Investment Journal

It’s been 6 months since my last update, and how the pendulum has swung. Just look at the headlines on Bloomberg in January.


Contrast this to the headlines earlier this month.


The pendulum has swung strongly to the other end of the spectrum.


Back in January, I posted an article which I’ve reproduced here which captured my thoughts on Hong Kong developers. Many of my comments still remain valid.

You can check out the original article here:

Investment Journal 01/01/2016 – Value in Hong Kong Property Developers?

Here’s a snippet of one of the key points raised:

Still, this says nothing about the short term price movements and if economic conditions worsened, the key to survival will be liquidity and solvency.

Avoid companies with bloated balance sheets, and find ones that are trading at the biggest discounts to book value.

There exists now an opportunity to buy prime district land at 60-70 cents on the dollar, a remarkable feat on its own.

On a side note, I am now collaborating with The Fifth Person.

I have produced several case studies for Alpha Lab – one of which is Hang Lung Properties.

Note: For the title of each post, I have now decided to use an article from Bloomberg that describes the current sentiment of the day:

Charting the Markets: The 2016 Equities Sell-Off Continues

Its a day more before I leave for London, and much has been accomplished. We had an intensive reshuffling of our portfolio, trimming positions of stocks that had appreciated significantly since our purchase, and adding to our current positions.

I am not too keen on portfolio churning, but in this instance, I find it necessary for us to take small losses on our positions given the level of opportunity available in the market. It has not been easy to fight our behavioral biases – the chief one being loss aversion. But we must. 

To achieve superior returns, one must act in a way that others are unwilling, or unable to.

With the market falling, and no end in sight, it is sometimes hard to stomach that just by waiting a couple more days, we could have obtained the same position at a cheaper price. But let me make the following observation: 

Investors do not become poor by being too early in a market downturn, but because they are too late in a market upturn.

Let us return to objective data. On a CAPE ratio, the South East Asian markets at all time historical lows. On the basis of P/B, markets have only been as cheap three times in history – 1997, 2003, 2008.

The current P/B stands at 1.3x for the MSCI Asia ex-Japan Index, 1.5 s.d. from its mean of 1.9x. Investors who have bought at these levels have always reaped significant rewards.

The markets have priced an economic crisis on the scale of the Great Financial Crisis – where one does not exist. Time will tell if I am right, but there exists no signs of widespread risk taking and hubris that existed in the run-up to 2008.

Investors have been cautious, investing out a lack of necessity instead of greed due to record low interest rates. In particular the Singapore government has been prudent, moving to restrict leverage within the system that has bore fruit, with housing prices coming out their exuberance in 2013.

China is a worry – no doubt. But let us recall that much of the pain that is happening now is because of a deliberate act of policy. Reigning in corruption, liberalizing the market, moving away from government led infrastructure projects to a consumption based economy. These are not easy feats to accomplish, and significant progress has been made.

Rome is not built in a day, and its important to remember even developed financial centers like New York, Hong Kong and Singapore underwent their own tumultuous periods. Thats how society evolves, two steps forward one step back.

This is not to say China will not have problems. But which country that chooses the free markets does not? It is an endless cycle where each boom creates excesses that are cleared out by the ensuing bust, sowing the seeds for the next boom.

It’s not pretty, but its the best system we have.

But enough digression. If China slows down, there is no doubt that many of the businesses we own will be hurt in the short run. But lets keep in mind two things

1. There is no correlation between GDP growth and stock market returns.

2. Winters do not last forever, and spring will eventually come.

Many of our companies are cash rich, with well enough resources to withstand the storm that hits. Belts will be trimmed, budgets cut. But they will emerge as their weaker, over-leveraged competitors are wiped out. Leverage is a two way sword.

Importantly, through our holdings, we now have a part owner-ship of some of the best commercial property in the CBD (and outside it) of Hong Kong, Singapore and China. Financial hubs are not built easily, and the demand of such quality properties will always be there.

Inflation is our friend, and while I cannot forecast the short term price movements, I can say with confidence that 10, 15 years from now, these properties will be worth far more than they are today. Replacement costs will rise with inflation, manpower and the scarcity of land.

It is indeed a weird feeling to be the most optimistic when everyone around me speaks of fear, panic and ruin. And yet, this has always been the way that we have generated significant out-performance against the markets. By moving against the crowd. By buying at the point of maximum pessimism.

I remember the eternal words of Sir John Templeton:

“Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria.”

We are now at that point of pessimism. All is required of us now is patience, patience, patience.


The current economic climate has produced incredible investment opportunities.

The trip to Hong Kong led me to conclude two things:

  1. Residential housing prices are due for a major correction
  2. The demand for prime district commercial properties will continue to be strong with Hong Kong serving as the financial hub for Asia to access China.

Legal systems and financial hubs are not built overnight – as China came to learn last year. Such systems take decades of mistakes and experiences to build up, painful lessons which Hong Kong endured in 1997.

Interestingly enough, the dramatic increase in price has not led to a typical supply side response, as what was seen in 1996. Although the government has set long term increased in housing supply that is 1.6x the average completion of the last ten years, two points must be taken:

  1. Supply the last ten years has been extremely low
  2. This supply side response by the government will take time to bear fruition

Given the relatively small size of flats, it seems to me that new families must move out at some point of time.

Another boon to property developers is that the cost of land has fallen by close to 40% since its peak – meaning that a drop in property prices may be buffered by lowered input cost.

In light of this, I find it hard to see where the sustained massive drop in prices will come from, with forthcoming supply low and players acting rationally, and pent up demand there.

Still, this says nothing about the short term price movements and if economic conditions worsened, the key to survival will be liquidity and solvency.

Avoid companies with bloated balance sheets, and find ones that are trading at the biggest discounts to book value.

There exists now an opportunity to buy prime district land at 60-70 cents on the dollar, a remarkable feat on its own.

Interestingly enough, the premium/discount anomaly seems to persist just as it does in close ended funds. A similar strategy should be utilized.

To close off, one must also consider not only the premium/discount, but the implicit growth in book values.

Inflation guarantees that the replacement cost of these investment properties will be significantly higher five or ten years from now. Add on the productive economic activity of these companies from reinvesting rental income and property development, and one should see a growth in book of 5 – 7%. This does not include dividend payments.

The key here is to always be selective, and paying below NAV. More research is needed.

This will in turn imply we receive the full rental income of the properties, but at 60% of market price. Our net rental yield becomes dramatically higher as a result.

Counters that look interesting are:

  1. Hang Lung Properties 0101 HKEX
  2. Henderson Land 0012 HKEX
  3. Sino Land 0083 HKEX
  4. Cheung Kong Property 1113 HKEX
  5. Sun Hung Kai 0016 HKEX,


The previous two months have been one of the busiest on record, with us selling holdings that had reached close to their fair values, and switching out to companies which were far more attractively priced.

The upcoming 2016 will be an exciting one. We have one last interview with a well known fund manager based in Singapore that will be released shortly (as time permits!) this month.

An exciting partnership is also in the works, and more details will be disclosed soon.

One new segment of the site will be journal entries which are curated from my own investment records. They will normally be embargoed for anywhere up to 2 months before I release them on the site.

The plan is that they will give some time for us to digest the events of that day in a more objective manner. The content has been preserved as it was written, and only some minor editing will be planned to correct any grammatical errors.

Investment Journal Entry Dated 26/12/2015

It’s Christmas Eve and I find myself reminiscing about the current state of affairs. It’s been almost six years since I started investing. How time flies!

I am grateful that I had a good start getting a solid foundation. Unwittingly, I started at a great time, and mistakes have been kept to a minimum by following some basic principles that I have never deviated from:

  1. Focusing on the ability of a business to generate sustained free cash flow
  2. Conservative balance sheets and management
  3. The alignment of interests between management and shareholders

There is I think a distinction to be made from the success of a business, and the success of minority investors. Many great businesses have turned out to be terrible investments. Likewise, distressed businesses can turn out to be great investments – albeit at the right price.

The key in my view, is to be selective.

Our small size allows us an invest-able universe of over ten thousand stocks. As Richard Branson said, business opportunities are like buses, there is always another one around the corner.

Acting in such a manner requires a calculated emotional detachment from it. At every point of time, emotions threaten to overwhelm our logic and reasoning. Knowing what to do does not mean one can do it when the time comes.

Investment opportunities are most abundant in stocks which investors are the most emotional, and have strong vested views in.

Take for example the rise and fall of SingPost this past 5 years. It’s share price had declined from $1.20 to close $1.00, before advancing to an all time high of $2.12.

Sentiment turned negative upon learning that the CEO spearheading its transformation had left, and of corporate governance problems, leading a decline back down to $1.60.

One must express great scepticism that the share price accurately reflects the business reality, as the core business of the company – a monopoly on delivering mail in Singapore has not been eroded.

These mis-pricings create an opportunity for investors to profit – if we can remain rational and cool headed.

Such opportunities are rare, and we must remain selective in our criteria.