Year Ending 31/12/17 Performance: +20.06%
Note: Performance figures are quoted net of any transaction costs but before taxes. Featured photo credits to Wilson Asset Management AGM Presentation for Nov 2017. Performance figures are annualised, using the Modified Dietz formula provided in: http://www.canadianportfoliomanagerblog.com/calculators/
Introduction
For many readers, this is probably the part that interests a lot of you... Especially those that I encourage to take a skim of my blog! This is my first time writing a performance blog, so forgive me if this isn't like other professionals, but I wanted to be as frank as I can, and show some of my personality in writing this format. I hope to update my portfolio performance on a half-year basis for my readers.
So below is my report for the FY17 year (i.e. 01/01/17 to 31/12/17) on my performance for my personal equity fund which I use to invest in shares. The broker I use is Commsec (i.e. trading platform of CBA), and with a CDIA account, they charge $20 per trade generally.
Before I get started, I do want to make a point that although people see this kind of 'hobby' of mine as simply being done to make money or CV boost myself, that was never the case for why I invest. As simple as it sounds, I enjoy researching stocks and by extension making investment decisions from my research.
The performance
The FY17 average of +20.06% has been a very fortunate year for me, and this does compare favourably to most of the Australian major equity indexes.
For example, compared to the ASX200 Accumulation Index (given I invest in a broad range of bigger Australian equities) going up by a FY17 average of 11.39%, this has definitely been a 'decent' year for me, in terms of 'beating the market'. There was a period of time in my portfolio where I remained outside, and stayed in cash during part of 1H17, due to inability and time to find value stocks, before returning in 2H17 with some stock picks. I continue to remind myself that one year is too little to judge performance however. I aim for at least 5 years as the bare minimum. See appendix 1 for table of monthly performance in 2017.
I am fully aware that Warren Buffet's golden rule is to "never lose money", and with that in mind, I remain cautious going into FY18, with the reminder recently from watching Wilson Asset Management's AGM in November 2017 on YouTube (see here), where Geoff Wilson quoted that "all bull markets end".
The difficulty, is discerning whether my +20.06% return is generated from my genius, or from the overall bull market (note this is the 3rd longest bull market in history, and probably the most 'reluctant' one at that). That's something worth considering every so often... I certainly don't think I'm a stock market genius.
Macro calls
Making macro predictions is hard, and not many people do well at them (not saying I am any better...), but this is worth a shot anyway, since it is my first time!
Some of the big issues that I have thought (aka worried) about, for the coming FY18 year that I believe could materialise, I have summarised below and taken from a variety of sources I've digested:
The resurgence of the Aussie consumer discretionary stocks after market realisation of Amazon impact being overblown
The 'fight' between North Korea and USA not having any effect (despite some bearish geo-political risk people saying otherwise)
Inflation rising faster than expected (returning to 2-3%), and interest rates lifting faster than expected in RBA (I think that 1 to 2 rate hikes will be inevitable)
The implications of Brexit and how the negotiations of trade will play out for Britain, will be a story with immaterial impact on equities
The AUD/USD currency remaining relatively flat around 78c to 80c (suggesting here that I think it could go higher), as I see the AUD currency like a 'commodity' in the sense driven by China
On that note, bullish on China markets performing well (better than OECD's estimate of ~7% GDP growth for 2018) and better than expected
Short term correction in the US stock market (specifically Tech sector ones due to overblown valuations on P/E basis), but still finishing in positive territory at YE as a whole
Remaining relatively neutral on the Aussie markets, with no surprise if the ASX 200 Index going up 5-10% this year to around 6400-6500 points
Several emerging markets performing well (won't name any countries however...)
The Aussie mining sector stocks will not be as amazing as 2017, so seeing an increase lower than ~17% for the year (although some stocks will still perform well)
Now that was a very interesting exercise on a macro level. For the micro level, I will discuss in brief, some of the stocks that I traded, with my thoughts on them below.
Micro thoughts
Some of the stocks that I held during the FY17 year in my portfolio (apologies if I am not giving exact figures in some instances, since I am trying to collect all the thoughts in my brain and see how much I remember...):
Advancers:
Telstra (sold in Jan 2017, at the ~$5.25 mark):
Telecoms sector performed really poorly (driven primarily by TLS who has a ~50% market share in Australia), and I'm glad I sold that position and made a nice ~10% return off that. This was a result from the buying of the stock following Trump's election in late Nov 2016, which led to a selloff in all stocks temporarily, making stocks cheap despite no fundamental changes. I recognise that it is a lot easier to speak in hindsight, but the main reasons for this SELL was due to my dislike in the management of Andy Penn (CEO); the uncertainty around the NBN Co in the background (and its threat to underlying earnings of $3b YoY); the unsustainable dividend payout of 32c per annum per share; lack of a clear strategy for the coming years (investing in capital projects with no clear ROIC); and the observations of little foot traffic at several physical TLS stores in areas like Rhodes, Top Ryde, Macquarie Centre and Town Hall.
MYOB (sold in Aug 2017, at the ~$3.55 mark):
MYOB was an investment made following my research of this stock, in the Fidelity Stock Pitch Competition. My DCF model proposed a $4.14 target price in 12 months (with a WACC of 8.5%), using similar ~10% revenue growth assumptions for the next few years, before stabilising the revenue using comparable mature info tech companies to lower growth rates. Furthermore, management had a clear 3 pillar strategy to shift revenue from physical software to digital cloud; had several acquisitions in the FY16/17 year; biggest Aussie market share with >50% making it a strong competitor. However, following the FY17 financial results, I made the mistake to SELL this position, because of my emotional excitement for a ~10% return, on the back of positive sentiment from those results. This was certainly a mistake, and the mind of a trader, rather than an investor. One would say, I got caught by 'Mr Market'.
CBA (bought in Oct 2017, at the ~$78 mark):
CBA was a BUY following the AUSTRAC scandal which led to a temporary sell off in its shares from the relative highs of ~$80 to ~$75. On a historical P/E basis (looking at the last 5 years of normalised underlying EPS), trading around 13-14, CBA looked like a fundamentally cheap business to own at the time, and my conviction for the stock, led to a BUY at the ~$78 mark. We later heard also, the Royal Commission that was announced for all 4 of the Big Banks which slowed the share price rise in my opinion. However, the fundamentals look unchanged for CBA. Per FY17 financials, net interest margins were slightly above 2% (better than their other Big 4 peers); restrengthened balance sheet by paying off debt; loan impairments expenses were at all time lows (compared to the past 5 years); underlying earnings/revenue were up 8-10%; foot traffic in several CBA branches I observed were still the same... filled with people in places like Liverpool, CBD, Macquarie Centre; and Top Ryde. Thus far for YE, CBA has returned a modest ~1% return, but I hold CBA for the fully franked dividend as well (with dividend yield of ~5%), which has not been factored into the stock yet.
Crown Casino (sold in Dec 2017, at the ~$13 mark):
This is a stock I unfortunately am not proud of owning. I held the stock, despite my christian values being quite against the idea of supporting a gambling business. This was before I met my mentor (when I did the case comp and presented a BUY with a TP for CWN of $12.94 using a DCF model with a WACC of 9.5%). When I met my mentor, I learnt not to compromise my christian values when investing, and I made the decision to SELL at the $13 mark following the spike in share price (already attaining a ~18% return from the stock) , following CWN's ASX release of the successful sale of the Alon Project in Las Vegas (as predicted since the case comp in Sept 2017) for circa USD300m. This was a serious lesson for me, in understanding my investing style and personality... Understanding the fundamentals of a company where you can make money, but refusing to buy because of your christian values despite your brain screaming otherwise. This was a lesson of the heart compared to the brain. I was certainly humbled by this lesson with CWN. I would point out though, that following the selloff from the media on the marketing staff caught in China by police in July 2017, the company was screaming 'cheap', especially with James Packer's sway on the board to refocus on a domestic only strategy, by selling off all international stakes, eg Melco in Philippines and Macau, and emphasising on Crown Sydney (expected to be completed in 2021). Trading on a ~24 PE (TTM) normalised (when the one-off overseas sales are excluded), due to underperformance in earnings, with the loss of junket operators in China that drove quite a portion of the VIP segment of revenue (leading to FY17 fall in revenue by ~50%). Yet, the stock is believed by many asset managers to be cheap versus other peers (eg Investors Mutual Ltd for one...), and thus the buy in continued from the $10.92 low. I still reflect on this stock, as one which I acknowledge I had been tempted by greed, which compromised my values. As a lesson to myself, I donated all my earnings from that stock to my charity I volunteered in Sri Lanka, called the Foundation of Goodness (which was ~$500 donated). Refer to my older blog post on CWN for more details of the stock.
Decliners:
ISelect (bought in Oct 2017, at the ~$1.45 mark)
This stock too, taught me a lot. I made a BUY for this stock for reasons that was driven by technical analysis thinking. The stock price was nearing the 52 wk low at ~$1.45 following a selloff after a pretty average release of FY17 financial results. However, for me, I only spent about 1 day thinking about this stock, and this was certainly a mistake on my part, and thus has been a lesson for me to remain grounded in my methodical investing style (I usually sit on a stock for AT LEAST a week before making a decision to BUY or AVOID). When reviewing the financials, revenue was up 8%, NPAT was up 27%, and EPS was up 39% for the year, but there was slight disappointment in the general/life insurance segment, with the health segment helping to offset the disappointment there. However, I will spend more time to reflect over this stock, because I am unsure how this company's future will play out in the next few years. As Peter Lynch once said, "You should only buy what you understand". This was definitely a mistake that costed me almost ~3% currently as at YE, with holding a stock I don't particularly understand, due to not researching deeply enough in the fundamentals. In other words... Mr Market certainly got me on ISU.
Final thoughts
For CY18, I plan to remain exposed to the Aussie stock market, for my personal equity portfolio. Certain areas I am planning to remain exposed in is consumer discretionary (eg The Reject Shop & possibly Afterpay); financials (eg CBA & possibly QBE Insurance); and healthcare (eg possibly Virtus Health & CSL).
For me, analysing companies both quantitatively and qualitatively, and thus finding undervalued businesses not yet discovered by the wider market is my passion. I like to think I'm very fortunate to have a passion that also earns some hobby income as well. While it is early days, I continue to be inspired by my family, friends, work colleagues, church community and mentor, and so devote the rest of my life to becoming the best version of myself.
I also do want to point out, that some are more fortunate than others in life. I do hope that if you are on the fortunate side and reading this blog post, you use your resources wisely, namely, by giving to those less fortunate in some way.
I am not saying that you have to go out of your way to start finding charities to give money to (although that would be beneficial too!). You can find other ways to 'give'. This could be sharing your knowledge to others, or by simply saying 'yes' to people who need a hand.
I hope the actions of 'giving' (in whatever form you believe) are underpinned by good intentions. In fact, I recall a talk Warren Buffett made in 2001 at the University of Georgia, I watched on YouTube (see here), who pointed out that the key to a successful life and success in business, came from having 3 qualities:
These 3 qualities were, "Intelligence, energy and integrity". I firmly believe the most important is the last quality.
Kind regards,
Michael Li
