2018 Summary and Review

For 2018, the Global Stock Picking portfolio is down -2.5%, that compares to MSCI World Total Return (i.e. including dividends) down -8.2% on the year. My return is also including dividends but no trading fees deducted. In the counterbalance to fees, I do not calculate any return on cash, which has averaged around 9% of my portfolio. Given my fairly heavy China tilt I have in the past compared myself with Hang Seng, down -10.5% on total return basis. During the first 9 months of the year I struggled to keep equal steps with MSCI World, given the benchmarks high weight to the U.S. When U.S. markets sold off sharply towards year end I increased my alpha quite significantly against the benchmark. As you can see in the graph below, I was flat performance wise from mid-October to year end. This meant that my cumulative alpha reached it’s highest level towards year end. Total return is 47% since inception vs 22.8% for MSCI World. Although a negative year is not very encouraging, I’m still happy with the results, given how exposed I have been to China, which has had a terrible year.

Significant Portfolio changes over the year

Funeral investments – Dignity and Fu Shou Yuan

I entered into my demographics investment case beginning of 2018. It did not play out as planned, I changed my mind and sold both holdings in late November.

Brewery and liquor companies – Olvi, Diageo and Kopparbergs

Olvi and Diageo I still hold, I see them as defensive good companies, 2018 performance wise has been unspectacular. Probably Diageo is a bit too big company to deliver outstanding returns, it would be better to find something smaller, like Olvi, which I like a lot. My best investment was the one I sold, Kopparbergs, good return and the stock has totally collapsed after I sold. I think this was a case of my being a bit lucky with the timing, but also being ahead of the market understanding the cider business fairly well. Behind the scenes I have done a lot of research on other cider companies and how the big breweries are ramping up their cider offerings. I also done a lot of on the ground research, always checking stocks in stores around the world and in pubs of course. All of this made my change my mind on Kopparbergs prospects, selling has so far paid of very well.

Larger portfolio reshuffle – Selling Tokmanni, Microsoft, Catena Media and Criteo

This selling was partly due to my change in investment style. One reason was that these companies are hard to understand and grasp, therefore hard for me to have an edge against the market. Hard to grasp also means high maintenance to keep on top of what is happening. Performance wise selling these holdings was neither good or bad, on average they are about flat since i sold. So overall they were not bad stock picks, given that flat performance is also out-performing the market.

Special Situations – Radisson Hotel and Amer Sports

Radisson was my HNA related turn-around idea, which played out like clockwork. Somewhat luckily I bought at absolute bottom (24.1 SEK) and the stock repriced upwards before the bid for the company came. I choose to sell out before the actual bid at 35.8 SEK, whereas in hindsight, like one my readers has pointed out, it would have been better to keep holding it. Currently trading at 42.4 SEK.

Amer Sports was just that I had pretty good understanding of the Chinese company Anta, which had indicated a bid for Amer Sports at 40 EUR per share. The market did not really believe this, I saw it as something that made total sense for Anta. I got my shares for 34.1 EUR and sold at 38.37 EUR 1.5 month later, currently trading at 38.75 EUR.

HK listed small caps – Tonly Electronics, Dream International and Modern Dental Group

I have invested long enough now on the Hong Kong exchange to have confidence enough to invest in the smaller companies listed in Hong Kong. It’s pretty dangerous waters, mis-pricing can last for very long periods of time and many of the companies are not run with shareholders best in mind. Anyhow I found three companies which I believe had few of these dangerous characteristics, low valuations and fairly bright future prospects. To summarize, so far so good, all companies have out-performed the market, although under very low volumes. All these stocks are easily manipulated up/down 10% on a single day. When I bought Tonly and Dream Hong Kong was one of few exchanges that had sold off, and these stocks were in my view uniquely cheap. Now when valuations are coming down everywhere, they seem less and less unique for each day that goes by. It might come a point when these are still good investments, but there are safer options that are valued as low as these. Still I think there is some way to go before we are there.

Speculative/Opportunistic holdings enter the portfolio – UR-Energy, Scorpio Tankers, Irisity and JD.com

The timing (mid Sep) of me buying more speculative, loss making companies was not really fantastic. Just when the markets really started to tank. Given that it’s no surprise that these stocks have not performed very well, all of them being a significant drag on performance. Currently I have most hope to Irisity which is making some acquisitions, trying to consolidate Swedish knowledge on video/camera detection software. Given the market climate I might make some changes and lower the weight towards these type of companies, it might get very brutal in a bear market.

JD.com is also an interesting case, the rape charges were thankfully dropped. On the other hand China feels much more wobbly now than 6 months ago. I’m a few dollars under water on this position, a bit hesitant if I should keep it, due to this being 100% China exposure. As argued earlier, with stocks repricing, there might also be better opportunistic investments than looking for a bounce in JD.com.

Thoughts about 2019

I believe we have entered a bear market. Opposite to a bull market when the market grinds higher and has sudden drops downwards, I think one can start to see that markets rather grind downwards and have large jumps upwards. That is for me the strongest sign of a typical bear market. 2008 was a bit special, since that was more of a collapse. I don’t believe in collapse this time, rather a longer grinding bear market, like in 2000-2003. It’s not going to be very fun performance wise in the next few years if I’m right. It’s also going to be frustrating finding a good investment case, just to see it trade down another 20%, becoming even cheaper. On the upside, it will be like a kid in the candy store, with a lot of great investments and fantastic prices. Probably all of this will not play out in 2019, but continue into 2020 (if I’m right). As always these things are impossible to call and I will just try to hold my long portfolio through it all.

I recently read a book with the title: China’s Great Wall of Debt – Shadow Banks, Ghost Cities, Massive Loans, and the End of the Chinese Miracle. The author definitely has a negative bias on China but it struck a cord with me. I had not read the book when I wrote this post: Rotate away from China. He of course summarizes it much more nicely in his book, but he brings up a lot of points, which is just in line with my own observations. Reading the book it kind of re-emphasized that something pretty bad is lurking in China and when it turns, it’s going to be ugly. On the flip-side China still has many weapons to fight a downturn. Just the other day PBOC announced a Reserve Ratio cut for the banks which will release a lot of liquidity into the Chinese market. I think the big bad ugly China crash is still some years away, probably dependent on how much of a downturn we now will see in the rest of the world.


17 thoughts to “2018 Summary and Review”

  1. Nice results, I’ve been following your blog and run a small portfolio based on your stockpickings. Beating index is a great result but the analysises and reasoning behind your investments are more interesting.

    However, I believe there is an issue with your benchmark that you are not modelling. Your purchase prices are paper trades at market price however they do not take into account that some of the stocks you pick have very shallow order depths and low volume. I’ve even had to contact my broker and ask them to add a few of the stocks in their webtrader.

    For the small cap businesses even investments of USD 1000 sometimes move the price point and any larger investment would probably require an out of market trade not to completely swallow the order book. I don’t have any real solution for how to compensate for this factor in your performance benchmarks (perhaps buying at a premium for smaller stocks?) but I though you should know anyway.

    1. Hi Benjamin,

      Honored to hear that you think my ideas are good enough to replicate into a portfolio. As I try to make a point of though, please always do your own due diligence (which I’m sure you do). It’s very hard to hold this type of portfolio of stocks if you don’t feel you understand these companies from your own reading. As long as it goes well its all fine, but when the holdings start to crash, that’s when you need the conviction from knowing these holdings first hand.

      I fully agree with you, a few my holdings are illiquid and its very hard to trade in and out of the positions aggressively. Since I of course hold actual positions in these stocks I know the struggle to get filled without moving the share price. The short answer is, I trade small amounts with my personal money. I don’t feel it’s warranted for me introduce an approach of for example adding a 3% cost for me to enter or exist these illiquid holdings. The slightly longer answer is below:

      I actually put quite a lot of thought into this when I started my blog. How should I go about creating my “paper” portfolio, given that it should be simple enough for me to administrate, at the same time being as accurate as possible. I decided on a simplified approach where I always take the close price as my entry point. Obviously my actual portfolio is buying/selling the stocks during the day, which could be both higher and lower than the close price. Then comes the issue of liquidity as you correctly mention. This becomes more of an a issue of with a larger portfolio size. If the portfolio is 10M USD, my approach of buying say a 5% position in one of these illiquid holdings at close, is utterly ridiculous. There is no way you could trade in a 500k USD position in some of these holdings even during the whole day. If your portfolio is 100k USD and a 5% position is 5000 USD, I would say, it’s a decent approach to use close price. If you put an order inside the spread during the morning, my own experience trading in all of these small caps, you will get filled during the day for orders less than 20k USD. You haven’t really moved the price either for these smaller trade sizes. The stock might close slightly higher or lower, but that’s mostly random and should even itself out over time. In one or two occasions it has takes multiple days to get filled without moving the price too much. So in practice for these small caps you need to have a bit of a strategy for accumulating shares or how to exist the position. If you run a large portfolio, these stocks are too illiquid for you and you should disregard from them. Alternatively like some investors do, they slowly accumulate a position over several months. In my view one of the reasons why they are interesting investments, is the illiquidity which scares away most professional investors and the stock gets (hopefully) mis-priced.

    1. Yes thanks! I saw the article, a really cool guy who proven that one can pick stocks successfully in Hong Kong.

        1. I have checked it a few times in the past, but this articled promted me to look more carefully. For example he highlighted an issue with Dream international in the past where the management acted unproffesionally and delaying informing the market. Important info to keep in mind for every company, especially in HK

  2. Very nice performance! I’m with you on your call on China. But we have to remember it’s a dictatorship and not very transparent so we only no parts of the story. But I’m also looking to lower my china exposure. I sold my JD shares and bought some leaps instead, if JD’s stock price recovers I will make up for my loss on the sale. I’m also looking into making a decision between Netease or Tencent; not both. I will keep Nagacorp and Las Vegas Sands. Lot’s of great companies close to my buy price so let’s wait and see how 2019 plays out! Good luck!

    1. Thank you and thanks for all the comments over the year. It’s great to get some feedback on the posts, most people understandably just reads the material and moves on.

  3. Zwack Unicum could be the small Diageo you are looking for. They are easter-europe based, but have a JointVenture (or distribution agreement with Diageo, which btw is also one of the largest shareholders).

    Which are the safer bets in HK in your opinion?

    1. Thanks a lot, will definately take a look! Do you understand the local market, how well regarded are their local brands?

      Safer bets in terms of quality companies regardless of valuation or margin of safety in valuation?

    2. Looked into Zwack. Issues I see is main product is a local champion which is hard to export elsewhere. It seems similar to what I come across in other markets, like Latvia which has a herb liquor called Balsam. Which is also only popular in the Baltics and elsewhere people never heard of it. So then its down to Hungary population, which unfortunately is in one of the fastest declines in Europe. Left is tourism, which is good and perhaps they can keep the Zwack sales going.

      It seems in the Diageo co-op that part is doing much better, nice growth, but they get to keep quite little of the profits. So it seems like Diageo gets the better end of this investment. Nice stable dividend though and the family that runs it gives a good impression (even watched a Ted-Talk with one of the family members).

      All-in-all pretty decent find I have to say, but I’m hesitant since I haven’t tried the product and know the market very poorly (never visited the country).

      1. My take is if Diageo (a well-run multinational) lets their business be run by Zwack, is because they will do equally a good job there. The upside is that the regulatory environment is Eastern Europe is less strict vs those in Western Europe (unfortunately eastern governments are less strong and more ‘open to deals’).

        Zwack may have slightly better perspectives than Diageo as their profit margins are higher (at a higher risk, due to low geographic diversification). Yet, family-run business do not easily take high risks…. (they seem to have little debt, while Debt/Equity ratio at Diageo is 100% + !! ) And other fin ratios are also much better for Zwack Unicum than for Diageo (see EV / EBITDA)…

        1. Yes you are right, Diageo debt to ebitda at 2.5x is aggresive. Although they have a lot of assets in terms of shareholdings in many companies. I do like what I see with Zwack, lowered corp tax rate also a positive. But their dividend payout ratio of close to 100% means they dont see any growth opportunities. Its steady state with a 6% yield

  4. Strong view on Coslight in 2019?

    Agree with your view on China. Lots of stimulus likely to come. If that result in better consumer spending in China, now might be a good time to add in JD?

    1. Hi Wilhelm, no strong view really, it’s a tricky holding. I believe the EV space might be too competitive for Coslight, maybe its rather the grid energy storage where Coslight can be competitive. Very low valuation on the company, but the challenge is the capital needed to invest in the business. The kicker is their game development business which the market seem to ascribe zero value to. The stock has traded quite strong lately, could be an indication that somebody knows sometime (often the case in Chinese companies). I’m tempted to sell the stock if there is a rally..

      Regarding JD, I think I either will move it over to the long term bucket of my investments or I will sell my holding. I need to make up my mind if the company is good enough to hold for many years.

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