Let winners run or invest with margin of safety?

As you long term readers know by now this blog has two main themes, stock picks and evaluating my investment style. This is another one of those posts where I explore one aspect of portfolio management – should one hold on to winners as their valuation gets more stretched?

In the past year markets have both become easier and harder to invest in, depending on your style of investing. I try to keep an open mind, be adaptive but at the same time invest in a way that works long term. I do believe some very basic fundamentals of investing rules will always stay true. Valuation does matter for me, but so does other things as knowing your holdings well. My portfolio returns have been especially good in the past year (on both absolute and relative terms). This has been driven by a handful of my holdings which have re-rated substantially. As an investor thinking in terms of margin of safety, this margin has in many cases reduced significantly as the stocks have gone up. Fundamentals improved warranting an increase of 20-30%, but the stock has gone up 60%, in other words reducing margin of safety (multiple has expanded). What is the prudent thing to do in such a case? Keep the position and let your winner run, or immediately re-allocate your capital to something which you perceive to have a higher margin of safety? These are for me very difficult questions to answer as manager of my portfolio. Below I want to contrast two different approaches to investing to highlight the issue.

The Coffee Can portfolio

The Coffee Can portfolio concept harkens back to the Old West, when people put their valuable possessions in a coffee can and kept it under-the mattress. The story that explains the concept the best goes like this:

I had worked with the client for about ten years, when her husband suddenly died. She inherited his estate and called us to say that she would be adding his securities to the portfolio under our management. When we received the list of assets, I was amused to find that he had secretly been piggybacking our recommendations for his wife‘s portfolio. Then, when I looked at the total value of the estate, I was also shocked. The husband had applied a small twist of his own to our advice: He paid no attention whatsoever to the sale recommendations. He simply put about $5,000 in every purchase recommendation. Then he would toss the certificate in his safe-deposit box and forget it. Needless to say, he had an odd-looking portfolio. He owned a number of small holdings with values of less than $2,000. He had several large holdings with values in excess of $100,000. There was one jumbo holding worth over $800,000 that exceeded the total value of his wife’s portfolio and came from a small commitment in a company called Haloid; this later turned out to be a zillion shares of Xerox.

Full text can be found here: Coffe Can portfolio

So at its extreme it is not never sell anything you bought, but perhaps a slightly less extreme version is to never sell your winners. Would this be a reasonable investment strategy and something I could really commit to?

Every day is a blank sheet of paper

Another extreme way to see your portfolio was something I learned a long time ago talking to some seasoned portfolio managers. Every day is a blank sheet of paper, they pretended their whole portfolios was in cash. Basically they went through the exercise of pretending they did not own any stocks and they needed to deploy all of their funds in the market every day. If their current portfolio looked different than how they would deploy their money if they started from scratch they rebalanced their portfolio to look like the weights they actually wanted to have. In reality I don’t think they thought of their portfolio like this on a daily basis, but for sure some did this on a monthly basis or so. If one holding in the portfolio for example doubled in a months time and went from 2% weight to 4% weight, they would scale it back to what they then thought was appropriate. Perhaps after such a run-up it was only 1% position or something the sold entirely.

At its extreme this type of portfolio managed will constantly sell winners if the stock price increase was not based on fundamentals that would warrant to hold a larger position. If the stock price just increased its multiple with no new information that should move the stock, this type of investor would quickly sell down that holding and re-allocate the money into other holdings. A true mean-reverting strategy which would work very well if the stock that increased in price came back down again.

Middle road – Thesis Investing

A middle road to this would be to care less about current valuation and just focus on if your long term thesis for the company holds. As long as the thesis holds you never sell. This would mean you could hold a company that is short term grossly overvalued (but still within some limits of reasonableness). I think the investors who have been most successful in the past few years have fully allocated their portfolios into this type of holdings. Leaning on the powerful laws of compounding, for something growing 20-30% YoY valuation matters little if they keep this up for the coming 10 years. Obviously the hardest part is to figure out if they really will keep it up for the coming 10 years – which then means coming back to that the thesis for the investment still holds. The nice thing with thesis investing is that you filter out a lot of noisy and just focus on where the company is going long term – this in its simplicity is appealing to me.

Tesla as a use case

If I just play out the thought process of investing with a Coffee Can approach owning Tesla. Tesla could have been an investment in my portfolio since I looked at the company when it was still trading around 30 USD per share. I was early on the EV theme (as you long term readers know) and of course also looked at the Tesla stock. I even read the book about Elon Musk and how he created Tesla and SpaceX. I was very impressed with him after reading the book and especially impressed with SpaceX (and still am). With benefit of hindsight its obviously a big regret not buying the stock around 30 USD back when I started this blog. Let’s just play with the thought that I did. How would I then reacted when the stock suddenly popped from 35 USD up to 80-90 USD? Back then there were a lot of naysayers, this company is going bankrupt soon, huge pile of debt etc. – risks seemed high and the valuation was already “stretched”. I’m very sure I would have sold close to the 80 USD level and been very happy with such a quick big return, breaking both the Coffee Can and Thesis Investing rule. .

So what kind of investment mindset does one need to have to hold on to a winner like Tesla from 30 USD all the way to 800 USD? Is the Coffee Can strategy of letting your winners run and never sell, the approach one should take to investing? If I used Thesis investing it would have come down a lot to what my thesis is. With the successes Tesla had over the past few years probably the initial thesis would need to updated. An initial thesis back in 2013-2014 could probably have been that Tesla would be one of many future EV car makers (but no market leader). Few people back then believed Tesla would get even that far. I think this is not really a reasonable thesis anymore if one is long Tesla. That would be some type of bear case that Tesla would only be one of many EV makers. Todays valuation is pricing in more than that initial thesis, so it would have been time to sell some time ago, but perhaps one would have held on to the stock up towards 2-300 USD per share using thesis investing.

Talking about updating the thesis, I realize that is the big issue I have with Coffee Can approach. It basically assumes to take one decision at one point in time and then never update your thesis. Obviously there are many factors to consider if Tesla is a buy or sell at current levels. But let’s just take the argument around competition.

What drives Tesla valuation today?

Barring very special circumstances, competition will always eat away at successful companies. If the cake is too big and juicy, the market will never let just one or two companies enjoy the spoils for all eternity. Perhaps the entry barriers to get a seat at the table are high, perhaps the market leaders are extremely good at what they do. In the end people will keep trying to get a piece of that cake. This dynamic means that there is long term tendency for something to mean-revert. A new industry flares up, profits increase rapidly for early entrants and things looks great. More entrants enter the market offering products at lower margins and margins are eventually reduced. Sometimes there are special circumstances where this margin compression does not occur – for example by branding. It doesn’t matter how many watch companies enter the market, they will not be the same as Rolex, not until they built the brand value. So to every rule there are always exception. I try to follow basic principles like competition (and many others) to not get carried away with my investments and dream up blue sky scenarios which are highly unlikely to materialize. These type of arguments are closely linked to valuation. In my view a key point for someone that takes either a long or short position in Tesla is competition and brand value. I think most of us can agree that Tesla’s brand value is extremely strong, basically across all age groups and quite broadly in society. Two very relevant questions to ask is then, will it keep or even increase its brand value over time? And more importantly how much extra are people willing to pay to drive a Tesla instead of say a Mercedes, BMW, Volkswagen or even a Porsche?

These type of thoughts around a holding is in my view essential for investing, otherwise I might just throw darts at a board and put them in my Coffee Can. Just like the original article hints, I think the Coffee Can approach is more of an alternative to index investing and nothing I’m interesting in entertaining.


In the case of Tesla it would have been fantastic to hold it since I considered the stock until today but thinking through this hypothetical investment, makes it clear to me that my investment style if very far away from holding a stock like Tesla from 30 USD to 800+. Have I missed out on some big gains by selling out of some of my stocks? I few years back I evaluated how all holdings I exited performed after I sold them. The strong conclusion that came out of that was that I escaped more failing stocks than missed out on stocks that soared after I sold. Read the whole post here: Look in the rearview mirror.

Everyone wants to find and hold the next Tesla, but the likelihood that it ends up in your portfolio is very low to begin with. After that to hold it through all ups and down needs a very special investment approach which is close to Coffee Can investing or at least Thesis Investing where the thesis is updated to more and more bullish future scenarios as the company delivers and fundamentally gets stronger. I would have benefitted the past years to invest more based on thesis and less on fundamentals. But I believe we are going through a very extreme stock market cycle currently and valuations will come back as a stronger factor for investing. So currently I land somewhere between Blank Sheet of Paper investing and Thesis Investing. I try to give my holdings a little bit of room to be overvalued for shorter periods, but as soon as that overvaluation gets a little bit too stretched I mercilessly sell my holdings although I still think the company is doing great things. To become more long term, perhaps I should move a bit closer to Thesis Investing and a bit further away from the Blank Sheet of Paper approach. I would appreciate my readers input on the topic, always happy to hear your thoughts!

With these thought as a backdrop I will follow-up with a post on how I reason about some of my latest portfolio changes. If you take a peak at my Trade History page you can get a preview of what those decisions were.




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Guest Post – A bullish scenario for global equities

We have had many good discussions around Macro lately, so I requested another guest post, enjoy!

It’s well known that one of the biggest drivers of strong performance for global equities since the bottom in March is lower real yields, which has driven Price/Earnings ratios to historically high levels. Real yields, which effectively is nominal yields minus inflation (or inflation expectations), latest peaked in the end of 2018 and has since moved far into negative territory. You remember the volatile Q4 for equities in 2018 which was finally saved by the FED’s U-turn in its hawkish communication.

Chart 1. MSCI World P/E vs US 10y Real yield

Nominal US yields have barely moved since end of March this year despite inflation expectations coming up, reflecting money printing and potentially better growth ahead. Some strategists argue the low nominal yields reflect weak growth expectations but given FED’s new inflation target US Treasury traders are most likely expecting FED to introduce a yield cap in case nominal yields move higher, which gives them a positive risk/reward to own US Treasury.

Chart 2. US 10y Nominal Yield vs 10y Inflation expectations


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5 years and blog still going strong!

It’s 5 years since I started this blog and what a journey it has been so far! When I set out on a mission, of becoming a better investor through this blog, I realized it would be hard to consistently keep posting. With life having it’s ups and down it has from time to time been a challenge to do so but I’m proud to have been able to keep up the pace. I have at least posted once every month since I started, and on averaged slightly above 2 posts a month. This sometimes cathartic exercise of publicly sharing all my investment decision has really been helpful in honestly reviewing what works and what does not work. Some of you readers have been part of most this journey and some might have scrolled back through my posts. But most of you are likely readers that found my blog in the last 3 years. So let me take the opportunity to introduce how I view my journey and also highlight some older posts that might still be worthwhile for you to read.

Pre-blog days

Everyone have their story of how they started investing and how they became better investors. My early days of investing is very colored by the 2003-2007 bull market. I had fantastic returns, about 200% return in 4 year time period. I really thought I had investing figured out back then, the 2008-2009 period taught me I did not. I like explain my feelings around how skilled of an investor I am with the hype cycle:

For me I was at the clueless stage in the early 2000’s, I got naively confident around 2006-2007 and discouragingly realistic around 2008-2010. I understood around 2011-2012 that the path to “Mastery Achieved” is extremely long. I needed to find a venue to set a long term plan to become a better investor. I considered just writing a personal diary, but realized it would be hard to keep it up. At the same time, I had been doing deep research into Electric Vehicle investments, trying to understand the whole supply-chain. This theme I spent some 6 months to research and that was how it started. I wanted to write down everything I had learned about this emerging sector and share it online. I realized I could use a blog format to share such information and at the same time structure the thoughts in my head around investments. I really wanted to get on the journey towards “mastery” in investing and a blog seemed like a good way to structure it.

First year of the blog

So my first big investment theme was that Electric Vehicles would totally change the car industry, below is the post where I truly kicked off my blog. Back in 2015 people did not talk about EVs like today, most people were still great skeptics that EVs would take over the car industry, I believed after all my research that they would. I think I have been proven right by now (sentiment actually turned already around late 2016). In the same post I formed my early thoughts around what kind of edges you can have in the market. I identified that investing with a longer term horizon was one such way.

Investment Theme: Electric Vehicles

As you know by now, my blog mixes discussions about my current portfolio, sometimes dropping a shorter note on a holding and writing lengthier write-ups of stocks. One of my first lengthier write-ups was of NetEase, which has been a very strong performer in the stock market since:

NetEase – Chinese Gaming

One of my more important posts which shows that I started this blog to go on a journey to become a better investor, was the following post:

Investment styles and lifelong learning

I particularly like this point I made in the post. I will come back to this later:

“but for me personally I want to spend a few more years understanding both stock markets around the world, different sectors, as well as different investing styles. Because if it’s one thing I learnt from meeting all these great managers out there, with great track-records of alpha generation – there is not one style that is superior to others, all different styles of investing can work, if you do it right. And maybe as important, different investing styles will outperform during different times.”

Second year

I started the second year with the best analysis I probably produced on this blog. At least if you evaluate it in terms of stock price returns (I don’t count stocks I just mention, like the DNA discussion I start of the post with – CRISPR there would have been a fantastic buy). The post was followed up with an equally good commenting from many of you readers.

Nagacorp – Casino in Cambodia

I was very early on the sneakers trend in China and invested long before Anta and Li Ning moved up multiple-fold. I did get a good return with XTEP in the end, but it also shows that buying value is not always the best case. A lot of the value sits in a brand and here Li Ning for example was a much stronger candidate. I understood that during my due diligence, but instead went with what looked cheap on fundamentals. As often is the case, cheap is cheap for a reason. I have gotten better at being skeptical against cheap companies, although I still do mistakes.

Chinese shoes – XTEP

Another analysis I spent a lot of time on was YY, which recently changed name to JOYY and which I re-bought into the portfolio. I was way too quick to sell the company as it doubled after I sold (and later came back down again).

YY.com – Full Analysis

Since I started the portfolio I always had a fairly high weight towards companies with exposure in the Chinese market and often listed on the HK exchange. The reason for that has been valuation and the nice growth prospects. At the same time I’m always fully aware of the Macro backdrop, which always scared me. I’m pretty sure at some point we will see a major economical collapse in China (before they really take over the world), maybe it will come now triggered by Corona. Anyway, the first time I got cold feet was in 2017 and I wrote this post.

Rotate away from China & Portfolio changes

Well in the end I have not been able to stay away from China, I still have a lot of China exposure in my portfolio, perhaps I should take a look at that once again?

Tokmanni was a company where I did the analysis correctly, but I did not have the patients to wait for the stock to reprice (which it did in the end):

Buy the dip – Tokmanni

One of the larger write-ups and due diligence processes I ever done on a stock was Teva. That taught me a lot about the industry which was good, but it also taught me that it’s not really worth it. A large Pharma company is just too complex to value and it takes too much of my precious time. Time better spent on smaller companies. I guess my analysis is still somewhat relevant (written in two parts) and the company is still a controversial highly leveraged investment:

The Perfect Storm – Teva – Part 1

Finally in December 2017 I did another large piece on a company I still hold, Dairy Farm. The company really is in a pickle right now with Corona virus, HK protests and in generally mis-managed supermarkets. The valuation also reflects it. This post gives a good overview what the company is about:

Dairy Farm – Asian food giant

Third year and onward

Given that these are more recent I will keep a bit more brief.

I was very proud of how I combined my knowledge of China and an entity listed in Europe when I presented this idea (which turned out be perfectly timed):

Adding Rezidor Hotel Group – HNA related idea

I also want to highlight a stock a still own, which continues to trade on a very low multiple, Dream International:

Dream International – a dream investment?

One of the post I’m most proud of in terms of originality is my Art of Screening post. I took a fairly scientific approach of trying to find out which markets have the lowest retail stock investing participation and through that approach find the stock that are most overlooked. This concept has stayed with me since and is another important puzzle piece to what today is how I go about finding new investments and building my portfolio. I think I will have to follow-up on this post, there never was a Part 2 written..

The Art of Screening – Part 1

Another major stepping stone in my approach to investing came with this post, where I introduced 3 buckets of investing, Long Term, Opportunistic and Speculative:

GlobalStockPicking 2.0 – Major Portfolio Changes

Just as Electric Vehicle was this big theme I researched I in the same way researched the Dental Industry in a three part series. Unfortunately most of the investment cases were in my view priced for perfection, but I learned a lot, which will be helpful to pick up these stocks in the future if the market provides a buying opportunity. The stock I choose to invest in which I still hold is Modern Dental Group:

The Dental Industry – Part 1- Overview

2019 saw my first guest post from a friend of mine. Maybe given the current situation is worth revisiting some Macro thoughts?

Guest post about the US debt cycle

And finally, in my view another one of my very solid write-ups, Polish listed LiveChat, which so far has had a very strong stock performance:

LiveChat Software – company with a strong track record

Readers input please!

I hope you liked what I have written over the years! What were your favorite posts? What would you like to see more of and what should I spend less time on? Please comment!

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The situation in China & Hong Kong

Although I find it highly interesting with Macro analysis, I deliberately write less about such topics on this blog. I want this blog to be focused on stock picking and the struggles of portfolio management. That said, given how many investment I have with a majority of their revenue exposed to Asia/China/Hong Kong I guess it’s time to write down some thoughts on what is going on in the region. The ground is moving very quickly around the Coronavirus (2019-nCov) and the attention has grown a lot over just the last few weeks. Even so I think people living in China & HK vs rest of world have very different views on the situation. I do not pretend to have the answers of what is going but I want to share my view and what I see and hear from people who I know live on the ground. In the end of the post I will go through why I’m as of Friday sold my full holding in Union Medical Healthcare.

The situation from my perspective

I would like to start of by saying, that I think we are facing an extremely serious virus spread. It’s the sneaky feature of the virus that it can spread before people feel sick, which really makes this so very dangerous. Thanks to very powerful actions taken in China and elsewhere, we might just dodge a major major global health crisis.

When the contagion started a lot of people where quick to comment, and in some cases I also drew conclusions too quickly. If you followed this virus situation closely you might recognize comments such as:

  • It’s only old or with previous health issues that passes away from this.
  • The mortality rate is only around 2%. 
  • A normal seasonal flu in the USA kills 10x as many every year as this flu, you don’t see widespread panic from that.
  • More people die from road accidents in China, since people now stay at home, road accidents should be down, meaning total deaths is down. What’s the big deal?

All these comments have some merit, but let’s look at the one by one.

“It’s only old or with previous health issues that passes away from this.”

It’s easy to understand why such comments came in the first few weeks of the spread. Because naturally weaker individuals would perish more quickly to the virus. A stronger individual would naturally fight the virus longer, even though in the end they might lose the fight. So it is interesting to look at is how many of the identified cases have fully recovered. The count changes hour by hour, but right now there is 37,566 confirmed cases and 2,152 recovered. That is 5.7% has so far recovered, which in itself does not say anything about how many will make it through to the other side. But at least it is clear it takes a person a long time to be rid of the disease. One of the whistleblowers of the virus, Dr Li Wenliang only became 34 years old when he recently passed away due to the virus. According to reports he started coughing on January 10th, but was only a confirmed case on January 30th. It took him almost a full month from starting to cough to actually passing away from the disease. That brings us to the next statement.

“The mortality rate is only around 2%”

I’m not the first one to point this out, but I’m more or less repeating what a lot of people have been saying. You can not take the current 813 dead and divide with the confirmed cases 37,566. Yes this division gives 2.1% but is faulty on so many levels. First of all, like was described in the case of Dr Li Wenliang, who had worked with this from the start. Although he started coughing on Jan 10th, it took another 20 days before he was a confirmed case. The procedure to be tested and confirmed for Corona is not uncomplicated and there is not endless resources to perform this test on request from the public. My best guess is that the test is restricted to really sick people that show most of the symptoms already (fever, short of breath, etc). Again, same with the death figure, this is only confirmed cases that pass away in the hospital. Most likely there will be many that tried to fight through this at home and also passed away at home, never identified as a corona case, but actually was one. So both figures are probably higher. My best guess again is that the actual confirmed case figure is much much higher than the 37,566 figure we see. The death figure is probably also higher, but not by as much. The third and maybe most important factor is that even though every single case of corona infection and death was accounted for you still can’t divide one with the other, due to the timing lag. A person that got sick today, naturally will not pass away on the first day, he will still be a confirmed case though, that might pass away in a few weeks. So how long a lag should we apply? Well again nobody knows, but from the case of Dr Li Wenliang it took him almost a month to pass away, but only a week from that he was a confirmed case. China also classifies how many of the confirmed cases are severe, where one can presume that the death rate will be much higher, that stands at some 14%. Taking all these factors together, you end up with a big range of guesstimates. My own guess is that the mortality rate most likely is above 4% and hopefully not higher than 10%, if I have to say a figure, I would guess 6%. That’s a pretty big span and also a much more scary figure than 2%.

“A normal seasonal flu in the USA kills 10x as many every year as this flu, you don’t see widespread panic from that.”

Yes it might kill more, but there are a lot of factors explaining why there is not a widespread panic from such a disease. First of all, there are vaccines against seasonal flu for the ones that do feel worried. Second, as soon as we step out of bed we are facing risks to our life. As long those risks are very small we seem to be able to brush them off as nothing to worry about. The seasonal flu according to CDC data has a mortality rate of 0.05%. Since a lot of people get the flu, the number of dead will be high during a season. Another podcast I listened to described this in another way. Everyday there are many many roads accidents around the world where people die. Very seldom these accidents even make news headlines. But every-time a plane crashes from the sky and all people on the plane die, it makes news headlines all around the world. This virus has the impact of a plane crash on peoples feelings. The problem is that the virus cases are like planes that keep crashing every day and the news media keeps pumping stories.

“More people die from road accidents in China, since people now stay at home, road accidents should be down, meaning total deaths is down. What’s the big deal?”

The big deals is how people perceive this danger and the actions they take due to this fear. In the end it actually doesn’t matter, from an economical perspective, if the mortality rate is 1% or 10%. It’s the actions the population takes in fear of the disease that matters. Social media plays a big role in this. Panic and fear especially with the help of mobile phones and social media spreads like wildfire. The actions people taken is what I would like to focus on now, because in the end that is what matters.

Situation in China and Hong Kong?

When I started to write on this post a few days ago I felt my fellow investors in the US and Europe had not understood what is going on in China. But just over the past few days I think investors are getting input from company management and decent news reporting on what is actually going on. I felt all worked up, how could equity markets continue up when 1.4 billion people had decided to sit at home, not work and basically tend to basic needs!?

We humans are pretty easy to scare and what influences most of all, is the behavior of the people around us. People can be calm and rational about the likelihood of catching the virus, but change mindset very quickly when put with a new group of people that act more panicked about the virus spread. It’s very quick back to basics in situations like this, Maslow’s pyramid comes to mind. Nobody is any longer thinking about which Hermes bag or new car to buy, when you are fighting at the local supermarket for the last rolls of toilet paper. Maybe it sounds like a joke, but this has been the actual situation in Singapore and Hong Kong over the last few days. People are so scared that they have started to hoard goods like toilet paper, rice, cooking oil. Let’s not even talk about facial masks and hand sanitizing soaps etc. This is a highly sought after good that even if you are rich, you might not be able to source. People in Hong Kong are scarred by the SARS days and takes this extremely seriously, almost everyone is avoiding gatherings by now. People more or less mostly stay at home and most companies apply work from home. On top of that both Hong Kong and Singapore has now effectively shut their borders for Chinese coming into the country. This is obviously very bad for local business, especially for Hong Kong who has suffered tremendously already on back of the protest movement that lasted since last summer. I believe Hong Kong will see a massive wave of lay-offs very soon and with a city with very poor social security, this is going to be extremely tough on a already frustrated population. But, what happens in Hong Kong and Singapore, is still fairly irrelevant for the world economy, what matters is what is that big population in China up to.

China is a big place, so it’s always hard to generalize what is happening. As far as I have been able to gather, the mainland Chinese are either isolated and quarantined in the worst hit areas, or they are voluntarily quarantined in the sense that they barely go out-doors. Partly because they are scared of being infected, but also because they are told by their government to take this seriously and help minimize the spread of the disease. For example you are not allowed to travel on public transportation without a mask in the major cities. So due to Chinese New Year (CNY) holidays, the whole country has been shut since Friday, Jan 24th. A longer CNY break is still fairly common in a normal year, especially for factories. The situation from a work activity perspective is not that extreme compared to a normal year. It would be the services sector (which has grown big in the past years) which has operated at a minimum activity level this past week. The really crucial period will be the next two weeks. China can’t afford to have people just sitting at home another two weeks, it would just have too big economic consequences. At the same time sending everyone back to work, risks severely worsen the virus spread. There is some serious anger in the Chinese society after Dr Li Wenliang passed away, so there are even political stability angle for the Party to consider. A highly sensitive situation indeed. The largest aspect though is the psychological part, reports come in of restaurants being empty or just closed. Home food delivery which is huge now is reporting some 50% drops in deliveries, because people are afraid of contamination just from meeting the food delivery guy. A population which is that scared, will not turn around in a few weeks and buy plane tickets, or go out shopping for a new car. It’s really back to basics in China.


So my take is that the Chinese population is taking this super seriously, on a government and individual level. Since everyone is taking this so seriously I think we will see long lasting effects on the Chinese economy, with spill over effects on other economies. I see it as wishful thinking that the virus spread would disappear anytime soon, a vaccine takes too long to develop. So we are looking at the virus being around for at least a few months and during that time the Chinese will be very careful spenders. Very few will buy a car, with all the knock on effects to suppliers and sub-suppliers that implies. Very few will invest in real estate, so property prices might turn soft, which is fueling most of the private individuals wealth. Extremely few will travel. I think much of this might stay true even for a few months after the virus seems to really dropped off in new cases. So when 1.4 billion people, more than Europe and USA’s population combined suddenly tightens the belt and stop consuming, could that trigger something else? Perhaps the world has for the past few years, during a epic never before seen bull run for both equities and bonds, built up excesses and made stupid investment decisions during a low interest rate environment? With a Private Equity bubble lurking, and easy leveraged loan money available everywhere? What happens to all this when we get an external shock that significantly slows down the economic wheels? I really don’t understand why we are 1% off all time high the S&P500 when we are staring this situation right in the eye.

The Chinese consumer is today just too big of a part of the economical wheels that are spinning. As Ray Dalio so nicely explains in videos. One persons spending – is another persons income. And when the Chinese are not spending, this is going to hurt the income of a lot of people. In a worst case scenario this could trigger the end of the bull market we have seen.

I want to end on a positive note, about something which I have not seen written about anywhere. I’m convinced China will see a small mini-boom in childbirths in about 9 months time. Remember where you read it first!

My holdings majorly affected by the virus situation:

In order of trickiness to handle

JOYY (a.k.a YY)

The companies cash cow is live streaming in China. With the whole population sitting at home with very little to do, I think this might be one of very few significant winners on this short term. I don’t really get it why the company is not trading up stronger. I have to consider if I should add to this holding.


This is the toilet paper producer which everyone is rushing to clean out the shelf’s off. The stock price has probably somewhat stupidly moved upwards due to this. I mean people are just moving consumption in time, the paper they stock piled will mean less consumption in the future. Perhaps this can have some inventory positive effects for Vinda, and the company for sure will have another monster quarter in Q1. But long-term it doesn’t change the case much, it’s also not that overvalued right now that I would take the opportunity to sell. I rather think that long term there is still upside at these levels.

Dream International

Again this toy producer is a winner when China is in trouble, with most of its factories in Vietnam they will be able to run at full steam, whereas the competitors mostly have their factories in China. The company does also have a few production lines left in China, so the company is not totally unaffected. The stock price is stuck in value trap land though, eagerly awaiting my semi-annual report and let’s see what that says!


Some 50% of customers and even more of the profit for the Nagaworld casino comes from Mainland Chinese, which is still less than Macau, where that figure is over 90%. Even non Chinese customers will probably be much more hesitant to travel to Cambodia during these times. I expect Nagacorp to take a significant short term hit from this just like any business dependent on Chinese and in this case even travel. But the stock has also taken a significant beating lately. One has to weigh the short term loss of income against the strong prospects the casino has over the long term. I have taken the bet that gamblers will be back at the Casino in full swing by summer and that the stock price already discounted a bad period up until then. I might very well be wrong and the market continues to hammer Nagacorp down, my strategy will still be then to weather through it.

Tianneng Power

This was a speculative holding, which performed fantastically until the virus fears shot down the stock. Obviously this is terrible for a producer of batteries in China. They might have trouble with their factories and there will for sure be less sales/replacements of electric scooter batteries when people are not even driving their scooters. Not really sure how to do here, I think I need a bit more time if I should close this speculative position. The case is much less clear than it was a month ago, that is for sure.

Union Medical Healthcare

I thought a lot about this holding lately. A lot of their business is built on Mainland Chinese coming to Hong Kong for different type of treatments, for health, minimal invasive procedures, etc. Lately they expanded more towards actual doctor clinics. Since the protest got violent in October, there are barely no mainlanders coming to HK and by now, with the border shut, there will be zero, for quite some time probably. On top of that due the shortage of facial mask, private clinics are even struggling to stay open. Locals population is neither for sure focusing on these type of activities now. So just like Nagacorp, UMH will most likely see a deep dive of it’s revenue and profits. I still like the founder, but this is just too much headwind for too long of a time. I have to be a bit tactical here and even if I like the company, I most likely will be able to get in cheaper in the future. I’m actually baffled that the stock is holding up so well. I have to be humble that I have misunderstood the situation and maybe the business is less dependent on mainlanders than I have understood. But I decide to sell my full holding as of Friday’s close.

Dairy Farm

This is another one of these which has got everything going against them, since the protest started. First it was the mainlanders that stopped coming during protests, which hurts the Mannings business. Then it was the protesters who got angry with the Maxim’s family, so nobody is eating at their restaurants. Then the 7-Elevens of course in general gets hit by less tourists and people moving about in the city. Now the virus. Well the only thing that finally must be flying is the supermarket business in Hong Kong. I can’t imagine a better market than these past months. People in general stay at home much more since the protests and obviously buys their goods from the supermarkets instead of going out eating. Problem is that I think the losses will be so severe in the other areas, so a great quarter or half year for the supermarket business won’t hold up the rest. In the long run this matters less, what matters is, will Hong Kong go back to normal long term and will the (not so) new CEO turn around the rest of South East Asia? This is not a high conviction position for me anymore and I need a bit more time to decide if it should perhaps leave the portfolio entirely. l have already reduced it to a very small position and the stock price is already hammered.

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Guest post about the US debt cycle

A good friend of mine, who is the one I bounce ideas the most with, asked if it was possible to do a guest post. Without this guest, my discussions and investment ideas over these years would not have been the same. So I’m very happy to present some Macro thoughts from my friend – the first guest poster!

Has the US debt cycle come to an end?

Until this week, the equity market has been holding up fairly well despite the trade war, slowing demand in China and Brexit. But there is something on the horizon that suggests we should sell
equities and wait for a better entry point – the debt cycle in the US seems to have come to an end. A rate cut from the FED during the second half of 2019 would confirm that theory and should be a negative catalyst for equities.

I’m sure many of you have read and heard about Ray Dalio, founder and co-CIO of Bridgewater, one of the largest hedge funds in the world. He describes how the “economic machine works” through the debt cycle. Simply described; both companies and households spending consist of two factors; Income and Credit. Income tends to be fairly stable, growing a few percentage points per year, and is the base of a households´ and companies spending. Credit on the other hand tends to vary over time, perhaps you use credit to buy a new, larger house, or a new car while a company might use it to expand manufacturing capacity. Thus spending can increase faster than income by using credit.

A person’s spending is another person’s income – an important aspect in a debt cycle. This means if you are using credit to consume, another person’s income will increase. With increased income the second person can increase their credit thereby expanding their spending power. This chain of events can continue for years, until the debt cycle stops i.e. when households and companies stop expanding their borrowing. As the cycle turns and less is being spent due to lower credit growth, it means another person’s income is falling. That person will therefore not be able not borrow as much since their income is falling thus decreasing their spending power. The chain of events goes both ways creating the debt cycle. You will find a great summary of Ray Dalio’s theory of How the Economic Machine works here:

I’ve thought a lot about this and tried to quantify the debt cycle with the help of the 3m US treasury yield. We start with the simple assumption that if the demand for credit is high, the price of credit i.e. the interest rate, will rise. When demand for credit slows the interest rate goes down. The reason I’m looking at the 3 month yield is that it says a lot more about the credit demand right now compared to for instance the 10 year yield which factors in a lot of expectations about future inflation and economic growth.

By looking at the y-o-y change in the 3m UST yields we can see how the demand for credit has changed over the last year. This is what we typically do when looking at a company`s specific data, we compare the order book, revenue and EBIT with the same quarter last year to see if it’s gotten better or worse. The chart below tells us that the 3m UST yields are about 50bps higher than a year ago, meaning demand for credit has gone up.

S&P500 vs 3m UST y-o-y (bps)

US Corporate Debt growth y-o-y (%) vs 3m UST y-o-y (bps)

A general thinking when looking at Capital Goods companies is that when the second derivative in organic order growth turns negative it’s usually a good time to sell the stock. It tells us demand is about to stabilize i.e. order growth will go towards 0%. In the same way a positive second derivative, when organic order intake is negative, would be seen as a sign that order growth is about to

Applying the same methodology on the 3m UST yields a negative second derivative would tell us that the demand for credit is slowing, a strong indicator the debt cycle is coming to an end. The y-o-y change in the 3m UST started to stabilize by mid 2018 and has recently started to go down as a result of the lack of rate hikes from the FED. The Fed Funds futures market indicates we will have at least one cut from the FED during the second half of 2019 and another one in 2020. A cut in interest rates from the FED in the second half of 2019 would confirm the end of the debt cycle which would mean the start of a bear market.

FED FUNDS Future Aug19-Dec19

S&P500 vs 3m UST y-o-y (bps) including a rate cut in October

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Thoughts on the market and portfolio construction

The last month I have not written much here on the blog. However the inactivity does not mirror what I have been up to. I spent a lot of time lately, screening for stock picking ideas, reading, listening to inspiring podcast and most of all thinking and contemplating.

My screening which will be covered in a separate post has made me realize that I need to significantly improve the way I look for new potential investments. The power of screening increases significantly when you have the luxury (like I do) of looking for stocks all over the world in all market cap sizes. The reading I have done lately has in part been inspired by trying to understand more what metrics I’m looking for in companies that I want to invest in over the long term. Hopefully the steps which I’m about to take over the coming months will be crucial to take my portfolio and investment process to the next level. Slowly but surely the aim is to move towards a more structured and professional investment approach.

My thinking and contemplation has mainly been around two things: 1. What markets are up to currently, if and how I need to adjust my approach. 2. How my portfolio construction should be structured to maximize my changes of success. That’s what I thought I write about today.

Markets and the Trade War

Let’s start with the current market environment. Anyone not living under a rock for the last six months has been flooded in the news about Trump, China and the Trade War. But return wise for most global stock portfolio this has so far had minor impact. US stock markets are at all time highs, Europe is doing pretty well (except Turkey). So far only one major stock market has really fallen significantly and that is China/Hong Kong. Although I made a point of reducing my exposure towards China already back in May 2017 (Rotate away from China). I still keep a large overweight compared to MSCI World in Chinese related stocks. Either that they are listed in Hong Kong, or that they actually are materially exposed to the Chinese economy. Below is the total return of both benchmarks since I made my post about rotating away from China.


The trade war puts a stock picker in a bit of a conundrum. Most Macro events should be ignored by a stock picker, but the Trade War actually becomes a company specific event as well. In my view it can not and should not be ignored. The effects of the tariffs are so big that a producer in China could be totally out-competed by a producer in another country, as soon as the tariffs comes into place. One could say that the Trade War is bigger than just China and USA, that’s probably true and Trump might for example still have a beef with the Japanese car producers and the imbalances created there in trade. But for now I have just focused on US/China conflict and how that has affected my portfolio.

I have not looked at the stock market in this light before, but I tend to group companies like this since the Trade War started. Especially for stocks listed in Hong Kong.

  1. Companies which mainly sell products and/or services to Chinese consumers. Here the main risks are more subtle, how will the Chinese economy fare if the Trade War intensifies? For the first time ever since I started visiting Mainland China, the people I talk to are afraid of the Trade War effects on the Chinese economy. I just have to point out how rare this is. I discussed everything from ghost cities, rampant borrowing, spiraling property market etc, nothing has really moved the belief among the Chinese I talked to, the only way was up. This is the first time I hear the Chinese people themselves admitting that this could end badly. One should not underestimate the effects such a psychological shift has on an economy which has been a one way street for so long. This makes me worried about my large China exposure.
  2. Companies producing products in China and mainly selling products to the USA/World, but products currently not on the list of tariff goods. Here the risk is more obvious and probably the area where one should be most careful. The stock market has probably not fully discounted that the companies products will fall under future tariffs. An excellent investment thesis could be destroyed by the stroke of a pen from Mr Trump.
  3. Companies producing products in China and mainly selling products to the USA/World, products already on the list of US tariff goods. These companies have probably already seen most of its initial stock price fall already. There might be opportunities here if the company somehow can navigate through this mess, perhaps relocating production or other measures.
  4. The rest – Companies with little or no direct exposure to the Trade War. Here we should more be looking at indirect effects. A lot of companies producing products in other countries are reliant on parts from China, which might be under new tariffs. This could quickly alter margins and shift advantages to producers in other countries which has non-Chinese suppliers of their parts. The problem here is it requires very very deep due diligence to understand these dynamics, if the management is not upfront about it.

Looking at my holdings grouped into the above categories:

  1. NetEase, Fu Shou Yuan, Essity (mainly its holding in Vinda), Dairy Farm (mainly its holding in Yonghui Superstores), Nagacorp (Chinese going to Cambodia to gamble), Coslight
  2. Dream International (although majority of production is now in Vietnam).
  3. I don’t hold any company with significant portion of their goods under current US/China tariffs.
  4. Since I have very few US based holdings I don’t see any major effects here for my portfolio.

So the conclusion for my current portfolio is that I have to be mindful of the general economic strength of the Chinese consumer. If they stop spending, my portfolio would be hurt significantly with so much direct exposure to Chinese consumers. So should I reduce my exposure? If this really pulls down China into a recession and all the unraveling of leverage that would mean, then yes, I really should reduce my exposure. My this is threading dangerous grounds, because now we are not talking about company specific effects anymore, this is Macro. As we concluded many times before as a stock picker we should be wary to try to time too much macro. The truth is I haven’t really made up my mind yet. Let’s look at the other side of the coin too, opportunities.


Such serious fall in one stock market also gives rise to opportunities. The same reasons why I had such an overweight towards China when I started the blog was partly due to the relatively low valuations compared to other markets. When the Hang Seng now is falling when other markets are rising, this puts me in a tough spot again. Hong Kong stocks looks cheap, but I already have a significant exposure, if I find something very interesting, do I dare to add more China exposure? I think my conclusion so far is, very selectively and with a larger margin of safety than before. I have one investment idea (again in a fairly illiquid company unfortunately), if it falls a bit further, it might enter the portfolio during the autumn. Please give your comments on what do you think of my portfolio taking larger tilts towards China in such sensitive times?

My new portfolio construction

I written quite a lot about the importance for me to find investments that I’m comfortable holding long term. I think this will always be main foundation of my portfolio, lower turnover and a long-term approach to investing. Although a few of my holdings to do not fully meet all my investment criteria (which I by the way will define more clearly later), in general I hold a portfolio now which I’m more comfortable with holding for the long term. I realized now, that reaching this is actually a very nice feeling in many ways. Mostly because I can relax more in terms of following up on my holdings. Instead spend that time on rather finding new good investments and taking my time to do so. Before there was always a stress to find something new to invest in, since many of my investments were short term and I knew I needed to replace them with new ideas rather quickly. This brings me to my next point.

I actually miss not being able to invest in what I would call a swing trade. A large part of my investing “career” I dedicated to following the markets very closely. I’m a contrarian investor at heart and I almost love catching knives (until I cut myself badly on them and need to lick the wounds for a while). Many of my investments in the past were at infliction points in stocks and actually I think I’m rather good at it! So this focus on long-term has taken away some of my possibilities for short term swings when I see an opportunity. Supposedly I could just do these trades outside of the GSP portfolio, but that’s not really what this blog is about. This is my journey to become a better investor and if I think I’m good at something, it should be evaluated properly under the scrutiny of the blog.

Another type of investment which I since the beginning have left outside of the blog is smaller positions in (usually loss making) companies with a return profile somewhat more like a out of the money call option. There is tremendous upside if things go right, but in most cases it turns into a dud and depending on sentiment money will be lost. This is also something I have been decently successful in outside the GSP portfolio. Again the exact same reasoning, if these strategies should be evaluated properly I should include it into the GSP. So with no further ado, I present to you my new future portfolio construction:

The new Global Stock Picking Portfolio

80% Long Term Holding – My current portfolio of long term holdings, target holding period 5+ years, maximum 15 holdings, range of allocation allowed 65%-90%.

10% Opportunistic Holdings – Holding period maximum 2 years, maximum 2 holdings at any one time, range of allocation allowed 0%-20%.

10% Speculative Holdings – Holding period could be short or very long term. Minimum position size (at acquisition) 2%, Maximum position size (at acquisition) 3%, range of allocation allowed 0%-20%.

0% Cash – Maximum Cash position 15% – I reduce my max cash position from previously 25%.

The idea of the speculative trades is to be able to sustain larger losses on several speculative positions, but hopefully that one or more will make up for it, by its high returns. The speculative positions could be everything from a micro cap with a potential success product, or even a larger company, where earnings are yet to be proven (think Biotech etc). More on this later.

During the rest of the year I will restructure my portfolio and introduce especially new holdings in terms of the speculative positions. In due time I will evaluate the performance of the different “buckets”, but main focus will still be on total performance of the whole portfolio.

All comments on my changes are appreciated, since I feel they are not 100% set in stone yet.



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