September portfolio update

Hello again. It's a been a while since I've posted an update for the portfolio. From now on, I'll try to keep posting updates each quarter, as discussed in my last post.

First things first, the big development for me lately is my self-managed super fund. It's now up and running which gives me some more capital to invest. For those interested in setting up their own SMSF, it cost me about $1,345 to set up the fund with a corporate trustee. The process was relatively straightforward. I'm expecting ongoing costs of roughly $1,400 each year using a low-cost administrator.

Now to the business end of things, and there's quite a bit to discuss as I've been more active than usual lately. In July, I established a large position in Chen Hsong Holdings Ltd, which trades in Hong Kong. Chen Hsong makes plastic injection moulding machines which it sells in China, Europe and elsewhere. In July, when I started investing in Chen Hsong, it had a market cap of roughly $1.8b HKD. It had net cash of $1.1b, NCAV of $1.9b and NTA of roughly 2.9b. It earned roughly $200m in the year to March 31, 2021. In other words, if you backed out the net cash, it was trading at under four times earnings. 

When faced with statistically cheap situations like this, I have two initial questions. The first is whether the company is a fraud or the directors are stealing the money. In this case, the answer is clearly no. Chen Hsong has a long history as a company, sells real products and the properties it owns are real. The second question is whether I — as a minority shareholder — will ever benefit from the company's cash and assets. In this case, Chen Hsong also seems to pass the test. It has consistently paid a dividend and the payout ratio has hovered around 50% in recent years.

What makes Chen Hsong particularly interesting is the fact it holds significant property holdings on its balance sheet at cost less depreciation. The most important of these properties is in Shenzhen, China. Chen Hsong owns an industrial park in Pingshan District, Shenzhen, with a site area of roughly 550,000 square metres. Chen Hsong has entered into a framework agreement with a property developer, Gaw Capital, to seek approval from Chinese authorities to develop this site into residential/commercial high rises. With the help of a friend, I looked at transactions of similar properties to get a sense of the potential value of this development. It seemed to us that the value could well exceed Chen Hsong's market cap. 

Shenzhen is one of the hottest real estate markets in the world — at least until recently. China's credit markets are in turmoil following the Evergrande crisis and prices for new developments in Shenzhen have fallen between 5 and 10 per cent in recent months. Considering the extreme prices of property in China, and particularly Shenzhen, it seems prices could fall much further. 

Chen Hsong is now trading at $2.34, roughly 15 per cent below my purchase price. The dilemma now is what to do. I am reluctant to sell my holdings, as the company is currently trading at a roughly 20 per cent discount to its net current asset value (calculated as net current assets less total liabilities) and roughly half net tangible asset value. However, the immediate catalyst — the potential property development — is now in doubt. It seems to me that Chen Hsong and Gaw may find it difficult or impossible to finance the project. Property prices could continue to fall, which could make the development less valuable. On the flip side, the situation may lead to a privatisation offer from the controlling family at a premium to the current share price.

For the bear case valuation of Chen Hsong, my friend and I valued the Shenzhen property as industrial land only. Our research indicates that, prior to the Evergrande situation, the land would be worth roughly $2.7b HKD on this basis. Once we take into account taxes (roughly $600m, assuming 25 per cent tax rate) and relocation costs (we assumed 720m, as the Shenzhen factory is Chen Hsong's main plant) we're left with roughly $1.4b HKD for the property. 

For conservatism's sake, let's knock 40 per cent off that for the Chinese credit situation. That would leave us with roughly $840m HKD. To that, we can add the operating business and cash. I've assumed the operating business is worth $1b (5x TTM net income) and excess cash is worth only $500m as Chen Hsong has consistently held a high cash balance. Even with those haircuts, we get to 2.34b HKD in value. That works out to ~$3.70 per share, roughly 60 per cent above the share price at time of writing. I have slightly reduced my Chen Hsong holding in light of the broken property development catalyst but I am comfortable maintaining a decent position at current prices. I have invested roughly 7 per cent of my net worth in Chen Hsong.

Chen Hsong wasn't the only position to go against me in the quarter. I purchased shares in Destination XL Group, a fashion retailer in the US, which promptly fell in value following a divestment from a major shareholder. I am currently down about 10 per cent on my purchase price. Naked Wines, one of my other major positions, fell roughly 14 per cent. Haier Smart Home D shares fell slightly more than 7 per cent. I am comfortable with all of these positions and have been adding to Naked Wines and Haier recently.

Periods of poor performance are part and parcel of the investment game, and we can't get upset when the tide turns against us. However, I am disappointed by a large and avoidable mistake I made during the quarter. I had a significant amount of cash and was itching to find a new investment. It led to me putting a very large amount of my net worth into a Japanese company after only preliminary (and poor quality) research. The stock is not wildly overvalued, and there is nothing seriously wrong with the business, but I should never have invested in the first place. Li Lu says analysis should be accurate and complete and mine was neither in this case. Thankfully, this particular mistake has not been costly. I have been able to sell half my position for a small loss, and I expect to sell my remaining shares in the near future. Hopefully, I can avoid making this particular type of mistake in future. 

The results of my private investment account and SMSF are summarised in the table below. The portfolios are constructed differently and performance will vary. 

My PA was up 2.81% in July, down 3.41% in August and down 6.79% in September. The cumulative return for the period was -7.44%. The S&P/ASX 200 Franking Credit Adjusted Annual Total Return Index (Tax-Exempt) gained 2.66% over the same period.

	August 3, 2017	September 30, 2021	Since July 1, 2021	Since Inception	Annualised
G&W Portfolio	1.0000	2.0730	-7.44%	107.30%	19.41%
Benchmark (SPAX2F0)	61,250.80	97,261.73	2.66%	58.79%	11.75%

My SMSF gained 1.88%  in August and fell 5.29% in September. The cumulative return from inception on August 4, 2021, to September 30 was -3.52%. The S&P/ASX 200 Franking Credit Adjusted Annual Total Return Index (Tax-Exempt) fell 0.88% over the same period.

	August 4, 2021	September 30, 2021	Since July 1, 2021	Since Inception	Annualised
G&W SMSF	1.0000	0.9648	-3.52%	-3.52%	-20.50%
Benchmark (SPAX2F0)	98,123.18	97,261.73	-0.88%	-0.88%	-5.49%

June portfolio update

Hello to all readers. As you may have noticed, I haven't been regularly updating the blog. There are three real reasons. Firstly, I've been busy. Secondly, there's not been much activity to report. Finally, I've come to realise that reporting on a month to month basis is excessive for an investment strategy aimed at outperforming over the long term. In future, I'm planning to report the portfolio's results at least each quarter. 

I'm also weighing up whether to post stock ideas. On the plus side, it's helpful to have a public track record of decisions. It also could help some of my stocks appreciate towards their intrinsic value. The problem, of course, is that some stocks could become more attractive investments over time, and in those cases it is in my interests that others don't know the full story. This is something Norbert Lou has discussed with regard to Quinsa, a stock he wrote up for the Value Investors Club in 2005. (As an aside, I think this is one of the best stock write ups I've ever read.) The profile of Lou by Santangel's Review notes:

Punch Card kept buying shares [of Quinsa], bringing the position to over 20 per cent of capital. Norbert liked Quinsa enough to write it up … a decision he later regretted when the stock subsequently rose, forcing him to pay more for his future shares. "I shouldn't have written it up," he later said. "The situation kept improving."

I'm no Norbert Lou but this is something I think about. Some of my positions are very illiquid, so even relatively small inflows of capital could push up prices.

I'm also in the process of setting up a SMSF. (For readers overseas, this means "self-managed superannuation fund". Basically, I am setting up a vehicle to invest my retirement savings myself.) In previous updates, I have briefly discussed a position in a basket of unlisted companies. My intention is to transfer all of these positions to my SMSF as soon as is practicable. These positions have acted as a sort of ballast for the portfolio: they have tended to underperform the rest of the portfolio when the market appreciates while reducing mark-to-market losses when the market is falling. Without these positions, there will be more volatility in the portfolio, but — at least based on the experience of the last few years — potentially better returns. I still like these stocks, and think they offer great risk-adjusted returns, which is why I will continue to hold them in a more tax-efficient entity.

When the SMSF is up and running, I intend to start reporting its results in my quarterly updates. I imagine I will hold similar positions in the SMSF vs. my regular portfolio but the compositions (and therefore results) could be quite different. (I intend to approach the SMSF and my personal account as one large pool of money and size positions accordingly.)

With all that out of the way, it's time to give an update on recent performance. The results of the portfolio and my benchmark since the end of March are summarised below.

	Portfolio	Benchmark
April	2.20%	3.47%
May	2.17%	2.34%
June	2.57%	2.26%
Total for the quarter	7.10%	8.29%

Since the end of March, I have not added any new names from the portfolio. I did dispose of one holding, Mo-BRUK SA, which was essentially a misguided trading idea. It was a very small position, and I quickly realised my mistake and sold on April 12 for 398 PLN. I realised a loss of 4.34% in a holding period of 55 days. I have also added to a number of existing positions in the quarter.

Lately, just about any asset you can imagine seems to be in a bubble. Nevertheless, I continue to have more good ideas than capital. I think my portfolio remains cheap, though nowhere near as cheap as it was this time last year.

At this time of year, I also like to reflect on the portfolio's annual performance. For the year to June 30, the portfolio returned 45.34% while my benchmark, the S&P/ASX 200 Franking Credit Adjusted Annual Total Return Index (Tax-Exempt), returned 29.44%. While there were mistakes and clear opportunities for improvement, I'm very happy with this result. I felt it was achieved with minimal risk but I did have luck on my side. 

	August 3, 2017	June 30, 2021	Since July 1, 2020	Since Inception	Annualised
G&W Portfolio	1.0000	2.2397	45.34%	123.97%	22.91%
Benchmark (SPAX2F0)	61,250.80	94,739.21	29.44%	54.67%	11.80%

My results for each financial year since the portfolio's inception are summarised below.

Date	Portfolio	Return	Benchmark	Return
August 3, 2017	1.00		61,250.80
June 30, 2018	1.0642	6.42%	69,053.50	12.74%
June 30, 2019	1.4233	33.75%	78,082.47	13.08%
June 30, 2020	1.5410	8.27%	73,194.42	-6.26%
June 30, 2021	2.2397	45.34%	94,739.21	29.44%

I will add my usual disclaimer here — These figures have not been audited. Additionally, I do not account for cash in the portfolio. The net result is that my performance is likely somewhat overstated, although I tend to be fully invested. The S&P/ASX 200 Franking Credit Adjusted Annual Total Return Index (Tax-Exempt) is simply the pre-tax total return of the S&P ASX200 Accumulation Index adjusted to include any franking credits received. I have unitised my portfolio to assist in calculating performance. 

P.S. Apologies for the dodgy formatting of the tables!

March portfolio update

Hello again readers. I hope you had a good Easter. March was very quiet and I didn't buy or sell anything. The portfolio ended the month up 1.98% while my benchmark, the SPAX2F0, gained 2.44%.

My largest position, Haier Smart Home D (690D.DE), reported earnings for the 12 months to December 31, 2020. Haier's market cap based on the current D share price is roughly 145 billion RMB and the company earned 8.9 billion RMB for the year. That puts the stock on about 16 times trailing earnings, and earnings will likely grow in coming years as the world continues to recover from COVID-19.

The D shares, of course, rank pari passu with Haier's H shares (listed in HK) and A shares (listed in Shanghai), which trade at much richer valuations. (The D shares currently trade at a 44.18% discount to the H share, implying an upside of 79.14%.) Haier's HK listing documents also outline a potential process for conversion of D shares to H shares but the company has not allowed conversion thus far. While we don't have a clear catalyst to realise the valuation disparity between the D and H shares, I'm still comfortable holding my large position in the D shares at current prices.

During March I read Lee Freeman-Shor's book, the Art of Execution. It is an interesting book with some very useful insights, and I would thoroughly recommend it. It has helped me reflect on some of the leaks in my own investment process.

My portfolio's results are summarised in the table below. Please note that my returns are pre-tax, include franking credits, and assume dividends are reinvested. These figures have not been audited. Additionally, I do not account for cash in the portfolio. The net result is that my performance is likely somewhat overstated, although I tend to be fully invested. The S&P/ASX 200 Franking Credit Adjusted Annual Total Return Index (Tax-Exempt) is simply the pre-tax total return of the S&P ASX200 Accumulation Index adjusted to include any franking credits received. I have unitised my portfolio to assist in calculating performance. 

	August 3, 2017	March 31, 2021	Since July 1, 2020	Since Inception	Annualised
G&W Portfolio	1.0000	2.0912	35.71%	109.12%	22.33%
Benchmark (SPAX2F0)	61,250.80	87,489.07	19.53%	42.84%	10.23%

February portfolio update

 Hello again to any readers. It's time for another portfolio update.

In February, my stocks fared worse than the broader market. This is partly a result of concentration in my portfolio, and partly a result of increased market volatility. While valuations are generally high, I'm comfortable with the portfolio at present. My holdings are an eclectic mix of generally undervalued and ignored businesses, but that does not mean they are immune from market movements. I ended the month down 3.53%, while my benchmark (the SPAX2F0) gained 1.45%. 

There was not much activity in the portfolio in February. I added to one of my smaller unlisted holdings at an attractive price. I also put about 2 per cent of the portfolio into a trading idea, which in hindsight was a mistake. I'm reviewing the position currently, and may sell in the future. 

If you haven't already, I would urge you to watch Charlie Munger at the DJCO meeting, which was broadcast by Yahoo. And, if you haven't seen it already, here is the link to Buffett's 2020 letter.

My portfolio's results are summarised in the table below. Please note that my returns are pre-tax, include franking credits, and assume dividends are reinvested. These figures have not been audited. Additionally, I do not account for cash in the portfolio. The net result is that my performance is likely somewhat overstated, although I tend to be fully invested. The S&P/ASX 200 Franking Credit Adjusted Annual Total Return Index (Tax-Exempt) is simply the pre-tax total return of the S&P ASX200 Accumulation Index adjusted to include any franking credits received. I have unitised my portfolio to assist in calculating performance. 

	August 3, 2017	February 28, 2021	Since July 1, 2020	Since Inception	Annualised
G&W Portfolio	1.0000	2.0511	33.10%	105.11%	22.05%
Benchmark (SPAX2F0)	61,250.80	85,402.85	16.68%	39.43%	9.74%

January portfolio update

Hello again to anyone reading the blog. I hope you've all had a good start to the year. January was another good month for my investments: the portfolio rose 11.85%, while my benchmark — the S&P/ASX 200 Franking Credit Adjusted Annual Total Return Index (Tax-Exempt) — gained 0.31%.

Most the gain came from a single stock, Haier Smart Home, which I discussed in last month's update. Early in the month, I sold my shares in Guillemot, Shinoken and ScS Group to buy more of Haier's D shares. I also bought a bit more of Boustead Projects, after the company announced the formation of a REIT. 

My purchases of Haier in early January are up approximately 40% to date, while Boustead is approximately 5% above my average purchase price. While that sounds like a great result, Guillemot shares are up 96% since my sale in early January. I did not think Guillemot shares were expensive at the time I sold them, but I needed funds quickly. And, of the shares I held, I figured that Guillemot was likely closest to fair value. In hindsight, it is clear I was being too conservative in my estimates. I was dumb, and it has been extremely painful to watch Guillemot's rise from the sidelines. Shinoken has also done well since my sale. It's up about 13% after Mohnish Pabrai announced that he had bought a stake in the business and more investors caught on to the story. I still think Shinkoen is cheap, but I haven't yet bought back my stake in the company just yet. ScS, meanwhile, is trading about 1.88% lower than my sale price.

I'm still comfortable with my holdings despite the spectacular performance of the last few months. However, I'm less comfortable with the broader marker. As we saw with the recent GameStop shenanigans, there is a lot of speculation in the market. Should the market fall, I expect my portfolio will probably follow suit.

I'll add one more thing. It's tempting in this current market to focus more on business quality rather than valuation, because that's what is being rewarded. There are lots of examples of style drift from traditional "value" investors, like Howard Marks and Mohnish Pabrai. The cynic in me can't help but think that this is more a consequence of the current market conditions than a paradigm shift in the business world. Over time, I think the approach used by Graham, Buffett, Munger, Li Lu and others — in which investors think of themselves as part owners of businesses, demand a margin of safety, and treat the market as a servant, not a master — will continue to win out. 

My portfolio's results are summarised in the table below. Please note that my returns are pre-tax, include franking credits, and assume dividends are reinvested. These figures have not been audited. Additionally, I do not account for cash in the portfolio. The net result is that my performance is likely somewhat overstated, although I tend to be fully invested. The S&P/ASX 200 Franking Credit Adjusted Annual Total Return Index (Tax-Exempt) is simply the pre-tax total return of the S&P ASX200 Accumulation Index adjusted to include any franking credits received. I have unitised my portfolio to assist in calculating performance. 

	August 3, 2017	January 31, 2021	Since July 1, 2020	Since Inception	Annualised
G&W Portfolio	1.0000	2.1261	37.97%	112.61%	24.06%
Benchmark (SPAX2F0)	61,250.80	84,179.18	15.01%	37.43%	9.51%

December portfolio update and 2020 review

Happy New Year to anyone reading the blog. Like many, I'm happy to see the end of 2020. It was a challenging year, but it also provided some opportunities. For one, I was able to move away from Melbourne thanks to changed policies in my workplace for working from home. I am grateful to be healthy, to have kept my job and to no longer be confined to my home.

From an investing point of view, 2020 was full of surprises and opportunities. Despite lockdown orders, restrictions on movement and all the other challenges presented by COVID the Australian sharemarket finished the year close to where it started. The S&P 500 meanwhile finished up 16.26% for the year, while the Nasdaq rose 43.6%.

2020 was fruitful for me, both in terms of returns and my learning. In March, we saw mass psychology in action with the toilet paper panic buying. Unfortunately, I must admit I joined in after seeing a cashier hoarding toilet paper behind the counter. It was a real-life example of how easily we can be influenced by social proof and scarcity. I'd read about these biases, and understood them, yet it wasn't until I got home that I realised what had happened.

I mention this because there has been a lot of mass psychology-induced craziness in the markets this year. What has really been hammered into me is that people do really dumb things under uncertainty and stress. And there are huge opportunities for investors in these moments. In March, I missed out on opportunities to buy better quality businesses at big discounts. One lesson, as I wrote in my update in March, is that it helps to have done the work beforehand. Another is just how difficult it is to time the market. I saw lots of smart people who went substantially to cash, only to miss out on the subsequent market rally. Good luck to anyone who thinks they can make moves like that reliably.

On the positive side, I didn't do anything too stupid in my portfolio. I did some selling around the edges, and added to some existing holdings, but that was about it. It helped that nearly all of my stocks had fortress-like balance sheets, with substantial net cash and no debt. It also helped that the companies I held managed to navigate COVID relatively well. For some, like Naked Wines, COVID was a huge boost. It must be said that I did not design the portfolio to be pandemic-proof. It was mostly luck.

Overall, my portfolio gained 33.22% in 2020. It was a great result, especially considering currency movements were a headwind. My annual performance since inception is shown in the table below.

Date	Portfolio	Return	Benchmark	Return
August 3, 2017	1.00		61,250.80
December 31, 2017	1.0675	6.75%	66,215.65	8.11%
December 31, 2018	1.1760	10.16%	69,053.50	4.29%
December 31, 2019	1.4268	21.33%	81,712.72	18.33%
December 31, 2020	1.9008	33.22%	83,917.90	2.70%

My biggest winners were Naked Wines and a stock I bought late in December, Haier Smart Home D. Haier is the world's number one appliance brand. The company has an A share listing in China, and recently listed a H share in Hong Kong. The D share, meanwhile, trades in Frankfurt, where it has not attracted much interest (until recently) from investors. In its prospectus for the H share listing, Haier outlined a process for the potential conversion of D shares to H shares. The D share closed the year at 1.60 Euro, while the H share finished the year at $HKD28.10, which is equivalent to 2.99 Euro. This represents a discount of 46.43%, or potential upside of 86.66% should conversion prove to be possible.

At the time of my purchase the D shares were priced very attractively regardless of the conversion. The spread seems too large, even if conversion isn't possible. And there is a chance that Haier itself may do something about the D share listing, which does not appear to serve the company any real purpose. My sense was this situation offered potential for outsized returns with low-risk, as I would be happy to hold the stock even if conversion was not possible. I bought a large position in the D shares at around 1.10-1.14 Euro, which has since appreciated significantly after a blog post by an investor on Twitter. Haier is now my largest position. Thanks to Asian Century Stocks for sharing the idea, and my friend Chris for helping me with my research. 

My biggest losers were Million Hope Holdings, which I still hold, and Donaco International. I was a bagholder in Donaco, and really should have sold it early in the year as soon as my thesis broke. I ended up selling in early December at 4.0 cents to fund better ideas. Since then, the stock has appreciated 70%. My biggest error really was not buying more Naked Wines. I understood the business model well enough, and it was clear the company would benefit from COVID, and there were plenty of opportunities to buy the stock while it was trading at around 2 GBP. It now trades at 6.90GBP. Naked Wines has a unique business model, and a huge opportunity to expand its DTC wine business in the US where it is already the number one player.

Over the year, my investing process has changed somewhat. At the start of 2020, the bulk of my portfolio was in statistically cheap net-nets and a basket of unlisted stocks that pay substantial dividends and trade at low multiples of their earnings and assets. Lately, I have shifted away from net-nets. There are two main reasons for this: the first is that there aren't many high quality net-nets around at the moment. The second is that I have been focusing my portfolio on my best ideas, and the better ideas have both a qualitative and quantitative aspect. This progression is a natural one. It is how Buffett approached ideas in his partnership, and is also the approach taken by Li Lu, Joel Greenblatt, Norbert Lou and other investors I look up to.

My net-nets were mainly microcaps found in Japan and Singapore. The problem, particularly in Japan, is that many of these companies aren't really run for the shareholders. The priority for management is often business survival, not shareholder returns. I was interested to read recently about a mochi shop that has been operated by the same family in Japan for 1,000 years. It's just a one of the many peculiarities of investing in Japan. While I have done pretty well in Japan, it feels a bit like a crapshoot. And even if you do buy something really cheap, there's no guarantee you'll ever get to see any of the benefits. As a result of this change in thinking, I've sold all of my Japanese holdings except for Shinoken (8909.T), which is unusually shareholder friendly for a Japanese company. That is not to say that I won't buy net-nets or cheap things in Japan in future. I just won't be buying things simply because they sell below cash, etc. I still think buying diversified portfolios of net-nets would work in Japan, but I think there are better opportunities available. Also, I just don't find buying a bunch of low multiple stocks very interesting.

Going into 2021, I have 16 positions, which is a bit more concentrated than I have been for most of 2020. I don't see this as a bad thing. In fact, I am trying to focus even further on my higher conviction positions. There might be a bit more volatility in the portfolio, but that is not something I really worry about. Finally, the unlisted stocks I own have now diminished to about 25% of the portfolio. As the portfolio grows, these stocks become less viable, simply because it is so difficult to buy them in a reasonable size. Occasionally there might be opportunities that come up, but I expect they will continue to become a smaller portion of the portfolio over time. Despite the issues with liquidity, I have no intention of selling most of these stocks at current prices.

In December, my portfolio rose 7.7%, while my benchmark rose 1.21%, My results since inception are summarised in the table below. 

Please note that my returns are pre-tax, include franking credits, and assume dividends are reinvested. These figures have not been audited. Additionally, I do not account for cash in the portfolio. The net result is that my performance is likely somewhat overstated, although I tend to be fully invested. The S&P/ASX 200 Franking Credit Adjusted Annual Total Return Index (Tax-Exempt) is simply the pre-tax total return of the S&P ASX200 Accumulation Index adjusted to include any franking credits received. I have unitised my portfolio to assist in calculating performance. 

	August 3, 2017	December 31, 2020	Since July 1, 2020	Since Inception	Annualised
G&W Portfolio	1.0000	1.9008	23.35%	90.08%	20.70%
Benchmark (SPAX2F0)	61,250.80	83,917.9	14.65%	37.01%	9.66%