My Portfolio – 2012 1Q

At the end of 2012 1Q, my portfolio stands at 1.35 NAV, representing a profit (unrealised) of 35%.

Overview of Portfolio:

First off, I am back to posting after my long exam break. And what a roller coaster ride 1Q 2012 has been! If our memories serve us correctly, it was not long during the latter half of 2011 that the entire market was weighted on heavy pessimism. People were anticipating the catastrophic outcome of a battered euro zone. Over at US, prospects were not very optimistic as markets seemed to be sulking at the persistently high unemployment claims. Even at the far east of the globe, the main topic over China economy was the debate of a soft or hard landing. Yet as the famous (or infamous) rule of thumb saying, when 10 out of 10 are pessimistic about the market, it’s probably ready to bottom out and signals a time to enter.

And as we all knew, 2012 started with a big bullish bang! It was perhaps my first glimpse of a bullish market. Somehow, with no particular reasoning, markets seemed to just bounce back. This is weird because when we switched from the last week of 2011 over to the first week of 2012, nothing fundamentally had changed much. Euro crisis remained the same. US recovery was not as strong as it seemed to be today. Maybe the LTRO did help a little but it was a simple ‘kick down the can’ approach as it doesn’t seem to solve the heavy public debt issue. Perhaps, it could have been the recoil effect of over-pessimism in 2H 2011 or it could simply be a psychological mentality – a new year signifies a new start. Personally, I reckon it to be a mimicking resemblance of the 2009 bullish recovery spurt. With the latter half of 2011 resembling a partial market crash as seen in 2008, investors do not wish to lose out on the bullish recovery this time round. Hence, this could probably explain the bullish nature. Or perhaps, too much bullishness.

From the beginning of March, optimism began to cool down gradually. Though the US markets continue to recover strongly and the limelight seemed to waiver away from the eurozone, much of global attention started shifting towards China. And the first heavy sign of correction started when Premier Wen announced a revised 7.5% growth for China economy. With that, the HK exchange witnessed a few sharp plunges and it has currently started to moved slightly sideways lately, becoming very sensitive to news announcements. Some of the common issues involve the political headlines over the dismissal of Bo Xilai, discrepancy between the HSBC’s own PMI & China’s official PMI (which to believe?!), betting on continuing easing in China’s monetary system and also on HK stock frauds (i.e. Boshiwa and auditor Deloitte’s “death touch” to such firms). Well, as we are still smacked right in the middle of this tussle, it’s hard to predict what the near term will be but again, one thing is for certain, in the short run, the market is only a voting machine and in the long run…… I suppose you will know it by now.

While I am a long-term perspective investor, the past quarter still marked a very valuable learning journey and essentially, it taught me a few lessons which I thought it will be good to share them here:

• As much as over-pessimism creates missed opportunities for value buy, the opposite holds true for over-optimism. I can never stress how much importance an adequate margin of safety will play in your investment. This mistake, is again signified in my latest new purchase – right at the peak of the end Feb short bullish cycle.
• It is important to do your homework and rely on your own convictions. Relying on half-hearted research or even relying wholly on research analyst report will not pull you through the down cycle. Doing so might result in you buying the wrong investment or selling away the right investment at the wrong price.
• Always plan your strategy after doing your research! Investment is akin to fighting wars. You do not want to be caught off-guard without a plan or strategy. Technical analyst Alexander Elder says it best. We tend to think rationally after the market closed and irrationally once the market opens. Plan your strategy wisely and be discipline in sticking to it. This goes true when an investor wishes to average down or up. (Something which I will add on to my investment research process)

Transactions for 2012 1Q:

At the end of 2011 4Q, my portfolio was coincidentally weighted towards holding cash after the divestment of SMB United. The cash was then allocated to further accumulation in my current holding in CSE Global & Boer Power. During 2012 1Q, CSE Global announced a negative profit warning. But as expected, the contracts were merely a delay in earnings (I had it covered slightly here). Lately, CSE Global has plunged quite significantly but I remained confident of its future prospect (and I will probably post an update of it – regarding its last AGM & other concerns). As for Boer Power, earnings were above analysts’ expectations but there are still some slight concerns which I will be addressing soon. In the light of better opportunities elsewhere, I also divested my Brothers Holding investment. The main reason was because Chinese property counters are probably taking a negative market view and hence, there is poor visibility to its catalyst realisation. Apart from the various adjustment, my portfolio also included a new stock – EVA Precision (0838.HK). In retrospect, the entry price was a mistake as subconsciously, I was betting heavily on a turnaround recovery. And as Charlie Munger had said, turnaround companies normally do not turnaround. The stock price soon took a beating and the effect was further amplified by the overall negative market sentiment. Nonetheless, EVA’s long-term prospect continue to remain attractive despite them currently facing a negative short-term outlook (i.e. lower margins).

Outlook

Markets probably won’t look any rosier for at least the next quarter. 2012 1Q had also clearly show the independence of correlation between US & HK markets and it is very unlikely that the effect of one will boost the other by a significant bit. Instead, my opinion stands that the outlook of China economy will continue to be a proxy guidance for the HK market performance. PMI performance and the political outlook of China’s once a decade leadership transition will probably be the focus of this year. A reversal in market outlook can in fact only be as near as October? Nevertheless, my stand continues to be inclined towards picking companies with strong quality fundamentals and purchasing them with a margin of safety. With my overall capital amount being small, I will continue to adopt a concentrated approach, holding a max of 3-4 stocks.