Monday, September 30, 2019

Buying Cheap Is An Excellent Catalyst In Itself (Because I'm Cheapo)

My wife tends to call me a cheapo, not in any mean way that it hurts my feeling but still well you know those sort of things that can get you riled up if it is of unintended clarity.

You tend to notice that my investing style has evolved over the years.

From what started as a pure dividend investor when I first began my investing journey, I began to explore different styles of investing which I believe can reap me better returns in the long run.

I think that's the whole idea of active investing in the first place - Not to simply let the market dictates your movement but having your instinct and experience in the market dictates the next move you will make.

Over the years, it has not all been gleams of sunshine and flowers as each learning curve takes a step into different directions, but with most outcome comes a glamor of rainbow thereafter.

One thing I’ve learned over the years is that value, or cheapness, and combining the two together is its own catalyst. 

What I mean is that when a stock becomes cheap enough for your own conviction, that very same cheapness may produce its own catalyst either in the form of a mean reversion, situational turnaround or merger buyout.

Take HK Land for instance.

HK Land is a conglomerate asset plays with development in various parts of the world such as Hongkong, China, Singapore and others.

Historically, they've been able to grow their equities based on the NAV from $5.92 in 2008 to $16.50 in 2019. On the depth of the GFC, they were trading at $1.86 at one time, which gives them a P/NAV valuation of around 0.31x.

The share price today of $5.65 gives them a valuation of 0.34x, which in my opinion is close to the trough of their historical mean on average.

Now, it is extremely difficult to forecast if the protest in HK will ever going to stop one day or if the company will take in major impairments for their assets in this current climate. Basing their valuations on forward earnings for such property asset play will be tougher as there are more variables in the permutation.

What we can do as investors is to assess the situation and buy the company when they get cheap enough for your conviction.

You see, when a stock becomes overvalued, it is usually pricing in future optimism or future growth that the people on the street are already expecting it to happen. This is the reason why some companies trade at multiple high earnings. Because people are expecting growth earnings to continue delivering.

Similarly, when a stock becomes cheap enough at some point, it is usually pricing in future pessimism and future decline which again the people on the street are already expecting it to happen.

In the case of HK Land, the ongoing riots weeks after weeks no longer has a major impact to the share price of the company as these news have been baked into the current valuation.

What is cheap enough will eventually cause other value investors to become interested. 

Should there be any positive news that come out from the camp which the market is not expecting, the share price should rebounce back in a massive way, almost similar to the case when the extradition bill was cancelled.

This is mean reversion, and mean reversion is one the greater force in markets. 

When it is applied within the context of an investment strategy, it can yield outstanding results for the patient and disciplined investor. 

One of the great investors of all time is a person named Walter Schloss.

He is not as media-popular as Warren Buffett but what he has accomplished over the years before he left was something not every fund managers can emulate.

Through deep value investing, he built on the foundation of buying a basket group of stocks that are essentially using cheapness as his catalyst. 

The idea he had was simple. 

He simply tried to buy stocks that are cheap and had greater amount of good assets and low amounts of debt, with the idea that eventually, these lowly levered companies as a group will survive, and thus the stock price and the valuation will rise (revert to the mean).

In some instances, the businesses improved and had a turnaround which represented an enormous upside for the stocks in his portfolio. 

Usually, the upside for those cases are so much such that he can stomach a few misses here and there, and yet still looking great for his overall portfolio.

I may not necessarily be an asset guy so much such that I focus solely on the Price to NAV of a particular company but I usually focus on companies which I think have catalysts that have yet to be identified by the market and priced in their valuation.

So my investing style has evolved over the years with that.

And because I thrived in a cheap environment, anything that goes slightly outside the cheap radar zone, will usually be easier to idenfity (and will get filtered out).

I suspect that's what my wife meant when she referred me as a cheapo!

Thanks for reading.

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  1. HK Land may not be a good deal because property prices had run up a few hundred percent in the last 10 years driving up the NAV. Hence the PB is so low. Just my thoughts so I trade rather than invest for this counter.

    1. Historically, HK property especially the commercial has been increasing for the past 4 decades or so, so it's hard to assume if prices will go back to where they are back then.

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