JC Fund + (JC Options Fund 2nd month review) - mistakes mistakes and more mistakes

As you can see Corning sell put option represents a high chance that it will be exercised. I sold put at 31 and as I am typing, the price has dipped to 29+. 

Lesson 1 - Never sell put/call into the earnings session unless I am very confident of the direction where it is heading. Even so, I should try to avoid at all cost because the stock price becomes very volatile.

Lesson 2 - I need to do more homework on the individual business.

Lesson 3 - I should create a shopping list just for options - income generating purpose only.

There is a high probability I need to standby some funds for Corning and UAA (why did I buy UAA and not UA?!). 

Another mistake I made this week is to sell out half of HPH Trust USD because the share price recovered to USD 0.46 after it ex-dividend. You can call it a mistake but I want to rebalance my portfolio and shift more of my funds into high ROE and ROIC companies. 

Well, I am going to be patient (as advised by a friend Mr Chia F.L. for me to take lesser bats like Warren Buffet) and hold some cash for a better opportunity before I take position. 

JC Options Fund 1st month review

There is some luck element involved here as we managed to achieve close to 90% profit for most of the options with very minimum risk level of them been exercised for the first month of our options' journey. If we have bought call options, the profit level will be higher.

Nonetheless, this is a good start or beginner's luck. I have already rolled out two options which are due on 18th August. 

What does Hedge Fund do?

Return on financial asset can be broken down into two components: capital appreciation and cash flow.

Capital appreciation is the purchase (or decrease) in the price of an asset over the purchase price. Cash flow is the actual cash distribution to the owner.

Hedge fund involves shorting shares of the company and using leverage.

Another example is to buy Google while shorting Yahoo in equal dollar amount. Alternatively you can buy Singtel and short M1 at the same time.The point is by taking hedge position, you can significantly reduce your risk of holding your Google or Singtel position. The Google (long) and Yahoo (Short) trade is known as a pairs trade, where investor wishes to benefit from his expectation that one security will perform better than another while hedging out market risk. The best pairs are those in the same or similar industries or ones where one industry has a clear advantage over the others.

The idea is to have a hedge portfolio of a dozen or more pairs trades that are similarly contrived to profit from the relative performance between two securities. 

Directional trade involves using strategies which captures macro trends. Nonetheless, the Sharpe Ratio of directional strategies are often low. A Sharpe Ratio, the portfolio return divided by the variability of the return, greater than 1 is very good. It means that taking the risk of making your investment is better than holding cash, even when the returns of the risky investment have been adjusted for the risk taken.

Arbitrage is likely the least volatile of all hedge strategies, involving simultaneous buying and selling of a security at two different prices in two different markets, resulting in profits without risk. Arbitrage opportunities do not stick around for long. The knowledge of an arbitrage seeps into the intelligence of the market, and others begin to see and trade the same idea, making it less profitable over time and prehaps even a losing trade.

Power Assets 2017 Half Year Results

Power Assets Group's unaudited profits for the six months ended 30th June 2017 amounted to HKD 4,024 million which is 16% higher compared to 2016 HK 3,476 million.
The company has announced an interim dividend of HKD 0.77 per share which is higher by 10% than compared to 2016 HKD 0.7 per share. In addition, there is a one-off special interim dividend of HKD 7.50 per share in order to address shareholders' expectations while balancing Group's financial capacity for future acquisitions.  

Let us pause for a while and address this great news for JC Fund.

Total Dividend Income = 30,000 shares x HKD (7.50 + 0.77)/share = HKD 248,100/=
which is equivalent to approximately SGD 43,000. 

This will be paid by 29th August 2017.

I know this special dividend will serve a higher purpose by boosting 6.2 billion for CKI to acquire another company. 

In the report, it was said that DUET was well aligned with the Group's strategy with energy generation, transmission as well as distribution. It is said that DUET will build, own and operate new unregulated gas pipelines. I need to investigate this further and forecast how this will affect the growth of the business.

Enough for the good news, now bring up the bad news, I may experience 2nd retrenchment in 2017. I cannot reveal too much but the company may not require my service anymore. It is time to move on. This is a major disruption to our quest. I need to believe in God's plan for me and I must believe that he knows what I want in life. He will open up the path for me to bring me back to my desired path. I felt disappointed when I hear the news that we did not win the project but I know we have done our best.

Time to gather myself and plan ahead.

Hutchison Port Holdings 2nd Q 2017

Today was a painful day for HPH Trust, it dropped by more than 7% from a high of 0.48 yesterday. Yesterday after market closes, the results came out. June 2017 throughput of HPH Trust' deep-water ports was 5% above last year. YICT' throughput was 4% above last year. Combined throughput HIT, COSCO-HIT and ACT (collectively "HPHT Kwai Tsing") increased 4% yoy. YICT's throughput growth in the first six months of 2017 was mainly attributed to the growth in US and EU. The increase in HPHT Kwai Tsing's throughput was largely due to stronger transhipment.

However, Distribution Per Unit dropped to 9.5 HK cents from previous 14 HK cents. The high dividend yield is no longer sustainable. HPH Trust managers felt that freight rates are weak and shipping lines will continue to seek ways to reduce cost and become more efficient through the use of facilities and manpower synergy. Global trade is forecast to rebound in 2017, they felt this may be the bottom.

From the figure, it seems to be painting a better picture in terms of throughput volume. So what went wrong?

The Total Operating Expenses is reduced by 5% from 4,029 to 3,808 HKD million. The issues come from the Interest and other finance costs which was an increase of 17% from 346.4 to 403.9 HKD million. This is primarily due to HIBOR/LIBOR applied on the bank loans' interest rates. Share of profit/losses after tax of Associated Cos/JV is negative 15.3 HKD million. This reflect the share of HICT's result following the completion of the acquisition by HPH Trust at the end of 2016.

Taxation was higher than last year due to increase of YICT Phase III Expansion and West Port Phase I's tax rates following the expiry of their tax exemption period, but was partially offset by lower profit and tax savings from YICT Phase I & II as it qualified as "High and New Technology Enterprise" in November 2016, which entitles YICT Phase I & II to a preferential corporate income tax from 2016 to 2018.

Total Operating Profit was HKD 1663.9 million, HKD 425.9 million or 20.4% below last year. Overall, profit and profit attributable to unitholders of HPH Trust was HKD 937.6 million and HKD 436 million respectively. Excluding HIT's rent and rates refund in 2016, profit was HKD 130 million or 12.2% below last year and profit attributable to HPH Trust was HK 104.6 million or 19.3% below last year. 

From the above figure, there is one positive sign which is stronger free cash flow of HKD 1,206 million as compared to HKD 607.8 million for 2016 Q2. Overall HPH Trust is producing positive Operating Cash Flow and increasing free cash flow. I see this as a positive sign unless the company is trying to delay CAPEX. The notes explain that purchase of fixed asset, projects under development, leasehold land and land use right were HKD 462 million for the period ended 30 June 2017 whereas it was HKD 1,284.5 million for the period ended 30 June 2016. The decrease was mainly due to the capital expenditures incurred for West Port Phase II Project in 2016.

All the negative results cause the big reaction by shareholders today. Shareholders are punishing the stock. I queued at USD 0.47/share to clear half of my holdings but I was too slow to amend to USD 0.46/share. Then it plunges to USD 0.445/share by noon time. Let's wait a while but I am quite sure it will drop to USD 0.4/share in the short term and recover over time.

Managing Risk with Options

Risk levels are different for calls and for puts on the short side. The timing of a strategy and choices made determine the actual market risks to which they are exposed. For example, a basic covered call strategy is deemed "safe" or conservative. However, if the basis of the stock is $39 and a covered call is opened with a 35 strike and with premium of only one point, the risk is considerable.Exercise creates an automatic net capital loss of $300 (four points between strike and the higher basis, minus one point for the option premium received). This is clearly high risk strategy, notably because the premium is small compared to the negative point spread between strike and basis.

A covered call strategy is likely to be high risk if the underlying is a highly volatile company. If the market value declines rapidly, it will result in a paper loss. For example, I bought 100 shares at $39 and sold a covered call with a 40 strike, receiving a premium of 5. In this case, the breakeven on the downside is $34 ($39 basis minus 5 points received for selling the option). If the stock declines below that level, the net outcome is in the loss. On the upside, exercise produces a profit of $600 ($500 received for selling the call, plus one point capital gain). So this situation presents a limited profit on the upside with potentially unlimited loss on the downside. Covered calls do not guarantee profits.

Risk even for uncovered calls, may be quite low. Focus on calls expiring within a month or less reduces risk due to time decay during option's final month. From there, uncovered calls can be selected based on a combined analysis of implied volatility and probability. The uncovered call opened without concern for time or proximity but only to augment the premium level is far more likely to represent a very high risk strategy.

The uncovered put contains much less risk than the uncovered call. The short put is less risky because risk are finite. An underlying price can only fall so far, at first glance drops to zero but the more specific risk level should be dropped from strike of the put and the tangible book value per share minus the premium received for selling the put.

For short spreads and straddles, the maximum loss is the ITM exercise level, minus the premium received for opening the position. Maximum gain is limited to the premium received and this is realized only when options end up OTM at ATM, or are closed prior to expiration at a profit.

Another key risk which I will like to highlight is Lost Opportunity Risk which comes in two varieties. First is the opportunity to take up positions that is lost when your entire equity and margin are at maximum. If your portfolio is full of paper loss, you lose opportunities because you are unable to move when those opportunities arise. Second definition relates to covered call writing, if the underlying price rises far above the strike, the short call is exercised and the trade loses the opportunity that would have resulted by just owning the underlying. 

JC Options Fund 15072017

I sold another put while I was in Taiwan. I gathered from my Taiwanese client that China is an unstoppable force in terms of economic strength. I will prefer to buy a Call on this stock FXI but let me practice my options first.

In an ideal world, I can boost my cashflow through the use of options to achieve financial freedom earlier. Then I will just continue to grow my existing portfolio while using cashflow from options to pay for daily expenses.

By 2019, if everything goes smoothly, we should be able to achieve our quest. Then I will let my wife continue to work for another 2-3 years and she can focus on her coaching business. 

I want to contribute back to society and help our fellow Singaporeans to be more financially savvy, encouraging them to start investing and do their financial planning earlier rather than late. I have seen how our Taiwanese counterpart are financially savvy and more entrepreneurial than us because of media and geopolitical reasons. I think there is an increasing number of financial bloggers which is good for young people to learn more about financial planning and investment. I think it should be compulsory for schools to teach about finance and investment (not textbook stuff like efficient market hypothesis, beta, CAPM model but practical ones). 

The world is going to be very different 20 years from now, AI is coming in a very big way, there will be a lot of disruptions to normal businesses. We need to get ready for this. 

Portfolio Rebalancing

After a week of business trip in Taiwan, I finally have time to think and reflect while waiting for the dentist. Yesterday I met up with an old friend and there was a moment which I risk losing my integrity. Thank god, I honour my words to get him the PlayStation 4 as agreed. I have a problem with focusing and tend to chase after shiny objects. We had this agreement that I will continue to run affiliate marketing campaigns till May 2017, if not I will get him a PS4.

I did continue to run campaigns till February 2017. Then we switched to Shopify, we achieved 62 sales but I cannot keep up with the team due to this new work commitment. The guys decided to pause the e-commerce store and move on to continue their affiliate marketing business. They wanted full commitment to continue as we wanted to switch to a niche store. See below picture which was accomplished by one of my business partners/friends, he has achieved some results because he consistently takes more actions every single day.

I think I lack the grit and perseverance. I bought this book called "grit and perseverance". Let me see how can I improve on this aspect. It is my shortcoming.

Coming back to the portfolio, I was thinking of my present setup. This year composition is mainly a dividend play setup, 70% in dividend stocks and 30% in growth stocks. I am being too passive. On hindsight, if I have sold my shares on this particular counter and move them into another two counters with higher ROE, the return will have increased by 30% instead of waiting for a 5% dividend yield. Another finger pointing is because of work, I have no time to look into my stocks. All these are excuses and blame game.

I need to reconstruct my portfolio, taking a balanced approach for assets allocation. 

I will move into 40% on dividend stocks, 50% on growth stocks and 10% using options.

JC Options Fund 13072017

I sold put on L Brands last night. This stock is still kind of pricey but I don't mind having it in my portfolio if been exercised. 

Recently I was very busy with work. There are lots of changes which I will like to update later on. Time to hit the gym before going for more meetings in Taiwan.

2nd half 2017 review with my wife

Last night, we were having coffee at Starbucks and I brought along my notebook. I decided to follow up with a 2nd half review. I was putting on the wealth coach hat and she is my customer. I reverse engineer the process to understand the present need.

I understand that there is a total annual insurance expense of HKD 44k and annual donation to charities at HKD 18k. Hence for her HKD expense will be HKD 62k. Her requirement is whether her HKD 586k can be put to better use. It has reduced from HKD 591k to HKD 586k.

After the session, we derived two key actions to take away from the session:
1) Her critical illness policy guarantees USD 300k at the end of 25 years tenure. However, the premium is very expensive. The first action is to check whether our SG term policy for critical illness covers her needs. If yes, then we will either terminate the HK critical illness policy or downgrade to save on premium.
2) If this happens, the extra premium saved will be used to invest so that we will have a larger pool of money for medical expenses. 

We also agreed that HKD 486k will be deployed for investment. I suggest that 50% into HK Tracker Fund and 50% into CSOP A50 ETF. Both are ETF and the purpose is to reinvest all dividend into the funds. HKD 100k will be reserved as emergency funds.

 
This morning after looking briefly at the specification of the funds (I used to invest in both funds), I suggest to Invest HKD 400k in 2822.HK. The rationale for investing in CSOP A50 ETF is because of the PE ratio of China which is still low at about 7.4 whereas HK PE ratio is at 18. China's "One Belt One Road" should bring the country towards a greater height in the long run. Therefore we invest in this not for the short term but cater for 30 years later. This 2822.HK will go in immediately. It may retract but we are focusing on the long term.



This morning I read up on both the HK policy and the existing term policy, the critical illness portion is identical. We are looking at terminating the critical illness policy. This will help us achieve financial freedom earlier without compromising our downside. It is a matter of "over-protection" in insurance which has became an unnecessary expense. 

Understand your risk appetite

In a soccer game, it is easy to determine which team is playing defensive, sometimes defense is the best offense. In a baseball match, you need to bat in order to win. I will say you need to take some risk in order when you are taking the offense role. 

1. Risk
As mentioned in previous post, the death rate taking a plane is one in millions, death rate by driving a car is 1 in 500,000. However, there are billions of people taking planes and driving every year. Risk is everywhere. Similarly, investment involves risk taking as well. Higher risk usually equate higher gains.

2. Sampling
With regards to risk in investing, Black Rock conducted a study in 2013 in 12 countries over 17,000 participants.

a) Investment Objective : Retirement
35% of the participants are investing for retirement purpose. The participants do not believe in relying on government funding and support for retirement purpose. They feel that they can only depend on themselves for retirement.

b) Ability to bear losses
35% of the participants are willing to bear 5% and below losses. 17% of the participants do not wish to bear any losses at all. More than half are conservative, most of the people are keeping bulk of their asset in cash and putting them in fixed deposit.

c) Saving rate
The average saving rate is 18%.

d) Investment Tools
40% will want a guarantee return. 34% will want their principal to be guarantee/protected. 20% want their investment products to be easily understand.

e) Control
34% want to be actively participated in their investment and they will review their investment on a timely basis.

You need to know your own risk level, whether you want active or passive participation in investment. How much are you willing to lose in the event you are wrong? As emphasize, you need to have high saving rate and have resources allocated for investment. It is important to understand your investment products, do not invest in products which you do not understand. I will suggest to review your investment on a yearly basis with your advisor.

Key Learning from Millennial Money

I find this an undervalue book and thank God it pops up in front of me in the bookstore.

Once you have set the investing strategy, stay with it. Don't switch to a new one just because the original one has not work for the last year or two.

Value over Growth: Low EV to FCF, low Price to Cash Flow, Low Price to Earnings, Low Price to Sales, low EV to EBITDA

Quality over Junk: High ROIC, high ROA, high ROE, high Interest coverage

Follow the Trend: High six month momentum, high nine month momentum, low volatility

Follow the Leaders: High stakeholder yield, high shareholder yield, high dividend yield, high buybacks

In the book, it teaches you the right mindset which is to have a long term investing strategy. Do not let emotions dictate you during the both market extremes of Greed and Fear. Stay invested in all circumstances. I have managed to invest during the Greece crisis and Chinese stock crisis but I failed to continue my average down of OCBC. I was buying OCBC in large amount during 2015 (if I recall correctly) from $9 to around $10.4+. When the trend turn, I did not exit but continue to buy more at $8+. However, I did not buy more when it dropped to $7+. I switched out when the price recovered to $9+ and in 2017 July is $10+. Sometimes, it is better not to do anything. During the oil crisis, I was too terrified by Swiber and Ezra, I failed to buy McDermott when it dropped to $4. All these are real fear, you do not know when is the lowest and you are afraid to throw good money at the bad ones.  

Apart from rules based investment strategy, you need to evaluate the business model and whether the business has Moats. I was discussing Foot Locker with my mentor and he felt that this company does not have economic moat and it is like a distributor business model. He will rather buy Hour Glass, at least the assets are ROLEX and other branded watches. Hence, I will recommend to use Moats, SWOT analysis and understand business positioning other than looking at the financial numbers.

Investing is fun and it requires a holistic approach to acquire strong businesses for your better future! 

Differences between Investment and Gambling

There is a minority group of people who are afraid of taking airplanes because they are terrified by news of plane crush such as MH370. In fact, the odds of a plane crash are one for every 1.2 million flights, with odds of dying one in 11 million. Your chances of dying in a car or traffic accident are one in 5,000.

Similarly, there is a group of people who will leave their money in the bank as their theory is "the stock market is a gamble and buying shares is equivalent to gambling. They perceive that if stock price goes up, they will win the game and if stock price drops, they lose. My mother always remind me that," Ah boy, you should stop gambling in shares, it is not so easy." She will also ask me to help her buy those penny stock at a few cents, the lower the price the better she perceives them as cheap. I always need to advocate it is the value not the price.

Let's discuss the difference from the end results point of view between gambling and investing.

1. The Chinese saying "you lose nine times in ten when you gamble"

The nature of gambling is "you lose, I win" or "I win, you lose" or it is a zero sum game.

2. Investing is a fair game

The international market in stocks is fair and all parties can win if everyone buys into the shares of a strong and growing company. Then who are the losers? Apart from market crash (if you did not sell out, you won't lose, market rebound back most of the cases), most of the countries' stock markets have an upward trend in the long run. If an investor buys the stock for $20 and gets a yearly dividend of $2, he will recover his capital in 10 years time.

The 3 exceptional cases of market crash are:

a. 1991, Japan market drops from 36800. In 2015, it was at 20,000 which is 54% of original high
b. In 1991, Taiwan market drops from 12682, in 2015, it was 9,000
c. In 2007, China market index was 6,200. In 2015, it was 3,600. 

Let's look at the difference in terms of the process

1. Gambling is a game of probability

Most of the games in a casino is based on chances except for cards counting for game of Blackjacks. If you are an expert and casinos may soon have you on their unwanted guests list and ban you from entering their complexes.

2. Investing is a skill set

The professional investors can use their skills in stock market. They can make money using fundamental analysis and technical analysis.