To You, 10 Years From Now

 

<Inflation is Transitory>

To You, 10 Years From Now
As I hit my 30th birthday at the month of November, I completed my CFA level 2 examination. This is the most challenging curriculum I have ever taken in my life. Despite my working experience and my Bachelor degree in Economics and Finance, the sheer difficulty and breadth of the content exceeded my expectations and sapped a lot of my time and mental energy for the past few months. I finally had time to do some introspection and reflect on my investment journey so far.

The latest list of worries in the headlines are wide ranging. Inflation can be keenly observed from home prices, asset prices, delays in shipping resources / food supplies /eCommerce, and heightened transport and shipping costs which affects all areas of the economy. The Omicron covid variant is disputing the narrative of post covid economic recovery which sent the prices of recovery stocks tumbling. As I was skeptical of the narrative of forward looking markets propagated in financial media, I was underweight recovery stocks and watching on the sidelines with a limited warchest. It is ironic that the herd is always afraid of the great unknown and uncertainty, but is completely at ease at following a twisted charade of a full economic recovery when it is convenient for everyone to do so.

Reflecting on the start of my investing journey
I graduated from my university 5 years ago at the midst of a recession. Graduating in the depths of the economic recession with uncertain employment terms (contract role) is a traumatic experience. There is no nobility in poverty and I am not optimistic about the ability of the government to protect the employ-ability of locals or generate quality well paying jobs for its own citizens. I witnessed first hand how older employees can be converted to contract roles and let go when their skill-sets are no longer deemed valuable and services are no longer required. I have no desire to follow in their footsteps.

After I accumulated savings worth 6 months of living expenditure, I started investing in Singapore market via DCA in OCBC and STI ETF, and bought my first active position in ascendas REIT (Dec 2016) from the fear of heightened interest rates. Those were the days of innocence whereby I was devouring every form of value investing materials. Some notable mentions ranged from US literature like The Intelligent investor (Benjamin Graham), One Up on Wall Street and Beat the Street (Peter Lynch), Books about John Templeton , Magic formula investing (Joel Greenbelt) , The Outsiders (William N. Thorndike), and Asian literature like Value Investing in Asia (Stanley Lim), Value Investing in Growth Companies (The Fifth Person) and Your First $1,000,000 Making it in stocks (Michael Leong). I also followed seasoned local investors in the Singapore Blogger space to get a crash course of what works and what doesn't, as well as best practices on retail trade execution in Singapore.

How my ideas changed since then
Unlike academia finance whereby you can conveniently hand wave away outliers as 6 sigma events, investing in the stock market is a very humbling experience. Active stock picking is an area whereby you are forced to reassess your most tightly cherished beliefs, and learn to let go bit by bit, shock by shock. 

From the literature of those books I went through, I saw how the initial thesis / moats on those individual companies can be completely destroyed by external forces, and the onslaught on capitalism and competition. I seen how magic formulas / factor investing can lose their effectiveness over time, or eventually become a unreliable factor that go in and out of fashion. Even the greatest investors like Bill Miller (Legg Mason) and Bill Ackman (Gotham Partners) can suffer huge destruction of their portfolio performance by making wrong sided bets and hit by involuntary investor withdrawal. The democratization of financial data has made the US market almost completely information efficient, whereby most fund managers under-perform the US market after fees. Factor investing can simply be outsourced via factor ETFs as an cost and time efficient method. Among the professional investors that are still performing well today, there is a notable shift from low PB PE investing, as they developed  qualitative analysis to gain deeper insight , or utilize alternative metrics and data sources to analyse and value different companies.

Three years into my investing journey, I started GARP investing outside of Singapore in companies such as Google HKEX and Tencent, while solidifying my understanding in foreign markets. I also tried to codify my investment checklist and philosophy to make it robust. There is this eternal debate between warchest approach (optionality approach) and fully vested approach (favored by fund managers to reduce cash drag) and the conflict between bottom up and top down analysis.

I also noted there are structural problems in Singapore companies, whereby Singapore is not in control of its own destiny, the cash flows as uncertain and volatile as any cyclical, and even the best local companies can only have a TAM of 5.8 million and forced to reset as a small fish in a big pond when venturing overseas. I witnessed the decline of Singapore businesses like Creative, SPH, Singtel, and Hyflux, as the best and most talented employees and managers move to better MNCs while Umbrage CEOS and managers are staffed in the Singapore GLCs. Even if you employ the sharpest analysis on mediocre companies, there will be diminishing returns on effort put in and investing performance is likely to be mediocre.

Lastly, I questioned the overemphasis of quantitative value investors to buy cheap stocks regardless of its competitive landscape and business characteristics, to earn the <value premium>. Even for grocery buying at the discount shelf, sharp eyed housewives will discern between the battered goods and opportunistically pounce on the better ones while the un-discerning are left with the rotten fruit. I have seen a number of value funds whom continue to under-perform over extended periods and dissipated in the annals of history and I do not think I can have faith in an unreliable mean reversion strategy, whereby I can simply buy higher quality business at a hopefully battered valuation.

The 10 Year Plan ahead
As my methodology of ideas generation and fundamental analysis is more refined, I am currently more focused on reducing churning, extending my time horizon and less active in prospecting for more stock ideas. I will weed out mediocre companies to hopefully achieve market beating performance, and kill my previous deeply held erroneous beliefs. As I started investing globally, each new stock idea must have a stronger hurdle rate than the optionality of cash, existing stock ideas, or the sandp index before being included in the watch-list and ideally bought with a margin of safety.

As my responsibilities in work increase and my personal life undergo changes, it will not be possible to generate as many original quality ideas as I had in the past. Specifically for the US market, an allocation to fundamentally sound active managers or a passive index is time efficient, while I can focus on the inefficient markets like HK/China/Asia, or pick up new skills to increase my active income. As I move closer to retirement at my later years, I might be considering the setup of a family fund structure in the Singapore tax haven to manage my US stock estate tax and tax issues, or transit from active stock picking to the Irish domiciled sandp500.

I don't know if 2022 will be a better year ahead, or will be a repeat of <twentytwenty-too>. Life is frail and unpredictable and I had overseas colleagues whom succumbed to covid and left this world unexpectedly.  I don't know if there will be any long term side effects from the vaccination drive that was enforced upon Singaporeans in an attempt to revert to open door policy. I don't know if return to pre-covid is a pipe dream, or everyone will simply readjust to the new normal. I don't know when the US stock market will crash from its heightened valuations or the cash flows (with inflation) of the companies will grow to its market valuations. Life is full of uncertainty, and I will continue to solider on and keep moving forward. I don't know if I will still be blogging in 10 years time, but I will pen this post and hopefully revisit this in a decade from now.

Portfolio decisions for the month of Nov
I averaged down on my second tranche of Paypal at USD 205 on 12 Nov 21. Naturally, the news of the Omicron Varient hit the news after that and Paypal hit new lows right after I bought. Investing in bad news is simple to understand but never easy to execute and I will remain disciplined to average in tranches considering its high valuation despite a correction. I will periodically assess the fundamentals and competitive landscape of the payments and crypto landscape while I size my overall portfolio exposure.

I sold my entire holding of Raffles Medical at SGD 26 Nov 2021 on SGD 1.39 at a profit of 29.23% including dividends. Raffles Medical is fundamentally a manpower intensive business (which is not fantastic compared to manpower and asset light scalable businesses) and has limited upside from the fixed over-capacity in its Chongqing and Shanghai hospitals. Although the growth story in China is still valid, the pricing power of the hospitals may not be as strong as I initially assessed due to competition from tele-medicine competitors from JD Baba and Tencent and there might be changing consumer behaviour as patients need not visit hospitals for consultations when it can be done at the comfort of their homes. The company is not a fantastic capital allocator (low 5% margins from clinics, 20% margins from hospitals with cyclical overcapacity). Although there are  revenue streams from SG government  from the country vaccination drive, the upside is limited as the high margin medical tourism business took another dent. 

As I want to raise my cash position in lieu of US investors exploiting year end tax loss harvesting and stock selling (executed by CEOs from Tesla to Microsoft), I expect further volatility in the equity markets and want to capitalize on it. Bull markets climb a wall of worry and I shall stay alert for opportunities ahead!