The Ultimate Call Option

The ultimate call option

Cash is a call option with no expiration date, an option on every asset class, with no strike price.”

“Wealth is not about having a lot of money; it’s about having a lot of options.

When entering into a new investing idea, think of not just investment costs, but also opportunity costs.  The importance of a cash buffer

Disciplined savings and accumulation of money is the motto I have been staunchly following for the past 2 years. As a novice investor in a recovering economy, opportunities are abound. The only grouse is that I lack the experience and the war-chest to accumulate positions and stakes in companies that I am confident in.

Now, the position is reversed. While many investors are crowing over their financial freedom dreams and new era stocks and IPO, I have been increasingly finding it difficult to find companies that are reasonably valued and have a good economic moat. I have accumulated sizeable positions of undervalued companies that I feel have a good economic moat, and have reached my self assigned limit in my portfolio limits. My portfolio time horizon will take 3-5 years to play out, and I already have my fair share of winners and losers. Value investing is not easy to stomach. Although you have a strong thesis on why your stock picks should succeed over the long run, the market does not pay you any due respect and your short term performance suffer accordingly. 

The major economies indexes and the proliferation of blind investing ETFs have reached dangerous levels. There is a disproportional amount of money blindly assigned to the 'most successful' companies such as Tencent, Alibaba, Apple, Facebook, Xiaomi, Netflix, Tesla and Amazon etc. Incredibly, these company simultaneously fit the criteria of liquidity, mid-large cap, growth, technology etc. All criteria except consistent profitability and sustained operating performance. These choice companies can go into any fund possibly imaginable, and blind investing have reached dangerous valuation levels particularly in the United States.

https://www.gurufocus.com/shiller-PE.php

 

 For China and Hong Kong markets, my impression is that there have been an actively launch of sizzling hot IPOs of companies such as Xiaomi, impending IPO DiDi ChuXing, taking advantage of the great wave of money chasing after investment returns. Considering the fact that retail investors dominate a large portion of China investors, are largely clueless about the workings of the financial markets, having blind faith that the government will solve whatever problems that come up, it is the classic example of the blind leading the blind.

With the nationalistic cries of the China Dream by the CCP and the size of the unregulated shadow banking industry, the downside risks presented in the China economy cannot be easily contained. Over-leverage is the story of people whom thrive during good times, and dive during bad times. Misallocation of capital by central planning instead of market forces could lead to misallocation of resources in the wrong areas. What is most ironic is that those whom had gotten too rich too soon, and have not gone through any financial crisis, are the ones whom will be chasing the rainbow and will ultimately fall flat. 

Alibaba is a company which I will short, provided that I have the guts and capital to do so. Personally, I am not familiar about China accounting standards. However, through studying the past blog-posts of seasoned investment bloggers,  the shadow of the 'missing cash' S-chips is overshadowed by even more creative accounting methodologies exhibited by Alibaba, and will easily put Enron to shame. 

Ali-baba is not a difficult business to understand at first glance. However, the multiple M&A transactions, legal entity structuring, legal jargon and financial accounting in the annual report is of a different world altogether. If you blindly look at the numbers, it looks legible at the surface. If you look at the notes to financial statements, even PWC (the auditor) dare not make any claims to certify the soundness of the numbers. Flipping past the colourful pictures at the front and and analysing the meat at the back, the annual report is the biggest cesspool of ring-fencing and financial mi-statement I have ever read in my entire life. Describing page 49-50 and onwards doesn't even do it enough Justice.

https://www.alibabagroup.com/en/ir/pdf/form20F_170615.pdf

 

What is scary is that that blind money flowing into ETF investing will most likely inflate corrupt companies like these to an unimaginable extent. And when large market cap companies like these fall, there might be systematic domino effects amongst the various ETFs, whom claim to be different but are all vested in the same thing. 

I am unusually bearish given the evidence that was presented to me at hand. I cannot foresee if whether or when an actual market crash will happen, or the prevailing issues will eventually work itself out. What I do know for certain, is that I will be continuing my DCA for undervalued STI ETF for the time being. I will be also furiously accumulating a war chest and digging a fire trench to capture the drop when it occurs. Boring investor now. Exciting times await.