The Loser’s game

I don’t play tennis, but I have read a number of articles describing investing as being a loser’s game (read here).

Loser’s game

Played by everyone who’s not a professional tennis player.

The way to score — and win — is by keeping the ball in play and not taking any unnecessary risks. Just focus on avoiding mistakes and you’ll be fine. Don’t give your opponent any easy points, for example by giving him the chance to smash.

You can also watch this talk by Howard Marks (click here). You can fast forward the video to 23.10 min (to watch that part about the Loser’s Game).

I like high growth companies with strong fundamentals. Often, their fast rising share prices would also reflect that. Who doesn’t like them?

Often I come across very promising companies with great financial figures, occasionally I was introduced to them by some of my readers. In some cases, I have not even heard of these companies nor their services or products.

It takes time and effort to understand the company eg. its history, management, products, services, the industry it is operating in and its competitors. To judge for ourselves if this company has a strong and wide business moat, and if its future is bright. Then there is the question of corporate governance and the country’s regulatory requirements etc. What works in Singapore may not work in other countries.

Let’s look at a few examples:

a) Real Nutriceutical Group Ltd

I found out about this company in July 2015, and wrote a post about it on 22 July 2015 (read here).

Its financial fundamentals were good. And from what I read online, “Real Nutri” is the leading brand in both amino acid-based and general nutritional supplement market in China.

Its future appeared bright then as there is an upward trend in its earnings. Profit margin and Operating margin are relatively high. Maybe too high. If you read Value Buddies posts about Real Nutriceutical Group Ltd (read here), there are posts questioning and debating on why Real Nutriceutical Group Ltd had almost twice the gross profit margin as compared to GNC.

In late Oct 2015, the shares of Real Nutriceutical Group Ltd plunge after after short seller Glaucus Research Group California LLC issued a report Thursday saying the company’s actual income is far below earnings reported to investors and regulators. (read here and here) Consequently Real Nutriceutical issued a rebuttal report on 24 Dec 2015 (Christmas eve), and shortly after Glaucus issued another report slamming it on 28 Dec 2015. Yes, the battle is still raging (read here).

I did not invest in the shares of Real Nutriceutical Group Ltd. In my post in July 2015, I mentioned that its ROE is not that high (at 14.16%), and although base on my calculations its share price appear to be undervalued, I felt that I needed to find out more about their amino acid-based supplement before investing in it.

Stock price of Real Nutriceutical Group Ltd on 22 July 2015 was 2.15. Fast forward to 30 Dec 2015, its share price has crashed to 0.81. With the on-going ‘war’ between Real Nutriceutical Group Ltd and Glaucus Research Group, share prices should remain low for some time.

b) Silverlake Axis Ltd

I was asked about my opinion on Silverlake Axis Ltd in late July 2015 by a reader and I have subsequently did a post on it (read here). Its share prices in June 2015 has dropped by nearly 30% in 2 months.

For such a high profile, strong financial fundamental company, the share price then appears to be an opportunity. In fact if you have bought the shares in early June 2015, you would be having a comfortable paper gain in late July 2015, and the prices appear to be trending up.

However, at that time I felt that its business was not within my circle of competence (and still is) and I would need a bigger margin of safety before I purchase its shares. I have tried reading Silverlake Axis’s annual report, and I can’t relate to what they are talking about, probably because I am not in the banking sector and neither have I used their products.

In addition to that, I felt that the shares then were still overvalued base on my calculations.

Consequently, I did not invest in the shares of Silverlake Axis Ltd.

Shortly after my post, an investing report was published on 20 August 2015 in which the writer, who “may” be shorting Silverlake Axis’s shares (when you’re short, you’re betting that the price of a stock will fall), has likened Silverlake Axis to high-profile fraud cases in the past involving software companies like Longtop Financial from China and Satyam Computer Services from India (read here). Consequently, when the report was first published, Silverlake Axis’s share price saw a hefty 24% collapse the very next day on Friday, 21 August 2015.

Stock price of Silverlake Axis Ltd on 29 July 2015 is 1.03. Fast forward to 30 Dec 2015, its share price is still lingering below that price, at 0.66.

c) Huabao International Holdings Limited

Again, I was asked about my opinion on Huabao in mid August 2015 by a reader and I have subsequently did a post on it (read here). Its share prices at that time has plunged.

From the surface, the financials of the company looks fantastic.

Surfing the internet, it is not hard to find news about Huabao. The flavours (food and beverages) industry is largely consolidated with top five players – Huabao being one of them.

However, as I started going deeper (reading its annual reports, news about it on the internet, etc), questions began to surface. Its annual reports are difficult to grasp, they lack simple factual statements (more descriptive than facts). Breakdowns are nowhere to be found. After studying the company, I am unable to determine its competitive strength or business moat – beside the fact that it is big, and earnings & dividend yield were good.

And then there was the report by Anonymous Analytics, that seems to suggest that Huabao has made efforts to conceal its operations by using such tactics as substantially reducing its public disclosures in financial reporting and using Photoshop to hide the location of one its facilities.

There was the possibility that the chair person, Ms Chu was using the profits from the sale of her shares to fund the dividend payout. Even with the 5% interest gain by putting the money in the bank, base on the past proportion of shares owned by the public , it is possible to fund the dividend while keeping most of the principle amount (she has) intact.

To top it up, I know very little about the “Flavours” industry. And its profit margin seems suspiciously high for a company dealing with “Flavours” and there was no detail break down (sector by sector) of its revenue and profit in its annual report.

So I did not invest in the shares of this company. Consequently, shortly after, I was informed by the reader that Huabao had just issued a profit warning regarding their Net Income.

Stock price of Huabao International Holdings Limited then (on 13 Aug 2015) was 3.82. Now on 30 Dec 2015, it is 2.75. A further drop. In retrospect, I am glad I did not invest.

In Summary:

These are just a few examples. I am sure there are more. However, having pointed out these few examples, there are also cases whereby I made mistakes eg. investing in the wrong companies only to watch their share prices plummet.

Nevertheless, things could have been worse, and my losses in 2015 could be much more if I had just invest blindly without first reading and analyzing the narratives and financial fundamentals of the companies. I thank my lucky star that I did not invest in those companies listed above in 2015.

Coming to the end of 2015, I am sure with the volatile markets we had in 2015, many of us would be unhappy with our ‘paper losses’. Perhaps we should take a moment and ask what are the ‘right’ decisions we made this year that made it not worse.