Financial Engineering

5 Oct 2019

Dear Fellow Investor,

Financial Engineering

Suppose someone owns 3 condos in a prime area in Kuala Lumpur. They are each valued at 1.5 million. This person sells one to his brother for 1.7 million and after a few weeks the brother sells to another brother for 1.9 million. The money stays in the family. This goes on among the 3 condos and because of publicity and media hype the property  investment crowd joins in.  After a year and a half  prices are up 50 %

The brothers then cash in their gains and walk away. The latecomers who bought at the high are caught .At least they may be earning rental income but may be suffering  capital losses.

No real value has been created. No new wealth has been created. Money has been churned.

The same thing has been happening in stock markets especially in the US.  Mr Tong who writes the stock market column in the Edge describes that 8 out of the last 10 Unicorn IPOs in the US such as Uber/ and Lift are suffering losses of well over 30 % in just a few months.Many IPOs in Malaysia have suffered the same cruel fate.

Just as in our condo example these IPOs have not been creating value in fact they have been destroying by value making large losses and burning cash. They were also promoted and hyped by the financial media so that the original owners could offload to the public at high prices.    

This is why I am a mainly a value investor and avoid IPOs .

I want to invest in established well managed businesses with increasing return on equity that share some of their profits in the form of dividends.

One of our holdings HK Land has suffered mainly because of the Hong Kong unrest.

They are well established and meet all of my value investing criteria including diversification into Singapore and Thailand. They also pay a solid dividend in USD backed by increasing cash flow.

I am not worried about the price correction in HK Land . According to one of our clients who travels frequently to HK, there is a silent majority of HK citizens who do not support the demonstrators.  They want to live normal lives and continue business as usual.  The new face mask law implemented yesterday  under the emergency law should make it easier for the police to identify the violent thugs.Carrie Lam is finally taking firm action. In New York last week  the EWH, The Hong Kong ETF country fund  traded on the NYSE has stabilized. HK Land should recover.

Next Tuesday, I will be attending a briefing at CIMB by the Hong Kong market strategist who is flying in from HK to give us an up to date view. . Will keep you posted.

Invest well and grow your wealth
Bill

Critters of the week are Sri Lanka elephants. Last year we toured the country and encountered an elephant sanctuary  with hundreds of these noble beasts.  They like to herd together just like IPO investors who sometimes go to the slaughter house.