Sell Dignity & Fu Shou Yuan

A new view on the funeral sector

Early this year I was really trying to find new long term investments, that I could hold for years and years. I thought I had come up with a very defensive and good investment idea. From my perspective it also seemed somewhat overlooked by the market. Great long term tailwinds with a increasing old population that will eventually pass away. The old generation is also wealthier than before meaning they would leave all that money and assets behind. All boding very well for a nice structural position for listed funeral companies in my view. Great invesment case, stocks were a bit expensive, but given these fundamentals that mattered less in the long run. So i invested, in one UK listed and one Hong Kong listed funeral company. What I didn’t forsee was that governments would come in and have a view on how expensive funerals should be. I have come to realize that society sees this as a service in line with schools etc. For these types of services it is not accepted to make large profits in the same way as for things not everyone needs. After seeing comments like these about Chinese funerals and what has happened lately in UK I started to look at this in a different way. Looking at it from this light, this will perhaps not be a great long term investment, even though demographics guarantee that demand will be there.

Dignity a disaster investment

With the above thesis of great tailwinds I bought into Dignity early this year at 18.8 GBP per share, only a few days later the stock plummeted with 50%. This was on the back of tougher price competition and that Dignity decided to change their pricing strategy. At the time I thought this was a big over-reaction by the market and a great buying opportunity, so i doubled up: Double Pain & Doubling down in Dignity At 8.7 GBP per share I bought as many shares as I bought at 18.8. The strategy seemed to do fairly well at first, the stock recovered and set a high around 13 GBP per share, on my average I was not really even down that much. Then came the next hit, the UK CMA decided to look into the British funeral market and the pricing of funerals, the stock took another dive. Today a clarification around this came out: “Nov 29 (Reuters) – Britain’s funerals industry could face formal investigation after the UK competition watchdog found that high prices were taking advantage of grieving families.” Link to article: Reuters article. The stock is currently down -17% on the day and back trading around the same price I picked up more shares. All in all a disaster investment for me.

Giving up on my Funeral theme

This all has made me realize I have misunderstood this segment. Given that the kind of thinking from UK CMA is probably even more true how the Chinese think, I decided to divest in both my funeral stocks (Dignity and Fu Shou Yuan) as of close today. I still see the structural tailwinds and defensive characteristics of these stocks as attractive. But these markets UK and China, will most likely not allow this companies to be highly profitable for the long term.

Fu Shou Yuan has not been an equally terrible investment, but also a loss. I bought it for 6.49 HKD per share on the same day as Dignity on Jan 15th and I sold today at 5.9 HKD. Which is not terrible given that Hang Seng is down -15% for the same period. But given that Fu Shou Yuan was trading above 9 HKD in June, it again feels like pretty poor timing on my side. This stock has been strangely volatile and I didn’t really understand why it went up (or down afterwards). The Hong Kong market has been extremely peculiar this year though..

So I am a bit bruised by these investment mistakes. You always learn something from your mistakes and here was another angle to consider. A similar story has taken place for my gaming stock NetEase, which was on real roll, until the Chinese government froze all new game launches in China. This has hurt NetEase a lot and it’s greatest rival Tencent. These kind of out-of-the-box disturbances from politicians and governments is not just disrupting in terms of Trade War, but most obviously also be considered from a more narrow sector perspective. As always the market is good at keeping me humble.

Now on and upwards to new investment ideas. Stay tuned for a Part 2 of my dental series!

Portfolio Changes – larger reshuffle – Part 1

Thoughts on investment philosophy

I have recently had quite a lot of time to contemplate my investment style and philosophy. I think I reached some conclusions. After all that is what this blog is about for me, learning from and seeing my mistakes more clearly and then adjusting accordingly.

Before I started this blog I have during periods followed the market and specific stocks very closely. I have used technicals and fundamentals to swing-trading holdings (3-12 month horizon) with fairly decent results. Meaning that I see the stock as fairly/undervalued with a chart that looks good for a move up. I then later sell when the stock is more close to fully valued. To some degree I have implemented such a strategy also for my blog (for example Avanza, Ericsson, YY, Shanghai Fosun etc). But this is very different from believing in a company truly long-term, even if the stock gets ahead of itself valuation wise. Given that I do have a full time job and this is a hobby, the time I can spend on updating myself on holdings vary widely. From another perspective baby-sitting such swing trade positions takes away valuable time from researching new interesting companies and sectors/niches.

All in all the conclusion for my future investment strategy is stop looking at these companies that trade cheaply currently and then start to swing them in/out of the portfolio as they get cheap/expensive. If all stocks in the world would be drifting sideways forever with some volatility this might be a successful strategy, but that’s not a very likely scenario. Instead I will focus on what makes more sense, finding great companies. Preferably currently cheap, but anyhow companies that in 5 years time in my view has a high probability of trading significantly higher. I should also at all times be comfortable turning to stop following my holdings and be happy to own them for the coming 5 years. Currently I do not hold such a portfolio and I intend to spend the coming months to do just that. This means that I am tilting my portfolio more towards Quality, which in general is expensive now. But I intend to find my own type of Quality, not necessarily Nestle and the likes (nothing wrong with Nestle though)

In terms of Portfolio management I will still allow myself to trim holdings that grow very large or add in holdings that have under-performed but I still believe in. And of course I will still make mistakes and mis-judge companies, meaning they will not sit in the portfolio for 5+ years, but till be sold when my view has changed. But preferably the investments should be such so I won’t be easily swayed in my judgement of the future prospects of the company. For example an oil company with great management and execution might be dead in the water if oil production cost is around US$60/barrel and oil drop to US$40, so before I have a very clear and sure long-term view on the oil price, it would be a silly investment to add to this portfolio. I take this as an example because currently outside the blog holdings I do have a swing-trade position in a what I think is a very decent oil company (Tethys Oil).

Reshuffle of Portfolio – Part 1

Not only have i contemplated my strategy, but another reason why I have written so little lately is that I have been very busy re-searching a larger number of companies. Most of these investment ideas will materialize in new holdings over the coming months. It probably won’t be perfect, since I change so much at the same time. Minor adjustment might come later. But all in all it’s holdings more in line with a more long-term investment strategy. The holdings are in general also more defensive than what I currently hold. This I also very much what I seek in such a late stage bull-market. I’m not sure if I should call it new Themes, but I chose to allocate significant capital to two industries below, 1. Funeral Services and 2. Alcohol and Beverage related companies. In due course I will try to expand on my thoughts behind these investments.

Dignity – Add at 5% weight

Funeral service business in the UK. I had my eyes on for some years now and lately a very good buying opportunity arose. I heard about it for the first time from a long only manager and have since understood what a wonderful business segment funeral service is. Firstly from a margin perspective. but also how fragmented the business is and the possibilities for a cash flow generating company to buy these small companies at attractive multiples.

Fu Shou Yuan – Add at 4% weight

Basically the same story as Dignity above, funeral services, this time in China. This stock I’m perhaps not buying at the right moment short term, as it has traded up and is actually very expensive at the moment, but from a long term perspective I’m very comfortable holding this.

Diageo – Add at 4% weight

Has a portfolio of high quality liquor brands. Also has a minority holding in Moet Hennessy which I find interesting. Overall the thesis here is that they will continue to leverage their strong brands and their tremendous track-record of shareholder returns. For example the portfolio of whiskey brands probably is 50% of all top quality brands available.

Olvi – Add at 4% weight

I have searched for quite some time for a way invest in line with my positive view on the three small Baltic countries, I think this might be one good way. I also have fairly bullish view on Finland, finally coming out of some economically challenging years. This is a family owned (through voting strong shares) beer and beverage company with exposure to the above mentioned countries. They have also shown a tremendous track-record of execution. Overall, smaller listed beer and beverages companies start to be as common as unicorns. I will expand on this later, but not many are listed anymore. As uncommon they are, its seems to be a fantastic business to be in. Since almost all companies shows great returns (until they are bought out) with very strong cash flows. Previously I held Royal Unibrew for mostly the same reasons (I should have kept it), but overall I find Olvi more attractive, with a stronger track-record.

Tokmanni – Sell Full Holding

This was also a play on Finlands recovery and that the company felt cheap with a good dividend. But they continue to under-deliver and the last straw was the mess with the new CEO not being allowed to start due to a non-compete clause. Felt very unprofessional. Also nothing I’m very confident to hold in 5+ years, with what currently goes on in Retail. I’m happy coming out of this one with a small profit.

Microsoft – Sell Full Holding

A great company of course, but current Tech-hype is just too much for me. If/when Tech companies re-price downwards I will definitely be looking at adding 1-2 Tech holdings again. I’m happy for the returns I got and unfortunately I cut my position in half way too early, the part I kept returned almost 80%.

Catena Media – Sell Full Holding

This became the latest of my “swing trades”, with over 40% return in less than 4 months one of the better ones as well. I was a bit torn about this holding, since I do see some good long-term prospects. The online gaming business will grow, and these sites really need channels which supply them with customers. But it’s a way to unstable business case for me to comfortably hold for many years. It is definitely in the “baby-sitting” category, where I felt a need to keep myself updated on a frequent basis. So with a bit of a heavy heart I sell this holding. This could for sure keep performing very well for a long time, but I categorize it in the “too difficult” pile.