a repeat of the 1997-98 Asian crisis which led to bankruptcies and devaluation of currencies,please note the foreign exchange reserves as indicated in the enclosed url http://en.wikipedia.org/wiki/List_of_countries_by_foreign_exchange_reserves.

Of the 14 countries holding in excess of US$100 billion in reserves,9 are Asian and two of the other five are Russia and Brazil.

China and Japan combined hold 38% of the world's total exchange reserves.

Surprisingly Thailand where the original Asia economic crisis began,holds in excess of $100 billion and has more foreign reserves than the UK and Australia combined!

The fear of emerging markets this week has impacted Standard Chartered Bank whose share price decline is at a record low and at an unbelievable PE ratio of 5.5.The original fear regarding Standard Chartered Bank was its capital adequacy ratio which has now been resolved with statements from the bank and an interview that the CEO made in Singapore on thursday.This has now moved to fears about economic growth in Asia and foreign currencies!

Standard Chartered Bank from my perspective is simply the best managed bank in the world.Unlike HSBC or Barclays,it concentrated on its strengths in Asia,Africa and Middle East and did not diversify into the US and has not had the problems other banks in Europe and US have had with subprime assets.Even with economic slowdown next year,it is expected that 50% of global growth will come from emerging markets in 2010 to 2015 and Standard Chartered Bank is well positioned to capitalise on this with their consistent strategy and powerful banking brand.Note China,India,South East Asia,Africa and Middle East will still witness economic growth in 2009 and 40% of Standard Chartered Bank's profits come from China,Hong Kong and Singapore whose currencies have not been impacted by the current turbulence.There will be some short term currency losses due to Standard Chartered Bank's exposure to the South Korean market but I believe this will be temporary,as the currency markets get back into some sort of balance over the next several months.Given the current hysteria,Standard Chartered Bank's share price may plummet further next week but I will continue to add to my holdings as the markets are now blinded by short term issues.

The market as I remarked before has become so short term focussed that price multiples based on normalised earnings over a 5,10 year period are now being rejected to focus on simply this year and next.Warren Buffett and value investors are now in high heaven!

21st October 2008

I never imagined that I would end up with opening a position in Microsoft but given the huge sell off in the last 6 weeks,even Microsoft was impacted.I do not need to explain Microsoft's competitive strengths but this cash machine whose return on equity is an outrageous 47%,increasing from a jaw dropping 37.5% over the last 4 years,simply has a vice like grip over its industry and can now be bought at 12 to 13 times trailing twelve month earnings - the lowest price earnings multiple in its history.

Literally every company feeling threatened in the software and wireless space from Yahoo! to Research in Motion,the makers of blackberry,are rumoured to be acquisition targets by this 800 lb gorilla.

The $20 billion of cash on its balance sheet just makes its valuation even sweeter and given the volatility of global stock markets today,this is one company that can be bought at a discounted price,with the knowledge that it will continue to generate tonnes of cash and be around for years to come.

I will add further to my holding if the price falls another 15% in today's uncertain stock market climate.

18th October 2008

Another rollercoaster week but there is a growing awareness in Europe and the US that the vast majority of companies impacted by the freeze in bank lending will not now go bust and once Lehman Brothers' liabilities are fully understood which should be by the end of tuesday 21st October,the fear amongst banks about each other's liabilities should finally be cleared.

I suspect the bottom,if it has not already happened in Europe,Japan and US,will happen by mid week,next week.

To be honest,I have yet to see phase 3 of the market meltdown in the US and Europe where investors flee in total panic and prices decline to bargain basement prices.It looks unlikely now that this will happen.However in Hong Kong,we are now in phase 3 of such a state with certain cash rich Chinese small caps and micro caps being sold at ridiculous prices such as at the cash and receivables on their balance sheets,valuing their rising domestic profits at zero!

Anta Sports is now being sold at 4 times their trailing earnings if one deducts the cash from their IPO last year.This is a company whose future earnings will be higher than its past and is one of China's biggest sportswear brands,sponsoring key national sports such as basketball and events such as China's sports personality of the year.

Such irrational valuations in Hong Kong does not surprise me given the lack of credibility of investment analysts and fund managers here.Paul Pong's investment portfolio in the South China Morning Post was wiped out last week and he refused to publish the fact that if people followed his stock picks and strategy,they would have ended up with no stocks remaining and a permanent portfolio loss of 75%.He blamed the US for such a "financial tsunami" without accepting the fact that China's stockmarkets were in bubble territory and accepting responsibility for the stocks and methodology that he recommended.

As for my stocks,given prices did not fall to bargain basement prices (except for Anta Sports),I only ended up adding to two of my existing positions and was not able to open a position in a new stock.

I give the analogy of what happened last week to an airplane which not only went through severe turbulence but literally lost power and was nosediving at accelerating pace.

When one is in such a situation,you have to have full confidence in the capability of the pilot to somehow make it through and that is another reason why I sold Chesapeake Energy - I can not have a reckless pilot (the CEO) in charge of the plane in such an environment.With the sale of America Movil,I give the analogy of having an excellent airplane,excellent pilot and crew but unfortunately the plane is running on fuel which could explode mid air (the Mexican peso)!

13th October 2008

If the markets continue their free fall,valuations of companies will become so ridiculous that the governments might step in and stop trading until they fix the interbanking lending issues.We have already seen suspensions in Russia and Indonesia in the past month so this could well happen in the US,Europe and key stock markets in Latin America and Asia.

Such action could happen as soon as wednesday depending on if mass hysteria engulfs the market and people continue to sell in blind panic.If this happens,daily stock price falls could be on average up to 10% per day as there are very few buyers.

Such times are a godsend for Warren Buffett and value investors and if the market falls on monday,you may be surprised at one of the stocks that I will add to my portfolio that I personally never believed that I could own at such a price.

I also misunderstood how much,irrational markets and panic can cause valuations to decline to.

The fall out to this,will be price earnings ratios at historically low levels for an extended period of time due to sharp falls in confidence by investors in stock markets. Companies that pay good dividends will come back in favour.Moreover strong companies will begin to acquire its weaker competitors and become even more dominant in their industries.The market will also now favour long term investors who can hold stocks for at least three years.

Now you know why "being greedy when others are fearful" is such a hard thing to do - things don't become cheap without a reason

11th October 2008 part 2

How to psychologically deal with violent market crashes and reflecting and analysing my mistakes

"In fact, the true investor welcomes volatility. Ben Graham explained why in Chapter 8 of The Intelligent Investor. There he introduced "Mr. Market," an obliging fellow who shows up every day to either buy from you or sell to you, whichever you wish. The more manic-depressive this chap is, the greater the opportunities available to the investor. That's true because a wildly fluctuating market means that irrationally low prices will periodically be attached to solid businesses. It is impossible to see how the availability of such prices can be thought of as increasing the hazards for an investor who is totally free to either ignore the market or exploit its folly."- Warren Buffett's letter to shareholders,1993.

"To me, an investment is simply a gamble in which you've managed to tilt the odds in your favor...In fact, the stock market most reminds me of a stud poker game" - Peter Lynch,"One Up on Wall Street"

Influential perspectives made by two of the most successful investors in US history when approaching investing in the stock market.

So how do you tilt the odds in your favour?

Make sure you have done as much homework in studying the businesses that you have decided to invest in because you are essentially playing a poker game with "Mr Market",a highly emotional person whose mood changes from one day to the next and you don't know when he raises the stakes whether he is bluffing by being unrealistically optimistic or pessimistic or he actually has an ace up his sleeve that you are not aware of,that can blow you out.So you can call him or keep on playing the game because you think he is wrong or raise your bet or you can quit because you have been dealt a card that means you will lose or the stakes get so high,you might not be around to play another game!

So what types of companies should one be willing to play poker with Mr Market and where did I go wrong with Chesapeake Energy and America Movil?

Companies with clean balance sheets,whose PE ratios are below their historic average and whose primary currency is stable is a good start! Secondly, tune out all the so called experts and websites that promote stocks and predict high earnings growth since they are one of Mr Market's personalities and consequently the odds are stacked more in their favour than yours.Some of them might genuinely believe in what they say but do not realise that they are nothing but Mr Market in disguise,promoting flavour of the month stocks.

Some of these "investment experts" may have made an excellent analysis but you need to do your own due diligence and check all the potential risk factors that can lead to the stock declining which they either did not factor sufficiently into the price or where they actually made a mistake in their calculations.Even if you agree with their analysis,the chances are that these companies will be near their intrinsic business value when they are first brought to your attention,so the discipline of being patient and not doing anything for months until something happens to one of these stocks that you like and can understand,is critical to increase the probability of your success.

Given the increased volatility of stock markets today due to the increasing mountains of information and gossip that is being distributed from a proliferation of media devices including the internet,together with the ease of low cost trading means that declines of 30% or 40% or even 50% is more likely to happen and more frequently than ever before,the lows will get lower and the highs will get higher and at faster velocity than ever before,so you can open the game with odds firmly in your favour if you have mastered the discipline of being patient.

Be prepared to start with only 25% of the capital that you are prepared to use in building your shareholding in the company with the intention of adding several more times,depending on whether the company's operating results tilt the odds even more in your favour as well as how much Mr Market is willing to make the game even more attractive for you to play.Do not use capital that forces you to quit because it was only available for a short period of time.

Sometimes you will be thrown a wild card that means you should fold - the recent events on Chesapeake Energy is one example.Sometimes you entered a game without fully understanding the cards that you were dealt - the pressure of the Mexican peso currency devaluing in a credit crisis and its deterioration in a long US recession being another.So spreading your portfolio over twelve to fifteen companies in different industries is important to minimise the risk of a wild card event destroying your wealth.

The most successful investors in history looked at stocks as part ownership of businesses and with that attitude and mental habit,it is far easier to withstand what the market throws at you in terms of price volatility as well as to take advantage of its fears.

However I must confess I was astonished at the reaction to the US and Europe on entering a recession and the ongoing credit crisis on all stock prices.Its response was literally as if the end of the world is going to happen and the lights will go out.I was also astonished by the reaction to Esprit's stock price when it announced that it could not give guidance due to current economic conditions in Europe.Short term mentality seems to be taken to a new level in today's market.It appears that it is now better to exit one's stocks when clearly one is aware of such an event happening and then buying them back once they hit a resistance level such as what happened to Esprit .A trading strategy has to be implemented to optimise wealth creation.If the stock hits close to its intrinsic business value,it must be sold as the risk premium is too high to hold.If one sector such as banking is out of favour and going through a fierce sell off,all banks will be sold regardless of the quality of the business so better to sell and wait for the market to hit a resistance level to reopen a position.

So how do I view my current stocks?

Out of the 12 remaining stocks that I hold,9 have clean balance sheets with surplus cash and minimal or low debt levels - Esprit,AntaSports,Intel,Infosys,Dolby,Adobe,Nokia,ABB and Garmin.

Out of the remaining three stocks,Standard Chartered Bank and NASDAQOMX are such critical institutions with either a near monopoly position or strong competitive differentiation in their respective industries that they should be financialy strong for years to come.

The one remaining stock,Superior Energy services is a key company in the oil well intervention and maintenance segment and without it,the US will have issues with oil production and energy security off its shores in the Mexican Gulf.

If the market crashes further,the one sentence pitch for each company to protect you from being under the spell of Mr Market and selling when you should not is

Esprit - teenagers will still need clothes!

Anta Sports - Chinese consumers will still need sports trainers!

Intel - people will still need computers!

Nokia - people will still need mobile phones!

ABB - people will still need electricity!

Dolby - people will still need sound!

Adobe - people will still need video and PC applications!

Garmin - people will still need GPS!

Infosys - companies will still need low cost,high quality IT services!

NASDAQOMX - people will still use stock exchanges to trade and companies to raise capital!

Standard Chartered Bank -Asia and emerging markets will still need premium banking services!

Superior Energy Services - people will still need oil!

11th October 2008

Sold Chesapeake Energy on friday 10th October at US$12

As I highlighted in my blog yesterday of which companies in my portfolio run the risk of permanent business value dilution,I sold Chesapeake Energy as soon as I discovered last night that they are looking at distressed asset sales due to the current financial crisis.That compounded with the CEO's forced sale of nearly his entire shareholding of the company due to margin calls which was announced today,means I no longer have confidence in the company's management team.

Despite growing the company to become the leading natural gas producer in the US,the CEO's reckless behaviour means I would no longer put one cent of my money in his business.

There is no point in having significant assets,if you do not have the cash to sustain the business since those assets run the risk of being repossessed and sold at fire sale prices.It appears that Chesapeake Energy's working capital is now seriously stretched due to the current financial climate so I have exited the stock.

For the record,my weighted average purchase price for Chesapeake Energy was $19.38 and the stock represented only 2.5% of my portfolio so this loss has not made a material impact to my global stock portfolio.

Reviewing the rest of my portfolio,the only energy services company remaining is Superior Energy Services.Similar to all oil services companies which are taking a significant beating by the stock markets in the last couple of weeks,unless something dramatic happens in the interim,I will hold this stock and listen to their presentation of Q3 and financial outlook.As I highlighted in my blog on 26th September,these guys have been around for years and have seen the cyclical nature of their business so they should be sufficiently experienced to be able to manage the downturn and potentially consolidate their industry in well intervention services and rental tools.Indeed a couple of their senior executives bought shares in the open market which provides reassurance that they feel positive about their company's future.

On Standard Chartered Bank which I mentioned yesterday taking a hit with all the banks in the UK and Hong Kong,it was announced on the 9th October that the Chief Financial Officer,amongst other executives,elected to take his dividends as shares at a purchase price of 14 British pounds (approximately HK$190)so clearly Standard Chartered Bank's management team are not unduly worried about the financial health of their company.

On Sunday,I will reflect on the past week and accept some mistakes that I feel I have made as well as what the ramifications are of the current nature of global stock markets and how this will need to be accomodated in my investing technique.

We are going through a wild card event which has not been seen for nearly 30 years and has hit all investors great and poor over the last couple of months.

10th October 2008

While I am still accumulating,I have been analysing which companies in my portfolio now runs an unacceptable risk of being infected by the current financial crisis to cause a permanent dimunition in business value and have now decided to sell America Movil and realise the loss while adding the sale to my cash reserves to accumulate more stock purchases in other companies,particularly given that phase 3 of the global stock market decline now appears likely.

The reason why I decided to sell America Movil is ironically nothing to do with its own business but more to do with the Mexican peso.The Mexican peso runs the real risk of devaluation due to 1)Mexico's exports being less than its imports, 2)85% of its exports going to the US which will be in recession causing Mexico's trade imbalance to deteriorate further, 3)Mexico's biggest foreign exchange earners are oil (whose price has declined sharply from its highs) and remittances from Mexican workers in the US (which is now declining due to the impact of the US economy);4)Mexico runs the risk of speculators shorting the peso if they believe that the Mexican economy is not big enough to withstand the consequences of the current financial crisis,5)Mexico's foreign reserves of approximately $85 billion may not be sufficient to protect it from such a concerted attack,unlike Brazil whose foreign reserves are in excess of $200 billion.

So even if America Movil's earnings and sales continue to prosper and it is a very well managed business with deep financial pockets,when such earnings and sales are translated from pesos to US dollars,it now runs too high a risk of significant currency dilution given the change in circumstances;for me to continue with this investment so I have exited the stock from my global portfolio.

With regard to my other holdings which run the risk of permanent business value dilution,the weighting of my portfolio (which I will disclose at the end of the year) of Chesapeake Energy which has a debt level now scaring off investors,is small enough for me to retain the shareholding and wait for its financial results.The company's net asset value is likely to be around 3 times the company's current market value so the reward of retention is worth the business risk premium.

The other company that I hold,which may also run the risk of permanent dimunition of business value due to the current financial crisis is Standard Chartered Bank which stated on the 8th of October,

If this is the case then Standard Chartered Bank is having its share price slashed due to pure market panic over all banks than due to any risks specific to itself.I will wait for Standard Chartered's third quarter results and conference call to confirm that this is true before I add further to my shareholding but I expect a sharp rebound in Standard Chartered once the uncertainty is cleared.Certainly the China Sovereign Wealth Fund and Temasek,Singapore's Sovereign Wealth Fund,along with the UK,would not allow this bank to fail given its prominence in Hong Kong and Singapore but its recapitalisation would lead to share dilution.However given its near 30% decline in share price this week,it appears that the market has already factored this in,without it actually happening!

I will add to my blog this weekend after what could be a very interesting friday in the US,following the panic selling in Asia and Europe today.

7th October 2008

If you read my blog dated 19th September,"buying at the point of maximum pessimism",together with my blog dated 3rd October,"the psychology of investing",you will understand why this week we have entered into the panic selling phase.

There is a lot of cash sitting on the sidelines waiting to see how things play out while the people selling are those who are either forced to sell or because fear has overcome their emotions.

Last night,I added to six of my positions given the market panic depressing valuations.

As I said by the end of the year,I will list my weightings and average prices so comparisons can be made on an annual basis with what the price was at the date I opened my website and my weighted average purchase price.

I will also list at the end of each year,mistakes that I accept I have made when reviewing my investments.

The great thing about the bear market is that if I am successful over a 3 year period,it will be conclusive proof that I am a good stock investor.If not,I will have no regrets since this is one of my passions.I suspect that my portfolio will accelerate in capital appreciation exponentially,if the holding can be extended into further years and I will continue to show its annual performance but the comparison I set myself is 3 years so I will have to abide by my own measurement.

5th October 2008

"It is only when the tide goes out that you can see who is swimming naked"

In Hong Kong,there is a highly respected investment fund manager who was invited to host a weekly stock investing column in Hong Kong's leading English speaking newspaper,South China Morning Post,making recommendations on stocks and building a portfolio to be measured against the Hang Seng index.

He published his recommended portfolio in November 2007 and I remember going through every single one of his original stock picks and deciding not a single one was worthy of investment.

The reason why I was so interested was that I had sold my Chinese "red" chip stocks in October 2007 because I thought that they were overvalued and had the cash to reinvest.

Today,I have decided to highlight this guy's performance since he is one of the leading investment professionals in Hong Kong and although performance should be measured over sufficient time for the businesses that have been invested in to show their real intrinsic business value and let share prices catch up with earnings,Paul Pong's failure is that he realises losses as soon as the share price declines 15% by automatically selling the stock.

His investment methodology has led to him realising a cash loss of 43% to date and a total rotation of his stock portfolio with not a single stock that he picked last November,still being held.

Another example of his bizarre investment method is that two weeks ago he picked a stock and then this week,sold it on the basis that it had declined 15%,realising another loss!

This method of investing is a sure way of losing all your capital since it is a bit like buying a property and then when someone offers to buy it from you at a price 15% lower than you bought it,you sell it!Remember,you should have done your homework before investing so that you knew that it was not overvalued in the first place!

Paul Pong should not have recommended any of his stocks last November in the first place or any stocks unless he thinks that they are either undervalued or have very strong growth prospects and are priced at reasonable earnings multiples.He should have thought of his reputation given the very public nature of his column.

Once he makes such recommendations,he should have bought more if he thought his business analyses were still valid.It is clear that his analytical capabilities are lacking as evidence from his weekly column and actions.

His poor stock picking and investment method has exposed him to be another fund manager caught swimming naked when the tide went out.

The most ironic thing,is that two weeks ago,he finally picked one company listed in Hong Kong which is common to my global stock portfolio - Standard Chartered Bank!

3rd October 2008

Now one can understand why from day one,I highlighted that if one invests in stocks,one should approach it with a similar timeframe and attitude to owning properties ie with capital that one is willing to tie up for the next three years,picking stocks of businesses that one likes at a fair or a good price after doing research on the foundations of the company and its industry.

If the environment turns pessimistic and people are selling due to fear of the future or due to forced,distressed sales because of overleverage or due to their own panic;fantastic opportunities present themselves to buy more provided that you have been sensible with your original purchases and not made mistakes with your due diligence.

If you have the temperament not to follow the crowd and you have the skills to conduct accurate due diligence,then there is a strong possibility of being successful.

During the Hong Kong stock market boom and bust,I have seen and heard of old age pensioners,college students and other people who would have needed the money after 6 months or a year,investing in the stockmarket because they thought that it was a one way bet.

There are many people who see stocks going up and feel tempted to buy after reading or watching so called financial analysts or investment experts recommend the stock or a stockmarket,only to see it crash and then not knowing what to do because they did not do any real research on the company itself or the industry it is in.

We are now going through the distressed sales phase in stock markets and because a significant number of hedge funds were caught out by the commodities bust and used large amounts of margin for their positions,combined with retail investors pulling out of mutual funds,most stocks are now being sold at lower and lower prices as forced sales.

The only sector that is being supported is consumer staples on the basis that everyone has got to eat!

I believe that there may be three more major declines over the coming couple of months though it may only be one more,no one can say.My plan is to add to my positions three more times over the coming couple of months.

Given the prices when I opened the website were not my purchase price and that I am adding more as prices get lower,by the end of the year,I will add additional columns so people can track my stocks based on weighted average price as well as the total weighting of my stock portfolio.

For those people who read my website and have confidence in my due diligence abilities;if I am right and you have the cash,you just might be able to make some serious money with my stocks over the next three years!

Following on from my comments on friday,the latest developments in the US will mean that the world's largest economy will be going into recession and given it consumes 25% of the world's oil,I expect demand for oil to now fall,leading to declining prices.

Despite the safety net that Transocean has,I am reducing my overall stock portfolio exposure to cyclicals and energy as well as building my cash balance to further accumulate stocks when I feel prices are at bargain basement levels.

The latest bank to collapse Washington Mutual and the extent of the incompetence of the US banking and credit system will now lead to the US going into recession which may last until the end of 2010.

The cosy relationships that built global economic growth in the past 5 years where leading exporters such as China lent the US the cash to buy its goods will now crack as the US has lived beyond its means for such a length of time,that the entire US financial system has the potential to go into meltdown.

China's huge budget surpluses and cash reserves combined with the government's key policy of maintaining economic growth will lead to an attempt to engineer an increase in consumption by the Chinese population with an easing of monetary policy.However given that the US is still the leading economy in the world (bigger than China,India,Germany,UK,France and Korea put together),it will still lead to a general global economic slowdown impacting all economies.

The sectors that you do not want to be exposed to are the mining and shipping sectors.The US financial sector is an obvious one due to the collapse of its risk management controls and the near bankruptcy of many of its institutions but as the US goes into recession,demand for iron,steel,aluminium,zinc,copper will all continue to decline and as the supply cycle ramps from the commodities boom of the past several years,prices will fall,squeezing margins of all mining companies.

As demand for commodities decline,the sharp falls recently seen in the Baltic Exchange will not reverse and shipping companies will continue to suffer from low day rates,collapsing their margins.

I believe that the "correction" in the commodities markets in Q3 this year will continue as the market recognises that the US has a strong possibility of entering a prolonged recession.

So what does this mean for my global stock portfolio?

Given we are going through deleveraging in the stock market and mutual fund redemptions and switches to cash and bonds,I expect valuations to be depressed well into next year.

For the long term and for the reasons I explained on my analysis on Chesapeake Energy and Superior Energy Services,I will continue to hold these stocks despite the US entering into recession impacting all commodities including energy.

However given that I now expect day rates for rigs of Transocean to decline going forward and the likelihood of a freeze in new builds from oil producers due to the reduction in demand for oil,I see little growth over the next couple of years for Transocean.Its PE ratio of 8 provides a big safety net given 1)its $41 billion order book(which protects it up to the end of 2010) 2)its strong cash position and 3)its market dominance in the offshore deep water oil drilling market.However,if all commodity related stocks continue to decline as the market works out the consequences of a long US recession,I will put a stop limit at $110 on Transocean to build additional cash reserves.

Such additional cash reserves will be used for stock purchases in the coming months since I now believe that there is strong potential for stocks to fall to bargain basement levels given the latest developments in the US.

The other stock I hold which will be impacted by the US going into recession is ABB.

24th September 2008

Warren Buffett has always said that he is not paid for activity but for being right so continually evaluating existing companies,industries,economic trends,potential investments and price targets should make up 95% of one’s time.

Over the weekend,I studied three more Chinese companies,one US company and one Korean company but have not acted as I don’t feel they offer bargain basement valuations despite depressed stock markets. I am now waiting for deleveraging to occur in the stock markets as the final stage of the stock market decline when I then intend to continue to add to my existing positions and possibly add new companies.

This final stage may or may not occur.If the market begins rising as investor confidence comes back from the US federal financial bail out plan,then the stockmarkets may not reach bargain basement levels.

Such levels seldom occur – the Asian financial crisis of 1997 was one example.Hong Kong during SARS in 2003 was another,the BJP losing power and the ensuing crash in the Indian stockmarket in 2004 was another.In the US one has to go back to the early 1980s to see blue chip companies hit such low levels. The US tech bust in 2000 was more to do with the deflation of a bubble in a specific sector with little spill over in the global economy and with consumers;in contrast to the impact of today’s bursting of the US credit bubble .

19th September 2008

Typically in every decade there is at least one recession and one bear market and the stock market cycle begins with a correction so prices become fair and then the market factors in a new calculation based on their view of a recession and the market continues to fall so prices become cheap and then either a panic in the market occurs or some other incident happens and prices become very cheap.At this point,investors or funds which were heavily leveraged or had no proper investment plan, sell due to margin calls or mutual fund redemptions and prices complete their decline to bargain basement prices.

So which part of the cycle are we at?

Clearly we are at the stage of prices being cheap or very cheap.

Cheap I define when companies are market leaders in their industries and have a proven track record of growing sales and earnings in excess of 15% annually and are being valued at no more than 12-15 times trailing twelve months earnings.

Prices become very cheap when PE ratios of non cyclical companies are in the range of 10-12 and bargain basement when they fall below 10 and are trading at around 8.

This relates only to quality companies with no balance sheet issues and no fundamental change to their competitive position.

Clearly technology software companies like Adobe and Dolby have different matrices given they are predominantly software businesses whom I believe have far greater futures ahead of them due to global technology changes borne about by the digitilisation of data,changes in media,growth in broadband and wireless and the implied resulting changes to content distribution.

Please note that only a tiny minority of people believe that the stock markets around the world today and related valuations of good quality companies will not be higher in the future.The issue is more to do with whether money invested was based on one’s own cash reserves or debt and whether those cash reserves can be tied up in stocks for at least three years.

People do crazy things when they see prices decline sharply when their only reason for holding stocks was because they saw the stock market going up.

Having a good understanding of the business is absolutely critical in investing so that when one experiences sharp price declines,one either buys more at lower prices or simply holds,knowing that the price will recover to match the company’s business fundamentals.

Out of the 15 stocks that I hold as enclosed which are large enough for fund managers to select,I have added to my positions in 6 of them this week and not sold a single one.

I am not changing the price of each existing stock since this is meant to show the comparison of my stocks in relation to indices and funds on an annual basis and how they track from the date that I opened this website.

Please also note that fund managers and investor websites, charge for their services so I am not going to spend my time highlighting all my additional purchases in existing stocks and at what lower prices.

If in 3 years,my stocks and the analyses as published on this website,outperforms the general market and mutual funds,I will have a public record that I may use for commercial purposes in 2011!

11th September 2008

The reason why I hold 3 stocks relating to the energy industry is due to three key macro economic trends that I believe are valid.

1)Due to economic growth in emerging markets,demand for oil will be maintained at historically high levels with major new discoveries being largely confined to off shore waters,requiring deep sea drilling such as the Tupi oil discoveries by Petrobras.

2)Due to the decline in the US dollar and the economic boom in the Arab states,fuelled by historically high oil prices,OPEC will try to maintain their oil supplies so that US$80-US$110 per barrel becomes the new price range over the coming several years.

3)Due to its trade deficit and energy security needs,the US can no longer totally rely on foreign oil and will diversify to alternative energies of which natural gas will be the biggest winner.

If these trends play out, well managed companies who offer services to the oil and gas industry will experience high earnings for an extended period of time,beyond analysts current valuations.

Earnings of oil services companies are relatively immune to the daily fluctuations of oil prices since they enter into long term agreements with the oil producers.Oil producers base those contracts on conservative estimates of the weighted average price of oil over a number of years ,which is significantly lower than what the actual daily prices were,over the last 6 months.

Exploration trends and global growth in oil demand has led to significantly higher activity and prices for the services companies in the US.This is due to demand for their services coming from previously non traditional sources such as Reliance in India as well as requirements from Western oil producers for exploration to replace their ever declining reserves or to maintain production at their existing oil wells.

Transocean (RIG) is the market leader for offshore oil drilling services and if the majority of new oil reserves will be offshore in deep waters,it will continue to prosper.

Superior Energy services is a smaller oil and gas services company with an executive management team who have been together for between six and fifteen years in the company and have successfully grown the company’s sales and earnings by 25% and 35% annually for the last eight years.Given the potential for its well intervention services and rental tools division,at current revenues of US$1.5 billion,it still has significant scope for growth, particularly now that it is expanding internationally and given the current boom in gas drilling in the US.

Both companies are currently being valued due to the current crash in all energy related stocks, at a trailing twelve month PE ratio of 7 and 9 respectively and at 8 and 13 respectively from their share price on 21st August - cheap and now very cheap,if my perspective of energy macro economic trends play out.

The third Texan company that I hold is Chesapeake Energy.Built by entrepreneurs into the leading natural gas production company in the US,they are a company with a management team that has the potential to transform the energy needs of the American economy for decades to come.

Aubrey McClendon is my kind of CEO -driven,joined at the soul to his company and his industry,battle hardened,having overcome the hard times in the natural gas industry in the 1990s;puts his money where his mouth is,investing millions of dollars of his own money into the company’s stock on the open market and providing a compelling vision to the US of its economic future with natural gas.

Chesapeake is one of a tiny minority of bellweather oil or gas producers who can increase production year in year out by 15% -20% and not only maintain reserve replacement ratios but actually increase them.

Depending on where natural gas prices will be in several years and Chesapeake has hedged most of 2008 natural gas at US$8.96,49% of 2009 natural gas at $9.37 and 19% of 2010 natural gas at $9.56,the valuation of its assets alone would give it a share price of US$75 to US$120.The fact that its current production cash cost per mcfe is $2.13 provides Chesapeake with sufficient margins to withstand a total collapse in natural gas prices.

Given the sharp falls in gas prices in the last two months and the fears that the market has of overproduction of natural gas in the US,Chesapeake Energy’s share price has fallen 40% in practically two months to US$40.

I believe this is overdone and that Chesapeake will return to a conservative stock valuation of US$75 per share. 


^{9th September 2008} 

Exactly how big can Nokia become?

To outperform over a 3 year period requires amongst other skills,business analysis superior to that which is employed by investment funds and banks as well as a willingness to take short term stock underperformance since picking unpopular or out of favour companies are highly likely to lead to further price declines until the market realizes that it got its business analysis and valuation wrong and the stock rebounds with a vengeance.

I believe the market has got Nokia wrong.

The simple view of Nokia is that it is a handset manufacturer whose high end smart phone market will continue to be rapidly eroded by Apple and RIMM while its low end is now being eroded by Samsung and in the future by Chinese vendors.

"Nokia has had its best days and will be in decline."

I believe this view is a distortion of reality partly because the market and financial institutions are in love with all things Apple and RIMM (if you don’t believe me,check out RIMM’s lofty price earnings multiple).

Wireless internet is one of the great technology trends of the 21st century.

The predominance of and people’s ever increasing reliance on mobile phones for their every day business and social needs is one of the biggest phenomenons of the modern day world.

From school children in Western Europe to the rising affluence in Latin America,South Asia and China,to the entrepreneurs in Africa,all driving mobile phone growth,I believe that the biggest benefactor from this demographic trend will be Nokia,due to its dominant global distribution chain,its economies of scale,variety of mobile phones as well as its global brand recognition.

Nokia has metamorphosised itself in recognizing global changes and capitalizing on them to become the mobile phone maker to the masses and to the world.In the past three years alone,Nokia has sold approximately 1 billion mobile phones.

In its early days,it was viewed in Europe as the hippest and trendiest phone maker to own and while it still retains that image in certain countries and also with a certain part of its product range; its ability to recognize changes in its industry particularly in emerging growth areas,has enabled it to transform itself and its fortunes by developing products to the mass market in spite of effectively,ignoring North American market requirements,where it is currently only a niche vendor.

One example of this,is that Nokia is now viewed as the most trusted consumer brand in the whole of fast growing India according to Brand Equity of The Economic Times, India's largest and the world's second most read financial daily.

Analysts view the mass and developing markets as commodity plays where prices and margins will continue to decline and consequently have marked down Nokia.Given most of the funds are North American based and highly influenced by what they see in North America,they also view that Nokia will lose its market leadership at the high end to Apple and RIMM,so Nokia will be squeezed at both ends.

While Nokia is likely to continue to lose handset market share from its high of 40%,Nokia is already undertaking another transformation due to its deep understanding of the wireless industry to seize leadership of the next wave of mass market adoption where the mobile phone becomes the pre-eminent device for school children (GPS so parents can track their kids),mobile gaming and social networking sites for teenagers and multi media consumer and business applications device for adults.The fact that it also plans to launch touch screen phones to the mass market first,also highlights that it has a strong understanding of where the big profits lie in the next wave of mobile industry development.

This year,Nokia bought Navteq giving it leadership in GPS.It bought out its partners and controls Symbian the dominant mobile computer operating system in the industry.It bought Plazes a social networking site.It has launched nGAGE for gaming and "Comes with music" for digital music downloads,signing up the top 3 music labels.

It will continue differentiating itself by offering a wider range of proprietary and non proprietary services and functionality than its competitors.This should enable Nokia to maintain if not increase market share in future years,while simultaneously increase average revenue and profit per consumer as well as enable the activation of recurring revenues and profits from its existing customer base.

As Olli-Pekka,Nokia’s CEO writes in their 2008 interim report,

"…we believe that the next wave of growth will be driven by devices linked with services."

Nokia’s settlement of its dispute with Qualcomm will also enable it to enter the significant and highly profitable North American CDMA device market which will also drive upside to Nokia’s revenues and earnings in the future.Currently North America represents less than 5% of its current 2008 revenues.

If Nokia can execute on its strategy in becoming the dominant mobile consumer applications company in addition to its current position as the leading mobile device company,then Nokia’s earnings and its stock price will move to ever increasing new highs.

The fact that Nokia has great financial discipline and is not willing to lose money to maintain its handset market share or to win telecom network infrastructure contracts from its Nokia Siemens joint venture,combined with its mass market instincts,highlights that its management is not being misdirected from what it needs to do.

Its end game is to continue to dominate and transform mobile consumer society for years to come.

Given Nokia’s brand,which is one of the top ten in the world,its existing 1 billion plus customers,its proven,world class management;it is arguably,the only company in the world that has the ability to pull this off.

I do not discount that it may make some mis-steps in the short term,that it needs a far more imaginative advertising campaign on its mobile services and also that it needs to resolve its current telecom carrier partnerships particularly in the US but I believe Nokia has simply too much power in the industry and with consumers for it not to be able to make corrective actions and end up as the ultimate winner in this huge and transformative global business.

Currently the market does not rate its capabilities in doing so and is discounting the ability and deep mobile industry knowledge of its management,by giving Nokia a PE valuation ratio in the range of of 8 to 10,similar to a commodity technology business with little earnings growth prospects.

I expect Nokia’s share price to deteriorate further this year due to their warning last week on device market share decline in Q3 as well as the short term earnings dilutive impact of its Navteq acquisition so there is a strong possibility of cheaper prices to be able to buy Nokia at,in the coming months.

I view the conservative fair value of Nokia if it can pull off its mobile applications strategy at US$40.  

5th September 2008

The bear market gets ugly

Given that the most obvious way of making money in the stock market is to buy low and sell high,it is amazing how few people can actually do this.

Given the stock market crashes in Hong Kong,China,India and the major declines in the US and Europe,you would think that no one would now sell given markets have now declined from last year's peak by 20% to 60%.

The fact that this is not the case,is largely down to a few reasons

1)Psychology of the crowd

If you are glued to the financial media,stock tickers and take opinions from your friends and colleagues,you lose sight of why you bought the stock in the first place and let fear overcome you,especially if you keep seeing your stocks decline for no valid business reason except for general market panic.

2)You had no understanding of the business when you bought the stock

You just thought a stock would go up without having done due diligence and a proper calculation of a fair valuation on the company.

3)You actually made a business valuation mistake

That is easy to identify for US banks and mortgage companies since their assets have suffered permanent dimunition in value ie their balance sheets are worth only a fraction of what people thought they were worth,due to bad loans.

However for other companies,this is a tough one because you would also need to identify which companies are suffering from temporary business declines as opposed to permanent ones.

Business valuation mistakes are also easy to identify in bull markets when companies have ridiculous price earnings ratios but in bear markets when economies enter a recession and stocks get really cheap,they are far more difficult to recognize as you do not know which ones will recover and achieve higher earnings in the future.

4)Traders

Given how easy it is to buy and sell stock and how this group try to make money by looking at charts,they will always trade regardless of whether from a fundamental view,it makes sense.

Since to complete a trade,50% will be right and 50% will be wrong,over time,results will reflect the market and be no better or worse.

5)Bought on margin,with borrowed money or with short term money

This is where investors become very vulnerable since in bear markets,prices can keep going down and if you have to take money off the table due to a margin call,you end up being forced to sell and make what would otherwise have been temporary paper losses.

Why I believe my stocks will go higher and have no current plans to sell at lower prices.

All my stocks are market leaders in their businesses of which either the long term demographic,macroeconomic or technology trends are such,that I expect their earnings to be significantly higher in two to three years time,than they are today.

They may suffer short term business setbacks due to recession,competition or "acts of god" but I do not believe that such set backs will be permanent and I expect them to continue to report higher profits over the long term and for an extended period of time.

Obviously,if I am proven wrong and the company becomes marginalized in their industry or fails to execute its business strategy effectively,I will take the loss since I made a business analysis error.

Clearly I will also sell when a stock reaches the price that I believe reflects its fair business value as when I sold China Huiyuan Juice this week when Coca Cola announced its proposed takeover.

Investing in the stock market is similar to buying a house or an apartment,if you do not plan to hold or to stay for at least three years,you should not be buying.
 
3rd September 2008

Can you imagine how I am feeling today?

These are the reasons why investing in stocks can be so worthwhile.

When one has the ability to identify undervalued stocks,has the temperament to withstand market hysteria and providing one makes the correct business analysis on the company,its stock will eventually rise to its correct valuation.

This is the most extreme example you can imagine!

Today,China Huiyuan Juice rose 168%.

Coke’s US$2.5 billion all cash offer,is the biggest proposed acquisition of a Chinese company to date by a western company.It is still subject to regulatory approval and so I decided to realize the gain and sold at HK$11.06.

Interesting that from my analysis of Huiyuan’s business,I put a conservative business valuation of HK$10.4 so clearly Coke are using slightly more optimistic assumptions plus its ability to scale Huiyuan’s distribution, to pay a 17% premium.

How ironic that my website does not claim or promise 100% plus gains in several weeks or months and I have made a 168% gain in 5 days!

1st September 2008

Cheng Hye Cheah – Asia’s real Warren Buffett 

This Malaysian born Chinese ex journalist,is the founder,chairman and chief investment officer of Value Partners,a company he set up in 1993 with just $3m and has now grown to become the second largest single manager hedge fund headquartered in Asia,valued at $5.9 billion. 

This guy is a stock picking genius and follows very similar principles to Warren Buffett and the value investing methodology. His genius lies in being able to pick turnarounds ie companies who suffer business value declines but where he views such declines to be only temporary,leading to massive gains when his analyses turn out be true,in future company results.
 
One of his funds,the Value Partners Classic Fund is included as a comparison to the results of my stock portfolio. 

29th August 2008

China Huiyuan Juice bought today at HK$4.14

I did say expect some rotation of my global stock portfolio due to earnings season in Hong Kong!

As highlighted with my Anta Sports stock purchase,the big macro economic trend of rising affluence and consumer purchasing power in China,will lead to certain Chinese companies becoming bigger and bigger.

One industry that interests me is the beverage industry as drinks will always be in demand and as a country develops,consumption grows.

China Huiyuan Juice controls 40 percent of China's pure juice market. Unlike Westerners, most Chinese seldom drink juice and it is an emerging trend. Huiyuan says the per capita consumption of juice is currently only 3.4 litres a year in China, compared with 19 litres in Japan, 34 litres in the US and 40 litres in Canada.

Consumption is expected to grow at a compound annual growth rate of 10.1% as Chinese consumers become increasingly aware of healthier diets and as their disposable income continues to rise.

Huiyuan Juice has doubled its revenues in the last two years and quadrupled is profits.Its intention is to quadruple again over the next three to five years and given that its current revenue as the number 1 pure juice brand in China,is still less than US$400m (as per 2007 year end),it has plenty of scope to meet such ambitious targets.

It is highly valued in China and has won many awards.One example was the "2006 Chinese College Students’ Favorite Brand In Fruit Juices" held by the China Business Newspaper in which over 10 million college students from about 3000 universities and colleges in China participated.

In China (unlike in my student days in the UK!),college students are not big alcoholic drinkers.Soft drinks,coffee bars and tea houses are preferred venues for many students.

The market leaders for milk beverages,Mengniu Dairy and alcohol beverages,Tsingtao Brewery have similar market shares in China for their respective beverage segments but unlike Huiyuan Juice,these companies are currently trading at 30x trailing twelve months earnings.

China Huiyan Juice,similar to Anta Sports,is flush with cash given its IPO in February 2007.

Warren Buffett once stated that " you pay a very high price in the stock market for a cheery consensus" and China Huiyuan at its IPO, fell exactly into that category.

During the Hong Kong stock market bull run,when the market fell in love with Chinese stocks,Huiyuan IPO’d at HK$6 which was then at a price earnings multiple of 45.6 times trailing twelve months earnings.Very soon it doubled in price leading to a crazy valuation of 90 times earnings!

Now,due to the current Hong Kong stock market crash,its price has declined to HK$4 in contrast to its continuing significant earnings growth,leading to a current valuation of 10 times trailing 2007 earnings!

China Huiyuan Juice could literally apply to the axiom of "buy low and sell high"!

The compelling reason that motivated me to buy now,apart from 1) investing into the growth in the consumer market for beverages in China with the de facto market leader 2) Huiyuan Juice’s now very attractive price earnings multiple 3)its net positive cash position, was actually 4) the results announcement yesterday evening,of its smaller competitor - Haisheng Juice.

Haisheng Juice announced excellent results with its gross margins not deteriorating since they managed to pass on price rises,to offset the rise in prices of its raw material fruit concentrate imports.

If I have correctly put "two and two" together,this should also lead to Huiyuan announcing strong first half 2008 results on the 10th September – we shall see!

I view the true Price Earnings ratio for this company at 20,a conservative compound annual earnings per share growth rate over the next 5 years of 18% and a target business price of HK$10.4.

Ironically,Value Partners which is the second biggest hedge fund in Asia, took a stake in this company at the IPO price of HK$6 - I add the stock to my global portfolio at a 30% discount today.

28th August 2008

Given that my global stock portfolio is intended to be held over 3 – 5 years,it may seem surprising that I am already changing the portfolio so soon after announcing it,however this is the middle of the results season for many Hong Kong listed companies so I can gauge performance and how they match my expectations.

To say that I was disappointed with Sinotruk’s half year results is an understatement.

Sinotruk,which the Chinese government spun off incorporating the government controlled heavy truck business late last year and intends to develop to become a multinational company to take on Volvo and Daimler,failed to increase value to shareholders.

Although Sinotruk increased sales and unit volumes by over 50%; management indicated prior to today’s interim results that due to demand exceeding supply,it would be able to raise prices to pass on the increase in cost of raw materials such as steel; however these results highlight that it failed to do so.

This has lead to declining gross and operating margins.Moreover,despite the fact of a low manufacturing cost base in China and its claim that it can make heavy trucks cheaper than western companies by 50%,it could not fully offset its foreign exchange losses by the rise in prices on its exports.

It gets worse!Sinotruk’s receivables nearly tripled and its debtors greater than 90 days,rose seven fold leading to its cash reserves halving.Although the majority of its debtors are Chinese institutions who will pay,Sinotruk is literally using their IPO cash to give extended credit terms which is not the best way to use shareholders’ money.

In effect,the result of Sinotruk’s IPO has led to it expanding its business and profits but not on a per share basis.In every company,management is critical to the success of the business but also in whether they are acting in the best interests of shareholders.While the jury may still be out on Sinotruk given that these are only the first 6 month results since the IPO,I see sufficient deterioration for me to look for value elsewhere – Sinotruk certainly did not meet my expectations.

Given the price of the stock on 21st August was HK$6.20 and I sold at HK$6.35 on 28th August,Sinotruk will have no bearing on tracking my global stock portfolio’s results so will now be deleted and not computed.

Esprit

Now one can understand why a strong stomach is needed in stock investing!
Esprit's stock price declined 18% in one day after disappointing analysts,with their results.
I guess this was on the cards given that I recommended an essentially European retailer as Western Europe enters a recession!The comments yesterday by the CEO of "we see a kind of consumer strike now with people refusing to spend money" also spooked the market,leading to a sharp decline in Esprit’s stock.

So clearly it was not a good call to pick Esprit given economic conditions this year and next in Western Europe but I believe Esprit is the best managed clothes brand retailer on the planet.Its largely German management has successfully grown Esprit through previous downturns and given its base in Hong Kong,it is well aware of the potential of growth in Asia which currently represents only 11% of their turnover.

I also trust the management due to their drive,track record and honesty in "telling it like it is".May be it is the German culture and mentality but they do not gloss over issues and when things are bad,Esprit’s management address them quickly and set up a plan of action.

Heinz Krogner the CEO and Thomas Grote the President of the Esprit Brand have done an impressive job in growing the business profitably without taking on debt and Esprit is flush with cash to withstand any downturn as well as increase market share as weaker European retailers decline and the industry consolidates.

Their marketing plans including sponsoring MTV Europe and MTV Asia with their EDC brand are good and their financial parameters in relation to profit margins,return on equity,return on investment capital are arguably the best in the industry.Even during what has been the toughest conditions for retailers in years in Europe,they still managed to increase same store sales by 7%.

The fact that only 2% of their business is in the US market,where the recession will be more severe due to US mortgage debt issues,means that their group exposure to risks of declining sales and profits is significantly reduced.

Esprit’s revenues are now nearly $5 billion.There is still more growth left in Esprit though its fast growing days of 20% plus may be over,due to its current size.

This will lead to a contraction to its price earnings multiple but over a 3 to 5 year period I still expect earnings growth of at least 10% per annum (though the next twelve months is likely to be flat to single digits).

Esprit provides a good dividend.Based on an average pay out ratio of 60% earnings,this would provide a dividend yield of around 4.1% at HK$75 and 4.7% at today’s closing price of HK$66.Esprit have announced a dividend sweetener this year,increasing the yield to 6.3%.

Given today’s sell off,Esprit’s trailing twelve months price earnings multiple is now reduced to 12.8.

I am prepared to sit out,hold,collect the dividend and suffer the likely stock underperformance over the coming 18 months.

I believe that Esprit is experiencing a temporary decline in business value due to the likely economic recession in Europe but that this will not be permanent.

Esprit’s focus on regularly updating its collections (more so than their competitors) also reduces the likelihood of their clothing becoming out of fashion to their targeted consumer base.So in summary,not a good call to be exposed to retail stocks in Western Europe or North America but Esprit pays a good dividend and I have yet to see evidence that their business will not continue to prosper over the medium term in Europe,with significant upside remaining in Asia. 

Even though I am based in Hong Kong,my global portfolio does not seem to be weighted with China stocks but that is more to do with me waiting for declines in valuation and evidence of company performance being sufficiently compelling, to have what I would consider a bargain and Anta Sports has now fallen into that category.

Anta Sports is the number two Chinese sports apparel and footwear retail brand in China behind Li Ning.

It has experienced explosive growth (nearly 100% CAGR in revenue and earnings per share in the last 3 years) and likely 25% CAGR over the coming 3 years due to continuing growth in consumer spending in China and Anta Sports' successful marketing and operating retail strategies.

The retail industry in China has grown by an annual compound growth rate of 12.5% over the past decade and the footwear market in China has seen CAGR of 20% in the last 5 years.Moreover in the developed markets of US,UK and Japan,the average number of pairs of shoes that are owned are 6 while in China it is still barely more than 2!

The per capita disposal income of the Chinese urban population is also increasing in double digits per annum and is still only US$2000.

Moreover urbanization of China is still at a low 40% compared to 80% in the US,66% in Japan and 50% globally.

When one considers that China has one of the highest savings rates in the world and the Chinese government has US$1.7 trillion in foreign exchange reserves,all these numbers combined with the still low base of consumption in China is simply staggering and has all global consumer companies salivating as to their continuing growth prospects in China.

So why invest in Anta Sports?

No matter how popular Nike and Adidas become in China,there will be room for two major Chinese sports retail brands due to their unique identification and knowledge of the grassroots and local aspirations of Chinese consumers.

Li Ning and Anta Sports associations in China combined with the entrepreneural skills of the senior management are simply too formidable,regardless of how many highly paid retail consultants,western brands employ on their Chinese sportswear retail strategy.

It did not go unnoticed to the hundreds of millions of Chinese viewers that the final torch bearer who lit the Olympic flame at the Bird’s Nest stadium,by being elevated to the top of the stadium was the founder of Li Ning himself and Li Ning did not pay for the privilege!

Moreover Nike,Adidas and other western brands do not address the sub US$25 sports footwear market which is huge in China.

Anta Sports sponsors a number of key sports including one of the two fastest growing sports in China – basketball.

Along with soccer,basketball has come from nowhere in China in the last ten years to become very popular.The catalyst for this is arguably the most popular and recognized sports athlete in the whole of China – Yao Ming and when he joined the Houston Rockets in the US.

Not only is Anta Sports the sponsor of the Chinese Basketball Association and all its basketball teams but the owner of the Houston Rockets has a 1.78% shareholding in Anta Sports and is helping to promote the popularity of baskeball in China as well as elevating the Anta Sports brand.

Another example of Anta’s brand growing into the mainstream of Chinese society is the annual hosting of ANTA CCTV’s (China’s equivalent of Britain’s BBC) Sports Personality of the Year.

The long term demographics of China for the sportswear and footwear industry is very compelling together with the increasing brand awareness of the top two Chinese brands and their ability to address a wider range of Chinese consumers.

The 37 year old CEO of Anta is one of the top management talents in the whole of China with a glittering 14 year track record of business success with Anta as well as being recognized for his abilities and achievements in China’s industry.While some of the awards that are given in China can be taken with a grain of salt,it is still nevertheless highly impressive to be awarded one of "Top 10 brand talents in China" at 33 years of age,"Top 10 Outstanding Young Persons in China" at 36 and "Business leader of China’s New Economy" by China Business at 37!

He along with his brothers,developed the company from 1994,when it was founded by their father.The family own 60% of Anta Sports and their aim is to make it the leading sports retail brand in the whole of China.

In terms of management drive,track record,ability and "owner manager" behaviour – Anta Sports scores very highly.

Anta Sports' strategies of elevating and segmenting their brand as well as targeting the mass market by having an aggressive strategy in Tier 2 and Tier 3 cities in China where they can dominate,is succeeding with continuing annual volume growth of 40%+ in footwear and 30% volume growth in sportswear.

Their average wholesale price for footwear and sportswear is also increasing (by 7% and 5.5% as per the latest interim results announced yesterday,25th August).

Given their trailing twelve month turnover to 30th June 2008 is still only US$577M with their gross margins increasing from 25% in 2006 to 38.9% and net profit margin continuing to increase and currently at 19.7%,there is still significant scope for growth.

Per annum same store sales per sqm is increasing 9%,average sales floor per store is increasing 15% and the number of stores is increasing 20%+.Currently Anta's number of stores is still only 5193 for an increasingly urbanised population in China of approximately 520 million.

Anta Sports expansion plans are not hindered by debt since during the boom in the Hong Kong stock market last year,they raised US$432m and currently have no debt and net cash of US$480m!

Their ROIC and ROE has been diluted by their current cash balance but is still very healthy,at near 20%.

To summarise,Anta Sports is a fast growing small cap stock (current market cap is US$1.6BN) tied to the prospects of China's domestic sportswear and footwear consumer market.

Unbelievably due to the Hong Kong stock market crash,its stock price has halved since the end of 2007 while its results have exceeded expectations and is now below its original IPO price in July 2007!

It is currently trading at 14.2 x trailing twelve month earnings.Moreover if one deducts the net cash on its balance sheet,its actual PE multiple is 10!

I place a conservative fair value price on Anta Sports at HK$7.5 but will be reluctant to sell for less than HK$10,unless their results deteriorate from a worst case revenue and earnings growth rate of 20%.

I add Anta Sports to my global stock portfolio as a long term hold.

In October 2006,I stumbled upon a book on investing which led me to study the great investors of the twentieth century - Warren Buffett,Benjamin Graham,Phillip Fisher,Peter Lynch,Jim Rogers,George Soros and Sir John Templeton.Their track records of consistently beating the stock market index over decades,indicate that their methodology and thinking can lead to a steady accumulation of wealth which can easily surpass any other method of wealth creation,whether it is in real estate,buying,managing businesses or in mutual fund investing.

<sup>I am now trying to apply similar methodologies to stock investing.

The most successful investors such as Warren Buffett are very patient,focussed on owning a share of a "wonderful business purchased at a fair price" and monitoring its operations so that it meets their expectations.</sup>

Warren Buffett is the living testament to the truth that "in the short term the market is a voting machine but in the long term,it is a weighing machine" ie that ultimately,it is not buying "hot’ stocks in "hot" industries or markets that leads to winning in the stock market but buying undervalued and underrated companies whose future earnings are likely to exceed the market’s expectations,with the accompanying re-pricing of the stock in the future,to its true business price.

Given that Warren Buffett is the world’s richest man and that he made his riches through investing in the stock market;it proves that his principles are the simplest and least riskiest ways of accumulating wealth.

Peter Lynch who was the most successful equity fund manager in the US during his ten plus years in running the Fidelity Magellan Fund,followed similar principles as did Sir John Templeton and Philip Fisher. 

Today was an auspicious day to start this website as there was a typhoon in Hong Kong.