Rules of the game

From 1 September 2014 this blog will be used to chronicle investment ideas and the portfolio composition at any given time of my personal account. I am an analyst for a Singapore-based investment firm engaging primarily in long-term stock investing.

Investments will be made in all of four asset classes: stocks, bonds, currencies and commodities. I will be using both direct ownership of assets and exposure to assets through derivatives. And investments will be made in various markets across the world through my various brokerage accounts.

Key building blocks of the investment philosophy with regards to equities:

  • My main focus is to invest in markets where equity is underallocated vs. other asset classes, where the currency is undervalued or long term competitive, where demographics are decent, and where reinvestment of capital is likely to lead to strong productivity growth. And in an ideal case, I want to invest just before money or credit growth is about to accelerate greatly, increasing the amount of funds that may potentially be invested in equity markets.
  • Franchise qualities of the company invested in is essential, to make sure the company has pricing power beyond what it is charging customers and its competitive position is strong. This to ensure strong returns on reinvested capital and also good cash flow generation.
  • Every investment thesis is focused on what will change in the company going forward, be it: new products, regional expansion, new regulation, an improving business cycle, competitor pressure subsiding, loss-making segments being closed down or general cost cutting programs.
  • Valuation is normally done on a P/owners earnings or EV/(EBITDA-MCX) basis, first forecasting future earnings and then applying a multiple at the end of the investment horizon for each case. Cash flow conversion rates need to be high.
  • For every investment, I aim to identify why it is cheap, and what is likely to happen to make this undervaluation disappear. Usually it concerns a misunderstanding of the prospects of the company, but it could also be technical reasons such as 1) asymmetric information where management knows more than investors, as evidenced by insider buying 2) capital flows, mutual fund redemptions or banking crisis leading to “forced” selling 3) technical reasons year end tax selling, post-reorganisation selling, failed merger arb situations, forced selling after spin-offs, dividend cancellations, or forced selling after rating downgrades.
  • I only invest in companies whose fundamentals are clearly improving or about to start improving. This goes hand in hand with a strong competitive position in the eyes of customers.

Focus is on upside probability vs. downside probability and how much I will make in each case. The largest positions are likely to be the safest situations where the downside is very limited. The focus will be on small capitalization stocks as it is normally easier to “know more than the rest of the world” about these stocks.

For bonds, most investments will be made in the high-yield arena, though at this point in time mostly on the short side. I will be taking bets on any variant perception I have on an issuer’s credit quality. For currencies, I will take highly contrarian positions, trying to identify inflexion points. Commodities will be also be invested in through derivatives, also in a contrarian fashion.

First post coming up soon!

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