Invest Patiently

27 June 2020

Dear Fellow Investor,

Strategy 2^nd half 2020

Every Saturday the Star publishes the Malaysian market dividend report. It is the first thing I read when I pick up my paper.  It lists the announcement date, the ex date, the amount of the dividend and when it is to be paid.

I carefully track this information looking for increases or decreases and special bonus dividends. This is a good financial measure of the companies we hold.   

This helps me in advising clients in my fund management business.  It helps me to survive the extreme market volatility and  maintain our sanity.

I program my brain similar to a real estate investor. A professional real estate investor will carefully research the properties he invests in.  He looks at such things as location, demand, quality of the property, the property cycle,  and the interest rate trend. If he is a REIT manager, he will among other things access the tenant mix, lease duration, the gearing, the condition of the property and of course location. 

When I evaluate a potential share investment I access similar things such things as gearing, quality and track record of the management, competitive edge and sector trends. I have an accountant who who advises me and is well versed in accessing the financials of the company to avoid surprises.

After performing due diligence, I accumulate at a value area with potential upside.  Because of this process of endeavouring to understand the business we invest in, I am not concerned with the day to day share price  fluctuations as I rest assured of the income we collect from our dividends just as rent collected by a property investor.   

For the balance of 2020, we will continue to accumulate quality shares and collect our dividends.  We will also accumulate selectively quality technology shares as mentioned in last week’s report.

Virus hysteria

This virus hysteria has been dominating the media cycle and has stocked up fear and panic among investors world wide.
The Dow dropped over  2.9 % last night on fears of a resurgence of the disease.  But is the over 120,000 US body count reported by the mainstream media true?

You be the judge: Despite extremely high population densities, Hong Kong and Singapore are two of the most prosperous cities in the world. Per capita GDP compares to the US.  Both are centers of international trade and finance much like New York.  Population together closely equals New York of about 13 million. Their covid deaths total 27 while New York has a death toll of 17,389.  

What’s happening ?

In the US if a patient on medicare ( a program for senior citizens to cover medical expenses) is admitted to a hospital for an array of illnesses, the government pays the hospital $5000. If the hospital reports the patient probably has covid the payment doubles. If the patient is admitted to ICU or put on a ventilator, the payment can be over $ 40,000. If he dies more will be paid and this money comes from the government. The US taxpayers have allocated USD 150 billion for Covid to go into the pockets of hospitals in the US and Europe.  Face it, the US government is pouring rivers of money into the pockets in the US and Europe who have a huge incentive to lie about their need for it.  That is why in my opinion the numbers are inflated.  

At some point the truth will prevail perhaps a whistle blower?  Should that happen there will be a market recovery aided by the dormant 5 trillion USD in money market funds earning a miniscule return. At some point a vaccine will be discovered. Progress is being made on this front.

In the meantime we wait for recovery while collecting our dividends. 

Invest patiently, Bill

Now is a good time to travel to Cameron Highlands. Uncrowded, cheap deals and fresh strawberries

Performing Index

20 June 2020

Dear Fellow Investor,

Since April 2020, the Malaysian technology index has been the best performing  index in our local market.  We hold some stocks in this sector and plan to add more.  These include Inari and Uchitech.

We also hold stocks which benefit from technology innovation including Kellington, Public Bank and Maybank.

Tech stocks were not considered defensive investments in the past but  the current covid crises reinforces technology’s fundamental role in our lives.  We can find sources of risk reduction and growth potential in companies that have become digital utilities which enable global networks. 

Global technology stocks have had a solid run in a tough year. The MSCI world technology index is up by 10.3 % this year while the MSCI country world index is down 3.9 % . This is not just FANG stocks but a wide spectrum of technology stocks .

Earnings have been resilient across the sector as global tech stocks have delivered much stronger earnings and revenue growth than the broad market.  The covid crises has accelerated these trends.

Below is a chart from Alliance Bernstein which illustrates the point in terms of earnings per share and revenues.

The Utility Benefit: Can’t Live Without It

 

Tech shares role has become  that of a utility. Consumers and businesses can not live with out it.  Broadband, hand phones, and streaming services are essential. As the pandemic increased the need for remote shopping, learning and working have increased. For companies it has become indispensible because without a robust digital infrastructure companies can not operate efficiently in work from home mode.

Just as a utility stock provided reliable recurring revenue and stability, investors in technology require the same. This includes cyber security, cloud infrastructure, automation, and payment systems.  

 

As we research opportunities we focus on those businesses which are adapting to the new environment and technologies.  SATS the Singapore airline caterer which we hold has been hit by the virus panic and air travel slowdown but has been recovering due their strong balance sheet, their focus on automation, robotics, artificial intelligence and  innovation.  Much of their business is in China and China air travel is returning to normal . 

 

World markets are consolidating their strong gains since April and are awaiting more central bank stimulus. As the US November election is less than 135 days away, the odds favor more stimulus, a recovering economy and higher stock prices.   This will benefit Trump as most voters vote their pocketbooks. The riots, virus and demonstrations are a distraction.  By proxy, Malaysia, Singapore and Asian markets will benefit. 

Invest well and grow your wealth, Bill

 

Critter of the week is a revived deer. Where there is life, there is always a chance. The same with stocks

 

                              Texas Men Revive Lifeless Baby Deer Found at Lake Using CPR

Two Texas men revived a baby deer found lifeless at a lake in Tyler, Texas, by performing CPR and blowing into the animal’s mouth.Brian Ballard was on a tubing trip to Lake Tyler with his family when he came across a lifeless baby deer underwater, the Tyler Morning Telegraph reported.

Ballard pulled the deer onto his boat and compressed it from its sides. Ashton Byrd, someone from a nearby boat, jumped over to assist Ballard.

The two of them then blew into the fawn’s mouth and nose, and the fawn stood up after a couple of minutes. Ballard said Byrd then took the fawn to a wildlife rehabilitation

Nidec - Market Review

13 June 2020

Dear Fellow Investor,

This week, I will review our holding in Nidec which is in our PGWA accounts. During the March and April market panic Nidec dropped over 30 % but has since recovered.  Nidec is well positioned in Asia and with the Covid crises burning out and with China/ Asia/ US/ Europe nascent  recoveries their prospects are bright.  Reading the Nidec 2019 annual report,  their competitive advantage is their global learning center founded in Kyoto in 2017 which expands their industrial science center founded in 2015. They focus on leading edge technologies including robotics and automation to help their clients be more efficient and profitable. Operating in Kyoto is an advantage because Kyoto is home to the leading technical universities in Japan.  Many of the scientists and engineers  who graduate join the Nidec research center.

Core business

Nidec is a global leader of brushless DC motors. Brushless DC motors have advantages over other types of motors in power efficiency, silence, and durability. Nidec possesses the number-one world market share in a wide variety of products, such as hard disk drive motors, optical disk drive motors, vibration motors on handsets, brushless motors for inverter air conditioners, and brushless motors for electric power steering on automobiles. It continues to benefit from the growing demand for power-efficient motors, driven by strengthening environmental regulations. Nidec targets to increase its revenue to JPY 2 trillion in fiscal 2021 from JPY 1.5 trillion in fiscal 2019.

 

On 11 June, Thursday, world markets suffered a major correction. Technology and growth shares were hit hard, especially the crowd favourite FANG stocks.  Nidec was down 1.9 % but not hit as badly as the overbought FANGs, airlines, hospitality and healthcare sectors.

 

Our core portfolios in Singapore, Hong Kong and Malaysia  were not much affected as we focus on value rather than growth. This includes REITs and consumer stocks

 

The strange death of value investing

 

Below is a quarterly 30 year Bloomberg  chart showing the spread between an index of growth stocks compared to value stocks.

It shows that growth stocks such as Tesla and the FANGS are trading at 30 year bubble price extremes versus  value stocks.

In my opinion this extreme could reverse and those who chase the pure growth sector could be badly burned.   Those who invest in value stocks will lose in a major correction but not lose as much and recover faster.

Pension fund support

Many pension funds who are mandated to hold government bonds do not even earn enough from the low interest rates offered by bonds to pay fund expenses much less earn an investment return. Imagine all the teachers, fire fighters, police and workers who lose their pensions when these funds can not pay their obligations. It is already happening in the US.  

Governments know this and that is who they are allowing pension funds to buy stocks. For his reason they are buying stocks that offer a reasonable return.  This is providing support to stock markets . Bank Negara is wise and allows EPF to buy shares. This provides some support to the KLSE.  

Perhaps Warren Buffet has seen this growth/ value chart and that is why his Berkshire fund holds mostly cash and value stocks.  Warren Buffet does not like to buy highs and is a patient man.

My view is that monitory stimulus by all major economies and near zero rates will support world  stock markets for the next few months but that will not prevent the growth bubble to burst.  The pin could be a Joe Biden win in November.  I am not forecasting that but we have to be prepared for the worst case.

Invest well and grow your wealth, Bill

Critter of the week is an odd couple, An appaloosa horse and a dalmatian. I have a dalmatian and it is a wonderful and loyal friend.

 

Singapore Banks Offer Compelling Valuations

6 June 2020

Dear Fellow Investor,

Weekly chart of EWS, the Singapore country fund traded on the NYSE.

Our core holding in Singapore is OCBC bank which I bought a few years ago as a stable and rising dividend payer and also its exposure to China through their Wing Hang Bank acquisition.  OCBC  benefits from Wing Hang China retail exposure and China Greater Bay expansion. I chose OCBC also because of   their affiliation with Great Eastern Life.  This is similar to Public Bank and their insurance arm LPI.

Presently,

Singapore Banks Offer Compelling Valuations

Prices of the banks have rallied somewhat since May; however, valuations are still compelling at current prices. DBS trades at 1.04x P/B, UOB at 0.97x P/B and OCBC at 0.84x P/B. If we compare this to its historical P/B valuations, DBS is trading close to its -1 SD, UOB and OCBC below its -1 SD.

 

Below is a quote which explains our reasoning of why investing in quality stocks is now a good idea.  

"The core of what we do today is the same as what we were doing back then. It may have become more sophisticated, but essentially, it’s the same: opportunities are to be found in those parts of the market that others are avoiding and those places where change is happening. It’s about avoiding the crowd and looking in the neglected or unloved parts of the market.

If you have seven people in a room talking about a particular investment idea and everyone walks out thinking it’s a great idea, that’s a terrible idea. The good ideas should be uncomfortable. There should be something about them that’s stopping you from doing it and you have to get past whatever that is." Andrew Clifford, Platinum Asset Mgt

In the US we chose Walgreen Boots Alliance, a pharmacy chain. They are a value stock trading at a PE of 11 and a 4.4 % yield.  They offer online as well as brick and mortar facilities.  They are benefitting  from the Covid hysteria and economic recovery now taking place in the US. It is not a fashionable stock and is unloved by the crowd but risk is low at current price and there is substantial upside . They are financially solid and a simple business which deals in basic necessities.  Warren Buffet would love this company.

Our Malaysian portfolios continue to improve.  It is good to see Maybank and Public Bank rise. These have been under a cloud of doom but the cloud is lifting.  

Covid seems to be burning itself out and life is slowly returning to normal.  Casinos are  opening in Las Vegas and Macau.  Once Genting Malaysia opens we could see a rally in this deeply undervalued stock.  

Invest well and grow your wealth, Bill

Critter of the week is the Zoo Negara king cheetah one of the rarest  in the world. The zoo should be open tomorrow 7 June.

The media is more of a problem than the virus.