Dear All,
Selamat Hari Raya Aidil Fitri.
This is probably my most thought of post of all, and its very important.
Firstly, Lets set the stage:
Some of you may know me, many will not. In any case, I have been investing in Topglove for the last 10 years, but as I cannot prove that, all I can do is maintain a trackable online portfolio starting in 2019 to monitor my investments, margin loans and returns. This portfolio is maintained publicly, it cannot be edited, deleted or removed. So the simple results will be reflected in profit and loss.
The main reason for me posting this publicly is not to show off or be arrogant (although I am confident) but I believe that all articles and stock promotions have to be compared with the real results of investing that can be attached as a supporting document to prove that the ideas and investing theories work. Warren does it, Bill ackman does it, Peter lynch does, Ray Dalio does it. That is why we listen to those investors, because their results are a body of work that proves their results.
In any case, lets begin.
Currently the theme for today is Glove stocks. Everyone is always saying buy buy buy, and as the prices go up it becomesa siren call to buy up more and more. And yet, after holding the glove stocks for over ten years, I have chosen to sell.
Why?
This question is very interesting, because everyone is always telling you what to buy. However you will quickly notice no one is ever telling you when and how to sell. So, in the spirit of sharing during this gracious holiday, I will try to share my experience in buying and selling topglove, in the hopes that you can also practise rational investing.
Rule No. 1 - How to Buy
When I first bought Topglove in 2010, I didn't find out through a stock screener or guru investment stock pick. It was actually through my Rotary Club. They had arranged a learn and visit session with the other rotary club members to visit the topglove factory and find out more about how it is run and what the business is like. When I went, the factory manager (who I later pulled into the Rotary Club), was a godsend. He spent a lot of time explaining what the business is like that I was so impressed. Wow, this seems like such a simple and scalable business, I wanted to know more. So I got to know the manager better and presented my checklist:
1. How scalable is the business (Apparently very scalable indeed. Specialized hand formers, machinery, workers and voila!)
2. How much does it cost to produce a glove? ( very cheap)
3. How much do you sell per glove? (in those days, depending on the customer and region, 20-30% margins)
4. Who is the target market (apparently they sell the world over)
5. How is the expansion like (at that time, the world market was growing at 5% a year, and topglove had a dominating position, so the minimum growth was to add 10% production capacity per year)
6.What is topglove competitive advantage? (apparently Malaysia. As the rubber latex only grew along the equator line, Malaysia with its political stability, the cash for building economies of scale, the english speaking supply chain, and most of all raw materials supply to topglove made it more gave it a huge competitive advantage compared to brazil, india and other cheaper areas.)
So after doing this scuttlebutt, I proceeded to look at the financials of the company. Remember this was around 2009+, right after the huge financial crisis and every stock was selling at dirt cheap prices. Here was a company selling at very fair valuations, 3 million in debt, 300 million in cash, 100 million in free cash flow, making 22 cents on the every dollar of equity. It was amazing! It is really hard for a company with no debt to get bankrupt. So with QL backing my collateral as margin, i bought a huge portion of Topglove, around 500K worth. I proceeded to top up every quarter since with my salary and bonuses and dividend income.
Rule No. 2 - How to Hold
This is a lot easier, but still not simple. I held the stock and added my position every year from 2010 to 2019. While you may say that in 2019-20 I did not add to my position, I must say I was very upset with the Aspion purchase. The company did not do due diligence and proper accounting, which caused dilution to the shareholders: me. So I left it on the back while investing in my other stocks. However, I did not sell a single share of topglove for the entire period 2010-2010. Why?
For me the basic rule is simple:
1. Sell and buy what? The thing to remember here is, if you have a growing busines that pays growing dividends, expands well , you have to weigh the cost of investing in something you know versus something you dont know that well. There is always an element of risk involved in buying stocks. But, one should always stay invested in stocks. So when you sell one, the goal is to reinvest in another company. If you can't find one better than the one you have, then you shouldn't be selling for the sake of selling. Only sell if you find that the valuation of another company is better than the one that you own. Only keep cash if cash is better than all the companies that you are thinking of investing in.
2. Never sell for the sake of selling. Most gurus who have never made real money in stocks, they are always very telling you to sell half, keep your profits etc. Never do this. IF you own disneyland, why would you sell half of disneyland just because the value of disneyland MIGHT drop? Understand your business. If you know it well, you will realize that selling a goldmine just to buy a new prospect elsewhere silly. I used the mental model of physics here, an object in motion tends to be in motion, an object at rest tends to be at rest. If you have a company with killer management, good cash levels, a strong business that is growing and maximizing its assets, it will tend to grow. If you have a company that has good cash and strong business, but is not scalable and the management not interested in growing the business, then it will tend to stagnate. If you have a busines that is changing CEOS and firing workers and losing market share, it will tend to drop over time. Please note I am talking about the business, not the share price. Over the short term the volatility will give you very different signs, over the long term share prices usually correlate with the busines prospects.
3. Never diworsify. Some people view diversification as risk management. For me I have never thought of selling a little bit of topglove and spreading it between kossan,supermax,harta, comfort. This kind of diversification to me doesn't make sense. There will usually only be one market leader in the industry. If you manage to find one at fair valuation, then stick with him all the way, instead of spreading your risks. As is shown over this covid19 period, holding onto 1000 stocks will just lead you to lose money in ALL of them. Buy and hold what you understand.
On the other hand, forcing diversification into new business or industries that you do not know well is even worse, that is like throwing money into the sea hoping it will come back to you somehow.
In my experience, in that entire period 2010-2019 I did buy 2 other stocks, Yinson in 2013 (which was my smallest position and a long term trading bet that became a long term investing hold ) and public bank in 2012 (which was bought because it was the lowest risk for acceptable prospects at that time that my wife and father in law could stomach, it was a joint private equity of 50/50)
Rule No.3 - When to sell
Now, this is the magic trick. No one can teach you how to anticipate this, not even Warren Buffett. You see, even value investing can only help you minimize risk, but buying with a margin of safety means nothing if the business prospects 2 years in the future is dim. Take for example Parkson, at 107 million in valuation with 2 billion in assets, it seems a compelling investment until you realize that if earnings do not come, no amount of value investing is going to help you.
To be honest , there is probably no way to predict what the newspapers will show 2 years from now, however what you can control is your discipline and rationality. I don't know about others, but as I recently sold my investment in Topglove after holding for 10 years, perhaps I can share my experience and my thoughts on it .
1. Sell when you find something else BETTER to buy. In my case there were 2 crisis going on at the same time in 2020, the oil crisis and the covid healthscare. In most cases, even at PE80, Topglove I would not be selling. I believe in its ability to generate 2x or even 3x earnings in the long run, as the market leader. However as one crowd runs into the shop to buy everything, somehow everyone is leaving the other shop in droves. For me oil & gas is at decade lows, business with huges assets and retained earnings are selling at IPO prices. The gap between holding and finding another wonderful company to buy had suddenly closed and rationally when that happened, when everyone is offering me multiple years of earnings baked into one black swan event for gloves, I just had to sell. I wouldn't say I was happy to do it, but finding another wonderful business with huge prospects and profits selling at bargain prices, it is hard to say no. The pure speculation of bursa in gloves leaves me shaking my head.
2. Sell when the business fundamentals change. Here I quote warren, he was a huge buyer of airlines. His reasoning for selling airlines was simple. An entire year of revenue gone, with fixed costs piling up daily, most companies would have gone bankrupt. For airlines to survive without government intervention, they would have to get huge loans at cutthroat rates that can only begin to pay back when the business returns to normalcy. The repayment of the loan will be a stone on their back that would kill the future of returns that one would expect from the business over the long term. Having to borrow 10 billion and paying 1 billion in interest payments would indeed be insane for any business.
The goal here is to understand risk. Business risk, margin of safety risk and share price volatility risk. A good business that has gone up in price can start to get risky (but not always), while a good business that goes down in price can become less risky (but not always). But a bad business at any price is always risky.
Summary
So in any case, I hope you learned something new today. Investment in essence does not require a phd in mathematics or constant investigation of details. It does however require some common sense. You do not buy a stock for what came out in the papers yesterday. You should be buying a stock for what will come out 2 years from now. Doing that requires you to be careful in investing, not chasing the current story, knowing when to be a contrarian and when to follow the herd, and being in earlier than others. Thats the real joy in investing
Philip
rylakk2016@gmail.com
P.S. I have also started a telegram discussion group started by my daughter, the telegram is on my portfolio profile tme/philipcapitalmanagement. Apologies about the title, it is a bit arrogant. But I think results speak louder than words.
https://klse.i3investor.com/blogs/Mentalmodels/2020-05-24-story-h1507829976-How_to_sell_Gloves_Stocks_or_buy_what_comes_out_in_newspapers_2_years_f.jsp
