Sunday, November 12, 2006

My first fund annual report

This is just to share the experience on the journey I have embarked on since last October after having read the biography of Mr. Warren Buffet "The making of an American Capitalist." All thanks to CH who has the grace to share great information like this with me. Without this, I will not find life as meaningful as how it is today.
Well, having said that, it has been a year since I made my first logical investment in the way of an "Intelligent" investor. The first purchase I made on 17 Nov 2005 can also be attributed to CH - SP Ship. This is a stock where CH made a killing, not in terms of just amount but in percentage in return. However, for my case here, it wasn't the same - a pathetic return of slightly above 5%. But, I learnt some really valuable lessons from here - PATIENCE and ignore the noise.
So far, in my fund, the only shareholder beside me is my sister. So rightfully, this report should only be available to her but it does not matter, this is just to cast my journey on record for me to look back and how far the fund have come to many years down the road.
The fund is operated like how a normal business is operated where it is split into a fixed number of shares. I intend not to split the number of shares further though I do not rule out doing it completely, but certainly not at the expense of the owners. I shall explain the logic behind it later in the report.
As at Nov 2005, the net asset value per share was S$1.13. this value has grown to S$1.36, representing a net increase of 19.4%. Compared to the performance of the STI index, the STI was around 2350 then and it is about 2750 now, representing an increase of 17% before accounting for all kind of costs paid to the intermediaries.
While on the subject of cost paid to the intermediaries - brokering houses, custodian fees, SGX charges and so on -, such costs are by no means small. For a normal retail investor, for a trade of S$10,000, it cost about $50 in commission per trade, which means at least $100 is incurred when you buy and you sell a single security. This accounts for about 1% on the principal. If an investor gain is 10% on buy price, this $100 accounts for 10% of gross gain. So it reduces your net gain to 9%. It is an astronomical amount to pay for in my view.
Let's see how much commission is accounted for in my fund for fiscal 2006. Commission paid came up to 2.8% on initial principle. It accounts for 12.4% of gross gain. The fiscal year gain is reduced by 2.8% due to this astronomical commission. To compare like for like, STI gain is 17% while the fund gain is 22.2%.
Certain of my actions have caused my sister money. Sometimes, as a value investor, we must be totally clear and critical on the actions we are taking. I find at times, I practice value investment on the buy side but I become a momentum investor on the sell side, guided by the price shown. This has quite an impart that reduces the overall return. Late in Dec 2006, I acquired quite a substantial amount in Kingboard Copperfoil. At the price I bought at, it was definitely a value which most value investors will readily acknowledge as undervalued. It has a low “Price-to-Earnings” ratio and a substantial discount to “Net Asset Value” while earning a decent return on shareholder's equity. Then sometime in Feb 2006, the trading price increased by almost 50%, a logical value investor will normally have sold off the stake then. As yet so human-like, I was being greedy, hoping for it to go up a little more before I sell off. Then what happens, it went back down slowly. At today price, the gain is about 23% or so.
Another of my action that costs my sister money was the lack of patience, particularly on two occasions. The first was my lack of patience in holding a stock which was earlier highlighted in the case of SP Ship, if I had chosen to hold on, the gain would have been at least 20% compared to 5% - all thanks to my thin patience. The second was the mistake I made in buying a second lot of Kingboard stake. This time, I became a momentum buyer on the buy side. Remember in Feb 06, the share was at its high of S$0.38, it then spiraled downwards sometime in April. This time, I was like the normal investor who looks at the charts to decide on how to invest. The share went to S$0.335, and I thought "Wow, what a great discount from its recent high" and I acquired another batch of Kingboard. Then in May, a slight turbulence in the market happens, the market suffer a drop in investor's confidence, and too driving Kingboard price down further. It went to the price which is almost the same as what I acquire in Dec 2006. "XXXX", if I had been much more patient and logical. But in life, no one really can get over silly mistakes all the time. What can be done is to identify silly mistakes - which are disguised in various forms - as much as possible and avoid going where one do not want to go. But sometimes, some of it just slipped through and that’s when silly mistakes are committed. But even if silly mistakes are committed, it should be acknowledged and addressed so that it will not happen again.
Luckily, thus far, I have not caused any great damage to both myself and my sister. In fact, it is great I committed some mistakes along the way. These mistakes are really a learning point for any investor to have a feel of what an intelligent investor should actually avoids doing. Most importantly, it strengthens my resolve towards the mindset of "never to lose money." To paraphrase Warren Buffett’s advice: “The first rule in investing is never to lose money. The second rule is never forget the first rule.”
Another lesson an intelligent investor ought to learn is never to invest in "cigarette-butt" businesses. Businesses which are dying trade or are generating low returns on equity should be avoided as far as possible. Though, an investor can purchase such business at a much "discounted" price from its book value but really, most of such businesses are really not worth to purchase. I had a personal experience in dealing with a purchase of such kind with my funds from CPF. The stock was Matex – a paint manufacturer. I was pretty lucky to be able to get out of the business at a gain. It is not that one will not gain in the future if you pay at today’s price of about 9 cents per share. The problem is the feeling of holding a business with dying economics or competitiveness is really not a good feeling.
As stated earlier, I do not intend to split any of my stock further even if it grows a lot better. The logic is by splitting stocks, it encourages a different class of investors. There are a few implications for businesses which split their stocks all too often. All of those businesses who split their stocks always state the "all-too-often" used reason "to increase liquidity and shareholder's value". This kind of action has really got nothing to do with increasing a business value or its intrinsic value. Just like a person having a dollar bill or four quarters. What is the difference? This is something where others use their emotions (randomness) than their brains (non-randomness). Were a business to split their stocks, investors and management alike are taking actions that focus on the stock price rather than the business value. It would entice a whole new entering class of buyers who are inferior to the exiting class of sellers. I too like Mr. Buffett encourages long-term investors in the fund.
I thank my brother, CH, in particular for giving me a little light to the path I totally enjoy which is absolutely meaningful and logical to me. Looking backwards, without me borrowing the simple book from him, I would certainly by as aimless as before. And really, this is one of the luckiest events I am sure that will happen in my life when I met CH. Through him, I discover Warren Buffett’s extraordinary logical thoughts on investing, and through Warren, I discover both Benjamin Graham and Charlie Munger. All of these three guys are extraordinary people with an extraordinary logical mind who can educate any normal person who is not resistant to change and open to lifelong learning.
Currently, the fund is invested pretty substantially in businesses in the USA. I find there are a whole lot of great businesses in USA, than in locally. In fact, I foresee that most of my purchase in the near future will be in the States rather than locally unless I can find a great bargain. The only risk in investing in USA is the depreciation of the Dollar, which is nothing but a certainty. If the deficit is not addressed, in the future, you can be certain the Dollar will be worth much lesser than today. When it will happens, no one knows for sure but it will happen if it isn’t address. Just like you throwing a bag of feather when you stand on top of a building. You know for certain the feathers will settle on the ground at somewhere at some time in point, but you cannot tell when it will land on the ground. This is a case how easy it is to predict the long term result than to predict the short term result.
Looking forward to the next fiscal year, I expect the fund to gain in value slowly and fairly while I strengthen on my fundamentals and learn on my mistakes as I move along. Hopefully, there will be many more reporting I can do on an annual basis till such time I am immobile or incapable to do so. That is the fun part of investing. A journey not a destination.

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